//
[2009] QSC 58
General information, not legal advice.
Supreme Court of Queensland
2009-03-24
Martin J
Original judgment source is linked above.
CORPORATIONS LAW - PROCEDURAL REQUIREMENTS - SHARES - ORDER TO PURCHASE - where respondents invited applications for shares and distributed share application forms - where shares were subsequently issued to applicants - where a no disclosure document was lodged with ASIC- whether the offering breached the 20/12 rule ('small scale offering') in s 708 Corporations Act - onus of proof - whether a disclosure document should have been lodged.
CORPORATIONS LAW - CONTRAVENTIONS - where respondents prepared and distributed a business plan - where respondents prepared and distributed a company newsletter promoting their business - where respondents created and displayed a web site promoting their business - where respondents made statements regarding the issue and sale of shares in their business - where respondents issued shares in their business - where respondents accused of conducting a 'financial services business' without a licence - where the issuing of shares was not the respondents' primary business activity - where respondents claimed to be merely 'raising capital' - where issue was of a 'one-off' nature - meaning of 'carrying on' and 'business' - whether the respondents breached s 911A of the Corporations Act.
CORPORATIONS LAW - MISLEADING & DECEPTIVE CONDUCT - REPRESENTATIONS - where respondents hoped to develop a machine powered entirely by magnets - where a prototype was made - where respondents stated an attempt to run machine was 'successful' - where respondents warned of risks and uncertainties - where respondents alleged to have represented that their invention/prototype worked - where no one in particular was alleged to have been misled - whether a hypothetical person of the relevant class would likely have been mislead or deceived by the respondents' representations - discussion of principles - whether respondents breached s 1041H of the Corporations Act.
CORPORATIONS LAW - MISLEADING & DECEPTIVE CONDUCT - REPRESENTATIONS - future matter - where respondents stated they had a 'Patent Program' - where respondents stated they expect to obtain patents for their invention - where no patents were obtained or applied for - where respondents made qualifying statements as to risks and uncertainties - whether the respondents had a reasonable basis for making the representations - whether a hypothetical person of the relevant class would likely have been mislead or deceived by the representations - discussion of principles - whether respondents breached s 1041H of the Corporations Act.
CORPORATIONS LAW - MISLEADING & DECEPTIVE CONDUCT - REPRESENTATIONS - future matter - where respondents made statements regarding future expenditure - where actual expenditure did not reflect projections - where respondents made qualifying statements - where respondents alleged to have made misleading representations - whether the respondents had a reasonable basis for making the representations - onus of proof - discussion of principles - whether a hypothetical person of the relevant class would likely have been mislead or deceived by the respondents' representations - whether respondents breached s 1041H of the Corporations Act.
Revised Explanatory Memorandum, Financial Services Reform Bill 2001
Trade Practices Act 1974 (Cth), s 51AF, s 52, s55A
Australian Patent Office's Patent Manual of Practice and Procedures, 2.11.3.11
ASIC v Arafura Equities Pty Ltd [2005] QSC 376
ASIC v Edwards [2004] QSC 344
ASIC v FUELbanc Australia Ltd [2007] FCA 960; (2007) 162 FCR 174
ASIC v McDougall & Anor [2006] FCA 427; (2006) 57 ACSR 175
ASIC v Mapstone [2006] NSWSC 993; (2006) 59 ACSR 214
ASIC v Mauer-Swisse Securities Pty Ltd [2002] NSWSC 741; (2002) 42 ACSR 605
ASIC v Narain [2008] FCAFC 120; (2008) 169 FCR 211
ASIC v Pegasus Leveraged Options Group Pty Ltd [2002] NSWSC 310; (2002) 41 ACSR 561
ASIC v Sweeney [2001] NSWSC 114
ASIC v Varsity Lodge Pty Ltd [2007] QSC 376
Bill Acceptance Corporation Ltd v GWA Ltd (1983) 50 ALR 242
Bowler v Hilda Pty Ltd (1998) 80 FCR 191
Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592
Chugg v Pacific Dunlop Ltd [1990] HCA 41; (1990) 170 CLR 249
Campomar Sociedad Limitada v Nike International Ltd [2000] HCA 12; (2000) 202 CLR 45
Concrete Constructions (NSW) Pty Ltd v Nelson [1990] HCA 17; (1990) 169 CLR 594
Domain Names Australia Pty Ltd v .Au Domain Administration Ltd [2004] FCAFC 247; (2004) 139 FCR 215
Downey v Carlson Hotels Asia Pacific Pty Ltd [2005] QCA 199
Fubilan Catering Services Pty Ltd v Compass Group (Australia) Pty Ltd [2007] FCA 1205
Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82
Hearn v O'Rourke [2003] FCAFC 78; (2003) 129 FCR 64
Hope v Bathurst City Council [1980] HCA 16; (1980) 144 CLR 1
Houghton v Arms [2006] HCA 59; (2006) 225 CLR 553
McGrath and Anor v Australian Natural Care Products Pty Ltd [2008] FCAFC 2; (2008) 165 FCR 230
Medical Benefits Fund v Cassidy [2003] 135 FCR 1
NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90
National Exchange Pty Ltd v ASIC (2004) 49 ACSR 369
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191 at 199
Purkess v Crittenden [1965] HCA 34; (1965) 114 CLR 164 at 167-168
R v Jarvis (1756) 1 East 643, 102 ER 249
Re AIRC; ex parte ATOF [1990] HCA 52; (1990) 171 CLR 216
Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160
Sykes v Reserve Bank of Australia [1998] FCA 1405; (1998) 88 FCR 511
Taco Company of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177
Telstra Corporation Ltd v Optus Communications Pty Ltd (1997) ATPR s41-541
Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc [1992] FCA 630; (1992) 38 FCR 1
Wright v Wheeler Grace & Pierucci Pty Ltd [1989] FCA 127; [1989] ATPR 40-940
"Statutory Injunction - Call for amendments to s1324 of the Corporations Act" (2006) 24 C&SLJ 41
Mr S J Keim SC with Ms E Longbottom for the applicant
Mr A J H Morris QC with Mr L Jurth for the third and fourth respondents
Garland Waddington Solicitors for the first and second respondents
DLA Phillips Fox for the third and fourth respondents
[1] For hundreds of years people have been investing time, money and effort in attempts to create a perpetual motion machine. Even though such a machine would violate either or both of the first and second laws of thermodynamics, there has been a continual stream of these "inventions" since at least the twelfth century. Coincident with that has been the quest by the "inventors" for funding to support their creations. There are many examples of funds being raised to sustain these endeavours. There have also been many who have been willing to point out the impossibility of these attempts, sometimes with scathing condescension.[1] On other occasions the would-be inventor is met with bureaucratic intolerance.[2]
[2] One of the ways in which it has been claimed that a machine can be created, which will require no external fuel input, is through the applied use of very strong magnets. That is the case here. In England the subject was studied during the reign of Queen Elizabeth, with a text on the properties of magnets being published in 1600.[3] Bishop John Wilkins,[4] in his book Mathematical Magick,[5] discusses the "difficulty" of achieving perpetual motion, and considers in detail a device consisting of two tilted ramps, an iron ball, and a magnetic lodestone fastened at the top. He determined that the device could not work but concluded: "So that none of all these magnetical experiments which have been as yet discovered, are sufficient for the effecting of a perpetual motion, though these kind of qualities seem most conducible unto it; and perhaps, hereafter, it may be contrived from them." The interaction among magnets, electricity and the generation of power has been investigated by giants of the field: Coulomb, Ampere, Faraday and Tesla.
[3] In this case, the applicant ('ASIC') says that the respondents have, in promoting a machine said to run solely on the power of magnets, engaged in misleading and deceptive conduct and have otherwise breached legislative provisions regulating fund raising by corporations. That simple description might lead one to the quick conclusion that the promotion of a "perpetual motion" machine must fall into the 'misleading and deceptive' basket, but looks can be deceptive in more than one way and the statutory remedies are not to be employed without careful scrutiny of what a promoter actually says and does.
[4] The provisions of the Corporations Act 2001 ('the Act') which deal with misleading and deceptive conduct are not designed as a complete shield to protect individuals against their own avarice or cupidity. Just as people will continue to play games of chance in casinos (knowing that the odds are in favour of the house) or buy tickets in lotteries (knowing that the chance of winning is one in many millions) so people will continue to chance their money in investments which, to others, appear far too risky. They sometimes adopt the attitude of one of the deponents whose affidavit was relied upon by ASIC - they see the investment as a bit of a gamble.
[5] ASIC alleges that each of the respondents has contravened the Act and the Australian Securities and Investments Commission Act 2001 ('the ASIC Act').
(a) During the period 16 March 2005 to 31 July 2006 ('the fundraising period') each respondent offered securities without a current disclosure document, contrary to s 727 of the Act;
(b) Each respondent carried on a 'financial services business' without the appropriate licence, contrary to s 911A of the Act; and
(c) Each respondent engaged in misleading or deceptive conduct in relation to the issue of shares, contrary to s 1041H of the Act and s 12DA and s 12DB of the ASIC Act.
(a) Pursuant to s 583(c)(ii) of the Act, that the first respondent ('CME') be wound up on the just and equitable ground and that liquidators be appointed;
(b) A declaration that each of the respondents has made offers and distributed application forms for the offer of securities in CME in contravention of s 727 of the Act;
(c) A declaration that each of the respondents has carried on a financial services business in contravention of s 911A of the Act;
(d) A declaration that each of the second, third and fourth respondents, in respect of disseminating documents referred to in the material, has engaged in conduct that is misleading or deceptive or likely to mislead or deceive, in contravention of the provisions of s 1041H of the Act and s 12DA and s 2DB of the ASIC Act;
(e) An order, pursuant to s 1101B(1) and s 1324(1) of the Act that each of the respondents be permanently restrained from carrying on any form of financial services business in this jurisdiction without holding an appropriate licence;
(f) An order pursuant to s 1101B(1) and s 1324(1) of the Act that each of the respondents be permanently restrained from making offers or distributing application forms for the offer of securities that require disclosure to investors without lodging a suitable disclosure document.
[8] CME is a foreign company within the meaning of that term as defined in s 9 of the Act. It was incorporated in February 2004 under the laws of the State of Nevada in the United States of America.
[9] The second respondent ('Mr Nugent') is a director of CME.
[10] The third respondent ('Mr McClelland') was, between 11 May 2006 and 27 February 2007, and has been, since 28 March 2007, a director of CME.
[11] The fourth respondent ('Mr Foster') was, between 11 May 2006 and 27 February 2007, and has been, since 28 March 2007, a director of CME.
[12] None of the respondents was the holder an Australian financial services licence within the meaning of s 761A of the Act.
[14] The principal activity and reason for existence of CME is to pursue the development of a "... commercially viable, environmentally friendly engine based on the use of permanent magnets to supply mechanical power on demand, without the need of external fuel input".[8] Its efforts, so far as are material to this trial, have resulted in the creation of a prototype "cycclone magnetic engine".
[15] The original directors of CME were, from February 2004 and up to, at least, late March 2006, Mr Nugent, Oliver Douglas and Jonathon McArthur. In about March 2005, Messrs McClelland and Foster entered into employment with CME.
[17] In the fundraising period more than 70 shares had been issued.
OFFERING SECURITIES WITHOUT A CURRENT DISCLOSURE DOCUMENT
• that needed disclosure to investors under Part 6D.2 of the Act,
• without lodging a disclosure document with ASIC, and
• without providing the lodged disclosure document to the offerees,
[19] The manner in which this was alleged to have occurred is set out in paragraph 8 of the Further Amended Statement of Claim ("FASOC"):
"(a) the First Respondent made offers of securities, as that term is used in s 761A of the Corporations Act, being shares or the legal or equitable right or interest in shares in the First Respondent, for issue, within the meaning of subsection 700(2) of the Corporations Act, by inviting applications for the issue of such shares in the First Respondent ('the Offers');
(i) the Offers were made by means of a form under the banner of the First Respondent inviting applications for an issue of shares in the First Respondent as a "seed capital provider";
(ii) the Offers were made to persons located in this jurisdiction in that they were made to persons who were shareholders or who were members of the public from whom investments being the purchase of shares in the First Respondent were being sought;
(iii) such persons, referred to in the preceding paragraph, are located predominantly in the Gold Coast, Lismore, Wagga and Geelong;
(iv) the First Respondent was the person who had the capacity to issue the shares if the Offers were accepted.
(b) each of the Second to Fourth Respondents, on their own behalf; and as agents for the First Respondent, distributed application forms for the Offers."
[20] Before turning to the factual issues which arise it will assist if I set out the relevant provisions of the Act.
[21] The relevant requirements of the Act commence with s 706:
"An offer of securities for issue needs disclosure to investors under this Part unless section 708 or 708AA says otherwise."
"(a) offering securities for issue includes inviting applications for the issue of the securities; and
(b) offering securities for sale includes inviting offers to purchase the securities."
[23] Section 706 directs attention to s 708 and s 708A. The latter is not relevant to these proceedings.
[24] Section 708 sets out the types of offer which do not need disclosure. There are 11 types:
• Small scale offerings - these will be considered later;
• Sophisticated investors - this is determined by reference to, among other things, the amount payable for the securities, the net assets and the gross income of the offeree;
• Professional investors - as defined in s 9 of the Act or a person who has or controls gross assets of at least $10 million;
• Offers to people associated with the offering body;
• Offers made under a Part 5.1 compromise or arrangement;
• Offers under a deed of company arrangement which, among other things, do not require consideration other than the release of the company from a debt;
• Offers made as consideration for an offer to acquire securities under a takeover bid;
• Offers of debentures of certain types of companies;
[25] "Small scale offerings" are dealt with in s 708 (1) - (7). It contains the so-called "20/12 rule" which provides:
"Small scale offerings (20 issues or sales in 12 months)
(1) Personal offers of a body's securities by a person do not need disclosure to investors under this Part if:
(a) none of the offers results in a breach of the 20 investors ceiling (see subsections (3) and (4)); and
(b) none of the offers results in a breach of the $2 million ceiling (see subsections (3) and (4)).
This subsection does not apply to an offer for sale to which subsection 707(3) (sale amounting to indirect issue) or (5) (sale amounting to indirect sale by controller) applies.
(2) For the purposes of subsection (1), 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.
(a) results in a breach of the 20 investors ceiling if it results in the number of people to whom securities of the body have been issued 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 body by issuing securities exceeding $2 million in any 12 month period.
(4) An offer by a person to transfer a body's securities:
(a) results in a breach of the 20 investors ceiling if it results in the number of people to whom the person sells securities of the body 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 the body's securities exceeding $2 million in any 12 month period.
(5) In counting issues and sales of the body's securities, and the amount raised from issues and sales, for the purposes of subsection (1), disregard issues and sales that result from offers that:
(a) do not need a disclosure document because of any other subsection of this section; or
(7) In working out the amount of money raised by the body by issuing securities, include the following:
(a) the amount payable for the securities at the time when they are issued;
(b) if the securities are shares issued partly-paid - any amount payable at a future time if a call is made;
(c) if the security is an option - any amount payable on the exercise of the option;
(d) if the securities carry a right to convert the securities into other securities - any amount payable on the exercise of that right."
[26] The "ceiling" imposed by s 708 is the subject of s 727(4). It provides:
(4) If a person relies on subsection 708(1) to make offers of securities without disclosure to investors under Part 6D.2, the person must not issue or transfer securities without disclosure to investors under that Part if the issue or transfer would result in a breach of the 20 investors ceiling or the $2 million ceiling (see subsections 708(3), (4), (5), (6) and (7))."
(c) Messrs Nugent, McClelland and Foster distributed application forms for the offers; and
(d) The amount raised by CME in the relevant period was less than $2,000,000.
[28] There are two questions which arise at this point:
(a) How does the exemption in s 708 for "small scale offerings" operate?
(b) Who bears the onus of proving the existence or non-existence of facts constituting that exemption?
How does the "small scale offering" exemption operate?
[29] The "small scale offering" exemption (the 20/12 rule) applies when certain conditions are met. They are:
(a) The offer must be a "personal offer" as defined in s 708(2), namely:
(i) The offer may only be accepted by the person to whom it is made, and
(ii) It can only be made to a person who is likely to be interested in the offer having regard to certain criteria,
(b) The offer does not result in the number of people to whom securities have been issued exceeding 20 in any 12 month period,
(c) The offer does not result in the amount raised by the person from selling the body's securities exceeding $2,000,000 in any 12 month period.
[30] In s 708(1),(, (2), (3) and (4) the terms "personal offer" and "offer" are used. Where the word "offer" appears it is not, in those subsections, intended to mean anything other than "personal offer". This follows from the first part of s 708(1)(a):
"(1) personal offers ... do not need disclosure ... if
[31] It is clear that when the word "offers" is used in s 708(1)(a) it is intended to be a reference back to the term "personal offers" with which the section commences. Similarly, where "offer" appears in the s 708(2)(b), (3), (4) and (5), it means "personal offer".
[32] It was suggested in the course of submissions that this part of the Act should be construed to the effect that a disclosure document is always required but that, if one or more of the exemptions set out in s 708 are satisfied, then disclosure may have been unnecessary.[13] For example, it was contended that an offer of securities is always required to be disclosed but should the offeror come within the 20/12 rule then that disclosure would have been unnecessary. That construction is unacceptable and is inconsistent with the balance of chapter 6A of the Act.
[33] Section 708 does not contemplate a situation where an offeror does not know whether disclosure should have taken place until after the event. Take, for example, the exemption in s 708(8) for sophisticated investors. It is clear that an offeror can mould an offer so that only a "sophisticated investor" could accept the offer. Similarly, with respect to the 20/12 rule, it would be open to an offeror to make the offers subject to conditions such that the 20/12 rule could not be breached. It is the clear intention of s 708 that offerors are to be relieved of the obligation to disclose if they can bring themselves within one of the exemptions and it is the offeror's responsibility to remain within one or more of the exemptions for any relevant period if disclosure has not taken place. It is not the intention of s 708 that offerors are required to issue a disclosure document and, then, to be retrospectively relieved of a liability which they have already discharged by, for example, demonstrating that 20 or fewer people have been issued securities in the relevant period.
