The proceedings to date
1 By an originating process filed on 9 March 2004, the plaintiff (ASIC) sought various orders in relation to what it considered to be the unlawful operation of a managed investment scheme centred upon a proposal to develop a property at Wentworth Falls. The proposal was known as the "Queen Victoria Project", the property being the site of the former Queen Victoria Hospital.
2 The first return date was 12 March 2004. On that occasion, certain undertakings were proffered to and accepted by the court and certain orders were made. Among the undertakings was an undertaking by the fifth defendant (Mr Warne) that he would at his own expense:
(a) commission and obtain a proper valuation of the Wentworth Falls property;
(b) make such payments as may be necessary to the National Australia Bank to ensure that for the time being it did not appoint a receiver under its mortgage of the property;
(c) subject to the prior approval of ASIC, prepare and circulate to all investors in the scheme "a report following upon the receipt of the valuation disclosing fully the alternatives which exist";
(d) subject to like approval, convene a meeting of all investors in the scheme "to report to them upon the proposals and to elucidate by vote the attitude of the investors to the alternatives which then exist"; and
(e) subject to like approval, report to the court "the wishes of the investors alternatively for sale or completion of the project".
3 On 5 April 2004, an order was made by consent of ASIC, the second defendant (Longevity Management Systems Pty Ltd) and the fourth defendant (Queen Victoria Project Management Company Pty Ltd), restraining those two companies permanently from operating an unregistered managed investment scheme in contravention of s.601ED(5) of the Corporations Act 2001 (Cth).
4 On 16 April 2004, Mr Warne was released from undertaking (c) given on 12 March 2004 and he and the first defendant (Tasman Investment Management Ltd or "TIML") and the third defendant (QV Mortgage Pty Ltd) gave certain undertakings to the court. TIML undertook to cause to be sent to each investor a particularly identified circular. All three parties undertook that they would, subject to first receiving approval from ASIC, prepare and circulate to investors "a report setting out the options which exist with respect to the site" together with the valuation obtained. Mr Warne was, on 23 April 2004, released from the latter undertaking.
5 Various documents were in due course sent to investors and a meeting took place. I shall return to those matters.
The hearing on 9 July 2004
6 The proceedings were listed before me on 9 July 2004 for hearing of ASIC's originating process. Mr Stack of counsel appeared for ASIC. Mr Ireland QC appeared for TIML, Mr Warne and the third defendant.
7 ASIC pressed for, first, a declaration that each of TIML and Mr Warne had contravened s.601ED by operating an unregistered managed investment scheme known as the "Queen Victoria Project", second, an order that TIML, Mr Warne and the third defendant be restrained permanently from operating an unregistered managed investment scheme in contravention of s.601ED(5), third, an order that Mr Parbery, an official liquidator, be appointed, without security, as receive and manager to wind up the scheme, fourth, certain orders ancillary to the third order and, finally, an order that TIML, Mr Warne and the third defendant pay ASIC's costs of the proceedings.
8 Mr Ireland QC announced that the making of the first and second of these orders was not opposed by the parties to whom the orders were directed. Mr Ireland also made it clear that his clients were content to see an order made under s.601EE for the winding up of the scheme, although on a particular basis that he described which would see no role at this point for Mr Parbery or any other official liquidator.
9 In the result, therefore, there was no submission that the court should not make an order for the winding up of the particular scheme, but there is no consensus as to the way in which the winding up should be carried out or as to who should have the carriage of it. Before addressing those issues, I should say something about the managed investment scheme, its history and its present circumstances.
Background to the scheme
10 In December 2002, TIML obtained a dealer's licence under the Corporations Act authorising it to act as the responsible entity for two registered managed investment schemes, being the Tullimbah Village Trust and the Wollongong Prime Property Trust. In January 2004, ASIC served on both TIML and Longevity statutory notices requiring the production of specified documents in relation to the "Queen Victoria Village Project", the "Queen Victoria Trust" and the "QV Project". Documents were produced shortly afterwards. Those produced by TIML were sent to ASIC under cover of a letter dated 29 January 2004 from a firm of accountants, Shannon & Co. That letter stated certain background facts which I do not think are controversial and may usefully be stated:
"By way of background, the QV Project commenced in or around June 2000 based upon developing a nursing home and retirement village complex at Wentworth Falls.
Longevity Management Systems Pty Limited ('LMS') was the manager of the scheme with TIML responsible for raising the initial capital.
TIML raised approximately $2 million to acquire the land and a further $2.7 million ($1.8 million from TIML) over eighteen months was raised to fund the project planning, DA's and holding costs of the project.
In or around December 2001, Council rejected the DA for the retirement village component although TIML was not notified of this until some six months later."
