Australian Securities and Investments Commission v HLP Financial Planning

REASONS FOR JUDGMENT 1 The plaintiff, Australian Securities and Investments Commission, contends that the corporate defendants (the HLP group) operated a managed investment scheme in breach of s 601ED(5) of the Corporations Act 2001 (Cth). This section requires the scheme to be registered. ASIC seeks a declaration that the scheme was an unregistered managed investment scheme and an order that it be wound up. ASIC also contends that the second defendant, Mr Berlowitz, who is said to have controlled the HLP group, himself operated the scheme. Accordingly, ASIC seeks a declaration that Mr Berlowitz operated the illegal scheme and that he carried on a financial services business without an Australian financial services licence. ASIC also wants an injunction permanently restraining Mr Berlowitz from operating a financial services business or from seeking funds from investors in connection with the operation of an unregistered managed investment scheme. The issue in dispute is whether, even if the facts are made out, the orders should be made. 2 It is convenient to begin with a description of the arrangements put into effect by the HLP group. As little as possible will be said about the role of Mr Berlowitz. His position will be considered separately. The starting point is with the structure of the HLP group. HLP Financial Planning (Aust) Pty Ltd (HLPFP) was the lead company in the group. It described its activities as "seek[ing] out and develop[ing] worthy investment opportunities for its clients and client investors." HLPFP conducted its operation as trustee of the HLP Financial Planning (Aust) Unit Trust (HLP Unit Trust). Four companies in the HLP group each held 41 units in the HLP Unit Trust. Each company was in turn the trustee of a unit trust and held the units in that capacity. Initially all the units in the sub-trusts were held by Leaberl Pty Ltd, another member of the HLP group. 3 Some time after March 2005 HLPFP began looking for investors willing to purchase units in the sub-trusts. A prospectus entitled "Private Investment Opportunity" was used to promote the investment. According to the prospectus, "[b]y acquiring units in [one of the sub-trusts], an investor becomes an indirect unit holder of the HLP Financial Planning (Aust) unit trust. This entitles the investor to the distribution of profit in line with their percentage ownership." The minimum amount an investor could subscribe was $50,000. The money invested together with other investors' money was to be applied toward the purchase of "loan books" upon which interest would be paid. In the "Investment Summary" section there was a profit forecast for each of the financial years ending 30 June 2005, 2006, 2007 and 2008. The projected return for those years based on a minimum investment of $50,000 was $2,500, $5,500, $28,500 and $33,500 respectively. That is, potential investors were told the total amount of anticipated distributions an investor would receive over four years was $70,000, with distributions to be made monthly. The prospectus provided a description of the HLP group and details of past projects undertaken by some group members. There was also a discussion about "Future Projects", one of which it was asserted had "guaranteed" minimum monthly returns. A section headed "Benefits and Limitations" contained discussion of "investment benefits" and "investment risks". On the benefits side it was said that: "The projected level of the returns (although not guaranteed) generated by the investment should provide a reasonable potential for capital growth and regular profit disbursements… Investors will have common investment objectives… The business investment will be professionally managed on behalf of the investors…" The discussion of risks was brief. The principal risks were: "The sale price of units purchased, like shares, reflects no increase or a lesser amount than the cost… [the] [i]nability to sell the units quickly… [and the] [g]eneral commercial risk". 4 Between April 2005 and September 2005 55 investors purchased units in the sub-trusts from Leaberl. The aggregate amount invested was $4,295,000. Most of the money went to Leaberl. Some money, approximately $150,000, found its way into the accounts of other HLP group companies. 5 For a time everything seemed to be going well. Investors received interest payments as had been promised. Then in late 2005 investors were told there was a problem. In a letter dated 7 December 2005 under the hand of Mr Berlowitz investors were informed that "HLP has been forced to take a new direction". The letter went on to explain that as a result of fighting "the legal dispute with 'sacked CEO' of [a HLP group company] we have fallen behind in the momentum of all the businesses". As a result of the dispute all HLP group companies bar one had "ceased trading". Investors were advised that they would continue "to receive all [their] current regular monthly payments" but that it was necessary to sell the group's one remaining business "and this will result in all of [the investors'] original investment being repaid to [them] in full by about 30/12/06". 6 In the new year investors were told there was an alternative to having their investment repaid. The alternative was explained in a letter from Mr Berlowitz dated 14 February 2006. It was the "conversion" of the investment into a loan to Beachmere View Pty Ltd (Beachmere) and Mr Berlowitz as joint borrowers. Investors were advised that interest on the loan would be paid monthly at the rate of 10 per cent per annum commencing on 1 April 2006. They were told they had the option of redeeming their investment or entering into the loan agreement. If an investor opted for the loan, he or she could nominate the term of the loan as being any of one to eight years. Most, if not all, investors took up the offer and entered into a written loan agreement with Beachmere and Mr Berlowitz. 7 The HLP scheme came to the attention of ASIC which then commenced an investigation. During the course of that investigation ASIC obtained documents in response to notices served under s 30 of the Australian Securities and Investments Commission Act 2001 (Cth). It also used its power under s 19 of the ASIC Act to examine Mr Berlowitz. 8 This action was commenced when the investigation had concluded. An urgent application was made to wind up the HLP companies (other than HLP Mortgage Company (Aust) Pty Ltd) and to obtain holding orders pending trial. The HLP companies were wound up without objection and Mr Berlowitz gave undertakings not to dispose of his assets pending trial. 