[34] That construction is consistent with s 727(4).[14] That section proceeds on the basis that a person will rely on s 708(1) to make offers without disclosure and imposes a duty not to issue securities if, in doing so, the 20/12 rule would be breached.
Who bears the onus of proving the operation or not of the exemption?
[35] ASIC, in paragraph 9 of its FASOC, pleads that the offers were not exempted by s 708 of the Act from disclosure. It particularises that allegation by claiming that shares were issued to over 70 persons in response to offers made by CME.
[36] At [25] in its submission, ASIC argues that the onus of proving that the offers were "small scale offerings" lies on the respondents. This is disputed by the respondents.
[37] Section 706 is clear. An offer of securities for issue needs disclosure "unless s 708 or s 708AA says otherwise". Those named sections provide grounds upon which an offeror may be excused from complying with the requirements of s 706.
[38] The question of how such a matter should be pleaded and upon whom the burden falls has exercised judicial minds since at least R v Jarvis.[15] Fortunately, it is not necessary to trace the development of the law since that time. In Chugg v Pacific Dunlop Ltd the High Court of Australia (Dawson, Toohey and Gaudron JJ with whom Brennan CJ and Deane J agreed) said this:[16]
"For the purpose of assigning the onus of proof, a distinction is made between a requirement which forms part of the statement of a general rule and a statement of some matter of answer, whether by way of exception, exemption, excuse, qualification, exculpation or otherwise (called an 'exception'), which serves to take a person outside the operation of a general rule. See Vines v Djordjevitch ... . The distinction does not depend on the rules of formal logic: Dowling v Bowie ... . Rather, the categorization of a provision as part of the statement of a general rule or as a statement of exception reflects its meaning as ascertained by the process of statutory construction. Where some matter is said to be an exception to an offence, the question is whether there is to be discerned a legislative intention 'to impose upon the accused the ultimate burden of bringing himself within it': Director of Public Prosecutions v United Telecasters Sydney Ltd ... . The intention may be discerned from express words or by implication. See Reg v Edwards ... and Reg v Hunt ... .
Although the form of language may provide assistance, ultimately the question whether some particular matter is a matter of exception is to be determined 'upon considerations of substance and not of form': Dowling v Bowie ... .
One indication that a matter may be a matter of exception rather than part of the statement of a general rule is that it sets up some new or different matter from the subject matter of the rule. See Darling Island Stevedoring & Lighterage Co Ltd v Jacobsen ... , per Dixon J. Such is ordinarily the case where, in the terms used in Reg v Edwards ... , there is a prohibition on the doing of an act 'save in specified circumstances or by persons of specified classes or with specified qualifications or with the licence or permission of specified authorities'. See Reg v Hunt ... , where Lord Griffiths considered the statement from Reg v Edwards ... 'an excellent guide to construction'. If the new matter is a matter peculiarly within the knowledge of the defendant, then that may provide a strong indication that it is a matter of exception upon which the defendant bears the onus of proof." (emphasis added)
[39] Examination of the terms of the relevant sections discloses:
(b) Section 708 and s 708AA express exceptions which take an offeror outside the operation of the general rule; and
(c) The exceptions are matters which, ordinarily, would be peculiarly within the knowledge of the offeror.
Further, it is clear that the intention of s 706 is to require the provision of important, relevant information to prospective purchasers.
[40] In those circumstances, then, considerations of substance and of form lead to the conclusion that the principles enunciated in Chugg require that I hold that the burden of establishing the exception lies on the respondents. The fact that the applicant has pleaded the absence of an exception does not discharge the respondents from satisfying the burden otherwise cast upon them. In other words, to obtain the benefit of the small scale offerings exemption the respondents need to adduce evidence to establish on the balance of probabilities that the exemption applied.
[41] None of the respondents called any evidence on this issue. They relied on what they argued was a failure by ASIC to demonstrate that the offers made resulted in securities being issued to more than 20 people in the relevant period. I have already determined that ASIC did not bear the onus on that point.
"(1) A person must not make an offer of securities, or distribute an application form for an offer of securities, that needs disclosure to investors under Part 6D.2 unless a disclosure document for the offer has been lodged with ASIC."
[43] Section 706 provides that, subject to the specified exemptions, an offer of securities needs disclosure. The other elements of s 727(1) are satisfied by the admissions referred to above. Thus, a breach by CME (by making an offer of securities) and breaches by each of the natural respondents (by distributing application forms for such an offer) have been established.
[44] Should my apprehension of where the burden on the issue of proving an exemption be wrong, then I will refer, briefly, to evidence which was called by ASIC which would otherwise satisfy me that there has been a contravention.
[45] The evidence to which ASIC referred as establishing a breach of s 727 consisted of a number of documents such as: completed share application forms, deposit forms, share certificates and the like.[17] ASIC also relied upon the evidence of Mr Nugent[18] and affidavits of four investors.[19] That evidence demonstrates the making of offers, the receipt of application forms and the issuing of shares to more than 20 persons (being those persons who had made the applications) in the relevant period. The natural respondents have admitted that they distributed application forms. There is no evidence to suggest that any application forms were made available in any other way.
[46] It was argued against ASIC that it had to demonstrate the causal link between the making of an offer and the issuing of a share or shares. This arises from the words of s 708(3):
(a) Results in a breach ... if it results in the number of people exceeding 20 ..."
In other words, it was submitted that ASIC had to show that the offer made led to shares in excess of 20 being issued.
[47] The facts which have been either established or admitted provide grounds for drawing inferences as follows:
(a) That the number of shares issued exceeded 20 in the relevant period; and
(b) That the shares were issued as a result of the offer to issue being accepted by people through the making of applications.
[48] Those inferences arise from, among other things, the fact that the persons who applied did so on the application forms given to them by the natural respondents. The inferences are also supported by the absence of any evidence from the respondents on these points and the omission to pursue these points with Mr Nugent when he was in the witness box.
CARRYING ON A "FINANCIAL SERVICES BUSINESS" WITHOUT THE APPROPRIATE LICENCE
"(1) Subject to this section, a person who carries on a financial services business in this jurisdiction must hold an Australian financial services licence covering the provision of the financial services.
Note 1: Also, a person must not provide a financial service contrary to a banning order or disqualification order under Division 8.
Note 2: Failure to comply with this subsection is an offence (see subsection 1311(1))."
[50] In s 761A, "financial services business" is defined to mean a business of providing financial services. Section 766A(1) of the Act tells us when a person provides a financial service:
"(1) For the purposes of this Chapter, subject to paragraph (2)(b), a person provides a financial service if they:
(a) provide financial product advice (see s 766B); or
(c) make a market for a financial product (see s 766D); or
(e) provide a custodial or depository service (see s 766E); or
(f) engage in conduct of a kind prescribed by regulations made for the purposes of this paragraph."
[51] Section 766B of the Act defines "financial product advice" in the following way
(1) For the purposes of this Chapter, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:
(a) Is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or
(b) could reasonably be regarded as being intended to have such an influence.
(2) There are 2 types of financial product advice: personal advice and general advice.
(3) For the purposes of this Chapter, personal advice is financial product advice that is given or directed to a person (including by electronic means) in circumstances where:
(a) the provider of the advice has considered one or more of the person's objectives, financial situation and needs (otherwise than for the purposes of compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 or with regulations, or AML/CTF Rules, under that Act); or
(b) a reasonable person might expect the provider to have considered one or more of those matters.
(4) For the purposes of this Chapter, general advice is financial product advice that is not personal advice."
[52] Section 766C(1) relevantly defines "dealing in a financial product" to include the following conduct:
"(a) applying for or acquiring a financial product;
[53] Section 766C(2) of the Act extends this definition to include:
"(2) Arranging for a person to engage in conduct referred to in subsection (1) is also dealing in a financial product, unless the actions concerned amount to providing financial product advice."
[54] Section 763A(1) of the Act, defines a "financial product" as follows:
(1) For the purposes of this Chapter, a financial product is a facility through which, or through the acquisition of which, a person does one or more of the following:
(a) makes a financial investment (see section 763B);
[55] Section 764A(1)(a) specifically defines a "financial product" to include a "security" which, in turn, is defined in s 761A of the Act to include a "(a) a share in a body" or "(c) a legal or equitable right or interest in a security covered by paragraph (a) or (b)" .
[56] Section 911D of the Act provides a definition of when a financial services business is taken to be carried on in this jurisdiction:
"When a financial services business is taken to be carried on in this jurisdiction
(1) For the purposes of this Chapter, a financial services business is taken to be carried on in this jurisdiction by a person if, in the course of the person carrying on the business, the person engages in conduct that is:
(a) intended to induce people in this jurisdiction to use the financial services the person provides; or
whether or not the conduct is intended, or likely, to have that effect in other places as well.
(2) This section does not limit the circumstances in which a financial services business is carried on in this jurisdiction for the purposes of this Chapter."
[57] In its pleading, ASIC asserts that Messrs Nugent, McClelland and Foster, on their own behalf and as agents of CME, made recommendations or statements of opinion or reports or either of those things that were intended to influence a person or persons in making a decision in relation to a security, being shares or the legal or equitable right or interest in shares in the first respondent, or, alternatively, could reasonably be regarded as being intended to have such an influence.
[58] Further, ASIC alleges that the following constituted the carrying on of a financial services business:
(a) The preparation by Mr Nugent of a business plan for CME which was then distributed by Messrs Nugent, McClelland and Foster to potential shareholders;
(b) The preparation and distribution of a newsletter in the same way relating to CME;
(c) The creation of a web site, in part by Mr Nugent, about CME and references to it by Messrs Nugent, McClelland and Foster; and
(d) The making of statements by each of Messrs Nugent, McClelland and Foster at meetings with persons regarding the issue and sale of shares in CME.
[59] The first response by each of the respondents to this claim is that, whatever they did, it did not amount to a financial services business within the meaning of the Act. Before going to that argument, it will assist to set out some further sections of the Act which are required to be taken into account when determining whether or not a financial services business has been conducted. Those sections are in chapter 1 of the Act, they provide:
"18 Carrying on business: otherwise than for profit
A reference to a person carrying on business, carrying on a business, or carrying on a business of a particular kind, includes a reference to the person carrying on business, carrying on a business, or carrying on a business of that kind, as the case may be:
(b) in the case of a body corporate - otherwise than for the profit of the members or corporators of the body.
A reference to a business of a particular kind includes a reference to a business of that kind that is part of, or is carried on in conjunction with, any other business.
20 Carrying on a business: alone or together with others
A reference in this Act to a person carrying on a business, or a business of a particular kind, is a reference to the person carrying on a business, or a business of that kind, whether alone or together with any other person or persons."
[60] Assuming, for the sake of the consideration of this point, that the assertions by ASIC are made out with respect to the respondents and that each of them for themselves or for CME made recommendations intended to influence persons in making a decision in relation to shares in CME, it is not a sufficient answer for the respondents to say that the parties are agreed that CME had "as its principal business activity and reason for existence, the development and promotion of a purported invention known as the "Cycclone Magnetic Engine". As is set out above, s 19 of the Act provides that a reference to a business of a particular kind (such as a financial services business) includes a reference to a business of that kind that is part of, or is carried on in conjunction with, any other business.
[61] It must, though, be a business and it is on that point that the respondents argue that what they were doing was nothing more than the raising of capital. A similar issue was considered by PD McMurdo J in ASIC v Edwards.[20] In that case, his Honour had to consider the actions of a company registered in Mauritius which, he found, had been offering securities without the necessary disclosure. After making certain other findings, his Honour had to consider whether there was jurisdiction to wind up the particular company. This required consideration of whether it was a Part 5.7 body which, in turn, required consideration of whether it had carried on business here. His Honour said:
"[61] In its case however, it is not so clear that its conduct did involve the carrying on of a business. In each of the cases of Carsworthy Limited and Edwardian Associates Limited, the company carried on business by the operation of a managed investment scheme. By operating that scheme to the extent that it did within Australia, it carried on business here. In the case of Coppertone Investments Limited, the moneys paid were by way of subscription for shares in the company itself. It is not immediately clear then that the offering of its shares is itself the carrying on of any business. Ordinarily, there is a distinction between the raising of capital by a company, by offering and issuing its shares, and the application of that capital in the conduct of its business."
[62] The question of whether the company's conduct within Australia involved the carrying on of a business is a question of fact: Luckins at 186_._ Because it is a factual question, its answer is the result of all of the circumstances of the particular case. The factual question is addressed not only by reference to the context of the particular statute ... but also with an understanding of the particular nature of the enterprise which constituted the company's business. In Town Investments Ltd v Department of the Environment [1977] UKHL 2; [1978] AC 359, Lord Diplock said at 383:
"The word 'business' is an etymological chameleon; it suits its meaning to the context in which it is found. It is not a term of legal art and its dictionary meanings, as Lindley LJ pointed out in Rolls v Miller (1884) 27 Ch D 71, 88 embraced 'almost anything which is an occupation, as distinguished from a pleasure - anything which is an occupation or duty which requires attention is a business'".
In Hope v Bathurst City Council [1980] HCA 16; (1980) 144 CLR 1 at 8, Mason J said that the word "business" denoted "activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis".
[63] The particular terms in which shares in Coppertone were offered and subscribed for make this an unusual case and have led me to the conclusion that the company did carry on business in Australia. ...
[65] The result of this is that the business of Coppertone Investments Limited involved the investment of specific sums deposited with it for the benefit of the depositor, so that profits less a management fee were credited against a depositor's capital account. This was notwithstanding that the depositor received, at the same time, an issue of shares. Moreover the investment had an agreed duration of 12 months, the parties having agreed that the shareholders' agreement would not be terminated within that time. I do not suggest that the overall structure of this investment is internally consistent. But the nature of Coppertone's enterprise, or at least as it was represented to be, was somewhat different from a company which was simply raising capital by issuing shares for the conduct of its own business. Under this regime, a shareholder's funds were treated as some discrete sum which was distinctly managed by the 'Provider' on the shareholder's behalf." (emphasis added)
[62] The extensive meaning of "business" has often been the subject of consideration: "Of all words, the word 'business' is notorious for taking its colour and its content from its surroundings ..." ;[21] and "[w]hile the word 'business' in any particular context takes its meaning from that context, normally it is a 'wide and general' word."[22]
[63] The reasons of Mason J in Hope v Bathurst City Council are of particular importance because of their context.[23] In that case consideration had to be given to a statutory provision which contained the words: "carrying on the business ... of grazing". His Honour said:
"Although it has been common ground that 'business' is used in its ordinary meaning in s 118 (1), the courts below have refrained from saying what that meaning is. This is perhaps understandable because, as a glance at the Shorter Oxford Dictionary will show, the word has many meanings. Ironically it is the last meaning given by the Shorter Oxford Dictionary, '19. A commercial enterprise as a going concern', that comes closest to the popular meaning which the courts appear to have acted on in the present case. In truth it is the popular meaning of the word as used in the expression 'carrying on a business', rather than the popular meaning of the word itself, that is enshrined in the statutory definition. It is the words 'carrying on' which imply the repetition of acts ... and activities which possess something of a permanent character. This conclusion serves to emphasize that it is necessary to engage in a process of construction in order to arrive at the meaning of the word in s 118 (1)." [24] (emphasis added)
[64] Section 911A(1) applies to a "person who carries on a financial services business". Section 911D refers to a "person carrying on the business". Applying the reasoning in Hope v Bathurst City Council, one would, when considering whether someone was carrying on a financial services business, look for a "repetition of acts" and "activities which possess something of a permanent character". It is possible to find a repetition of acts in what the respondents did but the nature of their activity did not possess something of a permanent character.
[65] Assistance in the construction of these provisions can be obtained by reference to the Revised Explanatory Memorandum for the Financial Services Reform Bill 2001 (which introduced these provisions). It contains the following comment on the meaning of "financial services business":
6.116 The common law meaning of 'carrying on a business' encompassing elements of system, repetition and continuity suggests that one-off transactions relating to the provision of financial services and financial products are unlikely to be caught by this regime. So, for example, a one-off issue of securities would be unlikely to fall within the definition of 'carrying on a financial services business'.
This is, not surprisingly, consistent with the authorities referred to above.
[66] The reference to "a one-off issue of securities" would comprehend what occurred in this case. The issue of shares took place over a limited period - a period which the Act uses for the purposes of assessing the small scale offering exemption - and has not continued.
[67] CME and the other respondents were "raising capital by issuing shares for the conduct of its own business". In doing so, they were not "carrying on a financial services business" because, by engaging in the conduct alleged, they were not carrying on a business. There are two reasons for drawing this conclusion:
(a) I respectfully agree with PD McMurdo J that: "It is not immediately clear then that the offering of its shares is itself the carrying on of any business." Merely promoting the issue of shares in one's own company does not, of itself, constitute a business.
(b) The "one-off" nature of the behaviour does not constitute a business.
[68] Assuming, in ASIC's favour, that ASIC can establish the allegations it makes against the respondents, that does not constitute the "carrying on of a financial services business" and, so, none of the respondents were required to hold an Australian financial services licence.
[69] ASIC pleads that the respondents engaged in misleading and deceptive conduct under four heads:
[70] I will deal first with the allegations so far as CME is concerned. ASIC alleges that the natural respondents are also liable as principals or, alternatively, as accessories.
