Australian Securities and Investments Commission v Marco

BACKGROUND 4 On 1 November 2018, ASIC applied ex parte for (and was granted) reporting orders and asset preservation orders against the defendants pursuant to s 1323(1) of the Corporations Act. As I explained in Australian Securities and Investments Commission v Marco [2019] FCA 466 (Marco (No 1)) (at [2]), the 'interim orders were sought to preserve the assets of the defendants and to maintain the status quo in order to protect the alleged "aggrieved persons" while allowing ASIC to continue to investigate claims that the defendants may be in breach of various provisions of the Corporations Act and the Criminal Code (WA).' 5 The 1 November 2018 orders provided that the relevant freezing orders would not prevent AMS Holdings and the AMS Holdings Trust from paying or otherwise incurring a liability for ordinary operating expenses up to $1750 per week or such greater sum as may be set by the Court. The orders have been amended from time to time. 6 In December 2019, as a result of investigations conducted thus far, ASIC sought further interim relief in the form of receiver orders and leave to amend its originating process. On 27 May 2020, that relief was granted and orders were made appointing Mr Robert Kirman and Mr Robert Brauer of McGrathNicol as interim receivers over the assets of the defendants (the Interim Receivers). The application was strenuously opposed by the defendants. The Interim Receivers were ordered to provide a report to the Court within 60 days that addressed a number of issues including the identification of the assets and liabilities of the defendants, an opinion as to the solvency of the defendants and the likely return to creditors, including investors, in the event that any scheme operated by Mr Marco were to be wound up. Leave to file an amended originating process was also granted: Australian Securities and Investments Commission v Marco (No 3) [2020] FCA 719. 7 On 28 May 2020, ASIC filed its amended originating process. Amongst other relief, by the amended originating process ASIC seeks orders: (a) that the scheme be wound up and a liquidator be appointed for the purposes of winding up the scheme pursuant to s 601EE of the Corporations Act; (b) that AMS Holdings be wound up and a liquidator be appointed for the purposes of winding up AMS Holdings and the AMS Holdings Trust pursuant to s 461(1)(k) of the Corporations Act; (c) that each of the defendants refund the total amount of principal invested by each investor in the scheme and further, or in the alternative, invested with Mr Marco personally, together with all undistributed returns due and payable to them as at the date of the orders less the total amount of principal, if any, returned to each of them prior to the date of the orders; and (d) to provide for various other relief including declarations, injunctions and publication orders. 8 On 24 July 2020, the Interim Receivers provided their report to the Court pursuant to the orders made on 27 May 2020 (the Interim Receivers' Report). The Interim Receivers' Report is annexed to the 2 October Lim Affidavit. Among other matters, the Interim Receivers' Report made the following salient observations: (a) 'Mr Marco has consistently stated in the Proceedings and in his dealings with the receivers that, in his view, he and AMS [Holdings] are in effect one and the same and should be viewed collectively as a representation of his business dealings. Mr Marco admits that all of [AMS Holdings'] assets were purchased from investor funds provided to him' (Emphasis added.); (b) 'with the exception of a $0.6 million business loan from Westpac (secured against a property located on McDonald Street West, West Osborne Park, Western Australia), all of [AMS Holdings'] funding was via an undocumented, related party loan of investor monies from [Mr] Marco'; (c) 'Mr Marco has informed the Receivers that there has been comingling of personal, investor and AMS [Holdings] funds in the bank accounts and that reconstructing separate accounts is unlikely to be possible'; (d) 'The Receivers have not identified any evidence to suggest that [AMS Holdings] traded in its own capacity … Mr Marco has also stated that AMS [Holdings] undertook no activities in its own right'; (e) there were 'limited records that have been maintained by Mr Marco to delineate between personal, investor or business funds'; (f) the Interim Receivers' view of the estimated realisable value of Mr Marco and AMS Holdings' net asset and liability position on a consolidated basis showed a high case scenario of a shortfall of $221,667,012 and a low case scenario of a shortfall of $362,605,964; (g) in the Interim Receivers' view, investors were owed between $254.5 million (on Mr Marco's records) and $381.9 million (if an approximation of additional interest accrued was included up to the date of their appointment); (h) the Interim Receivers' analysis of the estimated realisable value of AMS Holdings' assets included $237,400 in loans and $12,667,273 in property; and (i) the Interim Receivers' analysis of the sources and uses of funds disclosed that '$18.4 million has been used to purchase, renovate or maintain property either directly by Mr Marco or indirectly by advancing funds to AMS [Holdings] or related parties'. 