Australian Securities and Investments Commission v Empower Invest Pty Ltd

CATCHWORDS : CORPORATIONS - application under Australian Securities and Investments Commission Act 2001 (Cth), s 93AA(4)(a) for declarations that defendants in breach of enforceable undertakings to refund moneys to investors in unregistered managed investment scheme - whether enforceable undertakings varied - no evidence of consent by ASIC to variation - whether undertakings breached - whether appropriate to make orders under s 93AA where breach found - assertions by directors of defendant companies that companies unable to comply with undertakings - no evidence as to financial position of companies - court not satisfied that orders under s 93AA would be futile

LEGISLATION CITED : Australian Securities and Investments Commission Act 2001 (Cth)

National Australia Bank (NAB) Limited v Juric [2001] VSC 375 CASES CITED : Wyszynski v Bill [2005] NSWSC 110 Markisic v Commonwealth of Australia [2007] NSWCA 92; (2007) 69 NSWLR 737

Plaintiff: Australian Securities and Investments Commission PARTIES : 1st Defendant: Empower Invest Pty Limited 2nd Defendant: Newcastle Palais Holdings Pty Limited

Plaintiff: A Kuklik COUNSEL : 1st Defendant: n/a 2nd Defendant: B Cornwell (director)

SOLICITORS : Plaintiff: Conrad Gray Solicitors Defendants: n/a

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

2010/231254 Australian Securities and Investments Commission v Empower Invest Pty Limited & Anor JUDGMENT 1 HIS HONOUR: This is an application under s 93AA of the Australian Securities and Investments Commission Act 2001 (Cth). The Australian Securities and Investments Commission ("ASIC") seeks a declaration that the first defendant (Empower Invest Pty Limited) ("Empower Invest") and the second defendant (Newcastle Palais Holdings Pty Limited) ("NPH") are in breach of clause 3.2 of enforceable undertakings given by those companies on 9 May 2008 in proceedings number 1493 of 2009. 2 ASIC seeks an order pursuant to s 93AA(4)(a) directing Empower Invest and NPH to comply with clause 3.2 of the undertakings by repaying to each of the then nominated investors moneys which those investors invested in a "Scheme" within 28 days. 3 The enforceable undertakings defined the "Scheme" as being "unregistered management [sic] investment scheme" comprising the Palais Investment trust and Newcastle Palais Unit Trust. The enforceable undertakings recite that on or about 21 May 1999 the Newcastle Palais Unit Trust was established for the purposes of developing commercial and residential premises at the property know as the Palais Royale in Hunter Street, Newcastle. 4 The undertakings state that NPH has at all times been the trustee of the Newcastle Palais Unit Trust and was the legal owner of the Palais Royale. The undertakings state that on or about 31 January 2006 the Palais Investment Trust was established for the purposes of raising funds from investors for the development of the Palais Royale property. The undertakings record that Empower Invest was the trustee of the Palais Investment Trust and was engaged in the business of promoting investment in the development of the Palais Royale property through the Palais Investment Trust. They record that Mr Kenneth Watson was a director and secretary of Empower Invest and that Mr Brien Cornwell was a director and secretary of NPH. 5 The undertakings go on to record that on 15 February 2008 ASIC commenced proceedings in this Court alleging that Empower Invest, NPH and Messrs Watson and Cornwell had by operating the Newcastle Palais Unit Trust and the Palais Investment Trust operated an unregistered managed investment scheme in contravention of s 601ED(5) of the Corporations Act 2001 (Cth). 6 On 9 May 2008 Hammerschlag J, by consent, made a declaration accordingly. His Honour also, by consent, declared that each of the defendants had carried on a financial services business in contravention of s 911A of the Corporations Act. The enforceable undertakings record that both companies and Messrs Watson and Cornwell had agreed to resolve the court proceedings by, amongst other things, offering the undertakings set out in clause 3.1. In clause 3.1, the companies undertook within 21 days to send a letter to each of the investors in the form of an annexure to the undertaking. The annexed letter defined the two trusts as being "the Scheme" involving the property development at the Palais Royale in Newcastle. The letter stated: " In relation to your investment in the Scheme, you have the following options.