[71] It is ASIC's case that all the representations were:
(a) made:
(i) in relation to a financial product within the meaning of s.1041H of the Act;[29]
(ii) in relation to financial services, within the meaning of ss.12BAB and 12DA of the ASIC Act;[30]
(iii) in connection with the supply or possible supply of financial services, within the meaning of ss.12BAB and 12DA of the ASIC Act;[31] and
(iv) in connection with the promotion by any means of the supply or use of financial services within the meaning of ss.12BAB and 12DA of the ASIC Act.[32]
(b) misleading and deceptive, or likely to be so:
(i) in relation to a financial service in contravention of s.1041H of the Act;[33]
(ii) in relation to financial services in contravention of s.12DA of the ASIC Act;[34]
(iii) in connection with the supply or possible supply of financial services, or in connection with the promotion by any means of the supply or use of financial services in contravention of s.12DB of the ASIC Act.[35]
[72] As was noted by counsel for Messrs McClelland and Foster, no case under s.52 of the Trade Practices Act 1974 (Cth) of misleading and deceptive conduct in the course of general trade or commerce is pleaded. No doubt, ASIC took this course because the introduction of s 51AF into the Trade Practices Act in 1998 excluded the operation of ss 52 and 55A from applying to conduct engaged in relation to financial services.[36] But, the provisions are relevantly the same and, so, decisions on the cognate Trade Practices Act provisions must inform consideration of the relevant sections of the Act and the ASIC Act.
[73] The conduct alleged to be misleading or deceptive is limited by the Act and the ASIC Act to conduct:
(a) in relation to financial products or financial services;
(b) in connection with the supply of financial services; and
(c) in connection with the promotion of the supply or use of financial services.
[74] Section 1041H of the Act relevantly provides:
"Misleading or deceptive conduct (civil liability only)
(1) A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.
Note 1: Failure to comply with this subsection is not an offence.
Note 2: Failure to comply with this subsection may lead to civil liability under section 1041I. For limits on, and relief from, liability under that section, see Division 4.
(2) The reference in subsection (1) to engaging in conduct in relation to a financial product includes (but is not limited to) any of the following:
(ii) publishing a notice in relation to a financial product;
[75] Allegations are made that some representations (patent and expenditure) concerned future matters. In that regard, s 769C of the Act is relevant:
"Representations about future matters taken to be misleading if made without reasonable grounds
(1) For the purposes of this Chapter, or of a proceeding under this Chapter, if:
(a) a person makes a representation with respect to any future matter (including the doing of, or refusing to do, any act); and
(b) the person does not have reasonable grounds for making the representation;
(2) Subsection (1) does not limit the circumstances in which a representation may be misleading.
proceeding under this Chapter has the same meaning as it has in section 769B."
[76] The applicant also relies on the following sections of the ASIC Act:
(1) A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.
(i) section 670A of the Corporations Act (misleading or deceptive takeover document); or
(ii) section 728 of the Corporations Act (misleading or deceptive fundraising document); or
(b) in relation to a disclosure document or statement within the meaning of section 953A of the Corporations Act; or
(c) in relation to a disclosure document or statement within the meaning of section 1022A of the Corporations Act;
does not contravene subsection (1). For this purpose, conduct contravenes the provision even if the conduct does not constitute an offence, or does not lead to any liability, because of the availability of a defence.
(2) Nothing in sections 12DB to 12DN limits by implication the generality of subsection (1).
(1) A person must not, in trade or commerce, in connection with the supply or possible supply of financial services, or in connection with the promotion by any means of the supply or use of financial services:
(a) falsely represent that services are of a particular standard, quality, value or grade; or
(b) falsely represent that a particular person has agreed to acquire services; or
(c) represent that services have sponsorship, approval, performance characteristics, uses or benefits they do not have; or
(d) represent that the person has a sponsorship, approval or affiliation it does not have; or
(e) make a false or misleading representation with respect to the price of services; or
(f) make a false or misleading representation concerning the need for any services; or
(g) make a false or misleading representation concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy.
Note: Failure to comply with this subsection is an offence (see section 12GB).
(i) section 670A of the Corporations Act (misleading or deceptive takeover document); or
(ii) section 728 of the Corporations Act (misleading or deceptive fundraising document); or
(b) in relation to a disclosure document or statement within the meaning of section 953A of the Corporations Act; or
(c) in relation to a disclosure document or statement within the meaning of section 1022A of the Corporations Act;
does not contravene subsection (1). For this purpose, conduct contravenes the provision even if the conduct does not constitute an offence, or does not lead to any liability, because of the availability of a defence.
(3) An offence under subsection 12GB(1) relating to subsection (1) of this section is an offence of strict liability.
Note: For strict liability, see section 6.1 of the Criminal Code."
[77] Section 12BB of the ASIC Act relates to representations about future matters:
(1) For the purposes of Subdivision D (sections 12DA to 12DN), if a person makes a representation about a future matter (including the doing of, or the refusing to do, any act) and the person does not have reasonable grounds for making the representation, the representation is taken to be misleading.
(2) For the purpose of applying subsection (1) to a proceeding concerning a representation made by a person about a future matter, the person is taken not to have had reasonable grounds for making the representation unless it adduces evidence to the contrary.
(3) Subsection (1) does not limit by implication the meaning of a reference in this Division to:
(b) a representation that is misleading in a material particular; or
(c) conduct that is misleading or is likely or liable to mislead."
(a) Under s 1041H of the Act an applicant must show that the conduct complained of:
(i) is in relation to a financial product or financial service; and
(ii) is misleading or deceptive or likely to mislead or deceive.
(b) Under s 769C of the Act where a person makes a representation (in relation to a financial product or financial service) with respect to any future matter then, in order to establish that the representation is misleading, the applicant must show that the person did not have reasonable grounds for making the representation.
(c) Under s 12DA of the ASIC Act an applicant must show that the conduct complained of:
(iii) is misleading or deceptive or likely to mislead or deceive.
(d) Under s 12DB of the ASIC Act an applicant must show that the conduct complained of:
(ii) is in connection with the supply or possible supply of financial services; or
(iii) is in connection with the promotion by any means of the supply or use of financial services; and
(iv) falsely represents or is a false or misleading representation about one or several matters listed in the section.
(i) a person makes a representation about a future matter, and
(ii) the person does not have reasonable grounds for making the representation (a person is taken not to have reasonable grounds unless it adduces evidence to the contrary), then
[79] Considerable assistance can be obtained from the examination of the relevant principles by Dowsett J in National Exchange Pty Ltd where, after considering Campomar Sociedad Limitada v Nike International Ltd,[37] his Honour listed the following propositions as being relevant to the application of s 1041H(1) of the Act: [38]
"• Conduct will only be misleading or deceptive, or likely to mislead or deceive, if there is a nexus between such conduct and any actual or anticipated misconception or deception.
• In identifying such nexus regard must be had to the circumstances of the particular case, including the remedies sought. Section 52 of the TP Act does not confer any entitlement to a remedy for breach or anticipated breach. One must look elsewhere in the TP Act for such entitlement and construe the act as a whole.
• In some cases, a representation may be made to identified individuals; in other cases the representation may be to the public at large or to a section thereof. In the former case the process of deciding whether or not the representation is misleading or deceptive or likely to be so may be 'direct and uncomplicated'. In the latter case 'the issue with respect to the sufficiency of the nexus between the conduct or the apprehended conduct and the misleading or deception or likely misleading or deception of prospective purchasers is to be approached at a level of abstraction not present where the case is one involving an express untrue representation allegedly made only to identified individuals'. (I infer that the word 'representation' in [100] of Nike should be 'misrepresentation', relying upon the relevant passage in Taco Bell to which the High Court was referring.)
• When the representation is made to the public or to a section thereof, one must consider its effect upon an ordinary or reasonable member of the class in question. Although such class may include a wide range of persons, the ordinary or reasonable member will objectively be identified as having certain characteristics. In particular he or she can be expected to take reasonable care for his or her own interests and otherwise to behave reasonably.
• It is necessary to inquire as to how a particular or anticipated misconception has arisen or may arise. In so doing, the Court will consider 'the effect of the relevant conduct on reasonable members of the class'.
• Conduct will only be misleading or deceptive or likely to mislead or deceive if the representee 'labours under some erroneous assumption' or may be expected so to labour. Such an assumption or anticipated assumption may be obvious, predictable or fanciful.
• In assessing the reactions or likely reactions of the ordinary or reasonable member of the class, the court may decline to treat as reasonable, assumptions which are extreme or fanciful. The initial question which must be determined is whether the misconception or deception, alleged or anticipated, is properly attributable to an ordinary or reasonable member of the class.
• The 'question whether particular conduct causes confusion or wonderment cannot be substituted for the question whether the conduct answers the statutory description contained in s 52.'"[39] (emphasis added)
[80] Dowsett J adopted (as did the other members of the Court) the four-step inquiry for determining whether conduct was misleading or deceptive or likely to mislead or deceive propounded by Finkelstein J at first instance, namely:[40]
• What was the intention underlying the conduct in question? (His Honour identified correctly that intention to mislead was not essential but nonetheless was relevant to the inquiry.)
• Was the conduct such as to lead to an erroneous assumption on the part of representees?
• Did the conduct mislead or deceive or was it likely to do so, having regard to the behaviour of a reasonable representative of the whole class of representees?"
"Section 52 does not expressly state what persons or class of persons should be considered as the possible victims for the purpose of deciding whether conduct is misleading or deceptive or likely to mislead or deceive. It seems clear enough that consideration must be given to the class of consumers likely to be affected by the conduct. Although it is true, as has often been said, that ordinarily a class of consumers may include the inexperienced as well as the experienced, and the gullible as well as the astute, the section must in my opinion by regarded as contemplating the effect of the conduct on reasonable members of the class. The heavy burdens which the section creates cannot have been intended to be imposed for the benefit of persons who fail to take reasonable care of their own interests. What is reasonable will of course depend on all the circumstances." (emphasis added)
[82] Before moving to the specific representations, I should deal with one of the points which applies to all of the alleged misrepresentations. That is: what is the correct approach when the persons who may be misled are not identified individuals but are members of a class?
[83] ASIC does not assert that any particular person was misled by the respondents. It asserts, generally, that the conduct of the respondents breached the identified provisions of the Act and the ASIC Act. ASIC did rely on affidavits from four shareholders but none of them said that they had been misled or deceived. There was evidence that ASIC had interviewed other shareholders but no evidence was adduced as to their attitude. It can be inferred that ASIC could not, despite its efforts, find anyone who claimed to have been misled. That, though, is not the answer to the question.
[84] This area of inquiry has been considered in some detail in Domain Names Australia Pty Ltd v .Au Domain Administration Ltd.[43] In that case the appellant had sent out hundreds of thousands of notices to Australian businesses inviting them to engage it to register particular domain names. The trial judge found that the notices contained representations which were misleading or deceptive. On appeal, the Full Court dealt with the applicable principles in the following way:
[18] The likelihood of recipients of a representation being misled or deceived is not a matter to be proved by evidence (testimony, documents or things), or by judicial notice or its statutory equivalent (these are alternative methods of proof; Mathieson, DL, Cross on Evidence (7th ed, 2004) discusses judicial notice in Chapter Two which is entitled 'Facts which need not be proved by evidence'). The existence or otherwise of such a likelihood is a jury question for the trier of fact: Australian Competition and Consumer Commission v Telstra Corp Ltd [2004] FCA 987; (2004) 208 ALR 459 per Gyles J.
[22] Consideration of these difficulties shows the practical wisdom of the firm rule that the likelihood of conduct being misleading or deceptive is a question for the tribunal of fact and not for any witness to decide: General Electric Co (USA) v General Electric Co Ltd [1972] 1 WLR 729 at 738 per Lord Diplock, applied in a s 52 context by Gummow J, with whom Black CJ and Lockhart J agreed, in Interlego AG v Croner Trading Pty Ltd [1992] FCA 624; (1992) 39 FCR 348 at 387.
[23] Lord Diplock points out in General Electric that a different rule applies in the case of sales not to the general public but in specialised markets concerning persons engaged in a particular trade. In the present case the relevant market is that in which the consumers are business users of domain names. Such users constitute large sections of the public and are not participants in a specialised market in the sense discussed by Lord Diplock.
[24] His Honour (at [16]) summarised the text [sic] formulated by the High Court in Campomar Sociedad, Limitada v Nike International Ltd [2000] HCA 12; (2000) 202 CLR 45 in these terms:
'First, where the persons allegedly misled are not identified individuals but are members of a class it is necessary to isolate 'a representative member' of the class and enquire whether this hypothetical individual is likely to be deceived. Second, when considering the likely effect of the misrepresentation on this hypothetical person he (or she) should be judged as an 'ordinary' or 'reasonable' member of the class. In this way, reactions to the representation that are 'extreme' or 'fanciful' will be disregarded.' (emphasis added)
Having identified the test his Honour then said (at [21]):
'How then is one to identify and give characteristics to Campomar Sociedad's hypothetical individual? Logic demands that if one is dealing with a diverse group then, for the purpose of determining whether particular conduct has the capacity to mislead, it is necessary to select a hypothetical individual from that section of the group which is most likely to be misled. If the court is satisfied that this hypothetical individual is likely to have been misled by that conduct, that would be sufficient.'
[25] The appellants' complaint appears to be that his Honour should have considered the effect of the notices on the 'ordinary or reasonable' recipient.
[26] However in our view his Honour accurately summarised the Campomar test. There is no inconsistency between testing the effect of the representation by reference to ordinary or reasonable members of the class and by reference to the hypothetical individual. The attribution of characteristics to the ordinary and reasonable members of the class must be objective in order to allow for the wide range of persons who would in fact not [sic] make up the class: National Exchange Pty Ltd v Australian Securities and Investments Commission (2004) 49 ACSR 369 per Jacobson and Bennett JJ. Within a large class there may be a number of subclasses of ordinary and reasonable people. Thus in the present case there may be ordinary and reasonable persons who were well informed about the internet and the domain name registration system and other persons, equally ordinary and reasonable, who were not." (emphasis added)
[85] On the basis of the reasoning in Domain Names I intend to assess the alleged misrepresentations from the point of view of an ordinary or reasonable member of the relevant class. The extension of that class by Finkelstein J (and apparently approved by the Full Court in Domain Names) to a section "which is most likely to be misled" is, in my respectful opinion, not able to be drawn from what the High Court said in Campomar and is inconsistent with what Gibbs CJ said in Puxu. [44] The test set out in Campomar does not support the extension to a section "which is most likely to be misled":
"[102] It is in these cases of representations to the public, of which the first appeal is one, that there enter the 'ordinary' ... or 'reasonable' ... members of the class of prospective purchasers. Although a class of consumers may be expected to include a wide range of persons, in isolating the 'ordinary' or 'reasonable' members of that class, there is an objective attribution of certain characteristics. Thus, in Puxu ... , Gibbs CJ determined that the legislation did not impose burdens which operated for the benefit of persons 'who fail[ed] to take reasonable care of their own interests'. In the same case, Mason J concluded that, whilst it was unlikely that an ordinary purchaser would notice the very slight differences in the appearance of the two items of furniture in question, nevertheless such a prospective purchaser reasonably could be expected to attempt to ascertain the brand name of the particular type of furniture on offer ... .
[103] Where the persons in question are not identified individuals to whom a particular misrepresentation has been made or from whom a relevant fact, circumstance or proposal was withheld, but are members of a class to which the conduct in question was directed in a general sense, it is necessary to isolate by some criterion a representative member of that class. The inquiry thus is to be made with respect to this hypothetical individual why the misconception complained has arisen or is likely to arise if no injunctive relief be granted. In formulating this inquiry, the courts have had regard to what appears to be the outer limits of the purpose and scope of the statutory norm of conduct fixed by s 52 ... . Thus, in Puxu, Gibbs CJ observed that conduct not intended to mislead or deceive and which was engaged in 'honestly and reasonably' might nevertheless contravene s 52 ... Having regard to these 'heavy burdens' which the statute created, his Honour concluded that, where the effect of conduct on a class of persons, such as consumers, was in issue, the section must be 'regarded as contemplating the effect of the conduct on reasonable members of the class' ... ."[45] (emphasis added)
[86] In considering the ordinary or reasonable member of the class I should also bear in mind what Mason J said in Puxu. That case concerned a particular type of furniture, and its cost was relevant in defining the attributes of a potential purchaser:
" ... Lockhart J. is correct in stating that here "the relevant class of persons likely to be exposed to the alleged misleading or deceptive conduct would be anyone interested in purchasing lounge suites or chairs in the higher price range". As his Honour noted, the class protected by s. 52 must vary according to the facts of each case. In furniture of this price range in the order of $1,500 for a three piece lounge suite one would in the ordinary course expect persons within the admittedly wide range of potential purchasers to exercise somewhat more vigilance than may be the case with the purchase of items of less financial significance having less impact on the appearance of the home (cf. Jafferjee v. Scarlett [1937] HCA 36; (1936) 57 CLR 115, at p. 124)."[46] (emphasis added)
[87] In its pleading, ASIC defines the "Invention" as "the concept of using permanent magnets in a configuration that supplies mechanical power on demand".[47] The representation alleged to have been made was that the Invention works (the 'Invention Representation').
[88] Further, and in the alternative, ASIC defines the "Prototype" as the "three dimensional proof of concept model (CX3) of a Cycclone Magnetic Engine".[48] The representation alleged to have been made was that the Prototype works (the 'Prototype Representation').
[89] It is then alleged that the Invention Representation or the Prototype Representation or both, were misleading or deceptive (or likely to mislead or deceive) because neither the Invention nor the Prototype:[49]
[90] Further, it is alleged that the Invention Representation or the Prototype Representation or both were likely to mislead a reasonable person into the assumption that, by acquiring shares in CME, the person was investing in a proven technology.[50]
[91] Further, it is alleged that the Invention Representation or the Prototype Representation or both:[51]
(a) falsely represented that shares in CME were of a particular quality, that is, an investment in a proven technology; and further, or alternatively
(b) represented that shares in CME had a performance characteristic or benefit that they did not have, namely, an investment in a proven technology.
