1826/04 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V TASMAN INVESTMENT MANAGEMENT LIMITED & 4 ORS
JUDGMENT
1 HIS HONOUR: By the originating process in this proceeding, ASIC sought orders in relation to what it considered to be the unlawful operation of a managed investment scheme called the Queen Victoria Project ("the Scheme"), which had been formed for the development of three parcels of land at Wentworth Falls. Various interim orders were made in April 2004.
2 There was a hearing on 9 July 2004, at which ASIC pressed for a declaration that the first defendant ("TIML") and the fifth defendant (Mr Warne) had contravened s 601ED of the Corporations Act by operating the Scheme as an unregistered managed investment scheme, orders restraining them permanently from operating an unregistered managed investment scheme in contravention of s 601ED(5), and an order for the appointment of an official liquidator, Mr Parbery, as receiver and manager to wind up the Scheme. TIML and Mr Warne opposed the appointment of an external official liquidator to wind up the scheme, making an alternative proposal for winding up under Mr Warne's supervision. On 23 July 2004, Barrett J delivered judgment, rejecting the alternative proposal (ASIC v Tasman Investment Management Ltd (2004) 50 ACSR 153; [2004] NSWSC 651). He made orders appointing Mr Parbery as receiver and manager to wind up the scheme and ordering him to file a report.
3 The order for the filing of a report required that the report should be one:
"(a) identifying and describing the assets and liabilities of the Scheme;
(b) confirming whether proper financial records have been kept for the Scheme; and
(c) identifying any reason for suspecting that any of the defendants may have any liability to the members of the Scheme in their capacity as such."
Mr Parbery in fact prepared two reports, dated 11 and 26 October 2005. The second report ("the Report") is in evidence on the present application. I shall return to its contents later.
4 On 12 December 2005 Mr Parbery approached the court by interlocutory process, seeking advice or a direction that he had been justified in entering into a deed of surrender and release with a person called Judith Harrison, and in performing and giving effect to the deed. Barrett J made an affirmative order, for reasons given in ASIC v Tasman Investment Management Ltd [2005] NSWSC 1332 (16 December 2005). By the same interlocutory process, Mr Parbery sought orders for the final distribution of the net proceeds of the winding up of the Scheme, after the completion of the deed of surrender and release.
5 The application for those orders was initially heard by me, in amended form, on 6 March 2006. The first and fifth defendants, respondents to the application, were represented at the hearing before me, by the solicitors who also represent the third defendant. There was no appearance on behalf of the second and fourth defendants, who were also named as respondents to the application, but correspondence was tendered showing that their solicitor agreed to the amended interlocutory process. ASIC, the plaintiff in the proceeding but not a respondent to the application, did not appear on 6 March. Nor was there any representation on behalf of the investors in the Scheme or any of the promoters or operators of the Scheme (other than the defendants/respondents). However, Mr Parbery wrote to the investors on 26 October 2005, the date of the Report, informing them that he had completed the Report and that he would seek confirmation from the court that the proceeds of sale of the Wentworth Falls properties should be distributed to the investors, "based on their original investment amount".
6 Mr Parbery said in his affidavit of 16 November 2005 that he was mindful of the limited funds available to be distributed to those entitled to them, and the effect that the costs he would incur by making further investigations would have on the prospects of making a distribution. Although he had not had the benefit of detailed legal advice on a number of issues because of the cost of obtaining advice, and the Report had made it plain that there were many complex facts and unresolved questions, he said he had formed the view, on the basis of his investigations and the material available to him, that the investors should be paid the balance of proceeds held by him, on a pro rata basis and as a final distribution, and that the Scheme should then be wound up.
7 By his application, Mr Parbery seeks two primary orders:
· an order directing him to make payment by way of a final distribution of the net proceeds, after payment of all expenses incurred in winding up the Scheme, derived from the realisation of the Scheme assets (including the three parcels of land comprising the development property at Wentworth Falls) to the investors whose details appear in the first schedule to the interlocutory process, in proportion to the amount of their investments as set out in the first schedule;
· a direction that upon distributing the funds held by him in accordance with the preceding order, he is to prepare and have passed by the Registrar of the Court his final accounts of the receivership, whereupon the winding up of the Scheme will be concluded and Mr Parbery will be discharged from his appointment as receiver.
8 In the alternative, he seeks directions as to what he should do in respect of the funds recovered to date, and as to whether he should consult with interested parties on the question of carrying out further investigations, and whether any legal proceedings should be instituted.
9 The first schedule to the interlocutory process is a list of 75 names with amounts adjacent to them, the amounts ranging from $10,000 to $800,000. The total of these amounts is $4,663,076.54. In an annexure to his affidavit of 3 March 2006, Mr Parbery updated the Report by informing the court that he had sold the remaining parcel of land at Wentworth Falls and that the net assets of the Queen Victoria Project on completion of that sale would be a fund of $895,335. He estimated that if he were to make a pro rata distribution of the whole of that amount to the persons listed as investors, they would receive a "dividend" of 19.2 cents in the dollar.