9 The Interim Receivers' Report also contains a detailed analysis addressing the identification of the assets and liabilities of each of the defendants; the solvency of each of the defendants; the likely return to creditors, including investors, in the event the defendants were to be wound up; and other information necessary to enable the financial position of the defendants to be addressed. 10 On 25 September 2020 at 11.46 am (WST), the day after their appointment, ASIC provided certain documents to the Administrators of AMS Holdings, including copies of the asset preservation orders, the orders and judgment of 27 May 2020 in Marco (No 3), ASIC's amended originating process and a copy of the Court's judgment approving the asset preservation regime in Marco (No 1). 11 On 25 September 2020 at 2.56 pm (WST), ASIC sent an email to Mr Shaw, of the Administrators, querying when the Administrators anticipated receiving a proposed Deed of Company Arrangement (DOCA) and what involvement, if any, the Administrators intended to have in the proceedings. 12 On 29 September 2020 at 3.36 pm (WST), ASIC received an email from the solicitors for the Administrators attaching: (a) a letter in which the Administrators sought ASIC's consent to an adjournment of the proceedings and asserted that '[t]he Administrators act as statutory agent for the company under section 437B of the Act and only the Administrators can deal with AMS' property per section 437D'; and (b) a notice headed 'Initial Information for Creditors and Investors', in which the Administrators (amongst other matters) stated that (i) 'Mr Chris Marco is a Director of AMS Holdings (WA) Pty Ltd … and he appointed us as Voluntary Administrators of the Company'; (ii) '[t]he purpose of the appointment of an Administrator is to allow for an independent insolvency practitioner to take control of and investigate the financial affairs of a company'; (iii) Mr Shaw would 'prepare a report to creditors detailing [his] investigations into the Company's business, property, affairs and financial circumstances as well as provide [his] opinion on the future of the company with respect to the best interests of creditors'; (iv) that based on preliminary investigations, it was Mr Shaw's understanding that the assets of AMS Holdings were controlled by the Interim Receivers and that '[o]ngoing trade creditors should continue to liaise with the Receivers in this respect'; and (v) given the early stage of the administration, Mr Shaw had 'not determined the rights of the investors to prove as creditors of the Company', though he invited such investors to attend a forthcoming creditors meeting on 7 October 2020. 13 Amongst the documents attached to the communication referred to above was a Declaration of Independence, Relevant Relationships and Indemnities (the DIRRI). That document set out meetings, telephone conversations and email correspondence that took place prior to the Administrators' appointment. It also provided a document titled 'Initial Remuneration Notice' which details the remuneration of the Administrators. 14 On 29 September 2020 at 3.56 pm (WST), ASIC sent an email to the solicitors for the Administrators confirming it would not consent to an adjournment of the hearing. The same email requested an indication of when the Administrators would be in a position to advise whether they would provide ASIC with their consent to proceed pursuant to s 440D(1)(a) of the Corporations Act. 15 On 29 September 2020 and 30 September 2020, there was further correspondence between ASIC and the Administrators, including correspondence by which ASIC provided the Administrators with its evidence and submissions in support of its amended originating process, which, as mentioned, is set down for a two day hearing on 28 and 29 October 2020. 16 The defendants were required to file any lay and/or expert evidence that they intend to rely upon at the final hearing by 28 September 2020. No evidence was filed in response to the Court's orders which established the timetable for the final hearing of the matter. The defendants filed their written submissions on 12 October 2020.

