Australian Securities and Investments Commission v Marco

INTRODUCTION 1 This is an application by the defendants to vary the asset perseveration orders made on 1 November 2018. The variations sought are set out in the defendants' amended minute dated 5 August 2019. 2 Since the preservation orders were imposed on 1 November 2018, several variation orders have been made by the Court with the consent of the defendants and the plaintiff, the Australian Securities and Investment Commission (ASIC). However, ASIC opposed much of the relief sought in the defendants' minute and the application was listed for hearing. After the filing of supplementary submissions by the parties, I made orders in terms of the minute and advised the parties I would publish short written reasons. These are those reasons.

BACKGROUND 3 Much of the background to this proceeding is set out in a previous judgment of this Court: Australian Securities and Investments Commission v Marco (2019) 136 ACSR 116. 4 Section 1323 of the Corporations Act 2001 (Cth) empowers the Court, where necessary or desirable to do so, to make orders that protect the interests of 'aggrieved persons'. That section provides: 1323 Power of Court to prohibit payment or transfer of money, financial products or other property (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; or (b) a prosecution has been begun against a person for a contravention of this Act; or (c) a civil proceeding has been begun against a person under 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), (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: (d) an order prohibiting a person who is indebted to the relevant person or to an associate of the relevant person from making a payment in total or partial discharge of the debt to, or to another person at the direction or request of, the person to whom the debt is owed; (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; (f) an order prohibiting the taking or sending out of this jurisdiction, or out of Australia, by a person of money of the relevant person or of an associate of the relevant person; (g) an order prohibiting the taking, sending or transfer by a person of financial products or other property of the relevant person, or of an associate of the relevant person: (i) from a place in this jurisdiction to a place outside this jurisdiction (including the transfer of financial products from a register in this jurisdiction to a register outside this jurisdiction); or (ii) from a place in Australia to a place outside Australia (including the transfer of financial products from a register in Australia to a register outside Australia); (h) an order appointing: (i) if the relevant person is a natural person - a receiver or trustee, having such powers as the Court orders, of the property or of part of the property of that person; or (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; (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. (2A) A reference in paragraph (1)(g) or (h) to property of a person includes a reference to property that the person holds otherwise than as sole beneficial owner, for example: (a) as trustee for, as nominee for, or otherwise on behalf of or on account of, another person; or (b) in a fiduciary capacity. (2B) Subsection (2A) is to avoid doubt, is not to limit the generality of anything in subsection (1) and is not to affect by implication the interpretation of any other provision of this Act. (2) An order under subsection (1) prohibiting conduct may prohibit the conduct either absolutely or subject to conditions. (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. (4) On an application under subsection (1), the Court must not require the applicant or any other person, as a condition of granting an interim order under subsection (3), to give an undertaking as to damages. (5) Where the Court has made an order under this section on a person's application, the Court may, on application by that person or by any person affected by the order, make a further order discharging or varying the first mentioned order. (6) An order made under subsection (1) or (2) may be expressed to operate for a specified period or until the order is discharged by a further order under this section. (7) Nothing in this section affects the powers that the Court has apart from this section. (8) This section has effect subject to the Bankruptcy Act 1966. (9) A person must not contravene an order by the Court under this section that is applicable to the person. (10) An offence based on subsection (9) is an offence of strict liability. Note: For strict liability, see section 6.1 of the Criminal Code. 5 On 1 November 2018, on the evidence before the Court, it was accepted that it was necessary to make the preservation orders protecting the interests of such persons. 6 Many of the variation orders made in this proceeding have concerned payments relating to real property held by the defendants. 