Australian Securities and Investments Commission v Linchpin Capital Group Ltd

The Unregistered Fund 8 In general terms ASIC alleges Linchpin has operated an unregistered managed investment scheme, referred to as the "Investment Income Opportunity Fund" (the Unregistered Fund), and was not authorised to do so because it did not hold a relevant AFSL. Whilst there may be a debate about whether the Unregistered Fund was required to be registered under the Act, it is ASIC's contention that it has not been lawfully operated and, in fact, it has been conducted in a way which imperils the investments made by its members. Those are two different matters. The first concerns the lawfulness of activities engaged in by Linchpin in the course of operating the Unregistered Fund. The second concerns the veracity of the dealings in which Linchpin engaged. 9 It is alleged that from about January 2014, Linchpin issued an Information Memorandum offering investors the opportunity to purchase units in the Unregistered Fund. By the terms of the memorandum, Linchpin was to be an Authorised Representative operating under an existing AFSL and was also to be the Responsible Entity (RE) and trustee of the fund. Whilst the number of members of the fund was initially identified as being 20, it is apparent that many more members have subscribed. The stated investment strategy, found in section 3 of the Memorandum, was: [t]o invest funds progressively that [sic] achieves a diversified loan portfolio across property and corporate sectors on a secured basis that are income producing. The lending policy and process is outlined in the Lending Manual. The Fund also seeks to hold cash and cash equivalents to generate income and provide liquidity to the Fund. 10 That description of a diversified investment portfolio was explained in cl 5.3 and cl 5.4 as follows: 5.3 …The Fund will invest in a range of diversified assets. The Fund will invest in predominantly mortgages in particular commercial and development loans, secured by registered mortgages, commercial and corporate loans secured by registered fixed and floating charges and/all economic contractual interests. The Fund may also make loans to or invest in similar Managed Investment Schemes and in cash held on deposit with Banks or other financial institutions. 5.4 Those loans will be: • Secured by either registered mortgages and/or security interests and • Any other additional securities required by the Credit Committee. Those additional securities may be in the nature of floating and/or fixed debenture charges, guarantees and/or the provision of collateral securities. • Invested in cash. It was legitimately argued that other provisions of the Information Memorandum could have given an objective reader the further impression that the investments of the fund would be across a range of loans and assets. 11 The Information Memorandum, whilst identifying that the fund might enter into related party transactions, indicated that any related party loans would be made on an "arm's length" basis and in accordance with the conflict policies of the RE. 12 ASIC asserts that Linchpin has issued 5.25 million one dollar units in the Unregistered Fund which, if they were issued at par, presumably means $5.25 million has been raised. It is apparent, however, that Linchpin, as trustee of the Unregistered Fund, has also received substantial funds by way of loan or subscription from a fund operated by the second defendant, Endeavour. ASIC alleges that money from the Unregistered Fund has been used by Linchpin to make loans to itself and to its subsidiary company, Beacon Financial Group (Beacon) so as to allow them to expand and conduct their businesses. In total it appears that as the RE and trustee of the Unregistered Fund, Linchpin had lent approximately $15 million to itself and subsidiaries including Beacon and the further company, Risk and Investment Advisors Australia Pty Ltd (RIAA). The source of funds for these loans seems to have been, in part, the registered managed investment scheme operated by Endeavour which is another of Linchpin's subsidiaries. The loans have been documented and, on their face, appear to be for a duration of one year although they may be extended. Linchpin and Beacon have provided security for their loans in the form of charges over their shares and shares held in subsidiaries although those securities have not been registered under the Personal Property and Securities Act 2009 (Cth). The realisable value of the securities is not known. 13 It also appears that personal loans were made by Linchpin to two of its directors, Mr Daly and Mr Raftery. The security for each of these loans was over the shares held by each in Linchpin. Again, these securities have not been registered. 14 Although the purpose of the loans made by Linchpin to itself was identified as being to "fund acquisitions" to expand its business, ASIC has ascertained that at least some of the money has been used to meet Linchpin's ordinary business expenses. It is clear that the directors were aware that this was so and, as directors of the trustee / RE, they authorised the drawdown on the loans in favour of Linchpin for these purposes. It also seems that other funds in the Unregistered Scheme have been transferred to Beacon for use by that company in its ordinary business activities. It is a matter of concern that this transfer of money may not have been documented. 15 Despite the existence of the obligation to lend to related parties only by arm's length transactions and after compliance with conflict of interest policies, Linchpin has not been able to produce any documents showing that any consideration was given to these matters by its directors in relation to these loans. That is not surprising given that the directors of Beacon and RIAA (Messrs Daly, Williams and Nielsen) constitute three of the four directors of Linchpin. 16 In essence, ASIC submits that Linchpin has used the money in the Unregistered Fund to finance the expansion and operation of its own business and those of its subsidiaries in disregard of the investment strategies in the Information Memorandum. On the material available there is substantial support for that submission.