PRINCIPLES 17 Section 440D(1) of the Corporations Act provides: 440D Stay of proceedings (1) During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except: (a) with the administrator's written consent; or (b) with the leave of the Court and in accordance with such terms (if any) as the Court imposes. … 18 The statutory stay in s 440D must be read in light of s 440A of the Corporations Act, which is in the following terms: 440A Winding up company (1) A company under administration cannot be wound up voluntarily, except as provided by section 446A or 446AA. (2) The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. (3) The Court is not to appoint a provisional liquidator of a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than have a provisional liquidator appointed. 19 There is authority for the proposition that winding up proceedings alone are not subject to the statutory stay contained in s 440D: see, for example, Australian Prudential Regulation Authority v Rural & General Insurance Ltd (2004) 136 FCR 149 per Gyles J (at [11]-[13]). However, in light of the terms of s 440A, the application for leave pursuant to s 440D(1)(b) has been pursued in the present proceeding because ASIC seeks orders other than winding up orders against AMS Holdings: see Evans v Mullumbimby News Pty Ltd [2008] NSWSC 240 per Barrett J (at [7]-[8]). Implicit in ASIC's application for leave to proceed is a contention that the Court ought not adjourn ASIC's substantive application (insofar as it seeks orders that AMS Holdings be wound up) by reason of s 440A(2). 20 The factors that apply in determining whether to grant leave to proceed pursuant to s 440D(1)(b) have been the subject of consideration in Buurabalayji Thalanyji Aboriginal Corporation v Onslow Salt Pty Ltd (No 7) [2020] FCA 572; (2020) 144 ACSR 621 (at [71]-[72]). As I noted in those paragraphs, authorities such as Re Senvion GmbH (No 2) [2019] FCA 1732 per Anastassiou J (at [48]), Hopkins v AECOM Australia Pty Ltd [2012] FCA 1204 per Nicholas J (at [20]), Attard v James Legal Pty Ltd [2010] NSWCA 311 per Tobias JA (with whom Beazley and Giles JJA agreed) (at [146]-[147]) and Pybar Mining Services Pty Ltd v Challenger Gold Operations Pty Ltd [2018] SASC 156 per Doyle J (at [16]) suggest the relevant factors include: (a) whether the claim has a solid foundation and gives rise to a serious dispute; (b) whether the administrator would be unreasonably distracted from his or her statutory duties and be obliged unnecessarily to incur substantial legal costs; (c) whether the company is insured against the liability that is the subject of the proceedings; (d) the stage which the proceedings have reached; (e) who appointed the administrator; (f) who is applying for leave to proceed; (g) whether the claim is a monetary one; (h) whether the applicant will suffer any disadvantage if leave is not granted; (i) what funds the company has available to defend against litigation; and (j) whether there are good reasons for allowing a creditor to depart from the general intention of Pt 5.3A, which is that a creditor ought not be able to take action against the company in such circumstances. 21 Additionally, in Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd [2011] NSWSC 1305, Hammerschlag J observed that the discretion conferred by s 440D(1) ought not be confined, and expressed doubts about observations in some cases to the effect that a grant of leave should rarely or cautiously be granted. His Honour made the following observations (at [37]-[40]): 37 The policy underlying Pt 5.3A, as evinced by s 435A, is to maximise the chances of the beleaguered company staying alive. 38 The stay of proceedings imposed by s 440D may facilitate the achievement of this object, amongst others, by (a) affording the administrator time to assess and report on the company without the distraction of the proceedings; (b) putting a brake on legal and associated costs; (c) allowing time for the development of proposals which might preserve the value of the company as a going concern; (d) giving the creditors time to consider their position for the purposes of the creditors' meeting; and (e) in appropriate circumstances, preventing a creditor from obtaining some advantage over other creditors or potential creditors. 39 Whilst the discretion under s 440D must be exercised with the objects of the Part in mind, it remains one at large. A stay is the starting point. There must be circumstances which warrant its displacement. 