Australian Securities and Investments Commission v Realestate Equity Investment Trust

Federal Court of Australia|2018-02-06|Before: Murphy J

Solicitor for the Plaintiff: Australian Securities and Investments Commission

ORDERS VID 820 of 2017 IN THE MATTER OF REALESTATE EQUITY INVESTMENT TRUST (ARSN 094 623 515) AND TIMELINE PROJECT MANAGEMENT PTY LTD (ACN 15 830 851) BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff

AND: REALESTATE EQUITY INVESTMENT TRUST (ARSN 094 623 515) First Defendant

TIMELINE PROJECT MANAGEMENT PTY LTD (ACN 15 830 851) Second Defendant

OTHER MATTER: A reference to the registered scheme, Realestate Equity Investment Trust (ARSN 094 623 515), in these Orders includes a reference to all sub-trusts associated with REIT, including but not limited to the Lara Property Development Syndicate Trust.

REIT Orders

Pursuant to s.601ND(1) of the Corporations Act 2001 (Cth) (the Act), Lotus Securities Pty Ltd (ACN 121 418 317)(In liq.) (Lotus), in its capacity as the responsible entity for the registered scheme Realestate Equity Investment Trust (ARSN 094 623 515) (REIT), is directed to wind up REIT, subject to the orders below.
Pursuant to s.601NF(1) of the Act, Nicholas John Martin (Mr. Martin) and Andrew Thomas Sallway (Mr. Sallway) of BDO Australia, are appointed as persons to take responsibility for ensuring REIT is wound up in accordance with its constitution and these Orders.
Pursuant to s.601NF(2) of the Act, Mr. Martin and Mr. Sallway are appointed as receivers of the property of REIT.
Pursuant to s.601NF(2) of the Act, Mr. Martin and Mr. Sallway have all the powers in s.420 of the Act, mutatis mutandis, in relation to the property of REIT.
Without limiting the scope of Order 4 above, Mr. Martin and Mr. Sallway have all powers necessary to carry on the business of REIT for the purpose of winding up REIT, including but not limited to the power: (a) to access the books and records of REIT; (b) to enter into possession, take control of and dispose of the property of REIT; (c) to convert property of REIT into money; (d) to deal with any creditors and third parties with security over the property of REIT; (e) to investigate any claims on behalf of members of REIT; and (f) to execute any document, bring or defend any legal proceeding.
Until further ordered, the investigations of Mr. Martin and Mr. Sallway pursuant to the appointments under Orders 2, 3 and 12 herein, are limited to: (a) identifying any assets in REIT and Timeline Project Management Pty Ltd (ACN 145 830 851) (Timeline); (b) identifying unit-holders in REIT and verifying the quantum of investments made by those unit-holders; (c) identifying any other creditors of REIT and Timeline; (d) determining the status of the Musharakah Agreement (NMJ-23 to the affidavit of Ms Naomi Johnston sworn 25 July 2017) and the validity and value of any interest of Equitable Financial Solutions Pty Ltd in the land at 490 Flinders Avenue, Lara, Victoria (Certificate of Title Volume 9660 Folio 387) (the Land); (e) determining whether investors have a claim against Timeline or against REIT or against both; (f) determining whether Timeline has any claim against REIT; (g) once the pool of available funds has been determined, calculating the distributions that can be made to unit-holders in REIT and any other creditors; and (h) obtaining any legal advice in relation to the matters in Order 6(a) to (g) above.
Mr Martin and Mr Sallway will take all reasonable steps to procure from Equitable Financial Solutions Pty Ltd (EFSOL) an enforceable offer for EFSOL to purchase the Land that is open for acceptance for a period of 3 months.
By 4.00 pm on 9 March 2018, Mr. Martin and Mr. Sallway are to file a report in respect of the matters in Orders 6(a) to (g) and 7 above.
The Plaintiff's taxed costs of and incidental to this application insofar as it relates to the winding up of REIT are to be reimbursed from the property of REIT.
Pursuant to s 601NF(2) of the Act, Mr. Martin and Mr. Sallway are directed that their reasonable remuneration and costs and expenses in relation to Orders 6, 7 above, be paid from the property of REIT and, if REIT's property is inadequate, be costs and expenses in the liquidations of Lotus and/or Timeline. Such costs are not to be paid until further ordered. Timeline Orders
Pursuant to s.461(k) of the Act, Timeline be wound up on the ground that it is just and equitable that it be wound up.
Pursuant to s 472(1) of the Act, Mr. Martin and Mr. Sallway are appointed joint and several liquidators to Timeline (the Liquidators).
Pursuant to s.466(2) of the Act, the Liquidators must reimburse the Plaintiff out of the property of Timeline, the Plaintiff's taxed costs of and incidental to this application insofar as those costs relate to the winding up of Timeline. Asset preservation orders
Pursuant to s.1323(1) and (3) of the Corporations Act (2001) or s.23 of the Federal Court Act 1976 (Cth), that until further order, the Defendants by themselves, agents, employees or associates be restrained from: (a) selling, charging, mortgaging or otherwise dealing with, disposing of or diminishing the value of the land at 490 Flinders Ave, Lara; and (b) withdrawing, transferring or otherwise dealing with any funds in the Commonwealth Bank account numbered 06 3158 1037 482 8 in the name of Timeline Project Management Pty Ltd.
The Plaintiff is granted leave, to the extent necessary, to give notice of these Orders to the Commonwealth Bank of Australia and Land Use Victoria. Other Orders
Subject to further order, pursuant to s.37AF(1) of the Federal Court of Australia Act 1976 (Cth) (FCA) exhibits NMJ-1, NMJ-6 to NMJ-9 to the affidavit of Naomi Margaret Johnson sworn on 17 August 2017 are to remain confidential on the Court file and not to be disclosed or inspected by any person other than the parties to this proceeding and Mr. Martin and Mr. Sallway (and their staff and legal advisors).
The order in paragraph 16 above is necessary to prevent prejudice to the proper administration of justice as stipulated in s.37AG(1)(a) of the FCA.
Mr. Martin and Mr. Sallway have access to the documents held by the Plaintiff in relation to the First and Second Defendants.
There be liberty to apply by the Plaintiff and Mr. Martin and Mr. Sallway.
The proceeding be listed for a case management hearing on 20 March 2018 at 9.30 am. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

