Australian Securities and Investments Commission v Macro Realty Developments Pty Ltd

BEACH J: 1 The plaintiff (ASIC) seeks declarations and injunctions in respect of the defendants' conduct in: (a) engaging in conduct that constitutes counselling or procuring investors to contravene s 181(1) of the Corporations Act 2001 (Cth) (the Act); (b) engaging in misleading or deceptive conduct in contravention of s 1041H of the Act and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act); and (c) carrying on an unlicensed financial services business in contravention of s 911A of the Act. 2 On 7 October 2015, Middleton J in ASIC v McIntyre and Ors (VID 407 of 2015) appointed provisional liquidators to the second defendant, Property Tuition Pty Ltd (provisional liquidators appointed) and the third defendant, Education Holdings Pty Ltd (provisional liquidators appointed) (together, 21st Century). 3 On 26 October 2015 I granted leave to proceed against the two 21st Century entities under s 471B of the Act. 4 Up and until trial, these proceedings have been actively defended by the first defendant (Macro). Macro has now indicated in correspondence that it consents to some of the orders sought and does not oppose some of the other relief sought. The 21st Century entities do not oppose the orders sought. Accordingly, the trial proceeded before me this morning in order for ASIC to substantiate its entitlement to all relief claimed. I am satisfied that ASIC is entitled to the relief sought.

The conduct 5 In September 2015, ASIC became aware of a new "investment opportunity" associated with Macro and 21st Century that was being promoted and marketed by 21st Century. The "investment opportunity" was described in and promoted pursuant to a document entitled: (a) "Do you know how to buy Australian property, no money down?" (Brochure); (b) "Memorandum of Understanding" to be entered into by an individual investor and Macro (MOU), (together, the Investment Proposal). 6 The documents constituting the Investment Proposal were, in part, incomprehensible and infected with internal inconsistencies. 7 The Investment Proposal was promoted and marketed by 21st Century through websites, events, "facebook" pages and seminars involving both 21st Century and Macro. 8 The Brochure and the MOU were provided by 21st Century to prospective investors. 9 The structure of the Investment Proposal, as set out in each MOU, was as follows: (a) An investor agreed to establish a company, of which he or she was the sole shareholder and director; (b) Macro "remain[ed] the sole decision maker for all business associated with the company", "sole decision maker for all activities" and "retain[ed] control of the company via ownership of a unit trust and management agreement"; (c) The investor agreed to "do all things required by [Macro] to run the business as [Macro saw] fit"; (d) The company was to acquire or hold an option to acquire two properties which the company had to finance; (e) The investor agreed to use the services of "[Macro] Realty Finance" for any finance relating to the company and to use their recommended lenders; (f) Macro agreed to pay the investor between $100 and $400 per week (depending on whether the investor was able to obtain institutional finance and the number of properties owned by the company); (g) There would be a "transfer [of] the Directorship of the company to [Macro]" upon termination of the agreement (within three to seven years), prior to which the investor might, at their discretion, "purchase the units of the trust in order to effectively own the company and any property it ha[d] acquired or ha[d] the option to acquire" for a price both parties agreed in writing; (h) Macro warranted to offer to purchase the property "within 3 years of settlement" at the same price paid by the investor; and (i) "Proxy Heads of Agreement [were] to be signed after incorporation of the company and the Trust". 10 In effect, by entering into an MOU an investor agreed to become a sole director and shareholder in a company: (a) over which the investor (as director) had no real or effective control; and (b) which had an obligation to finance the acquisition of properties where the legal liability for that finance fell, in the first instance at least, on the company. 11 The representations and other illusory promises that were made in the Brochure were that the Investment Proposal: (a) promised "a way of structuring so it's effectively Capital guaranteed", with a "guaranteed Developer buy back in 3 years", and elsewhere "guaranteed BUY BACK of your investment at cost in 3, 5 or 7 years time if you don't want to keep it"; (b) promised "$200 per week cash flows available per person or $400 per week per couple (without even owning property)", "a guaranteed $200 per week income after expenses [and] a guaranteed 9% rental income", "$100 right through until the build is finished, then they will get their $200"; (c) promised "on average … $10,000 p/a positive cash flow per property into investors pockets", "rental yields that will deliver either $10,400 or $20,800 per annum, guaranteed positive cash flow income net of all expenses", and elsewhere "guaranteed positive cash flow income of $20,800 annually per investment net of all expenses"; (d) stated that there was "no deposit required, so no money down", "no capital or fees involved", "100% no money down deals", "all your expenses paid", and "no money down and no hidden costs" but also stated the following: "alternative funding solutions to support traditional bank lending"; "subject to finance approval"; in response to the question "who will pay the interest on the land while the house is being constructed?" stated "see loan agreement"; referred to the "interest rate that clients will need to pay on finance" and "your portion of the lending"; and stated that the investor "[was] required to sign and take responsib[ility] for the land and loan that [was] being provided via [Macro's] investors". 12 The Brochure was marked "21st Century Property" throughout and referred to 21st Century Property as "underwriting the whole project and [who would] receive underwriting benefits". The nature and extent of the "underwriting benefits" were undisclosed. The Brochure contained contact details for the second defendant.

