The scheme must therefore contemplate the generation of benefits under a common enterprise … from the funds contributed."
83 It is not necessary to consider whether for para (a)(ii) to be satisfied the purpose of the members pooling their contributions must be to obtain financial benefits proportional to the interest acquired from the contributions. There is no such express requirement. But it is essential that there be an intention, objectively ascertained, that the members' contributions are to be pooled, or used in a common enterprise, to produce financial benefits or rights or interests in property for the members.
84 In the present case all funds received by GND from any source were paid into a single bank account. In this sense any moneys received either pursuant to the loan agreements, which were debentures, or pursuant to the issue of promissory notes, or from any other source, were pooled. But there is no evidence that any one holder of a promissory note intended that his or her or its contribution in money or money's worth should be pooled with a contribution of any other holder of a promissory note, as distinct from being applied by the company. In many cases it does not appear that any money was received from a holder of a promissory note at the time of its issue. In most cases it appears that the money's worth provided for the issue of the note was the forbearance from calling up a debt arising from an earlier loan agreement. It is not possible to say that the money's worth constituted by such forbearance was capable of being pooled with the forbearance of any other noteholder, or with moneys paid by any other noteholder.
85 Nor is there evidence that holders of promissory notes had a purpose that their contributions (whether contributions made through payment of money or forbearance from calling up an existing debt) were to be pooled or used in a common enterprise with the contributions of other noteholders, to produce financial benefits for noteholders. There is no evidence that any one noteholder knew that GND issued promissory notes to others. The evidence does not go further than establishing that each holder of a promissory note had the purpose of being paid in accordance with the terms of the note. There is evidence that some unidentified lenders knew that other persons lent money to GND. There is no evidence whether such persons included holders of promissory notes. That is, there is no evidence that any individual holder of a promissory note knew that GND was issuing other promissory notes, and no evidence that promissory noteholders intended their contributions be pooled, or used in a common enterprise, assuming that that was possible. ASIC called no evidence from any holder of a promissory note.
86 It is unnecessary to explore the further complications that the pooling of the contributions in moneys paid was a pooling not only of contributions from other promissory noteholders who paid money as consideration for the issue of the notes, but also the pooling of money received from all other sources, including from the issue of debentures which are excluded from the definition of a management investment scheme.
87 For these reasons I do not consider that GND operated a managed investment scheme. This is not surprising. The conclusion is consistent with other provisions of the Act. If contrary to my view, GND did operate a managed investment scheme through the issue of promissory notes and if, as ASIC contends, the scheme was required to be registered pursuant to s 601ED, it would not have been possible to register the scheme without transforming it. The responsible entity of a registered managed investment scheme holds scheme property on trust for the scheme members (s 601FC(2)). "Scheme property" of a registered scheme is defined as follows (s 9):
" scheme property of a registered scheme means:
(a) contributions of money or money's worth to the scheme; and
(b) money that forms part of the scheme property under provisions of this Act or the ASIC Act; and
(c) money borrowed or raised by the responsible entity for the purposes of the scheme; and
(d) property acquired, directly or indirectly, with, or with the proceeds of, contributions or money referred to in paragraph (a), (b) or (c); and
(e) income and property derived, directly or indirectly, from contributions, money or property referred to in paragraph (a), (b), (c) or (d).
Note 1: Paragraph (a) - if what a member contributes to a scheme is rights over property, the rights in the property that the member retains do not form part of the scheme property.
Note 2: For provisions that are relevant to paragraph (b), see subsections 177(4), 1317HA(1A), 1317HB(3) and 1317HD(3) of this Act and subsection 93A(5) of the ASIC Act. "
88 Thus if the scheme were required to be registered and was registered, the result would be that promissory noteholders whose only contractual rights were to receive payment in accordance with the terms of the note would become beneficial owners of all of the money raised by GND from promissory noteholders, of all money borrowed or raised by GND for the purposes of the scheme, and of property acquired with such moneys and income and property derived from them. It is incongruous that a scheme should need to be registered when it does not have the features that would pertain to the scheme once it was registered.
89 It is true that in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147; (2009) 180 FCR 11, Sundberg and Dowsett JJ said (at [56]):
" [56] The scheme of the Corporations Act is to define the term 'managed investment scheme' in s 9 and to regulate some of those schemes pursuant to Ch 5C. Many of the regulatory provisions will affect the constitution and conduct of any scheme which must be registered. In other words, if a scheme falls within the s 9 definition, and if it is required to be registered, then it must be constituted and conducted so as to comply with Ch 5C. It follows that one cannot hold that a particular scheme is not within the s 9 definition simply because its structure does not comply with the requirements of Ch 5C. If the scheme must be registered then it must be constituted and conducted so as to permit registration. "
90 In my respectful view, that observation does not give full weight to the fact that not only does s 601ED(5) provide that a person must not operate a managed investment scheme that is required to be registered unless the scheme is so registered, but s 601ED(1) requires the managed investment scheme to be registered if other provisions of that section are satisfied. I prefer the later observations of Gilmour J (with whom Spender J agreed) in National Australia Bank Ltd v Norman at [183]. His Honour said:
" As I have already explained, s 601EE allows managed investment schemes to be wound up where a person operates a scheme in contravention of s 601ED(5). Section 601ED(5) prohibits a person from operating a managed investment scheme that is required to be registered, unless the scheme is so registered. Section 601ED(5), accordingly, envisages that the unregistered managed investment scheme is of a kind which ought to have been, and could in fact have been, registered ."