Option 1 If you do not want to continue with your investment in the Scheme, we will fully refund all money you have invested towards the Scheme. You may exercise this option by responding to us in writing within [the] next 10 days. Should you choose to seek a refund of moneys invested in the Scheme, we will organise payment of all moneys you have paid toward the Scheme in its entirety within 14 days. "

7 By an email of 7 July 2008 from Mr Watson to Mr Richard Wells, a lawyer employed by ASIC, Mr Watson confirmed that each of the unit holders in the Palais Investment Trust had requested a return of their capital. Mr Watson advised ASIC that he had sent cheques of $2,970 per unit to each of the investors. This was only a small part of the moneys invested. The investors had each invested $76,500 for one unit in the Palais Investment Trust. 8 The enforceable undertaking recorded in clause 2.7 stated: " 2.7 On 15 February 2008 ASIC commenced proceedings in the Supreme Court of New South Wales (' the Court Proceedings ') alleging that the Companies, Watson and Cornwall [sic] had, by operating the [Newcastle Palais Unit Trust] and the [Palais Investment Trust] : (a). operated an unregistered managed investment scheme in contravention of section 601ED(5) of the Act; and (b). engaged in a financial service business without holding an Australian Financial Services Licence in contravention of section 911A of the Act; and seeking injunctions. "

9 Clause 3.2 of the undertaking stated: " 3.2 If, after receiving the letter referred in 3.1 above, any of the Investors request a refund of monies they invested in the Scheme, the Companies will refund all monies invested by that investor within 28 days of receiving notification from the Investor. "

