Australian Securities and Investments Commission v Idylic Solutions Ltd; Australian Securities and Investments Commission v P.J.C.B. International Ltd

CATCHWORDS : CORPORATIONS - managed investment schemes - unregistered scheme - earlier order for winding up of scheme - application by liquidator for directions - statutory basis for the making of directions - nature of interests of contributors to pooled investment fund - EQUITY - maxims of equity - "equality is equity" - "he who seeks equity must do equity" - hotchpot - how losses to be borne among contributors to pooled investment fund - where "returns" to early contributors paid out of capital - whether "returns" should be brought into hotchpot - where money of one pooled fund mixed with money of another. -

LEGISLATION CITED : Corporations Act 2001 (Cth), ss 601EE(2),

Australian Securities and Investments Commission v Edwards [2009] QSC 360 Australian Securities and Investments Commission v Tasman Investment Management Ltd [2005] NSWSC 1332; (2005) 56 ACSR 449 Australian Securities and Investments Commission v Tasman Investment Management Ltd [2006] NSWSC 943; (2006) 202 FLR 343 Banco de Portugal v Waddell (1880) 5 App Cas 161 Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22 Burton v Arcus [2006] WASCA 7l; (2006) 32 WAR 366 Clayton's Case (Devaynes v Noble (1816) 1 Mer 572; 35 ER 781 Cleaver v Delta American Reinsurance Co [2001] 2 AC 328 Commerzbank Aktiengesellschaft v IMB Morgan plc [2005] 2 All ER (Comm) 564 Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318; 29 ER 1184 Edwards v Freeman (1727) 2 P Wms 435; 24 ER 803 Hall v Robinson 8 Ired 56 (1847) Keefe v Law Society of New South Wales (1998) 44 NSWLR 451 Lake Coogee Estate Management Pty Ltd v Australian Securities and Investments Commission [2009] FCA 471 Law Society of Upper Canada v Toronto-Dominion Bank (1998) 169 DLR (4th) 353 Meir v FN Management Pty Ltd [2005] QCA 408; [2006] 1 Qd R 339 CASES CITED : Miller v Sawyer 30 Vt 412 (1858) Pearce v Piper (1809) 17 Ves 1; 34 ER 1 Ponzi v Fessenden 258 US 254 (1922) Re Global Finance Group Pty Ltd [2002] WASC 63; (2002) 26 WAR 385 Re Hobourn Aero Components Ltd's Air Raid Distress Fund; Ryan v Forrest [1946] Ch 86 Re Lead Company's Workmen's Fund Society [1904] 2 Ch 196 Re Magarey Farlam Lawyers Trust Accounts (No 3) [2007] SASC 9; (2007) 96 SASR 337 Re Ontario Securities Commission and Greymac Credit Corp (1986) 30 DLR 4th 1 Re Printers and Transferrers Amalgamated Protection Society [1899] 2 Ch 184 Re Stacks Managed Investments Ltd [2005] NSWSC 753; (2005) 219 ALR 532 Re Sutherland; French Caledonia Travel Service Pty Ltd [2003] NSWSC 1008; (2003) 59 NSWLR 361 Re Tennant; Mortlock v Hawker [1942] HCA 3; (1942) 65 CLR 473 Re Walter J Schmidt & Co 298 F 314 (1923) Selkrig v Davies (1814) 2 Dow 230; 3 ER 848 Steel v Dixon (1881) 17 Ch D 825 Taylor v Secretary to the Department of Social Security (1988) 79 ALR 327 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107

TEXTS CITED : Susan Barkehall Thomas, "Tracing into an overdrawn mixed bank account" (2004) 12 Insolv LJ 95

(1) Australian Securities and Investments Commission - Plaintiff Idylic Solutions Ltd - First Defendant Idylic Soluitions Pty Ltd - Second Defendant 888 Management Inc - Third Defendant Serenity Management Pty Ltd - Fourth Defendant P.J.C.B. International Limited - Fifth Defendant Jimmy Truong - Sixth Defendant Brian John Wood - Seventh Defendant Barry Frank Jennings - Eighth Defendant Con Koutsoukos - Ninth Defendant Technocash Pty Ltd - Tenth Defendant Barry Anthony Taylor - Applicant Spyros Lambi - Contradictor (2) Australian Securities and Invesstments Commission - Plaintiff P.J.C.B. International Limited - First Defendant J & B Financial Group Pty Ltd - Second Defendant PARTIES : Destiny Holdings Ltd - Third Defendant Brian John Wood - Fourth Defendant Barry Frank Jennings - Fifth Defendant Technocash Pty Ltd - Sixth Defendant Idylic Solutions Ltd - Seventh Defendant Upton Ltd - Eighth Defendant Jimmy Truong - Ninth Defendant Con Koutsoukos - Tenth Defendant Idylic Solutions Pty Ltd - Eleventh Defendant Jennifer Trinh - Twelfth Defendant Geneva Financial Ltd - Thirteenth Defendant Jacqueline Hobbs - Fourteenth Defendant Brenda Hobbs - Fifteenth Defendant Unifund Ltd - Sixteenth Defendant Barry Anthony Taylor - Applicant Spyros Lambi - Contradictor

COUNSEL : Mr F Gleeson SC/Ms K J Williams - Applicant Mr P M Wood/Dr S R Derham - Contradictor

SOLICITORS : Deacons - Applicant Henry Davis York - Contradictor

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J TUESDAY, 1 DECEMBER 2009

5864/07 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v IDYLIC SOLUTIONS LTD & ORS 6021/07 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v P.J.C.B. INTERNATIONAL LIMITED & ORS JUDGMENT Background 1 On 20 June 2008, certain orders were made on the application of Australian Securities and Investments Commission, in two separate proceedings, with respect to unregistered managed investment schemes known as the "Super Save scheme" and the "Integrity scheme". Each scheme was defined in the court's orders by reference to a so-called "private placement memorandum" identified in the orders. 2 The principal order of 20 June 2008 in relation to each unregistered managed investment scheme was an order that the scheme "be wound up pursuant to section 601EE" of the Corporations Act 2001 (Cth). Mr B A Taylor was appointed by the court to conduct each winding up. Given the role assigned by the court to Mr Taylor, it is convenient to refer to him as "the liquidator". The present application and its statutory basis 3 The liquidator has applied to the court in each proceeding for "directions" that he "would be justified" in taking certain steps in and about each winding up.

4 In the particular statutory context, the court's power to give what are, in substance, directions of the kind that might be given for the guidance of a company liquidator or administrator derives from s 601EE(2) which enables the court to make "any orders it considers appropriate for the winding up of the scheme". An order that gives guidance and protection to the person administering such a winding up is within the s 601EE(2) description: Australian Securities and Investments Commission v Tasman Investment Management Ltd [2005] NSWSC 1332; (2005) 56 ACSR 449; Australian Securities and Investments Commission v Tasman Investment Management Ltd [2006] NSWSC 943; (2006) 202 FLR 343; Burton v Arcus [2006] WASCA 7l; (2006) 32 WAR 366; Lake Coogee Estate Management Pty Ltd v Australian Securities and Investments Commission [2009] FCA 471. 5 A wider dimension of s 601EE(2) may also be called in aid. The evidence suggests that the rights and duties of persons who invested in the two schemes may not, in all respects, be fully defined by the documents relating to the schemes. In those circumstances, a three-stage process is necessary in order to identify those rights and obligations. First, the import and effect of the documents must be ascertained. Second, the whole of the circumstances must be considered in order to discover whether general law principles supplement in a meaningful way the results of analysis of the documents. At that point, the legal rights, entitlements, liabilities and obligations, to the extent that they are discoverable by ordinary processes of legal analysis will have been ascertained. If something more is then needed in order to effect the winding up (by way of clarification or refinement of the legal rights and obligations or by way of procedural facilitation), the court is empowered by s 601EE(2) to supply that element. This is the effect of what was said by White J in Re Stacks Managed Investments Ltd [2005] NSWSC 753; (2005) 219 ALR 532 at [27] - [37] and by Austin J in Australian Securities and Investments Commission v Tasman Investment Management Ltd [2006] NSWSC 943; (2006) 202 FLR 343 at [18] - [20], [27] - [32]. To the extent that the court needs to supply otherwise missing elements at the third stage, it should resort to any analogies provided by the winding up of companies: Meir v FN Management Pty Ltd [2005] QCA 408; [2006] 1 Qd R 339. 6 An overriding principle is that orders of the kind now sought should not sanction the release of funds to persons who have no legal entitlement to any of them: Australian Securities and Investments Commission v Edwards [2009] QSC 360. Contradictor 7 The present application by the liquidator has been advanced in such a way that submissions have been received from a contradictor as to one of the central questions raised. Mr Spyros Lambi was, by order made on 31 July 2009, made the representative of a certain class of investors in each fund being, in essence, investors who were early entrants. It is convenient to refer to Mr Lambi as "the contradictor". 8 Mr F Gleeson SC and Ms K J Williams appeared for the liquidator of the application. Mr P M Wood and Dr S R Derham appeared for Mr Lambi. 9 Notice of the application was given to interested persons in accordance with directions made by the court. No one other than the contradictor sought to make submissions. 10 Before referring to the matters on which guidance is sought by the liquidator, I should describe the two schemes. In doing so, I pay particular attention to a statement of facts filed by the liquidator.

The Super Save scheme 11 The Super Save scheme operated between about June 2006 and December 2007, during which time 107 persons contributed US$6,400,382. Two investors retired during that period and were paid sums of money. They did so apparently under a regime that allowed withdrawal or redemption upon sixty days' notice after a minimum investment period. 12 The 105 investors who remained at the date of the winding up order had contributed US$6,336,391. The liquidator estimates that there are net funds of about A$6,332,542 available for distribution in the winding up. 13 A "private placement memorandum" was made available to prospective investors in the Super Save scheme. It may be assumed, for present purposes, that the structure and workings of the scheme are as described in that document. 14 The memorandum described the scheme as a "unit trust investment vehicle". An entity referred to as "Trans Management Corporation" is said to be the trustee, but the liquidator has found no record of involvement by any such entity (or even its existence). Nor is there any evidence of the kind of trust deed or other constituting document one would normally associate with a unit trust scheme. 15 The promotional material referred to a "return objective" of "3½ per month best efforts", presumably indicating that the promoters and operators of the scheme would strive to bring home to investors returns on investment at the rate of 3.5% per month. 16 Investors in the Super Save scheme signed a "contract of administrator of private placement investment" in which each acknowledged that the funds subscribed would be "pooled" with those of other investors. The investors were self-managed superannuation funds. 17 At the time of the orders for winding up, the administration and control of the Super Save scheme was in the hands of Idylic Solutions Ltd, a British Virgin Islands company. The role had previously been performed by an Australian company of almost the same name (Idylic Solutions Pty Ltd or "ISPL") and, at an earlier stage, by another New South Wales company (888 Management Australia Pty Ltd). Support services were provided by J & B Financial Group Pty Ltd. The day-to-day affairs were in the hands of Jimmy Truong, Brian Wood and Con Koutsoukos. They were variously and at different times members and officers of the companies. 18 Moneys provided by investors in the Super Save fund were deposited in one or more of several accounts with banks and other institutions. Moneys were sometimes transferred between accounts. One of the accounts was an account maintained by ISPL with Cadent Financial Services LLC ("Cadent"), a United States futures dealer which, in return for fees debited to the account, invested funds from the account in commodity interests. Some US$6,215,798 received from the scheme investors was deposited into this account (which I shall call "the ISPL Cadent account") during the active life of the Super Save scheme. Trading by means of the funds with Cadent was profitable. 19 The administrators of the Super Save scheme paid periodic "returns" to investors. A total of US$809,569 was paid during the active life of the scheme. The moneys to satisfy "returns" were sourced from the ISPL Cadent account. It will be necessary to say more about these "returns" presently. 20 In addition to paying "returns", the administrators of the Super Save scheme made payments from investors' funds to persons who procured investments (these were in the nature of commissions), to the promoters and to fund operational expenses. There was also a significant payment (US$501,000) in March 2007 for an unidentified purpose. The Integrity scheme 21 The Integrity scheme was described in a so-called "private placement memorandum prospectus" as a "pooled investment vehicle". As in the case of the Super Save scheme, the entity referred to as "Trans Management Corporation" was referred to as "trustee" of the scheme but in fact played no role. 22 Investors in the Integrity scheme signed a "fund agreement" which granted a limited power of attorney empowering PJCB International Limited ("PJCB"), a company incorporated in Anguilla, British West Indies, to "pool" their investments in a "private placement investment". 23 The Integrity scheme operated between about September 2004 and December 2007. It was administered throughout by PJCB. A total of US$29,399,627 was invested in the Integrity scheme. 24 There were, during the scheme's operation, withdrawals by six investors. As in the case of the Super Save scheme, there were provisions allowing withdrawal or redemption upon notice after a minimum investment period. Some 270 investors remained at the time of the court's order for winding up. 25 The investors in the Integrity scheme were individuals in foreign jurisdictions such as Greece and Lebanon and "international business companies" incorporated in the main in the British Virgin Islands or British West Indies. 26 The "return objective" of the Integrity Fund was stated to be "4% per month best efforts". 27 "Returns" of US$9,128,821 were paid out by PJCB on investments in the Integrity scheme. Again, it will be necessary to say more about the "returns" presently. Available records show that the "returns" were paid into accounts in the names of persons or entities other than the international business companies named as investors; but it appears that this was with their consent, so that they should be regarded as having received the benefit of the "returns". 28 The withdrawals by the six investors who withdrew during the operation of the Integrity scheme totalled US$224,991.

29 More than US$1.38 million was paid out of Integrity scheme funds to promoters, introducers and like functionaries. 30 An amount of US$80,218.57, represented by payments from investors, was deposited into a suspense account with a financial intermediary. PJCB did not receive these payments. The intermediary claims that the moneys are its property because they were unclaimed for more than 365 days. PJCB paid "returns" on some of these moneys, even though it never received them. 31 The several individuals who were active in the promotion and operation of the Super Save scheme (Jimmy Truong, Brian Wood and Con Koutsoukis) were likewise active in the promotion and operation of the Integrity scheme and the administration of PJCB. Mingling 32 Between 8 March 2007 and 12 October 2007, a total of US$5,440,992 was transferred by PJCB from an account maintained by it with Technocash Ltd (an Australian funds transfer company) and housing Integrity scheme funds to the ISPL Cadent account housing Super Save scheme funds (see paragraph [18] above). A total of US$6,215,798, representing capital contributed by Super Save scheme investors was also placed in the account. There were seven separate transfers of Integrity scheme funds. Each represented capital contributed by Integrity scheme investors. 33 ISPL played a role in the promotion and operation of the Super Save scheme. It was never involved in the promotion or operation of the Integrity scheme. 34 No explanation for the transfers of Integrity scheme funds into the ISPL Cadent account is apparent. There are no contemporaneous documents. 35 There were no transfers of funds between the two schemes in the opposite direction. There were, however, transfers totalling US$1,113,553 from the ISPL Cadent account to the administrators of the Super Save scheme. The present state of each fund 36 The liquidator's estimate of funds available for distribution to investors is US$6,332,543 in the case of the Super Save scheme and between A$12,218,430 and A$14,266,716 in the case of the Integrity scheme. There are no known creditors, except for possibly US$60,000 in the first case and US$18,384 in the second case. The matters on which the liquidator seeks guidance 37 The liquidator's application raises two key issues. 38 The first issue concerns the correct method of distributing the surplus funds of each scheme to investors in that scheme and raises questions of hotchpot. 39 The second concerns the appropriate allocation, as between the two schemes, of funds remitted to the liquidator from the ISPL Cadent account, given the mixing referred to at paragraph [32] above. 40 There are also some miscellaneous matters concerning the proposed treatment of particular investors, payments and receipts. These involve, for the most part, relatively small amounts. Investors' rights 41 It is accepted by both the liquidator and the contradictor that each investor in each scheme retained an entitlement to the fund to the extent of the investor's contribution as defined by a written acknowledgment (in the form of a certificate or contract) issued to the investor. Views about characterisation diverge. 42 The liquidator takes the view that each investor's entitlement is that of a beneficiary under a trust, either express or resulting. The contradictor's position is that the relationship between investor and administrator is, in relation to each scheme, a contractual relationship so that the beneficial entitlement of the investor is in reality a contractual right to be paid. 43 A particular difficulty that confronts the practical playing out of each characterisation is that of identifying a trustee or promisor, that is, a person liable to account or to satisfy the contractual right to be paid. The difficulty is of much greater significance if the contractual characterisation is the correct one. I say this because, while one can accept that the interest of a beneficiary continues to inhere in trust moneys held not by the trustee but by someone holding from or under the trustee or in succession to the trustee with notice of the interest (such as the liquidator in this case), it is by no means clear that one contracting party's obligation to pay can be asserted, by the person with the corresponding right to be paid, against some other person, whether or not that other person has come to hold money out of which the payment might be expected to have been made. 44 Having regard to the documents by which investment in each fund was invited and the basis of investment there outlined, I am of the opinion that invested moneys received by the scheme administrator or some associate became the subject of a trust. In Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107, Mason CJ and Wilson J said (at 121): "[T]he courts will recognise the existence of a trust when it appears from the language of the parties, construed in its context, including the matrix of circumstances, that the parties so intended. We are speaking of express trusts, the existence of which depends on intention. In divining intention from the language which the parties have employed the courts may look to the nature of the transaction and the circumstances, including commercial necessity, in order to infer or impute intention: see Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175, at 189." 45 In the present case, the solicitation documents made it clear that contributed money was to be "pooled" with other money and deployed to the advantage of the particular contributor in common with all other contributors. In the one case, there was reference to "unit trust" and "trustee"; in the other to "trustee". The notion was that the contributor became a participant in a pooled venture or fund along with other persons and made the contributor's money available to be deployed in company with the money of others. This last point is important. Each contributor knew that there were (or were to be) other contributors and must be presumed to have sought the advantage of aggregation for more advantageous deployment. The contributor's intention - and that of the promoter or administrator - must be taken to have been that the contributor should, by making the contribution that was to be pooled with those of others, obtain an interest in the whole fund made up of the totality of contributions together with accretions arising from the funds deployment - and, of course, diminished by any losses. 46 I am content, therefore, to proceed on the footing that the situation is, in each case, one of trust. A common or collective investment pool was created to be held upon trust for the several contributors. Basis of participation by investors 47 Once it is accepted that, by investing in one of the schemes, an investor obtained - and must be taken to have intended to obtain - an interest in a pooled fund made up of the totality of contributions together with accretions arising from deployment of the funds, the prima facie position must be that the proceeds of realisation by the liquidator should be allocated pro rata to the contributions of the several investors, so that losses are likewise borne pro rata: Barlow Clowes International Ltd v Vaughan [1992] 4 All ER 22 (see also Re Ontario Securities Commission and Greymac Credit Corp (1986) 30 DLR 4th 1; Keefe v Law Society of New South Wales (1998) 44 NSWLR 451; Re Global Finance Group Pty Ltd [2002] WASC 63; (2002) 26 WAR 385; Commerzbank Aktiengesellschaft v IMB Morgan plc [2005] 2 All ER (Comm) 564; Australian Securities and Investments Commission v Tasman Investment Management Ltd [2006] NSWSC 943; (2006) 202 FLR 343). 48 There was no submission before me that entitlements should be ascertained (and deficiencies borne) according to the rule in Clayton's Case (Devaynes v Noble (1816) 1 Mer 572; 35 ER 781), no doubt because the situation cannot be regarded as one of an account current or running account and is rather one of interests in a fund held on trust: see Re Walter J Schmidt & Co 298 F 314 (1923). According to the terms on which they were invested, funds could not be withdrawn except upon notice given after a minimum investment period had expired. Treatment of "returns" 49 A question then arises regarding treatment of "returns" in effecting pro rata distribution. As has been noted, "returns" were paid to certain investors out of the assets of each scheme (US$809,569 in the case of the Super Save scheme and US$9,128,821 in the case of the Integrity scheme). These were not distributions of profits. In the case of the Integrity scheme, there were never any profits; and in the case of the Super Save scheme, such profits as did emerge were earned well after the "returns" had been paid (also, the total of these later profits was less than the total of the "returns"). Rather, "returns" entailed receipt by early investors of capital contributed by themselves and perhaps some later investors, in order to satisfy expectations of periodic returns generated by the promotional literature (see paragraphs [15] and [26] above). Schemes that thus cause contributed capital to be distributed in the guise of non-existent profits are often called "Ponzi schemes" after American fraudster Charles Ponzi: see Ponzi v Fessenden 258 US 254 (1922) 50 The liquidator has identified three possible approaches to distribution of the assets of the respective schemes:

Method 1. Distribution among investors pari passu in proportion to their respective contributions.

Method 2. As for Method 1, but on the basis that investors had, during the period of the scheme's operation, withdrawn the returns paid to them.

Method 3. As for Method 1, subject to investors bringing into hotchpot the returns paid to them.

51 There is no dispute that, at a prima facie level, Method 1 is appropriate. Beyond that, however, there is disagreement. The liquidator takes the view that, having regard to the "returns", Method 3 should be adopted. The contradictor contends for Method 1 in its unmodified form. The differing views are explained, in a practical sense, by the fact that returns (in reality, distributions of capital) were mainly made early in a scheme's life and so were received by persons who were early investors, that is, members of the class whose interests are represented by the contradictor. Those persons would receive more under Method 1 than under Method 3. 52 The rationale for bringing returns into hotchpot in accordance with Method 3, as perceived by the liquidator, is that the payment of the returns depleted the pool of capital that ultimately became available for distribution on a scheme's winding up, so that investors who did not receive returns would be unfairly disadvantaged, as against the recipients of returns, if those recipients were entitled both to keep the benefit of the returns and to participate in the remaining pool on a basis of proportionate equality with non-recipients. 53 The position taken by the contradictor is that the case is not one to which the hotchpot principle should be applied. The hotchpot principle 54 Hotchpot was enacted for limited purposes by the Statute of Distributions 1670 (22 & 23 Car 1 c 10). The effect of that Act was that settlements and advancements conferred by an intestate on his children in his lifetime were to be taken into account in determining their shares upon intestacy. The underlying principle - no doubt reflecting social standards of the era - was that there should be equality among children after the parent's death, free from distortions arising from benefaction conferred by the parent while living. The statute was enacted to resolve conflict between temporal courts and ecclesiastical courts. It imposed civilian rules preferred by the latter and was said by Lord Chief Justice Raymond, in Edwards v Freeman (1727) 2 P Wms 435; 24 ER 803, to be "grounded upon the most just rule of equity, equality". 55 It became common for the same principle to be adopted expressly through hotchpot clauses in wills, particularly where residue was left to the widow with remainder to the children equally. Such a clause was typically to the effect that the trustees should, before dividing the residue among the children, deduct from a child's share whatever had been advanced to the child so as to make the children's respective shares equal. A discussion of numerous issues raised by such clauses is found in Re Tennant; Mortlock v Hawker [1942] HCA 3; (1942) 65 CLR 473. 56 The principles of equity that, in their civil law form, found expression in the Statute of Distributions also had an operation independently of statute. In the case of co-sureties, the general rule is that they share equally the burden to which all are subject: Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318; 29 ER 1184. But adjustment is required where one co-surety has received a benefit by way of indemnity or security from the principal debtor. In that case, the benefit must be brought into hotchpot so that it may be shared pro tanto with the other co-sureties. In so holding in Steel v Dixon (1881) 17 Ch D 825, Fry J approved the following observation of Barrett J in the Vermont case of Miller v Sawyer 30 Vt 412 (1858): "[P]ersons subject to a common burden stand in their relation to each other upon a common ground of interest and of right, and whatever relief, by way of indemnity, is furnished to either by him for whom the burden is assumed, enures equally to the relief of all the common associates." 57 Fry J also quoted with approval a passage in the judgment of Chief Justice Ruffin of the Supreme Court of North Carolina in Hall v Robinson 8 Ired 56 (1847): "The relief between co-sureties in equity proceeds upon the maxim that equality is equity, and that maxim is but a principle of the simplest natural justice. It is a plain corollary from it that, when two or more embark in the common risk of being sureties for another, and one of them subsequently obtains from the principal an indemnity or counter-security to any extent, it enures to the benefit of all. The risk and the relief ought to be co-extensive." 58 A like principle applies to proof in concurrent bankruptcies. In Banco de Portugal v Waddell (1880) 5 App Cas 161, certain creditors of wine merchants carrying on business in both England and Portugal had proved their debts in the merchants' Portuguese insolvency and received dividends there equivalent to less than twenty shillings in the pound. Those creditors then proved in the separate bankruptcy in England. Each was, of course, entitled to do so but, as Earl Cairns LC said (at 167), applying the principle stated by Lord Eldon LC in Selkrig v Davies (1814) 2 Dow 230; 3 ER 848, only "upon the terms of bringing in, for the purpose of dividend, the sum which he has received abroad". His Lordship said that "on the principle that he who asks for equity must do equity, he must bring into the common fund that which he had already received in respect of the obligations of the same debtors". 59 On the same basis, the principle that a secured creditor may, subject to surrendering the security, prove for the whole debt in the debtor's bankruptcy and share rateably with other creditors has been said to entail "bringing into hotchpot the security which he holds or its value": Taylor v Secretary to the Department of Social Security (1988) 79 ALR 327 at 337. 60 The hotchpot concept is a reflection of the maxim "equality is equity" (with "equality", in an appropriate case, understood as proportionate equality), supplemented by the maxim "he who seeks equity must do equity". The equality (or proportionate equality) that equity in general will promote can only be struck after a person seeking the benefit of it has, as a preliminary, borne whatever burden equity demands be borne in order to ensure that the ultimate equality (or proportionate equality) is not distorted by the effects of unconscientious retention of separately received benefit. The application of the principle to this case 61 The contradictor says that hotchpot is largely confined, in its application, to established classes of case and that the present case does not fall within any such class. Obvious cases are those of co-sureties and concurrent insolvency administrations already mentioned. 62 The liquidator, by contrast, argues that the relevant principles are not confined by categories of operation and apply more generally. The liquidator advocates as applicable to this case the approach taken by Campbell J in Re Sutherland; French Caledonia Travel Service Pty Ltd [2003] NSWSC 1008; (2003) 59 NSWLR 361 which involved the mixing of funds held upon distinct trusts. His Honour referred to a question that must be addressed once the respective claims upon the mixed fund have been established, that is, "whether by reference to any personal equities whatever which exist between the various claimants, there is any reason to treat any of the claimants as postponed to any of the others". 