Supreme Court of WA|2001-07-03|Before: Owen J

Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd & Anor [2001] WASC 177 (3 July 2001)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION -v- KNIGHTSBRIDGE MANAGED FUNDS LTD & ANOR [2001] WASC 177

MATTER : Section 601ND, s 601NF and s 601EE of the Corporations Law of Western Australia

BETWEEN : AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Practice and procedure - Discovery and inspection - Joinder of parties - Turns on own facts

Apache Northwest Pty Ltd & Ors v Western Power Corporation [1998] WASCA 127

ASC v Melbourne Asset Management Nominees Pty Ltd [1994] FCA 1031; (1994) 49 FCR 334

Cardinia Pty Ltd v Yu Feng Pty Ltd, unreported; SCt of Qd; 21 May 1999

Homestyle Pty Ltd v City of Belmont [1999] WASCA 59

Horwath Corporation Pty Ltd v Huie [1999] NSWC 583

Hoskins v Van Den Braak (1998) 43 NSWLR 290

Mantary Pty Ltd v Brookfield Breeding Co Pty Ltd [1992] 1 Qd R 91

Maronis Holdings Ltd v Nippon Credit Australia Ltd [2000] NSWC 138

National Employers' Mutual General Association v Waind & Hill [1978] 1 NSWLR 372

News Ltd v Australian Rugby League [1996] FCA 870; (1996) 64 FCR 410

Pegang Mining Co Ltd v Choong San [1969] 2 MLJ 52

Quilter v Heatly (1883) 23 Ch D 42

Rafidain Bank v Agom Universal Sugar Trading Co Ltd [1987] 1 WLR 1606

Re GB Nathan & Co Pty Ltd (In Liq) (1991) 24 NSWLR 674

Smith v Harris (1883) 48 LT 869

1 OWEN J: The defendants were involved in arranging what are loosely called pooled mortgage schemes (among other things). Some of the mortgage loans came (arguably) under the umbrella of a registered managed investment scheme. Others (arguably) did not. The substantive proceedings are an application by the plaintiff ("ASIC") for:

(a) declarations in relation to the management of certain of the loans;

(b) the winding up of the managed investment scheme or schemes;

2 The application with which these reasons deal is one by an investor who opposes the relief claimed by ASIC. It is an application for inspection and discovery.

3 At the conclusion on the hearing on 19 June 2001 I indicated that these reasons would be brief. This is because of the need to keep to the timetable that emerged from previous directions hearings and not to delay the progress of the substantive matter.

4 Knightsbridge Managed Funds Ltd ("KMF") and Knightsbridge Finance Pty Ltd ("KFP") are part of a group of companies involved in the finance sector, particularly the business of arranging loans. The loans fall into two broad categories. Some were administered under a registered managed investment scheme of which KMF was the responsible entity. KMF delegated its management duties to KFP. The second category is loans arranged by KFP outside the registered scheme. KFP arranged the mortgages by matching investors with borrowers.

5 Loans were generally secured by first and other ranking mortgages over land. In most cases loan funds were obtained from multiple investors whose money was pooled in order to accommodate advances to borrowers. Generally speaking, investors held their respective interests in the mortgages as tenants in common in proportion to the capital amount advanced. On some occasions the registered mortgagee was KFP, which held the security on trust for the investors. KFP received and distributed interest payments (after deducting fees) and, where necessary, acted on behalf of investors to enforce rights arising under the mortgages.

6 For reasons which I do not need to go into, the arrangements fell apart. In February 2001 the Finance Brokers Supervisory Board appointed a supervisor to KFP. On 6 March 2001 KMF's security dealers licence was revoked by ASIC. There is affidavit evidence from Giovanni Carrello (to whom I will refer in more detail later) proffering the opinion that KFP was insolvent from 1 November 2000.

7 In December 2000 ASIC commenced proceedings to wind up KFP. However, the company proposed a deed of company administration. Again in circumstances that I do not need to relate, the voluntary administration came to an end and Carrello was appointed liquidator on 15 May 2001. KMF appears still to be operating in voluntary administration with Carrello as its administrator.