Did Linchpin require an AFSL to operate the Unregistered Fund? 17 ASIC's submissions in relation to this issue were somewhat difficult to follow on occasion. As is discussed below the affidavit evidence of Ms Gubbins suggested that at no time was Linchpin the holder of a relevant AFSL which would have authorised it to operate a managed investment scheme. In ASIC's written submissions the argument advanced was, even if the scheme was unregistered and did not require registration, the company was required to hold an AFSL for the purposes of dealing with interests in the scheme if the scheme had more than 20 members. Why that was the case was not explained in the course of the hearing. A raft of sections from the Act were set out in an annexure to the written submissions although there was no elucidation as to how they operated or how they supported ASIC's submissions. This was somewhat unusual given that ASIC's case against the company was substantially founded upon its conduct of operating a managed investment scheme without authority. The manner in which the submissions on this topic were left at the end of the oral hearing was unsatisfactory. However, as a result of the filing of additional material and submissions by Linchpin, ASIC has responded with further submissions which clarify the position. 18 Linchpin submitted that by reason of ss 610ED(1) and (5) of the Act there was no prohibition on it operating the unregistered fund. Those provisions provide: [Where scheme must be registered] (1) Subject to subsection (2), a managed investment scheme must be registered under section 601EB if: (a) it has more than 20 members; or (b) it was promoted by a person, or an associate of a person, who was, when the scheme was promoted, in the business of promoting managed investment schemes; or (c) a determination under subsection (3) is in force in relation to the scheme and the total number of members of all of the schemes to which the determination relates exceeds 20. … [Prohibition] (5) A person must not operate in this jurisdiction a managed investment scheme that this section requires to be registered under section 610EB unless the scheme is so registered. 19 Linchpin's submission was that the section must be taken as meaning that there is no prohibition upon operating a scheme which does not require registration. Apart from its now reliance on an apparent concession by ASIC that the fund did not require registration, Linchpin sought to advance an argument that the Unregistered Fund did not require registration because it fell within the scope of Div 2 of Pt 7.9 of the Act. It argued the fund fell within that Division as the members were all "Sophisticated Investors" (being not "retail clients") to whom the interests in the fund could be issued without the giving of a Product Disclosure Statement. The starting point of this argument is s 601ED(2) which provides: [Where scheme need not be registered] (2) A managed investment scheme does not have to be registered if all the issues of interests in the scheme that have been made would not have required the giving of a Product Disclosure Statement under Division 2 of Part 7.9 if the scheme had been registered when the issues were made. Pausing there, it is important to observe that the points of temporal relevance are those when each and every interest in the fund is issued. It follows that, if on all of those occasions, the giving of a Product Disclosure Statement under Division 2 was not required, the scheme would not have to be registered. 20 The section in Div 2 of Pt 7.9 relevant to the issuing of interests in a scheme would appear to be s 1012B which is titled, "Obligation to give a Product Disclosure Statement - situations related to issue of financial products". In relation to the operation of this section it is relevant that an interest in an unregistered managed investment scheme is a "financial product" within the meaning of that expression as defined in s 763A and is specifically included in that concept by s 764A(1)(ba). As to the main situations in which a Product Disclosure Statement is required s 1012B(3) provides: 1012B Obligation to give Product Disclosure Statement - situations related to issue of financial products Section sets out issue situations in which Product Disclosure Statement required … The main issue situations (3) A regulated person must give a person a Product Disclosure Statement for a financial product if: (a) the regulated person: (i) offers to issue the financial product to the person; or (ii) offers to arrange for the issue of the financial product to the person; or (iii) issues the financial product to the person in circumstances in which there are reasonable grounds to believe that the person has not been given a Product Disclosure Statement for the product; and (b) the financial product is, or is to be, issued to the person as a retail client. The Product Disclosure Statement must be given at or before the time when the regulated person makes the offer, or issues the financial product, to the person and must be given in accordance with this Division. 21 It seems that Linchpin's argument was that the interests in the Unregistered Fund were not issued to the members "as retail clients" with the consequence that sub-paragraph (b) was not satisfied such that the giving of Product Disclosure Statements was not needed. It is said that, in contradistinction to "retail clients", the members of the scheme were "Sophisticated Investors" at the time of the issuing of the interests. To provide factual support for that contention Mr Nielsen, a director of Linchpin, deposed that there are 41 investors in the Unregistered Fund; no fresh investments were received since December 2017; all investors completed a "Sophisticated or Professional Investor Certificate" before they were issued with an interest; Linchpin assumed no role in the verification of the investor process; and, the last direct investment from investors was received in June 2015. It seems that the investments between June 2015 and December 2017 occurred as a result of investments from Endeavour as the RE of the Registered Fund or, perhaps, reinvestments by existing members. 22 The foundation of the argument that the members were "Sophisticated Investors" and not "retail clients" is s 761GA of the Act. That section provides, inter alia, that a financial product is not provided by one person to another as a "retail client" if certain requirements are fulfilled. Those requirements include the person giving the financial product being satisfied on reasonable grounds, that the person receiving the financial product has a certain degree of experience and capacity in relation to investing in financial products; i.e. a sophisticated investor. It would seem that the Sophisticated or Professional Investor Certificates to which Mr Nielsen referred and annexed to his affidavit were intended to satisfy this requirement. On the basis that all members signed such certificates it seems to be argued that, for the purposes of s 601ED(2), there was no need to provide a Product Disclosure Statement to any of them. 23 However, another of the mandatory requirements of s 761GA is that the person giving the financial product is a "financial services licensee". That expression is defined as meaning "a person who holds an Australian financial services licence". The central provision concerning the obligation to hold an AFSL in respect of a financial services business is s 911A(1) which provides: (1) Subject to this section, a person who carries on a financial services business in this jurisdiction must hold an Australian financial services licence covering the provision of the financial services. 24 The concluding words of that section are important as here the provision of financial services by Linchpin was the sale or issuing of the financial product, being interests in the Unregistered Fund. 25 One of the changes made to the Act by the Financial Services Reform Act 2001 (Cth) was the introduction of a single licencing system which replaced the erstwhile system of a variety of different licences for particular financial dealings. The present system has only one permit, being an AFSL, although the scope of activities in which a holder is entitled to engage is limited to those granted on and by the licence. The mere fact that a person holds an AFSL does not have the consequence that they are entitled to engage in the provision of all financial services. They are restricted to providing those for which they are authorised under the terms of the AFSL. 26 One of the significant exceptions to the requirement that a person hold an AFSL is where the person acts as the "authorised representative" of a holder: s 911A(2)(a). However, the activities which the authorised representative might legitimately engage in are those which are both covered by the AFSL of the holder and assigned to the representative. 