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[2004] QSC 68
Supreme Court of Queensland
2004-03-29
Jones J
Original judgment source is linked above.
1. Declaration that each of the respondents has contravened s 601ED of the Corporations Act 2001.
2. Declaration that the first, second and third respondents have contravened ss 780 and 781 of the Corporations Law and s 911A of the Corporations Act.
(a) The managed investment scheme carried on by the first respondent be wound-up pursuant to s 601EE of the Corporations Act;
(b) Ian David Jessup is appointed receiver and manager for the purpose of winding-up the scheme.
(c) The receiver's costs shall be paid out of the scheme;
(d) The receiver shall have all powers necessary for the purpose of winding-up the scheme including, but not limited to, all the general and specific powers identified in s 420(1) and (2) of the Corporations Act.
(a) The first respondent be wound-up pursuant to s 461(1)(k) of the Corporations Act;
(b) Ian David Jessup is appointed as liquidator of the first respondent;
(c) The costs of the liquidator shall be paid from the assets of the first respondent (if any);
(a) The fourth respondent be wound-up pursuant to s 461(1)(k) of the Corporations Act;
(b) Ian David Jessup is appointed liquidator of the fourth respondent;
(c ) The costs of the liquidator shall be paid from the assets of the fourth respondent (if any).
6. Order, pursuant to s 1324 of the Corporations Act, that the respondents be restrained and an injunction is hereby granted restraining each of them, whether by themselves, agents or otherwise howsoever-
a. from further operating this scheme referred to in paragraph 3 of these orders;
b. from doing any act in the furtherance of the scheme, or any act which is or is likely to impede the winding-up of the scheme;
c. from receiving or soliciting or otherwise dealing with funds in connection with this scheme;
d. from dealing with or causing, procuring or permitting others to deal with any property wheresoever situated held by them, or any of them, or by any other persons or entity on their, his or its behalf or;
e. from destroying or otherwise interfering with, or relocating any books, records or documents of the respondents or any of them.
7. Order that the respondents pay the applicant's costs of and incidental to these proceedings to be assessed on the standard basis.
COPORATIONS LAW - MANAGED INVESTMENT SCHEME - Characteristics of scheme- Carrying on investment advice and securities business without license --(Cth) Corporations Act 2001 ss 9, 780, 781, 911A
WINDING UP - Winding up scheme of in public interest - Winding up of corporation on just and equitable grounds - (Cth) Corporations Act 2001 s79.
Words and Phrases: - "carry on" "operate" "pooling" (Cth) Corporations Act 2001 ss77(1), 601ED, 780(1)
ASIC v AS Nominees Ltd 62 FCR 529
ASIC v Chase Capital Management Pty Ltd (2001) WASC 27
ASIC v Enterprises Solutions 2000 Pty Ltd (2000) QCA 452
ASIC v Pegasus Leveraged Options Group Pty Ltd (2002) NSWSC 310
ASIC v Young (2003) QSC 29
Australian Softwood Forest Pty Ltd v Attorney-General to the State of New South Wales [1981] HCA 49; (1981) 148 CLR 121 at 129
Harkness v Commonwealth Bank of Australia Ltd (1993) 32 NSWLR 543
Kokotovich Constructions Pty Ltd v Wallington [1995] NSWSC 54; (1995) 17 ACSR 478
Re Hampshire Land Co (1996) 2 Ch 743
Corporations Act 2001 (Cth)
Australian Securities and Investment Commission for the applicant
[1] The second and third respondents are the directors of the first respondent, a company which was incorporated on 26 August 1999.[1] The second respondent, until 28 June 2002 held a "property authority" to act for ABN AMRO Morgans ("Morgans") as a security representative pursuant to s 784(5) of the Corporations Law.[2]
[2] The fourth respondent was incorporated in January 1996. Its sole director is Virginia Ransom-Walters, also known as Virginia Lee Walters, who is the wife of the second respondent. The relationship between the fourth respondent and the other respondents is a matter for determination in these proceedings.
[3] By its Amended Application the applicant, ("ASIC") seeks declarations that each of the respondents have contravened s 601ED(5) of the Corporations Act 2001 (Cth) ("the Act") and declarations that each of the respondents had, prior to 11 March 2002, infringed provisions of the Corporations Law namely ss 780 and 781 by respectively carrying on an investment advice business and a securities business without being the holder of a relevant licence and further, by infringing the provisions of s 911A of the Act by carrying on a financial services business without being the holder of a relevant licence. ASIC seeks orders for the winding up of the corporate entities and the appointment of Ian David Jessup as the liquidator.
