9 I was also invited by Mr Thomson to find that s.601MB is applicable to the present circumstances. That section is concerned with each of two situations: first, where "a managed investment scheme is being operated in contravention of sub-s.601ED(5)" and a person "offers an interest in the scheme for subscription, or issues an invitation to subscribe for an interest in the scheme"; second, where a person makes an offer or invitation in relation to an interest in a registered scheme in contravention of Chapter 6D. Since there was not, in the present case, any registered scheme, it is only the first of these alternatives that needs to be considered. Section 601MB enables a person entering into a subscription contract as a result of an offer or invitation with which the section is concerned to avoid that contract.
10 The term "interest", as it applies to a managed investment scheme, is defined by s.9 as meaning "a right to benefits produced by the scheme (whether the right is actual, prospective or contingent and whether it is enforceable or not)". Paragraph (a)(i) of the definition of "managed investment scheme" seems to add a further dimension to the meaning of "interest" by contemplating that money or money's worth is contributed as consideration for the acquisition of the right that makes up the "interest".
11 The instruments or investments involved in this case were, as I have said, "debentures". In a sense, they conferred a right to benefits produced by any managed investment scheme in the course of operating which they were issued, since repayment of principal and payment of contracted interest in accordance with the terms of the debenture (or loan agreement) could be classified as a right to a benefit in the form of a payment of a stipulated amount out of moneys generated by the operation or pursuit of the scheme. It seems to me, however, that such a categorisation is at odds with paragraph (j) of the definition of "managed investment scheme". Under that definition, a particular "scheme" is a "managed investment scheme" if it has certain features described in paragraph (a)(i), (ii) and (iii) of the definition. Those features are defined in a way that might comprehend the borrowing of money at interest and the pooling of that money to generate financial returns permitting the principal and interest to be paid in due course. It is no doubt for that reason that paragraph (j) excludes from the definition of "managed investment scheme" the issue of debentures by a body corporate. I take this exclusion to mean that the issue of debentures by a body corporate cannot, of itself, be a "managed investment scheme", even though debentures might be issued in a way that, because of associated or surrounding activities, forms part of the operation a "managed investment scheme". But the inability of the issue of debentures as such to be a "managed investment scheme" seems to lead inevitably to the conclusion that the rights of repayment of principal and payment of interest inherent in the debenture cannot be an "interest" in any surrounding managed investment scheme since those rights, although rights to "benefits" (in the form of principal and interest), cannot be said to be rights to "benefits produced by the scheme", since the debentures which are the source of the right (or in which it is embodied) are, by definition, not part of the scheme.
12 I am therefore of the opinion that, although, as I have said, the solicitation of investment in relevant debentures occurred in the course of the operating of a managed investment scheme, the rights inherent in those debentures are not properly to be regarded as "interests" in that managed investment scheme. It follows that s.601MB can have no application.
13 It was submitted by Mr Thomson that each relevant investor or would-be investor is entitled to recover the money paid by him or her to the first defendant assuming, in a case where an agreement was entered into, that the investor elects to rescind. This leads to a consideration of the contractual consequences of non-compliance with ss.727 and 601ED(5) in the context where persons were solicited by the first defendant to pay money to it in return for a promise of repayment with interest contained in a loan agreement made (or to be made) by the first defendant. That entails an examination of the scope and purpose of the particular statutory provisions.
14 In the case of s.601ED(5), the statutory prohibition strikes at the operation of a scheme. It has regard to an ongoing course of conduct in which some coherent plan of action is put into effect. There is, clearly enough, a legislative purpose of protecting the public from the risks presumed to attach to involvement in a scheme conducted otherwise than in accordance with statutory norms of behaviour. But the section does not, in terms, (or, as it seems to me, by necessary implication), prohibit the making of such contracts as are made in the course of operating a relevant scheme in contravention of the legislation. I would apply to the present circumstances the observations of Gibbs ACJ in Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 411 in relation to a statutory provision prohibiting the carrying on of banking business by anyone not holding an authority or licence under banking legislation. Gibbs ACJ said at p.415:
"The language of s. 8 indicates that it is directed, not at the making or performance of particular contracts, but at the carrying on of any banking business. In the course of carrying on such a business a body corporate may make and perform contracts, many, if not all, of which might be made equally by a bank or by a company which is not carrying on banking business. A contract to lend money on mortgage is one example; a contract of employment is another. Although all of the contracts made by a body corporate in the course of carrying on a banking business are ex hypothesi things which it does in carrying on the business, that is, in doing what is unlawful, it is impossible to accept that the legislature intended to invalidate all such contracts with the result that contracts to pay its employees, or those who provided it with services, would be void."