11 Certain undisputed background facts may be added to those stated in the letter of 29 January 2004. Funds for the Queen Victoria Project were raised from some 74 investors. Of these, about 65 were introduced by Mr Warne who is an investment adviser and, at this stage, the sole director of TIML. The total raised was slightly more than $4,660,000. There is in evidence a form of circular and brochure Mr Warne used to solicit funds. Of the funds raised, some $2 million was spent on the acquisition of the Wentworth Falls property which currently stands registered in the name of TIML subject to a mortgage to the National Australia Bank securing a debt of some $680,000. The equity of redemption in the property is now essentially the only asset of the scheme, the balance of the funds raised having been expended. A recent valuation put the value of the property at some $2.3 million. If it proved possible to sell the property for that sum, there would be roughly $1.6 million left for investors after allowing for the bank debt.
12 The mortgage facility provided by National Australia Bank is said to have "expired", from which I infer that the principal sum is presently due and payable. Mr Shannon, the principal of Shannon & Co, said in evidence that TIML has no resources of its own to negotiate an extension of the existing facility or the creation of a new one. Mr Warne and his company, Warne Financial Services Pty Ltd, have kept up periodic interest payments out of their own resources.
13 Three trust instruments (or purported trust instruments) are in evidence. Under the first (apparently executed on 26 February 2002), the second defendant ostensibly became the trustee of a unit trust known as the "QV Trust" established "to develop and manage a multi-function longevity based health care facility" at the Wentworth Falls property. By the second, dated 27 February 2002, TIML appeared to replace the second defendant as trustee of the unit trust. By the third, dated 23 December 2002, the fourth defendant ostensibly replaced TIML as trustee. Various related documents are in evidence. Between them, these 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 who undoubtedly made funds available so that they might be pooled for the purposes of that project. It is sufficient to say, at this point, that there was a "managed investment scheme", as defined by s.9, in relation to the property, that it was never registered under Part 5C.1 of the Corporations Act and that the 74 investors were "members" of it, as defined by s.9. Ascertainment of the parameters and terms of the managed investment scheme will require examination at the appropriate time. The precise nature of the interests under the managed investment scheme was not canvassed before me and I make no findings on that subject.
The question for decision
14 There is, as I have said, no contest on the question whether the court should order winding up of the scheme under s.601EE(2) and make declarations of contravention and related injunctions. As to the conduct of the winding up, however, the parties are in disagreement.
15 ASIC says that Mr Parbery, an official liquidator, should be appointed receiver and manager of the property of the scheme and to wind up the scheme and that the court should make ancillary orders conferring appropriate powers on him accordingly.
16 Mr Ireland's clients propose a different regime. They do not oppose, in concept, the making of an order for winding up but say that, so far as the conduct and incidents of the winding up are concerned, the court should, at this stage, not go beyond orders that TIML itself sell the Wentworth Falls property and bring the proceeds into court. It is envisaged that TIML would give to the court an undertaking to appoint Mr Shannon as its agent to effect the sale and that he would, in turn, undertake to the court to act for TIML in effecting a sale and pursuing it to completion and to bring the proceeds into court following completion. Mr Shannon's undertaking would be supplemented by an undertaking by Mr Warne "to continue to make interest payments to the National Australia Bank during the period of such sale from my own resources".
17 Mr Shannon, as I have said, is the principal of Shannon & Co to which reference has already been made. He and his firm have performed a number of tasks for Mr Warne and TIML in relation to the Queen Victoria Project, including, in particular, in connection with the meeting of investors held on 29 April 2004. Mr Shannon and his firm were first retained by Mr Warne and his interests in August 2003. His involvement in matters concerning the Queen Victoria Project dates from January 2004.
Approaches in decided cases
18 Section 601EE(2) says nothing about the way a winding up ordered by the court is to be carried out or who ought have the carriage of it. These matters are left entirely to the court's orders. The present case is not the first in which it has been submitted that the court should allow the entity operating and administering the scheme to attend to its winding up under s.601EE. It is instructive to look at some of the decided cases.
19 In Australian Securities and Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778, it was submitted that the court should not order winding up of the relevant schemes but, rather, allow persons associated with them to realise assets and distribute them among the investors. Owen J rejected any such approach:
"I have come to the conclusion that it would be in the public interest for the schemes to be wound up in a formal administration. I have reached these conclusions for a number of reasons.
(1) As detailed in the receiver's report, at least some of the investments are in a questionable state and, in my view, it would be better if an independent person were in control of the recovery processes. The statement that there are question marks hanging over some of the investments is especially the case in relation to BBF for the reasons set out in paras 5.97-5.108 of the receiver's report.
(2) It is at least conceivable, because of the intra-group transactions, that there may be disputes as to the true ownership of some assets and as to the true purport of certain of the transactions.
(3) It may also be the case that investors take differing views as to the appropriate method of finalisation, for example, if some were to request direct transfer of securities while others opted for the proceed of realisation. Difficult questions might arise as to the allocation of costs. Again, it would be preferable for an independent person to take control of these investigations.
(4) I note also the evidence that in some instances dividends have been paid to investors purportedly as returns from certain investments that are in excess of receipts in relation to those investments. If this is so, there must inevitably be an accounting between the various interest.
(5) Finally, placing the schemes under the control of an independent external controller in a winding up will remove the conceptual problems that would arise if finalisation were to be effected with further breaches (albeit technical) of the Law. In this respect, it is difficult to see how the schemes could be finalised without dealings in securities. It is common ground that neither Hicks, Sims nor Percy nor any of the corporate entities are the holders of requisite dealers' licences."