[4] The first and second respondents did not appear on the hearing of the application. The third respondent did not give evidence before me but appeared by counsel to argue that the evidence did not establish the existence of a managed investment scheme for the purpose of s 601ED nor that he engaged in any other undertaking which required him to obtain a licence.
[5] The fourth respondent likewise appeared by counsel to argue that the evidence does not establish the existence of a managed investment scheme and further to argue that there has not been shown any contravention of the above provisions. The fourth respondent opposes its being wound up and to this end it tendered certain company records (exs 4 and 7). In the event that a winding up is ordered, the fourth respondent opposes the appointment of Mr Jessup as liquidator.
[6] By order of this court on 27 September 2002, Ian David Jessup was appointed receiver of the property and assets of the respondents, and was given certain powers of inquiry with respect to that property. Mr Jessup reported on his enquiries on 2 December 2002[3]. That report together with the results of other investigations and the evidence of persons who invested monies with the first respondent forms a basis upon which the declarations are sought as well as orders for the winding-up of the scheme and the winding-up of the first and fourth respondents.
[7] Since 4 June 2002 officers of ASIC have been investigating the affairs of the respondents. Their inquiries establish that since 1999, the second respondent and third respondent have engaged in conduct on behalf of the first respondent resulting in their obtaining money from various persons on an unsecured basis but evidenced by various documents. The documents included a "Promissory Note"[4] and "Deed"[5] or "Promissory Note and Guarantee"[6] and a "Trust Account Authority"[7]. Typically, the terms of the arrangement provided for payment of interest to those contributors at rates varying between 12% and 15% per annum. There was one instance of an agreed interest rate of 15% for 60 days. In relation to some loans the document expressly guaranteed the return of investment capital.
[8] The money contributions were paid in each instance to the first respondent which received the money into either of two trust accounts, one with National Australia Bank Ltd ("NAB") and the other with St George Bank Limited ("St George"). The authorised signatories to these accounts were the second and third respondents.
[9] At the time of the appointment of the receiver some 118 existing contributors were identified as having made contributions of capital of $7,970,206.00.[8]
[10] The funds deposited to these accounts were applied to a variety of purposes. These included the purchase of stocks and bonds in Australia and overseas, the purchase of real estate in Australia and overseas, and the financing of loans to proprietary companies controlled by various associates of the respondents.[9] For example, one such transaction was the payment of $600,000 to a gemstone exploration and development company, Gracie Mining International Corporation Pty Ltd, of which the second respondent was formerly a director/secretary. It appears that a substantial part of these funds have been transferred to a Brazilian mining company, though the basis on which this may have been done is not yet known.[10] There is a suggestion that the costs of erecting a building on the land at Malanda previously acquired by Mrs Ransom-Walters and the cost of purchase in her name of the property Longford House in Tasmania resulted from "funds emanating from investors".[11]
[11] The report of the receiver exhibited to the affidavit of Peter Phillips sets out in considerable detail the diverse application of funds from the above bank accounts held in the name of the first respondent. The disposition of these funds does not, for present purposes, have to be determined. The question is whether the receipt of the funds from contributors, the manner in which they were dealt with including the final disposition fall within the definition of "managed investment scheme" which by s 9 of the Act is described as:-
(i) People contribute money or money's worth as consideration to acquire rights ("interests") to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not);
(ii) Any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interest in property, for the people (the "members") who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders);
(iii) The members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions);
(there then follows a list of exceptions which are not relevant to this case)."
"We begin with the circumstance that the words in question are of very wide import. For example, all that the word 'scheme' requires is that there should be 'some programme, or plan of action'."
[13] The conduct engaged in by the second and third respondents on behalf of the first respondent had a distinct pattern. Although the words by which the scheme was explained to contributors and the promised rate of return varied slightly there is a high level of consistency in the manner in which potential contributors were invited to make the contributions. In each instance there was a promise of return in the form of interest payments much higher than the prevailing commercial rates. I find as accurate the general description of the plan of action set out in the affidavit of Emmanuel Givanakis filed 25 September 2002.[13]
[14] Some of the persons making contribution were clients of the accountancy practice DC Drury and Associates of which the second and third respondents were principals. The office premises were occupied by the accountancy practice and by the first respondent and by the second respondent in his capacity as a "proper authority" for Morgans[14]. There was little, if any, physical demarcation between these businesses. Other contributors had nothing to do with the accountancy firm but simply went to the office on the recommendation of others.