27 The evidence of Ms Gubbins, which was uncontested, showed that Linchpin did not hold an AFSL at the times when it issued the interests in the Unregistered Fund. However, Ms Gubbins did observe that, at least for some of the time, it was an authorised representative of The Financiallink Group Pty Ltd (TFG) which did hold an AFSL. The details of that AFSL were attached to Ms Gubbins' affidavit and revealed that TFG was authorised to provide financial product advice for, inter alia, interests in managed investment schemes. It also authorised the holder to deal in a financial product by: applying for, acquiring, varying or disposing of a financial product on behalf of another person in respect of the following class of products: … (D) interests in managed investment schemes. 28 The appointment of Linchpin as the authorised representative of TFG, which is also annexed to the affidavit, purported to give all of TFG's authorisations to Linchpin. 29 Ms Gubbins points out in her affidavit that the AFSL held by TFG did not authorise it to operate a managed investment scheme and, therefore, the authorisation of Linchpin did not permit it to operate a managed investment scheme. I accept that construction of the terms of the AFSL held by TFG. The question with which s 601ED(2) is concerned is the "issuing" of interests in a managed investment scheme. That is not something covered by the authorisations in TFG's AFSL. Whilst it would have permitted the holder and any authorised representative to apply for, acquire, vary or dispose of an interest in a managed investment scheme on behalf of another person, it did not authorise issuing interests in such a scheme. The important consequence of this is, whilst purporting to act as the authorised representative of TFG, Linchpin acted beyond the scope of its authority which amounted to a contravention of s 911B of the Act. 30 Somewhat curiously, the defendants now admit that Linchpin did require authorisation under an AFSL in order to issue interests in the Unregistered Fund and it did not have it at all relevant times. In an affidavit of Mr Raftery filed and read on 25 July 2018, it is said that Linchpin issued interests in the fund after October 2016 in ignorance of the fact that its status as the Authorised Representative of TFG had been cancelled. That seems to acknowledge it had been issuing interests since that time and that some of the interests in the Unregistered Fund were not issued at a time when Linchpin was licenced or authorised to do so. 31 The submissions of the defendants proceeded upon the tacit assumption that the status of Linchpin as the Authorised Representative of TFG authorised it to "issue" interests in the fund. As the discussion above shows, that was not the case. Mr Raftery's affidavit discloses that Linchpin has now been appointed as the Authorised Representative of Endeavour. Endeavour's AFSL authorises the "issuing" of interests in managed investment schemes being something which was absent from TFG's AFSL. So, now at least the activities in which Linchpin is authorised to engage as a representative, include the issuing of interests in managed investment schemes, but it is apparent that this was not the case when all interests in the fund were issued. 32 The effect of the above discussion is that Linchpin did require an AFSL, or authorisation under one, to issue the interest in the Unregistered Fund. On the material there is a rather strong case that it did not hold a relevant AFSL, nor was it relevantly authorised at any time to do that. At the least, ASIC has established a prima facie case that this is so and that Linchpin's conduct amounted to a contravention of s 911A. Similarly, it is likely to have been a contravention of s 911B. If these are established the issuing of interests by Linchpin amounted to the commission of an offence under s 1311(1). I accept ASIC's submission that this is a serious matter and is not ameliorated by resort to inadvertence. 33 The above discussion also demonstrates that Linchpin's assertion that the Unregistered Fund did not have to be registered cannot be sustained on the grounds advanced. Contrary to the defendants' submissions, on the material before the Court, s 761GA was not satisfied with the consequence it could not be said the members did not receive their interests as "retail clients". Whether another provision would justify the fund not being registered is not necessary to decide. In their written submissions handed to the Court on 25 July 2018, the defendants purported to rely on what was said to be ASIC's acceptance that the fund did not have to be registered. I am not at all certain that is an apt description of ASIC's position. Under questioning from the Bench, Ms Hindman QC for ASIC, identified that her client was not then alleging the Unregistered Fund had to be registered, rather that, for the purposes of the application, ASIC did not contend the fund had to be registered as that was not a contravention which it was alleging. ASIC was contending that because of the number of investors in the scheme, Linchpin had to be licenced and was subject to a number of duties under the Act, that it was not entitled to be the trustee of the unregistered fund even if all of the members were sophisticated investors. Although Ms Hindman QC seemed to accept at one stage the proposition that the fund did not have to be registered, I apprehend, in the context of the discussion, all that was being said was that ASIC was relying on the fact that Linchpin was required to have authorisation under an AFSL to issue interests in the fund and that it was not basing its arguments on the assertion that the fund should have been registered. In any event, whether the Unregistered Fund ought to have been registered is not an issue in the proceedings. 34 ASIC has established that Linchpin has contravened ss 911A and 911B, at least to the extent of raising a prima facie case. The defendants did not suggest the activities of Linchpin fell within any of the exceptions in s 911A(2).

Misleading or deceptive conduct 35 ASIC has also alleged that Linchpin has engaged in misleading or deceptive conduct in the provision of financial services in contravention of s 1041H of the Act or s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). The foundation of this allegation is, in the first instance, that it made misleading statements in the Information Memorandum to the effect that it had a conflict of interest policy when it did not; that it would invest funds in accordance with a lending policy when it had no such policy; and, that funds would be invested in a diverse portfolio of loans with registered security when that was not intended. On the evidence those allegations appear to have been established and the defendants did not contend to the contrary. 36 ASIC also asserts Linchpin engaged in misleading conduct by its omission to inform members of the Unregistered Fund: (a) that the Unregistered Fund was used to fund acquisitions by Linchpin through loans with related parties; (b) the nature and extent of those loans; and (c) that there was no registered security in respect of these loans. 37 Whilst there can be little doubt that circumstances may arise in which a failure to give information can be misleading conduct: Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 at 453; Australian Securities and Investments Commission v PFS Business Development Group Pty Ltd (ACN 106 761 826) (2007) 57 ACSR 553, [362]: on the material that is presently available, there is insufficient evidence the members would have expected to be informed of the matters identified. Whilst additional facts might ultimately establish this aspect of the claim, for present purposes I do not rely upon it.

The contraventions are serious 38 Nevertheless, the unauthorised issuing of interests in the Unregistered Fund is a serious matter and a substantive contravention of the Act. The manner in which the Unregistered Fund has been operated is also a matter of some concern given that the bulk of its funds have been invested in related party loans with no registered security. The investment of the funds in that manner does not appear to be in accordance with the Information Memorandum and the circumstances indicate that this is likely to have given rise to breaches of trust and fiduciary duty.