10 After considering the evidence tendered at the initial hearing of the application, I formed the view that it was necessary for Mr Parbery to address several additional matters. A directions hearing was held for that purpose, and at a subsequent hearing Mr Parbery tendered additional evidence in support of the application.
11 Some of the matters that I asked Mr Parbery to address were questions of fact going to the nature of the investors' rights in respect of the Scheme assets. Mr Parbery filed a further affidavit, sworn on 20 April 2006, directed to those matters. I shall refer to his evidence later in this judgment.
12 Other matters that I raised were procedural in character. One of the procedural matters was the attitude of ASIC to the application and to the Report. ASIC has now confirmed that it has received the Report and has been in communication with Mr Parbery's solicitors. ASIC has informed the court that it does not oppose Mr Parbery's application for final distribution orders, in accordance with the proposal set out in the Report.
13 Another procedural matter was whether persons criticised in the Report, who are not parties to the application or the proceeding, have been given adequate notice of the application. On 17 March 2006 Mr Parbery's solicitors, Henry Davis York, wrote to Teys Lawyers, the solicitors acting for the second and fourth defendants, informing them of the concern I expressed the directions hearing on the previous day. The letter said that the next hearing date would be advertised and Mr Parbery would provide express notification of the date to the unit holders in the QV Trust, including Mr and Mrs Brennan and other members of the Brennan family. The letter included a request for Teys Lawyers to indicate whether they had instructions to act for any of the unit holders or had contact details for them. There is no evidence of any reply to this letter. However, given that Teys lawyers act for two companies associated with Mr and Mrs Brennan, and have indicated that their clients do not oppose the orders sought, it seems to me as a practical matter that enough has been done to give specific notice to the Brennan family and other unit holders of the nature and contents of the application.
14 With a view to ensuring that adequate notification was given to any interested parties, I directed Mr Parbery to publish a notice of the application, including notice of the further hearing date, 21 April 2006. The notice was duly published by newspaper advertisement on 3 April 2006, and there was no appearance for any party other than the receiver and the first and fifth defendants at the hearing on 21 April.
15 The question for the court is whether it should make a direction that will permit Mr Parbery to give effect to the proposed distribution, and if not, whether it should require him to take some additional steps (and if so, what step should be taken). Before addressing the substance of those matters by reference to the facts presented on the application, it is necessary to consider whether the court has the power to grant the relief sought, and if so, whether there are any relevant limitations on the exercise of the power.
The court's power to make orders and give directions about the distribution of surplus funds in the winding up of an unregistered scheme
16 There is no statutory scheme for the winding up of an unregistered managed investment scheme, of a kind comparable to Parts 5.4B, 5.5 and 5.6 of the Corporations Act in the case of the winding up of a company. Instead, there is a single, short section. Section 601EE(1) simply says that if a person operates a managed investment scheme in contravention of s 601ED(5) (which prohibits the operation of a managed investment scheme that is required to be registered, unless it is registered), ASIC and certain others may apply to the court to have the scheme wound up. Then s 601EE(2) gives the court the power to make any orders it considers appropriate for the winding up of the scheme.
17 It was submitted on behalf of Mr Parbery that this subsection permits the court to make orders determining who is entitled to the surplus assets of the Scheme. If the Queen Victoria Project had been developed by a company and there were surplus assets in the court-ordered winding up of the company after the payment of creditors and the costs of the winding up, the liquidator would be required, after settling a list of contributories under s 478, to adjust the rights of the contributories amongst themselves and distribute any surplus among the persons entitled to it, with the court's special leave (ss 485(2) and 488(2)). Subject to the provisions of the company's constitution, that would normally lead to a pro rata distribution amongst contributories in the same class. According to the submission, the court should sanction the distribution of the surplus assets of the Scheme to the investors on a pro rata basis, by analogy with the winding up of a company.
18 Care must be taken to avoid any unreflective application of company law ideas to enterprises organised as managed investment schemes, whether registered or unregistered. As White J pointed out in Re Stacks Managed Investments Ltd (2005) 54 ACSR 466, at [41], the nature of the winding-up process depends on what it is that is being wound up. Thus, the winding up of a trust is quite a different thing from the winding up of a company, in terms of such matters as the rights of "scheme creditors" and investors (Stacks Managed Investments at [42]-[44]; see also Mier v FN Management Pty Ltd (2005) 56 ACSR 93 at [20] per Keane JA). Other analytical frameworks apply to the winding up of a scheme based on partnership, and a scheme based on contractual arrangements. Sometimes the person appointed to wind up a registered or unregistered scheme is described as a "liquidator", a title accurate enough to designate the function to be performed, but not to be confused with the liquidator of a company whose appointment carries with it the statutory consequences identified by White J (Stacks Managed Investments at [45]; see also Mier v FN Management, at [15]-[23] per Keane JA, a case where a "liquidator" had been appointed).
