Australian Securities and Investments Commission v Macrolend Pty Ltd

The nature of the application 1 This is an interlocutory application filed on 28 June 2024 by the Australian Securities & Investments Commission (ASIC) (the plaintiff). Pursuant to r 16.21 of the Federal Court Rules 2011 (Cth), the principal order sought by that application is that the defences filed on 20 May 2024 by Macrolend Pty Ltd (ACN 122 386 109), Mr David Hodgson and Great Southland Ltd (GSL)) (the first, second and third defendant) be struck out. 2 Relevant to this application, by its originating application filed on 14 February 2024, ASIC seeks, inter alia, injunctions against Mr Hodgson (and each of the first and third defendants pursuant to ss 1101B and 1324 of the Corporations Act 2001 (Cth) (and - against the first defendant and Mr Hodgson - further, or alternatively, s 12GD of the Australian Securities and Investments Act 2001 (Cth) (ASIC Act)) "to restrain him from carrying on a financial services business in this jurisdiction without holding an [Australian Financial Services Licence (AFSL)]", in contravention of ss 911A(1) and 911A(5B) of the Corporations Act. 3 Mr Hodgson is the sole director (since 1 October 2022) and shareholder of Macrolend. He is also the sole director of GSL (since 26 February 2014). Mr Hodgson and his wife, Mrs Merlene Hodgson, each own 50% of the shares in GSL. 4 Further to the injunctions sought by ASIC, in reliance on the matters pleaded in its Statement of Claim filed on 28 March 2024, ASIC seeks relief against Macrolend and Mr Hodgson in respect of two arrangements by which Macrolend raised funds from investors, termed the Kradle Investment Arrangement and the Macrolend Loan and Promissory Note Arrangement. As to both of these arrangements, ASIC seeks, inter alia, declarations that: (a) Macrolend contravened ss 911A(1) and 911A(5B) of the Corporations Act by carrying on a financial services business in this jurisdiction without holding an AFSL and ss 601ED(5) and 601ED(8) of the Corporations Act by operating an unregistered management investment scheme; and (b) Mr Hodgson contravened ss 911A(1) and 911A(5B) of the Corporations Act by carrying on a financial services business in this jurisdiction without holding an AFSL, or was involved, contrary to s 1317E(4)(b), in Macrolend's conduct in contravention of ss 911A(1) and 911A(5B) of the Corporations Act. 5 ASIC also seeks declarations that, in relation to the Kradle Investment Arrangement, Macrolend and Mr Hodgson engaged in conduct that was misleading or deceptive, or likely to mislead or deceive, in contravention of s 1041H of the Corporations Act (and further or alternatively, s 12DA of the ASIC Act). 6 Further, as against GSL and Mr Hodgson, ASIC seeks declarations in relation to the GSL Promissory Notes Arrangement that, inter alia: (a) GSL contravened s 601CD of the Corporations Act by carrying on business in this jurisdiction without being registered to do so under Pt 5B.2 of the Corporations Act; and (b) GSL and Mr Hodgson engaged in conduct that was misleading or deceptive, or likely to mislead or deceive, in contravention of s 1041H of the Corporations Act and s 12DA of the ASIC Act. 7 In addition, ASIC seeks an order pursuant to s 206E of the Corporations Act that Mr Hodgson be disqualified from managing corporations for a period to be determined by the Court. 8 There was no real dispute between the parties as to the matter that, absent an entitlement to rely on penalty privilege, the defences are deficient. Nevertheless, as submitted by the defendants, each of the defences makes numerous admissions. Despite the admissions and limited positive allegations in the defences, ASIC ultimately submitted that the defences do not give it fair notice of the defence of each defendant and do not properly assist the Court and the parties to identify the real issues in dispute, contrary to ss 37M and 37N of the Federal Court of Australia Act 1976 (Cth). 9 ASIC submitted that, prima facie, the defences should be struck out pursuant to r 16.21(1)(c), because they are evasive or ambiguous; or r 16.21(1)(d), because they are likely to cause prejudice, embarrassment or delay in the proceeding. 10 The defendants resisted ASIC's application on the basis that Mr Hodgson, so it was argued, is entitled to claim the privilege against self-exposure to penalty. They argued that the proceeding is properly characterised as one for the imposition of a penalty because the injunctive relief sought by ASIC in respect of Mr Hodgson would prohibit him from engaging in lawful conduct (namely, carrying on a business). I interpolate that there was no dispute between the parties that declarations are not penal in nature, nor that the Corporations Act has, by s 1349(1)(f), foreclosed any argument that a disqualification order is relevantly penal in character. 11 The first question to be decided in this case is the proper construction of the injunctive remedy sought by ASIC, namely whether it seeks the imposition of a penalty. The answer to that question informs the next question as to whether Mr Hodgson is entitled to claim the penalty privilege.