The Registered Fund 39 By the use of money from the Unregistered Fund, Linchpin acquired Endeavour. In May 2015 the latter established a second fund called the "Investport Income Opportunity Fund" (the Registered Fund) which was registered under the Act as a managed investment scheme. Endeavour was the RE and trustee of that fund and lodged a Constitution and Compliance Plan with ASIC in relation to it. It has produced to ASIC a Public Disclosure Statement (PDS) which indicates it was issued on 24 June 2016, although no similar document has been produced which covers the period prior to that date. 40 The material used by Endeavour to promote the Registered Fund described its objects in rather vague and general terms. By s 3 of the PDS the investment strategy of the fund was identified as being: [t]o invest funds progressively that achieves (sic) a diversified portfolio across property and corporate sectors on a secured basis that are income producing. These loans may be held directly by the Fund or held through another fund in which the Fund has invested 41 Somewhat unusually, the identified target borrowers of the fund were identified as being Authorised Representatives of Linchpin and Beacon. The PDS stated: that "Primary Target Borrowers" would be as follows "[f]rom time to time, the offer to borrow for business purposes, subject to all relevant securities, guarantees and external audit assessment, may extend to qualified Authorised Representatives of the FinancialLink Group Pty Ltd, AFSL 240938, or Risk and Investment Advisors Pty Ltd, AFSL 238141". 42 Apart from those potential borrowers, a range of other investments were identified. 43 The PDS stated that the loans made by the fund would be capable of being secured by either registered mortgage or registered security interests. It also contained provisions concerning Related Party Transactions and Conflict of Interest Risk which stated that loans with related entities would be at arm's length and would be undertaken in accordance with conflict of interest policies. Endeavour has provided to ASIC a document purporting to be the lending manual for the Registered Fund which stated that Endeavour will not invest in other managed investment schemes unless they are registered. 44 It appears that 16 million units at a value of $1.00 have been issued in this fund providing a capital of $16 million. That money was paid to the scheme's custodian, Australian Executor Trustees Limited, but from 29 June 2015 to 22 November 2017 at least $11,118,496.32 was transferred to Linchpin as trustee of the Unregistered Fund. When ASIC inquired into this transaction, Endeavour, through its directors have provided inconsistent explanations of the basis of the transfer. At one time it was said that it was for the acquisition of units in the Unregistered Fund and, at another time, it was said that it was a loan. Despite requests from ASIC no loan documentation has been provided nor any documents evidencing the provision of security for the loan. Regardless of exactly how or why the funds were transferred to Linchpin, it is apparent that the "investment" is in contravention of the fund's lending manual. 45 In the course of its investigation ASIC has ascertained that money which was obtained by Endeavour through subscriptions for the Registered Fund, has been used to pay the interest obligations of Linchpin to the investors in the Unregistered Fund. The exact manner in which that has occurred is unclear. 46 Endeavour, as the RE of the Registered Fund has maintained a Conflict of Interest/Related Party Register. Its purpose seems to have been to identify actual or potential conflicts of interest which arose in the operation of the Registered Fund as well as to record and track what steps were taken to address or resolve the conflicts. A number of entries have been made in that register apparently by Mr Nielsen in relation to various related party loans. The entries include the assertion that the loans are disclosed in the PDS although that statement is not true. The potentiality of such loans is mentioned, but the fact of the loans and their nature and extent are not. 47 As ASIC has submitted, and it is not contested by the defendants, the loans made by Endeavour to related parties did not have the approval of the members of the Registered Fund and they were not on arm's length terms. Those loans were either made directly to Linchpin or, in the case of the advances to Beacon and RIAA, indirectly through Linchpin. For the purposes of this application ASIC's submission can be accepted and it does not appear that the defendants contend to the contrary. Indeed, they recognise that member approval was not obtained and they have submitted that they ought to be allowed to call a meeting of members for the purposes of obtaining that approval, albeit nunc pro tunc. 48 On the available evidence it is pellucid that the loans made by Endeavour were not on arm's length terms. On any view such advances on unregistered security are improvident and uncommercial. I accept ASIC's submission that in s. 210 of the Act "arm's length" refers to a relationship which would exist between strangers who bear each other no special duty and invokes a standard of comparison to a transaction between unrelated parties, each acting in their own best interest: see Re Boart Longyear Ltd (No 2) (2017) 122 ACSR 437, [330] per Black J, citing with approval Australian Trade Commission v WA Meat Exports Pty Ltd (1987) 75 ALR 287 at 291 and Orrong Strategies Pty Ltd v Village Roadshow Ltd (2007) 207 FLR 245, at [717]ff. The loans in question do not meet that standard. Again, the defendants did not suggest the loans were on commercial terms. 49 The absence of any evidence of consideration of the veracity of the loans by the Board of Directors of Endeavour is especially concerning. Given the terms of the lending manual and the obligations of Endeavour as trustee and RE of the fund, a careful consideration of the terms of any loan made for the benefit of a related party was essential. That would necessarily include consideration of the strength and value of any security offered. In the ordinary course it would be necessary to obtain independent third party legal advice as to the appropriateness of the loan. Here, there is no evidence any of these matters were attended to. It appears that Mr Williams, a director of Endeavour, has asserted the lack of retained documentation in relation to the making of the loans was intentional, but that is unpersuasive or, if true, very concerning. 50 The personal loans made to Messrs Daly and Raftery through Linchpin also appear to have been made in breach of Endeavour's obligations in relation to the Registered Fund not to make related party transactions otherwise than in accordance with the Act. 51 On the uncontested material I agree with ASIC's submissions that in the circumstances Endeavour breached: (a) s 601FC(1)(b) of the Act by failing to carry out its duties with the degree of care and diligence that a reasonable person would if they were in the RE's position; (b) s 601FC(1)(c) of the Act by failing to act in the best interests of the members and, in a position of conflict of interest, failing to give priority to the interests of the members; (c) s 601FC(1)(h) of the Act by failing to comply with the compliance plan in the making of the related party loans. There was no evidence of any attempt to comply with those requirements. (d) s 601FC(1)(k) of the Act by failing to make payments out of the scheme property in accordance with the requirements of the Act. 52 For the purposes of this application, I also accept there is a prima facie case Endeavour breached the terms of s 912A in that it failed to ensure it did all things necessary to ensure the financial services covered by its AFSL were provided efficiently, honestly and fairly and it failed to have in place adequate arrangements for the management of conflict of interests. 53 ASIC also submitted that the PDS was inadequate because it did not identify the nature of the related party transactions which had already been entered into prior to its issuing. That seems to be correct and amounts to a breach of s 1013D of the Act. ASIC has also established a prima facie case of non-compliance with s 1017B of the Act by reason of Endeavour's failure to notify the members of the nature and extent of the related party transactions entered into after the PDS had been issued. 54 On the basis of the material which has been provided, there are probably some fairly good reasons why the defendants have not sought to contest ASIC's allegations of contraventions of the Act on this application. 55 If, at the end of a trial, the evidence remained as it is now there would exist a strong basis for the winding up of Endeavour on the just and equitable ground in s 461(1)(k) of the Act and, for similar reasons, for the winding up of the Registered Fund under s 601ND. There would be little doubt that there had been repeated breaches of provisions of the Act which exist for the protection of investor interests: Australian Securities Commission v A S Nominees Ltd (1995) 62 FCR 504 at 530 - 533; Australian Securities and Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778 at [74]. If the impact of the material presented by ASIC to date was not significantly diminished at trial, the Court could justifiably reach the conclusion that it cannot have any confidence in the "propensity of the controllers to comply with obligations, including the keeping of books, records and documents, and looking after the affairs of the company": Australian Securities and Investments Commission v ActiveSuper Pty Ltd (ACN 125 423 574) (No 2) (2013) 93 ACSR 189, [21]. In that latter case Gordon J observed at [23]: [A] risk to the public interest may take several forms. For example, a winding-up order may be necessary to ensure investor protection or where a company has not carried on its business candidly and in a straightforward manner with the public. Alternatively, it might be justified in order to prevent and condemn repeated breaches of the law. (Citations omitted.) 56 For similar reasons there would be a sufficient basis for winding up Linchpin on the just and equitable grounds. Prima facie there appears to be sufficient evidence of mismanagement in the conduct of the affairs of the Unregistered Fund and a disregard by Linchpin of its obligations under the Act and the Information Memorandum towards the members.