[92] Further, it is alleged that, by making the representations, each of the respondents engaged in conduct in relation to a "financial product" as that term is used in s 1041H of the Act.[52] The term "financial product" is defined, for the purposes of s 1041H, as including a "security",[53] which, in turn, is defined to include "(a) a share in a body" or a "legal or equitable right or interest in a security covered by paragraph (a) or (b)".[54]
[93] ASIC then pleads that the facts as alleged also support allegations that the representations were made: [55]
and that, in making the representations, each of the respondents:
(c) was engaging in conduct within the meaning of s 12BA of the ASIC Act, and that such conduct was:
(i) in relation to financial services within the meaning of s 12BAB and s 12DA of the ASIC Act; and, or alternatively
(ii) in connection with the supply or possible supply of financial services within the meaning of s 12BAB and s 12DB of the ASIC Act; and, or alternatively
(iii) in connection with the promotion by any means of the supply and use of financial services within the meaning of s 12BAB and s 12DB of the ASIC Act.
[94] ASIC identifies the representations as having been made in four ways:
(a) in a newsletter published by CME, designated "Volume 1, Issue 1" and dated 14 March 2005;[56]
(b) in a document published by CME entitled "Business Plan";
(d) in statements made by Mr McClelland during meetings concerning the invention.
[95] The respondents answer these allegations in a number of ways:
(a) the alleged representations that the invention (or the prototype) worked were not made;
(b) the statements made, when read in context, are not misleading or deceptive; and
(c) there is no evidence that the statements were made in relation to a financial product or a financial service.
[96] Before going any further, I should provide some details of the "invention/prototype". It is described in the Business Plan in this way:[57]
"CME is the concept of using permanent magnets in a configuration that supplies mechanical power on demand. To offer an alternative to the ubiquitous internal combustion engine that is commercially viable, the technology must imitate the manner and principles that the internal combustion engines operate under. CME believes that it is able to meet this criteria [sic] by concentrating development on the control and configuration of the applied magnets."
[97] On the web site conducted by CME the following description is given:[58]
"Practically all of the research and development work carried out in the race to create a power source utilizing the attraction and repulsion of magnets has been derived from linear motion. Cycclone magnetic engines combine cyclic motion with the use of spinning metals that clone the magnetic pole, hence the name cyc-clone."
[98] It is not surprising that there is very little detail about the manner in which the engine is constructed or how it operates. CME has no (and has not applied for any) patents relating to the engine. The inventor (Mr Nugent) was called by ASIC to give evidence of a fairly mundane character but, notably, was not asked any questions by his own counsel about the invention or the prototype or any other matter. Mr Morris QC cross-examined him (mostly) about matters going to the position of Messrs McClelland and Foster.
[99] Mr Nugent was asked about the engine's operation in the examination conducted under s 19 of the ASIC Act. The relevant part reads:[59]
"Q. Right. So just explain to me how that engine works?
A. .... The magnetic engine works wholly and solely with the attraction repulsion of permanent magnets. The objective of it is to produce an engine that doesn't require external input, either electrical or fuel. It's so that the engine runs purely on the attraction and repulsion of permanent magnets. In its geometric configuration that does not try to challenge perpetual motion but to use mechanical advantage.
Q. So it doesn't require any input or any source from an external battery system -
Q. -- or any back up electricity or anything like that. It's just a self propelling engine run on magnets; is that right?
Q. And are the magnets - just so I can get my head around - are the magnets housed inside the actual engine, are they?
Q. How many magnets would there be inside a housing?
A. There's 48 - .... There's 48 magnets in the current configuration that is shown in the public sense. The current engine that is shown in the public sense.
Q. Micheal can I ask you a question about the input energy. I've seen a piece of footage from your web site which actually shows, it looks like a car battery hooked up to your magnetic engine and it appears as though the power is actually generated from that battery in order for the magnets to then start operating and for the engine to run. So can you explain that for me? That's from the Cycclone Magnetic Engines web site?
A. Yes. .... The two batteries are only used to turn the fly wheel. Once - the video does not show the battery cables being disconnected and the engine running by itself. Other people have seen that where we drop the cables off. The two batteries are purely there to start.
Q. And then once that kicks over, the magnets take - well, they'd be going at the same time, would they, and then once the magnets have started rotating, you turn the fly wheel off, is that right, or you turn the batteries off?
Q. Can you just clarify the question that you gave previously then to Miss Gibson in relation to the input energy then, so there is some input energy from an external source in order to start the engine running or was that only a situation which isn't normal?. You don't normally have a battery hooked up to it to actually get the engine started?
A. No. .... We use batteries to set it in motion and then we disconnect the batteries.
Q. So there is some input energy into the engine to actually get it started? You can't get it started without that battery?
A. .... We could hand rotate it but with the configuration that we're using there we use batteries for simplistic reasons.
Q. Just so it's clear in my mind, is there input energy or no input energy whatsoever?
Q. Is it similar to starting off a big Easter [sic] generator. You know how some of those big old generators start with a hand cranking shaft and you initially kick it over with a hand cranking, you know, handle and then once it's kicked off it just propels by itself but the magnets keep it propelled. Is that how it works?
Q. How do you stop the engine? How do you stop it from running?
A. If you have a look I'm operating a hand throttle."
[100] Two experts were called to give evidence: Mr William Potts was called by CME, and Mr Nugent and Dr Geoffrey Walker by ASIC. Each was well qualified to speak on the subject at issue.
[101] In 2003, Mr Potts provided a report to CME as a result of being instructed to "review the concept of magnetic power generation and to comment on the motor construction in progress."[60] At the time of making that report (24 January 2003) the "three dimensional proof of concept model" was not in existence. Mr Potts' report was based upon a copy of the business plan from CME (dated 22 August 2002), a test report for a set of magnets grade M42M, a non-disclosure agreement document, a set of reports by Sandberg of the University of Sussex, and a paper by Mutch. After briefly reviewing some of the literature on the subject and the associated, accepted scientific principles, Mr Potts reaches a number of conclusions.[61] Without setting them all out in full, it is clear that Mr Potts directs his attention more to motors and systems which feature both energy storage and reclamation. He says:
"12.4 This author has viewed and investigated the magnetic motor proposed by Cycclone Magnetic Engines Ltd and has carried out a literature search and a theoretical analysis based upon the dimensions of relevant parameters. As it stands, the author is of the opinion that it is possible to design and position current carrying coils that will sustain very high short term current flow during braking and deceleration and that it is possible to design energy storage and reclamation systems that are within grasp of current technology.
12.6 Opportunities for invention and patenting lie, in this author's opinion, in the manner in which magnetic and electric fields can be deployed in a vehicle and how energy can be recovered during braking and deceleration stored and reused during acceleration.
12.7 Since carrying out the analysis and literature search, this author is of the opinion that discoveries made to date are significant in aligning the company towards useful invention. The quality of manufacture of components in this author's opinion is of high standard and there has developed within the company significant knowledge about magnets, their commercial availability and method of manufacture.
12.9 If the inventors extend their attention to the storage of recovered energy and its reuse on demand, it is this author's opinion that patents and products will flow in abundance from the ingenuity."
[102] A rushed or uncritical reading of Mr Potts' second report could lead a reader to conclude that Mr Potts apparently accepts the proposals by CME with respect to the manufacture of a Cycclone Magnetic Engine. He does not. His report carefully avoids supporting that proposition for, it seems, at least two reasons:
(a) Insufficient detail was provided to him by CME about the manner in which it was proposed that any such engine would work, and
(b) The claim made by CME (as inferred by Mr Potts) was "outside the boundaries of conventional engineering explanation".[62]
"On 29 October 2003, Cycclone Magnetic Engines announced the successful running of the C3X model. A Channel 9 news crew was there to record this momentous achievement."
[104] On or about that date, part of the film which was taken of the C3X model was included in a short segment on a Channel 9 news program about CME. That news segment was (and still is) able to be downloaded from the CME web site. The film appears to show the prototype being started by a starter motor and then accelerating and decelerating under the control of Mr Nugent.
[105] Another piece of film footage on the web site shows three people who provide an account of what each of them saw when the C3X motor was apparently operated.[65] It is said that the motor was started by a starter motor using power from two 12 volt batteries but that the batteries were then disconnected. The persons in the footage say that the C3X continued to spin and that Mr Nugent could apparently control the speed using a knob to make the motor go, at first, slower and then faster a number of times before allowing the motor to come to a stop.
[106] Dr Walker had the advantage of being provided with the C3X but in a disassembled form. Dr Walker notes that:
"The C3X was delivered disassembled, as it had been disassembled by its' owner prior it being delivered to ASIC."
This was not disputed. As well as being disassembled, there were several important parts missing. Dr Walker noted:
"It is immediately apparent that one key item that is missing is the central rotating shaft along with the means of attaching the other rotating items to this central shaft. On viewing images of the assembled motor on the web site and in video footage, other items which have not been supplied are the fly wheel, and any mechanism which along with the visible knob in the video apparently allows the control of power. Without these items, it is impossible to reassemble the motor into any meaningful or useful state, so no attempt was made to reassemble the motor."
[107] A further difficulty under which both witnesses laboured was that neither had any detailed exposition provided to them of the manner in which it was proposed that the engine worked or the way in which the prototype apparently worked. This was within the capacity of CME and Mr Nugent to produce. But, as I have noted, even though Mr Nugent was, unusually, called by ASIC to give evidence, no attempt was made by his own side to have him explain how it was that CME could say that the prototype had been successfully run or how CME proposed to develop an engine based on the use of permanent magnets to supply mechanical power on demand without the need of external fuel input.
[108] A matter which reflects poorly upon Mr Nugent on this point is the uncontradicted evidence of Mr Robertson that Mr Nugent told him:
(a) "ASIC asked for the engine and we've given it to them"
(c) "They'll never figure it out because it's in pieces"
(d) "Why would you give them a complete engine anyway?"
In the absence of any evidence from Mr Nugent on this point, I infer that he was involved in the provision of the disassembled engine and that it was a deliberate tactic to provide it in that state.
[109] One of the claims made in the business plan gave rise to a complicated debate between the reports of Mr Potts and Dr Walker. The claim made is:[66]
"Cycclone Magnetic Engines is dedicated to developing a commercially viable, environmentally friendly engine based on the use of permanent magnets to supply mechanical power on demand, without the need of external field input."
[110] Dr Walker formed the view that this amounted to a claim that the proposed permanent magnet motor would comprise a perpetual motion machine. Mr Potts agreed with that. Mr Potts, though, observed that "the good work done to learn more about magnets and to machine components to make the form of an engine shines a light on what could be achieved in allied areas of magnet use." This excited cross-examination which ranged from Newtonian physics to World War II crystal radio sets to the unfortunate fate of Rudolf Diesel's first experimental engine.
[111] Dr Walker's view was that the claim referred to above (the creation of an engine based on permanent magnets to supply mechanical power on demand, without the need of external fuel input), could not be supported scientifically and that the development of an engine of this type was not scientifically feasible.
[112] Mr Potts was reluctant to acknowledge that the well accepted laws of thermodynamics meant that the engine as proposed could not function. He frequently called up examples of scientific breakthroughs which disproved previously accepted principles. The wide ranging debate between the two witnesses about the application of the first and second laws of thermodynamics (while intrinsically interesting)[67] is not one which I am required to resolve or one which I am capable of resolving. Dr Walker and Mr Potts agreed that:
(a) The proposed permanent magnet motor would comprise a perpetual motion machine.
(b) The aim of using permanent magnets to produce power to propel motor vehicles or conventional industrial machines cannot be achieved.[68]
[113] In his final report, Mr Potts concluded:[69]
"6.3 The hope of making an engine that will operate purely on magnets is forlorn. That is irrelevant to the potential success of the company and examples can be found readily of successful firms based upon futile flagship inventions.
6.4 The faith in an engine operated purely by magnets has been founded on quasi scientific reports that give an illusion of being erudite but never quite close the loop on being comprehensible."
I am confident that Dr Walker would agree with the gist of those expressions. They adequately summarise my understanding of the effect of all the scientific evidence.
(a) the representations were made by each natural respondent on their own behalf and as agents for CME; and
(b) the representations (the Invention/Prototype Representations) were made:
(i) in the Newsletter in the following terms: "The design of the [Cycclone Magnetic Engine] that you have seen running on the television and internet ..."
(ii) in the Business Plan in the following terms: "On 29 October 2003, [the First Respondent] announced the successful running of the [Cycclone Magnetic Engine]. A Channel 9 news crew was there to record this momentous achievement."
(iv) in statements made by the Third Respondent during meetings with persons in this jurisdiction regarding the Invention and the acquisition of shares in the First Respondent in the following terms or in similar terms to the same effect, namely:
[115] There is evidence, which I accept, that statements like those set out in the preceding paragraph were made, and that they were made in those particular circumstances. But I should note that the way the pleading is framed results in arguably different concepts and descriptions being employed instead of those which were actually used. For example, the statement in the Newsletter is: "The design of the C3X that you have seen running ...". The statement in the Business Plan is: "On 29 October 2003, [the First Respondent] announced the successful running of the C3X model ...". The "C3X" is referred to elsewhere in the Business Plan as a "proof of concept model" of the Cycclone Magnetic Engine. There is, in my view, a difference. Models are frequently used to test inventions or prototypes. It is not necessarily the case that a successful model means a successful final result. But that is what ASIC apparently alleges. The representation complained of is that the "invention [or prototype] works". Those words were only used by Mr McClelland. With respect to the other respondents, what ASIC must be taken to have alleged is that the statements set out above amount to such a representation. I will deal with the representations made in the Business Plan and the Newsletter ("the written representations") first.
Can the alleged representations be drawn from the written representations which are particularised?
[116] When considering whether representations or conduct can be misleading or deceptive one must look at more than just the statements or conduct alleged. In Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd Gibbs J (as he then was) put it this way:[71]
"It would be wrong to select some words or act, which, alone, would be likely to mislead if those words or acts, when viewed in their context were not capable of misleading. It is obvious that where the conduct complained of consists of words it would not be right to select some words only and ignore others which provided the context and gave meaning to the particular words." (emphasis added)
[117] In Butcher v Lachlan Elder Realty Pty Ltd the following was said about the need to consider matters beyond the words used:[72]
"[38] ... It is not right to characterise the problem as one of analysing the effect of its 'conduct' divorced from 'disclaimers' about that 'conduct' and divorced from other circumstances which might qualify its character. Everything relevant the agent did up to the time when the purchasers contracted to buy the Rednal land must be taken into account. ..."
"[109] The question whether conduct is misleading or deceptive or is likely to mislead or deceive is a question of fact. In determining whether a contravention of s 52 has occurred, the task of the court is to examine the relevant course of conduct as a whole. It is determined by reference to the alleged conduct in the light of the relevant surrounding facts and circumstances. It is an objective question that the court must determine for itself ... . It invites error to look at isolated parts of the corporation's conduct. The effect of any relevant statements or actions or any silence or inaction occurring in the context of a single course of conduct must be deduced from the whole course of conduct ... . Thus, where the alleged contravention of s 52 relates primarily to a document, the effect of the document must be examined in the context of the evidence as a whole ... . The court is not confined to examining the document in isolation. It must have regard to all the conduct of the corporation in relation to the document including the preparation and distribution of the document and any statement, action, silence or inaction in connection with the document." (emphasis added)
[119] A document may still convey a misleading impression even when there are appropriate qualifications. In National Exchange v ASIC the appellant had written to certain (mostly small) shareholders offering to purchase their Onesteel shares for $2 per share.[73] The offer document compared this price favourably with the recent market price of $1.93 per share. However, later, in a less prominent part, the offer document provided that the purchase price was payable in 15 annual instalments, beginning the following year. The effect of the payment provision was that the value of the offer was substantially less than $2 per share in cash. The appellant argued that the primary judge was wrong to find that the offer document, which was factually true when read as a whole, was nonetheless misleading.
[120] On that point, Jacobson and Bennett JJ said:
"[49] It is well established that an offer which is literally true may nonetheless be misleading. It will be misleading or deceptive if it carries with it a false representation: see Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd [1978] HCA 11; (1978) 140 CLR 216 at 227-8 ; per Stephen J. However, Mr Karkar submitted that this principle cannot apply where the statement is factually true.
[50] In our opinion, no such distinction can be drawn. A document which, when read as a whole, is factually true and accurate may still be capable of being misleading if it contains a potentially misleading primary statement which is corrected elsewhere in the document but without the reader's attention being adequately drawn to the correction.
[51] The principle which applies to those cases is that the qualifying material must be sufficiently prominent or conspicuous to prevent the primary statement from being misleading: see Medical Benefits Fund of Australia Ltd v Cassidy [2003] FCAFC 289; ... at [35]-[38] (per Stone J with whom Mansfield J agreed); see also J D Heydon, Trade Practices Law, Law Book Co, Sydney, 1989, at [11.730].
[52] As Mason J said in Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191 at 210-11 (Puxu):
'There may be situations where to exploit mistaken views of the public would contravene s 52 and would not be corrected by an inconspicuous accurate representation made in, for example, a concealed label or the "fine print" of a contract.'
[53] The relevant document in the present case is Annex "B" [not reproduced in this report] to the judgment of Dowsett J. The striking feature of the document when read as a whole is the disparity between the impression created by the primary statement, namely that the offer is for payment in full on acceptance, and the true position stated in the qualification under which payment is to be made over 15 years. The primary statement is made in bold so as to emphasise it to the reader and it is repeated and reinforced in the comparative table.
[54] The representation made in the table is that the shareholders will receive in cash in full on acceptance a premium of 7c over the closing price. The true position is that accepting shareholders make an interest-free loan of the purchase price to the appellant over a period of 15 years. To describe it as a cheeky offer would be to understate the full import of the document.
[55] Where the disparity between the primary statement and the true position is great it is necessary for the maker of the statement to draw the attention of the reader to the true position in the clearest possible way." (emphasis added)
[121] The same rigour should be applied when considering whether a representation was made - that is, when it is alleged that the representation complained of is to be drawn from other representations or conduct. What, then, does it mean to say that the invention/prototype works? There is no qualification to the allegation. It is not alleged that the invention/prototype representation means that the invention is nearly at a working stage or is close to a working stage or that there is rapid progress towards completion. The Invention/Prototype Representation is absolute: the engine works.
[122] Can that conclusion be drawn from the written representations as a whole? The Invention/Prototype Representation relies, partly, on isolated fragments of some lengthy documents. It is not feasible to set out the entire documents but the following excerpts demonstrate that there was no certainty in what was being conveyed - hope, certainly - but nothing like the absolute character alleged by ASIC.
● "CME is the concept of using permanent magnets in a configuration that supplies mechanical power on demand."
● "To offer an alternative to the ubiquitous internal combustion engine that is commercially viable, the technology must imitate the manner and principles that the internal combustion engines operate under. CME believes that it is able to meet this criteria [sic] by concentrating development on the control and configuration of the applied magnets."
● "CME believes now is the time to forge forward and consolidate its technology into commercial reality."
● "The last six months has seen CME engaged in [sic] corporate structure in the activity and now considers that it is positioned to move forward both in a corporate sense and in a technical development sense. CME is looking forward to the assembly and testing of the next engine model with the view to a physical test via a vehicle to be driven on a long distance test."
● "As you are aware, Cycclone Magnetic Engines has been in the shadow of the parent company for the last two years and is now able to carry out business in its own right. This has been an important chapter in the project developing a permanent magnetic engine with support coming from the parent company in the early days."
● "Now that Cycclone is able to operate by itself, focus has turned to obtaining direct investment and to complete the development program laid out during the course of last year, that is, to finalise the purpose built engine and fit the engine to the company's test vehicle."
● "Our objective is to take magnetic engines to the next level ... On todays (sic) terms, the technology being poured into magnet research is higher than any other area and we are part of this revolutionary era."
● "This year will see Cycclone Magnetic Engines increase development work on the engine and aim for the release of the next model, the C3X2, and fitment to a vehicle as soon as possible."
[123] It is also appropriate that the substantial notes and disclaimers made in the business plan be taken into account. The business plan is a 13 page document. The last four pages come under the heading of "The Key Risks". These pages are presented in the same style as the preceding pages and with the same emphases. The risk factors are noted as including:
"Cycclone Magnetic Engines may be subject to a number of risks, some of which are specific to similar technology developments.
● 'The commercial success of the technology is highly dependent on the successful outcome of its Research and Development programs.'
● 'Further, when developing new products, development schedules may be altered as a result of the discovery of design flaws, performance problems or changes to the product specification in response to customer requirements or market developments.'
● 'Technology development is inherently high risk and the above risks should not be taken as exhaustive. Other risks may become evident with further development of the technology and commercial relationships. Cycclone Magnetic Engines and its Principles can give no assurance that all of the objectives can be satisfactorily achieved.'" (emphasis added)
[124] The web site to which ASIC refers is www.cycclone.com. The contents of the web site were captured on 19 September 2006.[74] Of course, the process of capturing the information only concerned the information on the web site on that day. There is little evidence about what was on the web site at the relevant times. In his examination,[75] Mr Nugent said that the web site had been used for marketing to the general public but he was not asked what constituted the web site. When he was shown the captured information from the web site he confirmed that it was correct, but he was not asked whether it was a true representation of the web site at earlier times. There is evidence that, at the relevant time, the Channel 9 news film was on the web site.[76] The representations alleged to have been on the web site were:
[125] There is no direct evidence that either of those statements was on the web site at the relevant time but I infer that they were because Mr Nugent said in his s 19 examination that he referred prospective shareholders to the web site where they could see the videotape running.[77] The only evidence that anyone accessed the web site during the fundraising period is given by Mr Robertson.[78]
[126] ASIC alleges that Mr McClelland made the following statements at meetings with prospective shareholders:
[127] It is important to note that the statements made by Mr McClelland, referred to above, come not from disappointed investors or persons claiming to have been misled but from the s 19 examination of Mr McClelland conducted by ASIC.[79] The answers given by Mr McClelland, in context, were:
"Q. When you've spoken to investors what have you told them?
"Q. Have you told people, either current shareholders or people wanting to invest, that the engine works?
Nugent has told me this engine he's developed this engine and I have no reason to disbelieve him."[81]
[128] Those answers do not provide complete support for ASIC's allegation, namely, that these statements were made "during meetings with persons in this jurisdiction regarding the Invention and the acquisition of shares in [CME]".
[129] The first answer was in response to the question: "When you've spoken to investors what have you told them?" Mr McClelland's answer was not directed to statements made to prospective investors.
[130] The second answer was directed to a question about current shareholders or "people wanting to invest". It is pertinent to note that Mr McClelland made it clear that he qualified the statement he made by referring to the "high risk".
[131] Given the absence of any evidence or complaint from any other person that Mr McClelland made those statements, the equivocal nature of his answers, the reference to "investors" in one question, and the warning of risk he said he gave, I do not regard this allegation as one which should be afforded any weight.
[132] How then would an ordinary or reasonable member of the group to whom the respondents provided these documents assess these representations? I assume that such a person would approach the proposal that he or she should invest in CME with a view to taking reasonable care of his or her interests and that he or she would exercise somewhat more vigilance than may be the case with the purchase of items of less financial significance. A reasonable person doing that would, in my view, read all of the documents available and would pay attention to any statements which expressed caution or which disclosed possible hazards.
[133] The "erroneous assumption" which ASIC must demonstrate is that the invention works. A fair reading of the business plan would be that, while confident, the authors of the plan were careful to ensure that the risks of development were made clear and that the project had not been completed. The assertions made are written with a view to the future, not with a view to the promotion of a working invention. So far as the written representations are concerned the allegation is not made out. That is not the end of the representations, though.
[134] The most telling of the representations is that made through the medium of the film on the web site. On the home page the following appears: "See the Engine Running". If a user clicks on those words a page appears on which, among other things, are the following words: "See the Cycclone Magnetic Engine running as featured on Channel Nine News". The appearance of the engine on the film was partially described by Mr Nugent in his s 19 examination:
"Q. Micheal, can I ask you a question about the input energy? I've seen a piece of footage from your web site which actually shows, it looks like a car battery hooked up to your magnetic engine and it appears as though the power is actually generated from that battery in order for the magnets to then start operating and for the engine to run. So, can you explain that for me? That's from the Cycclone Magnetic Engines web site?
A. Yes. .... The two batteries are only used to turn the fly wheel. Once - the video does not show the battery cables being disconnected and the engine running by itself. Other people have seen that, where we drop the cables off. The two batteries are purely there to start.
Q. And then once that kicks over, the magnets take - well, they'd be going at the same time, would they, and then once the magnets have started rotating, you turn the fly wheel off, is that right, or you turn the batteries off?
Q. Can you just clarify the question that you gave previously then to Miss Gibson in relation to the input energy then? So, there is some input energy from an external source in order to start the engine running or was that only a situation which isn't normal?. You don't normally have a battery hooked up to it to actually get the engine started?
A. No. .... We use batteries to set it in motion and then we disconnect the batteries."
[135] The film shows Mr Nugent apparently operating the engine. An enclosed cylinder is shown rotating at high speed. Mr Nugent appears to be causing it to rotate either faster or slower through the manipulation of a knob on the engine.
[136] The web site also had available on it the Newsletter but not the Business Plan. A person who only visited the web site would not have seen the disclaimer nor is there any reference which would alert a visitor to the Business Plan or any other relevant warning or disclaimer on the web site.
[137] In my view, a reasonable person who viewed the film on the web site could, at that point, labour under an erroneous assumption that the engine worked. There is evidence that at least one shareholder did. Mr Donald Robertson was introduced to Mr Nugent by his (Robertson's) employer. Mr Nugent showed him the film (which he saw again on the web site) and his evidence was:
"Based upon this video, I thought the CME engine worked, namely, that it produced power."[82]
[138] Mr Robertson (who was not cross-examined) also said:
"The video showing the CME engine operating had a big influence on my decision to invest in CME."[83]
[139] Mr Robertson did not receive the Business Plan until after he had applied for shares in CME and, after attending a CME shareholder's meeting in 2006, he decided he no longer wanted to invest in CME and sought a refund of his investment.
[140] Other people may have received the Business Plan before being directed to the web site. Some may have received it after viewing the web site. Some may not have received it at all. There is no way of knowing on the available evidence.
[141] In those circumstances, ASIC has established that CME, by putting on its web site the film and associated statements, engaged in misleading and deceptive conduct or conduct that was likely to mislead or deceive.
[142] In order for that conduct to have breached s 1041H of the Act, it must also have been "in relation to a financial product or a financial service".
[143] The most recent consideration given to the meaning of the phrase "in relation to" as used in s 1041H is to be found in the decision of the Full Court of the Federal Court of Australia in ASIC v Narain.[84] The headnote sufficiently describes the factual setting:
"The respondent was the managing director of Citrofresh International Ltd (CTF). The respondent was involved in the writing of an 'ASX Release' which claimed that CTF's products could reduce the spread of four major viruses including HIV/AIDS. The respondent instructed CTF's secretary to send the statement to the Australian Stock Exchange (ASX), who published it. The statement affected the price of CTF shares.
The appellant submitted that the respondent had breached s 1041H of the Corporations Act 2001 Cth (the Act), which stated that a person should not engage in conduct 'in relation to' a financial product that was misleading or deceptive.
The judge at first instance held that the ASX Release did not contain representations 'in relation to' CTF's shares pursuant to s 1041H of the Act because the statement did not refer to shares on the face of it, or deal with the shares directly."
[144] The construction favoured by the trial judge was rejected by the Full Court. Finkelstein J said:
"[9] As regards the first issue in the appeal (whether the representations were 'in relation to' CTF shares), it is of course true, as the judge said, that the words 'in relation to' require a relationship or connection between two subject matters. In the context of Pt 7.10 generally, and s 1041H in particular, the expression ought to receive broad construction. One important object of the Part is to ensure that participants in the market for financial products and financial services act with integrity and honesty and that consumers are adequately protected. To further this object I do not think the connection between misleading statements on the one hand and shares in a company on the other must necessarily be immediate or direct. I particularly do not accept as a necessary condition for conduct to be 'in relation to a financial product' that the conduct must 'on its face' refer to or, as the judge would have it, 'deal with' the financial product. With great respect to those who hold the opposite view, that approach gives s 1041H an unnecessarily narrow construction; a construction that will not promote its objects." (emphasis added)
"[75] Misleading and deceptive conduct takes many forms. The degree of the relationship between the financial product and the proscribed conduct is informed by the examples set out in s 1041H(2). They range from issuing a financial product (s 1041(2)(b)(i)) to carrying on negotiations or making arrangements or doing any other act preparatory to "or in any way related to" an activity referred to in the nine earlier examples listed in that subsection: see s 1041H(2)(b)(x).
[80] The breadth of the relationship between the conduct proscribed by s 1041H(1) and the financial product is not confined in this way because the concept of misleading and deceptive conduct is one which embraces all of the circumstances in which the conduct takes place. This is illustrated not only by the terms of s 1041H(2) but by what the High Court has said about the amplitude of the "conduct" which must be considered in analysing the question of whether it is misleading: Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592 at 605."
[146] The web site was, no doubt, intended to fulfil a number of functions. One would have been to publicise CME in a general way. Another was to allow interested persons to contact CME - the web site contained a feedback page. Another was, as the home page made clear, "to obtain... direct investment and to complete the development program".[85]
[147] The conduct of CME in placing the film on the web site and then describing it as showing the engine working is relevantly indistinguishable from writing an ASX release to the same effect, especially in the context of the introductory words on the home page about "obtaining direct investment", that is, shares in CME. That conduct, therefore, comes within s 1041H.
[148] It is also alleged that the conduct breached s 12DA of the ASIC Act. It refers to engaging in conduct in "trade or commerce" which is also "in relation to financial services".
[149] Section 12BA provides that "trade or commerce" means trade or commerce within Australia or between Australia and places outside Australia. That is the same definition as appears in the TPA. I see no reason why the same meaning should not be given to it in the ASIC Act, as has been given to it in the TPA. In Concrete Constructions (NSW) Pty Ltd v Nelson the following was said:[86]
"The phrase 'in trade or commerce' in s 52 has a restrictive operation. It qualifies the prohibition against engaging in conduct of the specified kind. As a matter of language, a prohibition against engaging in conduct 'in trade or commerce' can be construed as encompassing conduct in the course of the myriad of activities which are not, of their nature, of a trading or commercial character but which are undertaken in the course of, or as incidental to, the carrying on of an overall trading or commercial business. If the words 'in trade or commerce' in s 52 are construed in that sense, the provisions of the section would extend, for example, to a case where the misleading or deceptive conduct was a failure by a driver to give the correct hand signal when driving a truck in the course of a corporation's haulage business. It would also extend to a case, such as the present, where the alleged misleading or deceptive conduct consisted of the giving of inaccurate information by one employee to another in the course of carrying on the building activities of a commercial builder. Alternatively, the reference to conduct 'in trade or commerce' in s 52 can be construed as referring only to conduct which is itself an aspect or element of activities or transactions which, of their nature, bear a trading or commercial character. So construed, to borrow and adapt words used by Dixon J in a different context in Bank of NSW v The Commonwealth ... , the words 'in trade or commerce' refer to 'the central conception' of trade or commerce and not to the 'immense field of activities' in which corporations may engage in the course of, or for the purposes of, carrying on some overall trading or commercial business." (emphasis added)
[150] The narrow view of "trade or commerce" was the subject of consideration by the Full Court of the Federal Court in Hearn v O'Rourke. [87] In that case, the majority (Finn and Jacobson JJ) agreed with Dowsett J on his exposition of the relevant law but disagreed about its application to the facts. His Honour considered Concrete Constructions and drew, among others, the following conclusions about the operation of s 52 of the TPA:
• The section is concerned with the conduct of a corporation towards persons with whom it has, or may have dealings in the course of its trading activities or transactions which dealings, of their nature, bear a trading or commercial character.
• The dividing line between conduct which is in trade or commerce and conduct which is not may be unclear, in which case it may be necessary to identify the features which import a trading or commercial character to an activity which would not, without more, have that character.
• To engage in conduct which is divorced from any relevant actual or potential trading or commercial relationship or dealing will not, of itself, constitute conduct 'in trade or commerce' for the purposes of the section."
[151] On the basis of the decision in Concrete Constructions, as explained by Dowsett J, one might conclude that a company selling its own shares was engaging in conduct which did not bear the necessary trading or commercial character. That view, though, cannot stand against the clear expression of the purview of s 12DA which is to be found in Sons of Gwalia Ltd v Margaretic.[88] While that decision was primarily concerned with the ranking of claims in a winding up, the appeal emerged from a trial in which an investor had claimed that the company had breached its continuing disclosure obligations by failing to notify the Australian Stock Exchange that its gold reserves were insufficient to meet its delivery contracts and that it could not continue as a going concern. The investor claimed that failure contravened the prohibition of misleading or deceptive conduct in s 52 of the TPA, s 1041H of the Act and s 12DA of the ASIC Act 2001 Cth. He claimed damages under each Act as a creditor of the company.
[152] Justice Hayne (with whom Kirby J (on this point), Heydon and Crennan JJ agreed) said:
"A person who buys, or subscribes for, shares in a company, relying upon misleading or deceptive information from the company, or misled as to the company's worth by its failure to make disclosures required by law, may have a claim for damages against the company. That claim may be framed in the tort of deceit but, more probably than not, will now be framed as a claim under consumer protection provisions of the Trade Practices Act 1974 Cth (ss 52, 82) or investor protection provisions of the Corporations Act 2001 Cth (eg, ss 1041H, 1041I and 1325) (the 2001 Act) or the Australian Securities and Investments Commission Act 2001 Cth (eg, ss 12DA, 12GF and 12GM) (the ASIC Act)." (emphasis added)
[153] The availability of s 12DA to an investor has been made plain. It follows, then, that the conduct I have found above also contravenes s 12DA of the ASIC Act.
[154] Finally, ASIC asserts a breach of s 12DB of the ASIC Act. It is alleged that the conduct was in trade or commerce, in connection with the supply or possible supply of financial services, and that it:
(a) falsely represented that the services were of a particular quality, namely, an investment in a proven technology; or
(b) represented that the services had a performance characteristic or benefits they did not have, namely, an investment in a proven technology.
[155] The representation made by the film in its context - that the invention works - likewise amounts to a representation that an investment in a proven technology was available. Thus, s 12DB has been contravened.
[156] ASIC alleges that the following representations (the 'Patent Representations') were made:
(i) to achieve a range of patents associated with the technology from the shape and configuration of the magnets through to the mechanical application in general; and
(ii) to be able to increase and alter the number of patents as the technology is continually refined.
CME expects to achieve a range of patents associated with the technology from the shape and configuration of the magnets through to the mechanical application in general. As with all patents, they have a limited life span and CME expects to be able to increase and alter the number of patents as the technology is continually refined."
[158] The other particulars do not support the representations pleaded.
[159] It was submitted by ASIC that the Patent Representations were misleading or deceptive or likely to mislead a reasonable person because:
(a) the Patent Representations were representations with respect to a future matter;
(b) CME had not begun the process of obtaining a patent; and therefore
(c) there were no reasonable grounds for making the Patent Representation.
(d) the Patent Representations were misleading or deceptive or likely to mislead a reasonable person into the assumption that the "Invention" (as defined by ASIC in its pleading) in respect of which the acquisition of shares in CME was an investment was:
(i) protected by patents and would continue to be protected by patents; or in the alternative
(ii) subject to a plan, being followed by CME to obtain patents and, as a consequence thereof, protected by patents, or would be so protected within a reasonable time thereafter.
[160] As with the Invention Representation, the statements alleged to give rise to this representation must be read in context.
[161] There is no reason not to accept that CME represented that it had a "Patent Program". They are the words used as a sub-heading on page 9 of the Business Plan. Of course, all that is set out are CME's expectations. ASIC, though, argues that the effect of those statements was that a reasonable person would be misled into assuming that the "Invention" would be protected by patents.
[162] The representation is with respect to a "range of patents associated with the technology". What is the "technology" referred to in that paragraph? In one part of the Business Plan the "technology" appears to refer to "the concept of using permanent magnets in a configuration that supplies mechanical power on demand".[91] On that page (and the page that follows it) the discussion is clearly referring to the process of creating of an engine, for example:
(a) "... consolidate its technology into commercial reality ...'