63 Campbell J then said that an example of such a personal equity is to be found in Re Hobourn Aero Components Ltd's Air Raid Distress Fund; Ryan v Forrest [1946] Ch 86. That case concerned a fund established and maintained through voluntary contributions made by nearly all employees of a particular company. The fund was to be applied in making discretionary payments to or for the benefit of contributing employees on war service or in distress as a result of enemy action. A question arose as to the correct treatment of a surplus remaining after war's end. There was no dispute that the several contributors were properly regarded as entitled in proportion to contributions made. But there was a question about whether benefits received should first be brought into hotchpot. 64 Cohen J referred (at 97) to two cases in which distribution had been made without regard to benefits received. The first was Re Printers and Transferrers Amalgamated Protection Society [1899] 2 Ch 184 which concerned a contributory fund for the provision of financial support to trade union members during strikes and lockouts. It was held that a surplus should be distributed among contributors according to their contributions. Byrne J added, however (at 189): "If I were to carry out the strict rights to the fullest extent, I might have to direct an account as to fines and forfeitures and payments made. But, as in the case of Cunnack v Edwards [[1895] 1 Ch 489], Chitty J thought himself entitled to disregard the amounts paid for fines or forfeitures and annuities received by widows in taking the account, on the ground of the expense, loss, and delay that would thereby be occasioned; so in the present case I think I am justified also in saying those amounts need not be taken into account in ascertaining the proportions in which this fund is to be distributed." 65 The second case referred to by Cohen J was Re Lead Company's Workmen's Fund Society [1904] 2 Ch 196 where the case just mentioned was followed and no allowance was made for participation in the fund, apparently again because of the practical impossibility of ascertaining and bringing to account anything other than contributions. Warrington J saw the basic question as that posed by Lord Eldon LC in Pearce v Piper (1809) 17 Ves 1; 34 ER 1: "what will be an equitable distribution of the fund subscribed". The question must, no doubt, receive the best answer that the circumstances of the case allow. 66 In the Hobourn Aero case, there was no difficulty in ascertaining the amounts of benefits paid to recipients during the active life of the fund. That being so, Cohen J said (at 97-98): "I have come to the conclusion that I should not be justified in deviating from the general principle, that a person seeking to participate in the distribution of a fund must bring into hotchpot anything he has already received therefrom. Accordingly, I propose to declare that the fund now available for distribution ought to be distributed amongst all the persons who during their employment by Hobourn Aero Components, Ld., contributed to the fund at any time after December 12, 1940, in proportion to the total amount contributed by them respectively to the fund, each such person bringing into hotchpot any amount received by him by way of benefit out of the fund." 67 The rationale for this was described by Campbell J in French Caledonia Travel Service in this way (at [183]): "The manner of distribution supports the view that all the contributors have a charge over the fund in which their contributions are mixed, to support their interest in the fund by way of a contingent resulting trust if the committee were not to exercise its discretion and distribute the entire fund. As contributions are made week by a [sic] week, so the interest of each contributor increases; as the fund is expended, so the interest of each contributor is proportionately decreased. Further, the requirement to bring into hotchpot benefits received from the fund is an illustration of a personal equity which results in the charge which one contributor has being held to be of lower priority than the charge which another contributor has, though with the possibility of becoming of equal ranking if one of the chargees performed an action which he had no obligation to perform, but the performance of which was a precondition to his charge being accorded equal rank." 68 In arguing against the application of hotchpot in this case, the contradictor placed reliance on the decision of the Privy Council (Lord Steyn, Lord Lloyd of Berwick, Lord Cooke of Thorndon, Lord Scott of Foscote and Sir Patrick Russell) in Cleaver v Delta American Reinsurance Co [2001] 2 AC 328, a company winding up case. The question was whether a particular creditor who had proved in the winding up was required to bring into hotchpot a sum of some $735,000 already received by it. The creditor in question had obtained a judgment in a foreign court against the company in liquidation. Having done so, the creditor was able to call on a bank letter of credit in the sum of $735,000. The bank, upon making payment under the letter of credit, recouped $735,000 out of the company's credit balances with it, over which it held a charge. Those credit balances would otherwise have formed part of the pool of assets available in the winding up available for division pro rata among creditors, including the particular creditor which remained unsatisfied as to a balance of its debt. 69 The argument put to the Privy Council was that the particular creditor, by taking recovery action in the foreign court that enabled it to call on the letter of credit and thereby to achieve partial satisfaction of its debt, had obtained an inequitable advantage over the other unsecured creditors and, as a condition of proving in the winding up, ought to bring the $735,000 into hotchpot. 70 That argument was rejected. The purpose of the hotchpot principle, it was explained, is to ensure that no creditor obtains a share of the available assets otherwise than as part of the creditor's pro rata share. In the particular case, the $735,000 received by the creditor was not received out of the assets of the company. It was received from the bank, which admittedly thereby became entitled to retain an equivalent amount out of the company's credit balances. But those balances were charged to the bank - and, importantly, had been so charged before the commencement of the winding up - so as to be unavailable, in any event, for the benefit of unsecured creditors to an extent equivalent to the company's secured indebtedness from time to time. On that basis, acceptance of the submission that the creditor should bring the $735,000 into hotchpot would have made available in the winding up assets that had never formed part of what their Lordships called "the estate in liquidation". The Privy Council said (at [26]): "[T]he hotchpot requirement applies only to assets that, under English law, are regarded as forming part of the estate in liquidation. . . . The asset constituting the security never formed part of the liquidation estate. The equity of redemption would, theoretically, have been an asset of the estate but, in a case where the secured debt exceeded the value of the security, would be worthless."