[15] One such contributor was Margarete Hubbard who in addition to filing an affidavit gave oral evidence in these proceedings. In her affidavit she describes her attendance at the premises, which had signage in the front advertising Morgans and Drury and Associates, of her meeting with the second respondent there and advising him that she wished to invest funds including superannuation funds in medium risk and low risk investments. The second respondent advised her that the investments were "government protected" and the funds could be withdrawn on "five days notice". On a later date Mrs Hubbard and her husband made contributions and received in exchange trust account receipts. She believed that the funds were "being invested somewhere with Morgans". Some days after this Mrs Hubbard and her husband received documents entitled respectively "Promissory Note" and "Deed" which they signed and returned to the first respondent. Mrs Hubbard gave evidence of later conversations with the third respondent in which he spoke of the investment being covered by insurance policy (paras 30 and 31).
[16] Mr Sumner-Potts of counsel for the third respondent argued that in this instance the benefits arise wholly and solely from the borrower i.e. the first respondent and not from any pooled funds. He relied on a passage from the judgment of Owen J in ASIC V Chase Capital Management Pty Ltd[15] (at para 63) as follows:-
"It seems to me that the relevant part of the definition focuses on the acquisition of benefits from "the scheme", not from the manager. The "scheme" is the entire operation."
That statement does not support the argument contended for but rather has the opposite effect. Where there has been a payment of interest or a return of capital the evidence shows that it has simply been drawn from the funds in the subject bank accounts held by the first respondent which was made up of contributions from other contributors. Thus, it seems to me, that the benefits are indeed to be returned are derived from the entire operation.
[17] The affidavits of a number of contributors were relied upon and oral evidence was given by 13 of them. As I have mentioned there is a high level of consistency in the plan of action adopted by the second and third respondents on behalf of the first respondent in the manner in which the contributions were received. I am satisfied on this evidence that those persons contributing money did so to acquire rights in the form of interest to be produced by the scheme.
[18] The contributions made were in fact pooled in the two bank accounts in the name of the first respondent. Three of the contributors gave oral evidence to the effect that they were told by one or other of the second or third respondents that the monies were to be pooled with the funds of other people.
[19] Mr Bridgeman described a conversation with the second respondent in the following terms:-
"We talked about investing of the funds and that - and that I said that I didn't want to place the funds at any risk, you know. I was quite happy with the bank interests rates if that was - "you're going to have my money safe" but he said that I could put them in - into the pool of funds that he had - had going and - and the returns would be a lot higher at least 12%, and that - and, you know, cos it - cos he had such a big pool of funds that - he could afford to do this without - without - how do you put it without the money being at risk."[16]
Mr Bridgeman was cross-examined about his understanding of the promissory note[17] which he had signed which provided for a loan of $30,000 to be repaid after 12 months with in addition "interest calculated at the minimum rate of 12% per annum". He replied:-
"I thought they were for him to - well, I don't know what I really thought. I thought they were for him to invest my money in - into the - wherever he was going to invest it in this pool of funds."[18]
[20] Michelle Harriden gave evidence that during her discussions with the second respondent he said to her that "he was going to put it with other people's money and - it was going to go on the stock market".[19]
[21] Heather Joan Horseman gave evidence of conversations she had with the third respondent during which he told her about "a scheme that would achieve higher return without the fees".[20] As a consequence of that conversation she contributed funds to the first respondent.
[22] The applicant relies upon these statements about pooling of funds and the evidence that the funds were in fact pooled as being all that is necessary to satisfy the requirement in para (a)(ii) of the definition. In general, there was no discrete or separate dealing with the funds provided by individual contributors.
[23] On behalf of the third and fourth respondents it was argued that that feature in the definition requires more. They point to the words that "the contributions are to be pooled" to argue that there must be shown in the mind of the contributor an intention of this prospective action of pooling. On behalf of the fourth respondent, Mr Morrison QC points to the words used in sub-paragraph (a)(ii) noting that the definition does not say "are pooled" or "have been pooled". He argues that to come within the definition there must be a scheme already in existence which is within the contemplation of the contributors. He relied on a decision of Muir J in ASIC v Young[21]. In that case members of a club were invited to express interest in purchasing real property in a development undertaken by the respondents. The contributions of the individual members could not individually finance the development so it was implicit in the scheme that funds of members would have to be pooled to achieve the purpose. Muir J said at para 43:-
"In my view, the concept of "pooling", for the purpose of s 9(a)(ii), imports contributions to a discernible fund the monies in which are to be used in an identifiable way to provide (IRE) prescribed benefits to the contributors. That analysis may be a little narrow, but it will suffice for present purposes."
He went on to note (at para 46) that the loan monies were in fact pooled to produce financial benefits and he observed that the pooling was an anticipated part of the funding of the development.