19 Although the winding up of a managed investment scheme proceeds within the appropriate general law framework, the statutory provisions governing the winding up of schemes give the court a great deal of flexibility. Subject to the provisions of the scheme's constitution in the case of a registered scheme, the court may use its statutory powers under Ch 5C (s 601EE(2) for an unregistered scheme, and s 601NF(2) for a registered scheme), and its general statutory and inherent powers, to make appropriate orders for the winding up of the scheme (Warne v GDK Financial Solutions Pty Ltd [2006] NSWSC 259, at [93]-[100] per Young CJ in Equity; Cumulus Wines Pty Ltd v Huntley Management Ltd (2004) 50 ACSR 58). In the case of an unregistered scheme, the statute does not attempt to lay down a basis for or method of winding up, and s 601EE(2) empowers the court to make "any orders it considers appropriate for the winding up of the scheme" (emphasis added). That led Barrett J to remark, in ASIC v Commercial Nominees of Australia Ltd [2002] NSWSC 576; (2002) 42 ACSR 240:
"… the court has jurisdiction to settle or prescribe any aspect or element of the basis for winding up or the winding-up process which it is necessary to supply because that element cannot be obtained from any other source."
20 The court may designate a person as responsible for winding up the scheme and appoint that person as scheme liquidator (as in Mier v FN Management), receiver, or (where appropriate, as in ASIC v Tasman Investment Management Ltd [2004] NSWSC 651; (2004) 50 ACSR 153) receiver and manager. It may confer on that person, by force of its orders, a liquidator's powers under s 477 or a receiver's powers under s 420 of the Corporations Act. The court may use its statutory and inherent powers to make orders and give directions in the course of the winding up of the scheme. For example, it may give directions in the nature of judicial advice, analogous to directions under s 479(3) (see, for example, Hamilton v Piggott Wood & Baker [2003] FCA 1055; Woods v Dodge [2003] FCA 1066), or make orders approving a compromise, analogous to orders under s 477(2A) (see, for example, Cook v Law [2003] FCA 966; ASIC v Tasman Investment Management Ltd [2005] NSWSC 1332).
21 However, it seems to me that the court's statutory and inherent powers do not generally permit it to make orders that depart from the proprietary rights of the scheme's participants. Mr Parbery's submission implies the proposition that s 601EE(2) authorises the court to approve a distribution program whether or not the proposal reflects the proprietary rights of those involved.
22 I am not persuaded that the case law supports Mr Parbery's proposition. It would be a surprising departure from the company law analogy, as the Corporations Act requires the liquidator of a company to distribute the surplus amongst the persons entitled to it (s 485(2)). Section 601EE(2) does not, in terms, authorise the court to sanction a scheme of distribution that overrides existing proprietary rights. The variation of existing rights may depend on the availability of legislation that permits the variation of trusts (such as s 63A of the Trustee Act 1958 (Vic)) or empowers the trustee to adjust the rights of beneficiaries in the course of management (such as s 81 of the Trustee Act 1925 (NSW): see Arakella Pty Ltd v Paton (2004) 60 NSWLR 334).
23 In Mier v FN Management, a community titles scheme called the Cairns Village Resort, operated by FN Management, was held to be an unregistered managed investment scheme, and liquidators were appointed to wind up the scheme. The directors and shareholders of FN Management were the registered owners of a property leased to FN Management and used as a manager's office and residence, a shop and a restaurant. The issue was whether that property was scheme property for the purposes of the winding up of the unregistered scheme. On an application by the liquidators under s 601EE(2), apparently contested by FN Management and its directors/shareholders, the primary judge ordered that the liquidators were at liberty to sell the property and pay the proceeds into court. The Court of Appeal of the Supreme Court of Queensland set aside those orders on the ground that the property was not scheme property.
24 Keane JA (with whom McMurdo P and Douglas J agreed) held (at [16]) that the power granted to the court by s 601EE(2) included the power, as a "necessary first step", to determine what should properly be considered to be the property of the scheme. In the circumstances of the case, the determination that his Honour envisaged was a final determination of the rights of the investors to the property in issue, in an inter parties application, rather than merely directions to the liquidators. It is significant for present purposes that the question considered by the Court of Appeal was a question about the true ownership of the property and its relationship with the scheme, rather than any discretionary variation of ownership rights.