9 Mr Georges of Ferrier Hodgson was appointed as liquidator of the HLP companies being wound up. Since his appointment Mr Georges has conducted a preliminary investigation into the affairs of the group. He has filed a report setting out the results of his investigation. One topic discussed by Mr Georges is the financial position of the group. Mr Judd QC, who with Mr Segal appeared for Mr Berlowitz, objected to the tender of the report because ASIC had not arranged for Mr Georges to be present for cross-examination. Still, I propose to refer to his discussion of the financial position of the group as it seems to be uncontroversial: Evidence Act 1995 (Cth), s 190. Mr Georges says that Leaberl is the only company in the HLP group with any tangible assets. That company is, however, insolvent, having a deficiency of assets over liabilities of over $12 million. Mr Georges' view is that the position of the group overall is much worse. Investors are owed more than $35 million and there is little prospect of them recovering any money. 10 I mention this aspect of Mr Georges' report to explain the course this action has taken. Initially ASIC sought an order that if the scheme established by the HLP group was an unregistered managed investment scheme it should be wound up. In light of Mr Georges' assessment of the financial position of the HLP group, ASIC believes that nothing would be gained by a winding up order. It is now of the opinion that it would be in the best interests of investors if the assets under Mr Georges' control were distributed without incurring the additional cost of winding up the scheme. On the other hand, ASIC still seeks a declaration that the scheme is an unregistered managed investment scheme. Mr Judd says making that declaration is a waste of time. 11 This particular dispute raises two issues. The first is whether the scheme is a managed investment scheme. If it is, it is common ground that the scheme was not registered as required. The second issue is whether, in the circumstances, a declaration should be made. 12 Section 9 of the Corporations Act relevantly defines a managed investment scheme as a scheme that has the following features: (a) investors contribute money or money's worth as consideration to acquire rights to benefits produced by the scheme; (b) the contributions are to be pooled or used in a common enterprise to produce the financial benefits; and (c) the investors do not have day-to-day control over the operation of the scheme. There is no doubt that each element of the definition is satisfied here. Investors contributed funds to share in the profits of the loan book business conducted by HLPFP. The funds were to be pooled to finance the operation of the business. No investor had control over any aspect of the business. 13 The only point in contest (and only faintly so) is whether there should be a declaration that the scheme was an unregistered managed investment scheme. The power to grant declaratory relief derives from s 21(1) of the Federal Court of Australia Act 1976 (Cth). The power may be exercised whether or not other relief is sought. ASIC seeks the declaration so that there will, as it were, be a statement on the public record that the scheme was unlawful. Mr Judd contends there is no utility in making the declaration because the winding up of the HLP companies has resulted in the winding up of the scheme. Therefore, he says, nothing further need be done by the court. 14 It is true that the scheme was brought to an end when the HLP companies were wound up. Nonetheless it is appropriate to make the declaration sought by ASIC. Many people put money into the scheme. They are entitled to know that the scheme was illegal and that is one reason why the HLP group was wound up. The declaration will not enable the investors to recover their money. But at least it will inform them what they had got themselves into. 15 The real debate in this case is whether I should consider making a declaration that Mr Berlowitz had operated the scheme in contravention of s 601ED(5) and grant perpetual restraining orders against him. Section 601ED(5) provides that a person must not "operate" a managed investment scheme unless the scheme is registered. There are several cases which hold that where a company operates an unregistered managed investment scheme its directors also "operate" the scheme: eg Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561, 574; Re Lawloan Mortgages Pty Ltd [2003] 2 Qd R 200, 218; Australian Securities and Investments Commission v Atlantic 3 Financial (Aust) Pty Ltd [2006] QSC 132, [19]. According to those cases it all depends on the extent of the director's involvement in the management of the scheme. 16 The source of the court's power to grant a declaration has been identified. The court's power to grant an injunction is derived from ss 22 and 23 of the Federal Court of Australia Act. In a company case the power also derives from s 1324 of the Corporations Act. The power to make each order is discretionary. Here, however, we are not concerned with the usual factors that bear on the discretion to grant or withhold relief. In this case the court acting in its civil jurisdiction is asked to make an order in relation to Mr Berlowitz' allegedly criminal conduct. In that kind of case special rules apply. It is necessary to examine those rules. 17 Before undertaking that task two important features of this case should be noted. The first is that ASIC's investigation into the activities of Mr Berlowitz was not confined to determining whether he has committed merely regulatory offences. Ms Marks, counsel for ASIC, told me that also under consideration is whether Mr Berlowitz should be charged with criminal offences. She did not identify the particular offences but indicated that if charges are laid ASIC's "preliminary view… is [that the charges would be tried in] a Victorian court, and probably the County Court." It follows that consideration is being given to charging Mr Berlowitz with an indictable offence to tried before a jury. 18 The second feature is this. The evidence upon which ASIC will rely to establish that Mr Berlowitz operated the unregistered managed investment scheme is based substantially on statements (said to be admissions) he made during his s 19 examination. When an examination is conducted under s 19 the examinee must answer all relevant questions put to him: ASIC Act, s 21(3). A failure to answer a question without reasonable excuse is an offence punishable by a fine not exceeding 100 penalty units ($11,000) or imprisonment for two years or both: s 63. Self-incrimination privilege is not a reason for refusing to answer a question: s 68(1). On the other hand, any statements made at a s 19 examination that might tend to incriminate the examinee or make him liable to a penalty is not admissible in a criminal proceeding or in a proceeding for the imposition of a civil penalty: s 68(3). The effect of these provisions is that any statement made by Mr Berlowitz can be used against him in this proceeding because it is not a civil penalty proceeding (only declarations and injunctions are sought) but the statements could not be tendered in evidence in the contemplated criminal proceeding. 