15 This approach was consistent with that taken by other members of the High Court. It may be that a prohibition upon a particular course of conduct will strike at contracts entered into as part of that course. But this will only be so if the statute shows an intention of forbidding contracts of the relevant kind as an element of the course of conduct: see for example Cornelius v Phillips [1918] AC 199 (money lending business) and McCarthy Bros (Milk Vendors) Pty Ltd v The Dairy Farmers Co-operative Milk Co Ltd (1945) 45 SR (NSW) 266 (milk vending business). Section 601ED(5) dos not have any particular subject matter or class of contract in contemplation and cannot, as I see it, be regarded as directed towards prohibiting contracts. This is particularly so in light of the existence of s.601MB which deals expressly with the contractual consequences of solicitation of investment in "interests" in a scheme operated in contravention of s.601ED(5).
16 Section 727 stands in a different light. It is a provision prohibiting the making of offers and invitations directed towards the formation of contracts. By clear implication, s.727 causes the party enjoined from issuing the offer or invitation to be forbidden to enter into any contract resulting from the offer or invitation so that, such a contract, if made, is itself illegal: see the discussion by Street CJ in Eq in Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207 at 241-243. It is to be noted, in this respect, that s.727 appears in Part 6D.3 which contains a number of provisions concerned with the effects of contravention of Chapter 6D. There is, for example, a provision permitting recovery of compensation where the content of a disclosure document does not conform to statutory standards. There is a provision allowing persons to return securities and have their money repaid where the securities are issued but certain conditions concerning minimum subscription or stock exchange listing have not been satisfied or a need for a supplementary prospectus has arisen but not been met. There is a like provision in relation to securities issued as a result of an unsolicited meeting or telephone call. Significantly, however, there is no provision specifying or even suggesting the contractual consequences where there is a breach of the prohibition upon solicitation of investment by offer or invitation in the absence of a disclosure document.
17 The prohibition imposed by s.727 exists to protect persons from being enticed by contravening behaviour into subscription contracts with respect to securities. Accordingly, persons who are drawn into such contracts by the initiators of illegal offers and invitations cannot be regarded as being in pari delicto unless they become knowing participants in the illegal design. Absent such fault, they may therefore obtain restitution according to equitable principles: see Hurst v Vestcorp Ltd (1988) 12 NSWLR 394 at 445-446 per McHugh JA, Kirby P agreeing. This is a case in which a duty not to solicit investment without creation and lodgment of a disclosure document is imposed by statute for the protection of investors as a section of society. The only consequence the statute envisages in case of contravention is the criminal sanction of fine or imprisonment or both. In the absence of evidence to the contrary, the parties are not in pari delicto, so that the investor illegally enticed without knowing participation in this illegality is entitled by the law of restitution to recover the money he or she has paid: Kiriri Cotton Co Ltd v Dewani [1960] AC 192. The unjustness of the enrichment represented by the soliciting party's receipt comes directly from the statutory illegality which is a clear and uncontroversial type of unconscionability. There is no evident statutory indication that restitution may not be had: see Australian Breeders Co-operative Society Ltd v Jones (1997) 26 ACSR 26. The function of equity in striking an appropriate balance in such cases was referred to by McHugh and Gummow JJ in Fitzgerald v Leonhardt Pty Ltd (1997) 189 CLR 215 at 231:
"[A]s was pointed out in Hurst v Vestcorp Ltd (1988) 12 NSWLR 394 at 445-446, what may now be classified as restitutionary remedies may be available to assist in the striking of a balance. For example, it was held long ago that where a borrower had paid interest in excess of the rate permitted by statute, whilst the debtor could not recover the whole back, an action would lie to recover the surplus Smith v Bromley , reported as a note to Jones v Barkley (1781) 2 Dougl 684 at 697 [99 ER 434 at 444]; Stoljar, The Law of Quasi-Contract , 2nd ed (1989), pp 228-229; Palmer, The Law of Restitution (1978), vol 2, par 9.14.. The use of the quantum meruit in Pavey & Matthews Pty Ltd v Paul may be seen as another example."
18 The balance thus referred to may require adjustments on each side: see Nelson v Nelson (1995) 184 CLR 538 per Deane and Gummow JJ at 561-564. If, in a case such as the present, the investor receives something of value, he or she must bring that to account in any restitutionary claim based upon the illegality affecting the formation of the contract. But if the contract is rescinded so that the investor foregoes any right to future receipts, the situation becomes one in which he or she holds nothing in return for the investment made, so that the restitutionary claim must be regarded as extending to the whole of the invested sum.
19 In the present case, special circumstances exist in relation to the funds received by the first defendant from investors or would-be investors. Those funds are retained intact in the hands of the first defendant in the form of either an unpresented bank cheque received from the person concerned or a separately identified and segregated credit balance in the special bank account established by the liquidators as a safe custody receptacle for moneys comprised in bank cheques received from such persons. The important point is that, by action of the first defendant through its liquidators, all relevant moneys retain their identity and are held intact. This circumstance supplies one of the elements for a finding of some form of equitable proprietary right to the particular funds on the part of the investor or would-be investor, being the element referred to by the English Court of Appeal in Re Diplock [1948] Ch 465 (at p.521):
"The equitable remedies presuppose the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by means of such a fund. If, on the facts of any individual case, such continued existence is not established, equity is as helpless as the common law itself. If the fund, mixed or unmixed, is spent upon a dinner, equity, which dealt only in specific relief and not in damages, could do nothing. If the case was one which at common law involved breach of contract the common law could, of course, award damages but specific relief would be out of the question. It is, therefore, a necessary matter for consideration in each case where it is sought to trace money in equity, whether it has such a continued existence, actual or notional, as will enable equity to grant specific relief."