25 The position appears to be the same in the winding up of a registered scheme under Pt 5C.9. In Stacks Managed Investments, White J said (at [42]):
"Where the scheme is a trust, what is envisaged by the winding up of the scheme is the realisation of its property, the payment by the responsible entity of liabilities incurred on behalf of the scheme or the retention by it of funds with which to meet its liabilities, the ascertainment of the members' entitlements, and the distribution of the trust assets to the members in accordance with their entitlements ." [emphasis supplied]
26 My conclusion is that the court cannot use s 601EE(2) to authorise a distribution of surplus assets of an unregistered scheme otherwise than to those entitled to the assets, in proportion to their entitlements.
27 That being so, what is the court's function when the scheme liquidator makes an application for a direction to implement a distribution proposal? The issue is whether it is permissible and appropriate to
· make binding declarations and orders finally resolving entitlements to the Scheme assets, and directing distribution in accordance with those entitlements; or
· go no further than to give directions that the receiver would be justified in making the proposed distribution, thereby protecting him or her from liability should the distribution later be shown not to reflect the entitlements of those concerned.
28 In Re GB Nathan & Co Pty Ltd (in liq) (1991) 9 ACLC 1291 McLelland J of the Supreme Court of New South Wales considered the court's power to give directions to a court-appointed liquidator under the predecessor of s 479(3). In expounding the law concerning liquidators, he relied on case law concerning the position of court-appointed receivers. He explained that directions given under the section deal with the manner in which the liquidator should act in carrying out his or her functions. He continued (at 1295):
"… the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitory form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the Court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction."
29 Subsequently, in ASIC v Melbourne Asset Management Nominees Pty Ltd (rec'r and mgr apptd) (1994) 49 FCR 334, Northrop J the Federal Court of Australia took a different view, holding that s 479(3) permitted the court to make binding declarations as to the rights of different classes of creditors of a company that had operated a mortgage investment scheme. McLelland J responded in Re BPTC Ltd (1996) 14 ACLC 845, adhering to his earlier view. In Woods v Dodge [2003] FCA 1066 Heerey J preferred the view of McLelland J to the view of Northrop J. On balance, it seems that binding orders affecting third party rights are not authorised by s 479(3). But even if they are, the case law as a whole makes clear that directions under the section are usually made in the limited form described by McLelland J. One reason for making directions in limited form is that, if they were authorised by the section, binding orders would not be made unless all affected parties (or their representatives, as an Arakella v Paton) were properly before the court.
30 By analogy, it seems to me probable that, whether or not s 601EE(2) permits the court to make binding orders about entitlements in a form that affects third parties, the court is likely to prefer to make directions having the limited effect described by McLelland J. There are several consequences of doing so. One is that the rights of claimants to the scheme funds distributed on winding up will be unaffected by the court's directions, except in one limited respect. The limited impact on claimants' rights is this: if the court directs that the receiver would be justified in implementing a scheme of distribution, after full and fair disclosure of the material facts has been made, and the receiver complies with the court's directions, the receiver will be protected from liability for any alleged breach of duty as receiver, to a creditor or beneficiary of the scheme, for anything done in accordance with the direction. It will therefore remain open to anyone who disagrees with the distribution sanctioned by the court to take proceedings to seek to recover the alleged overpayment. This is important in the case of the winding up of a managed investment scheme, in contrast with the winding up of a company, because the winding up does not lead to the dissolution of any of the entities that conducted the scheme and might subsequently be defendants in an action by an aggrieved investor or scheme trustee.
31 Another consequence of the court confining itself to directions in limited form is that the application may be dealt with by a relatively informal procedure analogous to the procedure on an application by a trustee for judicial advice or an application by a liquidator for directions. In HIH Casualty & General Insurance Ltd (in liq) v Building Insurers' Guarantee Corporation (2004) 51 ACSR 21, Barrett J observed (at [18]) that, where a liquidator applies for directions under s 479(3), the practice is for the applicant to place before the court a statement of facts identifying the particular matter upon which directions are sought. The court makes its decision on the basis of the facts presented to it by the liquidator, and if they are not presented fully and fairly, the liquidator loses the protection that would otherwise apply to conduct undertaken in accordance with the court's direction.
32 In these circumstances, I approach the present application on the basis that it is an application for directions having the limited effect of protecting Mr Parbery from liability to the extent that I have described. The question is whether, on the facts presented to me, I should direct Mr Parbery that he is justified in paying the net funds of the Scheme held by him to the investors whose details appear in the first schedule to the interlocutory process, in proportion to the amount of their investments as set out in the first schedule. The answer to this question does not depend upon in the court determining the rights of the investors to the Scheme assets. It depends upon whether there is a reasonable basis for Mr Parbery's proposal, sufficient to persuade the court that it is proper to exonerate him from liability for implementing the proposal; or conversely, whether there is any good reason why the liquidator should not proceed as proposed. That is the approach taken by McLelland J in Re GB Nathan. His Honour considered complex facts placed before him by a liquidator and decided whether, in relation to each asset class, there was any reason why the liquidator should not deal with the assets in the manner that he proposed. In the case of some assets, there was "no reason" why the liquidator should not do so, though in other cases the material before the court was insufficient to warrant giving any directions.
