ASIC v Enterprise Solutions 2000 P/L & Ors [2000] QCA 452

[1] THE COURT: This is an appeal from a judgment of Douglas J given on the basis that each of certain schemes (we shall speak of "the scheme") with which the appellants are connected is a "managed investment scheme" within the meaning of s 9 of the Corporations Law ("the Law"). The appellants say there is no scheme of that kind. The documents tendered show that monies are collected from the public and used in betting on horse races. Depending, of course, on whether the bets laid are successful, those who put money in may become entitled to profits which are, subject to certain deductions, distributed to them. The judge had before him a considerable amount of detail concerning the scheme, but it does not appear to us that much of it has any real bearing on the issue in the case.

[2] There are four corporate appellants and the other appellant is Mr A L Rebbeck who is the sole director of the other appellants. There are hundreds of scheme investors, who pay monies which are put into two bank accounts. Payments go out of the accounts to pay management fees payable under the agreements the investors enter into; to place bets; to maintain credit balances with betting agencies; and to pay monies due to investors. Various software programs are used, the details of which are of no present consequence and the bets to be made are worked out from these programs, subject to an overriding discretion which Mr Rebbeck has. The agreements the investors make are in rather similar form. Each agreement makes one of the appellants the investor's agent and imposes certain duties on the agent including an obligation to pay out monies due to investors. Under cl 13.1 the investor cannot assign the agreement without the agent's consent. Each agreement provides for payment of fees to one of the appellants including 10% of any profit made, and other substantial fees which are payable whether or not a profit is earned.

[3] Each bet is placed by and in the name of Mr Rebbeck and is placed on behalf of all the investors covered by the relevant agreement, subject to the possibility that an investor may request exclusion from a day's betting or some other variation; such requests are usually accommodated, but can be disallowed. Subject to the possibility of allowance of such a request, the investors have no control over either the amounts bet, or the selection of horses on which the bets are placed.

[4] Mr Harrison QC for the appellants argued that the facts do not fit within the relevant definition; for reasons to be given, we cannot accept that. It is not in contest that there is a "scheme". The definition of "managed investment scheme" in s 9 of the Law reads in part as follows:

(i) people contribute money or money's worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not)

(ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders)

(iii) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or

There is in s 9 of the Act a definition of "interest" in terms which correspond to the language of para (i).

Mr Harrison QC said for the appellants that the rights acquired by the "investors" - the term used in the appellants' documents - are not interests because all investors get is the provision of betting services, and because whatever rights they have are not permanent enough to be interests. We have pointed out that the term "interest" is defined in terms corresponding to those used in para (i); the question is whether the investors "acquire rights to benefits produced by the scheme". If the argument advanced for the appellants is correct, then the definition should be read as if some such expression as "having a degree of permanence" were inserted after the word "benefits".

[6] The rights which the investors acquire when they pay money in are rights to have the scheme operate in accordance with the agreements they have made and to be paid monies due. As one would expect, the agreements require distribution of profits made (cl 6.2(c)). They also require that the investor receive all monies due within 30 days of notice of termination of the agreement; those monies will comprise profits, if any have been made, together with unexpended monies put in by the investor. Of course, participation may produce no benefit for an investor, but loss only: it would, however, be perverse to read the expression "to acquire rights to benefits produced" as excluding from the definition any scheme of investment which is not bound to produce benefits.

[7] It is true that, as the appellants argue, services, particularly by way of supposedly skilful betting, are provided for the contributions made; assuming such services are not in themselves benefits - a point it is unnecessary to discuss - the expected or at least hoped-for profits are benefits. As to permanence, one form of agreement says that it is to continue indefinitely unless terminated (cl 3.1) and subject to the parties' ability to terminate, the intention is that the agreement shall "remain in force for the life of the Investor" (cl 3.2). Others appear to be for a substantial fixed term. Assuming some sort of permanence of interest is required, it must surely be enough that the relationship between the parties is contemplated to endure for an indefinite or extended period, rather than a short fixed term. Certainly the betting transactions are ephemeral, but so would be the transactions involved in, for example, a scheme of day-trading in shares.

Mr Harrison contended that there is no pooling, in that the investors do not share in a betting pool. What appears to be meant by this argument is that each investor, not surprisingly, has a separate account in the appellants' records, setting out the individual's losses and gains; and it is said that the investors have no proprietary interest in the money collected. There is, however, certainly pooling at least in the sense that the monies paid in are collected in one of two accounts controlled by one or more of the appellants. The betting is as we have said done using the collected monies.

[9] We were referred to one of the definitions in the Oxford Dictionary of the word "pool":

"A common fund into or from which all gains and losses of the contributors are paid; hence, a combination of capitalists for united speculative operation in a stock or commodity; a combine".

The word "pool" is used with respect to gambling in such expressions as "football pools". In the Encyclopaedia Britannica, under the entry "pari-mutuel", one finds:

"[t]he payoff to winners is made from the pool of all bets on the various entries in a race ...";

The same work has, in the entry "investment trust":

"... financial organisation that pools the funds of its shareholders and invests them in a diversified portfolio of securities".

In these instances, "pool" and "pooled" are used with reference to a fund made up of numerous payments from participants and used for a purpose they contemplate.

[10] There is, according to the appellants' argument, no trust relationship between the holders of the bank accounts (in which monies are, the respondent says, pooled), on the one hand, and the investors on the other. If that is right, then it would follow that, in the event of winding-up of the account-holders, all the monies would go to the liquidators and the investors would have no right to a refund of any monies paid in; that does not appear to be correct: Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567. Apart from that, there is no reason to think that the use of the expression "pooled" has to be confined to instances in which the contributors have a proprietary interest; so to hold might exclude from the definition schemes in which monies are in the ordinary sense "pooled" for the purpose of investment, but the contributors expressly agree that they have no proprietary rights, but only rights in contract.