(a) Counselling and procuring contraventions of section 181(1) of the Act 13 The Investment Proposal required an investor to become a director of a company in respect of which Macro: (a) was the sole decision maker for all activities of the company; (b) retained control of the company; and (c) remained the sole decision maker for all business associated with the company in circumstances where the investor agreed to do all things that Macro required to run the business of the company "as [Macro saw] fit". 14 The general rule is that directors "must not fetter their powers by contract with or promises to other persons" (Davidson v Smith (1989) 15 ACLR 732 at 734 per Ipp J). In Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606 (cited with approval in Davidson), Lord Denning MR (dissenting, but not on this point) explained the rule in the following terms (at 626 and 627): It seems to me that no one, who has duties of a fiduciary nature to discharge, can be allowed to enter into an engagement by which he binds himself to disregard those duties or to act inconsistently with them. No stipulation is lawful by which he agrees to carry out his duties in accordance with the instructions of another rather than on his own conscientious judgment … [I]f a director of a company becomes a member of a trade union on the terms that he is to act in the company's affairs on the instructions of the trade union … (rather than according to what he thinks best in the interests of the company), such an agreement of membership is unlawful. It is contrary to public policy that any director should be made to deny his trust and throw over the interests of those whom he is bound to protect. … In each one of these cases the reason is simple: it is wrong to induce another to act inconsistently with the duty of fidelity which he has undertaken by contract or trust to perform. (emphasis added) 15 Because the discretionary powers of directors are fiduciary, in the sense that their exercise is required to be in good faith for the benefit of the company as a whole, an agreement may be void if the directors of a company have purported to fetter wholesale their discretions in advance in relation to the general control and management of the company. Moreover, for directors to purport to so fetter themselves would be a breach of their fiduciary duties and their analogous statutory embodiment in s 181(1). 16 The terms of the MOU required each investor to establish a company of which he or she was the sole director and to carry out his or her duties as director of the company in accordance with the instructions of Macro. The investor's general and specific powers and discretions as a director were to be fettered in an absolute way upon establishment of the company. The present case is distinguishable from Thorby v Goldberg (1964) 112 CLR 597. 17 In Thorby, Kitto J said at 605: There are many kinds of transactions in which the proper time for the exercise of the directors' discretion is the time of the negotiation of a contract, and not the time at which the contract is to be performed. … If at the former time they are bona fide of opinion that it is in the interests of the company that the transaction should be entered into and carried into effect, I see no reason in law why they should not bind themselves to do whatever under the transaction is to be done by the board. 18 Correspondingly, Menzies J said at 616: While I wish to guard against being understood as deciding that a director of a company can in an ordinary case bind himself to exercise his power as a director in a particular way, I have not in this case found any ground for objection to the directors of the company committing themselves, as I think they did, to act as set out in the agreement - for example, to allot shares as provided by cl. 4 or to resign and accept resignations as set out in cl. 5. All the shareholders were party to the agreement and what the directors undertook to do was what all the shareholders committed themselves to ensure that they did. … (emphasis added) 19 In Thorby, the court was concerned with a more limited arrangement and in respect of which the directors had, prior to entry into of the transaction, given consideration as to whether it was in the best interests of the company. There was no expansive fettering of the directors' general discretions and powers. But under each MOU, the investor is required to fetter his or her discretion in respect of "all activities of the company" and "control of the company", by permitting Macro to be "the sole decision maker for all business associated with the company", with the investor agreeing to "do all things required by [Macro] to run the business of the company as [Macro saw] fit". The MOU was not subject to any qualification or proviso that a director could act other than in the interests or at the direction of Macro in order to avoid breaching his or her duties. 20 Unlike Thorby, in the present case the fettering was not limited to a more limited transaction or set of transactions. Further, no consideration was to be given to the interests of the company. 21 Further, the MOU required each investor to agree prior to the establishment of any company to so fetter themselves to act in accordance with Macro's directions. As a result, and by definition, the investor could not, in his or her capacity as a director, give consideration to, and exercise his or her discretion in, the interests of the company. The discretion was fettered in advance of establishment. 