10 The expression "Companies" meant Empower Invest and NPH. Both companies undertook to repay moneys invested by the investors in the Scheme by their taking up units in the Palais Investment Trust if the investors requested a refund. 11 On 25 August 2008 Mr Wells of ASIC wrote to Mr Watson of Empower Invest and Mr Cornwell of NPH referring to the enforceable undertaking and Mr Watson's advice that all investors had stated they wished to obtain a refund of the funds invested in the Scheme. Mr Wells noted that the time for making such refunds had passed. He stated that ASIC reserved its right to take further action in respect of breaches of the undertaking and sought a report setting out details of the letter sent to investors, the requests for refunds made by investors, any refunds made to investors and an explanation as to what steps were being made to refund moneys to investors in a timely fashion. The present application was filed on 25 August 2010, exactly two years after that correspondence. 12 Mr Cornwell has sworn an affidavit in these proceedings in which he deposes that the funds received from Empower Invest investors were lent to Melaleuca Estate Pty Limited ("Melaleuca Estate"). 13 It appears that Mr Cornwell is a director of Melaleuca Estate. He has appeared on the hearing of this application for NPH. In the course of submissions he stated that at the time moneys were raised from investors, the Palais Royale property was valued at approximately $5.7 million and that development approval had been obtained for the construction of 97 units on the site. He says that at the time the land was subject to a mortgage securing a debt of $1,000,000, by which I infer he did not intend to include any obligations that were cross collateralised to the mortgage. 14 As I have said, Mr Cornwell deposed that the funds raised from investors were lent to Melaleuca Estate. It was in litigation with Port Stephens Council. Mr Cornwell deposed that on 12 December 2007, following a mediation held between Melaleuca Estate and the Port Stephens Council, it was agreed that the Council would pay compensation to Melaleuca Estate for a drainage system that Melaleuca Estate had built to process drainage water that he says the Council was using illegally to drain water from the surrounding catchment on to land owned by Melaleuca. He deposed that he signed the enforceable undertaking on 14 December 2007 when he was confident that there would be funds to repay the Empower Invest investors within the time limits agreed to in the undertakings. He asserts that the Port Stephens Council reneged on the agreement made following the mediation and says that proceedings have been instigated against the Council. I am told those proceedings are still pending. 15 Contracts for the sale of the Palais Royale property were exchanged on 1 May 2008 for $5,665,000 inclusive of GST. Mr Cornwell deposed that the sale was on 28 November 2008 but that the mortgagee would not release any funds from the sale to the vendor, apparently because the mortgagee contended that the property was security for other debts subject of a personal guarantee from Mr Cornwell. 16 Following conversations between Mr Wells and investors between September and December 2008, Mr Wells formed the view that negotiations were on foot with a view to security being provided for the investors for repayment of their investments. In the result no such security was forthcoming. 17 On 9 January 2009 Mr Cornwell sent an email to Mr Wells stating: " I do not have access to any funds to pay the claimants. I was relying on funds which should have come from the mediated agreement between Port Stephens Council and myself as Melaleuca Estate Pty Ltd of 12 December 2007. ... At the time that we entered into the enforceable undertaking I, in good faith, believed that the required funds would have been available from the mediated agreement with Port Stephens Council. ... I am currently pursuing an action for 'specific performance' against the Council and this should be heard about the middle of the year. I have been dealing with Ms Sandra Morey, a solicitor acting on behalf of the claimants, ... to secure the interests of her clients. In the current economic climate it is impossible to obtain further borrowings. " 18 The proceedings between Melaleuca Estate and Port Stephens Council have not yet been heard. I was told by Mr Cornwell that the matter is listed again for directions on 25 November 2010, by which time Melaleuca Estate is required to have served its evidence on quantum. He states that he is hopeful of obtaining a hearing date then. 19 It does not appear that anything further has been done by Empower Invest or NPH or Messrs Cornwell or Watson to repay investors. 20 There is evidence from investors that the cheques of $2,970 forwarded to them by Empower Invest were not banked because they were told that there were no moneys in the account of that company to honour the cheques. Some investors have been paid a small "finders fee", but that was not by way of refund of their investments. 21 The first question raised by Mr Cornwell is whether the undertakings have been varied. He contended that the enforceable undertakings had been varied by his email of 9 January 2009 to the effect that the investors would be repaid when the litigation between Melaleuca Estate and the Port Stephens Council was settled. 22 I understand him to contend that ASIC is to be taken to have consented to such a variation by its silence in not responding to his email of that day. His email of 9 January 2009 is an attempted explanation as to why the undertaking had not been honoured. It is not expressed as a suggested variation to the undertaking. ASIC's consent was not sought to any variation of the undertaking. There is no substance in the contention that the undertaking had been varied. 23 The second question is whether the court is satisfied that Empower Invest and NPH have breached the undertaking. 24 In clauses 3.4 and 3.5 of the undertaking, Messrs Watson and Cornwell undertook to use their best endeavours to ensure that Empower Invest and NPH respectively complied with their undertakings in these proceedings. ASIC does not allege a breach by Messrs Watson and Cornwell of clauses 3.4 and 3.5. The fact that their obligations were to use best endeavours informs the construction of clause 3.2. By clause 3.2, the companies did not undertake to use their best endeavours to refund moneys to investors if the investors requested a refund. The undertakings were expressed in absolute terms. The undertakings were not expressed to be conditional upon the companies having the financial resources to refund the investments. 25 I am satisfied that the companies did breach their undertakings and that the power to make orders under s 93AA(4)(a) is enlivened. The question is whether the power should be exercised. 26 If it were clear that neither Empower Invest nor NPH could comply with an order directing them to comply with their undertakings in clause 3.2, then it would not be appropriate to make that order. 27 The courts do not order the impossible. Nor would there be any point in doing so, because the purpose of the court's making an order directing a person to comply with the terms of their undertaking would be to enliven the sanctions against a person in contempt. But a person will not be in contempt of the order if the order is not capable of compliance (National Australia Bank (NAB) Limited v Juric [2001] VSC 375 at [37]; Wyszynski v Bill [2005] NSWSC 110 at [56]-[59]; Markisic v Commonwealth of Australia [2007] NSWCA 92; (2007) 69 NSWLR 737). 28 However, whilst Messrs Watson and Cornwell have asserted that Empower Invest and NPH are not able to comply with the undertaking, the evidence does not establish that that is necessarily so. 29 Empower Invest has indicated that it is prepared to submit to any orders. Mr Watson forwarded a letter to ASIC, which has been tendered on this application, in which Mr Watson stated: " Empower Invest Pty Ltd would have complied with the undertaking to refund capital to investors, if it had any capital. The company does not have any assets. It is in a parlous financial position and while it has used its best endeavours to resolve the matter, [it] has not been able to raise any funds, other than as set out below. " 30 Mr Watson then stated that $73,530 of every investment of $76,500 was paid to NPH and the balance was used to make introducer payments and cover out-of-pocket expenses, and that it borrowed $5,940 from which it made two payments of $2,970 to two investors. 31 I take it from Mr Cornwell's submissions that he says that NPH is also unable to make a refund. He submitted that NPH's only asset is what he called a "contingent asset", being a loan owed to it by Melaleuca Estate. 32 On the other hand, he also said, as I understood his submission, that the moneys raised from investors were received by the vendor of units in the Newcastle Palais Unit Trust, which he identified as the Cromwell Family Trust, and that it used the funds by lending them to Melaleuca Estate. 33 However that may be, there is simply no satisfactory evidence from either Mr Watson or Mr Cromwell, or the companies, as to the financial position of Empower Invest and NPH. 34 No financial statements, whether up to date or otherwise, have been tendered on this application. There has been no corroboration by any independent accountant of the financial position of either company. The matter rests in the assertions of the directors of each company that the companies are presently without funds. 35 I regard the explanation of the companies' financial position as quite inadequate, and the explanation as to the disbursement of the investors' funds troubling in the extreme. 36 It is particularly troubling that Mr Cromwell has asserted in submissions that units in the Newcastle Palais Unit Trust were not transferred to Empower Invest as he contends was the intention because he says the agreed price for the units of $1.25 million was not paid. Nonetheless, although he says the units were not transferred, he accepts that the moneys raised by the investors were paid, he says, to the vendors of the units and then on-lent to Melaleuca Estate, and all this notwithstanding that the agreed purpose of raising funds from investors was for the development of the Palais Royale property in Hunter Street, Newcastle. 37 I am not satisfied, on the present evidence, that an order under s 93AA(4)(a) would be futile. Having said that, the order may well prove to be futile if neither Empower Invest nor NPH is able to comply with it. 38 No order has been sought in these proceedings for the winding-up of either Empower Invest or NPH. 39 I understood counsel for ASIC to say that it might be a concern that such an application would be premature, unless an order were first made under s 93AA(4)(a) and the order was not complied with. I express no view on the correctness of that contention, as no order is sought other than a declaration of breach and an order under s 93AA(4)(a). 40 Mr Cornwell also submitted that no orders ought to be made, and the present application ought to be stood out of the list to be returnable on reasonable notice, apparently after the conclusion or settlement of the litigation between Melaleuca Estate and the Port Stephens Council. I do not think that such a course is appropriate. 41 Mr Cornwell also sought a declaration that he, on behalf of NPH, had used best endeavours to comply with the undertaking. ASIC has not alleged a breach by Mr Watson or Mr Cornwell of their undertakings. I see no reason to make an affirmative declaration that Mr Cornwall's undertaking has been complied with, and the materials before me would be inadequate for such a task. 42 Accordingly, for these reasons, I think it appropriate to make the declarations in the order sought by ASIC, although I fear that the order directing the companies to comply with their undertaking will be of little utility. 43 I make the declaration in paragraph 1 of the originating process, and I make order 2 in the originating process.