[24] The feature that contributions are to be pooled is simply one of the descriptors by which the existence of a scheme is identified. It is a question of fact whether that descriptor is made out on the evidence. One means of establishing the fact would be if the scheme's promoters declared that contributions would be pooled. Another would be if the scheme could only be given effect if the funds were pooled as was the case in ASIC v Young. Yet another would be if the funds were in fact pooled by the operators of the scheme, since this action alone would evidence a prior intention by the scheme managers to do so. To suggest that for s9(a)(ii) to be satisfied, there needs to be found in the mind of a contributor, knowledge of an intention to pool the contribution, is, in my view, to impose an unwarranted restriction on the ordinary meaning of the words used in the definition. The cases to which I have been referred do not suggest otherwise. The point was authoritatively determined by the Court of Appeal in ASIC v Enterprises Solutions 2000 Pty Ltd[22] where the Court said at para [13] as follows:-
"...the words "to be pooled"...to produce in para (ii) quoted above imply that the intention must be to pool the contributions and, by use of the pool, produce benefits; they do not imply that the benefits must be of such a kind as to be unobtainable without pooling. As for the words "to be", it was contended that there was no evidence that the contributors appreciate that the contributions are to be pooled. That contributions would be dealt with in that way is obvious; but in any event under the scheme pooling occurs and that is enough." (My emphasis)
Mr Morrison contends that that statement was limited by the facts of that case which required the funds to be pooled to give effect to the scheme as was the situation in Young. In my reading of the passage, the Court was making the distinction between cases where the pooling was "obvious" and where pooling in fact occurred.
[25] The feature that the contributions "are to be pooled" is in my view satisfied in this case by the fact that pooling occurred. In any event, there is the direct evidence given by three contributors that they had knowledge of the intention to pool their funds, and this is sufficient to meet the terms of the definition. I am satisfied that the existence of this feature has been established.
[26] As to the remaining feature, the evidence is clear and it is not challenged, that the contributors did not have day-to-day control over the operation of the scheme. The receipt of the contributions and the disposition of them were matters on which the respondents were not subject to the direction of the contributors.
Contraventions of the Act and Law
[27] In all the circumstances I am satisfied that the conduct of the first, second and third respondents in obtaining funds from the contributors and the disposition of funds constituted a managed investment scheme within the meaning of the Act and thus was required to be registered pursuant to s 601EB. The failure by the first, second and third respondents to register the scheme is a direct contravention of the Act and for the period prior to 11 March 2002 a contravention of the equivalent provisions of the Law. The scheme is clearly insolvent with deficiency in funds in excess of $9m.[23] In all the circumstances the scheme ought to be wound up and as well so ought the first respondent.
[28] The role of the fourth respondent requires separate consideration. ASIC does not contend that the fourth respondent had any contact with the contributors but argues that it was an integral part of the scheme by being directly involved in the receipt of scheme funds and subsequently in their dispersal. This role was facilitated by Mrs Ransom-Walters, as its sole director, handing over to the second respondent the management of the company. However, the fourth respondent argues that it simply borrowed from the first respondent moneys for its own purposes, which it would repay. In this sense the fourth respondent was carrying on its own business and was not operating a scheme in the sense described in ASIC v Pegasus Leveraged Options Group Pty Ltd[24] in these terms:-
"The word "operate" is an ordinary word of the English language and, in the context, should be given its meaning in ordinary parlance. The term is not used to refer to ownership or proprietorship but rather to the acts which constitute the management of or the carrying out of the activities which constitute the managed investment scheme. The Oxford English Dictionary gives these relevant meanings:
To effect or produce by action or the exertion of force or influence; to bring about, accomplish, work.
To clause or actuate the working of; to work (a machine, etc). Chiefly US.
To direct the working of; to manage, conduct, work (a railway, business, etc); to carry out or through, direct to an end (a principle, an undertaking, etc) orig US."
[29] The fourth respondent's involvement with the funds of contributors is revealed in the receiver's report[25]. Funds from this source were used to effect some discrete purchases such as an investment residential unit in Cairns and purchase of a utility motor vehicle registered in the name of G Spence. Funds from this source were also used to provide interest free loans to various associates of the respondent, for example a loan to Mr Ryan of $85,400.[26] A sum of $100,000 was paid to the trust account of Thompson Royds, Solicitors of which $50,000 appears to have come from the fourth respondent.[27] But the most significant movement of funds was associated with share trading transactions with overseas companies, Goldsaint Pty Ltd., Golden Capital Securities Ltd and Pan Atlas Financial Group. The reconstructed accounts for the first respondent detail some $2,069,244.17 as having flowed from the first respondent's account to the fourth respondent.[28] Mr Phillips interviewed the third respondent in his capacity as the accountant of the fourth respondent to explain some of these transactions. The response is recorded in the affidavit of Peter Phillips at para 37 in the following terms:-
"37. The third respondent explained that the second respondent would use the fourth respondent for all the investments. For example, the funds we had recorded as owing by Bridgeman to the first respondent represents investments made by the fourth respondent. Using this as an example, the first respondent would receive funds from investors and write cheques for the purpose of shares in various names including Bridgeman. The shares would be acquired by Bridgeman, or rather acquired in her name on behalf of the fourth respondent, and were recorded as an asset of the fourth respondent. Therefore, the funds that appear to be advanced by the first respondent to Bridgeman were really advanced to the fourth respondent and were a loan owing by that company. The corresponding asset, which was acquired, though registered in the name of Bridgeman was an asset of the fourth respondent."