Relief 57 As mentioned, the only real dispute at the hearing concerned the nature and scope of the relief which might be granted on an interim basis. Despite that, as the nature of relief granted will depend upon the seriousness of the contraventions, it has been important to assay their nature and extent. 58 The main question disputed at the hearing was whether receivers ought to be appointed to the assets of the defendants and, if so, to which ones. A consideration of the appropriateness of that relief provides guidance as to the scope of other orders sought.

Appointment of a receiver under s 1323. 59 Section 1323 of the Act relevantly provides: (1) Where: (a) an investigation is being carried out under the ASIC Act or this Act in relation to an act or omission by a person, being an act or omission that constitutes or may constitute a contravention of this Act; ... and the Court considers it necessary or desirable to do so for the purpose of protecting the interests of a person (in this section called an aggrieved person) to whom the person referred to in paragraph (a) ... (in this section called the relevant person), is liable, or may be or become liable, to pay money, whether in respect of a debt, by way of damages or compensation or otherwise, or to account for financial products or other property, the Court may, on application by ASIC or by an aggrieved person, make one or more of the following orders: ... (e) an order prohibiting a person holding money, financial products or other property, on behalf of the relevant person, or on behalf of an associate of the relevant person, from paying all or any of the money, or transferring, or otherwise parting with possession of, the financial products or other property, to, or to another person at the direction or request of, the person on whose behalf the money, financial products or other property, is or are held; … (h) an order appointing: ... (ii) if the relevant person is a body corporate - a receiver or receiver and manager, having such powers as the Court orders, of the property or of part of the property of that person; ... (3) Where an application is made to the Court for an order under subsection (1), the Court may, if in the opinion of the Court it is desirable to do so, before considering the application, grant an interim order, being an order of the kind applied for that is expressed to have effect pending the determination of the application. 60 It can be accepted that in the exercise of power under s 1323 to appoint a receiver the overriding concern of the Court is to protect assets for the benefit of those entitled, or may be entitled, or may become entitled to them: Australian Securities & Investments Commission v Burke [2000] NSWSC 694, [6], per Austin J. There is no requirement for the Court to be satisfied the relevant person will be liable to the aggrieved person. All that is needed is the person "is liable, or may be or become liable" in the relevant way. In this manner the section provides a means by which property that may, not "must", in due course represent a source for the vindication of the rights of those persons identified, is preserved for their benefit and shielded from the inroads that might otherwise be made upon it: Australian Securities and Investments Commission v Burnard (2007) 64 ACSR 360, [14], per Barrett J. The fact the power is enlivened once, inter alia, ASIC commences proceedings discloses that any uncertainty as to whether the relevant person will ever be liable is not a stumbling block to the making of an order. 61 The touchstone for the exercise of discretion is whether it is "necessary or desirable" in the circumstances. In Australian Securities and Investments Commission v Carey (No 3) (2006) 232 ALR 577, French J described in the following passages the boundaries of that criterion and the consequences of its width (at [26] - [27]): [26] The circumstances in which the court may make orders under s 1323(1) are wide as indicated by the words "necessary or desirable … for the purpose of protecting the interests of a person …". There is an element of risk assessment and risk management in the judgment the court is called on to make. It follows, and has been accepted, that there is no requirement on the part of ASIC to demonstrate a prima facie case of liability on the part of the relevant person or that the person's assets have been or are about to be dissipated - Corporate Affairs Commission v ASC Timber Pty Ltd (1989) 7 ACLC 467 at 476 (Powell J); Australian Securities and Investments Commission v Adler (2001) 38 ACSR 266; [2001] NSWSC 451 at [7] (Santow J). [27] The nature and duration of orders made under s 1323(1) can be fashioned by the court to reflect its assessment of any risk of dissipation of the assets of a person under investigation. But their legitimate purposes can go further. The interests of aggrieved persons may be protected not only by orders designed to protect dissipation of assets, but also by orders which create an opportunity for the assets of the person under investigation to be ascertained. 62 Importantly, French J there emphasised the absence of any requirement the Court ascertain that the assets in question are at a risk of dissipation before exercising its power: see also Re HIH Insurance Ltd (in prov liq); Australian Securities & Investments Commission v Adler (2001) 38 ACSR 266, [6]-[7]. That said, the principle that the overriding concern in the exercise of the discretion under s 1323 is the protection of assets for the benefit of those who might become entitled to them, focuses attention on the security of the assets which are subject of the application which, in turn, requires consideration of the manner in which similar assets have been dealt with by the relevant person in the past. It was for this reason that in Adler, Santow J (at [7(b)]) observed that a prior misappropriation of assets supports the appointment of a receiver. 63 In light of the above, the observations of Merkel J in Australian Securities and Investments Commission v Marshall Bell Hawkins Ltd (2002) 43 ACSR 340, [13]-[14] astutely describe the considerations which ought be taken into account when exercising the discretion: The purpose of the remedies provided in s 1323 is to protect the interests of persons who might have claims against the relevant corporations, irrespective of whether those claims are based on a breach of a law relating to corporations or arise under the general law. That purpose is usually achieved by securing the assets of the relevant corporation against which the claims may lie for the purpose of providing security for those claims or for securing assets for which that corporation may be liable to account in respect of such claims. In considering whether it is necessary or desirable to appoint a receiver and manager the court should recognise the "drastic nature" of such an appointment, which should only be made in exceptional or special circumstances, after careful scrutiny and after less drastic remedies, including a Mareva injunction, have been considered. The circumstances where a receiver and manager may be appointed include where potential or actual claimants are being protected from incompetence, where there have been persistent breaches of trust caused by "an undeveloped sense of trusteeship" or from fraud. Thus, proof of actual or apprehended fraud is not a pre-condition to the appointment of a receiver and manager under s 1323. Of particular relevance in the present case is the observation by Finn J in AS Nominees at 512 that an appointment of a receiver and manager may be appropriate where there have been serious and persistent breaches of trust and conflicts of interest resulting in the trust funds being subject both to depredation and dissipation. 