22 Further, the MOU required each investor to be the sole shareholder of the company. But unlike a breach of fiduciary duty arguably, on no view can shareholder consent operate to excuse a director from liability for a breach of the statutory duty in s 181. 23 Let me deal with the relief sought, although I will return to this later. Section 1324 of the Act empowers the Court to make orders restraining a person from engaging or proposing to engage in conduct that constitutes or would constitute counselling or procuring a person to contravene the Act. The grant of an injunction pursuant to s 1324 does not require an applicant to establish a contravention of the Act. I should say that in the present case, ASIC has not sought to rely upon s 181(2) or the concept of a person "involved" (see also s 79). 24 In the present case, the defendants have urged, prevailed upon and sought to persuade investors to enter into arrangements, namely, the Investment Proposal, by which investors will contravene s 181. 25 The defendants had knowledge of the essential facts that would go to make up the contravention of s 181 of the Act. 21st Century drafted the MOU and the Brochure. Both Macro and 21st Century were involved in its promotion and marketing. Moreover, the essential facts by which investors would contravene s 181 if they entered into the relevant arrangements were described in the MOU. The defendants plainly had the requisite state of mind for the purpose of s 1324 in terms of counselling or procuring.

(b) Misleading or deceptive conduct 26 ASIC contends that the defendants have engaged in misleading or deceptive conduct, including misrepresentations, in contravention of s 1041H of the Act and s 12DA of the ASIC Act. 27 Section 1041H of the Act prohibits a person from engaging in conduct in relation to a financial product or a financial service that is misleading or deceptive or likely to mislead or deceive. Section 12DA of the ASIC Act is cast in similar terms, save that the prohibition is confined to conduct in trade or commerce and relates to financial services. 28 The words "in relation to" are of considerable breadth. An indirect or less than substantial connection between the conduct and the financial product or financial service is sufficient. 29 The applicable legal principles are uncontroversial. I incorporate in these reasons my discussion in Australian Competition and Consumer Commission v Hillside (Australia New Media) Pty Ltd trading as Bet365 [2015] FCA 1007 at [67] to [77], Comité Interprofessionnel du Vin de Champagne v Powell (2015) 115 IPR 269 at [167] to [183] and Flexopack S.A. Plastics Industry v Flexopack Australia Pty Ltd [2016] FCA 235 at [259] to [270]. 30 In this case, the relevant class of recipients consists of potential investors including inexperienced and new investors who are not sophisticated or well resourced. 31 The following misleading or deceptive representations were made in the Brochure. 32 First, page 17 of the Brochure says: What are my obligations as a director? To ensure that the company is traded correctly and compliant with Australian rules. Once a year returns need to be signed and we handle everything else. 33 There is an implied representation, based on what is stated on page 17 (and what is not), that the investor's obligations as a director can be fulfilled simply by signing one document a year. The representation is also to be implied from the absence of any statement about the investor's duties as a director under statute and at general law. The implied representation that the investor's obligations can be fulfilled by simply signing returns once a year is false. The duties of a director are plainly of greater breadth, both under statute and general law. 34 Second, there is an implied representation that the investment is essentially risk free. The representation is to be implied partly from statements in the documents describing the scheme as "effectively capital guaranteed" with guaranteed income, cash flow and rental yield net of all expenses, with a guaranteed buy back in three, five or seven years. The representation is also to be implied from the fact that the only disclosure as to risk is Macro's insolvency which is expressed in the following terms: This is a risk with any business, but we are so lowly geared that we have plenty of room to soak up poor conditions and market movement. Plus, the primary bank debt between 50-80% only so there is significant margin in the property. 35 The implied representation that the investment is essentially risk free is false or misleading and likely to lead investors into error. The investment risk includes a risk that Macro may not be in a position to "buy back" the properties from all investors at the price for which the properties were transacted some three years earlier. 36 Third, the statements that there is "no deposit required, so no money down", "no capital or fees involved", "100% no money down deals", "all your expenses paid", and "no money down and no hidden costs" are misleading or deceptive. 37 These statements are likely to lead investors into error. There is evidence that investors will be required to contribute some finance to the Investment Proposal. There are statements in the Brochure such as "alternative funding solutions to support traditional bank lending [is available]", "subject to finance approval", responses to the question "who will pay the interest on the land while the house is being constructed" answering "see loan agreement", references to the "interest rate that clients will need to pay on finance" and "your portion of the lending", and statements that the investor "is required to sign and take responsib[ility] for the land and loan that is being provided via MACRO's investors". Further, the MOU states that the company acquires or holds an option to acquire, two properties, which the company must finance and that the investor agrees to use the services of "MACRO Realty Finance" for any finance relating to the company and to use their recommended lenders. 