Mr Parbery's Report
33 In the Report, Mr Parbery gave an account of what he considered to be facts pertinent to ascertaining the interests of the investors in the Scheme. The Report was based on financial records and other documentation provided by the parties to this proceeding and others connected with the Scheme, together with publicly available records. He said he had endeavoured to determine the accuracy and reliability of the information provided to him, but he could not verify its accuracy, completeness or reliability. He explained that the matters dealt with in the Report are complex and he had not, because of limited funds, obtained detailed legal advice.
34 The Report indicated that funds were raised from investors in the year 2000 for the purpose of developing the properties at Wentworth Falls, previously the Queen Victoria Hospital owned by the Government of New South Wales, into a retirement village, the Queen Victoria Development Project. A brief summary of the persons and entities connected to the Scheme, and their roles according to the Report, is sufficient to convey complexity of the Scheme's financial arrangements.
35 The Scheme was initially promoted by Tim Brennan and his wife, Dianne Brennan. Mr Brennan was primarily responsible for day-to-day operation of the Scheme, including preparation and lodgment of a development application, and he was a director and shareholder of numerous entities involved in the Scheme and its operations. Mrs Brennan was also a director and shareholder of numerous such entities, and was a consultant to the Scheme. Colin Warne was the financial adviser to the majority of investors who participated in the Scheme, and he was a director of numerous entities involved in the Scheme and its operations. Stephen Harrison was a director and former director of numerous entities involved in the Scheme and its operations.
36 Mr Brennan established the QV Trust in February 2002. The purpose of the Trust was to develop and operate a longevity based healthcare facility at the Wentworth Falls property. It was alleged that the Scheme property was held on the trusts of the QV Trust.
37 The initial owner of the property at Wentworth Falls was Longevity Management Systems Pty Ltd ("LMS"), the second defendant. Its shareholders and directors were Mr and Mrs Brennan. It was the author of a property report outlining the investment opportunity. It was project manager and was the initial trustee of the QV Trust. The receiver said it appeared that LMS was the ultimate recipient of funds provided by investors in respect of the Scheme and effectively incurred, approved and paid all associated expenses.
38 TIML replaced LMS as trustee of the QV Trust and became the owner of the Wentworth falls property. It was the entity through which funds were raised with the National Australia Bank secured against the property. It was a promoter of the Scheme to investors and was the recipient of most of the investor funds. Its director was Mr Warne and it shareholder was Tasman Capital Ltd, whose director was also Mr Warne and whose shareholders were Mr Warne, Julie McConaghy, Peter Smith and Mason Investments NV. Tasman Capital held units in the QV Trust.
39 TIML granted an unregistered second mortgage to QV Mortgage Pty Ltd (the third defendant) in August 2002. The directors of QV Mortgage were Mr Warne and Mr Harrison and the shareholder was Tasman Capital Ltd.
40 Queen Victoria Project Management Company Pty Ltd ("QVPM") replaced TIML as trustee of the QV Trust in December 2002. Its directors and shareholders were Mr and Mrs Brennan.
41 The Report identified various other entities associated with Mr and Mrs Brennan and the Brennan family, or Mr Warne or Mr Harrison, that entered into contractual arrangements in connection with the Scheme, or provided services, or made loans to the Scheme. It is unnecessary to set out the details here.
42 The Scheme failed in the second half of 2002 when the Blue Mountains City Council rejected the development application for the project. By that time a substantial portion of the investors' funds, as well as the secured loan from the National Australia Bank, had been spent acquiring the property and on expenses said to be connected with the development. Mr Parbery sold the property and paid out the bank's loan, as well as reaching a settlement with Mrs Harrison, and has been left with surplus funds to which there are no claimants, other than the investors and one other claimant whose claim as an unsecured creditor has been rejected by Mr Parbery.
43 The Report identifies a number of unresolved questions. One set of problems relates to the investors' rights in respect of kept scheme assets. Another set of problems relates to potential recoveries on behalf of the Scheme.
The Report's analysis of investors' rights
44 Mr Parbery's analysis of the nature of the interest of investors is in section 4.3 of the Report. There he carefully reviewed documents that might give a clue to the nature of the investors' interest, noting that Mr Brennan made statements to him suggesting that the investors had invested in TIML, which was merely a creditor of LMS. Mr Parbery commented (Report, page 21) that he did not consider that Mr Brennan's statements were necessarily a true representation of the intentions of the various parties. He saw Mr Brennan's statements as a series of assertions "designed to obviate any responsibility of himself in either a personal capacity or as director/shareholder of any of the entities involved, to the investors due to the ultimate failure of the Scheme".