20 In Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561, Davies AJ appointed an external and independent person to carry out a winding up ordered under s.601EE(2). Part of his reason for doing so is stated in the following passage:
"Funds are still held and their distribution needs to be resolved. In the present case, the winding up of the scheme should not be left to Mr McKim or any other person who may be connected with Pegasus. It is in the interest of the investors and it is in the public interest that the scheme should be wound up in a formal administration."
21 The same approach was taken by Byrne J in Australian Securities and Investments Commission v IP Product Management Group Pty Ltd (2002) 42 ACSR 343:
"The continuing operation of these schemes would involve a contravention of s 601ED(5) and, as will be seen, their project manager is also to be wound up. The proper course is for the affairs of the music schemes to be placed in the hands of a responsible, experienced and reputable person who can, if possible, get in the assets and distribute them to those persons who may be entitled to them."
22 In Australian Securities and Investments Commission v McNamara (2002) 42 ACSR 488, it was submitted that the schemes' operator could attend to winding up under a limited power of attorney already held. Mansfield J did not accept that submission:
"I do not think the position is as clear as he says. Given the timing of the purported assignment of rights of the limited partners in AFLP through their units, the purported cancellation of those units, and the issue of shares in EMS, I am not persuaded that each of those transactions was independent and without consideration. The scheme still has some funds, albeit minor. It is unclear whether the unit holders have any ongoing rights in funds already paid to ASSF, or what accounting from ASSF the scheme might be entitled to.
Moreover, there are matters indicating that the extent of rights that AFLP has in any successful marine salvage are uncertain. AAIS purported to transfer the rights of AFLP under the joint venture agreement dated 28 November 2001, but it is not a party to that agreement and it is unclear how it was able to do so. There may be some issue to explore, by virtue of JJM's information provided to ASIC that he has assigned 80% of what he gets under the joint venture agreement with ASSF to AFLP, as to the extent of AFLP's rights. He has indicated to ASIC a further agreement with ASSF dated 27 February 2002, which he said varied the joint venture agreement dated 28 November 2001, but in a way which does not accord with the purported transfer of rights under that agreement to AFLP. Legal advice provided to JJM and AFLP, moreover, has described the documentation as 'poorly drafted', 'incomplete' and 'difficult to follow'. That advice stated that the solicitors were 'not confident at all that the documentation accurately reflects (and more importantly protects) the respective parties and their interests'.
In the circumstances, I consider that it is in the public interest, and in the interests of those limited partners of AFLP granted units in AFLP in response to an application made following the proposal are better protected if the scheme is wound up by the appointment of a liquidator independent of the parties, rather than to leave it in its present position where it may or may not be wound up, or if it is to be wound up would be wound up under the control of one of the persons presently directly involved in its control."
23 The operator of the relevant schemes was appointed to wind them up in Re Lawloan Mortgages Pty Ltd [2003] 2 QdR 200, but under the supervision of two registered liquidators who had previously been appointed by the operator to be "supervisors of the loan schemes". The functions of the "supervisors", as stated in a deed appointing them, were described by Holmes J as follows:
"The deed of appointment confers on the supervisors powers to review the applicant's actions in relation to each loan and the conduct of the winding up; to make inquiries for the purposes of advice to the applicant and to advise ASIC separately of such advice; and to report to ASIC on any matter of concern in the winding up, including any negligence, breach of trust or illegal conduct on the part of any past or present officer of the applicant, any investor, borrower or any other person associated with the scheme. However, it specifically exempts the supervisors from any obligation to conduct a historical review of the conduct of the schemes."
24 In deciding to commit the winding up to the scheme operator under the supervision of two registered liquidators, her Honour considered five main factors. The first was, in general terms, the question whether conflicting interests of the operator would cause it to be ineffective in, or present potential dangers to, due and orderly administration of the realisation of assets and distribution to members. The second factor (an aspect of the first) was whether due conduct of the winding up might require assessment of rights of action the investors could have against the operator and persons associated with it. The third matter was a submission that appointment of an outside party was likely to create a marketplace perception "that bargains were to be had when the properties were being sold: the 'fire sale' effect". The fourth factor was fees: those proposed to be charged by the "supervisors" were lower than those proposed to be charged by the external and independent person proposed for appointment. The fifth matter was the views of the investors.
25 In Bells Securities Pty Ltd v LPG Mourant [2002] QSC 156, heard a few weeks before the Lawloan case, an outcome equivalent to that there sought and granted was denied. Wilson J considered it inappropriate to order that the scheme's operator be responsible for the winding up, even under the supervision of two insolvency practitioners. Her Honour accepted the submission of ASIC, as intervenor, that independent parties should be appointed. The task she saw as confronting the court upon such an application was stated as follows:
"Under s610EE (2) of the Corporations Act the Court "may make any orders it considers appropriate for the winding up of the scheme." It is a wide discretion. In the course of argument the following factors were identified as relevant to its exercise: