Australian Securities and Investments Commission v Marco

Background 10 Mr Marco was an operator of the Scheme. AMS was a company of which Mr Marco was a director and sole shareholder. The other director of AMS was Mr Marco's son, Mr Damon Marco. AMS was also an operator of the Scheme. AMS as Trustee was the trustee of the AMS Holding Trust and, in its trustee capacity, was also an operator of the Scheme. 11 On 29 October 2018, ASIC commenced proceedings against the first to third defendants and sought interim relief including asset preservation and disclosure orders. On 1 November 2018, the Court made orders against those defendants pursuant to s 1323 of the Corporations Act 2001 (Cth). Thereafter, ASIC's investigations into those defendants' affairs continued for another 12 months. 12 On 12 December 2019, ASIC filed an interlocutory process requesting an order for the appointment of interim receivers over the property of the first to third defendants and leave to file an amended originating process. On 27 May 2020, the Court made orders appointing Mr Kirman and Mr Brauer as Interim Receivers and granted ASIC leave to amend the originating process: Australian Securities and Investments Commission v Marco (No 3) [2020] FCA 719; (2020) 145 ACSR 265. 13 On 24 September 2020, the directors of AMS resolved to place it into voluntary administration. By operation of the terms of the AMS Holdings Trust deed executed in July 2013, thereafter, AMS ceased to be trustee of that trust. On 26 November 2020, the creditors of AMS resolved that AMS should be wound up. 14 On 7 December 2020, the Court made orders on the originating process, as amended: Australian Securities and Investments Commission v Marco (No 6) [2020] FCA 1781. The orders included declarations to the effect that: (a) each of the first to third defendants, by investing in client funds with the aim of generating financial return, contravened s 911A of the Corporations Act given that the defendants did not hold an Australian Financial Services Licence in the period between at least 1 January 2014 and 31 October 2018; and (b) each of the first to third defendants operated the Scheme in contravention of s 601ED(5) of the Corporations Act, in circumstances where the Scheme was required to be registered under s 601EB of the Corporations Act, in the period between at least 1 January 2014 and 31 October 2018. 15 The orders removed Messrs Kirman and Brauer as Interim Receivers and appointed them as the Receivers, the joint and several receivers and managers of all property of Mr Marco, and AMS, and of AMS as Trustee immediately prior to the appointment of voluntary administrators, and of the Scheme (Property). The orders included orders to facilitate the giving over of possession of the Property to the Receivers, describing various powers of the Receivers and, upon being called upon to do so, for delivering up that part of the Property that is property of the Scheme to the Liquidators. 16 The orders included an order under s 601EE(2) of the Corporations Act that the Scheme be wound up and orders appointing the Liquidators (Messrs Kirman and Brauer) as joint and several liquidators of the Scheme and AMS. There were other orders under s 601EE(2) regarding the manner in which the liquidation of the Scheme was to be carried out. The orders also included various other ancillary orders dealing with the Receivers and 'Liquidators' remuneration and indemnity, injunctive relief, costs and liberty to apply. 17 Section 601EE(1) of the Corporations Act relevantly provides that if a person operates a managed investment scheme in contravention of s 601ED(5), ASIC may apply to have the scheme wound up. Section 601EE(2) gives the Court power to make any orders it considers appropriate for the winding up of the scheme. 18 The term 'managed investment scheme' is defined in s 9 of the Corporations Act. The parts of the definition applicable to this case are as follows: (a) a scheme that has the following features: (i) people contribute money or money's worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not); (ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders); (iii) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or … 19 McKerracher J found that the evidence clearly established the existence of a 'scheme' of the kind referred to in the chapeau of sub-paragraph 9(a) of the definition of a managed investment scheme: Marco (No 6) at [65] - [66]. His Honour said (at [66]): The evidence clearly establishes that such a program or plan of action existed. There was evidence of: (a) the provision and execution of a large number of investment documents consisting of Declarations of Trust, investment confirmation letters and investment summaries (including those exhibited to the investor affidavits, those identified in Pt 3.2 of the Howman-Giles Report and the primary documents themselves as exhibited to the Lim Affidavit); (b) the receipt of funds from investors by Mr Marco into bank accounts held in his name (as addressed in Pt 4 of the Howman-Giles Report and [74] - [98] of the Gomm Affidavit, and evidenced in the bank statements exhibited to the Lim Affidavit); (c) the circumstances in which funds were provided by four sample investors, being Mr Martin, Mr and Mrs Morrison and Mr de Marte; and (d) the transfer and application of investor funds by all three defendants (as addressed in [74] - [147] of the Gomm Affidavit and evidenced in the primary bank statements exhibited to the Lim Affidavit). In these reasons 'investors' are also referred to as Scheme members. 20 His Honour also found that the evidence established the first element of the definition, that people contribute money or money's worth to acquire rights (interests) to benefits produced by the Scheme. In this respect, his Honour observed that the contribution of money for a fixed interest return is capable of meeting, and in this case met, the description 'to acquire rights … to benefits': Marco (No 6) at [68] - [71]. His Honour said (at [71]): The terms of the primary investment documents exhibited to the Lim Affidavit, the evidence contained in the investor affidavits, the financial analysis at Pt 5.2 of the Howman-Giles Report, and the primary financial records obtained from the defendants upon which the Howman-Giles Report is based demonstrate that people contributed money or money's worth as consideration to acquire rights (interests) to benefits produced by the Scheme. In particular, the Declarations of Trust exhibited to each of the investor affidavits provide for a rate of return of 7% on the principal investment with a maturity date falling just over three months after the commencement date. The investment type in each case is listed as 'Private Placement'. There is no doubt that investors executed these documents and transferred funds to Mr Marco on the understanding that they were acquiring rights to benefit from what appeared to be a lucrative and somewhat exclusive investment scheme. 21 As to the second element of the definition, which requires that any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for members who hold interests in the scheme, his Honour found that investors understood that their funds would be pooled to produce financial benefits and that investor funds were, in fact, pooled in accounts held under Mr Marco's name. Thus, the second element of the definition was also satisfied: Marco (No 6) at [72]. The final element of the definition, that members do not have control over the operation of the scheme, was also satisfied: Marco (No 6) at [73]. 22 Section 601ED(1)(a) of the Corporations Act provides that a managed investment scheme must be registered under s 601EB if, amongst other things, it has more than 20 members. McKerracher J found that the number of investors of the Scheme 'comfortably exceeded the 20 member threshold in each year from 2013 (at some point) to 2018': Marco (No 6) at [74]. His Honour also found that the Scheme was operated by each of Mr Marco, AMS and AMS as Trustee in contravention of s 601ED(5) of the Corporations Act: Marco (No 6) at [75] - [83]. 23 The preamble to the orders made on 7 December 2020 includes a description of the Scheme, reflecting the findings of fact made in the reasons for decision of McKerracher J in Marco (No 6). That preamble is set out later in these reasons. 24 On 23 November 2021, the Liquidators filed the interlocutory application the subject of these reasons. As to the method of distribution, the Liquidators have identified eight potential methods. These are described in more detail later in these reasons. The amount that a particular Scheme member would receive differs under each potential method based on that member's individual circumstances. 25 The Liquidators identified two groups of Scheme members each which have broadly similar circumstances. One member in each group was nominated to represent others in that group. On 10 December 2021, the Court made orders to facilitate the representation and submissions of these groups of Scheme members. Loughton Patterson Pty Ltd as trustee of the Loughton Patterson Unit Trust was joined as the first representative on the Liquidator's application (fourth defendant) to represent Scheme members in whose interests it is to contend that the remaining property of the Scheme should be distributed in accordance with one of the pari passu (b), Letten Net Investment and Letten Formula methods described later in these reasons. Ms Phoebe Ang was joined as the second representative on the application (fifth defendant) to represent Scheme members in whose interests it is to contend that the remaining property of the Scheme should be distributed in accordance with one of the Courtenay House Preliminary Dividend, Letten Preliminary Dividend and Courtenay House Formula methods described later. 26 Subsequently, on 6 January 2022, the Court made orders to facilitate the participation of a third group of Scheme members. Received Pty Ltd as trustee of the Increase Trust was joined as the third representative on the application (sixth defendant) to represent Scheme members in whose interests it is to contend that the remaining property of the Scheme should be distributed in accordance with one of the pari passu (a) and Courtenay House Net Investment methods described later. 27 Each of the Liquidators, Loughton Patterson, Ms Ang and Received appeared and made submissions on the application.

The Liquidators' application and its statutory basis 28 The Liquidators primarily make the application under s 90-15 of the Insolvency Practice Schedule (Corporations) (Schedule 2 to the Corporations Act) as liquidators of AMS, and under s 601EE(2) of the Corporations Act, as liquidators of the Scheme. The Liquidators also make the application for certain of the orders sought under ss 579E and 579G of the Corporations Act and s 92 of the Trustees Act 1962 (WA). 29 As to s 90-15 of the Insolvency Schedule and s 601EE(2) of the Corporations Act, the Court has power to give directions to the Liquidators in relation to the winding up of AMS and winding up of the Scheme. The proper subject of a liquidator's application for directions is the manner in which the liquidator should act in carrying out his or her functions. The only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitary form is disobeyed) is that the liquidator, if he or she has made full and fair disclosure to the Court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him or her in accordance with the direction: Re GB Nathan & Co Pty Ltd (In Liq) (1991) 24 NSWLR 674 at 679 - 680; Bastion v Gideon Investments Pty Ltd (In Liq) [2000] NSWSC 939; (2000) 35 ACSR 466 at [47]. Likewise, the liquidator of a managed investment scheme would be protected from liability for any alleged breach of duty as liquidator to a member of the scheme in respect of anything done by him or her in accordance with the direction: Australian Securities and Investments Commission v Tasman Investment Management Ltd [2006] NSWSC 943; (2006) 202 FLR 343 at [26] - [30]; Australian Securities and Investments Commission v Piggott Wood & Baker (A Firm) (No 6) [2019] FCA 672 at [25]. 30 On an application of the present nature, the Court is not, generally, permitted to make orders that depart from the proprietary rights of the creditors or members of a scheme. Section 90-15 of the Insolvency Schedule and s 601EE(2) of the Corporations Act cannot be used to authorise a distribution of assets of a company or unregistered scheme otherwise than to those entitled to the assets, in proportion to their entitlements: Tasman Investment at [18] - [21], [26]; Re GB Nathan at 679 - 681; Bastion at [49]. However, the general principle yields in cases where it is not pragmatic to ascertain the proprietary rights: Re Courtenay House Capital Trading Group Pty Ltd (in liq) [2018] NSWSC 404; (2018) 125 ACSR 149 at [34] (per Brereton J). Further, the rights and obligations of interested third parties are not affected by any direction of the Court made on such an application: Piggott Wood & Baker at [25]; Tasman Investment at [30]. 31 The application does not proceed on formal proof of facts in the ordinary sense. The Court makes its decision on the basis of the facts as put forward (in whatever form) by the liquidator. If those facts are not presented fully and fairly, the liquidator will lose the protection that would otherwise apply to undertake action in accordance with the Court's direction or judicial advice: Re Application of Perpetual Trustee Company Ltd [2003] NSWSC 1185 at [14], [24]; Re York Street Mezzanine Pty Ltd (in liq) [2011] FCA 1028; (2011) 196 FCR 479 at [42(2)], [42(3)] (Re Vickers); Tasman Investment at [31]; HIH Casualty & General Insurance Ltd v Building Insurers' Guarantee Corporation [2004] NSWSC 910; (2004) 51 ACSR 21 at [18]. On an application of this nature, however, the Court must be satisfied that there is a reasonable and proper basis for making the directions and orders sought: Piggott Wood & Baker at [25]; Tasman Investment at [30] - [32]. 32 The Liquidators have sought orders under ss 579E and 579G of the Corporations Act that the Scheme and AMS are to be treated as a pooled group and that the method of distribution under s 556 is to be modified in accordance with certain priorities and the applicable distribution method. In the alternative, the Liquidators have sought orders that would permit them to make distributions in accordance with the same pooling, priorities and distribution method under s 90-15 of the Insolvency Schedule and s 601EE(2) of the Corporations Act or s 92 of the Trustees Act. 33 Sections 579E and 579G permit pooling and ancillary orders to be made where two or more related companies are being wound up. The Liquidators' submit that the Court has power to make orders under these provisions in conjunction with the power to make appropriate orders in relation to winding up the Scheme under s 601EE(2). It is not necessary to consider if the Court has power to make the requested order under these provisions because, for the reasons set out later, I am satisfied that the alternative form of these orders should be made under s 90-15 of the Insolvency Schedule and s 601EE(2) of the Corporations Act. 34 In each instance where the Liquidators have sought an order under s 90-15 of the Insolvency Schedule and s 601EE(2) of the Corporations Act they have sought the same order in the alternative under s 92 of the Trustees Act. Section 92 provides that a trustee may apply to the Court for directions concerning any property subject to a trust, or respecting the management or administration of that property, or respecting the exercise of any power or discretion vested in the trustee. 35 A finding that there is a 'trustee' and 'property subject to a trust' is a condition that must be satisfied for the exercise of the power to give directions under s 92 of the Trustees Act: see, e.g., see: Hancock v Rinehart [2019] NSWSC 1451 at [166] - [172]; Blatchford v Laine [2018] WASC 207; (2018) 17 ASTLR 455 at [48] - [57]. Due to the nature of the evidence before the Court on this application, the Court is not in a position to make a formal finding in a global and definitive way that the remaining property of the Scheme is held by Mr Marco and (or) AMS on trust for the Scheme members. However, I am satisfied that the Liquidators would be justified in treating that property as if it were held by Mr Marco and (or) AMS on trust for the Scheme members for the purposes of the orders requested under s 90-15 of the Insolvency Schedule and s 601EE(2) of the Corporations Act. Therefore, it is not necessary to consider if and the extent to which the Court has power, in the circumstances of this application, to give directions under s 92 of the Trustees Act. 36 The balance of these reasons consider the Liquidators' application on the footing that it is an application for the Court to give the Liquidators directions under s 90-15 of the Insolvency Schedule and s 601EE(2) of the Corporations Act.