[PARTIES ADDRESSED ON COSTS.] 44 ASIC seeks costs, but accepts that the costs order against the defendants should not operate so as to disadvantage investors whose interests ASIC is seeking to protect in this application. 45 So far as the costs of the first defendant is concerned, it wrote to ASIC on 9 August 2010 submitting to any orders the court might make, and otherwise did not contest the application. 46 The costs order against the first defendant should relate only to costs incurred by ASIC up to 9 August 2010. 47 I order the first defendant to pay ASIC's costs of the proceedings up to and including 9 August 2010, and I order the second defendant to pay ASIC's costs of the proceedings. 48 I note the undertaking of ASIC to the Court not to enforce those costs orders if and to the extent that to do so will adversely affect the ability of investors in schedule C to the originating process to be repaid their investment. 49 Finally, I record that after delivering the earlier reasons, Mr Cornwell has submitted that the moneys received from the investors were not received by the Cornwell Family Trust, and that the Cornwell Family Trust did not lend the moneys to Melaleuca Estate. As I understood his submission, Mr Cornwell says Empower Invest lent moneys to NPH, which lent the moneys to Melaleuca Estate. 50 The financial statements from Melaleuca Estate of 30 June 2008 record a non-current liability owed to the Cornwell Family Trust, and no liability to NPH. It suffices to say that the accounting for the moneys raised from investors remains, on the present evidence, obscure, to say the least. 51 The exhibits on this application may be returned after 28 days.

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