Is the injunctive relief properly characterised as penal? 12 In determining whether a proceeding exposes a defendant to a penalty, the Court must focus on the effect of the relief sought: see Rich v Australian Securities and Investments Commission [2004] HCA 42; 220 CLR 129 at [25], [31] (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ). ASIC submitted, in reliance on the decision of the Full Court in Gore v Australian Securities and Investments Commission [2017] FCAFC 13; 249 FCR 167 (Dowsett, Rares and Gleeson JJ) that because the injunctions sought in the present case purport only to restrain conduct that would otherwise be unlawful, the relief sought is not penal. The defendants, however, submitted that ASIC has used a drafting technique to avoid the result that pertained in Gore. They submitted that the addition of the words "without holding an AFSL" to the terms of the injunctions sought against Mr Hodgson was designed to bring ASIC's application within the proposition that it is only seeking to restrain unlawful conduct, but in circumstances where Mr Hodgson does not currently hold an AFSL, and has no realistic prospects of being granted one, once the declarations sought by ASIC are made. The defendants submitted further that the words are superfluous in any event, because it is plain that one cannot carry on a financial services business in this jurisdiction without an AFSL. The defendants submitted that, if those superfluous words are removed, the injunctions sought by ASIC are intended to restrain otherwise lawful conduct. 13 The purpose of civil penalty provisions is deterrence: Australian Building and Construction Commissioner v Pattinson [2022] HCA 13; 274 CLR 450 at [42]-[43]. Nevertheless, a range of penalties is available under the Corporations Act, many of which may have the practical effect of being punitive. Mr Hodgson submits that such is the practical effect of the injunctions sought by ASIC - it is irrelevant that a pecuniary penalty is not sought. 14 Gore was an appeal from Australian Securities and Investment Commission v ActiveSuper Pty Ltd (in liq) [2015] FCA 342; 235 FCR 181 and Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq) (No 2) [2015] FCA 527. The primary judge had ordered that Mrs Gore be enjoined for seven and a half years from "carrying on any business in relation to financial products or financial services by providing financial product advice, dealing in financial products, and otherwise carrying on a financial services business within the meaning of Chapter 7" of the Corporations Act: see Gore at [154]. On appeal, Rares J said: [284] There are many situations in which an injunction could be sought and granted under s 1324(1) in which no-one could suggest that the proceeding in which the relief was sought was "for the imposition of a penalty". For example, a liquidator might seek to enjoin a person claiming to be entitled to take an enforcement process against a company's property contrary to s 471B or a shareholder might seek to enjoin the holding of a meeting of a company because of a contravention of the Act. [285] On the other hand, proceedings seeking to interfere with an important common law right of a person to carry on business or to pursue his or her livelihood free from restraint of trade can have the character of being "for the imposition of a penalty" (Citations omitted.) [286] The principle that applies for construing s 1324(1) is that stated by Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ in Owners of Shin Kobe Maru v Empire Shipping Company Inc (1994) 181 CLR 404 at 421 namely: It is quite inappropriate to read provisions conferring jurisdiction or granting powers to a court by making implications or imposing limitations which are not found in the express words. [287] The general application of s 1324(1) should not be circumscribed by characterising proceedings in which relief is sought under s 1324(1) as presumptively purely remedial or, because of the potential reach of the section, capable of being "for the imposition of a penalty". The section is inherently neutral in its potential reach. The prohibition in s 68(3) was directed to the purpose for which the proceedings were instituted, not to the range of possible uses that a statutory remedy, such as s 1324(1), might be conscripted by the applicant or court to serve. … [289] Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ held in Rich at [35] that it is