Issues upon which directions are sought 37 The issues that emerge from the application and the parties' submissions may be summarised as follows. 38 Description of the Scheme: The preamble to the orders of 7 December 2020 describe the Scheme as the managed investment scheme operated by Mr Marco, AMS and AMS as Trustee between 1 January 2014 and 31 October 2018. The Liquidators request orders or directions that would permit them to treat the Scheme as the managed investment scheme operated between September 2002 and 31 October 2018. 39 Nature of the Scheme: The general nature of the Scheme is described in the preamble to the orders of 7 December 2020 and in the reasons for decision of McKerracher J in Marco (No 6). However, the Liquidators consider the Scheme is and want to treat the Scheme as a Ponzi scheme. 40 Scheme property held on trust: The Liquidators consider and want to treat Scheme member's 'investments' in the Scheme as property held by Mr Marco and (or) AMS on trust for each Scheme member. 41 Pooling of mixed Scheme property: The Liquidators want to treat all Scheme property and property of AMS as a single (mixed) fund. 42 Tracing of Scheme property: The Liquidators want to treat certain assets of Mr Marco and AMS as Scheme property because the Liquidators consider that the assets were acquired with funds from Scheme Accounts. 43 Priorities on distribution of remaining Scheme property: The Liquidators want to pay certain remuneration, costs and expenses of the Interim Receivers, Receivers and Liquidators and certain debts owed to third parties in full and in priority to distributions to Scheme members out of the remaining Scheme property. 44 Treatment of contractual rights to accrued and rolled-over interest: During the operation of the Scheme, Mr Marco and (or) AMS made agreements with Scheme members pursuant to which those members had rights to be paid interest on 'investments'. Also, many Scheme members had a right to and chose to roll-over or reinvest interest. In substance, the Liquidators have sought direction as to the appropriate manner in which to treat accrued rights to payment of 'interest' to Scheme members and 'interest' rolled-over or reinvested. 45 Treatment of payments to Scheme members out of Scheme property: During the operation of the Scheme, many Scheme members received payments out of Scheme Accounts (as described later in these reasons). At the time of payment, these payments were characterised as capital, interest, both capital and interest, or may not have been specifically characterised. In substance, the Liquidators have sought direction as to the appropriate manner in which to treat payments characterised as, (or assumed to be) interest to Scheme members. Further, however payments characterised as interest are treated, the Liquidators have sought direction as to the appropriate manner in which to take into account any payments received by Scheme members during the operation of the Scheme for the purposes of calculating distributions to Scheme members. 46 The appropriate distribution method: The Liquidators have identified eight potential methods of distribution of the remaining Scheme property. The Liquidators have sought direction as to which of these, or what other distribution method, would be appropriate for the purposes of calculating distributions to Scheme members of the remaining property of the Scheme. 47 None of Loughton Patterson, Ms Ang and Received adopted a position contrary to that of the Liquidator on the issues of description of the Scheme, the nature of the Scheme, trust property, pooling, tracing and priorities. The Liquidator adopted a neutral position on the issues of the treatment of contractual rights to interest and payments to Scheme members and the appropriate distribution method. On these issues, in accordance with the orders of the Court of 10 December 2021 and 6 January 2022 Loughton Patterson, Ms Ang and Received had different positions. 48 Loughton Patterson made submissions to the effect that Letten Net Investment is the preferable method. Pari passu (b) is preferable to other methods except Letten Net Investment and Letten Formula is preferable to other methods except Letten Net Investment and pari passu (b). 49 Ms Ang made submissions to the effect that Courtenay House Preliminary Dividend is the preferable method. Letten Preliminary Dividend is preferable to other methods except Courtenay House Preliminary Dividend and Courtenay House Formula is preferable to other methods except Courtenay House Preliminary Dividend and Letten Preliminary Dividend. 50 Received made submissions to the effect that pari passu (a) is the preferable method and Courtenay House Net Investment is preferable to other methods except pari passu (a). While Received made written submissions to the effect that not all remaining property of the Scheme should be treated as trust property and pooled, during the oral hearing, Received submitted that it accepted that all property was held on trust and should be pooled. 51 The preferences of Received are founded on a submission that effect should be given to the contractual rights of the Scheme members in determining the appropriate distribution method. Pari passu (a) gives full recognition of these rights. Courtenay House Net Investment gives recognition to all rights except those to accrued interest. 52 The preferences of Ms Ang are founded in part on a submission that effect should be given to rights to rolled-over or reinvested interest. To that extent, the interests of Ms Ang and Received align. That is reflected in Ms Ang's preferences for two Courtenay House methods which take into account rolled-over or reinvested interest as part of a Scheme member's claim against the remaining property of the Scheme. 53 The preferences of Ms Ang are also founded in part on a submission that effect should be given to the hotchpot principle through the preliminary dividend method. As will be explained later in these reasons, the preliminary dividend method has the effect of distributing the remaining property of the Scheme on the basis that Scheme members with an entitlement to a distribution have received a preliminary dividend (distribution) out of the original property of the Scheme if they received payments during the operation of the Scheme out of Scheme Accounts. A Scheme member who has received such a payment is not entitled to a further distribution out of the remaining property of the Scheme until all other Scheme members have received at least the same dividend rate as that Scheme member. The method gives effect to the hotchpot principle in that Scheme members are required to 'bring in' to hotchpot the preliminary dividend (distribution) before participating in a further dividend (distribution) from the remaining property of the Scheme. 54 The preferences of Loughton Patterson are founded on a submission to the effect that distributions from the remaining property of the Scheme should be based on Scheme member's equitable proprietary interest in the remaining Scheme property. Therefore, effect should not be given to contractual rights to accrued, or rolled-over or reinvested interest. That is reflected in the preference for the Letten methods none of which take into account accrued or rolled-over or reinvested interest as part of Scheme member's claims. Loughton Patterson also submits, amongst other things, that the preliminary dividend and formula methods do not properly give effect to the equitable proprietary interests that Scheme members have now in the remaining property of the Scheme. 55 As is to be expected, the preferences of Loughton Patterson, Ms Ang and Received are those that result in the largest distributions of the estimated remaining Scheme property to Scheme members in similar circumstances to each of those participants. 56 I have taken all submissions into account, but, except where I consider it necessary to better explain my reasoning, I have not set out or summarised these submissions in any detail. Rather, the substance of the submissions are dealt with as is necessary and applicable when addressing each of the relevant issues.

Evidence on the application 57 The Liquidators read two affidavits of Mr Brauer in support of the application. An affidavit sworn 23 November 2021 and an affidavit sworn 10 March 2022. 58 Exhibit RCB-1 to Mr Brauer's affidavit of 23 November 2021 is a report he prepared also dated 23 November 2021 (Liquidators' Report). The Liquidators' Report was prepared in support of the application. It sets out Mr Brauer's opinions or beliefs concerning a number of matters of fact relevant to the application and provides the sources of the information from which Mr Brauer has formed his opinions or beliefs. 59 The Liquidators' Report contains references to numerous other materials and documents. These include the Interim Receivers' Report that was exhibit RCB-1 to the affidavit of Mr Brauer sworn 24 July 2020 and the KPMG Report that was Exhibit LHG-2 to the affidavit of Mr Luke Howman-Giles sworn 24 August 2020. These affidavits were read and formed part of the evidence upon which McKerracher J made the findings referred to in Marco (No 6). Mr Brauer sought leave to refer to and rely upon these affidavits on the application. To the extent that leave is necessary, that leave is granted and these affidavits are received in evidence on this application as evidence of part of the sources of information that Mr Brauer has relied on for the opinions and beliefs expressed in the Liquidators' Report. 60 The Liquidators' Report contains references to affidavits of Mr Marco sworn 21 February 2020 and 19 December 2018. The affidavit of 21 February 2020 was filed in these proceedings for the purposes of an interlocutory application, but not read on that application. The affidavit of 19 December 2018 was filed and read for the purposes of another interlocutory application to vary the terms of freezing orders which was heard on 8 February 2019. As appears from the reasons of McKerracher J in Marco (No 3) at [18] - [34], ASIC sought to read and rely on parts of these affidavits on its interlocutory application for the appointment of interim receivers. For the purposes of that application, Mr Marco had disavowed his affidavit of 21 February 2020 and, instead, relied on an affidavit of Ms Sierakowski sworn 6 March 2020. Mr Marco objected to ASIC relying on the affidavit on the grounds that the statements within it were hearsay. That objection was upheld because the paragraphs upon which ASIC sought to rely were neither admissions against interest nor statements of information or belief in respect of which the source of the belief or information was identified. Objections to reliance on parts of the affidavit of 19 December 2018 were also upheld. 61 On this application the Liquidators have not sought to read the affidavits of Mr Marco. Rather, Mr Brauer seeks leave to refer to and rely on the contents of them, in effect, as the source of his belief as to the existence of certain facts stated in those affidavits. No objection was taken to Mr Brauer so doing. In the circumstances, to the extent necessary, the requested leave is granted and the affidavits will be received in evidence as evidence of part of the sources of Mr Brauer's opinions and beliefs stated in the Liquidators' Report. 62 Appendix E of the Liquidators' Report contains samples of investment documents from the period before 1 January 2014. These are redacted to remove personal information of the applicable Scheme members. However, Exhibit RCB-3 to Mr Brauer's affidavit of 23 November 2021 is a USB stick containing unredacted copies of more than 230 investment documents from the period of September 2002 to 31 December 2013. 63 Appendix F contains an example of an email from Mr Marco to a Scheme member with attached documents entitled 'Investment Opportunity Overview.pdf' and 'Understanding Private Placement.pdf' from the period before 1 January 2014. 64 With the exception of the document referred to in subparagraph (c) below, Appendix H contains examples of documents provided to Scheme members in the period before 1 January 2014. These comprise: (a) a letter dated 7 May 2012 from Mr Marco to a Scheme member referring to an 'INVESTMENT OPPORTUNITY' and 'acceptance of AUD$112,000 for the purpose of re-investment'; (b) a letter dated 12 April 2011 from Mr Marco to a Scheme member referring to 'the status of your investments' with a table setting out the applicable entities, amounts, maturity dates and rates of return; (c) a document 25 October 2018 entitled 'DECLARATION OF TRUST' referring to an investment type as 'Private Placement' and that Mr Marco holds 'the investment specified in item 1 of the Schedule in trust for the party specified in item 2 of the Schedule'; (d) a letter dated 28 June 2013 from Mr Marco in response to an audit letter request referring to confirmation 'that this office has total funds of $483,750 reinvested on 28 June 2013' and identifying the amount deposited, the interest rate and the date it is payable; (e) a letter dated 5 April 2010 from Mr Marco to a Scheme member referring to 'INVESTMENT BRIDGING LOAN - 3 MONTH PERIOD' and thanking the Scheme member 'for undertaking financing of the above bridging loan for a duration of three (3) months', the loan amounts and the interest rates; (f) a letter dated 27 May 2003 from Mr Marco to a Scheme member referring to 'Currency Trading Investment' and advising the Scheme member of 'the dividends received from currency trading between 1 July 2002 to 30 June 2003 and the 'current balance' of the 'currency trading account'; (g) an email dated 6 December 2016 from Mr Marco to a Scheme member referring to a deposit of an amount 'into your nominated bank account today from your 3% Monthly "Warehousing Funds" program'; and (h) a letter dated 15 December 2004 from Mr Marco to a Scheme member confirming receipt of an amount 'for the purpose entering a trading program', that the program will be completed in the first week of April 2005 and that the net return would be 'a guaranteed 12% of the value of the investment'. 65 The documents in Appendix E are of a similar nature. These include numerous examples of declarations of trust from the period before 1 January 2014. 66 Exhibit RCB-2 of Mr Brauer's affidavit of 23 November 2021 is a USB stick containing a read-only excel version of a document referred to and described in the Liquidators' Report as the Model. The Model contains information that has been derived from the defendants' bank statements. That information is reproduced and recorded under a tab in the 'Bank Statements' tab in the Model. In his affidavit Mr Brauer deposed that the Liquidators have reconciled 290 deposits from Scheme members in the period from September 2002 to 31 December 2013. These are included in the Model under the 'Bank Statements' tab. 67 Appendix C of the Liquidators' Report refers to the books and records concerning the Scheme that the Liquidators secured. These include various spreadsheets. The spreadsheets were not in evidence, but the information derived from them upon which the Liquidators rely is reproduced in the Model. 68 For the purposes of the application, the Liquidators also sought leave to refer to and rely upon the following affidavits that were read and formed part of the evidence upon which McKerracher J made the findings referred to in Marco (No 6): (a) (second) affidavit of Mr Brauer sworn 21 October 2020; (b) affidavit of Ms Whee-Jong Michelle Lim (a senior lawyer employed by ASIC) sworn 24 August 2020; (c) affidavit of Mr Richard Warren Gomm (a senior investigator employed by ASIC) sworn 25 August 2020; (d) affidavit of Ms Kylie Lorraine Lethorn (an Analyst employed by ASIC) sworn 21 August 2020; (e) affidavit of Mr Shaun Milligan (a former associate director in the forensic division of KPMG who assisted Mr Howman-Giles in data entry activities which informed the preparation of the KPMG Report) sworn 24 August 2020; (f) affidavit of Mr Ross Edward Martin (an investor) sworn on 15 August 2020; (g) affidavit of Mrs Lorraine Morrison (an investor) sworn on 17 August 2020; (h) affidavit of Mr Peter John Morrison (an investor) sworn on 15 October 2020; and (i) affidavit of Mr Michele Raffaele de Marte (an investor) sworn on 21 August 2020. To the extent leave is necessary, the requested leave is granted on this application on the same basis as for the other affidavits referred to above. 69 For the purposes of the application, the Liquidators referred to and relied upon the following affidavits filed and read or referred to in proceedings in the Supreme Court of Western Australia and Supreme Court of New South Wales: (a) affidavit of Mrs Patricia Maree Markopoulus sworn 24 October 2019 in Supreme Court of Western Australia proceedings CIV 1431 of 2019 and read at the trial: see Markopoulus v Marco [2020] WASC 79 at [11]; (b) supplementary affidavit of Mrs Markopoulus sworn 24 January 2020 in Supreme Court of Western Australia proceedings CIV 1431 of 2019 and read at the trial: see Markopoulus at [11]); (c) affidavit of Mr Bradley David Rundin Williams sworn 28 October 2019 in Supreme Court of Western Australia proceedings CIV 1431 of 2019 and read at the trial: see Markopoulus at [11]; (d) affidavit of Ms Ann-Maree Lockett sworn 22 October 2019 in Supreme Court of Western Australia proceedings CIV 1431 of 2019 and read at the trial: see Markopoulus at [11]; (e) affidavit of Mr Marco sworn 24 June 2020 in Supreme Court of New South Wales proceedings 2020/53867 and referred to in Baxter Global Investments Pty Ltd (ACN 159 246 670) v Marco [2020] NSWSC 1293 at [18]; (f) affidavit of Mr Andrew Batchelar sworn 8 May 2020 in Supreme Court of New South Wales proceedings 2020/53867 and referred to in Baxter Global Investments at [17]; and (g) affidavit of Mr Marco sworn 10 January 2020 in Supreme Court of Western Australia proceeding CIV 1431 of 2019 and read at the trial: Markopoulus at [12]. Exhibit RCB-4 of Mr Brauer's affidavit of 23 November 2021 is a USB stick containing copies of the affidavits referred to in subparagraphs (a) to (f). Exhibit RCB-20 of Mr Brauer's affidavit of 10 March 2022 is a copy of the affidavit referred to in subparagraph (g). The affidavits are received in evidence as part of Mr Brauer's affidavit as evidence of part of the sources of Mr Brauer's opinions and beliefs stated in the Liquidators' Report. 70 The Liquidators also referred to and relied upon extracts from the transcript of the hearing held on 29 October 2020. These extracts are Exhibit RCB-19 of Mr Brauer's affidavit of 10 March 2022. These extracts relate to submissions made concerning the period during which the Scheme was required to be registered. 71 The Liquidators also tendered a letter of Hall & Wilcox to Ashurst Australia dated 6 April 2022 (Ex 1.1) and a letter of Ashurst Australia to Hall & Wilcox dated 8 April 2022 (Ex 1.2). The effect of that correspondence was to confirm that the orders the Liquidators sought in the application had no effect on the interests of Mr Marco's trustee in bankruptcy with respect to certain real estate and a Datsun motor vehicle. 72 Loughton Patterson read and relied on an affidavit of Ms Jemma Leigh Huntsman sworn 11 May 2022. That affidavit exhibited a copy of a report of the liquidators that is referred to in the orders Rees J made in Re Courtenay House Capital Trading Group Pty Limited (in liq) [2020] NSWSC 780; (2020) 147 ACSR 1 at [175(1)(a)]. No party objected to the Court receiving that affidavit or to the Court relying on the report to aid in the interpretation of the orders of Rees J. I have had regard to the report for the purpose of identifying and understanding the meaning of 'Scenario 2 as described in the liquidators' report to the Court dated 1 November 2018 at [5.2]' to which Rees J referred at [175(1)(a)] of her Honour's reasons.

Description of the Scheme 73 In the present application, the Liquidators seek an order to the effect that, for the purposes of the orders made on 7 December 2020, 'references to the 'the Scheme' include the managed investment scheme operated by [Mr Marco] in the period from September 2002 to 31 December 2013'. In the alternative, the Liquidators seek an order to the effect that they would be acting properly and are justified in treating persons who provided money to Mr Marco in that period by depositing funds into one or more of certain accounts in return for the right to receive interest payments as if they were persons entitled to make claims in the winding up of the Scheme (as described in the orders of 7 December 2020). 74 The Scheme was described in the preamble to the orders of 7 December 2020 as follows: A. For the purposes of these orders, 'the Scheme' means the managed investment scheme operated by the each of the defendants, whereby between 1 January 2014 and 31 October 2018: (a) the first defendant obtained moneys from investors; (b) the first defendant pooled the moneys in bank accounts, including the following accounts: (i) Westpac Banking Corporation - BSB 036406, Account number 239817; (ii) Westpac Banking Corporation - BSB 037131 Account number 684106; (iii) Westpac Banking Corporation - BSB 037 131 Account number 693360; (iv) Westpac Banking Corporation - BSB 037 165 Account number 857175; and (v) Westpac Banking Corporation - BSB 736 053 Account number 654708; (c) the first defendant represented and/or agreed with investors that the moneys were to be used as a proof of funds for investments and/or to fund investments; (d) the first defendant represented and/or agreed with investors that in return for advancing funds, investors would receive a right to interest payments; (e) the first defendant was to use the moneys as proof of funds for investments and/or to fund investments, with a view to generating a profit out of which interest payments were to be paid to investors; (f) the first defendant transferred moneys to the second and/or third defendants with a view to purchasing real and/or personal property; (g) the real and/or personal property of the second and/or third defendants purchased with the moneys that were transferred was to be available to meet liabilities to investors; (h) the first defendant, second defendant and/or third defendant transferred, or expended moneys obtained from investors for private gain and/or for the private gain of related parties or associates; and (i) the investors did not have day to day control over the use of the moneys. 75 The Liquidators submit that clarification of the Scheme (as described in the orders of 7 December 2020) is necessary because the preamble to the orders provides that '[f]or the purposes of these orders, 'the Scheme' means the managed investment scheme operated by each of the defendants, whereby between 1 January 2014 and 31 October 2018 …' amongst other things, Mr Marco obtained money from Scheme members. Accordingly, the orders could be read as confining the meaning of the Scheme to the managed investment scheme operated only in the period between 1 January 2014 and 31 October 2018. 76 As mentioned earlier, the orders of 7 December 2020 included declarations to the effect that each of the first to third defendants contravened the provisions of s 911A of the Corporations Act (carried on a financial services business without holding an Australian Financial Services Licence) 'in the period between at least 1 January 2014 and 31 October 2018' and that each of the first to third defendants operated the Scheme in contravention of s 601ED(5) of the Corporations Act, in circumstances where the Scheme was required to be registered under section 601EB of the Corporations Act 'in the period between at least 1 January 2014 and 31 October 2018' (emphasis added). Each of these declarations is expressed in terms that suggest that the Scheme (as described in the preamble to the orders) is intended to mean the managed investment scheme that was required to be registered, but the declarations concerning contraventions of ss 911A and 601ED(5) of the Corporations Act relate only to carrying on an unlicensed financial services business and an unregistered managed investment scheme in the period between 1 January 2014 and 31 October 2018. 77 As noted above, McKerracher J found that the number of Scheme members of the Scheme 'comfortably exceeded the 20 member threshold in each year from 2013 (at some point) to 2018': Marco (No 6) at [74]. McKerracher J found that s 601ED(5) was contravened from 'at least' 2014 because the evidence established there were more than 20 Scheme members from at least 1 January 2014. 78 In my view, on the proper construction of the orders of 7 December 2020, the chapeau to the preamble of the orders describing the Scheme is to be read as if it were expressed: 'For the purposes of these orders, 'the Scheme' means the managed investment scheme operated by each of the defendants, whereby between at least 1 January 2014 and 31 October 2018 …'. For the avoidance of doubt, an order will be made to amend the preamble to insert the words 'at least' into the chapeau under r 39.05(e) of the Federal Court Rules 2011 (Cth). 79 In the Liquidators' Report Mr Brauer expresses an opinion to the effect that Mr Marco operated an unregistered managed investment scheme from September 2002 until 31 October 2018. 80 On the basis of the facts identified in the Liquidators' Report and, in particular, the documents referred to in Appendices E and H of that report and contained in RCB-3, I am satisfied that it is reasonable for the Liquidators to believe that in the period from September 2002 to 31 December 2013 Mr Marco operated a managed investment scheme with, at least, the features described in subparagraphs (a) - (e) and (i) of the preamble to the orders of 7 December 2020. 81 The Scheme that is to be wound up under the orders of 7 December 2020 is the Scheme that was operated in contravention of s 601ED(5) of the Corporations Act. That is the managed investment scheme that had more than 20 members. Under s 601ED(1)(a) of the Corporations Act, the Scheme was required to be registered from the moment at which it had more than 20 members. 82 It is the managed investment scheme with more than 20 members that is be wound up under s 601EE(1). The 20 members of the scheme the day before the twenty-first member joined the scheme are no less members of and contributors to the scheme than each member on and from the twenty-first member. Thus, the Scheme that is to be wound up under the orders of 7 December 2020 is the same Scheme before and after it had more than 20 members. The members of the Scheme include all Scheme members who remained members of the Scheme on and from the date it was required to be registered irrespective of when those Scheme members became members of the Scheme. 83 It follows that, to the extent necessary, an order will be made to the effect of paragraph 2, but not to the effect of paragraph 1, of the application.