64 Mr Perry QC for the defendants placed substantial reliance upon the observations of Atkinson J in Australian Securities & Investments Commission v Arafura Equities Pty Ltd (2005) 56 ACSR 429, [33]-[34] and, in particular, her Honour's observations that, in considering whether it is necessary or desirable in order to protect the interests of creditors, the existence of a substantial shortfall between monies invested in the scheme and monies left in the scheme is a significant factor. Her Honour also acknowledges that the appointment of a receiver is a drastic remedy and will be utilised to protect the interests of persons where a lesser remedy is not adequate. Her Honour, though, did recognise that, if a party was undoubtedly operating an unregistered scheme in contravention of the Act, it ought to be wound up.

Application to this matter 65 In this matter the jurisdictional prerequisites for the exercise of power are satisfied in that: (a) ASIC has commenced and is carrying out an investigation under the ASIC Act and the investigation is in relation to an act or omission that constitutes, or may constitute, a contravention of the Act. (b) An application has been made by ASIC for one or more of the orders that may be made under the section. 66 Whilst it is not necessary ASIC establish a prima facie case that the defendants have committed a contravention of the Act, the strength of any case advanced by ASIC is relevant to the discretion. Where a strong case is shown to exist, a Court will more readily exercise the power because it can be satisfied that it is more likely assets in the defendant's hands are in need of protection. Similar considerations apply in relation to the seriousness of the breach. Technical contraventions of minor provisions are less likely to induce a Court to act than are serious and persistent ones. 67 Here, ASIC has established at least a prima facie case that Linchpin and Endeavour have engaged in contraventions of the Act. In relation to the former it is presently apparent there have been breaches of ss 911A, 911B and 1041H of the Act and s 12DA of the ASIC Act and, in relation to the latter there have been breaches of ss 208 (as modified by s 601LC), 601FC(1)(b), (c), (h) and (k), 912A, 1013(d)(1)(c) and (f), 1013E and 1017B of the Act. 68 In the light of that, receivers ought to be appointed to the property of Linchpin for the following reasons: (a) Linchpin has engaged in serious breaches of s 911A and 911B by issuing interests in a managed investment scheme without authorisation. It did not hold an AFSL or any relevant authorisation under one. Such a contravention has been admitted in part, however, it appears Linchpin has been committing this breach since the establishment of the fund as at no time whilst it was issuing interests did it hold authorisation to do so. (b) The contraventions by Linchpin are, of themselves, serious. There exists an extensive licencing regime under the Act for the authorisation of appropriate persons to engage in the management of such schemes. It operates to protect the public and maintain the integrity of the financial services sector. It follows the unauthorised operation of schemes undermines the rigor of that regime. (c) The underlying nature of the transactions identified by ASIC are very concerning. They involve the making of loans beyond of the scope of those identified in the Information Memorandum in terms of the identity of the entities to whom loans might be made and the terms on which they should be provided. On the material it is likely the loans in question were made in breach of the trust on which the funds were held. It is also likely they were made in breach of the fiduciary duties owed to the members. These apparent contraventions are exacerbated by the fact they appear to have conferred advantages on Linchpin and its subsidiaries. (d) The improper conduct has been systematic and has involved what appears to be almost the totality of the Unregistered Fund. (e) The fact the activities were enabled by Linchpin engaging in misleading or deceptive conduct exacerbates the above matters. (f) It is not apparent Linchpin operates any other business with which the appointment of receivers will interfere. It is the holding company of other companies which seem to be the operating entities of the group such that the appointment of receivers to its property will not necessarily impact on those business activities. (g) It is not appropriate for Linchpin to continue to control the Unregistered Fund even though it says it is now the authorised representative of Endeavour under its AFSL. As ASIC submits, that does not permit Linchpin to operate the Unregistered Fund. It is only entitled to engage in the activities specified in the licence and given to it "as representative of a second person who carries on a financial services business". In this case that second person would be Endeavour and it does not carry on any business operating the Unregistered Fund. It is not the RE of that fund nor is it apparently connected with it in any manner and it has no power to issue interests, vary them or dispose of them. Linchpin is the trustee of the fund and necessarily acts in that capacity on its own behalf. ASIC has established, to a prima facie standard, that the recent apparent creation of Linchpin as the authorised representative of Endeavour does not entitle the former to operate the Unregistered Fund. At the least there is doubt that such authorisation exists. That being so, it is not appropriate for a Court to authorise what may be a serious breach of the Act by permitting an unauthorised entity to operate a managed investment scheme. Linchpin submits that, other than requiring authorisation for providing financial services it does not require any authorisation to operate the Unregistered Fund. Even were that so, it is of little weight in the circumstances where so much unauthorised activity has already occurred. (h) In any event, the Court cannot have any confidence that Endeavour will ensure Linchpin, as its authorised representative, will comply with the obligations imposed by the Act. As is discussed below, there is a prima facie case Endeavour has engaged in contraventions of the Act and breaches of duty towards the members of the Registered Fund. (i) Although Linchpin has offered undertakings to immediately register the security received for loans made and to call meetings of members to approve loans which have already been made, any of those steps would be "acts which constitute the management of or the carrying out of the activities which constitute the managed investment scheme" and, if Linchpin is not appropriately authorised, they would involve the operation of the scheme in contravention of the Act: Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561 per Davis AJ; Bruce v LM Investment Management Ltd (ACN 077 208 461) (admins apptd) (in its capacity as responsible entity of the LM First Mortgage Income Fund) (2013) 94 ACSR 684, [12]. (j) In light of the evidence the Court cannot have any confidence that Linchpin and its directors will act in the interests of the members of the funds. It is more likely they will, as they have in the past, prefer their own interests. 