INTRODUCTION 1 In this matter the Australian Securities and Investments Commission (ASIC) seeks orders to wind up a registered managed investment scheme, Realestate Investment Trust (REIT or the Scheme), pursuant to ss 601ND and 601NF of the Corporations Act 2001 (Cth) (the Act), on the basis that it is just and equitable to do so. ASIC also applies to wind up an associated entity of REIT, Timeline Project Management Pty Ltd (Timeline) pursuant to ss 462(2)(e) and 464 of the Act, on the same grounds. 2 Through a Product Disclosure Statement (PDS) dated 25 August 2010 REIT invited members of the public to acquire units in a property development scheme. REIT had acquired 63.34 hectares of real property zoned for farming use situated at 490 Flinders Avenue, Lara, Victoria (the Lara Property), and the Scheme involved the property being rezoned for residential use and then subdivided into residential lots. 3 Members of the public were invited to acquire a unit in the Scheme by paying an initial subscription of $7,000 and then making monthly payments of a minimum of $300 per month over a five year period. At the end of the five year period, in the first stage of the proposed subdivision, 250 residential property lots would be delivered to the unit holders. The evidence indicates that the majority of the unit holders are unsophisticated persons of limited means and of Islamic faith. 4 ASIC conducted an investigation in relation to possible contraventions of the managed investment scheme regime in Part 5C of the Act by REIT's responsible entity, Lotus Securities Pty Ltd (ACN 121 418 317) (In liq.) (Lotus), and by Timeline. In the investigations ASIC served notices on various persons and entities pursuant to s 33 of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), carried out a compulsory examination of John Isaacs, a former director of Lotus, Timeline and other relevant companies pursuant to s 19 of the ASIC Act (the s 19 examination), communicated with some of the unit holders in the Scheme, made enquiries of Geelong City Council (the Council) as to whether any application had been made to rezone the Lara Property and made enquiries of Perpetual Nominees Limited (Perpetual), the Scheme custodian. 5 For the reasons I explain, I am satisfied that it is just and equitable to wind up REIT and Timeline. The orders direct Lotus, as the responsible entity, to wind up REIT and, because Lotus is insolvent and in the hands of liquidators, appoint Nicholas John Martin and Andrew Thomas Sallway as receivers of REIT's property (the Receivers), to take responsibility for ensuring the Scheme is wound up in accordance with its constitution and the orders. The orders also direct that Timeline be wound up and appoint Mr Martin and Mr Sallway as liquidators (the Liquidators). 6 The orders authorise the Receivers to conduct investigations aimed at identifying the assets in REIT and Timeline, identifying the unit holders in the Scheme and the quantum of their investments, identifying the creditors of the Scheme and the monies owed, ascertaining the status of an agreement between Lotus and Equitable Financial Solutions Pty Ltd (EFSOL) dated 16 May 2016 entitled the "Musharakah Agreement" under which EFSOL acquired a 52% share of the Lara Property in return for payment of $400,000 and a promise to pay a further $107,000, calculating the distributions that can be made to unitholders in the Scheme, and obtaining appropriate legal advice in that regard. 7 The investigations conducted must be proportionate to the limited Scheme property. The central purpose for orders to restrict the scope and expense of the investigations is to reduce the drain on the limited funds likely to be available to be returned to unit holders upon the winding up of the Scheme. A lengthy or costly investigation is likely to quickly deplete the limited funds available. Mr Boston, counsel for ASIC, informed the Court that ASIC has advised the Receivers of the importance of conducting a limited and proportionate investigation and that the Receivers understood that advice. Should the Receivers have any questions regarding the appropriate scope and expense of the investigations the matter may be speedily relisted for a case management hearing. 8 The orders are not, however, intended to limit the investigations that ASIC or the Receivers ultimately undertake. It is possible that, following the Receivers' investigations and their reporting back to the Court on 31 March 2018, further investigations will be appropriate, but that is a matter for another day.

THE EVIDENCE 9 ASIC relied on the following affidavits: (a) John Newby, Head of Custody Services of Perpetual Nominees Pty Ltd (Perpetual), the custodian of the Scheme, affirmed on 21 July 2017 together with the exhibits thereto; (b) Naomi Johnston, a lawyer employed by ASIC, sworn on 25 July 2017, 2 August 2017, 17 August 2017, 15 November 2017, 27 November 2017 and 18 December 2017 together with the exhibits thereto; (c) Jessica Zarkovic, a lawyer employed by ASIC, sworn 25 July 2017 and 17 November 2017 together with the exhibits thereto; (d) Daniel Juratowitch, one of the Lotus liquidators, affirmed 2 November 2017, together with the exhibits thereto; (e) Mr Martin, one of the Receivers, sworn 16 November 2017 and 13 December 2017, together with the exhibits thereto; and (f) Joanne Van Slageren, the Manager, City Development of the City of Greater Geelong Council, sworn 21 November 2017, together with the exhibits thereto. 10 Timeline relied on affidavits by five unit holders in the Scheme: (a) Hussein Sheikh Omar sworn 14 September 2017; (b) Martin Christopher Wain sworn 12 September 2017; (c) Behkit Behkit sworn 12 September 2017; (d) Muhyedin Adem sworn 19 September 2017; and (e) Mohamed Idris Saleh sworn 19 September 2017.

THE HISTORY OF THE SCHEME 11 On 19 July 2000 Mercator Funds Management Ltd, then the responsible entity of REIT (which was then known as the Mercator Monthly Fund), entered into a Custody Agreement with Perpetual (the Custody Agreement), pursuant to which Perpetual was appointed as custodian of the Scheme's assets. On 13 October 2000 REIT was registered as a managed investment scheme under the Act. It seems that REIT operated as an unregistered managed investment scheme prior to 13 October 2000 but it is not clear what, if any, activities it undertook. The Custody Agreement was later amended when Lion Advantage Limited (Lion Advantage) became the Scheme's responsible entity. 12 The Scheme did not acquire the Lara Property until 2010/2011. On about 14 July 2010 Mr Sharmake Ahmed and/or his nominee entered into a contract of sale for the purchase of the Lara Property for $975,000. The property was zoned for farming use under the Greater Geelong Planning Scheme. If it was to be used for residential housing the land was required to be rezoned to "Urban/Residential Use". On or about 16 May 2011 Mr Ahmed nominated Perpetual, in its capacity as Scheme custodian, as the nominated purchaser under the contract of sale. 13 At all relevant times the PDS promoted REIT as a property development scheme. The PDS informed prospective investors that sub-trusts were intended to be established for investing in Australian property assets and specifically residential land subdivisions. The Lara Property Development Syndicate Sub-Trust was formed as a sub-trust of the Scheme on about 25 October 2010. Because the Scheme does not appear to have had any operation beyond the sub-trust, for clarity I will refer to the Scheme rather than to the sub-trust. 14 The PDS stated that: (a) the purpose of the Scheme was to purchase, rezone and subdivide the Lara Property into approximately 700 residential lots; (b) members of the public were invited to subscribe for units in the Scheme by making an initial $7,000 investment and making a minimum $300 monthly payment over a fixed period of five years; (c) capital redemption of the units was available after five years (or sooner subject to completion of the project held by the sub-trust); (d) unit holders could redeem their units by acquiring a subdivided allotment in the property at a fixed purchase price of $85,000, subject to making a top-up payment at that point, if required; (e) the responsible entity for the Scheme (then Lion Advantage) had responsibility to administer the Scheme in accordance with the constitution and a compliance plan, and to do so in the best interest of the unit holders; and (f) Perpetual was appointed as Scheme custodian and its obligations include holding the assets of the Scheme in safe custody, opening and maintaining bank accounts to hold all cash and income of the Scheme and executing and holding all mortgage documents. The PDS promoted the benefit of having an experienced fund manager such as Perpetual as the custodian. 15 The PDS stated that the responsible entity had entered into a service provider contract with Timeline "to project manage the development and to locate suitable real estate assets including the proposed purchase and any ongoing prospective purchases." From Timeline's registration on 17 August 2010 until it was deregistered on 25 January 2015, Mr Isaacs, Natalie McKeown (Mr Isaacs' partner) and Mr Ahmed (the original purchaser of the Lara Property) were directors of the company. Mr Isaacs was also company secretary. 16 In December 2011 Perpetual opened two bank accounts in its name as custodian for REIT. On 13 March 2012 it became the registered proprietor of the Lara Property in its capacity as Scheme custodian. 17 On 1 August 2012, Perpetual closed the two bank accounts it had opened because Lion Advantage failed to pay Perpetual's fees for acting as custodian. 18 On 8 August 2012 ASIC cancelled the Australian Financial Services Licence (AFSL) held by Lion Advantage and banned one of its directors from providing any financial services for a period of two years. ASIC however allowed the AFSL to continue in effect, as though cancellation had not occurred, for the purpose of allowing Lion Advantage until 31 December 2012 to take steps to transfer the Scheme to a new responsible entity or to wind it up. By 31 December 2012 Lion Advantage had neither transferred the Scheme to a new responsible entity nor wound it up. 19 Lion Advantage's financial report for the financial year ended 30 June 2012 (dated 21 December 2012) stated that it had withdrawn the PDS at ASIC's request and was in the process of redrafting and reissuing it. That could not have been the case because, at that date, its AFSL had been cancelled except so as to allow it to transfer the Scheme to a new responsible entity or to wind it up. 20 The PDS was never reissued. Nevertheless members of the public continued to be invited to acquire units in the Scheme by paying the $7,000 initial subscription and making minimum monthly payments of $300, and existing unit holders continued to make monthly payments of $300 or more. From at least 1 January 2013 unit holders were invited to, and did, invest monies in the Scheme without an approved PDS in place. 21 On 17 June 2013 Mr Isaacs, Mr Ahmed and Ms McKeown opened a bank account in Timeline's name at the Commonwealth Bank of Australia. From at least that date, unit holders' initial subscriptions to the Scheme and monthly payments were paid into that account. ASIC's investigation did not ascertain the entity to which unit holders' funds were paid between 1 August 2012 (when Perpetual closed its custodian bank accounts) and 17 June 2013 when Timeline opened its relevant bank account. Timeline had not, however, been appointed the Scheme's responsible entity. 22 On 26 September 2013 Mr Isaacs became a director of Lotus. On 18 June 2014 ASIC granted Lotus an AFSL which authorised it to operate as the Scheme's responsible entity. Shortly thereafter Lotus commenced as responsible entity. There was no responsible entity for the Scheme between 31 December 2012 and 18 June 2014. 23 On 25 January 2015 Timeline was deregistered due to non-payment of fees. 24 On 16 May 2016 Lotus entered into the Musharakah Agreement with EFSOL. In his affidavit Usman Siddiqui, a director and shareholder of EFSOL, said that EFSOL paid $400,000 to the existing mortgagee of the Lara Property, and had an understanding with Lotus that the balance of $107,000 would be available upon request, and to underwrite expenses of the Scheme, such as land tax, council rates and other associated expenses. He said he had agreed with Mr Isaacs (a director of Lotus) that EFSOL would be entitled to register a mortgage over the Lara Property, but no mortgage was ever registered because of unstated difficulties Mr Siddiqui said EFSOL experienced with Perpetual. 25 On 3 July 2016 Lotus' Board of Directors met and resolved that "Lotus wind down the operations of and hand back to ASIC its AFSL in an orderly fashion." 26 On 20 September 2016 ASIC cancelled Lotus' AFSL because of various serious failures to comply with the Act. On 21 September 2016 Mr Isaacs ceased to be a director of Lotus. 27 On 14 December 2016 Lotus was placed into liquidation by order of the Supreme Court of Victoria.