8 On 14 March 2001 ASIC initiated these proceedings. On 29 May 2001 I gave leave to ASIC to amend the application. As I understand it, ASIC made the application to amend after discussions with the investors, or some of them, in order to take into account some of their concerns. As amended, the gravamen of the application can be summarised as follows.

9 It is in two parts. The first part deals with what are termed "Scheme Loans". These are the mortgage arrangements that were administered under the registered managed investment scheme. The loans are itemised in the first schedule to the application. ASIC seeks a declaration that the managed investment scheme comprises the management of the loans in the first schedule. It also seeks an order that the scheme be wound up and that Carrello be appointed liquidator with specified powers and duties. Paragraph 5 of the application seeks an order the effect of which is that if all investors in relation to a particular loan agree, that loan would cease to be part of the scheme and the liquidator would be discharged from further responsibilities in relation to it.

10 The second part of the application deals with mortgage arrangements that fall outside the registered scheme. They are itemised in the second schedule. ASIC seeks a declaration that the management of the loans in the second schedule (with nominated exceptions) comprises an unregistered managed investment scheme. It also seeks an order that the unregistered schemes be wound up and that Carrello be appointed liquidator with specified powers. Paragraph 10 is to the same effect in relation to the unregistered schemes as par 5 is for the registered scheme.

11 At the risk of oversimplifying the matter, the grounds on which ASIC seeks the orders include the issues which resulted in the appointment of the Supervisor, questions about the solvency of KFP, alleged breaches of the managed investment scheme constitution and questions about the risk of capital losses, especially in some of the non-scheme loans.

12 The application is opposed by some of the investors. Some individual investors feel (and they have expressed these feelings in affidavits) that the best course is to allow them (the investors) to handle the recovery of the loan moneys as it will be quicker and less expensive than a formal liquidation. The opposition of one of the investors, Romana Kay, has been developed in more detail. Again at the risk of oversimplifying the matter, Kay says a number of things:

(a) the registered scheme is not, in reality, a managed investment scheme and the fact that ASIC registered it as such is of no moment;

(b) the administration of the non-scheme loans is not a managed investment scheme and so was not required to be registered;

(c) if they are schemes then they are multiple schemes and it would not be appropriate to appoint one person as liquidator of them all;

(d) the investigations of the matter to date by Carrello have not been carried out with a sufficient degree of efficiency to justify him being appointed as liquidator;

(e) the trust account operated by KFP was administered in such a way (including it going into deficit, at least in relation to individual ledgers if not on a global basis) that there will inevitably arise conflicts between claimants in the various loan arrangements. It would therefore be inappropriate for one person to be the liquidator controlling multiple arrangements.

13 It is not necessary, and nor would it be appropriate, for me to make any comment whatsoever concerning the merits of ASIC's application or of the opposition to it. I am concerned solely with procedural matters. The resolution of the substantive application must await another day. I have to ensure that it will go to trial in a way that will give interested parties a fair and reasonable opportunity to bring before the Court matters that are relevant and are considered necessary for its proper disposal.

14 The application for discovery and inspection is brought by Kay. It is in two parts. First, she seeks, under O 26 r 8(2), an order for inspection of documents referred to in the various affidavits. Secondly, she seeks an order for discovery in relation to nominated classes of documents.

15 As a general statement, I think the solicitors for Kay have accurately stated the legal principles in their letter to ASIC of 5 June 2001, which is an exhibit to the affidavit of Douglas Solomon sworn 8 June 2001. But neither discovery nor inspection is an absolute right in litigation of this nature. Order 26 r 9 provides that the Court "may" order inspection. It is a matter of discretion. The discretion falls to be exercised judicially and according to established principles stemming from the authorities and from the rules. Nonetheless, the discretionary aspect should not be overlooked. The factors governing the exercise of the discretion include the following:

16 1. Regard must be had to the nature of the proceedings. This is a Corporations application. Generally speaking, they proceed on affidavit material rather than on pleadings and oral evidence. It is not usual (although the power exists) to order discovery in actions that proceed by way of affidavit: Re Borthwick [1948] Ch 645.