[30] As appears from the reconstructed accounts of the first respondent such amounts were not included in the amounts shown to have been advanced to the fourth respondent.
[31] ASIC submits that this conduct on the part of the fourth respondent indicates its participation in the scheme by reason of its direct involvement in the movement of contributors' funds into its accounts and disposing of those funds. ASIC does not seek to rely on the provisions of s 79 of the Act of aiding and abetting contravention of s 601ED of the Act. Mr Morrison, QC on behalf of the fourth respondent, seeks to characterise that conduct as being legal activity acquiring shares on its own behalf or on behalf of others with funds borrowed from the first respondent. Critical to this submission, he said, is the need to distinguish between the acts of the second respondent carried out as director of the first respondent, and his acts in the managerial role delegated to him by Mrs Ransom-Walters as director of the fourth respondent.
[32] The evidence shows that after the fourth respondent was incorporated in January 1996, it acquired property - viz real estate at Malanda, some cattle, shares and art works. Although the evidence is sketchy these activities appear to have been on a relatively small scale. The difficulties encountered by the receiver in identifying the financial returns of the fourth respondent is evident from the request for further information as set in ex "PWP 2" to the affidavit of Peter Phillips. Although the fourth respondent was involved in some trading prior to the commencement of the scheme, I do not have the impression that its activities were of the kind, nor on the scale, disclosed by the receiver's investigations after August 1999.
[33] It is common ground that the second respondent was responsible for some of the activities of the fourth respondent. The fourth respondent contends that this was authorised pursuant to a letter signed by Mrs Ransom-Walters dated 1 July 1998 appointing the second respondent as agent for certain purposes. That letter was admitted into evidence after the hearing by reason of my characterising it as a document for the purpose of s 1305 of the Act. It has been marked ex 7. But the evidentiary weight that should be accorded to the letter is another matter. No evidence was given as to the circumstances in which the letter was written nor the reasons for which it was felt to be necessary, or desirable. Its terms describe an agency of very wide scope but does not impose any limitation on the money to be spent or debt to be incurred. The letter makes no provision for the term of its operation or manner of termination. Presumably the agency could be terminated at will. The appointment makes no provision for reporting by, nor the accountability of, the agent. In short, the letter of appointment does not have the character of a commercial or independent document upon which I would rely to define the relationship between the fourth respondent and the second respondent. In support of that finding, I note that the purported author of the letter of appointment could have given evidence of those matters but has chosen not to. In accordance with the principles of Jones v Dunkel I infer that her evidence on this aspect would not have assisted on this issue.
[34] In her examination pursuant to s 19 of the Act, Mrs Ransom-Walters made reference to having signed an authority which she ultimately described as a Power of Attorney by which the second respondent was given control over the fourth respondent.[29] I assume, without being certain, that she was referring to the letter referred to above. A perusal of the balance of Mrs Ransom-Walters' evidence leads me to conclude that she really has no knowledge of, and little interest in, the share trading transactions that were undertaken on behalf of the company by the second respondent. Her interest in the activities of the fourth respondent were described by the second respondent in his s 19 examination saying that Mrs Ransom-Walters managed the art collection and the cattle but that he managed the company in relation to the sale and purchase of securities.[30] In her affidavit sworn 4 November 2002 Mrs Ransom-Walters confirmed that the second respondent, was "responsible for the conduct of the business and the affairs of the company".[31] The second respondent likewise stated:-
"My wife, Virginia Lee Ransom, is the sole director of the fourth respondent. I have had day-to-day management of the fourth respondent's affairs and continue to do so."[32]
[35] The fourth respondent argues that whilst the second respondent, as director of the first respondent had knowledge of the scheme, that knowledge cannot be imputed to the fourth respondent by virtue of his being the manager of its affairs. It refers to a number of cases including Re Hampshire Land Co[33] and Harkness v Commonwealth Bank of Australia Ltd[34]. The former expressed the principle, applicable in civil proceedings, that for knowledge to be imputed to a company the director must be under a duty to communicate the knowledge to the second company. In Harkness the issue concerned whether information received by a director in that capacity can be imputed to those by whom he was appointed.