45 Mr Parbery pointed out that the initial property report issued by Mr Warne to investors (annexure 4 to the Report) described the opportunity as an "investment", and used terms and phrases such as "return of capital", "expected annual return" and "the investors' position is underpinned by anticipation of increasing land values". This language suggests some form of equity participation opportunity, as opposed to a loan with a fixed return of interest per annum. It appears from the initial property report that the investors' funds were to be provided to LMS.
46 Mr Parbery noted that there were several later documents suggesting that the investors may have a different kind of interest. He referred to an undated loan agreement between TIML and LMS, believed to have been made around May or June 2000. The document characterises the funds provided by investors as "loan instalments" secured over the property by way of mortgage. Mr Parbery noted some unsatisfactory aspects of that document.
47 Mr Parbery recorded that on 26 February 2002 the "Queen Victoria Unit Trust" or "QV Trust" was established, and the Wentworth Falls properties were purportedly vested in LMS as trustee of that Trust. If there was any intention that the investors would be allocated units in that Trust, the intention was not carried into effect. Having reviewed the books and records of the Scheme, Mr Parbery concluded that the initial units were transferred into the names of Mr and Mrs Brennan, funded by a "buyback" of their shares in LMS, which resigned as trustee and was replaced by TIML. The initial units were transferred to other members of the Brennan family and related entities, and to Mr Warne, and new units were issued. In the result Mr and Mrs Brennan were no longer unit holders but their family and related entities held 36% of the issued units, Mr Warne and his related entity held 13% of the issued units, a company controlled by Stephen Harrison and Julie McConaghy held 25% of the units, and the remaining 25% of the units were held by Wallaby Lot Nominees, a company that received units in consideration of the forgiveness of loans made to LMS.
48 The evidence as to whether the investors provided their money on the faith of the initial property report, or on the basis of some of the other documents, additionally or in substitution for the initial property report, is very skimpy. At the directions hearing I raised the question whether there might be some further evidence on the issue, but Mr Parbery said in his affidavit of 20 April 2006 that no additional relevant evidence had been located by him or his staff.
Findings about investors' rights
49 The evidence as to the nature of the investors' rights in the Scheme is the evidence given in Mr Parbery's Report (particularly section 4.3) and the annexed documents. There is a brief but useful outline of the background and development of the scheme in Barrett J's judgment of 23 July 2004 (see [2004] NSWSC 651 at [10]-[13]). Having reviewed documentary evidence, Barrett J said that the documents "provide a clouded picture of legal relationships among the several defendants in relation to the Wentworth Falls property, the development project in which it was to play a part and the 74 persons [now 75] who undoubtedly made funds available so that they might be pooled for the purposes of that project". Barrett J did not have the benefit of Mr Parbery's Report, but in that document Mr Parbery confirmed the "clouded picture" produced by perusal of the documents.
50 I am impressed by Mr Parbery's work in the Report, all the more so because he has limited the occasions for seeking legal advice. His work is of such quality and thoroughness that I see no reason to disagree with his analysis of the factual issues. One of the questions addressed in the Report is whether the Scheme assets are held on the trusts of the QV Trust. In my opinion, having regard to the material Mr Parbery presented in the Report, there would be reasonable grounds for him to take the view that, if the investors subscribed for some form of equity in the Scheme assets rather than equity in TIML or secured or unsecured loans, their equity investments were not governed by the QV Trust.
51 Another question considered in the Report is whether the investors were making an investment (equity or debt ) in TIML rather than in the Scheme. In my opinion, the Report provides reasonable grounds for Mr Parbery to conclude that the investors were not making an equity or debt investment in TIML, but rather their investment was in respect of the Scheme, by its trustee.
52 Another question explored in the Report is whether investments in the Scheme were by way of loan or equity investment. I have noted Mr Parbery's discussion of the language used in the initial property report. It seems to me plausible to infer, in view of this language, that any investors who subscribed on the faith of the initial property report provided their funds to the Scheme for an equity investment rather than a loan. This equity investment was not for shares in LMS, the trustee of Scheme assets at the time, because LMS is described as entitled to 30% of the development profit, with 70% being allocated to investors. LMS was to have "ownership", while the investors' "vehicle" was described as "direct". The source of financing for "land acquisition" was said to be "Investors". Additionally, it seems to me plausible to infer, notwithstanding the skimpy evidence, that the investors who provided their funds at around the time of the preparation of the initial property report, advised by Mr Warne, did so on the faith of that report and accordingly subscribed their funds as an equity investment. It is plausible to say that documentation prepared after the time of the making of the investments did not change the character of the investments as equity investments. It is also plausible to infer that investors who subscribed at a later time intended to make an investment of the same nature as the investments that had already been made, that is to say equity investments. On this reasoning there is no proper basis for distinguishing between investors at the time of land acquisition and investors during the development phase. Those who may have had an interest to assert otherwise have been adequately notified of the receiver's application and had not come forward to make submissions.