19 Now I come to the rules. The traditional view was that civil courts have no jurisdiction to grant relief in aid of or to supplement the criminal law. In Gee v Pritchard (1818) 2 Swans 402, 413 [36 ER 670, 674] Lord Eldon said: "I have no jurisdiction to prevent the commission of crimes". The jurisdictional impediment to the grant of an injunction was removed by ss 79 and 83 of the Common Law Procedure Act 1854 (UK); Quartz Hill Consolidated Gold Mining Co v Beall (1882) 20 Ch D 501. Nonetheless, civil courts remained reluctant to intervene. In Ramsay v Aberfoyle Manufacturing Co (Australia) Pty Ltd (1935) 54 CLR 230, 239 Latham CJ said: "A court of equity has no general duty to 'enforce the law,' either at the suit of the Attorney-General or of private persons." McTiernan J said (at 255-256): "The provisions of the law for the trial and punishment of offenders are not to be supplanted or supplemented by this remedy [of injunction]." 20 Notwithstanding this reluctance, on occasion courts would grant an injunction to restrain illegal (including criminal) conduct. Although the cases of interference were few, there were four broad categories in which intervention was thought to be justified: to ensure that statutory bodies acted within the limits of their jurisdiction; to enforce local laws; to enjoin those who flouted the law; to protect public safety. Attorney-General v Westminster City Council [1924] 2 Ch 416 (an injunction to restrain a local council from using a library building for administrative purposes rather than as a public library) is an example of the first category. Cooney v Ku-ring-gai Municipal Council (1963) 114 CLR 582 falls into the second category. There an injunction was granted to restrain the use of a building in a residential area for the purposes of trade. The breach of the by-law caused disadvantage to residents living in the locality. See also Attorney-General v Shrewsbury (Kingsland) Bridge Co (1882) 21 Ch D 752 (an injunction to restrain interference with a public highway and a public navigable stream by illegal acts of obstruction); Attorney-General v London and North Western Railway Co [1900] 1 QB 78 (an injunction to restrain a railway company from allowing its trains to exceed four miles per hour when travelling over a level crossing). 21 The leading English example of a case in the third category is Attorney-General v Harris [1961] 1 QB 74. The defendants had been convicted on countless occasions of selling flowers outside a cemetery contrary to a century old statute. The flower stall was an obvious benefit to those who visited the cemetery. Nevertheless, Sellers LJ observed (at 86): "It cannot, in my opinion, be anything other than a public detriment for the law to be defied, week by week, and the offender to find it profitable to pay the fine and continue to flout the law." 22 A good example of a case in the fourth category is Attorney-General v Chaudry [1971] 1 WLR 1614. There the defendants had violated building safety regulations by permitting guests to occupy a hotel with inadequate fire safety precautions. The evidence showed there was a serious risk to the safety of patrons. Summary proceedings in the Magistrates Court for breach of the regulations were delayed so an application was made in the High Court of Justice for an interlocutory injunction to restrain the defendants from continuing to accommodate guests in their hotel. The injunction was granted and the decision upheld by the Court of Appeal. 23 The cases of judicial interference are not limited to the four broad categories. There are examples, although rare, of interference in other circumstances: see, for example, Attorney-General ex rel Bedfordshire County Council v Howard United Reformed Church Trustees, Bedford [1976] AC 363 (an injunction to restrain the demolition of a listed building); Kent County Council v Batchelor (No 2) [1979] 1 WLR 213, 220 per Talbot J: ("It is not just a case of taking action to prevent a criminal offence. It is a case of preventing interference with the areas of natural beauty which [the plaintiffs] have sought by their tree preservation orders to preserve.") 24 It will be noticed that the cases referred to are concerned with either offences of a regulatory character or breaches of a statutory provision affecting a public right. They do not involve violations of the criminal law proper. This is not to suggest that a civil court will not interfere in cases which involve serious criminality. But, whatever type of criminal case, all the leading authorities caution against a court that is exercising civil jurisdiction attempting to supplant the criminal law. The consensus both in England and Australia is that this should only happen in exceptional circumstances. 25 A good starting point is the decision in Gouriet v Union of Post Office Workers [1978] AC 435. The plaintiff, a private citizen, sought a declaration that it was unlawful for two Post Office unions in protesting against apartheid to solicit interference with the mail to, or communications with, South Africa. He also sought an injunction to restrain that interference. The trial judge refused the injunction holding he had no jurisdiction to grant it when the Attorney-General would not bring a relator action. On appeal to the Court of Appeal an interim injunction was granted and declarations were made against the unions. The validity of those orders were in dispute when the matter came before the House of Lords. Several of the Law Lords dealt with the "comparatively modern use" (as Lord Wilberforce described it at 481) of the Attorney-General invoking the assistance of a civil court in aid of the criminal law. Lord Wilberforce said (at 481): "It is an exceptional power confined, in practice, to cases where an offence is frequently repeated in disregard of a, usually, inadequate penalty… or to cases of emergency… It is one not without its difficulties". Later (at 481) he said that: "[T]his jurisdiction - though proved useful on occasions - is one of great delicacy and is one to be used with caution." Viscount Dilhorne said (at 491) that the exercise of the jurisdiction to intervene is "exceptional". Earlier he had identified the kinds of problems that might arise. The relevant passage is worth quoting. He said (at 490-491): "Great difficulties may arise if 'enforcement' of the criminal law by injunction became a regular practice. A person charged, for instance, with an offence under section 58 or 68 of the Post Office Act 1953 has the right of trial by jury. If, before he commits the offence, an injunction is granted restraining him from committing an offence under those sections and he is brought before the civil courts for contempt, his guilt will be decided not by a jury but by a judge or judges. If he is subsequently tried for the criminal offence, might not the finding of guilt by a judge or judges prejudice his trial? This question is not to my mind satisfactorily answered by saying that juries can be told to ignore certain matters. It was suggested that