Nature of the Scheme 84 In the Liquidators' Report, Mr Brauer expresses the opinion that the Scheme was operated as a Ponzi scheme. That epithet derives its name from the fraudster Charles Ponzi, who operated an elaborate and deceitful investment scheme involving promised returns for investment in international mail coupons in the 1920s: see Ponzi v Fessenden (1922) 258 US 254. The principal feature of a Ponzi scheme is that 'returns' to 'investors' of the scheme are paid out of the contributions of capital of other 'investors'. Therefore, to maintain the scheme the operator must continually obtain additional funds from existing or new 'investors'. 85 A Ponzi scheme is insolvent from its inception because no or insufficient real investments are made to generate the 'returns' paid to 'investors' in the scheme. From the moment the operator of the scheme commences to pay notional returns to investors in the scheme the total of the remaining capital investors have contributed to the scheme is insufficient to repay each investor the amount of each investor's capital sum invested in the scheme. That is, the scheme fund is deficient from the inception of the scheme or the point at which it commences to operate as a Ponzi scheme. 86 Mr Brauer's opinion is founded, in part, on certain statements that Mr Marco made in affidavits filed in this Court as to the manner in which Mr Marco operated the Scheme. His opinion is also founded on his analysis of the books and records of the Scheme. Mr Brauer deposed that his analysis reveals the following information. (a) Total deposits into the Scheme Accounts from September 2002 to 1 November 2018 were $285.6 million of which $261.3 million (91%) were funds deposited by Scheme members. (b) A sum of $10.6 million was received as a one-off transaction as a loan repayment. (c) A further sum of $13.6 million was received from rent or other returns. (d) A sum of $205.9 million (72%) of funds deposited into the Scheme Accounts were paid out to Scheme members. (e) A sum of $72.6 million of funds deposited into the Scheme Accounts was used for a number of other purposes including: (i) $20 million for property purchases or development costs; (ii) $18.3 million for loans to third parties or related parties which were largely undocumented; (iii) $11.6 million in failed attempts to participate in private placement projects (PPP); (iv) $5.7 million for payment of credit card expenses; and (v) $2.7 million on the purchase and restoration of motor vehicles. 87 Non-Scheme member receipts of $13.6 million were insufficient to meet the $205.9 million paid to Scheme members as 'returns'. That is, nearly all Scheme member returns were funded by Scheme member deposits. 88 Mr Brauer performed a separate analysis of the operation of the Scheme in the period from 9 September 2002 to 31 December 2013. The results from that period revealed a similar pattern or were otherwise consistent with the operation of the Scheme over the whole period. 89 As noted above, certain of the investment documents referred to Mr Marco receiving funds for 'currency trading', Mr Brauer found no evidence in the books and records of the Scheme of any currency trading. 90 As for the declaration of trust documents, these largely refer to investment type as 'Private Placement' or 'Private Placement Project'. Mr Brauer found no evidence in the books and records of the Scheme of any material returns from any successful private placement projects. However, it appears that at least some funds were used for unsuccessful attempts at private placements. Mr Brauer opines that none of these private placements could be considered as an asset or investment under Australian Accounting Standards. No value was attributed to these private placements. 91 On the basis of Mr Brauer's evidence, I am satisfied that it is reasonable for the Liquidators to believe that the Scheme, as operated by Mr Marco, had the following additional features to those described in the preamble to the orders of 7 December 2020. (a) The vast majority of returns (or interest) paid to Scheme members was paid out of deposits (capital) of other Scheme members. (b) No returns (or interest) were paid to Scheme members from revenue derived from currency trading or private placement projects. (c) No Scheme member funds were applied in private placement projects that could be characterised as an asset or investment under Australian Accounting Standards. That is, no funds were applied towards a genuine investment in a private placement project. (d) The Scheme as operated by Mr Marco had no prospects of success or generating sufficient revenue to meet the putative contractual obligations to Scheme members in the Scheme. (e) That some Scheme members withdrew capital or received returns exceeding the capital contributed is due to 'dumb luck'. These additional features of the Scheme render it a 'Ponzi scheme'.

Scheme property held on trust 92 A key issue for determination on the application is whether the Liquidators would be justified in considering that Mr Marco and (or) AMS held the sums Scheme members deposited into the Scheme Accounts (described later in these reasons) on trust for the Scheme members. Further, whether the Liquidators would be justified in treating all assets of AMS and certain assets of Mr Marco acquired with funds from the Scheme Accounts as property held on trust for Scheme members. 93 As mentioned earlier in these reasons, although Received made written submissions in which it submitted that part of the remaining property of the Scheme may not be held on trust for Scheme members, during the oral hearing counsel for Received withdrew that submission. Therefore, in the end, there was no contest between the parties represented on the application that all remaining property of the Scheme should be treated as property held on trust by Mr Marco and AMS. 94 The Liquidators submit that in most cases the funds Scheme members deposited with Mr Marco or AMS were the subject of an express trust arising from declaration of trust documents. In many other cases, it is to be inferred from the context and circumstances in which the funds were provided that these funds were the subject of a declaration of trust document, but the documentation has not been able to be produced. In all other cases, the Liquidators submitted that the funds provided are subject to a Quistclose trust or Black v S Freedman trust.

Express trust 95 An express trust requires certainty of intention, subject matter and object: Kauter v Hilton [1953] HCA 95; (1953) 90 CLR 86 at 97. Intention is to be determined objectively based on the text of the writing (whether in whole or in part) by which the trust is alleged to have been made: Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253 at [13] - [18], [46] - [66], [98] - [118]. Where the trust instrument is not in writing or wholly in writing, objective intention may be found in the language used and the nature and circumstances of the transaction: Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107 at 121. 96 In Markopoulus, Tottle J considered an application for summary judgment by Mrs Markopoulus and others against Mr Marco arising from the terms upon which the Markopoulus claimants provided investment funds to Mr Marco. Mrs Markopoulus and Tonpose Pty Ltd relied on a declaration of trust document in materially the same terms as the examples in evidence on this application in support of declaratory relief to the effect that money deposited with Mr Marco was held by him on trust of the applicable plaintiffs. 97 Tottle J found that the declarations of trust created an express trust over the money the subject of the declaration. His Honour said (at [49]): I am satisfied that the language the parties used in the Declarations of Trust manifested a clear intention to create an express trust. Central to this conclusion is that the parties chose to execute a document titled 'Declaration of Trust' which provided that the moneys would be held 'in trust' for the 'beneficiaries'. Such language was, to adopt Brereton J's words in Re Courtenay House Capital Trading Group, 'unambiguous and explicit' and is decisive. 98 Two other plaintiffs, Ms Lockett and Mr Williams also sought declarations that money deposited with Mr Marco was held on trust, but, for those plaintiffs there was no declaration of trust document produced. Tottle J also found that Mr Marco held those funds on trust. His Honour said (at [58]): The effect of Mr Marco's evidence as to the way in which he operated his business is that 'most' other investors had executed a Declaration of Trust and that he pooled the funds of those who invested with him. Mr Marco's counsel accepted that the terms on which he invested funds for Ms Lockett and Mr Williams were the same as the terms on which he invested funds for Mr Markopoulus. Despite the absence of documentation, it is a reasonable inference that the relationship between Mr Marco and Ms Lockett and Mr Williams was the same as that between Mr Marco and Mrs Markopoulus and Tonpose: that is, it was a relationship of trust. This inference was accepted by Mr Marco's counsel as being a necessary consequence of a finding that the funds of Mrs Markopoulus and Tonpose were held on trust. In effect, Mr Marco relied on the 'same position' that was taken in relation to the Mrs Markopoulus and Tonpose express trusts. For the reasons already stated, Mr Marco is unable to establish a triable issue on the basis of the contentions about his subjective intention and summary judgment should be given for Ms Lockett and Mr Williams. 99 In Baxter Global Investments, Henry J considered another claim by two other plaintiffs who had invested funds with Mr Marco and AMS. The Scheme members in that case had invested pursuant to similar declaration of trust instruments to those that had been used in Markopoulus. Henry J found that there was an express trust and that the amounts invested were held on trust in accordance with those instruments. His Honour said (at [39] - [46]): 39 The plaintiffs' claim that the principal sums are held by Mr Marco on trust. They contend that an express trust arises from the terms of the 25 October 2018 Declaration of Trust and that the surrounding circumstances also point to that conclusion as well. 40 The legal principles as to the creation of an express trust are set out by Tottle J in Markopoulus v Marco [2020] WASC 79 (Markopoulus), a recent case involving claims against Mr Marco by other investors who advanced sums pursuant to Declarations of Trusts in terms similar to those in issue in this case. Those trust principles can be summarised as: (a) An express trust requires certainty of intention, subject matter and object: Markopoulus at [36] citing Kauter v Hilton (1953) 90 CLR 86; [1953] HCA 93 at 97. (b) Where it is contended that a trust is created by a document, the intentions of the parties are to be determined by an objective analysis of the words used in the document - the Court is not concerned with subjective intentions. Markopoulus at [37] - [39] citing Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26 (Byrnes v Kendle) at [13] - [18], [46] - [66], [98] - [118]. (c) If the alleged trust is not wholly in writing, inferences from the terms of conversations may widen the enquiry but do not alter the nature of the enquiry: Markopoulus at [37] - [39] citing Byrnes v Kendle at [54] - [55] (Gummow and Hayne JJ), Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 at 352 (Mason J). 41 The plaintiffs' submit, and I accept, that the subject matter of the alleged trust is certain; the subject matter are the principal sums advanced to and invested with Mr Marco. I also accept the plaintiffs' submission that there is certainty to the object of the alleged trust. The object was to invest sums with Mr Marco, which sums were to be held and maintained in a blocked account in Mr Marco's name for a set period of time, thereby enabling Mr Marco to engage in a PPP arbitrage transaction and earn a rate of return for the plaintiffs. 42 The question in this case is whether the parties intended to create a trust over the principal sums. 43 The Courts have recognised that references in a document to "trust" or that property or money is held on "trust" for or on behalf of another are powerful indicators that the parties objectively intended to create a trust over that property or money: Byrnes v Kendle at [13] - [18], [34] and [36]; In Re [Courtenay] House Capital Trading Group Pty Limited (in Liq) [2018] NSWSC 404 (In Re [Courtenay]) at [23] - [26] (Brereton J). In Byrnes v Kendle and In Re [Courtenay], the Courts accepted that the references in documents to an "Acknowledgement of Trust" and an investment being "held in trust" were unambiguous and explicit words that indicated there had been an objective intention on the part of the parties to create a trust. 44 In Re [Courtenay], Brereton J also concluded that the pooling of funds in a single bank account was not inconsistent with an intention to create an express trust over funds in favour of particular investors, stating at [26]: "Nor is … the notion that funds deposited would be pooled with those of other investors to "live trade", inconsistent with an intention to create a trust. Receipt of funds from multiple beneficiaries into a single account is not inconsistent with a trust; the paradigm case is a solicitor's trust account. Segregation of funds, while an indicium of a trust, is not essential, and a trustee is not always obliged to keep the trust funds separate. An agreement that money be paid into a general account does not defeat a trust that would otherwise exist. Particularly in the context of managed investment schemes, the idea of trust money being "pooled" for the purposes of trading, and even being used to meet certain obligations of the trustee, even in connection with other clients, is established." 45 An intention to create a trust may also be imputed from the conduct of the parties or by inference from the available evidence, by looking at the nature of the transaction as a whole and the circumstances attending the relationship between the parties and known to them: Byrnes v Kendle at [98], [102] - [114]; JD Heydon and MJ Leeming, Jacobs' Law of Trusts in Australia (8th ed, 2016, LexisNexis Butterworths) at [3.06] and [5.02]. 46 Applying the above principles to this case, I am satisfied that the evidence demonstrates there was a clear intention to create an express trust in relation to the principal sums advanced to Mr Marco by the plaintiffs. This is for the following reasons. 100 Insofar as the terms of the example declarations of trust that are in evidence on this application are concerned, I agree with the conclusions of Tottle J and Henry J. On the face of these documents, there is an objective intention to create a trust over the sums referred to in the declarations. However, it does not necessarily follow that the sums described in each declaration of trust were in fact deposited and held on trust by Mr Marco and (or) AMS or that sum continued to be held on trust for the person (entity) referred to in the declaration of trust. 101 Later in these reasons, I address issues associated with rights to interest. For the reasons there given, in my view, the Liquidators would not be justified in treating declarations of trust over rolled-over interest or reinvested interest as sums held on trust for the relevant Scheme member. Therefore, while the declarations of trust provide evidence of an objective intention to hold capital sums deposited with Mr Marco and (or) AMS on trust, the declarations are not necessarily evidence of the capital sums actually deposited into Scheme Accounts by Scheme members. Nonetheless, the Liquidators would be justified in treating the capital sum (properly so called) the subject of declaration of trust that was deposited into a bank account that was controlled or operated by Mr Marco or AMS as sums held on trust for the relevant Scheme member. Thereafter, the remaining amount held on trust would be subject to repayments of capital and (or) other dealings (authorised or unauthorised) with the capital sum. 102 Likewise, the Liquidators may be justified in treating capital sums of Scheme members for whom there is not a declaration of trust as held on trust where it may be inferred from documents and (or) circumstances surrounding the transaction that a declaration of trust was made, but cannot be found, or that the capital sum was intended to be held on trust for the relevant Scheme member. The evidence before the Court on this application is not sufficient to justify the Liquidators treating all Scheme members for whom there is not a declaration of trust as if amounts deposited with Mr Marco and (or) AMS were held on an express trust.