(b) " ... developing a commercially viable, environmentally friendly engine ..."
(c) " ... further development of the Cycclone Magnetic Engine ..."
(d) " ... assembly and testing of the next engine model ..."
[163] Under the heading "The Cycclone Magnetic Engine" on page 4 of the Business Plan there is a sub-heading of "Technology".[92] It is in three parts. The first, and largest, is headed "The Magnets" and refers exclusively to the properties of magnets. The second section is headed "The Mechanical Application" and says, in part, that "[t]he concept behind CME is to replace the liquid fuel power stroke of two revolutions with a load line ... power pulse in four to eight deliveries per revolution depending on the size and power requirement."
[164] A fair reading of the whole of the Business Plan would lead a reasonable person to conclude that the reference to "... a range of patents associated with the technology ... the mechanical application in general" was a reference to the technology encompassing "the concept of using permanent magnets in a configuration that supplies mechanical power on demand", as exemplified by the engine referred to earlier in the Business Plan.
[165] There is nothing, though, in the Business Plan which would lead a reasonable person to assume that the "Invention" was "protected by patents and would continue to be protected by patents". The words used in the Business Plan are words of expectation not of confirmation. They are sufficient, though, to lead a reasonable person to assume that the "Invention" was subject to a plan, being followed by CME to obtain patents, and, as a consequence thereof, would be so protected.
[166] Those words are, therefore, with respect to a "future matter" within the meaning of s 769C of the Act and s 12BB(1) of the ASIC Act. Under the former section the onus is on ASIC to demonstrate:
(a) that CME did not have reasonable grounds for making the representation; and
(b) that it was in relation to a financial product or a financial service.
Under the latter section the onus is on ASIC to demonstrate that the representation was made in trade or commerce and in relation to financial services. The absence of reasonable grounds is assumed unless the representor adduces evidence to the contrary.
[167] It is argued on behalf of CME and Mr Nugent that "The Patent Program" passage has to be read in context. There can be no dissent from that. The particular context relied upon is a section of the Business Plan which provides: [93]
This Memorandum contains forward-looking statements, which involve risks and uncertainties. These forward-looking statements, which are usually accompanied by words such as "may", "might", "will", "should", "could", "intends", "estimates", "predicts", "potential", "continue", "believes", "anticipates", "plans", "expects" and similar expressions, relate to, without limitation, statements about our market opportunities, our strategy, our competition, our projected revenue and expense levels and the adequacy of our available cash resources. These statements are only predictions. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Memorandum. Our actual results could differ materially from those expressed or implied from these forward-looking statements as a result of various factors, including the risk factors described above and included in this Memorandum. We do not guarantee future results, levels of activity, performance or achievements. ... " (emphasis added)
[168] It is tolerably clear that "The Patent Program" falls within the coverage of the note on "Forward Looking Statements". It uses the word "expects" in two places and, read with the notes that "Technology development is inherently high risk ..." and "infringement of, and challenges to the intellectual property rights of Cycclone magnetic engines" constituted a risk,[94] it would be contemplated by the first sentence in "Forward Looking Statements", namely, "[t]his Memorandum contains forward-looking statements, which involve risks and uncertainties."
[169] What, then, is the effect of the qualification contained within "Forward Looking Statements" on "The Patent Program"? The latter is no more than a prediction and a prediction which is subject to substantial conditions. The failure to qualify predictions and the consequences under the Trade Practices Act were referred to by Lee J in Wright v Wheeler Grace & Pierucci Pty Ltd: [95]
"A positive unqualified prediction by a corporation may be misleading conduct in trade or commerce if relevant circumstances show the need for some qualification to be attached to that statement or the possibility of its non-fulfilment to be disclosed as a requirement of fair trading. The fact that the corporation believed or had reasonable grounds for belief that the prediction would be fulfilled, would not answer the question as to whether the conduct was misleading or deceptive conduct in trade or commerce. The misleading or deceptive conduct may be found in the failure to qualify the statement or disclose the risk of non-fulfilment and the event of non-fulfilment of a prediction or promise may be evidence that raises an inference that such a risk of non-performance existed or that qualification of the positive statement, prediction or promise was required."
[170] The idea of unqualified predictions constituting misleading conduct is not a difficult concept to accept. The proposition by ASIC ignores the qualification contained in the Business Plan.
[171] What effect can a disclaimer have? It is well established that:[96]
"... exclusionary and disclaimer clauses cannot override the statutory prohibition against misleading and deceptive conduct or prevent the grant of appropriate statutory relief where loss or damage is, as a matter of fact, caused by a contravention of the statute."
No claim of loss or damage was made by ASIC or by any shareholder.
[172] In Downey v Carlson Hotels Asia Pacific Pty Ltd Keane JA considered the efficacy of disclaimers and said:[97]
"[83] It has been recognised, however, that disclaimers can be effective 'if the clause actually has the effect of erasing whatever is misleading in the conduct'; ... in other words, if the effect of the disclaimer is to make clear something that, if allowed to remain vague or ambiguous, could have led a person into error. Disclaimers had this effect in Butcher [v Lachlan Elder Realty Pty Ltd] where it was held that the effect of reading an entire brochure, including the disclaimers, was to make it clear that the survey report included in the brochure had not been prepared by the producer of the brochure but was simply being passed on without any representations being made as to its truth or falsity. It is apparent that if a disclaimer is to function in this way it must be worded unambiguously, feature prominently and it must be communicated to the reader that the disclaimer is relevant to the information it is seeking to qualify. ... As Jacobson and Bennett JJ noted in National Exchange [v ASIC]:
'Where the disparity between the primary statement and the true position is great it is necessary for the maker of the statement to draw the attention of the reader to the true position in the clearest possible way.'"
[173] In cases dealing with misleading advertising it has been held that: [98]
"The qualifying material must be sufficiently prominent to prevent the primary statement being misleading and deceptive or likely to mislead or deceive."
[174] While there are obvious differences between various types of advertising and the documents in this case, there is still the underlying principle that, if a representor wishes to rely on a qualifying statement, it must be of sufficient prominence and clarity to act as a confining influence on the statement alleged to be misleading or deceptive. In this case, the qualification is not in "small print" or the subject of some obscure reference. It appears in the section headed "The Key Risks" and is a substantial constituent part of that section.
[175] In the light of the statements in the "The Forward Looking Statements", the entry under "The Patent Program" cannot give rise to the meanings alleged by ASIC and, thus, cannot give rise to an erroneous assumption. It is not necessary to consider the other questions which would arise had those meanings been available.
[176] ASIC alleges that CME represented (as "Expenditure Representations") it would use the proceeds available to it in, among other things, the following way:
(a) $50,000 on tooling, being certain plant and equipment in its tooling-up process required for the assembly of its fully functioning prototype;
(b) $300,000 on "research and development", a term expressly defined as comprising general administrative expenses, components, raw materials, tooling (other than capital equipment), insurances and promotional costs; and
[177] The Expenditure Representations are particularised as having been made in the Business Plans.
[178] They are alleged to be misleading or deceptive because:
(a) the actual expenditure by CME demonstrates a lack of expenditure on research and development and tooling, rather, the bulk of the expenditure was on remuneration for each of the natural respondents and administrative expenses attributable to the purpose of obtaining further investments in CME;
(b) an inference can be drawn that Mr Nugent, in particular, had no intention at any relevant time to cause any substantial expenditure to take place on research and development or tooling;
(c) there were no reasonable grounds for making the Expenditure Representations;
(d) they were likely to mislead a reasonable person into the assumption that:
(i) a very great proportion of the money raised by the issuing of shares in CME would be expended on research and development and tooling; and
(ii) "substantial development work commercialisation [sic] of the invention was being, and was capable of being carried out".
[179] The material dealing with expenditure appears in the sub-section headed "Forward Looking Statements" in the section headed "Key Risks" and constitutes the last two pages of the Business Plan. It commences with the following:
"CME is seeking Seed Capital in first round funding, in the form of convertible preference stock. The intended reinvestment and use of these proceeds is as follows;
Total Proceeds for working capital and reserve $ 710,000
[180] ASIC presented evidence drawn from a detailed analysis of the financial records of CME which appeared to demonstrate a substantial difference between actual expenditure and that represented above:
[181] It is accepted by CME and Mr Nugent (but denied by Messrs McClelland and Foster) that the Expenditure Representations are representations with respect to a future matter. Given the presence of the representation under the sub-heading "Forward Looking Statements", the use of the words "intended reinvestment and use" and, following the representation, the use of words and phrases such as "projection", "might need to be paid", and "expects" in paragraphs associated with the representation, it is clear that the Expenditure Representations are properly classified as representations with respect to a future matter.
[182] First I will consider the principles to be applied when dealing with a representation with respect to a future matter.
[183] As is considered above, if a person makes a representation with respect to a future matter, and the person does not have reasonable grounds for making it, then the representation is taken to be misleading. Under s 769C of the Act the applicant has the burden of proving that the person did not have reasonable grounds for making the representation.
[184] Under s 12 BB of the ASIC Act the representor has the burden of adducing evidence to the contrary, namely that he/she/it had reasonable grounds, otherwise the absence of such grounds is assumed. It is appropriate at this stage to consider the extent to which a representor is required to go in order to defeat the assumption. For example, is there a reversal of onus? If the representor adduces evidence does the applicant bear a burden?
[185] These, and other questions, were considered in Downey v Carlson Hotels Asia Pacific Pty Ltd.[99] In that case the almost identical provisions of s 51A of the Trade Practices Act were being considered. Keane JA, with whom Williams JA and Atkinson J agreed, rejected the submission that " ... once the appellant [representor] had put evidence forward it was up to the respondents [representees] to prove that reasonable grounds for making the representations did not exist at the time they were made."[100]
[186] Further, his Honour observed that:[101]
" ... when a representor does adduce evidence attesting to reasonable grounds, it will be a matter for the court to determine if that evidence does establish reasonable grounds, and so there will be no automatic deeming as there would be if a representor did not adduce any evidence at all."
[187] There are some single-judge decisions which support a view that the deeming provision can only be avoided if the representor establishes on the balance of probabilities that there were reasonable grounds for making the representation.[102]
[188] I am persuaded by the more recent examination of this area undertaken in McGrath and Anor v Australian Natural Care Products Pty Ltd where Allsop J (as he then was) considered the legislative history of s 51A in detail.[103] His Honour traces the series of cases which have dealt with this area and summarises, correctly in my respectful view, the true effect of the various decisions.[104] He quotes at length from the decision of Keane JA (referred to above) and his (Keane JA's) understanding of the earlier decision of Emmett J in ACCC v Universal Sports Challenge Ltd and says:[105]
"[191] ... That understanding, which Keane JA said reflected commonsense, and which reflects my understanding of the operation of the section, was that the provision required evidence 'to the contrary' to be adduced, that is evidence that tended to establish, or that admitted of the inference that there were, reasonable grounds for making the representation, before the deeming provision ceased to operate. It seems to me that that is what Emmett J was saying. His Honour was not referring to any evidence relevant to that topic, but evidence 'to the contrary'.
[192] If evidence is adduced by the representor that is said to be evidence to the contrary, it will be for the Court to determine whether it is to the contrary in the sense just discussed. If it is, the deeming provision will cease to operate. That was the view of Emmett J, as understood by Keane JA. That is my view. That was not, however, an expression of the view that the legal or persuasive onus has been changed by s 51A(2), as some of the judgments in the 'trend of established authority' referred to by Keane JA have stated. For instance, if evidence 'to the contrary' is adduced by the representor, and if the representee itself adduces evidence tending to the lack of reasonable grounds, the matter might be equally poised. In such a case, there has been evidence 'to the contrary' adduced by the representee, thereby eliminating the operation of the deeming provision, and, on the totality of the evidence, the proof of the reasonableness (or lack thereof) of the grounds is evenly balanced. Section 51A(2) does not, in my view, mean that in those circumstances the representor has not met an onus. The section does not cast the legal or persuasive onus, in such a case, on the representor. Its terms do not say so. The enactment history makes clear that the terms were deliberately chosen not to say so. Keane JA, despite his reference to the 'trend of established [first instance] authority', does not say so." (emphasis added)
[189] A further question arises, in circumstances like this case, where the alleged representors have not called any evidence on this topic.[106] Can a representor be regarded as having "adduce[d] evidence to the contrary" by referring to or relying upon evidence called or tendered by the representee?
[190] In Fubilan Catering Services Pty Ltd v Compass Group (Australia) Pty Ltd, French J said:[107]
"[Section 51A] does not reverse the onus of proof when it applies. It merely requires the alleged representor to 'adduce evidence to the contrary'. There may be a question whether a representor can discharge the evidential burden by pointing to evidence which forms part of the applicant's case. In my opinion a respondent may rely upon evidence called by an applicant which answers the description 'evidence to the contrary'." (emphasis added)
[191] This area was touched upon by Keane JA in Downey v Carlson Hotels Asia Pacific Pty Ltd.[108] He said:
"[129] For the sake of completeness, it should also be noted that, even if the [representor's] submission as to the reversal of the onus in s 51A where a representor tenders evidence is correct, there are two further reasons why the [representor's] challenge to this aspect of his Honour's decision should fail. First, the evidence of the [representor's] preliminary forecasts relating to the project was tendered by the [representees]. For that reason, the [representees] contend, correctly in my view, that even on the view of the onus provisions of s 51A for which the [representee] contends, the onus remained on the [representee] to establish a reasonable basis for making the representations in question."
[192] In McGrath and Anor v Australian Natural Care Products Pty Ltd Allsop J, in referring to that observation by Keane JA, said:[109]
"[190] It is unnecessary to deal with all that is contained in [129] of his Honour's reasons, in particular with the proposition that the representor must be the party to tender the material for s 51A(2) to be engaged, or whether the better approach is to be found in the last two sentences of the extract from the reasons of French J [above]."
[193] What, then, need a representor do in order to "adduce evidence to the contrary"? The word "adduce" means "to bring forward in argument; cite as pertinent or conclusive".[110]
[194] Justice Allsop's interpretation of Keane JA's observation in [129] of his reasons does not, in my respectful view, necessarily follow from what Keane JA said. Keane JA said that "the onus remained on the [representee] to establish a reasonable basis for making the representations in question." He did not, by referring to the tender of a document by the representee; mandate that a representor must call evidence or tender documents to satisfy the test in s 51A. To have done so would have been inconsistent with the meaning of "adduce" and with common experience of proving matters. In a trial, there is more than one way for a party to bring forward evidence favourable to it. Obviously, it can call a witness and lead evidence from that person. It can tender documents or other tangible evidence through a witness or, in some cases, in the absence of a witness when legislation allows a particular type of document to be admitted without further evidence, for example, a certificate of incorporation.[111] It is possible, and it does happen, that a defendant can establish some or all of its case through answers elicited in cross examination of the plaintiff's witnesses. It might be possible, in a case such as this, for a representor to establish through cross examination that it had reasonable grounds for making the representation of a future matter. A representee might tender a document in its own case which, on its face, demonstrates the necessary grounds were held by the representor. None of the preceding possibilities are far-fetched; they occur regularly in the courts. The fact that these things do occur lead me to the view that Keane JA did not, and did not intend to, say that a representor must call evidence or tender documents if it is to adduce evidence to the contrary.
[195] On that view, the opinion expressed by French J (above) is not inconsistent with what Keane JA said and I intend to proceed in accordance with it.
[196] The representations the subject of complaint concern: "Tooling", "Research and Development", and salaries and wages.
[197] The section of the business plan in which these representations appear contains notes on two of those matters.
"CME expects to acquire certain plant and equipment in its tooling-up process required for the assembly of its fully functioning prototype."
[199] Under "Research and Development" the following appears:
"The principal types of expenses within this category are general administrative expenses, components, raw materials, tooling (other than capital equipment), insurances and promotional costs."
[200] There is no section specifically headed "salaries and wages", but there is one headed "Compensation of Management". It provides:
"The directors, officers and other employees of the Company, some of whom will be shareholders, will receive fees, compensation and salary for services rendered to the Company, which fees, compensation and salary may not necessarily be dependent upon the success of the Company's business. Accordingly, subscribers understands [sic] and acknowledges that upon payment to the company of the subscription price for the Shares, the value of the Subscribers' Shares in the Company will be immediately diluted inasmuch as each Share of stock issued in the Company participates pro rata in net value of the Company based upon the total number of Shares then outstanding in the Company."
[201] ASIC submits that "the actual expenditure reflects nothing of the professional and capital intensive research and development promised by the business plan but rather suggests a frittering away, of the money raised, on remuneration for the second third and fourth respondents and associated administrative expenses ..."
[202] The point of conflict between ASIC and the respondents arises at the definition of the terms used. The respondents point to the following matters with respect to the use of the terms:
(a) Under the listing of expenditures there is a note "Summary of significant account policies employed". It provides:
"The projection has been prepared using generally accepted accounting principles that CME expects to use when preparing its historical financial statement."
(b) The portion of the business plan dealing with expenditure items concludes with the following note:
"The projections herein are the responsibility of the officers and founders of Cycclone Magnetic Engines as identified in the business plan, and, to the best of management's knowledge and belief, are in conformity with generally accepted accounting principles. CME believes all of the assumptions underlying the projections are reasonable and appropriate. Management further represent that these projections were not compiled or examined by a [sic] an independent public accountant and should not be viewed as if so compiled or examined."
(c) The contents of the subsection headed "Forward Looking Statements", already referred to above.
(d) The use of the "definitions" of "Tooling", etc referred to above.
[203] The table set out above, which contrasts what ASIC says is the actual amount spent under particular headings with those in the business plan, was prepared by a witness called by ASIC, Bradley Hellen. Mr Hellen is a chartered accountant who has been in practice since 1985 as such. He is also an official liquidator and has held that qualification since 1996.