THE ADJOURNMENT APPLICATION 28 ASIC served the originating application and the primary supporting affidavits on the defendants on 1 and 2 August 2017. On 21 August 2017 Starnet Legal, a firm of solicitors, filed a notice of appearance on behalf of both defendants. The same day Mr Boden of Starnet Legal appeared for the defendants at the first case management hearing. By consent, orders for a pre-trial interlocutory timetable were made, under which ASIC was to file written submissions in support of the application by 1 September 2017, the defendants were to file any affidavits by 15 September 2017 and written submissions by 6 October 2017, and the matter was to be listed for hearing after 6 October 2017. The application was subsequently listed for hearing on 23 October 2017. 29 In about mid-September 2017 the defendants filed affidavits by five unit holders. The deponents opposed orders to wind up of the Scheme but they said nothing to contradict ASIC's evidence that REIT had over many years substantially failed to comply with various legal requirements of the Act including by failing to properly account for unit holders' monies. In broad summary they opposed winding up because they preferred that the Scheme continue under proper management. They said that if the Scheme was to continue their investment returns would be substantially higher than if they invested their monies in alternative investments. They also expressed a concern to avoid the expense associated with winding up which they considered would mean they would recover less of their investments. However, they were not at that point in time interested in accepting an offer made by EFSOL to acquire their units for the amounts they had paid. 30 On 6 October 2017 Starnet Legal contacted chambers seeking an adjournment of the hearing. I made orders for a one month adjournment to 28 November 2017 and extended the time for the defendants to file any affidavits and written submissions in opposition to the application. 31 The defendants did not meet the extended pre-trial timetable. They did not file and serve any further affidavits or written submissions in opposition to the application. In the week prior to the hearing date my chambers telephoned the offices of Starnet Legal to seek compliance with the pre-trial timetable but did not receive a return telephone call or email. 32 On 27 November 2017, the day before the adjourned hearing date, Starnet Legal sent an email to chambers advising that the defendants would seek a further adjournment of the hearing. 33 At the hearing on 28 November 2017 Mr Carlisle of counsel appeared for Timeline, but not for REIT. Timeline filed the following affidavits in support of its adjournment application: (a) Brian Haratsis, an asserted property development expert, sworn 24 November 2017; (b) Anurag Thukral, Managing Director of Starin Ltd (Starin), sworn 27 November 2017; and (c) Mr Siddiqui, director and shareholder of EFSOL, sworn 28 November 2017. 34 Mr Carlisle submitted that it was self-evident from ASIC's evidence that unless an appropriate party was prepared to be appointed as responsible entity for the Scheme to replace Lotus, and was so appointed, then the Scheme must be wound up. Counsel accepted, at least at that point in submissions, that Timeline had no other basis upon which to resist the application. 35 In his affidavit Mr Thukral deposed that Starin had entered into a Memorandum of Understanding (MOU) with Timeline under which Starin conditionally agreed to take over as responsible entity. Mr Carlisle submitted that Starin held an appropriate AFSL and was prepared to accept an appointment as REIT's responsible entity, and he sought an adjournment to allow REIT's unit holders to vote upon whether Starin should take over. Counsel submitted that by permitting an adjournment the Court could take into account the unit holders' vote in deciding the winding up application. Later in submissions Mr Carlisle further argued for an adjournment because Timeline needed more time to put on evidence to address ASIC's evidence that unit holders' funds were not properly accounted for and may have been misused. 36 I refused the adjournment application for numerous reasons. 37 First, the defendants had ample time to prepare for the hearing and file the necessary evidence in opposition to the application. ASIC's evidence provides a real basis for concern that the Scheme has been operated in substantial non-compliance with the Act, that unit holders' monies have not been properly accounted for, and that unit holders' monies may have been misused. ASIC served its main affidavits in early August 2017 and the defendants had almost four months to put on responsive evidence. 38 The solicitors for the defendants consented to the initial interlocutory timetable and hearing date, and were subsequently granted a generous adjournment. Notwithstanding the indulgence provided, the defendants did not file any further evidence or written submissions in opposition to the application. Mr Carlile informed the Court that this was not because of any failure by Timeline's lawyers, but because Mr Isaacs had his "head in the sand" in relation to the application. 39 Second, the affidavit material filed (on the morning of the hearing) in support of the adjournment did not address ASIC's evidence as to the Scheme's substantial non-compliance with the Act, that unit holders' funds were not properly accounted for, and that unit holders' funds may have been misused. 40 In brief summary: (a) Mr Haratsis only said that, in the long-term, there was good potential for the Lara Property to be considered for rezoning to accommodate residential uses; (b) Mr Siddiqui deposed that EFSOL's asserted 52% interest in the Lara Property pursuant to the Musharakah Agreement was acquired by payment of $400,000, and an agreement to pay a further $107,000 on request as well as to underwrite various expenses of the Scheme. He rejected any suggestion that EFSOL or he had in fact sought to be paid $107,000. He also said that a meeting of unit holders took place on 23 August 2017, at which he informed the approximately 70 unit holders present that EFSOL was prepared to purchase any units in the Scheme which they wished to sell for the amounts they had paid for the units. He said that, because such an arrangement would require approval of the responsible entity, it could not take place until a new responsible entity was appointed; and (c) as I have said, Mr Thukral only said that Starin had conditionally agreed to be appointed as the Scheme's responsible entity to replace Lotus, and exhibited the MOU. 41 Further, it became apparent in the course of argument that counsel for Timeline had no instructions as to what further affidavit evidence Timeline would be in a position to adduce or what the provision of financial statements for the Scheme would show, if an adjournment was granted. 42 Third, Ms Johnston deposed that Starin does not have the appropriate AFSL to act as REIT's responsible entity, and it had not applied to vary the terms of its AFSL. Timeline put on no evidence to contradict this. If Starin cannot take over as responsible entity then that basis for the adjournment application completely falls away. Further, the evidence indicates that Mr Isaacs has unsuccessfully attempted to find a replacement responsible entity since late 2015. I infer that no appropriate entity is prepared to take over as responsible entity. 43 Fourth, even if (contrary to my view) Starin does have an appropriate AFSL, the MOU with REIT does not constitute a clear agreement for Starin to take over as the Scheme's responsible entity. The MOU expressly states that it is not legally binding and provides only that Starin is "willing to consider" taking on the role of responsible entity. That commitment is insufficiently definite to support the adjournment sought. 44 Fifth, the MOU provides that Starin's willingness to become the responsible entity is conditional upon a satisfactory legal review and due diligence investigation. The MOU specifies comprehensive legal and due diligence requirements including a requirement for the production of audited and unaudited financial reports for REIT for the last seven years. I doubt that worthwhile financial statements for REIT for the past seven years will be prepared and therefore doubt that the due diligence requirements of the MOU can be met. 45 I say this because financial statements for REIT have not been filed since the financial year ended 30 June 2012, and because Mr Isaacs has repeatedly failed to meet his promises to provide up-to-date financial statements for the Scheme. He has also failed to comply with notices by ASIC which require him to produce books and records of the REIT and Lotus. The other directors of Lotus and its liquidators state that they have no books or records in relation to the Scheme. 46 Sixth, there are good reasons to doubt that Starin will be prepared to take on the role of responsible entity upon the completion of the proposed legal review and due diligence investigation. As I later explain, the evidence indicates that the Scheme has operated in substantial non-compliance with legal requirements under the Act and with the PDS provided to prospective investors, it has outstanding invoices which have been unpaid for a lengthy period, its books and records after 30 June 2012 are missing or were never created, and unit holders' monies have not been properly accounted for and may have been misused. It is unlikely that Starin would take on the onerous obligations of becoming the Scheme's responsible entity if it was made aware of these matters. 47 Seventh, the MOU provides for REIT to pay a number of fees and charges to Starin, namely: (a) a "Commitment Fee" of $10,000 which is refundable if the Court decides to wind up REIT; (b) a "Due Diligence" fee of $25,000 which is non-refundable; (c) an "Establishment Fee" of $25,000 which is non-refundable; (d) a "Site Visit Fee" for the costs of visiting the Lara Property which is non-refundable; (e) legal costs to be charged by Starin's solicitors for a review and recommendation in relation to the Scheme. A rough estimate of such costs is to be provided by the solicitors and REIT is required to pay that amount before commencement of the review. 48 REIT has insufficient funds to pay such fees. There is only about $50,000 in the bank accounts of the Scheme and its associated entities, and there are outstanding invoices for approximately $95,000. 49 It appears that Starin is only prepared to consider taking over as REIT's responsible entity if its costs of investigating the viability of doing so are met on a non-refundable basis. It is not in the unit holders' interests to pay non-refundable amounts of up to $70,000 in order for Starin to undertake a due diligence investigation which, in my view, is unlikely to result in it taking over as responsible entity. 50 Eighth, the MOU has not been properly executed by REIT. It states that REIT is represented by Mr Siddiqui "as authorised by the Investment Manager, Timeline Consulting". Mr Siddiqui signed the MOU "for and on behalf of" Timeline Project Management Pty Ltd. Neither Timeline Consulting Pty Ltd or Timeline Project Management Pty Ltd are the responsible entity of the Scheme and neither company has the capacity to authorise Mr Siddiqui to sign the MOU on behalf of REIT or the capacity to bind REIT. Both are private companies associated with Mr Isaacs. 51 It is also worth noting that Mr Siddiqui is the sole director of EFSOL and pursuant to the Musharakah Agreement EFSOL purports to hold an unregistered mortgage in relation to a 52% interest in the Lara Property. The interests of Mr Siddiqui and EFSOL are potentially in conflict with the interests of the unit holders. 52 Ninth, an adjournment of winding up proceedings, where insolvency is established, can only be justified in exceptional circumstances. It is in the public interest that an application to wind up a company in insolvency (and by analogy a registered managed investment scheme) be determined without avoidable delay: Re National Computers Systems & Services Ltd (1991) 6 ACSR 133 at 135: Australian Securities and Investments Commission v Bilkurra Investments Pty Ltd [2016] FCA 371 (Bilkurra) at [108]. 53 Finally, while I sympathise with the concern expressed by the unit holders that the funds they contributed into the Scheme may be eaten up by an investigation by receivers, that does not mean an adjournment should be granted. There is a public interest in ensuring that managed investment schemes are operated in accordance with the Act, and the evidence of the Scheme's substantial non-compliance with the Act weighs heavily in favour of refusing the adjournment. The concern with depletion of the unit holders' funds through a costly investigation are better addressed by directions for a limited investigation, at least until the Receivers report back to the Court. 54 I refused to grant an adjournment and proceeded to hear the application.