Quistclose trust 103 A Quistclose trust is a trust that arises in circumstances similar to the facts upon which the House of Lords determined that a trust arose in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567; [1968] 3 All ER 651. A Quistclose trust is a form of express trust that arises in circumstances in which funds are advanced for a specific purpose and are to be held on trust unless and until that purpose is fulfilled. There must be an objective intention to create a trust. As the facts of Quistclose demonstrate, intention to create a trust must be found in the words, conduct or combination of words and conduct of the parties. 104 In Quistclose, Wilberforce LJ said (at 579 - 580): Two questions arise, both of which must be answered favourably to the respondents if they are to recover the money from the bank. The first is whether as between the respondents and Rolls Razor Ltd. the terms upon which the loan was made were such as to impress upon the sum of £209,719 8s. 6d. a trust in their favour in the event of the dividend not being paid. The second is whether, in that event, the bank had such notice of the trust or of the circumstances giving rise to it as to make the trust binding upon them. It is not difficult to establish precisely upon what terms the money was advanced by the respondents to Rolls Razor Ltd. There is no doubt that the loan was made specifically in order to enable Rolls Razor Ltd. to pay the dividend. There is equally, in my opinion, no doubt that the loan was made only so as to enable Rolls Razor Ltd. to pay the dividend and for no other purpose. This follows quite clearly from the terms of the letter of Rolls Razor Ltd. to the bank of July 15, 1964, which letter, before transmission to the bank, was sent to the respondents under open cover in order that the cheque might be (as it was) enclosed in it. The mutual intention of the respondents and of Rolls Razor Ltd., and the essence of the bargain, was that the sum advanced should not become part of the assets of Rolls Razor Ltd., but should be used exclusively for payment of a particular class of its creditors, namely, those entitled to the dividend. A necessary consequence from this, by process simply of interpretation, must be that if, for any reason, the dividend could not be paid, the money was to be returned to the respondents: the word "only" or "exclusively" can have no other meaning or effect. That arrangements of this character for the payment of a person's creditors by a third person, give rise to a relationship of a fiduciary character or trust, in favour, as a primary trust, of the creditors, and secondarily, if the primary trust fails, of the third person, has been recognised in a series of cases over some 150 years. 105 Lord Wilberforce also pointed out that the 'lender' may have rights against the 'borrower' both in debt for repayment of the funds advanced and in equity against the specific funds advanced which the borrower is taken to hold on trust for the lender. In this respect, His Lordship said (at 581 - 582): … There is surely no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies: when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose (see In re Rogers, 8 Morr. 243 where both Lindley LJ. and Kay L.J. recognised this): when the purpose has been carried out (i.e., the debt paid) the lender has his remedy against the borrower in debt: if the primary purpose cannot be carried out, the question arises if a secondary purpose (i.e., repayment to the lender) has been agreed, expressly or by implication: if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor's assets) then there is the appropriate remedy for recovery of a loan. I can appreciate no reason why the flexible interplay of law and equity cannot let in these practical arrangements, and other variations if desired: it would be to the discredit of both systems if they could not. In the present case the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and I can find no reason why the law should not give effect to it. 106 However, the funds advanced cannot form part of the general assets of the borrower and, at the same time, be held on trust for the lender. It is a question of the objective intention of the parties as to the manner in which the funds are to be held in the event that they are not applied for a purpose for which they are advanced. The principles derived from Quistclose have been accepted and applied by Australian courts for many years: e.g. Rambaldi (Trustee) v Commissioner of Taxation, Alex (Bankrupt), Re [2017] FCAFC 217; (2017) 107 ATR 1 at [17] - [27] and the authorities there cited. 107 The examples of investment documents in evidence on the application include many letters from Mr Marco to 'Scheme members' expressing confirmation of acceptance of sums of money expressed as 'for the purpose of re-investment', 'for the purpose of entering into a trading program', 'for the purpose of short term investment', 'for investment', 'for re-investment' or 'for short term investment' and other expressions of a similar nature. The terms of these letters indicate that the sums of money accepted were not objectively intended to form part of the assets of Mr Marco and (or) AMS. That view is supported by other letters from Mr Marco to 'Scheme members' in which he refers to 'the status of your investments'. The sums were provided for the purposes stated in the letters of confirmation. Mr Brauer has expressed a belief, in effect, that none of the money deposited was, in fact, used for any of the purposes stated in the letters. Where a Scheme member is able to satisfy the Liquidators that sums were deposited for a particular purpose (whether by express letter or by implication from other documents) and that the funds were not used for that purpose, then the Liquidators would be justified in treating sums of those Scheme members as sums held by Mr Marco and (or) AMS on trust for those Scheme members.

Black v S Freedman trust 108 Black v S Freedman & Co [1910] HCA 58; (1910) 12 CLR 105 concerned an action by the respondents against the appellant, Mr Black and his wife to recover a sum of money alleged to have been stolen by Mr Black while in the respondents' employ. In relation to Mrs Black, the respondents claimed to recover part of that money, which they said came into her possession and was identified as the stolen money, and which she received under such circumstances that she was bound to repay it to the respondents. There was abundant evidence to demonstrate that Mr Black had stolen the money and there was no doubt that he had deposited an amount of the stolen money into his wife's account. 109 O'Connor J said (at 110): Where money has been stolen, it is trust money in the hands of the thief, and he cannot divest it of that character. If he pays it over to another person, then it may be followed into that person's hands. If, of course, that other person shows that it has come to him bonâ fide for valuable consideration, and without notice, it then may lose its character as trust money and cannot be recovered. But if it is handed over merely as a gift, it does not matter whether there is notice or not. 110 In substance, the case is authority for the proposition that a person who acquires property by fraud holds that property on trust for the benefit of the person defrauded out of that property. In Wambo Coal Pty Ltd v Ariff [2007] NSWSC 589; (2007) 63 ACSR 429 White J (at [40] - [42]) characterised the trust in such circumstances as a resulting or constructive trust that arises immediately upon the fraudster acquiring the property from the innocent party because the fraudster's conscience is bound in equity to hold the property on trust for the innocent party. 111 There is little doubt that funds acquired by the operator of a Ponzi scheme from an 'investor' are obtained by fraud. The funds so acquired would be held on trust by the operator for the benefit of an innocent investor: see, e.g., Re Courtenay House Capital Trading Group Pty Ltd (in liq) [2018] NSWSC 404; (2018) 125 ACSR 149 at [30]. As I have concluded that the Liquidators would be justified in treating the Scheme as if it were a Ponzi scheme, the Liquidators would also be justified in treating all sums Mr Marco and (or) AMS received from Scheme members as sums held on trust for those members.

Summary 112 Subject to the Liquidators being satisfied that a person provided funds to Mr Marco and (or) AMS for the purpose of participating as a member of the managed investment scheme described in paragraphs (a) to (e) and (i) of the preamble to the orders of 7 December 2020 and that the funds so provided were not used for that purpose, the Liquidators would be justified in treating the funds so provided as held on trust for the benefit of the Scheme member by Mr Marco and (or) AMS, as applicable.

Pooling Scheme property 113 The Liquidators submit that they would be justified in pooling the applicable assets on one or both of two alternative bases. First, it is submitted that Scheme members made 'investments' in circumstances in which they knew or understood that their funds invested would be pooled with the funds of other Scheme members. Second, it is submitted that the funds of the various Scheme members have been mixed, as a matter of fact, in such a manner that it is no longer practically or economically feasible to trace or identify funds that belong to individual Scheme members. These submissions reflect the different ways in which the term 'pooling' may be used. 114 A form of 'pooling' may arise in circumstances in which a group of investors all contribute to a common fund in the knowledge and on the understanding that the funds will be pooled with the funds of other investors. In such circumstances it may be appropriate to ignore individual or separate contributions to the fund and treat the fund (or what may remain of it upon insolvency) as a common pooled fund in which each investor holds a share proportionate to the contribution made to the common fund: e.g., Australian Securities and Investments Commission v Idylic Solutions Ltd [2009] NSWSC 1306; (2009) 76 ACSR 129 at [45] - [46]. 115 Another form of 'pooling' may arise in circumstances in which the separate and individual funds of a group of investors are mixed, as a matter of fact, without the knowledge and understanding that the funds were to be contributed to a common fund for investment purposes. While in theory it may be possible to 'trace' and identify individual investors, or individual contributions made to the mixed fund, it may be practically impossible or not economically feasible to undertake that exercise. In such circumstances, a liquidator may be justified in treating the mixed fund as a common pool of funds in which investors who have contributed to the fund have equal rights in relation to each other, subject to such equities as may arise between them: e.g., Georges v Seaborn International (Trustee) [2012] FCA 75; (2012) 288 ALR 240 at [83] - [84], [92] - [94]; Re BBY Limited (Receivers and Managers appointed) (in liquidation) (No 3) [2018] NSWSC 1718 at [8]; Re BBY Limited (Receivers and Managers appointed) (in liquidation) (No 2) [2018] NSWSC 346; (2018) 363 ALR 492 at [38] - [57], [400]; Kelly (Liquidator), in the matter of Halifax Investment Services Pty Ltd (in liquidation) v Loo [2021] FCA 531; (2021) 390 ALR 669 at [164], [183] - [186]. A mixing of funds may take place both within an entity and between entities such that there is, in effect, a common remaining (yet deficient) fund upon the insolvency of the operators of an investment scheme: e.g., Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 at [79] (per Black J), citing Australian Securities and Investments Commission v Nelson [2003] NSWSC 129; (2003) 44 ACSR 719 at [21] (per Austin J); and Seaborn International at [92] (per Gordon J). 116 In Re BBY (No 3), Brereton J said at [8] (citations omitted): As summarised in the Principal Judgment, while the theoretical basis for pooling is the principle that all contributors to a deficient mixed fund hold an equitable charge over the entire fund and its traceable proceeds to the value of their contributions, subject to any dealings and costs, or are equitable tenants in common of the mixed fund as a whole, including its traceable proceeds, subject to such deductions, so that each contributor has an "entitlement" in each fund, the pragmatic nature of the jurisdiction to give advice and directions to a liquidator means that neither strict proof of mixing such as would entitle a beneficiary to an equitable proprietary remedy, nor absolute impossibility of tracing, is required; pooling may be directed where the identification and tracing of the interests of individual clients is not in the circumstances of the particular case reasonably and economically practical, on the basis that it is reasonable in the circumstances that the funds be regarded as irreversibly deficient and mixed. However, because the effect of pooling two or more accounts is to treat each client's entitlement to one as identical to its entitlement to the other(s), and so to treat each client as having a rateably equal interest in each fund, it will be warranted only when the funds have become so intertwined that each client's entitlement to one account may reasonably be regarded as identical to its entitlement to the other(s), and this will be so when it is reasonable in all the circumstances to regard each as having a rateably equal interest in the mixed fund. The combination of mixing and impracticability of tracing does not of itself mean that it will necessarily be reasonable to treat each client's entitlement to one account as identical to its entitlement to the other(s), and to regard each as having a rateably equal interest in the mixed fund: whether that will be so is influenced by the scale of the mixing, the relative sizes of the funds and the deficiencies, and above all the extent of the interest of the contributing fund in the mixed fund. That requires the Court to form a view, if it can - albeit an imprecise and impressionistic one - as to what is likely to be the extent of the interest of the beneficiaries of each fund in the other(s). In doing so, the Court is informed, but not controlled, by equitable tracing principles. 117 It follows that it is not necessary to consider if all Scheme members should be treated as having invested funds in the knowledge and on the understanding the funds would be pooled in a common 'investment' fund along with other Scheme members. Here, the evidence of the Liquidators, which I accept, is to the effect that Scheme members' funds were mixed, as a matter of fact, and it is not practically or economically feasible to trace and identify each individual participant's specific proprietary interest in the remaining Scheme property. In such circumstances, the Liquidators would be justified in treating all Scheme Accounts and assets and property acquired with funds from Scheme Accounts or otherwise traceable to funds in those accounts as a single fund. Further, there is nothing in the evidence upon which the Liquidators rely nor in the submissions of the parties to suggest that it would not be appropriate, subject to the question of hotchpot addressed later in these reasons, to treat each Scheme member as having equal rateable interests in the mixed fund. 118 The Liquidators would be justified in treating the proceeds of realisation of the assets and property of the Scheme and AMS, whether held legally or beneficially, as held by them on the basis that they comprise a single (mixed) fund over which each Scheme member holds an equitable charge and its traceable proceeds to the value of their contributions, subject to any dealings and costs, or in which Scheme members are equitable tenants in common, including its traceable proceeds, subject to such deductions, so that each contributor has an 'entitlement' in each fund. In these reasons, the original single (mixed) fund as it was constituted from time-to-time and its traceable proceeds are referred to as the Scheme property. That part of the Scheme property that is now in the hands of the Receivers or Liquidators is referred to as the remaining Scheme property. 119 The last question concerning the treatment of Scheme property is whether the Liquidators would also be justified in treating certain assets of Mr Marco and AMS as assets held on trust for the benefit of the Scheme members and that these assets form part of the single mixed fund (i.e., part of the remaining Scheme property).

Tracing Scheme property 120 As noted above, in the Liquidators' Report Mr Brauer opines that funds deposited into the Scheme Accounts were used for a variety of purposes including: the purchase of property or development costs, loans to third parties and related parties and the purchase and restoration of motor vehicles. A more detailed description of Scheme funds and assets acquired from Scheme funds is contained in Appendix G of the Liquidators' Report. It appears that the Liquidators have applied the principles of tracing referred to later in these reasons to identify Scheme property as specific assets held by Mr Marco, AMS and Mr Marco's son. In substance, the Liquidators consider that as the specific assets were acquired with funds Mr Marco and (or) AMS held on trust for Scheme members. As Mr Marco was a director of AMS, it could not be considered that Mr Marco and (or) AMS acquired the specific assets other than with knowledge that the funds used were trust funds in which Scheme members have a beneficial interest. Accordingly, Scheme members have valid and enforceable claims of equitable proprietary interests in the specific assets.

Cash at bank 121 As noted above, the preamble to the orders of 7 December 2020 identifies five bank accounts into which Mr Marco pooled funds. In the Liquidators' Report Mr Brauer opines that in the period from September 2002 to 31 October 2018 funds of Scheme members were deposited into a number of additional bank accounts and that Mr Brauer considers these bank accounts also to be accounts of the Scheme. All bank accounts into which Scheme members' funds were deposited are identified in Appendix D of the Liquidators' Report (Scheme Accounts). The Liquidators would be justified in treating the Scheme Accounts as bank accounts operated for the purposes of the Scheme. 122 The Receivers have received a total of about $6 million held in accounts in the name of Mr Marco and AMS. These were funds in one or more of the Scheme Accounts and two accounts held by the Interim Receivers on the termination of their appointment on 7 December 2020. The Cash at bank is identified in a table in Appendix G of the Liquidators' Report. The Liquidators would be justified in treating the funds in or realised from the bank accounts referred to in that table as Scheme property.

Debts and loans 123 Loans made to various debtors are set out in a table in Appendix G. Mr Brauer opines that the source of the loans are derived from Scheme Accounts. Further, in the relevant period, 98% of the funds held in the Scheme Accounts were deposits of Scheme members rather than Mr Marco's personal funds or funds from non-Scheme related activities. In the circumstances, the Liquidators would be justified in treating the debts set out in that table as Scheme property.

Real property 124 The Receivers have received about $7.9 million upon the realisation of real property set out in a table in Appendix G. Of the amount received, about $2 million is from a property registered in Mr Marco's name and about $5.9 million is from property registered in AMS's name. Mr Brauer states that he understands that the property registered in AMS's name and one commercial property registered in Mr Marco's name were purchased from funds in Scheme Accounts. The Liquidators would be justified in treating the proceeds from the realisation of these properties as Scheme property. 125 Mr Marco is the registered proprietor of a number of other properties. Mr Brauer indicates that the Liquidators consider these to be personal property of Mr Marco, but the Scheme may have a claim against part of the proceeds from the sale of these properties, as funds from Scheme Accounts were used for the maintenance and improvement of these properties.

Investments 126 The Receivers have received about $1.7 million from the realisation of certain investment assets set out in a table in Appendix G. 127 A number of the 'assets' identified in the table are private placement projects. No value has been ascribed to those 'assets' for the reasons given earlier. 128 About $1.1 million was received from the realisation of an ASX share portfolio. Those shares had been registered in the name of Mr Damon Marco, Mr Marco's son. These shares were purchased with funds from Scheme Accounts. There is nothing in the evidence to suggest that Mr Damon Marco acquired the shares as a bona fide purchase for value without notice. 129 About $0.6 million was received from realisation of unit shares in the Broadway Fair Shopping Centre registered in the name of AMS. Mr Brauer states that he understands the unit shares were purchased with funds from Scheme Accounts. 130 The Liquidators would be justified in treating the proceeds from the realisation of the investments identified in the table in Appendix G as Scheme property.

Motor vehicles 131 The Receivers received about $3 million from the realisation of Mr Marco's classic car collection. The motor vehicles and realisation values are set out in a table in Appendix G. Mr Brauer states that with the exception of a Datsun motor vehicle, he understands that all motor vehicles were purchased with funds from Scheme Accounts. Accordingly, the Liquidators would be justified in treating the proceeds from the realisation of the applicable motor vehicles set out in the table as Scheme property. 132 In the case of the Datsun motor vehicle, the Liquidators consider to be personal property of Mr Marco, Mr Brauer opines that material funds from the Scheme Accounts were used for the maintenance and (or) improvement of that vehicle. Accordingly, the Scheme may have a claim against the proceeds from the sale of that vehicle.

Plant and equipment 133 The Receivers have received about $37,000 from realisation of various plant and equipment. Mr Brauer states that he understands the plant and equipment was purchased with funds from Scheme Accounts. Accordingly, the Liquidators would be justified in treating the proceeds from the realisation of that plant and equipment as Scheme property.