7 By their minute, the defendants sought the following orders: 1. Notwithstanding order 3 of the orders made on 1 November 2018 herein, the Third Defendant be permitted to pay: (a) QHM Residential Maintenance the sum of $14,080.00, being the cost (including GST) of labour and materials for repairs and renovations to the property at 262 Stirling Highway, Claremont, pursuant to invoice number 0950 dated 27 May 2019; (b) AAI Limited trading as GIO the sum of $690.18, being the cost (including GST) of the premium for strata insurance for Units A and B, 171 Edinboro Street, Joondanna, pursuant to a quote dated 9 May 2019; (c) Karika FenceWright WA Pty Ltd the sum of $6,996.00, being the cost (including GST) of the supply and installation of colorbond fencing for the property at 177 Scarborough Beach Road, Mount Hawthorn, pursuant to quote number #10682P dated 18 April 2019; (d) Knightcorp Holdings Pty Ltd the sum of $10,382.97, being the cost (including GST) of the premium for commercial strata insurance for the property at 264 Stirling Highway, Claremont, pursuant to invoice number 55828 dated 23 April 2019; (e) Knightcorp Holdings Pty Ltd the sum of $3,889.70, being the cost (including GST) of the premium for commercial property owners insurance for the property at 262 Stirling Highway, Claremont, pursuant to invoice number 55829 dated 23 April 2019; (f) the Australian Taxation Office the sum of $1,522.00, being the amount due on a business activity statement of the Third Defendant (payment reference number 5771 5461 8604 860); and (g) Knightcorp Holdings Pty Ltd the sum of $2,068.13, being the cost (including GST) of the premium for commercial property insurance for the property at 8 McDonald Street, Osborne Park, pursuant to invoice number 57621 dated 7 June 2019. 2. Notwithstanding order 3 of the orders made on 1 November 2018 herein, the First Defendant be permitted to transfer the sum of $108,266.68 from his bank account BSB 037165 account number 857175 to the Third Defendant's bank account BSB 036080 account number 540078 to enable the Third Defendant to pay: (a) the sums set out in order 2 of the orders made on 22 March 2019 herein to the Commissioner of State Revenue for land tax on the respective dates set out in that order; (b) the sum of $4,576.00 to the City of Vincent for the hire of car bays pursuant to the order made herein on 23 April 2019; (c) the sum of $14,080.00 to QHM Residential Maintenance for the cost of repairs and renovations to the property at 262 Stirling Highway, Claremont, pursuant to sub-paragraph (a) of order 1 above; (d) the sum of $690.18 to AAI Limited trading as GIO for the premium for strata insurance for Units A and B, 171 Edinboro Street, Joondanna, pursuant to sub-paragraph (b) of order 1 above; (e) the sum of $6,996.00 to Karika FenceWright WA Pty Ltd for the supply and installation of colorbond fencing for the property at 177 Scarborough Beach Road, Mount Hawthorn, pursuant to sub-paragraph (c) of order 1 above; (f) the sum of $10,382.97 to Knightcorp Holdings Pty Ltd for the premium for commercial strata insurance for the property at 264 Stirling Highway, Claremont, pursuant to sub-paragraph (d) of order 1 above; (g) the sum of $3,889.70 to Knightcorp Holdings Pty Ltd for the premium for commercial property owners insurance for the property at 262 Stirling Highway, Claremont, pursuant to sub-paragraph (e) of order 1 above; (h) the sum of $1,522.00 to the Australian Taxation Office for the amount due on a business activity statement of the Third Defendant (payment reference number 5771 5461 8604 860), pursuant to sub-paragraph (f) of order 1 above; (i) the sum of $2,068.13 to Knightcorp Holdings Pty Ltd for the premium for commercial property insurance for the property at 8 McDonald Street, Osborne Park, pursuant to sub-paragraph (g) of order 1 above; and (j) the ordinary operating expenses of the Second and Third Defendants of $2,750.00 per week pursuant to order 3 of the orders made on 12 February 2019 herein for the weeks commencing 8 April 2019, 15 April 2019, 22 April 2019, 13 May 2019 and all subsequent weeks thereafter up to and including the week commencing 29 July 2019. 3. Notwithstanding order 3 of the orders made on 1 November 2018 herein, the Third Defendant be permitted to engage QHM Residential Maintenance to complete the repairs and renovations to the property at 262 Stirling Highway, Claremont, for the sum of $24,145.00 including GST pursuant to quote number 0256 dated 10 June 2019. 8 ASIC opposed the making of the orders at paras 1(a), 2 and 3 of the minute. 