[36] I do not accept that such considerations apply here. What the Court is concerned with is the conduct of the company which is to be assessed by the actions of its officers. The second respondent was undoubtedly an "officer" within the meaning of the term as defined in s 9 of the Act.[35] The second respondent was a person in "control" of the fourth respondent in the sense, expressed in s 50AA of the Act, of his being able to exert "the practical influence".
[37] I am satisfied that the actions taken by the second respondent, whereby the fourth respondent gained access to the scheme and through those funds the acquisition of shares and real estate and advances to other persons, were actions undertaken on behalf of the fourth respondent. The scale and complexity of these transactions were not matters which Mrs Ransom-Walters, as the sole director of the fourth respondent, could comprehend nor indeed were they matters in which she took any significant interest. In her evidence on the s 19 examination she showed some awareness of the activities of the fourth respondent's purchase of property and shares. By virtue of the scale of these activities (which included the purchase in her name of the historic Longford House in Tasmania) I infer that she had some knowledge of the scheme by which the funds for this purchase were provided. Any loans to her to effect this purchase and other purchases were not offered on any commercial basis. That inference is clearly open on the evidence. If the fourth respondent wished to suggest some other result then the opportunity existed for the fourth respondent to call evidence from the persons directly responsible for the actions of the fourth respondent. The principle in Jones v Dunkel applies. I am satisfied that the fourth respondent under the control of the second respondent participated in the scheme.
Contraventions of ss 780 and 781 of the Law and s 91A of the Act
(b) hold out that the person carries on a security business;
unless the person holds a dealer's licence or is an exempt dealer."
[39] For the purpose of this section the term "securities" includes interest in a managed investment scheme. (See s 92(1)(c).
(b) hold out that the person is an investment adviser;
unless the person is a licensee or an exempt investment advisor."
"Investment advice business" for the purpose of this section is reference to a business advising other persons about securities. See s 77(1) of the law.
[41] Reference to ss 780 and 781 is made with respect to the conduct of the respondents, or any of them, prior to 11 March 2002. In respect of conduct after that date the relevant provision is s 911A of the Act. By sub-section 1, a person that carries on a financial services business must hold a financial services licence covering the provision of the financial services. The only conduct which falls to be considered against the prohibition of this section involves the first and second respondent's dealings with Mrs Hubbard whose contact with the second respondent occurred on 27 May 2002 with the consequences referred to in para 15 above. The evidence of the various contributors of funds to the first respondent establish that the first, second and third respondents were engaged in conduct which falls within in the ambit of those definitions. The basis upon which ASIC argues that the fourth respondent is caught by those provisions is the fact that it was the vehicle through which funds from the scheme were dispersed or invested. ASIC relies upon the provisions of s 19 of the Law and the equivalent section of the Act dealing with the 'carrying on of a business' for the purpose of division 3 of Part 1. Relevantly this refers to a business that is "part of" or "is carried on in conjunction with, any other business". Whilst the connection between the first and fourth respondents is clearly established in the receiver's report[36] that connection does not make the fourth respondent liable. The term "carry on" does not have applicability in these circumstances as was identified by Davies AJ in ASIC v Pegasus as follows:-
"However, the words "carry on" are not equivalent to "operate", a term which appears in s 780(2)(b). In the context, the words refer not to the operations of a business but to the proprietorship of the business. Thus, s 780 does not include the exception for agents and employees which appears in s 601ED"[37]
[42] I am not satisfied therefore that the fourth respondent was carrying on a business contemplated by these three sections.
[43] None of the remaining respondents hold licences of the kind referred to in these respective sections of the Law or Act. I would therefore make the declaration sought in respect to the first, second and third respondents.
[44] ASIC, whilst acknowledging that the fourth respondent's participation in the scheme was not as involved as that of the other respondent, seeks that the company be wound up on "just and equitable" ground pursuant to s 461 of the Act. Mr Flanagan, Senior Counsel for ASIC referred me to a number of cases including ASIC v Chase Capital Management Pty Ltd[38] and ASIC v A S Nominees Ltd[39] where companies associated with the principal proponents of a managed investment scheme were also wound up. In Chase Capital even though Owen J described the evidence of the association companies involvement as "wafer thin" he nonetheless ordered the winding up of the company "for pragmatic considerations"[40]. In A S Nominees, Finn J identified a number of considerations relevant to the determination of whether a winding up should be ordered. Relevant to that case those considerations included imprudent investments, the directors' lack of a sense of trusteeship, conflict of interests, misleading conduct and as well breaches of the Corporations Law.