38 Generally, there are various internal tensions and inconsistencies in the documents given to investors which were and are likely to mislead or deceive. 39 Fourth, the representations of: (a) promised income of "guaranteed $200 per week", but elsewhere "$100 right through until the build is finished"; and (b) income "on average … $10,000 p/a", but elsewhere "guaranteed positive cash flow income of $20,800 annually per investment net of all expenses", are inconsistent on their face and likely to lead investors into error. 40 The representations were made by and the conduct engaged in by each of the defendants. 21st Century is identified on each page of the Brochure. The Brochure and MOU were provided by 21st Century to prospective investors and promoted at seminars involving Macro, and were made on behalf of Macro.

(c) Unlicensed provision of financial services 41 Let me begin with some definitions. A "financial product" is a facility through which or through the acquisition of which, a person makes a financial investment (s 763A). A facility is defined to include intangible property, an arrangement, or a combination of both (s 762C). A person (investor) makes a financial investment if (s 763B): (a) the investor gives money or money's worth (the contribution) to another person and any of the following apply: (i) the other person uses the contribution to generate a financial return, or other benefit, for the investor; (ii) the investor intends that the other person will use the contribution to generate a financial return, or other benefit, for the investor (even if no return or benefit is in fact generated); (iii) the other person intends that the contribution will be used to generate a financial return, or other benefit, for the investor (even if no return or benefit is in fact generated); and (b) the investor has no day-to-day control over the use of the contribution to generate the return or benefit. 42 The Investment Proposal constitutes a financial product. It is an arrangement (facility) through which investors may make a financial investment. This is because the investor: (a) agrees to give "money or money's worth" (contribution) by agreeing to establish a company (of which the investor is the sole director and shareholder) and to commit the company to the purchase of properties through institutional finance arranged by or through an entity related to Macro; (b) intends that the contribution will be used by Macro to generate a financial return or other benefit for the investor in the form of "guaranteed returns" and "rental income", promised in the Brochure and MOU; (c) has no day-to-day control over the use of the contribution in circumstances where control of the company has, in effect, been ceded to Macro. 43 A person provides a "financial service" if they provide financial product advice (s 766A). 44 Section 766B defines financial product advice to mean: (1) … a recommendation or a statement of opinion, or a report of either of those things, that: (a) is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or (b) could reasonably be regarded as being intended to have such an influence. 45 A recommendation, statement of opinion or report will be of that type if it was the subjective intention of the maker to have the prescribed influence or if, considered objectively, the recommendation, statement of opinion or report could be regarded as having been intended to have such an influence: Australian Securities and Investments Commission v ActiveSuper Pty Ltd (ActiveSuper) (2015) 105 ACSR 116 at [296] per White J. 46 By marketing and promoting the Investment Proposal, 21st Century and Macro have made recommendations that could reasonably be regarded as being intended to influence investors to decide to enter into the Investment Proposal. Accordingly, as the Investment Proposal constitutes a financial product, financial product advice has been provided. Accordingly, financial services have been provided. 47 21st Century has engaged in the unlicensed provision of financial services in contravention of s 911A of the Act. 48 A person who carries on a financial services business (by dealing in financial products and/or providing financial product advice) must hold an Australian Financial Services Licence (AFSL). Section 911A(1) provides: 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. 49 The expression "financial services business" is defined in s 761A to mean "a business of providing financial services". The notion of carrying on a financial services business is informed by s 761C and by ss 18 to 21 of the Act: ActiveSuper at [295]. A person provides a financial service if, amongst other things, the person provides "financial product advice" or deals in a "financial product" (s 766A(1)). 50 21st Century is and has been providing financial product advice and providing financial services as discussed above. But no AFSL is held by 21st Century and nor is either company an authorised representative of any AFSL holder. 51 In summary, 21st Century is carrying on an unlicensed financial services business in contravention of s 911A.