this difficulty might be overcome by adjourning the proceedings for contempt until after the conclusion of the criminal trial. If that was done, the question might arise then as to the propriety of imposing a punishment in the contempt proceedings additional to that imposed on conviction for the same conduct in the criminal court." Lord Diplock also cautioned against interference. He said (at 498-499): "It is in my view appropriate [that an injunction to restrain a potential offender from committing a criminal offence] be used only in the most exceptional of cases. It is not accurate to describe it as preventative justice. It is a deterrent and punitive procedure; but this is characteristic too of the enforcement of criminal law through the ordinary courts of criminal jurisdiction. The very creation by Parliament of a statutory offence constitutes a warning to potential offenders that if they are found guilty by a court of criminal jurisdiction of the conduct that is proscribed, they will be liable to suffer punishment up to a maximum authorised by the statute. When a court of civil jurisdiction grants an injunction restraining a potential offender from committing what is a crime but not a wrong for which there is a redress in private law, this in effect is warning him that he will be in double jeopardy, for if he is found guilty by the civil court of committing the crime he will be liable to suffer punishment of whatever severity that court may think appropriate, whether or not it exceeds the maximum penalty authorised by the statute and notwithstanding that he will also be liable to be punished again for the same crime if found guilty of it by a court of criminal jurisdiction." 26 The second important English case is Imperial Tobacco Ltd v Attorney-General [1981] AC 718. Imperial Tobacco was being prosecuted for a scheme alleged by the Director of Public Prosecutions to be an unlawful lottery. It sought a declaration from the commercial court that the lottery was lawful. The trial judge did not grant the declaration because he was of the view the scheme was both an unlawful lottery and an unlawful competition. The Court of Appeal was of the opposite opinion and granted the declaration. On appeal to the House of Lords one of the issues that arose was whether a declaration should have been granted in light of the criminal proceedings. The House ruled that the civil court should not have granted any relief. On this aspect I propose to refer only to the speech of Viscount Dilhorne. He said (at 741-742): "That decision [that is the decision of the Court of Appeal], if it stands, will form a precedent for the Commercial Court and other civil courts usurping the functions of the criminal courts… Such a declaration is no bar to a criminal prosecution, no matter the authority of the court which grants it. Such a declaration in a case such as the present one, made after the commencement of the prosecution, and in effect a finding of guilt or innocence of the offence charged, cannot found a plea of autrefois acquit or autrefois convict, though it may well prejudice the criminal proceedings, the result of which will depend on the facts proved and may not depend solely on admissions made by the accused. If a civil court of great authority declares on admissions made by the accused that no crime has been committed, one can foresee the use that might be made of that at the criminal trial… My Lords, it is not necessary in this case to decide whether a declaration as to the criminality or otherwise of future conduct can ever properly be made by a civil court. In my opinion it would be a very exceptional case in which it would be right to do so. In my opinion it cannot be right to grant a declaration that an accused is innocent after a prosecution has started." 27 The House of Lords confirmed its guarded approach in R (Rusbridger and Another) v Attorney-General [2004] 1 AC 357. The editor and senior journalists of The Guardian were conducting a press campaign advocating a republican form of government for England. They sought a declaration that their campaign did not offend the Treason Felony Act 1848 (UK). In truth there was no prospect of the editors and journalists being charged with any offence. That did not deter them from bringing the action. The House of Lords said that the republican campaign did not offend the statute. The Law Lords also discussed the circumstances in which a court would entertain a claim for declaratory relief on a question of criminal law. 28 Lord Steyn dealt most extensively with this issue. He said (at 367) that: "Normally, the seeking of a declaration in a civil case about the lawfulness of future conduct will not be permitted. But in truly exceptional cases the court may allow such a claim to proceed." He then laid down (at 367-368) the criteria that were to be satisfied to show that a case was exceptional. The first was the existence of a genuine dispute about the subject matter, that is, whether there was likely to be a prosecution if the conduct were engaged in. The second was whether the case was "fact sensitive" or not. If the dispute involved a question of pure law a declaration might be appropriate but not if the facts were in dispute. The third criterion was whether there was "a cogent public or private interest" which would be advanced by the grant of a declaration. 29 Lord Rodger approached the issue rather more generally. He said (at 367): "A civil court can make such a declaration, although it would be right to do so only in a very exceptional case: Imperial Tobacco Ltd v Attorney-General [1981] AC 718, 742C-D per Viscount Dilhorne. The authorities do not spell out what constitutes a very exceptional case for these purposes. In ordinary cases people must take and act on their own legal advice. So, broadly speaking, a very exceptional case must be one where, unusually, the interests of justice require that the particular claimant should be able to obtain the ruling of the civil court before embarking on, or continuing with, a particular course of conduct which, on one view, might expose him to the risk of prosecution." 30 This trilogy of House of Lords cases show that whether or not a court will intervene may depend on whether the court is asked to consider past or future conduct. If the court is asked to rule on future conduct and the issue involved is simply a question of law, the court is more likely to intervene. On the other hand, it is less likely to act in relation to past conduct, especially if the facts are in dispute. Moreover, if criminal proceedings are pending, the court will not intervene at all: R v DPP ex parte Camelot plc [1997] Admin LR 93. The position is likely to be the same if criminal proceedings have not begun but are threatened: Rusbridger [2004] 1 AC 357, 367. 31 The position in Australia appears to be in a state of flux at least in company cases. The early cases, including decisions of the High Court, followed the English principles. In recent times, however, there has been a shift away from that circumspect approach. The reason for the shift must be examined. 