17 2. There is a strong pointer to the correct approach in O 26 r 11: an order for production of documents should be made only if it is necessary for disposing fairly of the case or for saving costs.

18 3. It is necessary to identify and bear in mind the precise nature of the relief sought and the issues that have been joined in the proceedings.

19 4. The power exists to limit discovery in the way set out in O 26 r 7(3).

20 Paragraph 2.1 of the summons seeks discovery generally of documents relating to trust account misfeasance. In relation to the trust account problem, the starting point is the statement made by Carrello in par 17 of his affidavit sworn 13 March 2001:

"There are indications that funds have been removed from the trust account in an unauthorised manner, however from investigations to date these funds seem to have subsequently been replaced. This appears to primarily relate to the period prior to 30 May 2000."

21 In par 12 of his affidavit of 24 May 2001 Carrello says that when he swore the earlier affidavit he had in mind two transactions. One was a loan to Sulcon Pty Ltd. The second was a cheque for $10,000 drawn on the trust account in favour of Rosamel Holdings Pty Ltd on 31 December 1998. A deposit was banked to the trust account on 28 January 1999 to bring the account back into credit. In par 13 of the second affidavit Carrello also refers to a transaction involving Southern Wine Corporation over an investment of $600,000. In par 14 Carrello says:

"Upon the appointment of the Supervisor and so as not to duplicate effort, I relied on the Supervisor to continue investigations into the trust account. I am unaware of any instance of intermingling of trust funds. At this time there appears to be no conflict between the interests of investors in different loans."

22 I think it is common ground that a misapplication of trust funds (if that be the case) would be a relevant consideration for the Court to take into account in determining whether to place the scheme (or schemes) into liquidation and appoint a common liquidator. If there had been a mixing and misapplication of trust funds it would not be easy to characterise the arrangements as being neatly divisible into separate schemes. The potential for claims and cross claims between the various loan arrangements would also create difficulties for a liquidator and therein lies the real mischief. On one view of it, if there has been a problem with the trust account, the best course may well be to appoint an independent third party (in this case a liquidator) to administer the last rites to the arrangements. The alternative of allowing the investors to carry out their own administration of the funds, assuming for the moment that there has been trust account misfeasance, may be productive of serious conflicts between rival claimants.

23 It would not be legitimate to use as a starting point that Carrello was not up to the task, or was unlikely to be up to the task of carrying out the administration. He is an experienced insolvency administrator and is an officer of the Court. His opinion, to the extent which the investigations to date permit an opinion to be proffered, that there has been no misapplication of trust funds, must be given some weight. That is not to say that it is unchallengeable or that it must necessarily and inevitably be accepted. This is a matter for another day. But at the interlocutory stage it is not an opinion that can lightly be dismissed.

24 There is a strong public interest in resolving this issue as quickly as possible. As has been pressed upon me on many occasions, a significant number of the investors are elderly and in indifferent health. They have been left in an emotional and financial predicament because of the uncertainty about the manner in which the affairs of KMF and KFP are to be brought to finality.

25 This is a factor that deserves considerable weight. The first and fundamental issue is whether a liquidator should be appointed. If such an appointment is to be made, the sooner it happens the better. If not, the parties need to know so that they can go about the task of regularising their respective financial interests with a degree of certainty.

26 In my view, it would not be in the interests of justice to allow the proceedings which are the subject of this application to become a wide-ranging inquiry into the affairs of KFP and KFM and the various loan arrangements. That is properly the subject of the administration in the liquidation (if such a course finds favour with the Court when the substantive matter comes to hearing) or by some other investigative means authorised by the Corporations Law or otherwise according to law. On the other hand, the objectors must have a reasonable opportunity to put a case in opposition. I have therefore decided that there should be no wide-ranging discovery or inspection permitted of the documents generally or of the operation of the trust account generally. However, I will examine each situation raised by the counsel for Kay to see if a case has been made out for interlocutory relief in the form of discovery or inspection.