[204] Mr Hellen was asked to prepare a report in which he compared the Expenditure Representations with the actual expenditure incurred by CME. He was not provided with any final financial statements for CME and none were produced at trial. Given that the period under consideration concluded on 31 July 2006, the absence of any final documents is most unusual but it was not explained by the respondents.
[205] The analysis conducted by Mr Hellen concentrated on the actual expenditures by CME and how they should, in his view, be categorised. This is a further point of departure for the parties. Mr Hellen examined the expenditure of CME and, by using the Australian Accounting Standard for Intangible Assets,[112] arrived at the conclusion that no money had been spent on research and development.
[206] The respondents argued that such an approach is irrelevant given that the particular items of expenditure are the subject of separate definitions in the business plans. In other words, the respondents argue that, whatever a term such as "research and development" might mean in the Australian Accounting Standard, it has been given a particular meaning in the business plan and that is all that is relevant.
[207] At 3.1.3 of Mr Hellen's analysis he says that he has proceeded on the basis of categorising outgoings into expenditure in accordance with the business plan, other business expenses and non-business expenses. What he actually did was to use the headings in the business plan, such as "Tooling" but not the definitions of those terms in the business plan.
[208] He did, though, form a view about the expenditure that was incurred under the terms as defined in the business plan. The effect of Mr Hellen's evidence was that he could find:
(a) No evidence of expenditure on research and development using the definition in the business plan;[113] and
(b) No evidence of expenditure on research and development using the definition in the Australian Accounting Standard.
[209] It was suggested in cross-examination that there had been expenditure under the heading of "General Administrative Expenses" such as, for example, bank fees, and that those items should be included as expenditure on research and development.[114] Mr Hellen rejected this on the basis that a proper reading of the business plan definition of research and development would confine "General Administrative Expenses" to those expenses that related to research and development. This is obviously correct.
[210] The written submissions of CME and Mr Nugent contained a table which those respondents submitted demonstrated that there had been substantial expenditure on research and development using the business plan's definition of that term. That table should be rejected. It was not put to Mr Hellen. It was not the subject of any supporting evidence.
[211] What, then, is the consequence when a representation is made that $300,000 will be spent on "Research and Development", but, on either definition of that term, no money was spent under that head. ASIC relies on s 769C of the Act and s 12BB(1) of the ASIC Act and asserts that there were no reasonable grounds for making the representation. The pleaded basis for that allegation is found in paragraph 27 of FASOC:
(b) the actual expenditure by the first respondent evidences:
(i) a lack of expenditure on research and development and tooling; and instead
(A) remuneration for each of the second to fourth respondents; and
(B) administrative expenses, attributable to the purpose of obtaining further investment in the first respondent;
(c) the second respondent, in particular, it may be inferred, had no intention, at any relevant time, to cause any substantial expenditure to take place on research and development or tooling."
[212] So far as s 769C of the Act is concerned, the first allegation would not, if proved, support an inference that there were no reasonable grounds for making the Expenditure Representation. The time at which to assess whether there were reasonable grounds for the representation is the time at which the representation was made.[115] Clearly, the first basis upon which ASIC seeks to support the allegation is one made with the benefit of hindsight. The second basis upon which ASIC relies is that an inference should be drawn about the state of Mr Nugent's intention at any relevant time. ASIC submits that statements made by Mr Nugent in his s 19 examination support that conclusion. The parts of the examination to which I was referred do not relate to Mr Nugent's state of mind at the time of the creation of the business plan document. ASIC also relies upon material in the s 19 examinations of Messrs McClelland and Foster. As they had no part in the creation of the business plan, they can hardly support a conclusion with respect to Mr Nugent's state of mind. No attempt was made by ASIC during Mr Nugent's examination-in-chief to adduce evidence which would support this allegation. It follows, then, that no case is made with respect to s 769C of the Act.
[213] There is, of course, a difference so far as s 12BB(1) of the ASIC Act is concerned. As has been discussed above, under that section the person making the representation about a future matter is taken not to have reasonable grounds for making the representation unless evidence to the contrary is adduced. No evidence of that nature was adduced either by reference to other evidence or, when the opportunity was available, by cross-examining Mr Nugent. It is, I think, reasonable to infer that the deliberate omission to cross-examine Mr Nugent was because he could say nothing which would assist his case on this point.
[214] The disclaimer on page 11 of the Business Plan should be considered. It relevantly provides:
" ... All representations, projections, estimates, or statements (either written, stated, or implied) or revenues, costs, specific performance, or other items listed in this business plan or during any discussions with Cycclone Magnetic Engines, Inc. owners, managers or employees are only good faith projections. Cycclone Magnetic Engines, Inc. makes no warranties to [sic] the success of this endeavour, either express or implied."
[215] The assertion in the Business Plan of "good faith projections" does not assist the respondents. It is of no more weight than a statement by a representor that he or she has reasonable grounds for making a statement. This area is not one in which the impression upon representees is of importance. It is a separate question about the possession of reasonable grounds and a disclaimer of the type in this case does not have any effect.
[216] Further, the case for CME and Mr Nugent on this point was inconsistent. In their Defence they denied that there were no reasonable grounds for making the representations:
" ... because the Expenditure Representations were made in good faith in reliance upon figures calculated by Jon McArthur, a former director and registered chartered accountant."[116]
[217] No evidence was called to support that positive assertion. To the contrary, in their written submissions they said:
"The Court is ignorant of what role, if any, Mr McArthur played in assisting Mr Nugent in the drafting of this document."[117]
[218] It follows, then, that ASIC has made out its allegation that the expenditure representations were misleading or deceptive for the purposes of s 12DA of the ASIC Act.
Liability of the natural respondents - as principals
[219] In addition to that which it has alleged against CME, ASIC asserts that each natural respondent is liable as a principal on the following bases:
[220] I will deal first with Mr McClelland and Mr Foster. They were employees of CME from March 2005 until 11 May 2006. From the latter date they were directors of CME until 27 February 2007. It was argued on their behalf that they were merely "conduits" and that they were not responsible for, nor could they have known about, the misleading nature of the representations which I have found to be established. Mr Nugent's evidence established those latter propositions to my satisfaction. Even after they became directors they were not exercising the ordinary duties of directors. As he put it, after they were appointed the ASIC action began and that halted any sort of advancement.[125] Similarly, I find that they would not have been aware of the disparity between what they were being paid and what was represented in the Business Plan. They had only been engaged on higher remuneration for a short period and they did not have the training, experience or background to fully comprehend the contents of the expenditure representations. Similarly, they were entitled to accept what Mr Nugent told then about the engine and the technology. He had qualifications and experience in the field - they did not.
[221] Nevertheless, s 1041H of the Act and s 12DA and 12DB of the ASIC Act each commence with the words:
Those words, of course, are in contrast to those used in s 52 of the TPA which refer to a corporation and which (subject to the extended application available under s 6) do not capture employees of corporations. Under the sections relied upon by ASIC, employees are caught and can be made liable for misleading and deceptive conduct. A similar situation was considered in Houghton v Arms.[126] In that case, it was argued that s 9 of the Fair Trading Act 1999 (Vic.) (which provided that: "A person must not, in trade or commerce ...") did not apply to employees as the conduct was that of the employer not the employee and that the "trade and commerce" must be that of the employer. This was unanimously rejected by the High Court, which held that the employees were liable notwithstanding that they had been engaged in the trade or commerce of their corporate employer and not of themselves.
[222] Neither Mr McClelland nor Mr Foster adduced evidence of "reasonable grounds" as referred to in s 12BB of the ASIC Act. They are in the same position as CME with respect to the allegations about future matters. It follows, then, that both have contravened the sections asserted by ASIC with respect to:
(a) the expenditure representation because they each distributed the Business Plan; and
(b) the invention representation because they each directed prospective investors to the web site.
[223] Mr Nugent was, I have no doubt, the prime force behind CME. He is the person with the engineering experience and he, as the author of most of the Business Plan, set out the direction of the company. He also must have known that the engine did not work as proposed on the web site. The conduct he engaged in was the creation and provision to prospective investors of the Business Plan.[127] I was not referred to any evidence which established that he directed people to the web site. He has, therefore, contravened the sections asserted by ASIC with respect to the expenditure representation.
[224] Of the matters complained about by ASIC in its statement of claim, it has succeeded with respect to the following:
(ii) breach of s 1041H of the Act with respect to the invention representation and the expenditure representation;
(iii) breach of s 12DA of the ASIC Act with respect to the invention representation and the expenditure representation; and
(iv) breach of s 12DB of the ASIC Act with respect to the invention representation.
(ii) breach of s 1041H of the Act with respect to the expenditure representation; and
(iii) breach of s 12DA of the ASIC Act with respect to the expenditure representation.
(ii) breach of s 1041H of the Act with respect to the invention representation and the expenditure representation;
(iii) breach of s 12DA of the ASIC Act with respect to the invention representation and the expenditure representation; and
(iv) breach of s 12DB of the ASIC Act with respect to the invention representation.
[225] The relief sought, putting to one side that which related to claims which have been dismissed, is as follows:
(a) An order, pursuant to subsection 583(c)(ii) of the Corporations Act, that the first respondent be wound up on the ground that it is just and equitable that the first respondent be wound up;
(b) A declaration that each of the first to fourth respondents has made offers and distributed application forms for the offer of securities, namely shares, in the first respondent in contravention of sub-sections 727(1) and 727(2) of the Corporations Act in circumstances where the offers required disclosure to investors under Part 6D.2 of the Corporations Act and no such disclosure document has been lodged with the applicant;
(c) A declaration that each of the Second to Fourth respondents, in respect of disseminating documents identified in the supporting affidavits as the business plan and the internet web site of the First Respondent has engaged in conduct that is misleading and deceptive, or likely to mislead or deceive, in contravention of the provisions of section 1041H of the Corporations Act and section 12DA and 12 DB of the ASIC Act.
(d) An order, pursuant to subsection 1101B(1) and 1324(1) of the Corporations Act, that each of the first to fourth respondents be permanently restrained, whether by themselves, their servants, agents and employees or otherwise, from making offers or distributing application forms for the offer of securities that require disclosure to investors under Part 6D.2 of the Corporations Act without lodging a disclosure document for the offer with the applicant and including the disclosure document in the offer or application form as required by s 727 of the Corporations Act.
[226] I have found that there have been breaches of the Act as set out above. ASIC seeks the winding up of CME on two bases:
(a) That public interest considerations warrant the making of an order winding up CME; and
(b) Given that the invention has no proper scientific basis, there is no proper basis or substratum for the existence of the company.
[227] CME is, for the purposes of this claim, a Part 5.7 body under the Act. Section 583(c)(ii) provides:
"Subject to this Part, a Part 5.7 body may be wound up under this Chapter and this Chapter applies accordingly to a Part 5.7 body with such adaptations as are necessary, including the following adaptations:
(c) the circumstances in which a Part 5.7 body may be wound up are as follows:
(ii) if the Court is of opinion that it is just and equitable that the Part 5.7 body should be wound up;"
[228] Breaches of the Act have been established but they, in themselves, are insufficient to justify a winding up order. It is not uncommon for corporations to be the subject of adverse findings, so far as breaches of consumer protection provisions are concerned. They will not ordinarily justify a winding up order.
[229] There are other matters which also militate against the making of such an order:
(a) As this is a company which is incorporated pursuant to foreign laws, a winding up order in Australia will not serve to bring the company's existence to an end.
(b) Apart from Mr Robinson, no shareholder has supported the winding up of the company, even in the light of material advanced by ASIC. Mr Williamson's evidence was that "generally the other shareholders don't seem to support the winding up application."[128]
(c) There was uncontradicted evidence from Mr Potts that, if CME directed its efforts towards "the storage of recovered energy and its reuse on demand ... that patents and products will flow in abundance from their ingenuity."
(d) There are no outstanding debts of any significance.
(e) If the company was wound up now it would, on Mr Hellen's understanding of the financial position of CME, result in no return to any of the investors. Whatever funds are currently held by the company would inevitably be dissipated in paying the persons who would otherwise be charged with the winding up of the company in Australia.
(f) No notice of the winding up application has been given.
[230] ASIC seeks a declaration that the respondents have contravened sections 727(1) and 727(2) of the Act. The utility of such a declaration is one which attracts some doubt. ASIC submitted that "the making of a declaration is an appropriate vindication of the operation of legislation designed to protect public rights".[129] The operation of Commonwealth legislation does not require to be vindicated by way of a declaration in this matter. A declaration such as the one sought by ASIC would be no more than a recording of the finding of fact which I have made above with respect to this particular contravention.
[231] There is another important consideration to be taken into account. In the examination of Mr Nugent, conducted pursuant to s 19 of the ASIC Act, he was referred to the notice which had been served upon him concerning the examination and the fact that it related to, among other things, a suspected contravention of s 408C[130] of the Queensland Criminal Code for the period 1 January 2004 to 14 July 2006.
[232] Similar notifications were given to Messrs Foster and McClelland, referring to s 408C of the Criminal Code.
[233] I agree with the remarks of Bryson J in Telstra Corp Ltd v AAPT Ltd when, referring to the TPA Act, he said:
"Declaratory orders are not made as of course when remedies are granted under the Trade Practices Act, and in my opinion they should not be... A declaratory order is a form of relief, and should not be added to other relief granted to a party unless it has some real effect as relief. A declaratory order is not made only to give other remedies an air of completeness or of symmetry." [131]
"[w]here the possibility of prosecution is open, it would, in my judgment, be contrary to the ordinary practice for the authority of this Court to be given to a declaration which, in substance, amounted to a declaration that a defendant had committed a crime. One should not make a declaration which might be falsified by a subsequent acquittal in proceedings between the same parties"
[235] That approach is consistent with the view expressed by Finkelstein J in Australian Securities and Investments Commission v HLP Financial Planning (Aust) Pty Ltd & Ors [134]:
"The English and Australian authorities that warn of the dangers of a civil court becoming involved in criminal conduct continue to apply in an appropriate company case. The general rule in a company case is that a civil court will usually be the appropriate court to deal with a contravention of the Corporations Act. But the court should be wary of granting relief, including the grant of a declaration or an injunction, if the case is likely to end up before a criminal court. Ordinarily, a civil court should not intervene in those circumstances unless its failure to do so will result in irreparable injury. That strict rule need not be applied if the case involves undisputed facts and the issue raised gives rise to a question of pure law. Then a declaration can be a very useful remedy. As Barwick CJ said in Commonwealth v Sterling Nicholas Duty Free Pty Ltd [1972] HCA 19; (1972) 126 CLR 297 at 305 that is the kind of case "which contributes enormously to the utility of the jurisdiction."
[236] ASIC referred to the decision of Heerey J in ASIC v FUELbanc Australia Ltd, in which his Honour said:[135]
"[51] While courts are still reluctant to grant declaratory relief on issues which are theoretical or hypothetical (see Zamir and Woolf, op cit, 117 et seq), the Intertax argument against the grant of declaratory relief is based on a hypothetical fact, indeed a hypothesis upon a hypothesis - that there will be a prosecution and that such prosecution will result in an acquittal.
[52] There is high authority against the supposed limitation on the exercise of the discretionary power to grant declaratory relief. In Sankey v Whitlam [1978] HCA 43; (1978) 142 CLR 1 the High Court, in respect of then current committal proceedings (ie actual, not hypothetical, criminal proceedings), made declarations that (i) certain documents were privileged from production and that (ii) the information laid against Mr Whitlam was bad in law. Gibbs ACJ said (at 20-21):
'It is well established that the power of the court to make a declaration, under a provision such as s 75 of the Supreme Court Act 1970 (N.S.W.), as amended, or O. 26, r. 19 of the Rules of this Court, is a very wide one: Forster v. Jododex Aust. Pty. Ltd. [1972] HCA 61; (1972) 127 CLR 421, at pp 435-436. It is clear enough that the power of the court is not excluded because the matter as to which a declaration is sought may fall for decision in criminal proceedings. Indeed in Dyson v. Attorney- General [1911] 1 KB 410, which is one of the foundations of the law on this subject, it was held that the court had power to make a declaration that the plaintiff was not under any obligation to comply with the requisitions contained in a notice sent to him by the Commissioners of Inland Revenue, notwithstanding that neglect to comply with the notice was an offence... Since that time there have been many cases in which the courts have made declarations in relation to questions which could have fallen for decision in criminal proceedings.'
[55] In Intertax [2006] QSC 276 at [8] Fryberg J distinguished Australian Softwood [1981] HCA 49; 148 CLR 121 on the ground that the High Court's approval
'... was to the proposition that a declaration could be granted notwithstanding that an injunction would not be granted.'
If by this his Honour meant that the High Court only granted a declaration because, with the consent of the parties, they did not grant an injunction, then I do not agree. Gibbs CJ said (at 125):
'With all respect, Hutley JA was not correct in saying that declarations "are little more than prefatory averments to the grant of an injunction". In my opinion it was proper to grant a declaration in the present case although it is now agreed that an injunction is not an appropriate remedy.'
[60] ...[T]he consistent practice [of making such declarations] is a matter of considerable weight.[136]
[61] I conclude that I should not follow Intertax [2006] QSC 276. It is appropriate to make the declarations sought. It is sometimes said that a declaration is an appropriate way of marking the Court's disapproval of the contravening conduct...