Purported debt AMS owes Mr Marco 134 In Mr Brauer's affidavit of 10 March 2022 he deposed to facts to the effect that in the Interim Receivers' Report Mr Brauer noted that the financial statements of AMS recorded a loan owed by it to Mr Marco in the sum of $12.2 million. However, the loan was not included (as a liability) in the reports on company activities and property for AMS that Mr Marco and Mr Damon Marco prepared as directors of AMS dated 16 June 2020, 10 January 2021 and 22 January 2021. The loan was not included (as an asset) in Mr Marco's statement of assets and liabilities provided to the Interim Receivers. The loan was not included (as an asset) in the first report to creditors of Mr Marco's trustee in bankruptcy dated 9 April 2021. The Liquidators of AMS have not received a proof of debt or claim from Mr Marco in respect of the purported debt or at all. 135 In the circumstances described above and having regard to the nature and operation of the Scheme, there is good reason to doubt that the purported debt recorded in the financial statements of AMS is a genuine debt or transaction. The Liquidators would be justified in considering that there is no genuine debt owed by AMS to Mr Marco. 136 The Liquidators have requested the Court to make an order to the effect that the Liquidators would be acting properly and justified in treating any debt payable by AMS to Mr Marco as if and on the basis that it is extinguished. I am satisfied that such an order is appropriate.

Priorities on distribution of remaining Scheme property 137 The Liquidators have sought a direction that the funds received from realisation of the Scheme property is to be paid in the following order of priority. (a) First, all unpaid remuneration, costs and expenses of the Interim Receivers, the Receivers and the Liquidators pursuant to the orders of the Court made on 7 December 2020 and 28 January 2021. (b) Next, in discharge of the known outstanding debts or liabilities of AMS identified in the table at paragraph 22 of Mr Brauer's affidavit of 10 March 2022 totalling $10,541. (c) Next, to Scheme members as the beneficial owners of the assets and property of the Scheme, with entitlements to be determined in accordance with the applicable distribution methodology. 138 I am satisfied that the Interim Receivers, Receivers and Liquidators unpaid remuneration, costs and expenses should be paid first out of the fund otherwise available to Scheme members. As to creditors of AMS, it is proposed that creditors of AMS be paid a total of $10,541 and that these creditors will receive, in effect, full repayment of non-Scheme member debts and liabilities in priority to distribution of the fund to the beneficial owners of the fund. 139 The nature of the debts and the process by which the Liquidators called for proofs of debt is set out in Mr Brauer's affidavit of 10 March 2022. Mr Brauer deposed that he is of the opinion that AMS incurred the applicable debts as a result of AMS owning or maintaining real property it acquired with funds from Scheme Accounts or as a result of AMS attending to and complying with its tax lodgement obligations. The debt owed to the Australian Taxation Office is relatively minor. Otherwise, in the circumstances, I am satisfied that it is appropriate to treat the relevant creditors as, in effect, creditors of the notional trustee of the Scheme and it is appropriate that debts incurred owning or maintaining Scheme property are paid in priority to distributions to the beneficial owners of those properties.

Distribution options 140 As noted above, the Liquidators' Report and application identify eight potential distribution methods. Two other potential methods: first-in-first-out and lowest intermediate balance were excluded at the outset due to the impractical, onerous and expensive nature of using one of these methods. 141 The Liquidators' Report describes the manner in which the Liquidators prepared the Model, the assumptions underpinning it and information reproduced in it. In terms of the potential distribution methods, the Liquidators have used the Model as a tool for analysing the outcomes and impacts on various groups of Scheme members based upon which distribution method is applied. 142 The Liquidators' Report uses a number of terms that are defined in that report. For ease of reference the same terms with same meanings are adopted in these reasons. The terms were defined as follows: Key definitions for calculations Defined Term Definition Accrued Interest Any accrued but unpaid interest on an investor's Balance Outstanding in the final recorded investment period. Balance Outstanding An investor's Total Contributions less Withdrawals of Capital. Capital Contributions An investor's initial cash deposits to the Scheme, any further legitimate cash deposits, and any Capital Receipts. Any amounts owing to an investor under their Balance Outstanding that are attributable to Rolled-Over Interest are not treated as part of an investor's Capital Contributions. Capital Receipts Any amounts recorded as an investment in the name of or credit to the account of an investor (the transferee) which were transferred from another investor (the transferor) at maturity of the transferor's investment, reflected as a debit on the account of the transferor and a credit on the account of the transferee, and in respect of which the transferee has made no cash deposit, but only to the extent that the debit on the account of the transferor is treated as a debit in respect of capital invested by the transferor and not interest earned as per the terms of their investment. Incoming Transfers Any amounts recorded as an investment in the name of or credit to the account of an investor (the transferee) which were transferred from the investment of another investor (the transferor) at maturity, reflected as debit on the account of the transferor, a credit on the account of the transferee, and in respect of which the transferee has made no cash deposit to the Scheme. Interest Receipts Any amounts recorded as an investment in the name of or credit to the account of an investor (the transferee) which were transferred from another investor (the transferor) at maturity of the transferor's investment, reflected as a debit on the account of the transferor and a credit on the account of the transferee, and in respect of which the transferee has made no cash deposit, but only to the extent that the debit on the account of the transferor is treated as a debit in respect of interest earned as per the terms of their investment and not capital invested by the transferor. Outgoing Transfers Any amounts originally recorded as an investment in the name of or to the credit to the account of one investor (the transferor) that are transferred at maturity of the investment to another investor (the transferee), reflected as a debit on the account of the transferor and a credit to the account of the transferee, and in respect of which the transferor made no cash withdrawal from the Scheme. Rolled-Over Interest Any amounts representing Interest Receipts and any interest earned on maturity as per the terms of the investment, that are not withdrawn or paid to the investor but are instead re-invested in the Scheme. Total Contributions The sum of Capital Contributions and Rolled-Over Interest for a particular investor. Withdrawals of Capital (1) any payments to an investor in respect of capital invested and that is not a Withdrawal of Interest; or (2) any Outgoing Transfers, but only to the extent that the debit on the account of the transferor is treated as a debit in respect of capital invested by the transferor and not a Withdrawal of Interest. Withdrawals of Interest (1) any payments to an investor in respect of interest earned as per the terms of their investment; or (2) any Outgoing Transfers, but only to the extent that the debit on the account of the transferor is treated as a debit in respect of interest earned as per the terms of their investment and not a Withdrawal of Capital.

143 Certain of the terms defined in the Liquidators' Report will have a different value depending upon which of the distribution methods is used in the calculation of the applicable amount. 144 The defined terms take into account that there are different possible approaches to the treatment of accrued interest, rolled-over or reinvested interest, transfers of 'investments' between Scheme members and payments of 'interest' to Scheme members. For example, the terms 'Balance Outstanding', 'Accrued Interest', 'Total Contributions' and 'Rolled-Over Interest' take into account contractual rights to unpaid accrued interest and reinvested interest. However, the term 'Capital Contributions' does not take into account contractual rights to unpaid accrued interest or reinvested interest. 145 The defined terms also take into account that from time-to-time there were transfers of account balances from one Scheme member (transferor) to another Scheme member (transferee). Transfers are taken into account in the term 'Capital Receipts' which, in turn, are included in 'Capital Contributions'. In the term 'Interest Receipts' which, in turn, are included in 'Rolled-Over Interest', and in the term 'Outgoing Transfers' which, in turn, are included in 'Withdrawals of Capital' and 'Withdrawals of Interest'. That is, the defined terms treat a transferee's rights to capital and interest as the same as the transferor's rights to capital and interest. Also, a transfer is treated as a withdrawal of capital and interest by the transferor. The transferor's rights to capital and interest are treated differently in the Courtenay House and Letten methods. 146 The Model incorporates the following information drawn from the various sources identified in the Liquidators' Report: (a) cash deposits and withdrawals of each Scheme member allocated to respective 'investments'; (b) all transfers between Scheme members including details of the amount, the transferred 'investment' and the received 'investment'; (c) all roll-overs or reinvestments by Scheme members including details of the amount, the transferring 'investment' and the receiving 'investment'; (d) details of the interest accruing on each 'investment' in the Scheme; and (e) other adjustments required for 'investments'. 147 Withdrawals and roll-overs were apportioned between interest and capital in the Model. The apportionment was different between the methods referred to as Courtenay House and the methods referred to as Letten described later. The apportionment was different because different assumptions were used as to the order in which interest and capital was withdrawn from the Scheme Accounts. 148 The Liquidators have referred to Courtenay House methods after the case of Re Courtenay House Capital Trading Group Pty Ltd (In Liq) [2020] NSWSC 780; (2020) 147 ACSR 1. The Liquidators' report assumes that in that case, investors in the scheme were permitted to claim for reinvested returns. In my view, even with the benefit of the liquidators' report referred to in the orders of Rees J, there is ambiguity as to the precise manner in which the 'Net Claim' of investors was calculated under 'Scenario 2' referred (at [110(1)(b)]) of the reasons. 149 It appears that Rees J considered that 'capitalised profits' (or redistributed capital) were not included in the calculation of investors' claims in that case: see, Re Courtenay House at [111], [118]. However, in the description of 'Scenario 2' her Honour said: 'If an investor reinvested their returns, the new investment is combined with the existing investment for the purposes of the calculation': Re Courtenay House at [111]. These appear to be contradictions. 150 Ultimately, Rees J concluded that the liquidators in that case would be justified in distributing the available funds in accordance with 'Scenario 2 as described in the liquidators report to the Court dated 1 November 2018 at [5.2]': Re Courtenay House at [175(1)(a)]. As mentioned earlier, a copy of that report was in evidence, however, paragraph [5.2] of the report does not, of itself, shed a great deal of light on what claims were included in 'Scenario 2'. It is necessary to read paragraph [5.2] in the context of the report as a whole. When that is done, it appears, to me at least, that the amounts investors received as returns that were reinvested were included as additions to an investor's capital in the calculation of an investor's 'Capital Outstanding', but the reinvested returns were also deducted in the calculation of an investor's 'Net Claim'. That is, reinvested returns had a neutral effect on the investor's 'Net Claim' and, therefore, investors were not entitled to claim for reinvested returns. If so, the contradiction referred to above is non-existent. Nonetheless, in the Liquidators' Report and the proposed distribution methods now under consideration, the Courtenay House methods assume that Scheme members are entitled to claim for rolled-over or reinvested interest. 151 The Liquidators have referred to Letten methods after Australian Securities and Investments Commission v Letten (No 20) [2012] FCA 1283; (2012) 92 ACSR 630. In that case, investors in the scheme there under consideration were not permitted to claim for capital gains recorded (but not paid) for investments in the Scheme operators' records. They were only permitted to claim for initial capital contributions to the scheme. 152 In the case of Courtenay House methods, the Liquidators have assumed that interest was withdrawn first and then capital. That is consistent with the contractual rights of the Scheme member. 153 In the case of the Letten methods, the Liquidators have assumed that capital was withdrawn first and then interest. That is consistent with the view of Gordon J expressed in Letten (No 20) (at [23]) to the effect that the contractual right to capital gains rolled-over and reinvested in the Ponzi scheme under consideration in that case were fictitious because there were no genuine 'investments' from which real capital gains were generated. Therefore, in the Letten methods, payments out of the Scheme Accounts are assumed to be capital of the relevant Scheme member before payments are considered to be 'interest'. 154 The Liquidators have made similar assumptions with respect to transfers between Scheme members, other than transfers identifiable as legally effective assignments of 'investments'. In the latter case, the assignee is treated in the same manner as the assignor would have been treated, absent the assignment. In the former case, there is little documentation and the transfers are generally between related parties. 155 Apart from the simple pari passu methods, the differences between the net investment, formula and preliminary dividend methods described below turn on whether or not each Scheme member's admitted claim takes into account or ignores rolled-over or reinvested interest. It is taken into account in the Courtenay House methods and ignored in the Letten methods.

Pari passu options 156 Pari passu is the standard method liquidators use to distribute the remaining assets of a company in liquidation after discharging priority payments. Under this method, the remaining assets of the Scheme would be shared amongst Scheme members with admitted claims pro rata in the proportion that each Scheme member's admitted claim bears to the total of all Scheme members' admitted claims. 157 The Liquidators have identified two simple pari passu methods: pari passu (a) and pari passu (b). The methods differ in terms of the manner in which the value of admitted claims is to be identified. 158 Pari passu (a) values the admitted claim as a Scheme member's contractual entitlements arising from the transactions involving investments in the Scheme. These are the Balance Outstanding (Capital Contributions plus Rolled-Over Interest less Withdrawals of Capital) plus Accrued Interest. The pari passu (a) method results in the same distribution to Scheme members as they would receive if the Scheme were a company in liquidation. 159 Pari passu (b) values the admitted claim as the remaining capital each Scheme member contributed to the Scheme. That is, Capital Contributions less Withdrawals of Capital. The method only takes into account the capital position of Scheme members and ignores contractual rights and payments associated with interest. 160 The formula to calculate each Scheme member's distribution for each of these methods is described in the Liquidators' report as follows: Once each investor's claim has been determined, the available funds will be distributed rateably amongst all claimants. The formula to determine the precise distribution payable will be: where: "D" means the distribution payable "A" means the assets available for distribution to all investors (i.e. $20m in all methods) "B" means the total of all investors' claims against the fund as calculated above "C" means the investor's claim against the fund as calculated above

Net investment options 161 Neither of the two simple pari passu methods take into account that many Scheme members received payments of 'interest'. Further, these payments of interest were made from the cash deposits of other Scheme members. The Liquidators have identified two methods: Letten Net Investment; and Courtenay House Net Investment, by which payments of interest are brought to account as deductions in the determination of each Scheme member's admitted claim. Each of these is also a pari passu method and differ from the simple pari passu methods in the manner in which each Scheme member's admitted claim is determined. 162 Courtenay House Net Investment values the admitted claim as Total Contributions (Capital Contributions plus Rolled-Over Interest) less Withdrawals of Capital less Withdrawals of Interest. The method gives effect to contractual rights arising from rolled-over or reinvested interest, but not contractual rights to unpaid accrued interest. 163 Letten Net Investment values the admitted claim as Capital Contributions less Withdrawals of Capital less Withdrawals of Interest. The method differs from the Courtenay House Net Investment method in that a Scheme member's admitted claim does not include rolled-over or reinvested interest. 164 The formula to calculate each Scheme member's distribution is the same as the formula for the simple pari passu methods except that 'B' is to be replaced with the total of all Scheme member's admitted claims and 'C' is to be replaced with an individual Scheme member's admitted claim as determined under each of the Courtenay House Net Investment and Letten Net Investment methods.

Formula options 165 The Liquidators have identified two further methods for taking into account that many Scheme members have received payments of capital or interest. These are based on the formula that the Court ordered in Letten (No 20). These are referred to as Courtenay House Formula and Letten Formula. 166 The Courtenay House Formula (at section 8.8.19 of the Liquidators' report) is as follows: … The Courtenay House Formula method uses the following formula to determine each investor's claim against the fund: where: "P" means the investor's claim against the fund "A" means the investor's Total Contribution "B" means the assets available to distribute "C" means the total sum of all Withdrawals of Interest and Withdrawals of Capital by investors with a Balance Outstanding "D" means the sum of the Total Contributions by all investors with a Balance Outstanding "E" means the total sum of all Withdrawals of Interest and Withdrawals of Capital by the investor 167 The Letten Formula (at section 8.8.27 of the Liquidators' report) is the same, except that the key is as follows: where: "P" means the investor's claim against the fund "A" means the investor's Capital Contributions "B" means the assets available to distribute "C" means the total sum of all Withdrawals of Interest and Withdrawals of Capital by investors with a Balance Outstanding "D" means the sum of the Capital Contributions from all investors with a Balance Outstanding "E" means the total sum of all Withdrawals of Interest and Withdrawals of Capital by the investor 168 The formula is the same in each case except that the Courtenay House Formula takes into account rolled-over or reinvested interest as part of the inputs into the formula whereas the Letten Formula does not take these into account. Under these methods, the formula is not used to calculate each Scheme member's distribution per se, but it is used to calculate, in effect, each Scheme member's admitted claim. The admitted claim is then used to calculate each Scheme member's distribution using the simple pari passu formula. 169 Due to 'E' in the formula, certain Scheme members with a 'Balance Outstanding' will have zero or a negative amount where they have received more than their proportionate share of the fund in capital and interest payments. These Scheme members are excluded or have no admitted claim. The formula for the simple pari passu methods is then used to calculate the distribution to each Scheme member with a (positive) admitted claim by replacing 'B' with the total of all these admitted claims and 'C' with an individual Scheme member's admitted claim calculated in accordance with the Courtenay House Formula or Letten Formula. 170 The main difference between the formula methods and the other pari passu methods is that the admitted claim is a proportionate share of the fund that would be available for distribution if all Scheme members with an Outstanding Balance (a contractual claim against the Scheme) repaid all amounts received as capital and (or) interest.