20 The unpresented bank cheques and the money in the specially established bank account are the property of the first defendant - or, more precisely, it was submitted by Mr Thomson that this is the case and there is nothing in the facts before me to suggest otherwise. It follows that if restitution based on illegality is to cause the particular funds to be returned to the persons by whom they were paid, it will have to be seen that those persons have an equitable claim in respect of the specific property. It is here that the position of persons with whom the first defendant actually entered into the contracts differs from that of persons who, although they had paid money, never became the recipients of a contractual promise of the first defendant.
21 I have referred earlier to the possibility of an investor's electing to rescind the contract based in or proceeding from the illegal offer or invitation. Mr Thomson's suggestion that an investor who has become party to such a contract may rescind was founded on the proposition that the first defendant was guilty of fraudulent misrepresentation but, as I have said, I do not think that the evidence allows me to come to such a conclusion in relation to any particular contract. I therefore need to consider whether the unlawful conduct of the first defendant to which I have referred (that is, solicitation of investment in circumstances of illegality attracting the s.727 sanction) is of itself sufficient to justify rescission by an investor. That will depend on the circumstances of each case. At most, it seems to me, an investor will have a right to have the court set the contract aside on the basis that he or she was induced by unlawful conduct of the first defendant to enter into it ignorant of the illegality and that equitable intervention is justified on the basis of unconscionability. But the availability of that equitable relief may depend in part on the quality of the investor's own conduct. In seeking to assert and enforce an equity to rescind a contract (or, more correctly, to have the court set it aside), an investor would have to present a case that was not successfully met by a defence based on some factor constituting a disentitlement to equitable relief or a barrier to the grant of that relief.
22 A person who is party to one of the already concluded contracts under discussion therefore cannot, in my view, be presumed to be entitled to an order setting aside the contract. Such a right will depend on the circumstances of the particular case. Each instance will have to be separately examined and adjudicated upon. This is not a "one size fits all" situation. And since, in the case of investors with concluded contracts, rescission of the contract would be an essential prerequisite to any grant of restitutionary relief of the kind I have outlined, it is not appropriate that the court give to the liquidators any direction with respect to those cases.
23 The persons I have called "would-be investors" - that is, those who delivered bank cheques but never received any contractual promise - stand in a different position. They are not parties to any contract and there is no question of contracts being rescinded as part of machinery causing the funds handed over by them to be restored. The situation is one in which there is simply no pretext at all for retention of the funds by the first defendant. Even if the moneys have passed into the ownership of the first defendant, that has occurred in circumstances where it cannot conceivably assert any right to retain them, the payment having been made and received for a purpose that must be taken to have been abandoned by both parties. Following the collapse of the first defendant and assumption by its liquidators of responsibility for corporate decision making, it must be accepted that the would-be investor no longer intends to become party to a loan agreement with the first defendant and that the first defendant no longer intends to become party to a loan agreement with the would-be investor. Whichever theory of the doctrine of total failure of consideration one adopts, there has been a total failure of consideration in relation to the would-be investors.
24 This, coupled with the fact that the money received from the relevant would-be investors retains its identity in the hands of the first defendant under the control of its liquidators, leads to the conclusion that the moneys in question should be restored to the persons from whom they were received. Mr Thomson submitted that the circumstances of the case warrant the recognition of an equitable lien in accordance with principles enunciated in Hewett v Court (1983) 149 CLR 639. In my opinion, however, several factors combine to indicate that the situation is, rather, one of constructive trust. In the first place and as I have said, the very moneys contributed or paid over by each would-be investor exist in a readily identified and segregated form so that there is no question of property of greater value being something to which resort may be had in respect of some smaller claim. In Bathurst City Council v PWC Properties Pty Ltd (1998) 195 CLR 566, Gaudron, McHugh, Gummow, Hayne and Callinan JJ said:
"In any event, before the court imposes a constructive trust as a remedy, it should first decide whether, having regard to the issues in the litigation, there are other means available to quell the controversy. An equitable remedy which falls short of the imposition of a trust may assist in avoiding a result whereby the plaintiff gains a beneficial proprietary interest which gives an unfair priority over other equally deserving creditors of the defendant …. This appears to have been the cause of division between Gibbs CJ on the one hand and Mason J and Deane J on the other hand in Muschinski v Dodds (1985) 160 CLR 588. The Chief Justice saw as an adequate equitable remedy an entitlement of the appellant to a contribution from the respondent to the extent to which she had paid more than one-half of the purchase moneys, coupled with an equitable charge for that amount upon the half interest of the respondent in the land."