32 The traditional approach was referred to in Mutual Home Loans Fund of Australia Ltd v Attorney-General (NSW) (1973) 130 CLR 103. In this action the Attorney-General sought a declaration that an advertisement published by Mutual Home Loans constituted an invitation to the public to take up an interest in the corporation in contravention of the prospectus provisions of the Companies Act 1961 (NSW). The Attorney-General also sought an injunction to restrain future advertisements. Barwick CJ said (at 110-111): "No point was taken in this case that the declaration sought related to a criminal offence and the injunction to the commission of further criminal offences. The ability of the Attorney-General to bring such a proceeding has been said to depend upon persistent breaches of the criminal law antecedent to the commencement of the suit. It would seem to be otherwise where the suit is to restrain breach of a statutory provision not enforceable by penalty or other criminal sanction. In such a case the Attorney-General may sue to protect the public interest in the due observance of the statute." [citations omitted] 33 The next case is Sankey v Whitlam (1978) 142 CLR 1. That involved an application for a declaration that cabinet documents required to be produced on subpoena before a magistrate in committal proceedings were wrongly accorded Crown privilege. There was also a cross-claim for a declaration that the facts alleged against the defendant did not constitute an offence in law. One argument raised in the High Court was that there was no power to grant the declarations sought. The High Court held the power did exist and should be exercised. Gibbs ACJ dealt with this issue in some detail. First of all he rejected an argument that for the purposes of granting declaratory relief in matters the subject of criminal proceedings a distinction should be drawn between regulatory offences and what I have described as true crime but what Gibbs ACJ described, rather more accurately, as crimes involving moral turpitude. He said that whenever a declaration is sought the circumstances must be carefully examined, especially if criminal proceedings have begun. But he said that to intervene some special reason must exist. He put it this way (at 25): "[T]he circumstances must be exceptional to warrant the grant of relief." In this connection Gibbs ACJ endorsed the observations of Jacobs P in Shapowloff v Dunn [1973] 2 NSWLR 468, 470 that a court will be reluctant to make a declaration in a matter which impinges directly upon the course of criminal proceedings. However Gibbs CJ said (at 26) that the case before the High Court was "most exceptional". The proceedings in the Court of Petty Sessions at Queanbeyan were brought against a former prime minister and members of his cabinet and involved issues of great importance. 34 Inglis v Moore (1979) 24 ALR 411 is a decision of the Full Federal Court. The plaintiff sought declarations that the defendants were guilty of a criminal conspiracy contrary to s 86 of the Crimes Act 1914 (Cth) and the common law. The trial judge refused the declaration on the basis that the court should not entertain the application. The Full Court upheld the decision. St John J said (at 414) that what was sought was "outside the ambit of declaratory relief." He referred to Sankey v Whitlam and said (at 414), correctly, that the cases to which Gibbs ACJ referred in holding there was jurisdiction to intervene in criminal cases did "not reveal a single instance in which, in civil proceedings, the declaration sought has been one that certain actions of the defendants constituted a crime after finding facts in those proceedings." All were cases in which there was no contest as to the facts. He went on to say (at 415) that: "Whether indictable offences have been committed is the concern of the criminal courts and are for trial there." Thus he concluded that the court could not intervene. Even if declaratory relief could as a matter of jurisdiction be granted St John J said (at 415): "a court would never exercise its discretion in favour of granting such relief." He explained that "[w]hat, in effect, would happen if such an application were allowed to proceed would be that a defendant in civil proceedings would be found to have committed a crime without having the various advantages which are afforded him in a criminal trial." 35 Brennan and Davies JJ delivered a joint judgment in which they said (at 421): "Although it cannot be said that a declaration that conduct constitutes a crime will never be made… the discretion to make declarations of that kind is cautiously exercised." They referred with approval to what Lord Wilberforce said in Gouriet [1978] 1 AC 435, 481 paraphrasing Lord Eldon LC in Attorney-General v Cleaver (1811) 18 Ves Jun 211 [34 ER 297]: "These and other examples which can be given show that this jurisdiction [to grant a declaration] - though proved useful on occasions - is one of great delicacy and is one to be used with caution." 36 Australian Softwood Forests Pty Ltd v Attorney-General (NSW) ex rel Corporate Affairs Commission (1981) 148 CLR 121 is an important case. There the High Court held it was appropriate to grant declarations that the defendants' conduct contravened ss 81, 82 and 83 of the Companies Act 1961 (NSW). Those sections, respectively, prohibited a person from offering any "interest" as defined to the public unless that offer was made by the company or a person authorised under the seal of the company, a statement in writing equivalent to a prospectus was issued and there was an approved deed in force. A contravention of each provision was a criminal offence. 37 To appreciate the significance of this case it is necessary to know something of its history. Initially the Corporate Affairs Commission sought a declaration that the defendants' conduct had breached ss 81, 82 and 83 as well as an injunction to restrain future breaches. The case was tried by Helsham CJ in Eq on an agreed statement of facts. Helsham CJ found in favour of the Commission and made the orders sought: Corporate Affairs Commission v Australian Softwood Forest Pty Ltd [1978] 1 NSWLR 150. There was an appeal to the Court of Appeal. The Court of Appeal agreed that there were breaches of ss 81, 82 and 83 but held that only an injunction should go it not being "a proper case for declarations which are little more than prefatory averments to the grant of an injunction": Attorney-General (NSW) ex rel Corporate Affairs Commission v Australian Softwood Forests Pty Ltd [1979] 2 NSWLR 73, 76. 