Preliminary dividend options 171 The Liquidators have identified yet two further methods for taking into account that many Scheme members have received payments of capital and (or) interest. These are the Courtenay House Preliminary Dividend and Letten Preliminary Dividend methods. 172 Under the preliminary dividend methods payments of capital and interest are brought to account by treating those payments as preliminary dividends (distributions), in effect, from the whole original Scheme property. A Scheme member who has received payments of capital or interest is not able to participate in further dividends (distributions) until other Scheme members have received an equivalent dividend (rate of return) out of the funds available for distribution. The distributions for each Scheme member is able to be determined using the 'GOAL SEEK' function in Excel. 173 Courtenay House Preliminary Dividend uses a dividend rate calculated as Withdrawals of Capital plus Withdrawals of Interest divided by Total Contributions (Capital Contributions plus Rolled-Over Interest). Letten Preliminary Dividend uses a dividend rate calculated as Withdrawals of Capital plus Withdrawals of Interest divided by Capital Contributions. Therefore, the difference between these methods is again that the Courtenay House method takes into account interest that Scheme members have rolled-over or reinvested whereas the Letten method does not. 174 In the Liquidators' Report, Mr Brauer postulates an alternative to the Courtenay House and Letten Formula methods by which, rather than determining each Scheme member's admitted claim, the formula is used to determine a participant's distribution (dividend). In this alternative, the second step (applying the simple pari passu formula) is eliminated and instead the formula is repeated until only Scheme members who would receive a positive amount remain. In the Liquidators' Report, the alternative formula is described as follows: 8.8.34 Using the formula in this alternative way requires the following changes: a. A member's entitlement to receive a dividend is determined by whether the result of the formula is positive (using their relevant figures for integers "A" and "E"). b. All investors with a negative result are then excluded from participating and their Withdrawals of Capital, Withdrawals of Interest and claims are then removed from integers "C" and "D". c. The calculations are then undertaken a second time for the remaining investors (using the new values for integers "C" and "D"). d. Steps (a), (b) and (c) are repeated until the formula provides ·au remaining investors with a positive result. These results are then taken as the distribution payable to those investors. 8.8.35 In the absence of undertaking the steps in (b) to (d) above, the sum of all indicative distributions payable to investors is far in excess of the funds available for distribution. 8.8.36 The Liquidators have modelled this alternative interpretation and note that the results obtained are exactly the same as those provided under the respective 'Preliminary Dividend' methodologies. As a result, we have chosen to maintain the current interpretations of the 'Formula' methodologies (as outlined at sections 8.8.18 and 8.8.27 above) to maintain a distinction between these methodologies. 175 Put another way, if the alternative approach to the Courtenay House and Letten Formula methods were adopted, there would be six and not eight potential distribution methods.

Other potential options 176 As noted earlier, the Liquidators excluded any distribution based on the first-in-first-out method or lowest intermediate balance method. 177 The first-in-first-out method determines each contributor's remaining funds in a mixed fund, based on an assumption that earlier deposits are withdrawn before later deposits. The method favours later contributors over earlier contributors. The method has been rejected as an appropriate method in circumstances of multiple contributors to a deficient mixed fund: Caron v Jahni (No 2) at [81]. It also requires an analysis of each deposit into and withdrawal out of the mixed fund. 178 The lowest intermediate balance method also requires an analysis of the timing of each deposit into and withdrawal out of the mixed fund. The method allocates withdrawals rateably and proportionately between all contributors to the mixed fund at the time of each withdrawal. While the method was acknowledged as preferable when dealing with proprietary interest of contributors to a mixed and deficient fund, it may result in enormous complexity where there are a significant number of contributors over a long period of time: Caron v Jahni (No 2) at [120]. 179 In the Liquidators' Report, Mr Brauer opines that as a result of the manner in which the Scheme was operated there would be significant practical difficulties in attempting either the first-in-first-out or lowest intermediate balance method. I accept his evidence and opinion that the adoption of either of these methods is impractical, onerous and expensive to apply. The Liquidators are justified in excluding each of these as possible methods for distributing the remaining fund.

Model outcomes of distribution methods 180 The Liquidators' Report includes sections that compare the outcomes in terms of distributions for Scheme members depending upon the individual circumstances of those participants. While the Model and outcomes are illustrative of the different interests of individual Scheme members and groups of Scheme members with similar interests, in my view, the appropriate distribution method should be selected based on principle rather than on the potential outcome for an individual Scheme member or group of Scheme members. Accordingly, I have not had regard to the outcomes of the different distribution methods when considering the appropriate method to be adopted in this case.

Significance of equitable proprietary interests 181 Before considering the issues of interest and appropriate distribution method, it is important to appreciate the context in which these issues are to be considered having regard to the observations already made to the effect that the Liquidators would be justified in treating: (a) Scheme property as held on trust by Mr Marco and (or) AMS for the benefit of Scheme members; (b) Scheme property (whether held by Mr Marco or AMS) as part of a single mixed fund; (c) Scheme member as holding an equitable charge over Scheme property to the value of their contributions, subject to any dealings and costs, or as equitable tenants in common of the Scheme property, subject to deductions, so that each contributor has an 'entitlement' in each fund; and (d) the Scheme as a Ponzi scheme.

Interests are not necessarily equal 182 It follows that the Liquidators would be justified in treating each Scheme member as having an equitable proprietary right to Scheme property: Caron v Jahani (No 2) at [66] - [74]. Further, as Brereton J observed in Re BBY (No 3) (at [8]), treating Scheme property as a single mixed fund in which Scheme members have an equitable proprietary interest does not necessarily mean that it is reasonable to treat each participant as having a rateably equal interest in the mixed fund. 183 The significance of proprietary rights and the importance of treating contributors differently where the evidence reveals that a contributor or class of contributor is able to trace contributions directly into a mixed fund or part of it was emphasised in and forms the foundation of the NSW Court of Appeal's reasoning in treating each Scheme member as having 'clearly discernible separate property rights'. Accordingly, where it is possible to apply a distribution method that gives better effect to the true proportionate interests in a mixed fund, then that method should be adopted. E.g., the lowest intermediate balance method should be used in preference to pro rata distributions where it is reasonable and practical to apply it: Caron v Jahani (No 2) at [145] - [155].

Tracing 184 The conclusion that the Liquidators would be justified in treating the Scheme property as a single mixed fund and that it is not practicable to trace individual Scheme member's interests in that fund or adopt the lowest intermediate balance method, does not mean that principles of tracing have no application at all. As noted earlier, the principles of tracing may be utilised to identify and trace Scheme property into the possession of Mr Marco, AMS and other parties (including Scheme members). These principles may have a bearing on the treatment of payments to Scheme participants out of Scheme property or other transactions connected to Scheme members' claims against the remaining Scheme property. 185 Lord Millett described the concept of tracing in Foskett v McKeown [2001] 1 AC 102 at 128 in the following terms: Tracing is thus neither a claim nor a remedy. It is merely the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property. Tracing is also distinct from claiming. It identifies the traceable proceeds of the claimant's property. It enables the claimant to substitute the traceable proceeds for the original asset as the subject matter of his claim. But it does not affect or establish his claim. That will depend on a number of factors including the nature of his interest in the original asset. He will normally be able to maintain the same claim to the substituted asset as he could have maintained to the original asset … See, also: Evans v European Bank Ltd [2004] NSWCA 82; (2004) 61 NSWLR 75 at [132] - [139]; Heperu Pty Ltd v Belle [2009] NSWCA 252; (2009) 76 NSWLR 230 at [89]. 186 Colvin J recently surveyed the principal authorities, applicable principles and modern approach concerning tracing in Goldus Pty Ltd (subject to a deed of company arrangement) v Cummins (No 4) [2021] FCA 1095 at [265] - [283]. The essence of tracing is that it is a process rather than a right or a remedy. It is the process by which, as a question of fact and evidence, a claimant demonstrates what has happened to its property such that a claim in respect of identified property in the possession of a third party may be made. It involves demonstrating causal or transactional links from the original property to other property. It does not necessarily require that one asset is 'substituted' directly for another. In the process of demonstrating causal or transaction links 'common sense and reasonable inference play their part': Toksoz v Westpac Banking Corporation [2012] NSWCA 199; (2012) 289 ALR 577 at [7] - [10]. See, also, Edelman J, 'Understanding Tracing Rules' (2016) 16 QUTLR 1 at 7 - 11. 187 Tracing may be considered to be a preliminary to the making of a personal or proprietary claim. In the context of a Ponzi scheme, volunteers who come to know that they have received and retain the proceeds of, or have taken advantage of a fraud to which they were not a party, cannot knowingly seek to retain the proceeds or that advantage without, in effect, becoming parties to that fraud and liable accordingly: Heperu at [92] citing Black v S Freedman at 109 - 111. Conversely, bona fide recipients for value without notice of any wrongdoing are not liable to disgorge the proceeds: Foskett v McKeown at 127-128; Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 at [562].

Hotchpot 188 There are a number of authorities that have considered the concept of hotchpot in the context of distributions of the remaining funds of insolvent unregistered managed investment schemes. The historical origins of hotchpot and examples of the circumstances in which it has been applied are set out in the judgment of Barrett J in Idylic Solutions at [54] - [60] and Rees J in Re Courtenay House at [78] - [109] and it is not necessary to repeat or set out these principles at length. 189 The equitable doctrine of hotchpot has its origins in probate and applied to the residual estate of testators who during their lifetime had made gifts to children and left the residual estate to children in equal shares. In the absence of directions to the contrary, inter vivos gifts to children were taken into account in the distribution of the residual estate so as to make all the children's shares equal. Hotchpot was extended to intestacy by the Statute of Distributions 1670 (22 & 23 Car 1 c 10). The underlying principle was that there should be equality among children after the parent's death, free from distortions arising from benefaction conferred by the parent while living. It became common for the principle to be adopted expressly through hotchpot clauses in wills. 190 The hotchpot principles of equity also operated outside probate and intestacy. By way of example, in the case of co-sureties, the general rule is that they share equally the burden to which they are all subject. That required adjustment where one co-surety has received a benefit by way of indemnity or security from the principal debtor that other co-sureties have not received. In such as case, the benefit must be brought into hotchpot so that it may be shared pro tanto with other co-sureties. A similar principle applies to proof in concurrent bankruptcies (or corporate insolvencies) in different jurisdictions. A creditor who has received a dividend in an insolvency in one jurisdiction which proves in the insolvency in another jurisdiction was required to bring into hotchpot the dividend received in the other jurisdiction before sharing in the fund available for distribution locally. It also applies in the principle that a secured creditor may, subject to surrendering the security, prove for the whole debt in a debtor's bankruptcy (or corporate insolvency) and share rateably with other creditors is an example of bringing into hotchpot the security or its value. 191 After summarising the hotchpot history and principles referred to above, in Idylic Solutions Barrett J said (at [60]): The hotchpot concept is a reflection of the maxim "equality is equity" (with "equality", in an appropriate case, understood as proportionate equality), supplemented by the maxim "he who seeks equity must do equity". The equality (or proportionate equality) that equity in general will promote can only be struck after a person seeking the benefit of it has, as a preliminary, borne whatever burden equity demands be borne in order to ensure that the ultimate equality (or proportionate equality) is not distorted by the effects of unconscientious retention of separately received benefit. 192 The maxim 'equality is equity' was the subject of consideration and explanation in Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361 where a company in liquidation held mixed funds on trust that were insufficient to satisfy all beneficiaries claims on that fund. There, Campbell J explained (at [176]) that the maxim 'equality is equity' does not require that the available funds be divided between all people who can establish that, at one time, they had a claim on a fund in which property held on trust for several people has been mixed. If several people have an equal right to be paid out of a particular fund, and the fund proves insufficient, their claims will abate rateably. However: [r]ateable abatement does not automatically apply whenever there is a mixed fund because there is a preliminary question, the answer to which cannot be assumed, of whether all the claimants on the fund, in the form the fund takes at the time of trial, have claims which are equal. 193 His Honour went on to note (at [177] - [178]): 177 There are two senses of "have claims which are equal" which apply here. The first concerns whether, in relation to the amount of money of a beneficiary which has gone into a mixed fund, and for which that beneficiary has in one sense a claim, the beneficiary has a charge over whatever property remains from that fund for the whole of the amount of his money which went in. If it can be demonstrated that some beneficiaries have a charge over those assets for the whole amount of their money which went into the fund, while others have a charge over those assets for only part of their money which went into the fund, their claims are not equal. … 178 The other sense in which claims might be unequal arises once the amount of the various charges of beneficiaries on the fund has been established. Then a question arises of whether in accordance with the equitable principles concerning priorities, or indeed whether by reference to any personal equities whatever which exist between the various claimants, there is any reason to treat any of the claimants as postponed to any of the others. 194 By reference to Re Hobourn Aero Components Ltd's Air Raid Distress Fund; Ryan v Forrest [1946] Ch 86 (first instance Cohen J) and Re Hobourn Aero Components Ltd's Air Raid Distress Fund; Ryan v Forrest [1946] Ch 194 (Court of Appeal), Campbell J identified an example of postponement due to a personal equity where certain persons who had contributed to a mixed fund had received the benefit of a part payment from that fund and, in those circumstances, although all contributors were entitled to share in the remaining fund pro rata, those who had received a payment out of the mixed fund were required to 'bring in' to hotchpot any amount received by way of benefit out of the fund: Re French Caledonia Travel at [179] - [183]. 195 His Honour also noted that the appropriate way of dividing available assets between beneficiaries whose money has been mixed in an account may also depend upon what other remedies in rem are available to the various beneficiaries. For example, if there is a situation in which a beneficiary is able to trace that beneficiary's funds into the mixed fund that beneficiary may have a proprietary claim against the fund for the specific amount paid into that fund (at [184]). That is, in effect, the beneficiary with a right to trace into the remaining mixed fund directly to an ascertainable portion of that fund rendered that beneficiary's claim on the fund unequal with the other claimants and therefore distribution to that beneficiary pari passu with all other claimants would not be appropriate. His Honour concluded: '[t]hese examples show how it cannot be said that, as a matter of law, a fund in which assets of several beneficiaries have become mixed should always be distributed amongst all beneficiaries, pro rata to their claims' (at [185]). 196 The authorities also demonstrate that while there may be a number of claimants who have a claim upon a mixed fund, the question of whether those claimants' claims are in 'equal' (or proportionately equal) relationship to each other may depend on the nature of the fund in question. The rules for distribution of claims against funds in a case of wills and estates, co-sureties and upon winding up insolvent companies or individual bankruptcies may, or may not, be applicable in the circumstances of a claim by a number of persons who have a beneficial interest in a mixed fund that is held on trust for them or over which each beneficiary has an equitable charge. Where there is a mixed fund it may not be a single 'fund'. Claimants on the fund may have different rights and interests in the fund.