The renewed adjournment application 55 After the lunchtime adjournment, Timeline filed an affidavit of Mr Isaacs sworn 28 November 2017 and renewed its adjournment application. 56 In summary Mr Isaacs deposed that: (a) he understood that the PDS stated that Perpetual, as Scheme custodian, had the obligation to collect and disburse unit holders' funds as directed by the responsible entity; (b) after Lion Advantage (the responsible entity prior to Lotus) lost its AFSL on 8 August 2012, the monies contributed into the Scheme by unit holders were deposited into a bank account operated by Timeline (of which Mr Isaacs was a director), rather than into bank accounts operated by the Scheme custodian, Perpetual; (c) following the appointment of Lotus as responsible entity (which occurred on about 18 June 2014) he decided that monies contributed by unit holders into the Scheme should continue to be paid into Timeline's bank account. He said he made that decision because Lotus was experiencing significant financial problems and did so to protect the unit holders; (d) he had been unable to provide reconciled financial statements for the Scheme although he had been working on this for some time. He said that he expected to be able to provide such statements within 21 days, and that he was confident that they would demonstrate that no unit holders' funds had been misused. He said that the funds received from unit holders were applied to pay AFSL fees, land tax, council rates and interest on loans taken out to acquire the Lara Property; and (e) completion of the financial accounts would demonstrate that Timeline had never received any payment for its project management activities. 57 Mr Isaacs undertook, on behalf of Timeline, not to accept any further contributions from unit holders and noted that he had previously undertaken not to disburse and/or deal with any unit holders' funds held by Timeline. He sought an adjournment to allow preparation of the Scheme's financial statements. 58 Mr Carlile argued that, Timeline having undertaken not to receive further unit holders' funds and not to disburse or deal with the funds it had already received, there was no danger to unit holders' funds in allowing an adjournment. Counsel also submitted that, in circumstances where EFSOL was prepared to acquire all units in the Scheme by paying the unit holders the amounts they had paid for them there was no good reason to wind up the Scheme. Counsel contended that the process of liquidation would involve some potentially significant investigation costs, which would ultimately be borne by the unit holders, and said that unit holders would not want the cost of such investigations to come from their funds when EFSOL has agreed to acquire their units. 59 I refused the renewed adjournment application. 60 I did so, first, because Timeline had ample time to file this affidavit and offered no satisfactory explanation for not doing so until half way through the hearing and after an earlier adjournment application had been refused. Mr Carlile said that the delay was not due to any failure by Timeline's lawyers. 61 Second, I had no confidence that Mr Isaacs would prepare financial accounts within 21 days as he said. As I have said, he has repeatedly promised to prepare financial statements for the Scheme and he has not done so. For example, Mr Isaacs emailed a letter to ASIC on 14 September 2016 and said that Lotus would provide up-to-date audited financial statements for the Scheme by 31 October 2016. The letter stated that: The financials [for the Scheme] are currently being finalised for the FY13, 14 &15 accounts and audits. More than a year later Mr Isaacs has still not provided financial statements, audited or otherwise. 62 In the s 19 examination on 15 December 2016 Mr Isaacs said that he was in the process of finalising the accounts for the Scheme for the financial years 2013, 2014 and 2015 with the assistance of two bookkeepers provided by Mr Siddiqui. Almost a year later Mr Isaacs had still not done so. 63 Third, I give little credence to Mr Isaacs' explanation as to why he had not earlier fully explained matters to ASIC. He deposed that: One of the reasons I have been unable to explain these matters to ASIC previously is because I was under pressure trying to assist Lotus with its difficulties and trying to ensure that Lotus does not lose its AFSL license, which it did eventually. I was concerned to make sure that the scheme would not lose its RE. Unfortunately it did. That assertion is without foundation. ASIC cancelled Lotus' AFSL on 20 September 2016 and Mr Isaacs has had more than a year since then to provide a proper explanation to ASIC in relation to accounting for unit holders' funds and in relation to the suggestion that they may have been misused. In his s 19 examination on 15 December 2016 he did not take the opportunity to fully explain matters, even though by that point Lotus had already lost its AFSL.