38 Each side appealed to the High Court: the defendants on the basis that its scheme did not involve the creation of any interest as defined and the Attorney-General against the refusal by the Court of Appeal to grant declarations. By the time the appeal was heard the defendant was no longer interested in pursuing the scheme, so the injunction was not pressed. The High Court ruled that declarations should have been made. Mason J (with whom Stephen J agreed) did not explain why. Neither did Wilson J. Gibbs CJ, who agreed generally in the reasons of Mason and Wilson JJ, did not explain why a declaration should be made, except to say that the Court of Appeal had erred. Murhpy J said (at 136) that both a declaration and an injunction were appropriate forms of relief to protect against the "most widespread and successful of the species of fraud known in Australia and elsewhere as 'the investment racket' [of] the forest or plantation variety." But, as the injunction was not pressed, the Court held that only the declaration should be made. 39 In Corporate Affairs Commission (NSW) v Transphere Pty Ltd (1988) 15 NSWLR 596, 603 Young J said that by its decision in Australian Softwood Forests the High Court had given its "seal of approval" to the New South Wales practice of the Crown being entitled to obtain a declaration that a business person's conduct contravened the law. This is true provided two important points are kept steadfastly in mind. The first is that Australian Softwood Forests was argued from beginning to end on an agreed statement of facts. The only issue that separated the parties was whether, on those facts, the defendants had offered to the public an "interest" within the meaning of the Act and were accordingly in breach of ss 81, 82 and 83. The second point is that there was no suggestion at any stage of the proceeding that criminal charges might be laid against the defendants. The way the case was presented, and the arguments put in each court, showed that the Corporate Affairs Commission sought to vindicate its view of the defendants' conduct by civil rather than criminal proceedings. This is not at all surprising. The legal issues raised were complex and, perhaps, more effectively dealt with by a civil rather than a criminal court. It is not possible, therefore, to take from Australian Softwood Forests that there had been a wholesale change to the circumstances in which a civil court will intervene in the criminal law. In any event, if the High Court had intended to change the law that dramatically it would have said so. 40 Still, there is a need to rethink the position in company cases. The need arises because the Corporations Act now allows, indeed contemplates, the enforcement of most of its provisions (including those creating criminal offences) by a court in the exercise of its civil jurisdiction granting relief by way of injunctions, what are known as "civil penalties" and other remedies appropriate to the circumstances. To understand how this has come about it is necessary to go back to the 1970s. 41 A Senate Select Committee on Securities and Exchange was appointed on 19 March 1970 under the chairmanship of Senator Rae to inquire into the desirability of establishing a securities and exchange commission that would be empowered to act against improper practices in relation to the shares and securities of public companies. The Committee's investigation revealed that corporate fraud, misconduct and incompetence were pervasive in a series of corporate collapses that occurred during the speculative boom in mining shares in the late 1960s and early 1970s. In its report handed down on 18 July 1974 the Committee's major recommendation was that a national corporate regulator should be established in order to prohibit undesirable market practices and thereby restore public confidence in the stock market and protect those who invest in the securities of public companies. This led to the creation of the National Companies and Securities Commission (a predecessor of ASIC). The NCSC was granted broad investigatory powers. Parliament wanted to avoid a situation where the regulator's investigation into misconduct had no practical benefits and amounted to nothing more than a public record of breaches: Commonwealth, Parliamentary Debates, Senate, 5 December 1974, 3240-3242 (Lionel Murphy, Attorney-General). As a result the NCSC was given the power to commence or intervene in proceedings in a wide range of circumstances. 42 It was also thought appropriate to give to the NCSC, as well as to persons affected by a contravention, power to obtain an injunction to prevent contraventions of the Companies Code and related legislation. The first attempt to introduce such a provision in the mid 1970s failed: see the Corporations and Securities Industry Bill 1974 (Cth) cl 274. But when the co-operative scheme legislation was enacted between 1979 and 1981 the power to grant an injunction was included in the Companies Code (s574) and the Securities Industry Code (s 149). The Companies (Acquisition of Shares) Code introduced a more far-reaching set of powers to deal with contraventions of that statute. The powers included the right to restrain the disposal of shares, to restrain voting rights on shares and to restrain a company from making payment of any sums due in respect of shares (ss 45, 46 and 47). 43 The co-operative scheme legislation was replaced by the Corporations Law, which came into operation in 1990 and 1991. Instead of several statutes regulating the affairs of companies and dealings in securities there was, from that point, as there had been in the past, one statute. The enforcement provisions that had been in the co-operative scheme legislation were found in s 1324 (injunctions) and ss 737-744 (orders for contraventions of the acquisition of shares provisions) of the Corporations Law. In the current legislation the successor provisions are ss 1324 (injunctions) and 1325A (remedial orders for contraventions of Chs 6 (takeovers), 6A (compulsory acquisitions and buy-outs), 6B (rights and liabilities in relation to Chs 6 and 6A) and 6C (information about ownership of listed companies and managed investment schemes)). 44 Later, the shift to civil enforcement received a sharp boost. This resulted from the report of the Senate Standing Committee on Legal and Constitutional Affairs, chaired by Senator Cooney, known as the Report on the Social and Fiduciary Duties and Obligations of Company Directors (1989). The report stated (at 190) that criminal penalties were a necessary means of enforcing the companies legislation for conduct that involves fraud and dishonesty and is "genuinely criminal in nature". The report recommended (at 191), however, that the companies legislation be amended to include "civil penalties" for breaches by directors where no criminality is involved. The result was the introduction by the Corporate Law Reform Act 1992 (Cth) of a civil penalty regime. This was a scheme by which certain breaches of the Corporations Lawwere to be dealt with by a court exercising civil jurisdiction operating alongside the criminal courts. 