27 Counsel for ASIC submitted that this arrangement should not be made the subject of an order because the loan had been repaid. I do not agree. If it be the case that the Sulcon account was operated in breach of the proper operating procedures it may be indicative of a trust account irregularity that infects other arrangements.

28 The document entitled "Sulcon Pty Ltd Split 1694 Reconciliation", which is Annexure HCM 42 to the affidavit of Henry Morris sworn 27 November 2000 in COR 320 of 2000, raises as many questions as it answers. It is true that the end result of the reconciliation is that the credits exceed the debits. But according to the document the ledger had debit entries before it had any credit entries and from 1 November 1999 to 18 November 1999 was overdrawn. This is a legitimate subject for inquiry.

29 I am prepared to order discovery of documents that are directly relevant to the question whether the trust account for the Sulcon loan operated in debit between 1 November 1999 and 18 November 1999. The choice of the words "directly relevant" is deliberate.

30 The matters raised by counsel for Kay in relation to this loan are sufficient to justify discovery. There is uncertainty about the amount raised from investors, the amount the subject of a promise of repayment and the amount or amounts actually repaid. I am prepared to order discovery of documents that are directly relevant to the question of the true nature and extent of this loan arrangement and the operations on the trust account in relation to it.

31 This does not appear to me to raise an issue of trust account misfeasance. It is about a so-called "tax effective" investment arrangement. True it is that the information provided from time to time is inconsistent and confusing. However, I think this is a legitimate area for inquiry in the course of the finalisation of the affairs of the companies and the various loan arrangements. It is not necessary to investigate them in the context of this substantive application.

32 The documents sought in par 1.5 of the Schedule to the summons should be produced for inspection. The fact that the $10,000 withdrawal was later credited to the account may (but does not necessarily) cure the problem. In this respect it is similar to the Sulcon loan.

33 The first question that will have to be answered is whether the registered and unregistered schemes are managed investment schemes and thus amenable to winding up orders under Pt 5C.9 or s 601EE. This is put in issue by Kay.

34 In relation to the registered scheme, one of the issues is whether there is one overriding scheme or whether each loan arrangement represents a separate scheme and whether it is (or they are) managed investment schemes. In my view, the documents sought in par 2.2 of the application for discovery are relevant to that issue and should be discovered.

35 In my view, it is not necessary to have a broad-ranging interlocutory investigation of the relationship between Westralian, KFP and KFM in order to decide whether to place the schemes in liquidation or to appoint a common liquidator. The relief asked for in par 2.3 is declined.

36 I make the same comment in relation to unregistered mortgagees. Of course, it will be necessary to identify all of the registered and unregistered claimants in relation to each individual loan arrangement. But I cannot see why it is necessary to do so at this stage. The relief claimed in par 2.4 is declined.

37 As I have already said, the legal basis on which Kay seeks inspection of the documents in the Schedule under O 26 r 8 is not seriously in dispute. But the discretionary features to which I have already referred are important. It is not uncommon in complex situations such as this for the factual matrix to be set out in detail. This will often involve references to documents, both directly and indirectly. But the mere fact a document is referred to will not, of itself, make its production for inspection necessary for the fair disposal of the proceedings.

38 Items 1.2 and 1.8 are general claims in relation to the trust account and production will not be ordered. Items 1.4, 1.5 and 1.6 have already been dealt with.

39 Item 3.7 has probably been answered by the amplification of the comment in the affidavit of 24 May 2001. To that extent it has been dealt with earlier in these reasons. However, if as a result of further investigations there are other examples of removal of moneys from the trust account in an unauthorised manner (which have not been included in pars 12 to 14 of the later affidavit) the documents should be produced.

40 Items 1.1, 1.3, 3.4, 3.5 and 3.6 seem to me to be part of the factual matrix but are not necessary for the proper disposal of the substantive application.

41 Items 1.7, 3.1, 3.2 seem to me to be part of the factual matrix but are not necessary for the proper disposal of the substantive application.

42 Item 3.3 (the custodial agreement entered into between KFP and KFM) has already been disclosed as Annexure PFK 6 to the affidavit of Peter Knight affirmed 13 March 2001. This is an unsigned copy. If a signed copy has been located, it ought to be produced.