9 The variation application was listed on 9 August 2019, at which various oral submissions were made to which I will refer further below. However, of particular note, was the following comments made by ASIC's counsel: Have a look at what they've done to date to have a look at how likely it is that they will reach a point of being able to independently generate money without having to resort to investor funds. It is - while an explanation can be given property by property as to why each property is not realising the rental yields it should, it is a rather extraordinary list to have so many properties out there, all of them being, with very few exceptions, capable of receiving decent rent that would meet these kind of expenses, and almost none of them, in fact, receiving any rental money at this point. There's an explanation, as I say, that's given each time for each particular property. It's things like we have to do the property up before we can rent it out or, you know, there was this problem with this person paying the rent, but it does - it can't escape the court's notice that the people who had been given rather generous extensions of time to pay rather large amounts of money happen to be people who are friends with or related to [the first defendant]. And so it is a relevant consideration the court must take into account is the failure of the defendant to make what one would expect to be a normal commercial rental yield from the relevant properties and be able to use that money to then pay the relevant expenses. So that's one of the concerns we've raised in some detail in our submissions. And again, I'm just dealing with this in a summary way, sir, simply because we've dealt with it in the submissions. (Emphasis added.) 10 The parties were invited to file submissions and supporting evidence on this passage. 11 Final supplementary submissions and evidence were filed on 11 September 2019. Orders were made on 12 September 2019.

SUBMISSIONS AND CONSIDERATION 12 The defendants' chief submission was that since the making of the preservation orders on 1 November 2018, the defendants have endeavoured to preserve, and in some cases improve, all of the assets of the first, second and third defendants; by far the largest of those assets, in monetary terms, are the real properties. The defendants' contended that the variations to the preservation orders sought by the minute ought to be characterised as a further attempt by the defendants to preserve and improve these assets. The payments sought to be approved were said to be relatively modest and necessary to be paid; the outstanding taxes have to be paid, the real properties need to be insured and the renovations need to be made to place the properties into a marketable condition. 13 Since the commencement of this proceeding, the defendants' position has been that all of the assets of each of the first, second and third defendants are available, if needed, to pay to the first defendant's investors any monies that are due to them. 14 In summary, ASIC opposed the making of paras 1(a), 2 and 3 of the minute on the following bases: (a) in respect of para 1(a), the work undertaken was after the preservation orders dated 1 November 2018 were in place and without consent of the Court, in circumstances where the first defendant, deposed to the property being tenanted and generating an income; (b) in respect of para 2, the first defendant should not be permitted to use funds held by him on trust for his investors to pay the liabilities of the first and second defendants, a separate legal entity, in circumstances where the second and third defendants' financial difficulties are the substantial result of the failure by the first defendant and Mr Damon Marco, to properly manage the properties owned by the second and third defendants; and (c) in respect of para 3, the second and third defendants do not have the funds to pay for this expense. 15 The defendants maintained that the most obvious and accessible source of funds was the bank accounts of the first defendant and the fact that the payments relate to properties of which the second defendant is the registered proprietor is irrelevant. If, as ASIC maintains, the monies paid to the first defendant by his investors were held on trust by him for the benefit of his investors, then regardless of whether those monies were used to purchase properties in the name of the first defendant or the second defendant, the properties are held on trust for the benefit of the first defendant's investors. On the other hand, if the monies paid to the first defendant by his investors were not held on trust, then the properties in the name of the first defendant are available to his investors because he is personally liable to them and the properties in the name of the second defendant are being made available by the first defendant to his investors. This, the defendants contend, the first defendant is able to do because he is the sole shareholder of the trustee and he is also the appointer and guardian of the trust and a specified beneficiary of the trust. 16 It is unclear whether all of the investors have an (equal) interest in the properties held by the second and third defendants and whether the investors whose monies are currently held in the first defendant's bank accounts have an interest in the properties such that it would be for their benefit that the expenses of the second and third defendants to be paid. It is an unresolved issue between the parties, and this point is yet to be fully argued, as to the nature or characterisation of the asserted nature of the liability of the respective defendants to the investors. 