EFSOL'S OFFER TO PURCHASE THE LARA PROPERTY 64 In light of the strength of the evidence in favour of orders to wind up the Scheme, I had a concern as to whether unit holders might wish to accept EFSOL's informal offer to acquire their units. It seemed likely that if unit holders accepted an offer from EFSOL to acquire their units for the amounts they had paid for them the unit holders would recover a greater proportion of their investment than if the Scheme is wound up. 65 In response to my suggestion in that regard, Mr Boston said that ASIC was interested in entering into an arrangement with EFSOL which would facilitate a 100% return of unit holders' funds to them, but it needed a concrete proposal from EFSOL in that regard. The matter was stood down for discussions between the parties and ASIC and EFSOL reached an agreement; (a) to jointly appoint a valuer to provide a sworn valuation of the Lara Property; and (b) for EFSOL to make any offer it proposed to make for the purchase of the Lara Property by 15 December 2017. In light of the agreement I adjourned the further hearing of the application until 19 December 2017. 66 On 5 December 2017 Robert Henshaw, a Certified Practising Valuer jointly appointed by the parties, valued the Lara Property at $1,050,000. On 15 December 2017 EFSOL offered to purchase the Lara Property for that amount, on a 90 day settlement. 67 However, in an email to EFSOL on 18 December 2017 ASIC sought Mr Siddiqui's advice as to: (a) whether EFSOL intended to claim any interest in the Lara Property under the Musharakah Agreement and if so the interest EFSOL claimed, and how it arose; and (b) whether EFSOL sought to rely on a mortgage purportedly granted to it under the Musharakah Agreement, and the amount that it said it is owed. 68 Mr Siddiqui responded the same day and asserted that EFSOL had a 52% interest in the Lara Property pursuant to the Musharakah Agreement, but said that "in order to achieve a swift resolution, [EFSOL] will only claim the original sum of $400,000 pursuant to the mortgage." 69 When the matter came back for hearing on 19 December 2017 ASIC submitted that it was not appropriate for it to respond to EFSOL's offer to purchase the Lara Property at that time. Mr Boston expressed concern about the status of the Musharakah Agreement as: (a) the agreement was entered into without the Custodian's knowledge; (b) EFSOL's asserted 52% interest in the Lara Property is not registered on title; (c) Mr Isaacs was on both sides of the Musharakah Agreement as a director of the responsible entity, Lotus, and as a director of (or advisor to) EFSOL; and (d) ASIC had not yet received proof that EFSOL actually transferred $400,000 to secure its asserted 52% interest in the property. 70 Mr Boston contended, and I accept, that the validity of the Musharakah Agreement is a matter of importance in determining what monies will be available for distribution to unit holders. It is significant to assessing the true value to unitholders of EFSOL's informal offer to acquire the units in the Scheme by paying unit holders the amounts they paid for them. If the Musharakah Agreement is valid, it will only leave about $500,000 to be distributed to unit holders, when they have contributed almost $1 million into the Scheme. That may make EFSOL's offer to purchase their units for the amounts they had paid for them an attractive one. 71 Mr Boston accepted the legitimacy of the Court's concerns about the cost of the proposed investigation and its effect on the quantum of funds that may be left for distribution to the unit holders upon winding up. Accordingly, ASIC proposed a regime in which the initial investigations are limited to those matters necessary to determine: (a) the assets available for distribution; (b) the unit holders in REIT and the quantum of their investments, having regard to the fact that there are concerns with the accuracy of the register of unit holders provided by Mr Isaacs; (c) the existence and amount of other creditors' claims; (d) the status of the Musharakah Agreement; (e) whether unit holders' claims are against REIT or Timeline, in circumstances where the unit holders' funds were directly debited from their respective bank accounts through the PAYGATE system and into the Timeline Account. If the funds were "misappropriated" at that point unit holders claims may be against Timeline; (f) whether Timeline has a claim against the REIT; and (g) the distributions that can be made to the unit holders and any creditors. The limited investigation is to be completed by 31 March 2018 after which the matter is to be listed before the Court. At that time the Court will be updated on the subject matter of the investigations and the Receivers can make submissions as to the best, most cost-effective way forward, and seek any necessary orders to achieve that end.