40 Every application must be considered on its own circumstances. There are infinite possible scenarios. There may be a flurry or a dearth of meritorious applications. Those circumstances need have no particular quality of rarity. 22 Insofar as prayers 27 and 28 of ASIC's amended originating process seek orders for the winding up of AMS Holdings, a question may arise as to whether the Court ought exercise its discretion to adjourn the substantive proceedings under s 440A(2). As is evident from the terms of s 440A(2), the critical question for the Court is whether it is satisfied that it is in the interests of AMS Holdings' creditors for the company to continue under administration rather than be wound up. 23 As Logan J observed in Deputy Commissioner of Taxation v Bedroff Pty Ltd ACN 079 158 955 (No 2) [2009] FCA 1399 (at [30]): There is no presumption, arising from the presence of Pt 5.3A in the Corporations Act, in favour of allowing the administration to continue so as to allow a vote to be taken … Rather, what is offered by that Part of the Corporations Act is an alternative to liquidation but an alternative which is regulated by the provisions of that Part. … 24 In TCS Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830, Hamilton J made the following observations regarding s 440A (at [18]): … It is clear that the onus is on the person seeking the adjournment to establish to the satisfaction of the Court that the adjournment is in the interests of those creditors. In general terms, that will be difficult to do unless there is a good case that there will be a greater or more accelerated return from the course contended for. But considerations beyond mere quantum may be relevant to take into account in determining what is in the interests of the creditors and whether it is established that an adjournment may be said to be in the creditors' interests. Where there are advantages in either course, in general terms it may well be the proper course to give such adjournment as will allow the creditors themselves to vote upon the proposal and determine which course they prefer. (cited with approval by Logan J in Re Storm Financial Limited (Receivers and Managers Appointed) (Administrators Appointed) [2009] FCA 269 (at [26]-[27])). 25 In Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 548 (at [11]), Palmer J said: … The cases show that the mere possibility or hope of a better result for creditors under administration than in liquidation is not enough to justify an adjournment. If a company is insolvent and there is no realistic hope that it can be saved through an administration and Deed of Company Arrangement, then there are strong reasons why it should be wound up as soon as possible. One of those considerations is that the sooner that there is an investigation into matters such as whether there has been insolvent trading or dispositions of assets which may be avoided, the better it will be for creditors. 26 In Re Offshore Ocean Engineering Pty Ltd [2012] NSWSC 1296 (at [6]), Brereton J made the following comments about s 440A(2): What is required by s 440A(2) is satisfaction that it is in the interest of the company's creditors for the company to continue under administration, rather than be wound-up, as distinct from satisfaction that it may be so. That reinforces the view that a substantial degree of persuasion that administration rather than liquidation is in the interests of the company's creditors is required to invoke the section. (Emphasis in original.) 27 ASIC's primary position is that leave is not required to proceed against the third defendant, AMS Holdings as trustee for the AMS Holdings Trust. In a supplementary affidavit filed 12 October 2020, Ms Lim provides the Trust Deed for the AMS Holdings Trust. Clause 16 of that deed is relevantly in the following terms: The Trustee shall automatically be deemed to have vacated office if … such Trustee (being a company) comes under an administration or enters into liquidation (not being a voluntary liquidation for the purposes of amalgamation or reconstruction). 28 In circumstances where the assets of the third defendant are the subject of the freezing orders referred to above and the Interim Receivers have been appointed to the property of the AMS Holdings Trust, ASIC contends that it is doubtful that the Administrators have any role to play with respect to the assets of the third defendant. This may well be correct, but leave if required and if otherwise justified, should be granted in my view.