53 The wording of the initial property report suggests a trust by which LMS would hold its ownership of the property investment in trust for the beneficiaries of the development project, including the investors. Since, however, any intended trust was not formally constituted, there is a reasonable basis for concluding the investors retained the beneficial ownership of the funds they subscribed in response to the initial property report, on resulting trust. This is on the basis that the investors have transferred their investment funds to a recipient who has received them in trust, to hold on terms which have not wholly divested the investors of their interest in the funds: Re Vandervell's Trusts (No 2) [1974] Ch 269 at 290 (reversed on other grounds). This is a case where there was more than one "settlor", with the following result, according to Ford and Lee's Principles of the Law of Trusts (Lawbook Co, looseleaf, at [21020]):
"Where the trust fund in respect of which the full beneficial interest has not been disposed of was contributed by several persons, the resulting trust will be in favour of those persons or their respective personal representatives in proportion to their contributions: Re British Red Cross Balkan Fund [1914] 2 Ch 419; Beggs v Kirkpatrick [1961] VR 764; Burgess v Rawnsley [1975] Ch 429 at 441 per Browne LJ."
54 According to Mr Parbery's affidavit of 20 April 2006, investors' funds in a total sum in excess of $3 million were received into the trust account of Warne Investment Management Ltd. Mr Parbery's staff prepared a table entitled "Summary of Warne Trust Account", annexed to Mr Parbery's affidavit, which shows the identity of the investors, the amounts invested and the dates of deposit, and the application of each investment. The evidentiary foundation for the assertion implied in the table, to the effect that the funds received from Investor X were applied (say) to the settlement of the property while the funds received from Investor Y were applied (say) to repay Mr Warne, is not made clear in Mr Parbery's affidavit. But Mr Parbery has also of supplied, as an annexure to his affidavit, a document headed "Financial Examination" which is said to be an extract from the cashbook maintained by LMS for the Queen Victoria Project. It seems to me plausible to infer, on the basis of these documents, that there was a mixing of investors' funds in the bank account used to conduct the Warne Investment Management Ltd trust account. It appears that the moneys that were applied in the manner indicated in the table were applied by withdrawal from the bank account where the funds had been mixed. In those circumstances the assertion that the funds of one particular investor, rather than the funds of another investor, were applied for a particular purpose appears to be unwarranted, because it implies an approach to tracing that does not reflect the Australian law.
55 Where beneficiaries' funds are mixed in a common pool such as a bank account of the trustee, and after the mixing, the funds are partly dissipated and partly retained or invested in an asset held by the trustee, modern Australian cases do not allocate the loss amongst the beneficiaries by applying the "first in, first out" rule of Devaynes v Noble (1816) 1 Mer 572; 35 ER 781 (Clayton's Case). Instead they allow each beneficiary to assert a charge over the amount remaining in the account and any assets that can be identified as having been acquired, after the mixing, by the use of funds taken from the account (Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 48 ACSR 97; Commonwealth of Australia v Official Trustee in Bankruptcy (as trustee of the property of Vasil) [2004] NSWSC 1155; Westpac Banking corporation v Earthwise International Ltd [2005] NSWSC 1037; Re Rowena Nominees Pty Ltd; ex parte Conlan [2006] WASC 69). Where the sum of the balance of the bank account and the realisable amount of any charged asset or assets is less than the total amount of the beneficiaries' charges, the charges usually abate proportionately, with the consequence that the beneficiaries share pro rata in the balance of the account and the proceeds of realisation of the assets. Pro rata distribution is departed from only in circumstances not relevant to the present case (see French Caledonia Travel at [177]-[185]).
56 It seems to me plausible to say that these principles govern investors' funds in an amount of over $3 million in the present case. The reasoning is as follows. Those funds were mixed in a bank account that was held in trust. Withdrawals were then made, partly to be dissipated and partly to be invested in the acquisition of the Wentworth Falls properties. The investors, being beneficiaries under resulting trusts, had equitable charges over the balance in the account and the properties so acquired. There being a shortfall, their charges abate proportionately.
57 A potential difficulty with this analysis is that the Wentworth Falls properties were acquired by a third party to the trust relationship, namely LMS. Where the trustee has disposed of funds to a third party which uses those funds to acquire an asset, the beneficiaries' right to trace against the asset in the hands of the third party depends upon whether the third party acquired the asset as a volunteer or with knowledge of the beneficiaries' rights Re Diplock; Diplock v Wintle [1948] 1 Ch 465; French Caledonia Travel at [129]-[134]).