If the scheme were a managed investment scheme it was required to be registered
91 As I do not consider that GND operated a managed investment scheme, it is unnecessary to decide whether the scheme would have required registration under s 601ED. However, in case I am wrong in my conclusion I will deal with the arguments raised under that section. Section 601ED relevantly provides:
" 601ED When a managed investment scheme must be registered
(1) Subject to subsection (2), a managed investment scheme must be registered under section 601EB if:
(a) it has more than 20 members; or
(b) it was promoted by a person, or an associate of a person, who was, when the scheme was promoted, in the business of promoting managed investment schemes; or
(c) a determination under subsection (3) is in force in relation to the scheme and the total number of members of all of the schemes to which the determination relates exceeds 20.
(2) A managed investment scheme does not have to be registered if all the issues of interests in the scheme that have been made would not have required the giving of a Product Disclosure Statement under Division 2 of Part 7.9 if the scheme had been registered when the issues were made.
...
(4) For the purpose of this section, when working out how many members a scheme has:
(a) joint holders of an interest in the scheme count as a single member; and
(b) an interest in the scheme held on trust for a beneficiary is taken to be held by the beneficiary (rather than the trustee) if:
(i) the beneficiary is presently entitled to a share of the trust estate or of the income of the trust estate; or
(ii) the beneficiary is, individually or together with other beneficiaries, in a position to control the trustee. "
92 Regulation 5C.11.05A provides:
" 5C.11.05A Schemes not required to be registered (Act s 601ED)
Subsection 601ED (2) of the Act has effect as if the words 'and Division 2 of Part 7.9 applied to the interests at that time' were inserted after the words 'when the issues were made'. "
93 GND contended that if the issue of promissory notes gave rise to a managed investment scheme, the scheme did not have 20 members and therefore did not have to be registered (s 601ED(1)). GND also contended that the scheme did not have to be registered by reason of s 601ED(2).
94 Twenty-eight promissory notes were issued between 20 August 2008 and 13 July 2009. The 20th note was one issued on 5 February 2009 to a Ms Ilona Fleishhacker for $150,000. Prima facie, if there were a managed investment scheme, it had at least 20 members by 5 February 2009. ASIC contended that in fact it had more than 20 members, because in some cases an interest in the scheme was held on trust for beneficiaries and each beneficiary was to be treated as a separate member pursuant to s 601ED(4).
95 GND submitted that a member of a managed investment scheme is someone to whom an interest has been issued. GND submitted that an interest in a managed investment scheme should be taken to have been issued only in the circumstances provided for in s 761E. That section defines the circumstances in which a financial product is issued to a person. An interest in a registered managed investment scheme is a financial product, as is an interest in an unregistered managed investments scheme other than a scheme in relation to which none of paragraphs (a), (b) or (c) of s 601ED(1) is satisfied (s 764A(1)(b) and (ba)). Section 761E (2) provides that subject to that section, "a financial product is issued to a person when it is first issued, granted or otherwise made available to a person." GND contended that only five of the promissory notes were issued in this sense. The others were issued to persons who had lent money to GND on earlier occasions under a loan agreement.
96 Paragraphs (a)(i) to (a)(iii) of the definition of "managed investment scheme" do not use the word "issue". Nor does s 601ED(1), which prescribes the circumstances in which a managed investment scheme must be registered. The fact that s 601ED(2) sets out the circumstance in which a managed investment scheme does not have to be registered and that subsection incorporates the concept of "issue" in Chapter 7 does not mean that s 761E is relevant to determining whether s 601ED(1)(a) is satisfied. In my view, it is not.
97 In any event, the promissory notes, if issued as interests in a managed investment scheme, were a different financial product from the debentures (which were securities) issued previously. The promissory notes were issued to each investor on or about the date each bore. That is so even to the extent that the investors to whom the notes were issued had made earlier loans under loan agreements.
98 For these reasons I accept that s 601ED(1)(a) was satisfied if there were a managed investment scheme.
99 GND did not plead reliance on s 601ED(2). Nonetheless, in submissions it relied on s 1012E of the Corporations Act and contended that if it did operate a managed investment scheme, the scheme did not have to be registered because none of the issues of interest in the scheme would have required the giving of a product disclosure statement under Division 2 of Part 7.9 if the scheme had been registered when the issues were made.