69 Receivers should also be appointed to the property of Endeavour. In reaching that conclusion the following matters are significant: (a) It appears that a substantial portion of the assets of the Registered Fund have been applied by it in contravention of the Act. It has paid most of its funds to Linchpin for that entity to use or to pass onto its related entities. On the material before the Court, ASIC has established a number of serious contraventions arising from this conduct. (b) The transactions entered into by Endeavour required the approval of the members of the fund and that has neither been sought nor obtained. (c) The transactions entered into appear to have been made to related parties in breach of the PDS. (d) It is strongly arguable that insufficient security was obtained for the loans to the related parties and that which was obtained was not registered, thereby affording the borrowers added advantages and putting the security at risk. (e) The responses of Endeavour to ASIC's requests for the production of documents indicates either an unwillingness to cooperate with the regulator or that the company has failed in its obligations to maintain adequate records in respect of the operation of the fund. (f) Endeavour has apparently permitted its borrowers to use the funds advanced by it for purposes other than those for which the loans were made. (g) The investment of most of the capital of the fund has occurred in contravention of the fund's lending manual. (h) The breaches by Endeavour have been serious and persistent. (i) The breaches have also favoured the interests of Endeavour's directors who caused the transactions to occur. This gives rise to concern that leaving the assets under their control puts them at risk of dissipation. This is so regardless of the fact that an alternative order would be restraining the use of fund assets. In the circumstances this is insufficient. (j) It can be accepted that the appointment of receivers to the property of Endeavour will necessarily have a deleterious impact upon its other business obligations. However, in the light of the significant breaches that is a consequence of the company's own making and there seems no reason to be cautious about causing harm to it if that has the consequence that the interests of the members are put at risk. (k) The Court cannot have any confidence that Endeavour or its directors will change their ways and commence acting in the interests of the members of the fund. 70 In relation to both Endeavour and Linchpin it was necessary to consider whether alternative orders in the nature of injunctions as to the use of the fund assets would be sufficient. On the material which establishes fairly strong cases that each company was prepared to sacrifice the interests of their members which they had a duty to advance in favour of their own, the granting of injunctions or the accepting of undertakings as suggested by them would be insufficient. Whilst the appointing of receivers is a drastic step, in the circumstances of this matter it would appear to be the only acceptable course.

Property over which the appointments should be made 71 The defendants submitted that the appointment of any receiver should be limited to the property held by them as scheme property. They submitted that if the appointment was with respect to all their property it would have the same effect as the granting of a Mareva injunction. Whilst there is some force in that submission, it is apparent from the authorities that the power under s 1323 is not limited to the appointment of receivers over property which belongs to the aggrieved party. It expressly extends to all of the property of the relevant person. Moreover, as the passage from the decision of Merkel J in ASIC v Marshall Bell Hawkins Ltd reveals, the section protects the interests of persons who have claims against the relevant corporation regardless of whether they arise under the Act and the purpose of the section is to provide security for those claims or securing assets for which the company may be required to account. That being so, it seems to be well established that the section can be used for providing security for the claims of those aggrieved persons. Here, it is not known whether the loans which Linchpin and Endeavour made in breach of their obligations are recoverable. If they are not, the appointment of a receiver only over that property will not protect the interests of the members. 72 In relation to Endeavour, ASIC has indicated it was concerned not to interfere with the conduct of its other business interests. It may be that can be accomplished by excluding from the property, to which the receivers are appointed, that which is held on trust save for what is in the Investport Income Opportunity Fund. In that way the receivers will not have control of property which is beneficially owned by persons other than Endeavour and the members of the Registered Fund. By a written communication to my Chambers after the hearing (with the consent of the defendants) ASIC has quite properly made its position clear on this and has framed orders such that the property held by Endeavour over which receivers might be appointed should be that relating to the scheme. I accept that is an appropriate remedy. Were it not for ASIC's concession, I would have been prepared to make the order over all of Endeavour's assets. 73 No such limitation is applicable to Linchpin and the receivers should be appointed to all of its property including that which it holds on trust for the members of the Unregistered Fund.

Asset preservation orders 74 The parties were agreed that the Court should make asset preservation orders pursuant to s 1323 and in the circumstances referred to above that is appropriate. In my view that order could properly apply to all of the property of the defendants for the reasons referred to above. 75 The defendants seek an exemption to these orders such that they may use funds to pay their ordinary business expenses which are reasonably incurred. In the case of Linchpin, given the extent of the property to which the receivers are to be appointed, the meeting of these liabilities would be a matter for those receivers to consider and no exemption is required. In relation to Endeavour, the concession by ASIC as to the scope of the property over which the receivers are to be appointed has the consequence that it is appropriate to permit it to meet its ordinary business expenses which are reasonably incurred in relation to its other operations.