Whether the claim has a solid foundation and gives rise to a serious dispute 29 There is plainly a serious dispute in the present case. I considered a number of the issues that will be agitated in the final proceedings on a preliminary basis in Marco (No 3) (see, for example, at [115]-120]), albeit in the context of an interlocutory application for the appointment of the Interim Receivers. In circumstances where there is at least a prima facie case that the alleged unregistered managed investment scheme and alleged unlicensed financial services business generated no substantive returns, and at least prima facie evidence of a substantial deficiency, there is plainly a serious dispute.

Whether the administrator would be unreasonably distracted from his or her statutory duties and be obliged unnecessarily to incur substantial legal costs 30 The Administrators should not be unreasonably distracted from their statutory duties or obliged unnecessarily to incur substantial legal costs if the matter were to proceed. The hearing is imminent. The defence of the proceedings to date have been substantially conducted by solicitors retained by Mr Marco on behalf of all of the defendants. There is no evidence before the Court that those solicitors intended to file any further or additional evidence on behalf of AMS Holdings. Written submissions have already been filed.

Whether the company is insured against the liability that is the subject of the proceedings 31 This matter is not relevant in the context of the present proceedings, in circumstances where ASIC is seeking winding up and related orders broadly directed at the orderly cessation of the scheme conducted by Mr Marco and involving AMS Holdings.

The stage which the proceedings have reached 32 These proceedings were commenced in late October 2018. They are listed for final hearing in less than two weeks. As noted, the Interim Receivers have prepared a very substantial report into the affairs of the defendants. ASIC has filed a significant body of evidence in support of its substantive application. The Administrators have been appointed at the eleventh hour, after the Interim Receivers have secured the assets of AMS Holdings and conducted extensive inquiries into the affairs of AMS Holdings.

Who appointed the administrator 33 The Administrators were appointed by Mr Marco, though it is possible that Mr Marco's son Damon may also have had some involvement in the appointment. Mr Marco is alleged to have conducted the unregistered managed investment scheme and unlicensed financial services business which are the subject of these proceedings. 34 The Interim Receivers have observed that Mr Marco has consistently stated in the proceedings and in his dealings with the Interim Receivers that, in his view, he and AMS Holdings are in effect one and the same and should be viewed collectively as a representation of his business dealings. To the extent Mr Marco is a creditor of AMS Holdings, it would appear on the Interim Receivers' analysis that any funding he contributed to AMS Holdings 'was via an undocumented, related party loan of investor monies'. There is simply no evidence before the Court on this application, or on the substantive application, that there is any independent liability from AMS Holdings to Mr Marco other than as a result of the funds contributed to AMS Holdings by Mr Marco from investor funds.

Who is applying for leave to proceed 35 ASIC is not pursuing the proceedings as a private creditor. Rather, it is pursuing the proceedings in the discharge of its statutory functions.

Whether the claim is a monetary one 36 ASIC is not pursuing the proceedings for the purpose of obtaining a monetary judgment. 37 Rather, it is pursuing the proceedings in order to facilitate the orderly cessation of the unregistered managed investment scheme and unlicensed financial services business conducted by the defendants, and to facilitate the repayment of investor funds.

Whether the applicant will suffer any disadvantage if leave is not granted 38 The proceedings are at an advanced stage. ASIC has filed extensive evidence in support of the substantive proceedings. If leave were not granted, the final proceedings would likely be delayed to the potential detriment of investors. 39 There is also unlikely to be any disadvantage suffered by the Administrators or AMS Holdings. AMS Holdings' assets are the subject of freezing orders and secured by the Interim Receivers. The Interim Receivers have prepared a significant and detailed report which addresses the affairs of AMS Holdings. It is unclear what, if any, role the Administrators are to play in the affairs of AMS Holdings in those circumstances. There are also likely to be very real advantages in having the affairs of the defendants addressed collectively, both at the final hearing and in any winding up process.

What funds the company has available to defend against litigation 40 This factor is of limited relevance in the context of the present proceedings. As noted above, the proceedings are at an advanced stage and have been substantially defended by solicitors retained for the defendants by Mr Marco. AMS Holdings continues to have material assets.

Whether there are good reasons for allowing a creditor to depart from the general intention of Pt 5.3A 41 This factor is not relevant in the present case having regard to the nature of the proceedings. Indeed, ASIC submits that a grant of leave is entirely consistent with the policy of Pt 5.3A, especially in circumstances where it is pursuing the winding up of an unregistered managed investment scheme pursuant to s 601EE and s 461(1)(k) of the Corporations Act.

DISPOSITION 42 As noted, the Administrators and the defendants appeared by counsel at the hearing of this application. The Administrators to assist the Court, filed submissions not inconsistent with those filed by ASIC and the defendants expressed no view on the matters raised. 43 It is appropriate to grant ASIC leave to proceed pursuant to s 440D(1)(b). No application to adjourn the proceeding was made or foreshadowed. Orders as sought by ASIC were made. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McKerracher.