RElevant Legal Principles 72 The principles surrounding winding up of a registered managed investment scheme on the just and equitable ground under s 601ND are well-settled, and it suffices to only briefly restate them. They are derived from the traditional ground for winding up found in s 461(1)(k) of the Act and the case law under that section can be relied upon to inform a winding up under s 601ND(1)(a). The section confers a very wide discretionary power: Capelli v Shepard (2010) 29 VR 242 (Capelli) at [102]-[104]. 73 As ASIC submitted, a breakdown in the administration of a registered scheme and the commercial unviability of a registered scheme are established and overlapping contexts which may justify the winding up of the scheme on the just and equitable ground: In the matter of the ITC Pulpwood Project 2001 [2013] VSC 747 at [20]. Such contexts might include: (a) the insolvency of the responsible entity, especially where it "cannot continue to perform its functions, and…no responsible entity can be found to replace it": In Re Rubicon Asset Management Ltd (2009) 77 NSWLR 96 (Rubicon) at [25]; and (b) the insolvency of the registered scheme: Re PWL: Ex Parte PWL Ltd (No 2) [2008] WASC 232 at [43]. In the context of registered managed investment schemes which are not legal persons capable of incurring liabilities the courts have adapted the concept of insolvency to refer to "inter-related factors, including the non-viability of the scheme, the related insolvency of the responsible entity, its inability to fund the continued operations of the schemes, the unavailability of any responsible entity and the consequent breakdown of the original scheme arrangements set out in the prospectus": Capelli at [94]-[95]. In assessing whether a scheme is insolvent the concept of insolvency applied is less strict than as prescribed under s 459A: Australian Securities and Investments Commission v AGKM Green Pty Ltd [2017] FCA 846 (AGKM Green) at [49]; Shepard v Downey (2009) 69 ACSR 530 at [105]. 74 The protection of the public interest may justify the winding up of the registered scheme under s 601ND(1)(a) "where there is a justified lack of confidence in the conduct and management of the company's affairs such as to give rise to a real risk to the public interest that warrants protection". ASIC may seek a winding up based on its justifiable lack of confidence in the control and management of the company, including winding up in the public interest: Australian Securities Commission v AS Nominees Limited (1995) 62 FCR 504 (AS Nominees) at [354], [387]; Australian Securities and Investments Commission v Austimber Pty Ltd (1999) 17 ACLC 893 (Austimber). 75 Such a lack of confidence involves examining all of the conduct of the affairs of the company to form the conclusion that "there is a lack of confidence in the propensity of the controllers to comply with obligations, including the keeping of books, records and documents, and looking after the affairs of the company": A real risk to the public may be found in, for example, a requirement to ensure the protection of investors including where a company has "not carried on its business candidly and in a straightforward manner with the public" or "in order to prevent or condemn repeated breaches of the law": AGKM Green at [44]-[47]. 76 The fact that a scheme cannot achieve its stated purpose may also form a ground justifying the protection of the public interest: Re Banksia Mortgages Ltd (2013) 95 ACSR 161 (Banksia Mortgages) at [49]. The notion of the public interest also includes considerations of commercial morality and the public interest at large that may favour liquidation. A winding up beneficial from the public policy perspective where investigations could lead to at least some of the persons responsible for the company's demise being brought to account: Australian Securities and Investments Commission v Midland Hwy Pty Ltd (administrators appointed); in the matter of Midland Hwy (administrators appointed) [2015] FCA 1360 (Midland) at [68]; Bilkurra at [105]-[107]. 77 An order winding up a registered scheme will provide a compelling reason to wind up other corporate entities that have been part of the operation: Australian Securities and Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778 (Chase Capital Management) at [93]. It may also be relevant to whether to wind up such other corporate entities that they have no assets other than those arising by reason of their involvement in the scheme, and no business or any reason for existence outside the operation of the scheme: Chase Capital Management at [91].

CONSIDERATION 78 Although Lotus is in liquidation, ASIC's records of registration continue to record Lotus as the Scheme's responsible entity and, by operation of s 601FJ, it remains the responsible entity. ASIC seeks orders: (a) under s 601ND(1)(a) of the Act to direct Lotus to wind up REIT on the grounds that it is just and equitable to do so; (b) as a solution to the difficulty that Lotus is insolvent and not capable of winding up REIT, ASIC seeks an order under s 601NF(1) appointing Mr Martin and Mr Sallway as Receivers to take responsibility for ensuring the Scheme is wound up in accordance with its constitution and any orders made under s 601NF(2); (c) under s 601NF(2) appointing Mr Martin and Mr Sallway as receivers and to confer upon them various powers including the powers under s 420 of the Act; (d) under s 461(k) to wind up Timeline and under s 472(1) to appoint Mr Martin and Mr Sallway as joint and several liquidators. 79 Having regard to ASIC's largely unchallenged evidence I am well satisfied that it is just and equitable to wind up REIT. I note that, although Mr Carlisle later argued against winding up, he initially conceded that unless a replacement responsible entity was appointed it was self-evident that orders should be made to wind up the Scheme. Numerous factors support orders to wind up the Scheme and I now deal with the main factors.

The Scheme is insolvent 80 First, having regard to the extended concept of insolvency in relation to the winding up of a registered managed investment scheme, REIT is insolvent: see AGKM Green at [49]; PWL at [43]. 81 REIT has not filed financial statements since the financial year ended 30 June 2012. The 2012 financial statements record that it: (a) made a net loss of $141,109; (b) had equity in the Scheme property of $578,691 (which appears to be based on the value of the Lara Property and takes into account finance arranged to purchase the property); and (c) a contingent liability to Lion Advantage of $135,660.58. 82 The evidence tends to show that the Scheme's financial position has deteriorated since 30 June 2012. At present it appears that the Scheme has approximately $50,000 held in various bank accounts but owes $76,904 to Perpetual for unpaid custodian fees, $16,271.28 in unpaid land tax to the State Revenue Office and $1,586.70 in unpaid Council rates. Since 30 June 2012 unit holders have continued to contribute monies into the Scheme. As at 30 June 2015 they had paid a total of approximately $964,862 yet their equity in the Scheme property (if the Musharakah Agreement is valid and if the Lara Property is worth $1,050,000 as valued) is in the order of only $500,000. Taking into account just under $95,000 the Scheme owes in unpaid custodian's fees, unpaid land tax and unpaid Council rates, the value of the net Scheme property is less than half of the total contributions unit holders have made into the Scheme. 83 The Scheme is unable to pay its debts as and when they fall due. It has not paid long outstanding invoices for custodian fees, land tax and Council rates and its only significant asset is illiquid.

Lotus is insolvent 84 Second, Lotus's AFSL was cancelled on 20 September 2016 and it was wound up by order of the Supreme Court of Victoria on 14 December 2016; see PWL at [43]. 85 As at that date it had only $19.48 in the bank, no other assets, secured debts of over $700,000 and unsecured creditors of approximately $150,000. It has no interest in the Lara Property. As at June 2017 the balances of Lotus' bank accounts totalled less than $10. Lotus has been re-registered administratively just for the purposes of this proceeding.

No replacement responsible entity 86 Third, the Scheme has not had a responsible entity since 20 September 2016 and it is unlikely a suitable entity can be found to take over as responsible entity: see Rubicon at [25] 87 Mr Isaacs attempted to persuade Vasco Investment Managers (Vasco) to take over as responsible entity of the Scheme from about late 2015 and his efforts were continuing in late 2016. Vasco did not, however, take over as responsible entity. On 20 November 2017 Starin signed an MOU in which it conditionally agreed to take over as responsible entity. However, Starin does not hold the appropriate AFSL, the MOU is conditional and non-binding, the MOU was not executed by the proper parties, and the legal review and due diligence requirements set in the MOU are unlikely to be met. 88 In circumstances where Mr Isaacs has unsuccessfully sought a replacement responsible entity for Lotus since late 2015, I infer that there is no suitable entity prepared to take on the role.