[45] In this case ASIC relies upon a number of bases for the application for winding up, including the fourth respondent's contravention of the Act, its failure to keep proper records, its failure to deliver documents to the receiver pursuant to the court order of 27 September 2001 and uncertainty as to its solvency. The failure to keep proper records was referred to in the report of Mr Jessup[41] (at para 8.6). Mr Jessup listed as missing a number of bank statements, deposit books and receipt books. Some items matching these descriptions were ultimately tendered on the hearing as ex 4. These were the items which were seized by Federal Police in the execution of a search warrant in April 2003. They were tendered into evidence by the fourth respondent to counter a suggestion that the fourth respondent should be wound up because of its failure to keep proper records. On a quick perusal of the documents contained in ex 4 it appears that not all the documents identified by Mr Jessup as being missing are contained within that exhibit. This is not a matter however where one has to make some quantitative or qualitative assessment of the documents that are missing. It is really a matter of taking a broad view of the way in which the affairs of the fourth respondent were conducted, the manner in which the financial affairs of the company are recorded and the ease with which those records could be accessed. One telling example of the inadequacies in the fourth respondent's record keeping was the need for Mr Phillips to make a lengthy requisition of the fourth respondent's accountants as evidenced in ex "PWP-2" to the affidavit of Peter Phillips. More specifically there is the lack of commerciality in the arrangements whereby company funds were used to purchase property in the names of other persons or the acquisition of shares in the names of associates on their behalf or on behalf of the company. The keeping of financial records by the fourth respondent in my view, falls below an acceptable standard which would allow compliance with the provisions of the Act.
[46] In his consideration of the just and equitable ground, Finn J in A S Nominees, noted the "contrary trends in judicial treatment" of this ground but focused on its application when questions of public interest arise. He said at p 532:-
"The ASC's application is founded first and foremost on the lack of propriety and competence in the management and conduct of the affairs of the three companies. ...However, while indicating that insolvency is not a precondition for the making of an order, the ASC has acknowledged that to wind-up a prosperous company is an extreme step requiring a strong case; Kokotovich Constructions Pty Ltd v Wallington [1995] NSWSC 54; (1995) 17 ACSR 478 at 494.
"To order the winding-up of these companies is not merely a convenient means of securing their removal from the control and management of the trust with which I have been concerned - notwithstanding that there is an urgent need for effective external administration of the trust business. Rather it is the appropriate expression of the lack of confidence one must have in the directors of these companies in their conduct and management of the affairs of their companies. Such an order should, also, convey a message to companies which hold or manage funds on a trust basis - an undoubted and proper purpose the ASC has had in mind in these proceedings."
[47] It cannot be said that the fourth respondent is a prosperous company - certainly not in its own right. But it is the manner in which the fourth respondent has conducted its affairs, its role in the managed investment scheme as I have found it to be and the need for further investigation to be undertaken as to the fourth respondent's connection with the other participants in this scheme which satisfy me that I should order that the fourth respondent be wound-up.
[48] With respect to the winding-up of the scheme and the winding-up of the first respondent, considerations of expense, convenience and timeliness dictate that the present receiver, Mr Jessup, should be appointed as receiver/manager of the scheme and liquidator of the first respondent.
[49] The fourth respondent argues in the event Mr Jessup should be so appointed, he should not be the liquidator of the fourth respondent. Instead it proposes that Anthony James Jonsson be appointed to this position. During the cross-examination of Mr Jessup some instances of potential conflict were put to him. Foremost amongst those was the fact that as receiver, Mr Jessup lodged a caveat over land registered in the name of Mrs Ransom-Walters claiming an interest in the land on the basis that the registration was the result of fraudulent or dishonest transfer from the fourth respondent. That, it was argued, raised a conflict in the liquidator's duty to act fairly between the company, its creditors and the shareholders. A further example was the potential conflict in the duty as liquidator of the first respondent in recovering loans made to the fourth respondent and as liquidator of that company in challenging the validity and purpose of such loans. In such circumstances the liquidator would inevitably find himself representing the interests of different and conflicting groups of creditors. As well, some assets standing in the name of the fourth respondent are said to be assets of the first respondent. The likelihood of litigation in respect of one or other of these matters is high.
[50] Suggestions were also made of some pre-judgment on the part of the receiver during his investigations to date. It was submitted that Mr Jessup displayed an inability to comprehend the nature of the conflicts that would confront him. I disagree with these suggestions. I find Mr Jessup to have been quite mindful of such potential conflicts. He was well aware of his obligations as a court appointed liquidator and of his right to apply to the court for directions.