erroneous to make an a priori classification of proceedings as being either protective or penal, since those categories are not necessarily mutually exclusive. They said there: Just as a law may bear several characters, a proceeding may seek relief which, if granted, would protect the public but would also penalise the person against whom it is granted. That a proceeding may bear several characters does not deny that it bears each of those characters [Stone, Legal System and Lawyers' Reasonings (1964), pp 248-252]. (Emphasis in original.) [290] Here, the objective purpose for which ASIC sought relief against Mrs Gore under s 1324(1) was to prevent her from engaging in the earning of her livelihood for a future period, not just in the contravening manner she had acted, but also in any other way in a large field of activity that she otherwise could have pursued without contravening any law. ASIC, as a statutory regulator, sought that the latter consequence be inflicted on her on account of her wrongdoing in contravening the Act. If inflicted, the consequence of an injunction was a penalty: Rich at [29], [37]. 15 The present case is different. The injunctions sought do not have the breadth of that sought against Mrs Gore. They are, rather, to restrain only "carrying on a financial service business in this jurisdiction without holding an AFSL". They do not seek also to restrain the carrying of any business in relation to financial products or financial services by providing financial product advice or by dealing in financial products in ways which may not require an AFSL. 16 Section 911A(1) of the Corporations Act contains the obligation on a person who carries on a financial services business, within the meaning of Ch 7, to hold an AFSL: [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 service. 17 The requirement extends to all financial services in the course of business, whether for profit or not. The scope of services caught by the requirement to hold an AFSL is very wide. As observed by Justice Ashley Black and Professor Pamela Hanrahan, Securities and Financial Services Law (LexisNexis Butterworths, 10th ed, 2021) at [10.1], the requirement applies to: brokers, dealers, market makers, underwriters, financial advisers … credit rating agencies, custodians and depositories, crowd-sourced funding (CSF) platform operators, margin lenders, responsible entities of registered managed investment schemes (listed and unlisted) and operators of direct distribution foreign passport funds, issuers of exchange traded funds (ETFs), derivatives and structured products, and litigation funders. [The] requirement also applies to product issuers who sell banking, insurance and non-cash payment (but not credit) products directly to clients or engage representatives to do so and to life insurance companies and general insurance companies; deposit-taking institutions and foreign exchange dealers; providers of non-cash payment facilities; underwriting agencies; and those representatives of financial services providers that may operate as principals such as multi-agents for insurers. 18 Since the date of that publication, litigation funders have been absolved of the need to obtain an AFSL by the Corporations Amendment (Litigation Funding) Regulations 2022 (Cth). Credit providers are also not required to obtain an AFSL; nor services in relation to cryptocurrencies, unless their characteristics otherwise meet the definition of "financial product" or are used as the basis of other financial products such as cryptocurrency-linked derivatives (ALRC Report No 137, Financial Services Legislation: Interim Report A, November 2021 at [3.40]). 19 Unlike the circumstances that pertained in Gore, ASIC does not seek, by the terms of the relief sought, to prevent Mr Hodgson from engaging in the earning of his livelihood in a field of activity for which an AFSL is not required; rather, it seeks only to restrain him from carrying on a financial services business in this jurisdiction without holding an AFSL - ipso facto, a business that provides financial services within the meaning of Ch 7 of the Corporations Act. 20 It is axiomatic that if Mr Hodgson wishes to carry on a financial services business in this jurisdiction, he is required by s 911A(1) to hold an AFSL. I accept that one reading, therefore, of the injunctions sought might render the words "without holding an AFSL" superfluous. That reading, however, fails to distinguish between the reality of an "ability" to carry on a financial services business and the "statutory permission" required to do so. Section 911A(1), in its terms, recognises that reality: a person who carries on a financial services business must hold an [AFSL]. 