An extension of the hotchpot rule in order to cater for all cases of 'unfair advantage' would be to introduce inherent uncertainty into what ought to be, and at present is, a rule easy to understand and to apply." 72 It was submitted on behalf of the contradictor that application of hotchpot in the present case would involve no more than unprincipled elimination of "unfair advantage". The point made is that "returns" paid to earlier investors were paid out of assets in which later investors - that is, those who contributed to the fund after the "returns" had been paid - never had an interest. That being so, the argument runs, the "returns" were not paid out of an "estate", in the Cleaver sense, in which those later investors had an interest. 73 According to this submission, the hotchpot principle is to be applied (if at all) successively to the fund according to its several reconstitutions. Let it be assumed, by way of hypothetical example, that there were, at inception on 1 January, three contributors, A, B and C; that two new contributors D and E were introduced on 1 February; and that the final two, F and G, subscribed on 1 March. According to the submissions of the contradictor, returns paid otherwise than rateably to all seven contributors would be required to be brought into hotchpot only if made after 1 March, that is, at a time when the fund representing the contributions of all seven had been constituted. There would be no requirement to bring in on 15 March returns paid to A alone on 15 February when there were only five contributors (A, B, C, D and E); but there would, it seems, have been a requirement to bring in those contributions on 28 February when the fund consisted of contributions of the five only. 74 I am of the opinion that this approach fails to afford necessary weight to the nature of a common or collective investment pool. Once a contribution is made to the fund, the contribution ceases to have any identity linked to its contributor. The contributor's rights become proportionate rights in relation to the fund as it exists from time to time, as distinct from rights in respect of specifically traceable assets within it (contrast the solicitor's trust account considered in Re Magarey Farlam Lawyers Trust Accounts (No 3) [2007] SASC 9; (2007) 96 SASR 337). This is the characterisation advocated by Susan Barkehall Thomas in her article "Tracing into an overdrawn mixed bank account" (2004) 12 Insolv LJ 95 at 100-102, citing Law Society of Upper Canada v Toronto-Dominion Bank (1998) 169 DLR (4th) 353. And as Campbell J said in French Caledonia Travel Service in the passage quoted above: "As contributions are made week by a [sic] week, so the interest of each contributor increases; as the fund is expended, so the interest of each contributor is proportionately decreased." 75 It follows that one cannot, in effect, view the common pool as a succession of separate "estates", in the Cleaver sense, each subsisting only until the receipt of some new contribution or the making of some new disbursement causes it to be replaced by another "estate" and with each separate "estate", at a particular point, subjected to a form of independent pari passu entitlement analysis without paying attention to the history of the fund as a whole. 76 It is, I think, of particular relevance that the "returns" were not in truth distributions of profits and were paid inconsistently with the provisions which, in effect, allowed return of capital only upon notice of withdrawal given after the expiration of the minimum investment period. The payment of the "returns" was not in accordance with the basis on which each scheme had been promoted and established. 77 Applying the rationale in the French Caledonia case, personal equities can be seen to exist between the recipients of "returns" and other contributors to a particular scheme causing those recipients to merit a lower priority as to participation in the fund, which relegation will, however, be eliminated if the "returns" are brought into hotchpot. In order to "carry out the strict rights to the fullest extent", to quote the words of Byrne J in Re Printers and Transferrers Amalgamated Protection Society (above), there must be an account of the "returns" in order to ascertain the whole of each remaining fund to which the principle of division in proportion to contributions is to be applied. The recipients of the "returns" must, as against the other persons interested in the pooled fund as a whole, do equity by giving up the advantage of the "returns" before participating rateably in what remains of the fund. 78 The liquidator should therefore proceed according to Method 3 at paragraph [50] above, rather than Method 1 (neither the liquidator nor the contradictor advocated Method 2 - a method that proceeds, by implication, on the false premise that payment out of the "returns" was in accordance with the terms governing the respective schemes). The transfer of Integrity scheme funds to the SPL Cadent account 79 I consider next the question concerning transfer of funds of the Integrity scheme held by PJCB in its Technocash account to the ISPL Cadent account, so that moneys of the Integrity scheme became mixed with moneys of the Super Save scheme already in the ISPL Cadent account. 80 Once it is accepted that contributed funds became, in relation to each scheme, trust moneys, the approach to be taken in relation to the Integrity scheme funds transferred to ISPL's Cadent account becomes clear. 81 It was submitted by the liquidator, and I accept, that, by making the transfer, PJCB committed a breach of trust. Funds received by PJCB from Integrity scheme investors were received on trust to pool them with funds of other Integrity scheme investors and to invest and deal with the pool as a segregated whole. It was contrary to that treatment (and therefore a breach of trust) for part of the funds to be mixed with funds of a different invested pool representing contributions by other persons who had made those contributions on distinct terms involving a different administrator. Once the transfers to the ISPL Cadent account were made, PJCB no longer had any means of recovering the transferred moneys. They had passed beyond its custody and control. That too entailed breach of trust. 