100 Relevantly, s 1012B(3) in Division 2 of Part 7.9 provides:
" 1012B Obligation to give Product Disclosure Statement situations related to issue of financial products
...
(3) A regulated person must give a person a Product Disclosure Statement for a financial product if:
(a) the regulated person:
(i) offers to issue the financial product to the person; or
(ii) offers to arrange for the issue of the financial product to the person; or
(iii) issues the financial product to the person in circumstances in which there are reasonable grounds to believe that the person has not been given a Product Disclosure Statement for the product; and
(b) the financial product is, or is to be, issued to the person as a retail client.
The Product Disclosure Statement must be given at or before the time when the regulated person makes the offer, or issues the financial product, to the person and must be given in accordance with this Division.
Note: If a Product Disclosure Statement is given when the offer is made, it will not need to be given again when the product is issued to the person (see subsection 1012D(1)) unless the Product Disclosure Statement that was given is no longer up to date. "
101 A product disclosure statement would not have been needed in respect of the issue of a promissory note with a face value of $500,000 or more because the person to whom such a note was issued would not have been a "retail client" within the meaning of s 761G(7)(a) (reg 7.1.24(2)).
102 Section 1012E provides:
" 1012E Small scale offerings of managed investment and other prescribed financial products (20 issues or sales in 12 months)
(1) This section applies only to financial products that are:
(a) managed investment products; or
(b) financial products of a kind prescribed by regulations made for the purposes of this paragraph.
(2) Personal offers of financial products do not need a Product Disclosure Statement under this Part if:
(a) all of the financial products are issued by the same person (the issuer); and
(b) none of the offers results in a breach of the 20 purchasers ceiling (see subsections (6) and (7)); and
(c) none of the offers results in a breach of the $2 million ceiling (see subsections (6) and (7)).
(3) Subsection (2) does not apply to an offer to which subsection 1012C(6) (sale amounting to indirect issue) or (8) (sale amounting to indirect sale by controller) applies.
Note: Under section 1012K, ASIC may make a determination aggregating the transactions of bodies that ASIC considers to be closely related.
(4) If subsection (2) applies to an offer of a financial product, a recommendation to a person to acquire a financial product in response to a personal offer of that kind does not need a Product Disclosure Statement under this Part.
(5) For the purposes of subsections (2) and (4), a personal offer is one that:
(a) may only be accepted by the person to whom it is made; and
(b) is made to a person who is likely to be interested in the offer, having regard to:
(i) previous contact between the person making the offer and that person; or
(ii) some professional or other connection between the person making the offer and that person; or
(iii) statements or actions by that person that indicate that they are interested in offers of that kind.
(6) An offer to issue, or arrange for the issue of, a financial product:
(a) results in a breach of the 20 purchasers ceiling if it results in the number of people to whom the issuer has issued financial products exceeding 20 in any 12 month period; and
(b) results in a breach of the $2 million ceiling if it results in the amount raised by the issuer from issuing financial products exceeding $2 million in any 12 month period.
(7) An offer by a person to sell a financial product:
(a) results in a breach of the 20 purchasers ceiling if it results in the number of people to whom the person sells financial products issued by the issuer of that financial product exceeding 20 in any 12 month period; and
(b) results in a breach of the $2 million ceiling if it results in the amount raised by the person from selling financial products issued by the issuer of that financial product exceeding $2 million in any 12 month period.
(8) In counting issues and sales of the financial products issued by the issuer, and the amount raised from issues and sales, for the purposes of subsection (2), disregard issues and sales that result from offers that:
(a) do not need a Product Disclosure Statement (otherwise than because of this section); or
(b) are made under a Product Disclosure Statement.
Note: Also see provisions on restrictions on advertising (section 1018A) and the anti hawking provisions in section 992A.
(9) In counting issues and sales of the financial products issued by the issuer, and the amount raised from issues and sales, for the purposes of subsection (2), disregard any issues and sales made by a body if:
(a) the body was a managed investment scheme (but not a registered scheme) at the time that the offer of interests in the scheme that resulted in the issues or sales was made; and
(b) the body became a registered scheme within 12 months after that offer was made; and
(c) the offer would not have required a Product Disclosure Statement (otherwise than because of this section) if the managed investment scheme had been a registered scheme at the time that the offer was made.
(10) In working out the amount of money raised by the issuer from issuing financial products, include the following:
(a) the amount payable for the financial products at the time when they are issued;
(b) if the financial product is an option - any amount payable on the exercise of the option;
(c) if the financial products carry a right to convert the financial product into other financial products - any amount payable on the exercise of that right.
(11) If a person relies on subsection (2) to make offers of financial products without a Product Disclosure Statement under this Part, the person must not issue, arrange for the issue of, or transfer, financial products without a Product Disclosure Statement under this Part if the issue or transfer would result in a breach of the 20 purchasers ceiling or the $2 million ceiling (see subsections (6), (7), (8), (9) and (10)).