17 It is accepted between the parties that the purpose of s 1323 of the Corporations Act is to provide a means by which property that may, in due course, represent a source for the vindication of the rights of those (aggrieved) persons can be preserved for their benefit. Therefore, the core concern of the Court is not whether the defendants have made 'what one would expect to be a normal commercial rental yield from the relevant properties'. Rather, my chief concern was whether the making of the orders sought in the minute would serve to preserve the property that may, in due course, represent a source for the vindication of the rights, if any, of the investors: the 'aggrieved persons'. 18 ASIC's case has been that all of the properties purchased with monies provided by the investors are held on trust for those investors, irrespective of whether the properties purchased are real properties or personal properties and irrespective of whether the legal ownership of those properties resides with the first defendant or the second defendant, the beneficial ownership of that property resides with the investors. The legal ownership of the properties does not matter to the investors. However, in submissions concerning this application, and indeed throughout this action, ASIC has treated the monies in the first defendant's bank accounts quite differently to the real properties owned by the second defendant. ASIC has contended that orders in terms of the minute would have the 'effect of depleting the liquid assets presently restrained for the benefit of "aggrieved persons"'. However, dealings in the real properties owned by the second defendant are also presently restrained for the benefit of aggrieved persons. 19 While the defendants dispute the trust characterisation, the defendants contend all of the real and personal assets of each of the defendants are available to satisfy the claims of the investors to the same extent as if those assets were held on trust for the investors. This contention, at this stage, has not been challenged. 20 It seemed clear that many of the payments which were the subject of this application will have to be made, either voluntarily or, ultimately, by the forced sale of some of the assets owned by the second defendant (a suggestion raised by ASIC's counsel). 21 It cannot be said that insuring the real property would be imprudent. Insuring the real properties owned by the second defendant is consistent with the purpose of s 1323 of the Corporations Act to preserve the properties for the benefit of the aggrieved persons. Conversely, not insuring those properties, particularly when the cost is fairly minimal compared to the value of the properties and when funds are available to pay the premiums, is inconsistent with that same purpose. 22 Turning to the renovations and repairs, the first defendant has deposed that the property has both structural and aesthetic defects requiring rectification. These will serve to put the property into a rentable condition and thereby generate an income. 23 ASIC suggests that there may be tracing issues arising such that investors may not be able to equally assert an interest to both the monies in the first defendant's bank account and the assets of the second and third defendants. The defendants note several things, the complexity of these contentions which have not been the subject of detailed submission, the relative modesty of the payments and the commerciality considerations favouring payment of these liabilities from monies resting in a bank account rather than forcing the sale of real property in the current commercial climate; however, ultimately, my decision to make orders in terms of the minute was based on consideration of whether the payments were good money after bad and whether payments which have been made or incurred were prima facie in good faith . I did not consider this to be the case. 24 Ultimately, ASIC's counsel accepted that it was a matter for the Court to determine whether the payments sought by the minute were a proper use of investor monies. Here monies were being expended on assets, the subject of the preservation orders, preserved for the benefit of the investors. 25 From submissions from ASIC's counsel it was clear that this was going to be a lengthy investigation and assets cannot be permitted to waste in the interim. The considerations required to perpetuate freezing orders for an extensive period may well be different from those taken into account in granting freezing orders for a short period at the outset. The matters to be taken into account in the exercise of the discretion will require consideration not only of the investors' interests but also those of the defendants and a review of the strength of the prima facie case if the investigation is to continue for another 12 months. 26 Further, from the evidence filed, I was satisfied that the 'generous extensions' to which ASIC's counsel referred, have been adequately explained as has the necessity of the real property works. Accordingly, I made orders in terms of the minute. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.