21 Absent evidence to the contrary, a Court is generally entitled to infer that a person will act, or has acted, lawfully: Embedded Claims Pty Ltd v Litigation Finance (Australia) Pty Ltd [2023] FCAFC 30 at [35] (Markovic, Colvin and Thawley JJ). That being so, if the words "without holding as AFSL" are removed from the terms of the injunctions sought, their effect will be to restrain Mr Hodgson from carrying on a financial services business in this jurisdiction at all (lawfully or otherwise) because it will be presumed that he has complied with the statutory obligation to hold an AFSL. The inclusion of the words make pellucid that the injunctions are intended only to restrain the unlawful conduct, as alleged in the statement of claim, of carrying on a financial services business in this jurisdiction without holding an AFSL. 22 I am not persuaded that the words "without holding an AFSL" in the terms of the injunctions as presently sought against Mr Hodgson are superfluous. My view accords with that reached by Flanagan J of the Supreme Court of Queensland in Australian Securities and Investments Commission v Munro [2016] QSC 9. His Honour was there concerned with s 68(3) of the ASIC Act by which a statement is not admissible in evidence against the person who made the statement in, inter alia, a proceeding for the imposition of penalty. Flanagan J distinguished the decision of Gordon J in Australian Securities and Investments Commission v Monarch FX Group Pty Ltd [2014] FCA 1387; 103 ACSR 453, in which her Honour had been concerned with an order, pursuant to s 1101B of the Corporations Act, seeking to restrain the first defendant for a period of four years from carrying on a financial services business. Her Honour held, in those circumstances, that the proceeding was for the imposition of a penalty: Monarch at [28]. Flanagan J said (Munro at [29]): In the present case the injunctive relief does not have this punitive effect. Here the injunctive relief sought is that the respondents be permanently restrained from carrying on a financial services business in this jurisdiction without holding an AFSL. The injunctive relief does not therefore seek to punish the respondents but rather to ensure that the respondents comply with the relevant provisions of the Act. (Emphasis added.) 23 On this basis, I reject the submission of the defendants that the inclusion of the words "without holding an AFSL" are a "drafting device to side-step the privilege". 24 True it may be, as the defendants submitted, that in the event ASIC succeeds at trial and is granted the declarations sought, it may be difficult for Mr Hodgson to satisfy ASIC that he meets the requirements for the grant of an AFSL. But that is not to the point. Any anticipated difficulty in successfully applying for an AFSL does not convert the injunctions sought from ones to restrain unlawful behaviour into ones that restrain lawful behaviour. 25 Further, unlike the position in Gore, were the injunctions to be granted in the terms sought, Mr Hodgson would remain at liberty to carry on any business that does not fall within the definition of "carrying on a financial services business in this jurisdiction" within the meaning of Ch 7 of the Corporations Act. ASIC relied on the affidavit of Ms Anne Elizabeth Gubbins filed 14 June 2022, to which a letter from ASIC to the defendants' solicitors dated 10 June 2024 was annexed, that read: By the proceeding, ASIC is not seeking the imposition of a pecuniary penalty order pursuant to s 1317G, nor any other penalty, against Mr Hodgson, or indeed any of the defendants. Further, for the avoidance of any doubt, ASIC will not seek to amend its Originating Process, Amended Concise Statement or Statement of Claim filed in the proceeding (based on the defendants' conduct identified in those documents) to seek a pecuniary penalty order against Mr Hodgson or injunction against him in terms other than as outlined in paragraph 2(b) of ASIC's Originating Process. 26 Consequently, all that ASIC is seeking is injunctive relief to compel conduct in accordance with an existing duty. The relief sought is not penal.

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