82 The fact that a single group of individuals was active in the promotion and operation of both the Super Save scheme and the Integrity scheme means that the funds transferred from the PJCB's Technocash account housing Integrity scheme funds to the ISPL Cadent account were received by ISPL with knowledge of the nature of those funds, of the fact that they formed part of the Integrity scheme, of the fact that contributors to the Integrity scheme had interests in them and of the breach of trust that their transfer involved. I am therefore satisfied that ISPL must be regarded as having received the funds in question as a constructive trustee for the Integrity scheme investors as a group under the first limb of Barnes v Addy (1874) LR 9 Ch App 244. 83 I am also satisfied that ISPL's Cadent account was established and operated in such a way that Cadent became indebted to ISPL in conceptually the same way that a bank becomes indebted to its customer - in other words, that Cadent was not, as against ISPL, a trustee. It was a debtor, with the extent of its liability being measured in accordance with the contractual provisions governing the account. 84 The second issue at paragraph [39] above must be dealt with on the basis that ISPL holds the rights represented by the ISPL Cadent account on trust as to part for the investors in the Integrity scheme and as to the remainder for the investors in the Super Save scheme. 85 When it comes to determining the proportionate entitlements, however, questions arise. Deposits to the ISPL Cadent account were US$6,215,798 of Super Save scheme funds and US$5,440,837 of Integrity scheme funds - a total of US$11,656,635. Payments out were US$1,113,553, all of which went to the administrators of the Super Save scheme. In addition, there were accretions to the account, according to the contractual terms governing it, of US$1,205,613. 86 The liquidator submitted, and I accept, that the credit balance in the ISPL Cadent account should be treated in its own right as a mixed or pooled fund in which interests are held by the Super Save scheme investors as a body and by the Integrity scheme investors as a body. For reasons already canvassed, the respective interests must be taken to be in proportion to the deposits of the respective schemes' funds into the account. This is, however, subject to a question of hotchpot. 87 The Super Save scheme investors, as a group, derived benefit by reason of the payment of US$1,113,553 made out of the ISPL Cadent account. The Integrity scheme investors received no like benefit. In accordance with the principles discussed by Campbell J in French Caledonia Travel Service (above) at [176] and following, proportionate participation in the ISPL Cadent account by the two groups of investors should be on the basis of recognition of the benefit thus already derived by the Super Save scheme group. The US$1,113,553 should thus be brought into hotchpot before the division rateably according to contributions is struck. Miscellaneous matters 88 There is no need to deal in detail with the several miscellaneous matters raised by the liquidator. It is, I think, sufficient to state general principles supporting the directions he seeks. These are: 1. Where funds have been treated as part of one scheme but, on the evidence, are clearly part of the other, they should be recognised as assets of the latter scheme. 2. Where there is doubt as to whether a particular sum appearing to be an asset of one scheme is correctly regarded in that way but no evidence is available either to confirm or negate the correctness of the treatment, the appearance should be accepted. 3. Where funds have been recovered by the liquidator from intermediaries who took "commissions" from the schemes but there is no evidence to link the commissions with particular subscriptions, the recoveries should be apportioned between the schemes according to the respective amounts of "commissions" paid out of the schemes. 4. Where the administrators of one scheme applied funds of that scheme in "purchasing" investments held by a third party in the other scheme, the first scheme should be regarded as having an interest in the second scheme equivalent to that which the third party would have had but for the "purchase". 5. Where a person intending to invest in a particular scheme paid to an intermediary the funds to be invested and those funds never reached the administrators of the relevant scheme but have been recovered by the liquidator from the intermediary (and the person providing the funds has been recognised in the scheme's records as an investor), the person should be regarded as having an interest in the scheme in question commensurate with the recovered moneys and those moneys should be treated as part of the assets of that scheme. 89 These generally stated principles resolve most of the miscellaneous questions. In particular, item 1 above justifies the approach outlined at C1 and C2 of the revised submissions of counsel for the liquidator dated 31 August 2009, item 2 above justifies the approach at C3, item 3 justifies the approach at C4, item 4 justifies the approach at C5 and item 5 justifies the approach at C6, C7 and C8. The remaining miscellaneous matters (C9 and C10) will be appropriately dealt with in the way outlined in the written submissions of counsel for the liquidator. Directions 90 In each separate proceeding, the court will make an order pursuant to s 601EE(2) of the Corporations Act to the effect that Mr Taylor, as the person appointed by the court to wind up the particular scheme, is justified in doing specified things in and for the purposes of the winding up. The substantive content of the orders will be as sought in Mr Taylor's application (adjusted, however, to recognise a payment into court on 19 November 2009 out of funds of the Super Save scheme pursuant to an order made by Austin J on 9 November 2009). 91 Orders thus framed will, of course, not be determinative of rights inter partes should some question subsequently arise. There has not been any definitive decision, in properly constituted proceedings, of those rights - merely, as Austin J put it in Australian Securities and Investments Commission v Tasman Investment Management Ltd [2006] NSWSC 943; (2006) 202 FLR 343, a decision that there is "a reasonable basis" for the liquidator's proceeding in the way he proposes. 92 I will ask that counsel for Mr Taylor bring in appropriate short minutes so that orders may be made in chambers. **********

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