The purpose of the Scheme has failed 89 Fourth, the purpose of the Scheme has failed: see Banksia Mortgages at [49]. The PDS informed prospective investors that the Scheme was for a fixed period of five years during which the Lara Property was to be rezoned for residential use and subdivided. Rezoning would require consideration by a planning panel, the Minister for Planning and the Council. 90 The Lara Property remains zoned for farming use. No application to the Minister for Planning or a planning panel seeking rezoning of the land has been made, nor has even any approach been made to the Council in that regard. In his s 19 examination Mr Isaacs accepted that no steps had been taken to apply to rezone the land. 91 I have no difficulty in accepting Mr Haratsis's evidence that there is good "potential" for the Lara Property to be considered for rezoning "in the long-term", but the PDS informed prospective investors that the Scheme was for a fixed period of five years. Notwithstanding that more than seven years has passed since the PDS was issued there is no evidence that the Lara Property is any closer to being rezoned. Even if it is assumed that rezoning will ultimately occur, putting a date on when that might take place is just speculation. It suffices to note that, if rezoning does eventually occur, it will be well outside the timeframe provided in the Scheme.

Repeated breaches of the Act 92 Fifth, REIT and its management have persistently failed to comply with their obligations under the Act. 93 ASIC cancelled Lotus' AFSL on 20 September 2016 for reasons including: (a) Lotus did not file financial statements for REIT for the financial years ending 30 June 2013, 2014, 2015 and 2016, in contravention of ss 319 and 912A of the Act; (b) Lotus did not file financial statements for itself for the financial years ending 30 June 2009 and following; (c) the registration of Lotus' auditor was cancelled on 30 March 2015 and, despite repeated requests from ASIC, no replacement auditor has been appointed, in contravention of s 327C ; (d) Lotus was required to be, but was no longer, a member of an approved dispute resolution scheme; (e) Lotus was required to, but did not, engage an auditor to audit Lotus' compliance with REIT's compliance plan; and (f) Lotus did not comply with a notice issued by ASIC dated 23 March 2016 which required it to produce various documents relating to the affairs of Lotus and the Scheme including: (i) bank statements for accounts held for itself and as responsible entity for REIT; (ii) management reports and Board submissions relating to Lotus' business and the business of REIT; (iii) an audit report of Lotus and REIT; and (iv) compliance committee minutes and reports for REIT. 94 ASIC formed the view that unit holders dealing with Lotus "are exposed to a greater risk of the financial service being provided to them being inadequate" and "there being an inadequate opportunity for redress" and that suspension or cancellation of its AFSL would protect unit holders from these greater risks. 95 It is significant that the Scheme operated without a responsible entity for approximately 15 months between 2013 to 2014, and again from 21 September 2016 to date. 96 It is also worth noting that Mr Isaacs failed to comply with a notice by ASIC dated 22 December 2016 which directed him to produce documents relating to the income and expenses of the Scheme, all correspondence between Lotus and Vasco in relation to Vasco becoming the responsible entity, and correspondence between Lotus and unit holders who sought a refund of their investments or sought to exit the Scheme.

Many of the Scheme's books and records are not available 97 Sixth, many of the important books and records of REIT are not available. I infer that such records were either never created as required by the Act or that they are missing. 98 No financial statements have been filed for REIT since the financial year ending 30 June 2012. The directors of Lotus other than Mr Isaacs state that they did not have any books or records relating to the Scheme and Lotus' liquidators state that they do not have any books and records relating to the Scheme. 99 In September and December 2016 respectively, Lotus and Mr Isaacs failed to comply with notices requiring them to produce documents to ASIC relating to the Scheme and Lotus. Mr Isaacs has repeatedly promised to produce financial statements for the Scheme but he has not done so.

Unit holders' funds unaccounted for 100 Seventh, unit holders' funds have not been properly accounted for and there are grounds for concern that they may have been misused. 101 As at 23 December 2016 approximately 102 persons had acquired units in the Scheme and as at 30 June 2015 they had paid a total of approximately $964,862 into the Scheme. 102 In his s 19 examination Mr Isaacs said that unit holders' funds were paid into Timeline's bank account rather than into accounts operated by the Scheme custodian, and he confirmed that in his affidavit. ASIC's investigation reveals that between 17 June 2013 and 5 June 2017 unit holders contributed a total of $308,212.90 which was deposited into Timeline's bank account. Yet as at 5 June 2017 the balance of Timeline's account was only $47,796.65. ASIC has only been able to locate a total of $52,271.11 in the bank accounts of Lotus, Timeline and Timeline Consulting. 103 Amongst other things, it appears that Lotus may have overcharged unit holders. The PDS states that the responsible entity would be paid a management fee of 1.4% per annum of the gross asset value of the Scheme. The Lara Property is the only significant asset of the Scheme and it was purchased for $975,000. A 1.4% management fee would therefore permit a management fee of approximately $13,650 per annum. 104 ASIC's investigation reveals that between 17 June 2013 and 5 June 2017 a total of $107,400 was transferred from Timeline's account to Lotus, which is an average of about $26,850 per annum. In his s 19 examination Mr Isaacs said that Lotus was paid about $4,000 per month which would equate to a management fee of $48,000 per annum. The evidence therefore indicates that Lotus was paid between two to three times the amount of management fees permitted under the PDS. 105 There is also a basis for concern that the Musharakah Agreement, which was made in May 2016, was not an arms-length transaction. At the relevant time Mr Isaacs was a director of Lotus and the responsible manager of the Scheme. As at 8 December 2016, EFSOL's website described Mr Isaacs as also being a director of EFSOL. I note, however, that in his s 19 examination on 15 December 2016 Mr Isaacs said that information was incorrect and he was only "associated" with EFSOL. As at 25 January 2017 Mr Isaacs' profile on EFSOL's website had been amended to state that he is an advisor to EFSOL.

The Scheme has no PDS 106 Eighth, because the PDS was withdrawn at ASIC's request prior to 31 December 2012, and a replacement PDS has never been issued, the Scheme has been operating without a PDS since about January 2013. Notwithstanding that there was no PDS in place REIT continued to invite and receive monies from prospective investors: see AGKM Green at [44]-[47].