[11] Another reason for rejecting, as we do, the submission that the contributions are not "pooled" unless the result is to give the contributors property rights in the pool is that para (ii) quoted above contemplates that the contributions "are to be pooled ... to produce financial benefits, or benefits consisting of rights or interests in property ...". The benefits, consisting in monies to come to the contributors out of the pool, need not be proprietary rights. And the "rights" acquired need not even be enforceable, let alone proprietary.

[12] Contributions not to be pooled to produce benefits

Mr Harrison said that the pooling must be for the purpose of producing financial benefits. He pointed out that if a large amount of investors' money were bet on a totalisator system, it would produce a reduction in the dividend payable, since under that system the dividend per dollar bet paid on a successful bet is in inverse proportion to the total amount bet on the successful horse. He contended that if there was pooling, the reason for it was not to produce benefits; the respondent countered by pointing out that it would be quite impracticable to run such a scheme without pooling.

[13] If the appellants' argument is correct, then a scheme for the collection and investment of funds cannot be a managed investment scheme (absent any "common enterprise") unless it can be shown that the percentage return on investment in pooled money is expected to be higher than the return which would have been gained if the identical investment had been made by each individual contributor, using his or her own money. This is a possible but uncommon situation; for example, the percentage profit, or loss, produced by an investment in particular shares over a specified period would not be altered if the investment is made by a mutual fund rather than by an individual investor in the fund. The words "to be pooled ... to produce" in para (ii) quoted above imply that the intention must be to pool the contributions and, by use of the pool, produce benefits; they do not imply that the benefits must be of such a kind as to be unobtainable without pooling. As for the words "to be", it was contended that there was no evidence that the contributors appreciate that the contributions are to be pooled. That contributions would be dealt with in that way is obvious; but in any event under the scheme pooling occurs and that is enough.

[14] Consequences of holding scheme to be within definition

Mr Harrison pointed out that if the scheme here in question is a managed investment scheme, then consequences follow under Ch 5C of the Law. He contended that these consequences are, in general, such as to show that the legislature could not have intended to catch by the definition schemes of the present kind. An answer given by Ms O'Reilly SC, who led Mr Christopher Wilson for the respondent, is that the respondent may exempt a person from a provision of Ch 5C or declare that the Chapter "applies to a person as if specified provisions were omitted, modified or varied as specified in the declaration": s 601QA(1). An exemption or declaration may be general or specific: s 601QA(2).

[15] There is also power to make regulations under s 601QB modifying the operation of Ch 5C, in relation to either a managed investment scheme or all managed investment schemes of a specified class. The respondent could exercise its powers under s 601QA so as to make Ch 5C wholly or partly inapplicable to a scheme in relation to which compliance with Ch 5C would be impracticable. But it is not necessarily the case that the presence of impracticability of that sort would require that an exemption be granted; there may be reasons for thinking that the promoters of a scheme in relation to which there is difficulty in complying with Ch 5C should either rearrange matters so that compliance is practicable, or else suffer the fate which has befallen the scheme with which the appellants are concerned.

[16] Our attention has been drawn to particular aspects of Ch 5C, in connection with the argument that the requirements of that chapter show that it is unlikely that the Law intended to catch the present scheme within the definition of "managed investment scheme" in s 9 of the Law. There must be lodged with the application for registration of a managed investment scheme a copy of the scheme's constitution and of its compliance plan (s 601EA(4)) and the scheme must be operated by a "responsible entity" (s 601FB(1)). That entity must be a public company (s 601FA); it is not difficult to create such a company, under the Law.

[17] But that company must hold a dealer's licence authorising it to operate the scheme (s 601FA) and it was argued that this indicates that the creation of "securities" as part of the scheme was contemplated by the legislature: see s 93(1), s 780(1). The argument has no substance, in our view, for s 780(2) shows that a dealer's licence may authorise a person, not to carry on a securities business, but only to operate a managed investment scheme. More generally, it is by no means clear that it would be impossible for the structure of this scheme to be rearranged so as to comply, without benefit of any exemption or modification, with the requirements of Ch 5C. Even if that were not so, it would not necessarily assist the appellants much. Mason J, referring to a similar argument under earlier statutory provisions, said:

"There are real difficulties in the suggestion that the court can read down the very comprehensive definition of 'interest' by reference to the supposedly unintended consequences of a literal reading on everyday commercial transactions. ... The hazards of adopting such a course are not dispelled by the absence of a supporting context. It would be different if we could glean from the legislative provisions an overall purpose which, being limited in scope, justified a reading down of the definition": Australian Softwood Forests Pty Ltd v Attorney-General (NSW); ex rel Corporate Affairs Commission [1981] HCA 49; (1981) 148 CLR 121 at 130.

We should add that the respondent also relied in this connection upon observations made in R v Commons, ex parte Attorney-General [1987] 1 Qd R 158 at 161. We agree with those remarks to the extent that they discourage reading down the broad words of the definition here in question "influenced by any preconception as to the intended policy".

[18] Mr Harrison has argued the points set out above, but has not contended that in any other respect the definition is unsatisfied. In particular, it is not said that there is no "scheme", nor that the members have "day to day control over the operation of the scheme". It should be added that there was substantial argument on the point whether or not the contributions are "used in a common enterprise"; We have not found it necessary to discuss that. In our opinion the appellants' contentions against the correctness of the judgment of Douglas J fail.

[19] The appeal should be dismissed, with costs to be assessed.