Australian Securities and Investments Commission v Ludgates Corporate & Investment Advisory Services Pty Ltd

Federal Court of Australia|2003-06-20|Before: Sackville J

REASONS FOR JUDGMENT 1 On 17 June 2003, I refused an ex parte application by the applicant ("ASIC") for interlocutory relief against the fourth respondent ("Mr Dean"). ASIC sought orders pursuant to the Corporations Act 2001 (Cth), s 1323(1): · requiring Mr Dean to deliver up to the Court all passports held by him and providing for such passports to be held until further order of the Court; and · restraining Mr Dean from leaving mainland Australia without the consent of the Court until 24 June 2003. ASIC led no evidence at the hearing that Mr Dean intended to leave the country in the immediate future. 2 At the conclusion of the hearing held on 17 June 2003, I made an order abridging time for service of ASIC's originating and interlocutory process. I indicated to Mr Stack, who appeared for ASIC, that I was prepared to hold an interlocutory hearing on the morning of 19 June 2003. However, he stated that his instructions were that the proceedings should stand over until 23 June 2003. 3 On 18 June 2003, ASIC renewed its ex parte application. It did so on the basis of affidavit evidence that showed that Mr Dean planned to leave Australia on 19 June 2003. This evidence emerged from a conversation between an ASIC investigator, Mr Jackson, and Mr Dean which took place after the hearing on 17 June 2003. It appears that Mr Dean had booked the flight in September 2002 and planned to travel to Italy with his family. It also appears that Mr Dean, although an Australian citizen, lives in Italy, at least part of the time. 4 The application filed in Court by ASIC on 17 June 2003 seeks orders winding up four schemes, including the so-called "Seed Program" and the "Shell Program". The respondents to the application are Ludgates Corporate & Investment Advisory Services Pty Ltd ("LCIAS"), Mr Benjamin Whitehouse, Ms Jennifer Sisson and Mr Dean. Mr Whitehouse and Ms Sisson are directors of LCIAS and apparently operate an accounting practice under the names "Ludgates Accountants Network ("LAN") and Ludgates Chartered Accountants ("LCA"). 5 Although the application involves a claim for an order that a receiver be appointed to the property of each of the respondents, Mr Stack made it clear that, at this stage, ASIC is not seeking any substantive relief against Mr Dean. The basis upon which ASIC seeks the interlocutory orders against Mr Dean is that ASIC wishes to examine Mr Dean pursuant to s 19 of the Australian Securities and Investments Commission Act 2001 (Cth)("ASIC Act") in relation to its investigation of the two schemes to which I have referred. Mr Dean has not as yet been given written notice under s 19 that he is required to appear for examination. The conversation attested to by Mr Jackson tends to suggest that had Mr Dean been asked to attend such an examination at an earlier stage in the investigation (that is, earlier than two days before his scheduled departure for Italy) he would have been prepared to do so. 6 Section 1323(1) of the Corporations Act provides, relevantly, as follows: "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; or

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), (b) or (c), as the case may be, (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:

(j) if the relevant person is a natural person - an order requiring that person to deliver up to the Court his or her passport and such other documents as the Court thinks fit;

(k) if the relevant person is a natural person - an order prohibiting that person from leaving this jurisdiction, or Australia, without the consent of the Court."

7 The Shell and Seed Programs were schemes set up in 1999. They appear to have been promoted by LCIAS, at least to some extent (although it must be remembered that I have not as yet heard from the directors of LCIAS). The documentation suggests that investors' funds were to be paid into a trust account maintained by LCIAS (or a related entity) and then used to acquire stock in United States corporations. The documentation also suggests that investors were told that they could expect high returns. It appears that funds obtained from investors were transmitted to the United States. It is not clear what happened to the funds thereafter. 8 On 19 August 1999, ASIC commenced an investigation pursuant to s 13 of the Australian Securities Commission Act 1989 (Cth) into the two schemes. This investigation resulted in LCIAS and LCA, on 29 February 2000, entering into an enforceable undertaking with ASIC pursuant to s 93AA of the ASIC Act. The undertaking records that investors invested about $1.1 million in the two schemes. By the undertaking, LCIAS and LCA agreed not to promote the schemes and to take no further step in relation to them. They also undertook to use their best endeavours to return the moneys forwarded to the United States and to keep ASIC informed of these efforts. 9 ASIC does not seem to have closely monitored the efforts to secure return of the invested funds. Be that as it may, on 21 February 2003 ASIC reactivated its investigation into the affairs of LCIAS and LCA, apparently because of complaints concerning other schemes in which these entities were allegedly involved. It is not suggested that Mr Dean was involved in the later schemes. 10 In a letter dated 11 March 2003 to ASIC, LCA asserted that the firm had relied on specialists who had never been investigated by ASIC. The persons named included Mr Dean. However, it was not until 12 June 2003 that ASIC widened its investigation to include (among others) Mr Dean. 11 There is evidence that Mr Dean played a part in encouraging LCIAS to participate in the two schemes. It is possible, on the material before me, that his activities could ultimately be shown to have contravened the Corporations Act or other statutory provisions. However, the evidence adduced by ASIC at the hearing falls short of establishing a prima facie case against him. 12 The power conferred by s 1323(1) is of wide scope. As Palmer J observed in ASIC v Mauer-Swiss Securities Ltd (2002) 20 ACLC 1530, at 1536 [36]: "What 'the interests' of aggrieved persons may be and how they ought to be protected are matters incapable of categorisation or of precise definition".

By the same token, the power is not to be exercised lightly. In ASIC v Australian Investors Forum Pty Ltd [2001] NSWSC 1180, Hamilton J summarised the position this way (at [4]):

"What authority there is in relation to s 1323 emphasises the importance of the right of freedom of travel and the caution which should be exercised when interfering with that important right of individuals. That was referred to by Young J (as his Honour then was) inCorporate Affairs Commission v Price Commodities Pty Ltd (1987) 5 ACLC 787 at 789-790. His Honour emphasised the importance of the private right to which I have just referred but also indicated that the public interest will in appropriate cases outweigh the private right where a sufficient case is made out. The caution which should be exercised in interfering with the right to travel was emphasised by Finkelstein J in Australian Securities and Investments Commission v Wiggins(1998) 30 ACSR 190. In that case, referring to the exigencies of an investigation justifying restriction of the right to travel, his Honour said that the restriction should not be maintained unless it can be shown that that investigation cannot properly or effectively be conducted in the absence of the person. Again, inAustralian Securities and Investments Commission v Viney (1998) 29 ACSR 391 R D Nicholson J referred to Young J's decision, which I have mentioned above, and the countervailing public interest which may outweigh those rights. His Honour noted at 393 that the Court is required to engage in a balancing exercise which includes a balancing of public and private rights. One of the considerations that must weigh in favour of the private right is the consideration there is a right of a person to have a passport and to move freely in and out of Australia. Matters which may be weighed on the other hand are the character of potential offences, the fact that the person has a base overseas, the importance of the person in the ongoing investigation and the stage which that investigation is at."

13 If there was evidence that an examination of Mr Dean is likely to improve significantly the chances of the investors in the schemes retrieving their money, the application would have some force. This would be so notwithstanding that the proposed examination relates to events which occurred nearly four years ago and that ASIC has been concerned with the schemes for over three years. It would also be a material consideration that Mr Dean apparently could live in Italy if he chose to do so. 14 Once again, on the material before me, it is possible that Mr Dean would be able to provide some information that would increase the prospects of recovering funds transmitted to the United States. But the evidence does not suggest that this is likely. As Mr Stack accepted, having regard to the history of these two schemes, the money is probably long gone. The real question, so far as investors are concerned, is whether actions against those who are alleged to have promoted the scheme will succeed in recovering lost funds. 15 Similarly, if the evidence established a prima facie case of contravention by Mr Dean of the legislation (cf ASIC v Mauer-Swiss, at [39]), the case for interim relief would be stronger, even though the effect would be to disrupt long held travel plans of Mr Dean and his family. But as I have said, the evidence falls short of establishing such a case. 16 I should add that I do not regard the apparent delay by ASIC in taking steps in relation to Mr Dean as disentitling it from relief. Nonetheless, the lapse of time in opening an investigation into Mr Dean is of some relevance because the present application, if successful, would restrain Mr Dean from travelling overseas on very short notice without him having had an opportunity to put his case to the Court. I am not in a position to assess why action was not taken more promptly. However, if ASIC had acted more swiftly, for example in response to the letter of 11 March 2003, it may well have been possible to examine Mr Dean without any disruption to his travel plans. The evidence does not suggest that he would have refused to comply with his legal obligations. 17 Taking into account the circumstances to which I have referred, I do not think it appropriate to grant the relief sought by ASIC. While it is possible that an examination of Mr Dean would advance the interests of investors, on the present evidence it is not likely that that would be the case. The evidence does not establish a prima faciecase that Mr Dean had contravened any law. Against ASIC's desire to examine Mr Dean, I must weigh the disruptions to him if his settled travel plans were to be frustrated at very short notice. On balance, I do not think that Mr Dean should be restrained from leaving Australia. 18 It is for these reasons that I announced at the conclusion of the hearing on 18 June 2003 that I declined to grant the orders sought by ASIC I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville.

Australian Securities Commission Act 1989(Cth)

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