The PDS is misleading or it has not been complied with 107 Ninth, there are reasonable grounds for concern that the PDS is misleading or deceptive and/or that the Scheme has not been operated in accordance with the representations made in the PDS: see AGKM Green at [44]-[47]. 108 The PDS informed prospective investors of the offer made to them in the following terms: Description of the Offer The offer is for investments to be raised under this product disclosure statement for the Lara Property Development Syndicate. The A class units offered in this disclosure statement are redeemable in full at the end of 5 years in exchange for realisation of the property to be developed. The property being purchased by the Sub Trust is at 490 Flinders Avenue Lara which is owned farming. The property is 63 ha to be rezoned and subdivided into approximately 700 lots subject to council approval. Each A class investors are to initially subscribe to units for the value of $7,000 totalling $1,750,000 to assist with the purchase price, the acquisition cost and to pay rezoning and associated costs. The A investors are to subscribe a minimum $300 per month under a savings plan in aggregate over a 5 year period to achieve an investment of equivalent to $85,000 the cost of a completed block of land with services. The savings by the investors achieved during the period will be utilised to actually subdivide the land and complete the services in order to deliver 250 lots to the investors in the Sub Trust. The land will be subdivided initially into a three lot sub division so that the A class unit holders have first access to the land subdivision after re zoning approval. 109 The PDS states that to obtain a unit in the Scheme prospective investors must pay the initial subscription of $7,000 and then make monthly payments of $300 per month over five years. After five years the unit holder is entitled to provision of a serviced block of land with a value of $85,000. However, if a unit holder made the required payments they would have paid only approximately $25,000. It is far from clear how that might entitle a unitholder to be provided a subdivided lot with a value of $85,000. Indeed, to achieve a saving of $85,000 on a $300 per month savings plan (including the initial $7,000 investment) would take slightly more than 20 years of consistent savings. The PDS refers to the possibility of a top up payment being required from unit holders at the point that they acquire their residential lot but the likelihood and size of any such payment is not adequately disclosed; 110 The PDS states that the minimum initial investment in the Scheme is $1.75 million. As at 30 June 2015 (almost 5 years after the Scheme commenced) a total of only $964,862 had been invested. Despite the fact that the minimum initial investment threshold was not reached the Scheme continued to invite and receive subscriptions from investors. It appears that if the minimum investment threshold had been adhered to the Scheme would not have proceeded. 111 The PDS also states that Perpetual is appointed as the Scheme custodian to hold the assets of the Scheme in safe custody and open and maintain bank accounts to hold all cash and income of the Scheme. It promotes the benefit of having an experienced fund manager such as Perpetual as the custodian. However, from August 2012 Perpetual no longer received the contributions made by unit holders and over the next four years a total of $308,212.90 was deposited into Timeline's bank account. The monies were then not properly accounted for. 112 Similarly, the PDS states that Perpetual is to execute and hold all mortgage documents. Despite this it appears from the evidence that Lotus entered into an unregistered mortgage agreement with EFSOL in relation to EFSOL's interest in the Lara Property under the Musharakah Agreement, doing so without Perpetual's knowledge or consent. 113 The Scheme is predicated on a plan that the Lara Property would be rezoned and subdivided into residential lots within five years. However, the best evidence Timeline could adduce in this regard is Mr Haratsis's evidence, which is only that (more than seven years after the Scheme commenced) there is good "potential" for the Lara Property to be considered for rezoning in the "long-term". There are grounds to doubt that, at the time the PDS was issued, there were reasonable grounds for believing that the Lara Property would be rezoned and subdivided into residential lots within five years.

The unit holders' right to redeem their investments 114 Tenth, the PDS provides that unit holders can redeem their investments in the Scheme after a fixed period of five years, or sooner subject to completion of the project, doing so in exchange for identified property lots in a subdivision. However, more than seven years after commencement of the Scheme, rezoning and subdivision has not yet even started and there are insufficient funds in the Scheme for unit holders to redeem their investments. 115 The PDS states that unit holders have a right to redeem their investments in REIT if it is liquid, although it warned that an investment in property assets is an illiquid investment and not readily convertible into cash. It said that, if there are insufficient funds available to meet the redemption requests of an investor, or the responsible entity has received more redemption requests than there are funds available, the responsible entity may pay out the redemptions on a pro rata basis. 116 The Lara Property is the Scheme's only substantial asset. It has recently been valued at $1,050,000 and it is illiquid. Under the Musharakah Agreement unit holders only have 48% equity in that property. Putting to one side the possibility that EFSOL are prepared to acquire their units, unless the Scheme is wound up unit holders cannot redeem their investments, and notwithstanding the Scheme's poor performance they are effectively trapped in the investment.

Justifiable lack of faith in the management of the Scheme 117 Taking into account the circumstances overall, I consider ASIC has a justifiable lack of confidence in the control and management of the Scheme: see AS Nominees at [354], [387] and Austimber. Amongst other things: (a) both the Scheme and the responsible entity are insolvent, and the responsible entity is in liquidation; (b) there have been lengthy periods in the operation of the Scheme during which there has been no responsible entity, and there has not been a responsible entity in place since 21 September 2016. The Scheme has been operating in breach of Part 5C of the Act and will continue to be in breach unless wound up; (c) Mr Isaacs' attempts to secure a replacement responsible entity have been unsuccessful. As late as the morning of the hearing Timeline said that it had obtained a commitment from Starin to take over that role, but that was shown to be illusory. I infer that no appropriate entity is prepared to take on the role; (d) financial statements for the Scheme have not been filed since 30 June 2012 and management has failed to keep and lodge financial records as required by the Act; (e) contrary to the PDS, and notwithstanding that Mr Isaacs understood the requirements of the PDS in this regard, unit holders' contributions into the Scheme were paid into a bank account maintained by Timeline, rather than to the Scheme custodian. Those funds have been substantially depleted. ASIC has only been able to locate approximately $50,000 in various bank accounts. Unit holders' funds have not been properly accounted for and may have been misused; (f) the purpose of this Scheme has failed. The management of the Scheme has taken no steps to secure rezoning and redevelopment of the Lara Property within the five-year window provided by the PDS; (g) Lotus has been paid management fees totalling $107,400 which appear to be in excess of those permitted under the PDS. It was paid those fees notwithstanding that it appears not to have performed significant parts of its role. It did not maintain proper books and records for the Scheme, it did not issue a replacement PDS when ASIC identified concerns with the existing PDS, it has not acted in accordance with the representations in the PDS, and it has taken no steps to seek rezoning and redevelopment of the Lara Property; (h) there are reasonable grounds to suspect that Lotus and its officers have been involved in misleading and deceptive conduct; (i) in relation to the Musharakah Agreement there are grounds to suspect that officers of Lotus did not enter into that substantial transaction on an arms-length basis and may not have acted in the best interests of the unit holders. 118 Taken together the above matters indicate that the affairs and management of the Scheme are being conducted in a manner that is prejudicial to unit holders' interests, and that unit holders' funds are at risk. ASIC has a justifiable lack confidence that the Scheme and its management will comply with their obligations under the Act. Indeed, the evidence indicates that those who control and manage the Scheme have not complied with those obligations for years. The Scheme has not been operated candidly or in a straightforward manner with the public. 119 It is also significant that the investigations to be conducted pursuant to the winding up orders could lead to at least some of the persons responsible for the demise of the Scheme being brought to account: Midland at [68]; Bilkurra at [105]-[107]. Taking all of these matters into account it is plainly just and equitable that the Scheme be wound up under s 601ND.

Winding up Timeline 120 For similar reasons it is also just and equitable to wind up Timeline. Amongst other things: (a) Timeline is insolvent and no longer viable. It was deregistered on 25 January 2015 and reinstated administratively only for the purposes of this proceeding; (b) it has been directly involved in breaches of the Act by receiving and banking monies contributed by unit holders into the Scheme over more than four years. Mr Isaacs' affidavit illustrates that he was aware that unit holders' contributions were required to be paid into bank accounts operated by Perpetual, and he nevertheless directed them into Timeline's account. Timeline was deregistered on 25 January 2015 but nevertheless continued to receive monies contributed by unit holders; (c) Timeline has failed to properly account for the investors' funds which it holds. Mr Isaacs has repeatedly failed to provide accounts which will show what happened to unit holders' funds and has failed to answer notices issued by ASIC which required him to produce relevant books and records; (d) the evidence of Lotus' misconduct to which I earlier referred also applies in respect of Timeline. Mr Isaacs' conduct was central in both companies and the management of Timeline, Lotus and the Scheme are connected. 121 It is in the public interest to wind up Timeline because that will provide a measure of protection for unit holders who have contributed substantial monies into the Scheme which are (wrongly) held by Timeline, it will allow appropriate investigations in relation to unit holders' funds and, as far as possible, ensure that those funds are not further depleted. The order winding up the Scheme provides a compelling reason to wind up Timeline, when there is no evidence that it has any business or reason for existence outside the operation of the Scheme: Chase Capital Management at [91] and [93]. I certify that the preceding one hundred and twenty-one (121) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Murphy.

Federal Court Act 1976(Cth)

At a glance

Court

Decision date

Before

Source

Judgment (26 paragraphs)

Parties

Legislation Cited (4)

Cases Cited (8)

Cited By (1)