Treatment of contractual rights to accrued and rolled-over interest 197 The question of whether Scheme members should be entitled to claim for accrued interest or rolled-over or reinvested interest turns on whether it is appropriate, in the circumstances of this case, to give effect to rights and obligations between each Scheme member and the operators of the Scheme derived from the contracts and (or) declarations of trust documents. 198 It is possible for contractual rights (or other rights in personam) to exist concurrently with proprietary rights derived from a trust instrument. Contractual or other personal rights may also affect the nature and terms of the trust. Therefore, the existence of a trust does not mean that the personal rights are necessarily to be ignored when determining the nature of the trust property and beneficial interests in it. 199 In the case of a genuine managed investment scheme in which investors' funds are pooled and expenses, revenue and profits or returns are shared between investors rateably and proportionately, any rights and obligations derived from the rules of the scheme or instruments by which the scheme is established would likely govern investors' rights and obligations concerning the scheme inter se and vis-à-vis the operator of the scheme. Upon winding up such a scheme, it may be appropriate to give effect to the rules governing the scheme (i.e., rights in personam) in the determination of distributions from the scheme because the same rules govern the rights and obligations of all investors in the scheme. That is, it may be appropriate to treat the scheme and investors in the scheme in the same manner as a company and its members for the purposes of winding up the scheme (whether solvent or insolvent). 200 The position of a genuine managed investment scheme described above, is to be contrasted with the position of the Scheme members whose rights and obligations vis-à-vis the Scheme operators are not uniform and are not common, but are idiosyncratic and individual. Further, where there are no rules or rights and obligations governing the Scheme that bind Scheme members inter se, the Scheme is not a genuine managed investment scheme. Scheme members may have be paid 'interest' to which they were contractually entitled, but that interest was paid out of Scheme property held on trust for all Scheme members. Contractual rights of Scheme members are individual and not common. Even if some Scheme members knew, expected and agreed to pooling of funds, that was not on terms that bound members with pooled funds to a common set of rules governing the 'investments'. 201 If it were possible to identify separate property beneficially owned by AMS, it may be possible to give effect to claims in personam against AMS arising from Scheme members' transactions with AMS. However, on the basis of Mr Brauer's evidence and the Liquidators' Report, AMS does not have such property or any that is able to be readily identified. In the case of Mr Marco, Scheme members with in personam claims against him may be able to pursue those claims against his trustee in bankruptcy. 202 Otherwise, having reached the conclusion that the Liquidators would be justified in considering that Scheme property was held as a single (mixed) fund on trust for Scheme members, it would be inconsistent with that view to give effect to any rights in personam (whether created by contract or a declaration of trust) in the determination of each Scheme member's admitted claim because a Scheme member's claim is a claim to an equitable interest in property held on trust for that member's benefit. Further, in this case, the Scheme member's contractual or other rights in personam are not uniform and common as between Scheme members and the operators of the Scheme. There are no rules or terms of trust instruments that purport to bind and govern the rights of Scheme members inter se with respect to the property held on trust. 203 It follows that the Liquidators would not be justified in paying Scheme members any amounts claimed for accrued interest out of the remaining Scheme property. Likewise, the Liquidators would not be justified in treating any payments made to Scheme members out of Scheme property as if it were a payment of revenue generated from Scheme property rather than a transfer of part of the Scheme property to that Scheme member. 204 The funds in the Scheme Accounts were and are property. The funds were and are a chose in action, namely the amount in which the relevant bank is indebted to the relevant account holder (Mr Marco or AMS or the Receivers or Liquidators). That chose in action was and is held on trust for the benefit of all Scheme members. 205 In circumstances in which funds were 'transferred' from a Scheme Account to a Scheme member, there was no physical transfer of property. The transferor's bank debited the transferor's bank account with the amount of the sum 'transferred' and the Scheme member's bank credited the Scheme member's bank account with the same sum. However, the Scheme property (funds) can be 'traced' from the applicable Scheme Account into the Scheme member's bank account and into the Scheme member's property (the debt owed by the Scheme member's bank to the Scheme member). That 'tracing' exercise is founded in fact and causal or transactional links even though there is no actual transfer of physical currency or assignment of a debt from the transferor to the transferee. In substance, there has been an exchange of value and one asset (a debt owed to the transferor) for a new asset (a debt owed to the Scheme member). That tracing exercise may be undertaken irrespective of whether or not Mr Marco or AMS characterised the transfer as capital or interest or partly capital and partly interest or made no characterisation of the transfer. It is an exercise in tracing Scheme property into the hands of a Scheme member. 206 On the facts set out in the affidavits in support of the Liquidators' application, the Liquidators would be justified in treating all Scheme members who have received payments out of Scheme Accounts as bona fide recipients of the payments for value and without notice of wrongdoing. As such, the Liquidators would be justified in treating Scheme members as the legal and beneficial owners of all funds received out of Scheme property. However, where a Scheme member has received more than the amount of capital contributed to the Scheme property in payments out of Scheme property (whether identified as capital, interest, both or neither, at the time of payment), the Liquidators would be justified in not admitting any claim against the remaining Scheme property by that Scheme member. That is, the member would not have any remaining equitable proprietary interest in the Scheme property. 207 Ms Ang submitted that rolled-over or reinvested interest falls into a different category to pure contractual rights were there is a declaration of trust and evidence of a decision to roll-over or reinvest interest in accordance with the terms of the trust instrument. Ms Ang submitted that in these circumstances there was a separate declaration of trust over the original capital sum plus the interest. As a consequence, Mr Marco or AMS held the capital plus interest on trust for the relevant Scheme members. 208 As noted earlier in these reasons, the declaration of trust documents provide evidence of an intention to create a trust, but that instrument alone does not demonstrate that a trust was, in fact, created over identifiable property. Where a declaration of trust is coupled with evidence of a deposit of a sum into a Scheme Account, the necessary degree of certainty of the subject matter of the trust may be present. That degree of certainty is not present in cases were there has been a decision to roll-over or reinvest interest recorded in communications between a Scheme member and Mr Marco, AMS or an agent of them. 209 In theory, Mr Marco could have declared that he held an identifiable part of the Scheme property (e.g., a particular sum of money in a Scheme Account) in trust for a specific Scheme member who, if a bona fide purchaser for value without notice, may have become entitled to the beneficial interest in that property to the exclusion of other Scheme members in the same way that Scheme members who received payments directly into their bank accounts became so entitled. However, the declarations of trust and communications evidencing decisions to roll-over or reinvest interest that were in evidence do not permit specific property to be identified as the subject of the declaration of trust with respect to the 'interest' component of the declaration. As noted above, the capital component may be identified by reference to the sum referred to in the declaration coupled with evidence of deposit(s) of the corresponding sum into a Scheme Account. 210 Otherwise, in circumstances in which 'interest' is rolled-over or reinvested there is no sense in which there has been a 'transfer' of Scheme property from Mr Marco or AMS to a Scheme member. The Scheme member has exchanged a personal right to receive an immediate payment of interest for a personal right to receive payment of that sum as principal (capital) in the future. Although contractual rights may be considered property (choses in action), Scheme members are the legal and beneficial owners of that property. That property is not part of the Scheme property. Rolling-over or reinvesting interest had no effect on Scheme property. Therefore, the Liquidator would be justified in ignoring amounts recorded as rolled-over or reinvested interest when determining the amount of a Scheme member's admitted claim. 211 In addition to circumstances in which a Scheme member has received a payment out of Scheme property or has rolled-over or reinvested interest, there are circumstances in which a Scheme member has assigned or transferred an 'investment' in whole or in part to another Scheme member. These 'investments' assigned or transferred may include amounts of 'capitalised interest'. 212 In the Liquidators' Report, Mr Brauer draws a distinction between assignments and transfers of 'investments'. In the case of assignments, subject to being satisfied that the transaction meets the formal requirements for an effective assignment, the Liquidators treat the assignee in the same manner as they would have treated the assignor absent the assignment. That is, the assigned 'investment' is treated as 'subject to the equities'. In the case of transfers, these appear to be circumstances where there has been a transfer of an 'investment' at 'maturity' of the 'investment'. In these situations, no cash was withdrawn or deposited, but the investment is recorded as transferred from one Scheme member to another Scheme member in the records of the Scheme operators. 213 The Liquidators have treated transfers differently depending upon whether a Courtenay House or Letten method is used. In the case of Courtenay House methods, the whole sum 'transferred' is treated as a 'new' investment that is not 'subject to the equities'. In the case of the Letten methods, only the capital component 'transferred' is treated as transferred because any 'interest' transferred is considered fictitious. That is, the transferee is not entitled to claim for any sums transferred that were not, in truth, a capital amount of the transferor. 214 Consistently with the view expressed above concerning rolled-over or reinvested interest, the Liquidator would be justified in ignoring amounts recorded as transfers of 'interest' as these do not involve any transfer of Scheme property between Scheme members. In the case of transfers of capital, although there may not have been any true 'assignment' of Scheme property, the Liquidator would be justified in treating these transactions pragmatically as an assignment of the remaining amount of the transferor's original capital to the transferee even if the formal requirements for a legal or equitable assignment have not been demonstrated. That is, the Liquidators would be justified in giving effect to the apparent intention of the transferor and transferee recorded in the Scheme operator's records to 'transfer' the 'investment' from one Scheme member to the other, but the transferee could receive no better title to the 'investment' than that of the transferor. 215 It follows from the above that none of the pari passu (a), pari passu (b) or Courtenay House methods would be appropriate in the circumstances of this case. The reason that none of these methods is appropriate is not because personal contractual or other rights Scheme members have against Mr Marco or AMS are necessarily fictitious, but because the Liquidators are justified in considering that the Scheme property is a single (mixed) fund that the Scheme operators held on trust for all Scheme members. Further, it is not possible to trace any Scheme member's individual property into any part of the mixed fund so as to give recognition to any specific proprietary interest that may have arisen in respect of a specific part of that mixed fund.

Treatment of payments to Scheme members 216 As noted above, many Scheme members have received payments from Scheme property. The payment issue concerns the most appropriate manner of taking these payments into account when determining how to distribute the remaining Scheme property.

Net investment methods 217 The net investment methods bring payments received to account as deductions from each Scheme member's original capital contribution. A Scheme member's distribution is thereafter determined by reference to ratio that the participant's 'net investment' bears to the total of all 'net investments'. Except that Scheme member who has received more than the member's original capital contribution is excluded from participating in a distribution. 218 In Re Courtenay House Rees J considered three potential distribution options that the liquidator in that case had identified. Her Honour was also considering the appropriate means of distribution of the remaining funds of an insolvent Ponzi scheme. In that case it was the company in liquidation not the unregistered managed investment scheme, but the relevant question concerned the distribution of mixed funds held on trust. The distribution options are referred to in her Honour's reasons as Scenario 1, Scenario 2 and Scenario 3. Scenario 1 was an orthodox pari passu distribution based on investors' 'Capital Outstanding' (calculated without taking into account payments received as 'returns'). Scenario 2 appears to have been a pari passu distribution of investors 'Net Claims'. Scenario 3 was a preliminary dividend method. The liquidators used a 'goal seek' function to equalise, so far as was possible, investors' rates of return on 'Capital Outstanding'. All scenarios assumed that there was no 'claw back' of returns or commissions already paid to investors: Re Courtenay House at [110], [111]. 219 As mentioned earlier, Rees J approved Scenario 2 and that scenario appears to have involved a calculation similar to the net investment methods the Liquidators have proposed in this case: Re Courtenay House at [131] - [134], [175]. Rees J considered the principles applicable to hotchpot in general (at [78] - [88]) and in their application to Ponzi schemes (at [89] - [109]). In the course of her Honour's consideration of Ponzi schemes and hotchpot she identified an approach that is taken in the United States 'where courts typically order pro-rata distribution of the total amount recovered based on the net equity of each investor on the basis that 'equality is equity' between 'equally innocent victims' (at [89]). Her Honour also observed (at [89]) that 'the claims of private investors are admitted to prove in the liquidation for the amount their investment less amounts repaid, called the "net investment method" … [which] is broadly consistent with the equitable doctrine of hotchpot'. 220 The 'net investment method', as applied in the United States, is described in Re Bernard L Madoff Investment Securities LLC 654 F 3d 229 (2d Cir 2011). That case concerned the collapse of the infamous Ponzi scheme operated by Mr Bernard Madoff. Under the applicable legislation in the United States, claims of innocent investors against the corporate operator of that Ponzi scheme were to be determined having regard to an investor's 'net equity'. In a genuine investment scheme, 'net equity' would have been calculated based on the mutual debts and credits between investors and the scheme operator (i.e., contractual rights). That method of calculating 'net equity' was not available in Re Madoff because the scheme operator's records of investors' were fictitious and there were no genuine securities positions that could be liquidated to create a fund for distribution to investors. Therefore, 'net equity' as described in the legislation, could not be determined. The 'net investment method' (cash deposits into the scheme operator's account minus withdrawals) was used as a substitute for 'contractual rights' of investors. There was a departure from 'contractual rights' and the statutory regime otherwise applicable to those rights because the insolvent company had operated a Ponzi scheme. In that sense, the 'net investment method' is 'broadly consistent' with hotchpot in that contractual rights are ignored and rights are determined based on net capital contributed to a mixed deficient fund. 221 In approving Scenario 2, Rees J observed that Scenario 2 took into account hotchpot, but whether it aligned with the net investment method was 'not particularly relevant'. It was also not relevant whether it was analogous to s 553C of the Corporations Act because, while the companies were in liquidation, Part 5.4 of the Corporations Act does not apply to trust funds: Re Courtenay House at [128], [131], [132]. 222 Her Honour considered (at [131]) that Scenario 2 brought into hotchpot the 'returns' already received by 'accounting for any return of capital in calculation of the "Net Claim", and the return on investments and commission by apply the principles of hotchpot'. That view must be read in the context that each of the three scenarios assumed that there was no 'claw back' of returns or commissions already paid to investors and the 'net investment method' was characterised as 'broadly consistent' with hotchpot. Further, that the liquidators in that case had submitted that the precise way in which hotchpot was applied in Idylic Solutions and Letten (No 20) was 'somewhat ambiguous'. 223 As explained later, in my view, it is sufficiently clear from the reasons in Idylic Solutions and Letten (No 20) that the investors in those cases were required to 'bring in' to hotchpot prior payments by accounting for them in a pro rata distribution of a mixed fund augmented by those payments. In that sense, in Idylic Solutions and Letten (No 20) the hotchpot concept was applied in a manner that brought about a 'claw back' of prior payments. None of the scenarios under consideration in Re Courtenay House contemplated a 'claw back' or 'bringing in' and accounting for prior payments in that manner. Therefore, Rees J was not called upon to consider the appropriateness a specific scenario that applied the hotchpot concept in a manner that was consistent with the way it was applied by Barrett J in Idylic Solutions and Gordon J in Letten (No 20). 224 In my view, the net investment methods that the Liquidators have identified in this case do not fall squarely within the equitable concept of hotchpot described earlier in these reasons. The net investment method proposed in this case is a pari passu method by which admitted claims are determined by a Scheme member's 'net investment' rather than by a Scheme member's putative contractual rights against the operators of the Scheme as they would be under the pari passu (a) method (i.e., in a company liquidation). The net investment method as proposed in this case, might well be described as pari passu (c) as it differs only from pari passu (b) in that payments of interest as well as payments of capital are to be deducted from the original capital contributed to determine the admitted claim. No payment received is 'brought in' to hotchpot. Nonetheless, in my view, 'net investment' is an appropriate way to determine the amount of a Scheme member's admitted claim before considering if and the extent to which the concept of hotchpot should be applied in the distribution of the remaining Scheme property between Scheme members who have an admitted claim.

Formula methods 225 As noted above, the principle underpinning hotchpot is that not all claimants on a fund may stand in 'equal' relationship to each other. In the case of mixed pooled trust funds, once it is accepted that by investing in the scheme 'an investor obtained - and must be taken to obtain - an interest in a pooled fund made up of the totality of contributions together with accretions arising from deployment of the funds, the prima facie position must be that the proceeds of the realisation by the liquidator should be allocated pro rata to the contributions of the several investors, so that losses are likewise borne pro rata.': Idylic Solutions at [47]; Caron v Jahani (No 2) at [91] - [92]. The formula methods operate on the assumption that a person who has received the 'benefit' of a payment out of a pooled fund must 'bring in' and account for that benefit before participating in a pro rata distribution. 226 By way of example, if the total of all contributions to a pooled fund was $10 million, the remaining fund is $5 million, a claimant's original contribution was $100,000 and that claimant received prior payments of $50,000, to participate in a share of the remaining fund that claimant would be required to 'bring in' $50,000 to hotchpot and thereby increase the fund available for distribution pro rata to $5,050,000. Provided that the claimant's proportionate share of the fund available for distribution exceeds $50,000, acting rationally, the claimant will 'bring in' $50,000 in order to receive a distribution of more than $50,000. If the claimant were to make a claim, as a matter of accounting, the amount to be brought in to hotchpot could be set off against the pro rata distribution leaving a net payment to the claimant. In that sense, bringing in $50,000 may be regarded as notional, but, in accounting terms, it is a real transfer of value. If the claimant's proportionate share of the fund available for distribution would be less than $50,000, acting rationally, the claimant would not make a claim against the remaining fund and would not be required to 'bring in' the prior payment to hotchpot. The fund available for distribution would not be increased to $5,050,000 and the remaining fund of $5,000,000 would be distributed between fewer claimants. 227 In substance, the formula methods the Liquidators have identified seek to give effect to the concept of hotchpot in the above manner. However, as noted above, the formula methods described in the Liquidators' application use the formula to determine the amount of a Scheme member's admitted claim. The distribution is then calculated using the simple pari passu formula applied to the resulting admitted claims. It is not obvious that the methods of distribution approved in Idylic Solutions and Letten (No 20) applied a formula in that manner. 228 In Idylic Solutions Barrett J also considered three proposed distribution methods of the remaining funds of a Ponzi scheme. The scheme there under consideration was wound up under s 601EE of the Corporations Act. Method 1 was a pari passu distribution in proportion to investors' contributions. Method 2 was as for Method 1, but on the basis that investors had withdrawn the returns paid to them during the period of the scheme's operation. Method 3 was as for Method 1, subject to investors bringing into hotchpot the returns paid to them: Idylic Solutions at [50]. Barrett J concluded that the liquidator in that case should proceed according to Method 3 and expressed the reason for preferring that method as follows (at [77]): Applying the rationale in the French Caledonia case, personal equities can be seen to exist between the recipients of "returns" and other contributors to a particular scheme causing those recipients to merit a lower priority as to participation in the fund, which relegation will, however, be eliminated if the "returns" are brought into hotchpot. In order to "carry out the strict rights to the fullest extent", to quote the words of Byrne J in Re Printers and Transferrers Amalgamated Protection Society (above), there must be an account of the "returns" in order to ascertain the whole of each remaining fund to which the principle of division in proportion to contributions is to be applied. The recipients of the "returns" must, as against the other persons interested in the pooled fund as a whole, do equity by giving up the advantage of the "returns" before participating rateably in what remains of the fund. 229 The reference to ascertain 'the whole of each remaining fund to which the principle of division in proportion to contributions is to be applied' is evidently a reference to the whole fund available for distribution. That is, the remaining fund in the hands of the liquidator plus the total of all prior payments brought in to hotchpot. Therefore, Method 2 involved, in effect, a 'claw back' of prior returns in the calculation of the investors' proportionate share of the funds available for distribution. 230 Gordon J adopted the same approach in Letten (No 20) which also involved winding up a Ponzi scheme under s 601EE of the Corporations Act. Gordon J reasoned that the investors' claims against the mixed fund 'did not spring into existence when the court appointed receivers'. The 'investors' claims against the mixed fund arose immediately when moneys paid by the investors to the Letten entities on trust were mixed together with other moneys held on other trusts': Letten (No 20) at [65] - [67]. Her Honour concluded (at [74] - [75]): 74 What then is the position here? The property which is the subject matter of the directions sought by the Receivers is the Common Fund. What comprises the Common Fund was resolved in the Pooling Judgment. The remaining question is how are particular claims on that Common Fund to be determined? In particular, should those investors who received distributions or returns be asked to do equity in order to rank equally with investors who have not received distributions? In my view, they should. Personal equities exist between those investors who received distributions and those investors who did not receive distributions such that the equitable charge held by those investors who received the distributions should only be afforded an equal priority to the equitable charge held by investors who have not received distributions once all distributions have been brought into hotchpot. 75 As Barrett J stated in Idylic, "[t]he recipients of the "returns" must as against the other persons interested in the pooled fund as a whole do equity by giving up the advantage of the 'returns' before participating rateably in what remains of the fund". Of course, investors who received distributions may elect not to share in the distribution of the Common Fund in which case the distributions they have already received will not form part of the Common Fund. 231 In Letten (No 20) there were also three proposed methods of distribution. Method 1 was to reduce investors' claim by the amount already received from the fund. That method appears to have been similar to the net investment method the Liquidators proposed in this case. Method 2 was to allow investors to claim for the full amount of their initial contribution, but require them to account for the amounts already received by applying those amounts in reduction of the distribution that would otherwise be payable to the investors from the common fund. Method 3 was to allow investors to claim for original contributions less returns of capital: Letten (No 20) at [85] - [86]. Gordon J concluded that the receivers in that case would be justified in adopting Method 2. 232 In expressing her Honour's reasons for preferring that method she appears to have accepted that it resulted in the 'most equitable outcome for investors' (at [89] - [91]). However, it is clear that her Honour also took into account and applied the hotchpot principles referred to earlier in these reasons (at [47] - [83]). The method chosen was the means of accounting for the 'personal equities' (at [84] - [92]). Method 2 was reflected in the formula the subject of her Honour's orders. That formula was in similar terms to the formula method the Liquidators have proposed in this case.