43 The law concerning joinder of parties is not in dispute. In The State of Victoria v Sutton [1998] HCA 56; (1998) 195 CLR 291 McHugh J said at [77 - 78]:

"The rules of natural justice require that, before a court makes an order that may affect the rights or interests of a person, that person should be given an opportunity to contest the making of that order. Because that is so, it is the invariable practice of the courts to require such a person to be joined as a party if there is an arguable possibility that he or she may be affected by the making of the order. That practice also assists in avoiding duplication of hearings on the same issues and in avoiding the spectre of inconsistent decisions by courts or the judges of the same court. In Pegang Mining Co Ltd v Choong Sam Lord Diplock, delivering the opinion of the Judicial Committee of the Privy Council, said:

'In their Lordships' view one of the principal objects of the rule is to enable the court to prevent injustice being done to a person whose rights will be affected by its judgment by proceeding to adjudicate upon the matter in dispute in the action without his being given an opportunity of being heard ... a better way of expressing the test is: will his rights against or liabilities to any party to the action in respect of the subject matter of the action be directly affected by any order which may be made in the action?'

The test for determining whether a person is a necessary party has usually arisen in the context of a person seeking to join proceedings rather than a failure to join a relevant person. But the same principle must apply in both situations. Thus, in News Ltd v ARL, the Full Federal Court held that an order 'which directly affects a third person's rights against or liabilities to a party should not be made unless the person is also joined as a party. If made, the order will be set aside'."

44 However, it remains necessary to look at the exact nature of the issues and the relief claimed. In this case, the orders sought contain an "opt out" provision. Admittedly, it is not something that an individual investor, acting alone, could take advantage of. But it remains a possibility and, read strictly, the relief sought does not necessarily and permanently affect rights and interests. It must also be said that the gravamen of the relief claimed is to put in place a regime that is recognised by statute as a legitimate means to administer a scheme in the public interest and in the private interests of those who have unmet claims. The rights of the individual investors will not be entirely exhausted even if the relief is granted. They will have, for example, the right to call on the courts to exercise the supervisory jurisdiction which the Corporations Law confers on them in relation to the activities of liquidators.

45 There is then the practical aspects of how best to inform the investors and give them the chance to participate to whatever extent they feel is appropriate to their circumstances. They have already been given notice of the proceedings. If, in the course of procedural directions, notice of the final substantive hearing were to be given to them with an invitation to participate, I believe justice would properly be served. The investors who are presently before the Court without legal representation have all submitted that they should not be joined. They cite the fear of adverse costs orders (admittedly an unlikely event) and the fear and distress that could be caused to some elderly investors if a formal notice of joinder were to be given to them. I accept that I have no affidavit evidence to that effect but it is a constant refrain that has come through the "finance brokers litigation" and it is something to which I am prepared to ascribe weight.

46 I also note O 81G r 21(1) which appears to authorise the Court to allow an interested person to be heard without becoming a party.

47 In the peculiar circumstances of this case I do not believe that I am obliged as a matter of law to order the joinder of the investors generally, either individually or by way of the cumbersome and unsatisfactory procedures embodied in O 18 r 12 and r 13 of the Rules of the Supreme Court. As a matter of discretion, I think the process of giving notice to the investors and inviting them to participate if, and to the extent, they wish, will adequately serve the ends of justice.

48 Discovery and inspection will be ordered to the extent set out in these reasons.

49 Unless any party gives notice that she, he or it wishes to be heard as to the precise form of the orders, within 14 days ASIC is to give discovery on oath to Kay and make available for inspection by Kay the various documents and classes of documents in accordance with these reasons for decision. As both parties have been partially successful and partially unsuccessful, the costs should be reserved to be dealt with as part of the costs of the substantive proceedings.

Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd & Anor [2001] WASC 177

At a glance

Court

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Judgment (85 paragraphs)

Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd & Anor [2001] WASC 177 (3 July 2001)

Parties

Cases Cited (7)