Orders pursuant to s 1101B 76 ASIC also relies on s 1101B(1)(a)(i) of the Act which enables the Court to make orders where it appears that a person has contravened a provision of Chapter 7 of the Act, or any other law relating to dealings in financial products or providing financial services. For present purposes it is relevant that ss 911A, 911B, 912A, 1013(1)(c) and (f), 1013E, 1017B and 1041H are found in Chapter 7. Section 1101B(4) discloses that the Court has wide powers which extend to the granting of injunctions restraining a person from acquiring, disposing of or otherwise dealing with any financial products that are specified in the order, restraining a person from providing any financial services that are specified in the order; and appointing a receiver to property of a financial services licencee. Section 1101B(5) affords the Court power to make interim orders of this kind where it is desirable to do so. 77 Similarly, wide power to grant injunctions, including interim ones, is given to the Court by s 1324 in cases where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute a contravention of the Act. 78 The principles founding the Court's power to grant injunctions under s 1324(4) were succinctly stated by Palmer J in Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605 in the following terms: [36] At the risk of some repetition, I summarise the principles which I draw from the presently applicable authorities: • the jurisdiction which the court exercises under CA s 1324 is a statutory jurisdiction, not the court's traditional equity jurisdiction; • Parliament has made it increasingly clear by successive statutory enactments that the court, in exercising its statutory jurisdiction under s 1324, is not to be confined by the considerations which would be applicable if it were exercising its traditional equity jurisdiction; • among the considerations which the court must take into account in an application for an injunction under CA s 1324 are the wider issues referred to by Austin J in Sweeney and Parkes, and by Davies AJ in Pegasus; they may be gathered under the broad question whether the injunction would have some utility or would serve some purpose within the contemplation of the Corporations Act; • these considerations are to be taken into account regardless of whether the application is for a permanent injunction under s 1324(1) or for an interim injunction under s 1324(4); • where an application under s 1324(4) is made by ASIC rather than a private litigant the court is more likely to give greater weight to the broad question whether the injunction would serve a purpose within the contemplation of the Corporations Act; • where there is an appreciable - that is, not fanciful - risk of particular future contraventions of the Corporations Act by a defendant, it would serve a purpose within the contemplation of the Corporations Act that the court grant not only a permanent injunction but, in an appropriate case, an interim injunction restraining such conduct. Section 1324 evinces an intention that the possibly severe consequences and the relative promptness of proceedings for contempt of court be added to criminal prosecutions as a deterrent to contraventions of the Corporations Act; • although the questions whether there is a serious question to be tried and where the balance of convenience lies will not circumscribe the court's consideration in an application for an interim injunction under s 1324(4), the interests of justice will always require that those questions be examined carefully when restrictions are sought to be imposed before the case has been properly examined by the court, even where the protection of the public is said to be involved: see per Young J (as his Honour then was), in Corporate Affairs Commission (NSW) v Lombard Nash International Pty Ltd (1986) 11 ACLR 566 at 570-1; • the balance of convenience will be viewed differently according to whether the applicant under s 1324(4) is ASIC or a private litigant. Where ASIC is acting to protect the public interest, the absence of an undertaking as to damages, exempted by s 1324(8), will usually be of little consequence. However, where the proceedings are brought to advance a plaintiff's private interests, then if such an undertaking is not proffered even though it is likewise exempted by subs (8), the court may take that circumstance into account as a matter of practicality, common sense and fairness in determining where the interests of justice lie and whether "it is desirable" to grant the injunction: see per Young J in Lombard Nash at 571. And, as to the principles on which the Court's power to grant injunctions via s 1101B(4) is based see Australian Securities and Investments Commission v Wealth & Risk Management Pty Ltd [2017] FCA 477, [15]. 79 There was no debate before the Court as to the correctness of those principles and I am prepared to accept them for the purposes of this application, only pausing to note that the further the Court strays from the guidance provided by the equitable rules governing the granting of injunctions, the less principled any exercise of power is likely to be. 80 As has been discussed above, ASIC has established a prima facie case that Endeavour has breached its obligations as a financial licencee and has contravened the Act in numerous respects. Similarly, it has shown more than a prima facie case that Linchpin has contravened the Act in significant respects and engaged in, what might transpire to be, significant breaches of trust and fiduciary duties. The breaches gives rise to a risk that the fund assets remaining in the hands of those companies, being mainly the rights to recover the loans which have been made, may be lost. It would follow there are solid grounds for the imposition of injunctions restraining the defendants from further engaging in the operation of the schemes or engaging in the provision of financial services save, in the case of Endeavour, to the extent necessary to allow it to carry on its other existing business interests. 81 With respect to this order the defendants sought exemptions in relation to the receiving of interest from borrowers, paying interest to members and redeeming investments. If the exception was made and Linchpin undertook those tasks it would be operating an unregistered managed investment scheme without authorisation to do so which would be most inappropriate. 82 As ASIC has seemingly agreed that Endeavour ought to be entitled to carry on its other business of operating other management investment schemes for the time being, it is necessary that an exception be made to allow this occur. Again, save for ASIC's concession which I apprehend is appropriately given so as to prevent loss being suffered by other persons, I would have been prepared to grant the injunctions preventing Endeavour from engaging in the provision of all financial services.

Books and records and disclosure orders 83 ASIC seeks orders the defendants deliver up to the receivers all their books and records which relate to the management investment schemes in issue in this matter and to their property. Such orders are appropriate in circumstances where receivers are appointed such that they will know the nature and extent of their obligations under their appointment. It is also appropriate the receivers ascertain the extent of the defendants' property for the purposes of any future action which might be brought. There needs be no exemptions in relation to Endeavour for these orders. 84 ASIC also seeks an order it deliver to the receivers documents in its possession concerning the defendants which it has obtained under Part 3 Division 3 of the ASIC Act and, for the same reasons, it is appropriate that such an order be made. 85 The defendants do not object to the disclosure orders sought by ASIC save for the time in which they are to be complied with and the scope of the disclosure required. I accept that two weeks might be insufficient for the defendants to complete that task and three weeks from the date of order ought to be allowed. The defendants submitted that such orders should be confined to the property of the two funds, however, given the width of the powers of the Court under s 1323 and the fact that it is likely to be important for the receivers to know the extent of the defendants' property interests, the orders sought by ASIC in this respect are more appropriate. 86 ASIC seeks additional orders that the defendants provide further information in relation to questions which the receivers may have in relation to information received from them and that they assist the receivers in carrying out their functions. I accept that these machinery orders are appropriate although it must be limited to the defendants themselves; the officers, agents and employees are not before the Court. I accept it would be appropriate to order that the company use its best endeavours to cause their officers, agents and employees to provide the assistance identified.

Orders 87 For the reasons given the orders sought by ASIC, with appropriate alterations, should be granted. The parties are to bring in short minutes of orders which accord with these reasons or if they are unable to agree, the matter is to be relisted. I certify that the preceding eighty-seven (87) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Derrington.