58 Mr Parbery has provided evidence, in his affidavit of 20 April 2006, on the question whether LMS had notice of the investors' rights when it used funds deriving from the Warne trust account for the acquisition of the properties. The evidence, comprising various financial records, indicates that LMS, through its appropriate officers, was aware that funds it received in connection with the acquisition of the properties were from an investment syndicate associated with Mr Warne. Some of the documentation treats these funds as loan funds, but the foundation for inferring that the investments were equity investments was in a document initially prepared by LMS itself, namely the initial property report. In the circumstances, it is plausible to infer that LMS acquired the properties with knowledge of the investors' beneficial rights.
59 The table called "Summary of Warne Trust Accounts" relates only to funds totalling $3,027,076.54. The total amount of the investors' claims shown in the schedule to the interlocutory process is $4,663,076.54. Therefore the evidence is incomplete. I infer from his evidence that Mr Parbery and his staff have diligently attempted to trace the flow of all of the investment funds and have not been able to provide further information regarding the balance of the funds. As to that balance, the position is that there are reasonable grounds for inferring that they are held on resulting trust, no evidence demonstrating that they have been separately dissipated, and some evidence to indicate that they were intended to be used for the purposes of the Scheme. In the circumstances, my view is that it would be reasonable for Mr Parbery to proceed on the basis that those investors should be treated in the same fashion as the other investors for whom better evidence is available.
60 Taken as a whole, Mr Parbery's evidence in his Report and subsequent affidavits satisfies me that there is a good arguable case for the view that the investors were the beneficial owners of the Wentworth Falls property when it was acquired, subject to the secured rights of the National Australia Bank, because their investments were received subject to resulting trust in their favour and the investments were pooled and used in part as a contribution to the purchase money of the property, the only other contribution being from the National Australia Bank loan. On the basis of the evidence before me now, there is a sufficient foundation for Mr Parbery to take the view that the surplus funds in his possession belong in equity to the investors in rateable proportions and should be distributed to them pro rata.
Potential recoveries
61 In section 6 of the Report, Mr Parbery considered at length whether any of the defendants might have any liability to the investors, in response to Barrett J's direction that he should do so. He discussed whether any of the defendants might be treated, by order under s 601EE(2), as a responsible entity having statutory liability as such under Ch 5C of the Corporations Act. It seems to me unlikely that a court would attach liability to any of the defendants as a responsible entity, since the Scheme was not a registered managed investment scheme and the statutory liabilities of a responsible entity arise only in connection with a registered scheme.
62 Mr Parbery considered whether the defendants may be civilly liable under the general law of fiduciary duties. This raises the question whether they were in fiduciary positions and had allowed their personal interests to come into conflict with their fiduciary duty, or were liable as accessories for breaches of fiduciary duties. He recounted some facts which, if true, would suggest breaches of fiduciary duty or accessory liability either by some of the defendant corporate entities or perhaps by Mr and Mrs Brennan and Mr Harrison. I do not intend to set out the allegations in any detail here, as they have not been proven. Suffice it to say that there are many facts suggestive of related party transactions and other self-interested dealings of a serious kind, prima facie justifying further investigation through examinations or otherwise.
63 However, Mr Parbery has expressed the considered view, after what seems to me to be a thorough and careful examination of the facts available to him, that the interests of the investors would best be served by distributing the net assets in his hands without further investigation, and then terminating his position as receiver and manager. I can see no basis for questioning his good faith and independence in expressing those views. His application for orders and directions to give effect to his views has been notified to the parties, the investors, and to the unit holders of the QV Trust, and by newspaper advertisement, and none of them has come forward to contest the application. Mr Warne and TIML do not oppose the application.
64 The pursuit of further investigations, especially if they involve a process of examinations, and the initiation and maintenance of proceedings, would be expensive in proportion to the net funds available for that purpose. There would be a risk that all of the funds would be consumed, whereas a distribution at the present time would give the investors about 19 cents in the dollar. No one has come forward to fund any such process. Importantly ASIC, the regulator who initiated this proceeding and has the resources to take further steps, does not oppose the receiver's application.
65 A relevant consideration is that the making of the distribution and termination of the receivership will not have the effect of extinguishing any rights that may have arisen by virtue of the matters described in the Report. The rights of ASIC, or anyone with standing to take proceedings, will not be diminished if the court accedes to Mr Parbery's application, although the fund presently available for further investigations and proceedings will no longer exist.
66 Taking all of these matters into account, I have reached the conclusion that the court should not require Mr Parbery to conduct further investigations or take other steps to pursue recoveries.
Conclusions
67 I shall make orders and directions along the lines of the amended interlocutory process, although (for the reasons explained earlier) I shall take into account that the appropriate direction is that the receiver is justified in taking the steps he proposes.