[51] The convenience of having the receiver continue the long running investigations is obvious. There will be a saving in professional costs and the investigation will be completed more quickly. The only question is whether, if any potential conflicts arise, they can be dealt with in a just way. Quite apart from the liquidator having the right to seek directions from the court, the court or ASIC has, pursuant to s 536 of the Act, power to inquire into any matters where a complaint is made with respect to the conduct of a liquidator in connection with the performance of his duties. In a sense the performance by the liquidator is under constant review.
[52] In the circumstances of this case the investigations still have some way to go before there can be an assessment of the competing rights of the contributors to the scheme and the persons or entities who dealt with the respective respondents, I am satisfied that the most efficient and just course is for David Jessup to be appointed liquidator of the fourth respondent.
[53] 1. I declare that each of the respondents has contravened s 601ED of the Corporations Act 2001.
2. I declare that the first, second and third respondents have contravened ss 780 and 781 of the Corporations Law and s 911A of the Corporations Act.
(a) The managed investment scheme carried on by the first respondent be wound-up pursuant to s 601EE of the Corporations Act;
(b) Ian David Jessup is appointed receiver and manager for the purpose of winding-up the scheme.
(c) The receiver's costs shall be paid out of the scheme;
(d) The receiver shall have all powers necessary for the purpose of winding-up the scheme including, but not limited to, all the general and specific powers identified in s 420(1) and (2) of the Corporations Act.
(a) the first respondent be wound-up pursuant to s 461(1)(k) of the Corporations Act;
(b) Ian David Jessup is appointed as liquidator of the first respondent;
(c) The costs of the liquidator shall be paid from the assets of the first respondent (if any);
(a) the fourth respondent be wound-up pursuant to s 461(1)(k) of the Corporations Act;
(b) Ian David Jessup is appointed liquidator of the fourth respondent;
(c) The costs of the liquidator shall be paid from the assets of the fourth respondent (if any).
6. I order, pursuant to s 1324 of the Corporations Act, that the respondents be restrained and an injunction is hereby granted restraining each of them, whether by themselves, agents or otherwise howsoever-
(a) from further operating this scheme referred to in paragraph 3 of these orders;
(b) from doing any act in the furtherance of the scheme, or any act which is or is likely to impede the winding-up of the scheme;
(c) from receiving or soliciting or otherwise dealing with funds in connection with this scheme;
(d) from dealing with or causing, procuring or permitting others to deal with any property wheresoever situated held by them, or any of them, or by any other persons or entity on their, his or its behalf or;
(e) from destroying or otherwise interfering with, or relocating any books, records or documents of the respondents or any of them.
7. I order that the respondents pay the applicant's costs of and incidental to these proceedings to be assessed on the standard basis.
[1] Affidavit of Givanakis filed 25 September 2002 para [11]
[3] Ex "PWP-4" to affidavit of Peter Phillips sworn 23 December 2002
[10] Affidavit Peter Phillips sworn 23 December 2002 - ex "PWP4" Jessup report para 5.2
[12] [1981] HCA 49; (1981) 148 CLR 121 at 129
[17] Ex "KB1" to affidavit of Bridgeman sworn 18 November 2002
[24] (2002) NSWSC 310 at para 55
[25] Ex "PWP 4" to the affidavit of Peter Phillips sworn 23 December 2002
[26] See Affidavit of Jessup sworn 24 December 2002 para 17-21
[27] Affidavit of Phillips sworn 23 December 2002 para 31
[28] See ex "PWP 13" to the affidavit of Peter Phillips sworn 23 December 2002
[29] Ex "ECG 24" to affidavit of Givanakis sworn 24 December 2002 at pp 14-16
[30] Ex "ECG 23" to the affidavit of Givanakis sworn 24 December 2002
[31] See para 3 of affidavit of Virginia Ransom-Walters sworn 4 November 2002
[32] See para 9 of Affidavit of Piet Walters sworn 27 September 2002
(i) who makes or participates in the making, decisions that affect the whole or substantial part of the business of the corporation; or
(ii) has the capacity to affect significantly the corporation's financial standing; or
in accordance with whose instructions or wishes the directors of the corporation are accustomed to act..."
[37] [2002] NSWSC 310; 41 ACSR 561 at para 50
[40] [2001] WASC 27; 36 ACSR 778 at para 94
[41] Ex "PWP4" the affidavit of Peter Phillips (supra)
Australian Securities and Investments Commission
Drury Management Pty Ltd & Ors [2004] QSC 68
(1981) 148 CLR 121
(1993) 32 NSWLR 543