In the present case the legislation contravened protects public rights by regulating the conduct of those who seek investment from the public. Declarations as to the contraventions provide a formal vindication of the law's operation."[137] (emphasis added)
[237] The view expressed by Heerey J was supported by Young J in ASIC v McDougall & Anor where his Honour said:[138]
"[55] Since Australian Softwood Forest Pty Ltd v Attorney-General (NSW) [1981] HCA 49; (1981) 148 CLR 121...esp at CLR 125..., the courts have recognised that the grant of declaratory relief on the application of a statutory body such as ASIC may serve important law enforcement purposes: see Corporate Affairs Commission (NSW) v Transphere Pty Ltd (1988) 15 NSWLR 596 at 603...; Australian Securities and Investments Commission v Sweeney [2001] NSWSC 114 at [30]-[31]; and Pegasus at 571. ASIC is charged with the administration and enforcement of the Act, and there will be many cases where it is in the public interest for the courts to make a declaration on ASIC's application that the Act has been contravened in specified respects. The making of such a declaration does not simply record the outcome of enforcement proceedings; it may also be an appropriate way of marking the court's disapproval of the contravening conduct: see Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc (No 2) [1993] FCA 83; at 97-9 and 106, 110." (emphasis added)
[238] ASIC did not give any undertaking that it would not seek to have criminal proceedings commenced against any of the respondents. In the light of the manner in which each of the natural respondents was questioned, I think it would be inappropriate to describe the prospect of a criminal prosecution as merely hypothetical. I am persuaded by the reasoning of Fryberg J in ASIC v Varsity Lodge Pty Ltd where, after considering the views of Heerey J in FUELbanc, his Honour said:[139]
"Having regard to the reasons given to me for the utility of the declaration it seems to me that there might be two problems which could arise from the making of declaratory orders in the present case. The first is that, in the event that the proceedings which the evidence suggests are quite a serious possibility are in fact started, there will be a declaration on the record of a superior court of record foreclosing the outcome of those proceedings. In the event of an acquittal, there will be inconsistent curial outcomes. Even without that result, there is the serious possibility of embarrassment in the course of the proceedings.
Second, I was informed by Mr Derrington that both of the offences created by the two sections are indictable offences and that they would be tried by jury. That, it seems to me, creates a substantial factor operating in a way which conflicts with what ASIC proposes to do with the declarations, that is to say to publicise them.
It is, I think, elementary that it is generally undesirable for a jury to be made aware of declarations of this sort.
Those, then, are powerful factors, in my judgment, which would tend against the granting of the declarations sought.
I emphasise that I am not now talking about speculative hypothesis, but about matters which, on the evidence, are real possibilities. The same was true in Intertax." (emphasis added)
[239] It follows, then, that I am of the view that a declaration is an inappropriate means of relief so far as s 727 is concerned. The breaches of s 1041H of the Act and s 12DA and s 12DB of the ASIC Act are in a different category. No criminal sanctions attach to those breaches and it is appropriate that current investors and any prospective investors be made aware of that conduct. Appropriate declarations will achieve that result.
[240] Apart from the film which was, at the trial, still able to be viewed on the web site, there is no evidence that any of the respondents intend to recommence activity of a kind which I have found to be in breach of the Act.
[241] By way of final relief ASIC seeks an order pursuant to subsection 1101B(1) and 1324(1) of the Act that CME, and each of Messrs Nugent, McClelland and Foster:
(a) be permanently restrained, whether by themselves, their servants, agents and employees or otherwise from carrying on any form of financial services business in this jurisdiction without holding an Australian Financial Services Licence as required by s.911A of the Act;
(b) be permanently restrained, whether by themselves, their servants, agents and employees or otherwise from making offers or distributing application forms for the offer of securities that require disclosure to investors under Part 6D.2 of the Act without lodging a disclosure document for the offer with ASIC and including the disclosure document in the offer or application form as required by section 727 of the Act.
[242] The first injunction is not appropriate given the findings above.
Court's power to make orders in relation to certain contraventions
(1) The Court may make such order, or orders, as it thinks fit if:
(a) on the application of ASIC, it appears to the Court that a person:
(i) has contravened a provision of this Chapter, or any other law relating to dealing in financial products or providing financial services; or
(ii) has contravened a condition of an Australian market licence, Australian CS facility licence or Australian financial services licence; or
(iii) has contravened a provision of the operating rules, or the compensation rules (if any), of a licensed market or of the operating rules of a licensed CS facility; or
(v) has contravened a condition on an exemption from the requirement to hold an Australian market licence or an Australian CS facility licence; or
(vi) is about to do an act with respect to dealing in financial products or providing a financial service that, if done, would be such a contravention; or
However, the Court can only make such an order if the Court is satisfied that the order would not unfairly prejudice any person.
Note: For examples of orders the Court could make, see subsection (4).
(4) Without limiting subsection (1), some examples of orders the Court may make under subsection (1) include:
(a) an order restraining a person from carrying on a business, or doing an act or classes of acts, in relation to financial products or financial services, if the person has persistently contravened, or is continuing to contravene:
(ii) a provision or provisions of any other law relating to dealing in financial products or providing financial services; or
(iii) a condition on an Australian market licence, Australian CS facility licence or Australian financial services licence; or
(v) a condition of an exemption from a requirement to hold an Australian market licence or Australian CS facility licence; or
(vi) a provision of the operating rules, or the compensation rules (if any), of a licensed market or of the operating rules of a licensed CS facility; or
" (1) Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:
(c) aiding, abetting, counselling or procuring a person to contravene this Act; or
(d) inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or
(e) being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or
the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.
(6) [Where court may restrain action] The power of the Court to grant an injunction restraining a person from engaging in conduct may be exercised:
(a) whether or not it appears to the Court that the person intends to engage again, or to continue to engage, in conduct of that kind; and
(b) whether or not the person has previously engaged in conduct of that kind; and
(c) whether or not there is an imminent danger of substantial damage to any person if the first-mentioned person engages in conduct of that kind."
[245] ASIC relies on the observations of Austin J in ASIC v Sweeney where his Honour said:[140]
"[34] According to s 1(2) of the Australian Securities and Investments Commission Act 1989 (Cth), in performing its functions and exercising its powers, the plaintiff must strive to achieve various objectives, including:
[35] These provisions imply that it is appropriate for the commission to take civil proceedings for declaratory and injunctive relief in respect of past events, even if there is no risk of repetition, where the outcome may establish that the conduct complained of was wrongful (and thereby mark the court's and the community's disapproval of it) and may deter other wrongdoers. It is appropriate for the court to take these matters into account in the exercise of its discretion to grant or refuse such relief.
[36] Thus, the Court has jurisdiction to grant relief of the kinds sought by the plaintiff in these proceedings. The granting of that relief will depend on the exercise of the Court's discretion." (emphasis added)
[246] That decision (and others) was the subject of a very helpful analysis in an article by Lang Thai: "Statutory Injunction - Call for amendments to s1324 of the Corporations Act"[141]. The author demonstrates that there are authorities which apply s 1324 by using well-accepted equitable principles and others which eschew the use of such principles. In the latter category, reference is made to ASIC v Pegasus Leveraged Options Group Pty Ltd [142]. In that case, the court rejected ASIC's claim for an injunction, not by referring to equitable principles, but on the basis of Austin J's analysis in ASIC v Sweeney. Davies AJ said:
"[109] However, although the court has a wide discretion and is relieved by s 1324(6) and (7) from the shackles which would otherwise be imposed by the well understood principles of equity, nevertheless, the court should not grant an injunction simply because it has been requested to do so. An injunction should not be granted unless the order is directed to and appropriate to achieve an end such as enforcing and giving effect to the statute." (emphasis added)
[247] Further consideration to this issue has been given by Palmer J in ASIC v Mauer-Swisse Securities Pty Ltd[143] where is Honour referred to Pegasus Leveraged Options Group Pty Ltd. He considered a number of the authorities and said:
"[36] At the risk of some repetition, I summarise the principles which I draw from the presently applicable authorities:
[248] His Honour's analysis, so far as it applies to interim or interlocutory injunctions, is not something to which I can subscribe. On an application which does not seek final relief I think that the ordinary principles (relating to whether there is a serious question to be tried and the balance of convenience) should be applied.[144] The analysis otherwise is, in my respectful opinion, a correct apprehension of the operation of s 1324 subject to the overriding consideration referred to by Davies AJ in Pegasus Leveraged Options Group Pty Ltd, that is: "An injunction should not be granted unless the order is directed to and appropriate to achieve an end such as enforcing and giving effect to the statute."
[249] In terms of whether or not an injunction is "desirable" ASIC contends that the contravening behaviour (offering securities without a current disclosure document) will be continued because the "future continuation of the activities of CME must be dependent on continuing breaches of the Act and the ASIC Act".[145] I do not understand that submission because I do not understand any of the evidence to support a finding that CME can only continue to operate if it does not comply with the disclosure regime under the Act.
[250] As I have noted previously, Mr Nugent, although called by ASIC was not questioned by his own counsel about anything. Nothing was sought from him which would serve to explain his conduct concerning the film or to support a submission that he had reasonable grounds for making the expenditure representation. The only conclusion which I can draw in all the circumstances is that he could not say anything which would have assisted his case. In addition to the findings I have made about his role in the conduct of CME I think it is important to bear in mind his unworthy conduct concerning the provision of the engine to ASIC. In the absence of any evidence from Mr Nugent on these issues, in the light of his lengthy and intimate connection with CME and its actions, and the fact that the material on the web site (the film and associated text) was not removed, I think it is appropriate that injunctions issue restraining both CME and Mr Nugent from dealing with the breaches I have found to have occurred.
[251] While I have found that Messrs McClelland and Foster have breached provisions of both Acts, I find that their circumstances were such that those breaches were unwitting and unintended. They were, at all material times, either employees or directors in name only and their involvement was at such a low level that no order will be made concerning them.
[252] The Applicant is to bring in minutes of order reflecting the findings I have made. I will hear the parties on costs.
[1] "Oh, ye seekers after perpetual motion, how many vain chimeras have you pursued? Go and take your place with the alchemists." Leonardo da Vinci
2.11.3.11 In many countries there is a statutory prohibition of inventions which contravene well-known laws of nature - e.g. perpetual motion machines. Under the Australian Patents Act, however, there is no such prohibition. The fact that an invention is apparently contrary to the laws of nature is likely to be manifested in a lack of utility of the invention or lack of full description. Inutility is not a ground of objection which is open to examiners to take prior to acceptance. If the applicant makes relevant assertions about the manner in which their invention works, the examiner may raise an objection that the specification does not fully describe the invention, since having regard to the known laws of nature the invention is not capable of performing in the manner described.
[3] "De Magnete, Magneticisque Corporibus, et de Magno Magnete Tellure" William Gilbert and Christopher Clews
[4] The first Secretary of The Royal Society
[7] Admitted by CME in Final Submissions. See s 21 of the Act
[9] See Trial Transcript, Day 2, page 16.55
[10] See Williamson's first affidavit Exhibit SPW-36 at page 1064 and SPW-37 at page 1066
[17] See the first Cole affidavit at [4]-[18] and exhibit MC9, the 6th Williamson affidavit at exhibit SPW 17 (share certificates)
[19] The affidavits of Luff, Brown, Robertson and Purnell-Webb
[21] Re AIRC; ex parte ATOF [1990] HCA 52; (1990) 171 CLR 216 at 226
[22] NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90 at [66]
[36] The absence of a TPA claim in the alternative means that relief is not available should ASIC prove misleading and deceptive conduct but not prove that it occurred in relation to financial services.
[38] National Exchange Pty Ltd v Australian Securities and Investments Commission (2004) 49 ACSR 369 at [18]
[40] National Exchange Pty Ltd at [35] Finkelstein J had identified these steps as constituting the inquiry proposed in Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177.
[41] National Exchange Pty Ltd at [66]
[42] [1982] HCA 44; (1981) 149 CLR 191 at 199
[44] [1982] HCA 44; (1982) 149 CLR 191 at 199
[63] This is the "prototype" in the Prototype Representation.
[71] [1982] HCA 44; (1982) 149 CLR 191 at 199. See also Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc [1992] FCA 630; (1992) 38 FCR 1 at 4, Taco Company of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177 at 199 and Telstra Corporation Ltd v Optus Communications Pty Ltd (1997) ATPR s41-541 at 43,514 as authorities for the proposition that in assessing whether conduct is misleading or deceptive, one must take care not to select and assess aspects of conduct out of context.
[76] First Affidavit of Robertson; Ex SPW 17 (examination of Foster)
[84] [2008] FCAFC 120; (2008) 169 FCR 211 (Special leave to appeal refused - [2008] HCATrans 408)
[86] [1990] HCA 17; (1990) 169 CLR 594, per Mason CJ, Deane, Dawson and Gaudron JJ at 602-604
[89] FASOC at [18(b)(ii)(B)(I) and (II)].
[95] [1989] FCA 127; [1989] ATPR 40-940 at 50, 251, approved in Bowler v Hilda Pty Ltd (1998) 80 FCR 191
[96] Bowler v Hilda Pty Ltd (1998) 80 FCR 191 at 207
[98] Medical Benefits Fund v Cassidy [2003] 135 FCR 1 at 17
[102] Ting v Blanche [1993] FCA 524; (1993) 118 ALR 543; Blacker v National Australia Bank Ltd [2000] FCA; ACCC v Kaye [2004] FCA 1363; ACCC v Emerald Ocean Distributors Pty Ltd [2005] FCA 1703
[103] [2008] FCAFC 2; (2008) 165 FCR 230 at [162] to [174].
[104] At [177] to [195]. Emmett J agreed. Stone J said that the question of the meaning of s 51A(2) should be left to a court which had the benefit of full argument on the point.
[106] None of the respondents called any witnesses or tendered any documents relevant to this topic. Mr Rolls called Mr Potts on the Invention/Prototype and Patents Representations and Mr Morris QC tendered a document unrelated to any of the representations.
[107] [2007] FCA 1205 at [545]. This decision was affirmed on appeal, but this point was not a subject of the appeal: [2008] FCAFC 53.
[111] Section 73, Evidence Act 1977
[115] Sykes v Reserve Bank of Australia [1998] FCA 1405; (1998) 88 FCR 511
[118] Ex SPW 15, p. 68, line 18 - p. 70 line 1.
[119] ASIC submits that this can be inferred from the newsletter itself and Ex SPW 15, p. 88 to 93.
[120] Ex SPW 15 at p. 68, lines 7 - 12, p. 93, lines 1 - 13.
[122] Ex SPW 16, p. 52, lines 22 - 24 and p. 58, lines 7 - 9.
[123] Ex SPW 17 at p. 55, lines 8 - 11.
[124] Ex SPW 17 at p. 39, lines 16 - 27.
(a) applies to his or her own use or to the use of any person -
(ii) property belonging to the person, or which is in the person's possession, either solely or jointly with another person, subject to a trust, direction or condition or on account of any other person; or
(c) induces any person to deliver property to any person; or
(d) gains a benefit or advantage, pecuniary or otherwise, for any person; or
(e) causes a detriment, pecuniary or otherwise, to any person; or
(f) induces any person to do any act which the person is lawfully entitled to abstain from doing; or
(g) induces any person to abstain from doing any act which that person is lawfully entitled to do; or
(h) makes off, knowing that payment on the spot is required or expected for any property lawfully supplied or returned or for any service lawfully provided, without having paid and with intent to avoid payment;
(2) An offender guilty of the crime of fraud is liable to imprisonment for 5 years save in any of the following cases when the offender is liable to imprisonment for 12 years, that is to say -
(a) if the offender is a director or member of the governing body of a corporation, and the victim is the corporation;
(b) if the offender is an employee of another person, and the victim is the other person;
(c) if any property in relation to which the offence is committed came into the possession or control of the offender subject to a trust, direction or condition that it should be applied to any purpose or be paid to any person specified in the terms of trust, direction or condition or came into the offender's possession on account of any other person;
(d) if the property, or the yield to the offender from the dishonesty, or the detriment caused, is of a value of$30000 or more.
[131] [1999] NSWSC 853 at [56], [57]
[135] [2007] FCA 960; (2007) 162 FCR 174 at p 181-186
[136] The cases are: Australian Securities and Investments Commission v Atlantic 3 Financial (Aust) Pty Ltd [2006] QCA 540 (Queensland Court of Appeal); Australian Securities and Investments Commission v PFS Business Development Group Pty Ltd [2006] VSC 192; (2006) 57 ACSR 553 (Hargrave J, Supreme Court of Victoria); McDougall [2006] FCA 427; 229 ALR 158 (Young J, Federal Court); Australian Securities and Investments Commission v Preston [2005] FCA 1805 (Finkelstein J, Federal Court); Australian Securities and Investments Commission v Drury Management Pty Ltd [2004] QSC 068 (Jones J, Supreme Court of Queensland); Australian Securities and Investments Commission v Young (2003) 173 FLR 441 (Muir J, Supreme Court of Queensland); Pegasus [2002] NSWSC 310; 41 ACSR 561 (Davies AJ, Supreme Court of New South Wales); Australian Securities and Investments Commission v Hutchings (2001) 38 ACSR 387 (Windeyer J, Supreme Court of New South Wales); Australian Securities and Investments Commission v Sweeney J, Supreme Court of New South Wales).
[144] ASIC v Arafura Equities Pty Ltd [2005] QSC 376; ASIC v Mapstone [2006] NSWSC 993; (2006) 59 ACSR 214
[145] ASIC's written submissions [92(a)]
Australian Securities and Investments Commission
Cycclone Magnetic Engines Inc & Ors
(2007) 162 FCR 174
(2008) 169 FCR 211
(1983) 50 ALR 242
(1998) 80 FCR 191
(2004) 218 CLR 592
(1990) 170 CLR 249
(2000) 202 CLR 45
(1990) 169 CLR 594
(2004) 139 FCR 215
(1984) 2 FCR 82
(2003) 129 FCR 64
(1980) 144 CLR 1
(2006) 225 CLR 553
(2008) 165 FCR 230
(2004) 219 CLR 90
(1982) 149 CLR 191
(1965) 114 CLR 164
(1990) 171 CLR 216
(2007) 231 CLR 160
(1998) 88 FCR 511
(1982) 42 ALR 177
(1992) 38 FCR 1
(2004) 208 ALR 459
(1992) 39 FCR 348
(1936) 57 CLR 115
(1978) 140 CLR 216
(1972) 126 CLR 297
(1978) 142 CLR 1
(1972) 127 CLR 421
(1981) 148 CLR 121
(1988) 15 NSWLR 596
(1993) 41 FCR 89
(1981) 149 CLR 191
(1993) 118 ALR 543
(2007) 164 FCR 487
(2003) 173 FLR 441