45 Under the scheme certain provisions, most of which dealt with the duties and liabilities of corporate officers, were designated as "civil penalty provisions" (Corporations Law, s 1317DA; see now Corporations Act, s 1317E). The court was given power to declare that a person had contravened a civil penalty provision. The power was mandatory where the court was satisfied a contravention had occurred (CL s 1317EA(2); CA s 1317E(1)). A person who contravened a civil penalty provision was exposed to a number of "civil penalty orders" (CL ss 1317EA-1317EH; CA ss 1317E-1317HA). If the contravener was dishonest and intended to gain an advantage or intended to deceive or defraud someone, he was also liable to be prosecuted in criminal proceedings (CL s 1317FA and sch 3). Although the same conduct could give rise to both civil penalties and criminal sanctions (CL s 1317EA(1)), civil penalty proceedings and criminal proceedings were, in most cases, mutually exclusive. This was because criminal proceedings could not be brought if civil penalty proceedings had already commenced (CL s 1317FB). Likewise civil penalty proceedings could not be brought after criminal proceedings had commenced, except in very limited circumstances (CL ss 1317GC and 1317GD). Effectively it was necessary to make a choice between civil penalties and criminal sanctions. 46 The scheme was changed by the Corporate Law Economic Reform Program Act 1999 (Cth). The principal change was that a criminal proceeding could now be commenced during the currency of a civil penalty proceeding (CL s 1317N; CA s 1317N) or after such proceedings had been disposed of, whatever the outcome (CL s 1317P; CA s 1317P). And the criminal court was given priority over its civil counterparts. Thus, civil penalty proceedings would be stayed if criminal proceedings were begun (CL s 1317N; CA s 1317N). There was, though, a practical limitation to the commencement of a criminal proceeding. Evidence of information given or documents produced by an individual in proceedings for a civil penalty was not admissible in criminal proceedings against the individual (CL s 1317Q; CA s 1317Q). The other side of the coin was that a civil penalty proceeding could not be brought if the offender was convicted of an offence (CL s 1317M;CA s 1317M). 47 The orders that may now be made in a civil penalty proceeding, in addition to a declaration of contravention, are that the person pay a pecuniary penalty of up to $200,000 (s 1317G) and that the person pay compensation to a corporation or registered scheme that has suffered loss because of the contravention (ss 1317H and 1317HA). If a declaration of contravention is made the court may also order that the person be disqualified from managing a corporation (s 206C). A declaration of contravention must specify the things mentioned in s 1317E(2), including identifying the person who contravened the relevant provision and describing the conduct that constituted the contravention. The declaration is conclusive evidence of those things (s 1317F). So, the declaration may be used to prove those things in other civil proceedings. 48 To this point, the discussion has been about the way in which a court exercising its civil jurisdiction in a civil penalty proceeding is able to grant relief in company cases, that is supplemental to criminal law. It is also worthwhile making reference to the ever increasing range of civil remedies that may be granted by a civil court in the event of a breach of the Corporations Act. Some, such as an order to disclose information or publish advertisements under s 1324B, apply only to certain kinds of breaches. Others, like the power to prohibit a person who contravened a provision of the Corporations Act from disposing of his assets under s 1323(1), apply to contraventions of any provision. Then there are the remedies available to a person who has suffered loss from a breach. For example: s 1325(5)(e) permits the recovery of damages resulting from a breach of a provision in Chs 5C (managed investment schemes), 6CA (continuous disclosure), 6D (fundraising) or Pt 7.10 (market misconduct and other prohibited conduct relating to financial products and financial services); ss 1317H and 1317HA allow the recovery of damages for a breach of a civil penalty provision; s 670B provides for compensation for loss caused by misstatements in or omissions from takeover documents. 49 The expanding power of the court on its civil side to deal with criminal conduct made a clash with the criminal court inevitable. Parliament was alert to the problem. Since 1981 there has been a provision in the companies legislation that civil proceedings are not to be stayed merely because the proceeding discloses or arises out of an offence (Companies Codes 543; CL s 1331; CA s 1331). Without such a provision courts might not allow a civil proceeding to go ahead until the criminal law had played itself out. 50 The current regime of corporate regulation is, as the Cooney Committee's report observed (at 190), characterised by a "pyramid of enforcement". The basic premise is that to deter breaches of the legislation, there should be various levels of enforcement that correspond to the seriousness of the contravention. There are three levels to this pyramid: civil remedies at the base, civil penalties in the middle and criminal sanctions at the top. But it is the court exercising its civil jurisdiction that is the primary means of enforcement. Only the most serious contraventions now end up before a criminal court. Nonetheless when a criminal proceeding is commenced the criminal court should be given (and in many cases is expressly given) priority over civil litigation. 51 The present case is one where the contraventions of the Corporations Act of which Mr Berlowitz has been accused may result in him being prosecuted for criminal offences. What should happen when a civil court is asked to make a declaration of contravention and to grant an injunction restraining future contraventions when a criminal trial is pending or threatened? 52 There are many cases where courts have granted a declaration that a person has contravened the Corporations Act and enjoined any further contraventions. In all but two a criminal prosecution was not on the horizon; at least the possibility was not adverted to by the judge. In some cases the court explained the rationale for making the orders sought. The most common explanations were that ASIC's function as a public regulator made it appropriate to grant the relief or because it was in the public interest to make a declaration so that the illegal conduct bore the stamp of the courts' disapproval. See eg: Australian Securities and Investments Commission v Sweeney [2001] NSWSC 114, [34]-[35] per Austin J ("The present proceedings have been brought by the public regulator to enforce the corporations and securities legislation… [The provisions setting out the objectives of the ASIC Act] 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."); Pegasus Leveraged Options 41 ACSR 561, 571 per Davies AJ ("[W]hen declarations are sought by a public authority such as ASIC, the declarations should be made if it is in the public interest to do so."); Re McDougall; Australian Securities and Investments Commission v McDougall (2006) 57 ACSR 175, 187 per Young J ("Since Australian Softwood Forest, 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. 