Preliminary dividend methods 233 As noted above, Rees J considered a preliminary dividend method (Scenario 3) in Re Courtenay House. As that method assumed no 'claw back' it was not the same as the method that the Liquidators proposed as the preliminary dividend method in this case. That is, the dividend rate of the preliminary dividend method under consideration in Re Courtenay House was not calculated on the basis of a dividend (distribution) from an available fund augmented by amounts 'brought in' to hotchpot. In rejecting the preliminary dividend method Rees J said (at [134]): Whilst the methodology employed by the liquidators in Scenario 3 has some attractive features, it is novel and has no comparator in the authorities reviewed at [89] to [109]. I do not consider that the notion of "common misfortune" supports a novel calculation where hotchpot can apply, noting that this calculation is imperfect in any event as investors are not equalised to an overall rate of return of 44% in the absence of 'claw back'. As to whether Scenario 3 is fairer, individual ideas of fairness differ widely and frequently align with self-interest. Whilst the application of the equitable principle of hotchpot may not deliver a perfect remedy, it does deliver a predictable result supported by good reason developed over centuries of similar misfortunes. For these reasons, the funds in the Westpac bank accounts should be distributed in accordance with Scenario 2. 234 As to her Honour's observation that the methodology was 'novel' and had no comparator in the authorities, as noted above, the alternative formula methods result in the same outcomes as the preliminary dividend methods the Liquidators have proposed in this case. Thus, the preliminary dividend method under consideration in this case appears to have a comparator in, at least, the formula that was the subject of the orders in Letten (No 20). As to the absence of 'claw back', as noted above, the formula method the Liquidators have proposed gives effect to a 'claw back' by requiring Scheme members to account for payments already received and the preliminary dividend gives effect to a 'claw back' in the calculation of the dividend rate. 235 Nonetheless, even after bringing in prior payments to hotchpot, there will not be a complete equalisation of the dividend rates. Further, Scheme members who have received higher dividend rates than all other members, will not be entitled to a further distribution. However, that is no different, in concept, from excluding Scheme members who have received more than their original capital contributions under the net investment method or members who would have negative distributions under a formula method. That is, all proposed methods have a mechanism by which some Scheme members will be excluded from distributions based on the quantum of prior payments even if that member may have an equitable interest in the remaining Scheme property.

Selection of an appropriate distribution method 236 In the circumstances of this case, the selection of the appropriate distribution method boils down to a choice between: (1) a pari passu distribution in proportion to Scheme members' net investments; or (2) a pari passu distribution in proportion to Scheme members original capital contributions, subject to them bringing to account payments received during the operation of the Scheme. In the second case, Scheme members who would have to account to the Liquidators (have negative distributions) would be excluded until only Scheme members who would receive a distribution, after accounting for prior payments received, remain. Scheme members who have negative distributions are excluded because, acting rationally, they would choose not to claim and avoid having to account to the Liquidators. That was the approach of Gordon J in Letten (No 2) (at [90]), which Rees J described in Re Courtenay House (at [129]) as uncontroversial. The first option is reflected in the net investment method and the second option is reflected in the alternative formula and preliminary dividend methods the Liquidators have proposed. 237 Ms Ang submitted that the preliminary dividend method was to be preferred to the net investment method. Loughton Patterson submitted the opposite and made a number of submissions that were critical of the application of one or other of the preliminary dividend and formula methods. 238 Loughton Patterson submitted that the preliminary dividend and formula methods ignore (too much) the observations of the NSW Court of Appeal in Caron v Jahani (No 2) and ignore the true property rights which would necessarily be different if it were practically possible to trace or apply the lowest intermediate balance rule. Loughton Patterson submitted, in effect, that the net investment method is to be preferred to the formula or preliminary dividend methods because Scheme members who have received payments out of the Scheme property, as bona fide purchasers for value without notice, are entitled to keep what they have received. That is a consequence of those members' good fortune or luck. Other members who have not received payments are in that position due to poor fortune or bad luck. Therefore, postponing distributions to members who have received payments due to good luck so that members with bad luck are able to 'catch up', and without knowing the true property interests of Scheme members, would be arbitrary and unprincipled. 239 It was submitted that in truth there is no 'claw back' of payments already made to increase Scheme property because any 'repayment' is notional. It was submitted that the formula methods are based on division of a notional and non-existent fund and, thereby, ignore the equitable proprietary right each Scheme member has now in the remaining Scheme property. 240 It was submitted that the preliminary dividend and formula methods do not achieve apparent 'fairness' or 'equality' because some Scheme members have already been paid more than the amount calculated using these methods and those members will not be required to repay the amounts they have received. There will be no claw back from those members such that the Scheme property will be fully augmented or dividend rate fully equalised. Therefore, the formula and preliminary dividend methods do not result in a true equalisation of proportional shares in a fully reconstituted notional single (mixed) fund. It was also submitted that there was precedent for the application of the net investment method, the application of the formula methods must be considered in light of the Court of Appeal's reasoning in Caron v Jahani (No2), and the preliminary dividend method is novel and has not been applied in Australian jurisprudence. 241 There is not insignificant force in Loughton Patterson's submissions. However, in the end, I am not persuaded that these arguments supply sufficient reason for preferring the net investment method to the alternative formula (or preliminary dividend) method. 242 That the preliminary dividend method (by that label) has not been applied in Australian jurisprudence is not a persuasive reason for refusing to adopt that method if, properly understood, that method gives effect to the hotchpot concept in the most appropriate manner in the facts and circumstances of this case. Further, while distribution methods approved in other cases may provide useful guidance as to the applicable legal principles, the selection of the most appropriate distribution method is to be founded on the application of those principles to the particular facts and circumstances of this case. 243 It can be accepted that the neither the preliminary dividend method nor formula method is likely to reflect the true property rights of Scheme members. However, the same observation may be made of the net investment method. 244 The Liquidators have proposed net investment, formula and preliminary dividend methods as options in this case precisely because it is not reasonable or practical to adopt a method that would result in a distribution that more accurately reflects true property rights. All proposed methods involve some form of proportionate division of the remaining Scheme property predicated on the assumption that there is a single mixed fund into which individual Scheme member's individual property cannot be traced. As Campbell J observed in Re French Caledonia Travel (at [189] - [190]): 189 While a liquidator must distribute funds of the company, or under his control through the company being trustee of trusts, in accordance with legal entitlements of people to those funds, the court's findings about what legal entitlements exist depend upon the evidence which is placed before the court, and inferences properly drawn from that evidence. When distribution of a fund is made by reference to classes of claimants, the available evidence is frequently evidence about the nature of a fund and the types of contribution which have gone into it. It is because the evidence is at this level of generality that the court reaches conclusions about the beneficial ownership of the fund by saying that it is divided amongst claimants in some particular way. If ever the court is able to give a remedy founded on tracing some individual claimants, it is because evidence is available which enables the property of those individual claimants to be more specifically traced. It should not be a cause for surprise that evidence of these different types can lead to different types of conclusion. 190 It is possible to recognise that, on the basis of evidence of a liquidator's investigations taken to a certain stage, distribution among claimants proportionately to their claims is proper, while at the same time recognising the theoretical possibility that further investigation might turn up facts which showed, in some way, inequality amongst the various claims. If ever a liquidator is in significant doubt about whether he ought conduct further investigations to see whether any such facts emerge, he can always ask the Court for directions on that topic. As matters stand, the evidence before the Court does not permit an informed choice to be made between the proposed distribution methods based upon which method more accurately reflects individual Scheme member's proprietary rights. 245 It can also be accepted that no Scheme member is under any obligation to repay any payments received out of the Scheme property. However that does not mean that the conscience of a Scheme member who has received a payment and who now knows that payment to have comprised other Scheme member's property is unaffected if that Scheme member chooses to make a claim against the remaining Scheme property. The hotchpot principle reflects not only the equitable maxim that 'equality is equity', but also that 'he who seeks equity must do equity'. As Gordon J observed in Letten (No 20) (at [73]): The juridical foundation for the hotchpot principle is clear. It comprises the elements summarised at [70] above. Its rationale is simply stated - if Investor A received money from a mixed fund with the consequence that other peoples' (Investors B to Z) property interests in that money were extinguished or diminished, it would be unconscionable for Investor A with knowledge of that fact to claim to rank equally with Investors B to Z in relation to the balance of the mixed fund whilst retaining all of the benefit of the payment from property over which Investors B to Z used to have, but no longer had, any proprietary claim. 246 In my view, a personal equity arises in the circumstance of this case that requires the interests of Scheme members who have received payments out of the single (mixed) fund at an earlier point in time to be postponed to those members who have not received such benefits or benefits to the same proportionate extent. The net investment method assumes that all Scheme members with admissible claims stand in equal relation to each other with respect to the remaining Scheme property, but that is not the case because what is to be distributed is what now remains of a larger single (mixed) fund to which all those members have contributed. 247 Loughton Patterson's submissions have analogues in the submissions of the contradictors that Barrett J rejected in Idylic Solutions and Gordon J rejected in Letten (No 20) where reliance was placed on, amongst other authorities, the Privy Council's decision in Cleaver v Delta American Reinsurance Co [2001] AC 328 in support of a submission that investors should not be required to 'bring in' to hotchpot 'returns' already received because investors were entitled to retain them and those returns were not paid out of the 'liquidation estate'. The submissions to that effect were rejected because that approach 'fails to afford necessary weight to the nature of a common or collective investment pool' and that investors had claims against the whole mixed fund from the moment the funds were mixed, not from the date of liquidation: Idylic Solutions at [68] - [75]; Letten (No 20) at [62] - [68]. Subject to the qualification that this approach may be taken in circumstances in which individual proprietary interests cannot be traced and later investors are not subsidising earlier investors where the mixed fund has, at some point, been completely depleted or had a negative balance, Bell P referred to the analysis of Barrett J with apparent approval in Caron v Jahni (No 2) at [93]. 248 It follows that I do not consider that the formula methods ignore the equitable proprietary rights of each Scheme member has now in the remaining Scheme property. The price a Scheme member is to pay for participating in a distribution of the remaining Scheme property is that the member must 'give up' all that the member has received from the original Scheme property at an earlier point in time. 249 In my view, the formula methods also do not involve a truly notional repayment. As noted above, there is a set-off at the point of distribution of the Scheme property as augmented by the amount of the repayment. Effect is given to the set-off through the 'E' value in the formula. Therefore, Scheme members would not receive a distribution from notional, but actual, augmented Scheme property. 250 In my view, the object of the preliminary dividend and formula methods is not to achieve apparent 'fairness' or 'equality' between all Scheme members. The object of these methods is to give effect to the hotchpot principle by postponing distributions to those Scheme members who have received the benefit of a payment out of Scheme property until those members have brought in to hotchpot the value of the benefit received. Moreover, none of the net investment, preliminary dividend and formula methods requires Scheme members who do not have an admissible claim against the Scheme to repay payments made to them out of Scheme property. Likewise, none of the methods requires Scheme members who do not want to make a claim against Scheme property to repay payments previously received. All methods are predicated on the reasonable assumption that Scheme members who have received payments did so bona fide for value and without notice of wrongdoing. Under the alternative formula and preliminary dividend methods, a Scheme member is only required to 'bring in' to hotchpot and account to the Liquidators for prior payments if that member wants to participate in a distribution of the remaining Scheme property. 251 I accept that application of the alternative formula and preliminary dividend methods are unlikely to result in distributions that reflect the true proprietary interests of Scheme members in the remaining Scheme property. I also accept that due to the inability to compel repayment and the insufficiency of the remaining Scheme property it is not possible to achieve complete equality between all Scheme members. However, in my view, on the available evidence and in the prevailing circumstances these are the methods that give most complete effect to the hotchpot principle in a pro rata distribution of the remaining Scheme property as the remnant of single mixed trust fund into which no individual Scheme member's property can now be traced.

Conclusion 252 In my view, the Liquidators would be acting properly and are justified in distributing the remaining Scheme property in the following manner. 253 First: (a) All payments made to a Scheme member are to be deducted from that member's total capital contributions. (b) All Scheme members with a negative balance are then excluded from participating in a distribution. (c) The remaining Scheme members are treated as members with an admissible claim for the first application of the formula below. 254 Second, by application of the following formula: where: 'P' means a Scheme member's distribution 'A' means the Scheme member's total capital contributions. 'B' means the Scheme property available for distribution to Scheme members with an admissible claim 'C' means the total sum of all payments made to Scheme members with an admissible claim out of Scheme property 'D' means the sum of all total capital contributions of Scheme members with an admissible claim 'E' means the sum of all payments made to the Scheme member out of Scheme property 255 Next: (a) A Scheme member's entitlement to receive a distribution is determined by whether the result of the formula is positive (using their relevant figures for integers 'A' and 'E'). (b) All Scheme members with a negative result are then excluded from participating in a distribution (are thereafter treated as not having an admissible claim) and their capital contributions and payments made to them are removed from integers 'C' and 'D'. (c) The calculations are then undertaken a second time for the remaining Scheme members with an admissible claim (using the new values for integers 'C' and 'D'). (d) Steps (a), (b) and (c) are repeated until the formula provides all remaining Scheme members with a positive result. These results are then taken as the distribution payable to those Scheme members. 256 I will hear the parties on the appropriate form of the orders to give effect to the distribution method described above and these reasons regarding the treatment of accrued interest, rolled-over or reinvested interest, assignments and transfers of 'investments' and payments out of Scheme property. 257 There will be an order made to vary the orders of the Court of 7 December 2020 to clarify that the Scheme described in those orders means the management investment scheme operated between at least 1 January 2014 and 31 October 2018. 258 There will be an order to the effect of paragraph 2 of the Liquidators' minute of proposed final orders on the application by which the Liquidators would be justified in determining Scheme members and Scheme property by reference to the managed investment scheme Mr Marco and AMS operated in the period from September 2002 to 31 October 2018. 259 There will be an order to the effect of paragraphs 5 and 6 of the Liquidators' minute of proposed final orders by which the Liquidators would be justified in treating certain assets of Mr Marco and AMS as Scheme property, treating the asset and property of the Scheme and AMS as a single fund, a purported debt owed by AMS to Mr Marco as extinguished and applying and distributing the remaining fund between Scheme members after payment of certain remuneration, costs and expenses of the Interim Receivers, Receivers and Liquidators and debts owed to certain creditors. 260 There will be an order in terms of paragraph 9 of the Liquidators' minute of proposed final orders by which the Liquidators' and AMS's costs of the application are to be costs in the winding up of the Scheme. The costs of the fourth to sixth defendants will be reserved. I will hear the parties on the appropriate costs orders for those parties. I certify that the preceding two hundred and sixty (260) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Feutrill.