RELIEF SOUGHT 52 ASIC has sought injunctions restraining Macro from: (a) promoting and marketing the Investment Proposal; (b) entering into any arrangement or agreement in relation to the Investment Proposal; (c) doing any act in furtherance of or in connection with the Investment Proposal; and (d) receiving, soliciting or disposing of any funds in connection with the Investment Proposal. 53 As I have said, s 1324 of the Act empowers the Court to make the relevant orders. The relevant principles were summarised by White J in ActiveSuper at [622] citing Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605 at [36]. First, the jurisdiction which the Court exercises under s 1324 is statutory and not traditional equitable jurisdiction. Second, the Court is not confined by the considerations that would apply if it was exercising such equitable jurisdiction. Third, the Court should consider whether the injunction will have some utility or will serve some purpose manifested by the Act. Relatedly, the Court should give greater weight to the question of whether the injunction will serve a purpose contemplated by the Act when ASIC is the applicant for relief. 54 Further, the grant of an injunction under s 1324 marks the Court's disapproval of the relevant conduct and operates as a deterrent to others. 55 Relatedly, s 1101B of the Act empowers the making of orders in respect of contraventions of Ch 7 if, in the opinion of the Court, it is desirable to do so. 56 Relatedly, s 12GD of the ASIC Act is in relevantly identical terms to s 1324 of the Act. It enables the grant of an injunction for misleading or deceptive conduct in contravention of s 12DA of the ASIC Act. 57 In my view, ASIC has established its entitlement to the injunctions sought. The triggers for the exercise of any one or more of these powers have arisen and it is appropriate to make the orders sought in the exercise of my discretion. 58 Further, the Court has discretionary power to grant declarations by consent or on a not opposed basis on the basis of affidavit evidence. The Court should be satisfied that the questions are real and not theoretical, the applicant has a real interest in obtaining the declarations and there is a proper contradictor. A proper contradictor can include a person who consents to, or does not oppose, the relief sought. 59 In the present case, the questions raised are not theoretical, ASIC has a real interest in obtaining the declarations and the defendants are proper contradictors. The declarations sought are appropriate and serve to: (a) record the Court's disapproval of the contravening conduct; (b) vindicate ASIC's claim that the defendants have contravened the Act and the ASIC Act; (c) inform members of the public about the contravening conduct and about the nature of the Investment Proposal; and (d) act as a general deterrent. 60 I will make orders in the terms discussed with counsel. But before doing so I should deal with one other matter. Counsel for ASIC properly drew my attention to the fact that the form of declarations ASIC now seeks differs from those expressed in the originating process. Having made a comparison, the differences appear to be matters of form rather than substance, but with additional detail being added. Apparently, these amended declarations were circulated to the other parties yesterday. Counsel for ASIC informed me that Macro, who did not appear today, wanted an opportunity to put in written submissions on the form thereof. I have declined to give Macro that opportunity. First, Macro should have appeared before me if they wanted that opportunity. Second, as I have said, the amended declarations are fully consistent with the material served, including ASIC's written submissions. The defendants have had adequate notice and no new point has been sought to be finessed through the amendments. Third, paragraph 6 of the originating process permits of variations of the present type in any event. Fourth and in any event, the content of the amended declarations are encompassed within the generality of the declarations expressed in paragraph 3 of the originating process. I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beach.