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" [citations omitted].); Re PFS Wholesale Mortgage Corporation Pty Ltd; Australian Securities and Investments Commission v PFS Business Development Group Pty Ltd (2006) 57 ACSR 553, 615 per Hargrave J ("There is no question of any unfair prejudice to any person if a declaration of contravention is made. The only question is whether the defendants or any of them have contravened a provision of Ch 7 of the Act or of any other law relating to dealing in "financial products" or providing "financial services" within the meaning of those concepts as defined in the Act."). 53 There are some cases where there is no discussion of the principles upon which the court acted: see eg Australian Securities and Investments Commission v Hutchings (2001) 38 ACSR 387; Australian Securities and Investments Commission v Young (2003) 21 ACLC 655; Australian Securities and Investments Commission v Drury Management Pty Ltd [2004] QSC 68; Australian Securities and Investments Commission v Preston [2005] FCA 1805; Australian Securities and Investments Commission v Atlantic 3 Financial (Aust) Pty Ltd [2006] QCA 540. 54 One case in which the possibility of a criminal proceeding was mentioned is Australian Securities and Investments Commission v Intertax Holdings Pty Ltd [2006] QSC 276. There ASIC sought a declaration that the defendants had contravened s 601ED(5) (when a managed investment scheme must be registered), s 727 (offering securities without a current disclosure document) and s 911A (need for an Australian financial services license). It also sought orders restraining them from continuing to engage in the allegedly unlawful conduct. Fryberg J refused to grant the declaration. He acknowledged there was jurisdiction to make the order but said that "[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." The judge did grant a restraining order as it was clear on the facts that the directors had aided their company's contraventions of the Corporations Act. 55 The other case is Australian Securities and Investments Commission v Fuelbanc Australia Ltd (2007) 25 ACLC 1230. The case involved a petrol payment scheme where subscribers, by paying a joining fee and making upfront contributions of cash and so-called "barter units", were provided with a debit card to which a specified amount was deposited every week to purchase petrol at participating service stations. ASIC alleged that the scheme constituted an unregistered management investment scheme in breach of s 601ED and that the defendants conducted an unlicensed financial services business in breach of s 911A. It sought an order that the scheme be wound-up as well as declarations, injunctions and other ancillary relief. The defendants did not contest the facts upon which ASIC based its claim. Nor did they oppose the orders sought. But because counsel for ASIC could not rule out the possibility of future criminal proceedings against the defendants he drew the court's attention to Intertax Holdings. Heerey J was not troubled by the case. He referred to the "consistent practice" in company cases of courts making declarations of criminal conduct, citing, in particular, Transphere, Sankey v Whitlam and Australian Softwood Forest among other cases. 56 I do not doubt that because the facts were not in dispute and the defendants were content for the case to go ahead an application of the traditional rules would not require the judge to stay the case. Yet Heerey J thought that Intertax Holdings, if good law, stood in his way. He expressed the view, however, that Intertax Holdings was wrongly decided. He explained (at 1235): "While courts are still reluctant to grant declaratory relief on issues which are theoretical or hypothetical, 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 willresult in an acquittal" [citations omitted]. 57 For my own part I do not regard this criticism as justified. Intertax Holdings was different from the case that confronted Heerey J. In the former case the facts were in dispute and the defendants did not want the facts to be determined in a civil action in advance of a criminal trial. In addition, one must not lose sight of the fact that one object of the caution rule is to protect the defendant. 58 I would sum up the position as I see it as follows. 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) 126 CLR 297, 305 that is the kind of case "which contributes enormously to the utility of the jurisdiction." 59 The case at bar is a particularly good example of one in which the court should not interfere. First of all, a criminal prosecution is on the cards. Second, the facts are not agreed. On the contrary, if there is to be a trial, the Crown would be put to its proof on most issues and some of the "facts" to be asserted by the Crown are likely to be in contest. Third, there is potential for an adverse impact on the jury. The civil case will be decided on evidence that, for the most part, will not be available to the prosecutor in a criminal trial. Imagine what would happen if a jury discovers that a civil court has ruled that Mr Berlowitz' conduct is illegal. The judge presiding over the criminal trial will be obliged to tell the jury to leave that out of account. It is axiomatic in our courts that jurors can be trusted to leave out of their consideration things that they are instructed to leave out. Yet many regard this kind of instruction as little more than wishful thinking. Perhaps the jurors will have explained to them that the judge who made the ruling acted on evidence not before the jury and that in any event a lower standard of proof was required in the civil court. Whether those instructions will result in a fair criminal trial may be strongly doubted. Last, but by no means least, is the falsification point made by Fryberg J which, if it occurs, will bring the law into disrepute. 60 For the foregoing reasons I decline to entertain, on a final basis, the application for declaratory and injunctive relief against Mr Berlowitz. I am, however, prepared to stand the matter over until a final decision is taken as regards a criminal prosecution. If Mr Berlowitz is to be charged I would dismiss this proceeding against him and leave it to the criminal court to decide his fate. On the other hand, if the decision is made not to lay charges, this case can be brought back on. 61 I will hear the parties on what interlocutory orders, if any, should be made in the meantime. There will, in any event, be an order that ASIC pay the fifteenth defendant's costs as a result of the discontinuance of the claim against that company. I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.