Australian Securities & Investments Commission v Kyriackou

REASONS FOR JUDGMENT 1 In this proceeding the plaintiff contends that the defendants have operated an unregistered managed investment scheme contrary to s 601ED(5) of the Corporations Act 2001 (Cth) ("the Corporations Act"). It seeks a declaration to that effect, an order under s 1324(1) of the Corporations Act that the first defendant be restrained from operating or promoting the scheme, an order under s 601EE of the Corporations Act that the scheme be wound up, an order that the third, fourth, fifth, sixth and seventh defendants be wound up, and an order for the appointment of a liquidator to each of those defendants. The application was filed on 28 May 2007, and was supported by the affidavits of Sonia Natalie Kohary, a financial investigator in the enforcement directorate of the plaintiff, and of Glenn Joshia Cook, an investigator in that directorate. There were, and are, no pleadings. 2 On 28 March 2008, Middleton J ordered that the plaintiff file and serve, by 30 May 2008, any affidavits and statements of facts and contentions on which it intended to rely at trial, and that the defendants do likewise by 27 June 2008. By consent orders made by Goldberg J on 2 June 2008, those dates were varied to 10 June 2008 and 8 July 2008 respectively. On 28 March 2008, Middleton J also ordered that the proceeding be set down for trial on 21 July 2008, with an estimate of seven days. 3 On 12 June 2008, the plaintiff filed and served its statement of facts and contentions, and two affidavits. In correspondence covering that service, the plaintiff foreshadowed an intention to file and serve a further affidavit the following day (which was subsequently done), and to rely upon additional affidavits which had previously been filed in the proceeding. 4 On 18 June 2008, the plaintiff received a letter from the first, third, fourth, fifth, sixth and seventh defendants (to whom I shall hereafter refer as "the defendants"), stating that they had received counsel's advice that the plaintiff's statement of facts and contentions was "totally deficient" and that, unless the statement were "amended to properly plead the case" against the defendants, they would suffer "irremediable prejudice". They contended that they did not have sufficient particulars to be aware of the case that the plaintiff intended to present at the hearing. 5 By letter from the plaintiff to the defendants dated 20 June 2008, the plaintiff stated that it considered that its statement of facts and contentions, together with the affidavit material which had been filed and served, clearly set out the relevant issues and facts upon which it intended to rely. 6 On 2 July 2008, the defendants gave notice of a motion that the court would be moved for orders that "the proceeding be struck out" against the defendants, by reason, as alleged by them, that the plaintiff's statement of facts and contentions did not disclose any case against them, or that the proceeding was an abuse of process. The defendants claimed in the alternative that there be summary judgment entered against the plaintiff, or that the plaintiff have three days to plead "an arguable case" against them, in default of which the proceeding should "stand dismissed with costs". That Notice of Motion came on for hearing before me today. 7 Mr Senathirajah, who appeared for the plaintiff, applied for the hearing of the defendants' Notice of Motion to be adjourned until at least 16 July 2008 because of the unavailability of counsel who had settled the statement of facts and contentions. While accepting that the availability of counsel would rarely be a sufficient basis for the adjournment of a hearing, Mr Senathirajah pointed out that it was only upon receipt of the defendants' letter on 18 June 2008 that the plaintiff had been put on notice of the defendants' concerns about the statement of facts and contentions, and that the defendants had permitted a further period of about a week to pass before filing the instant Notice of Motion. He submitted also that a fair defence of the statement required the attention of counsel who had settled it, and who had a detailed familiarity with the facts of the case. In this respect, Mr Senathirajah relied upon State of Queensland v J L Holdings Pty Ltd (1997) 189 CLR 146; upon Smith v Gannawarra Shire Council (2002) 4 VR 344 and upon Forbes Engineering (Asia) Pte Ltd v Forbes [2007] FCA 1598. 8 Mr Levine, who appeared on behalf of the defendants, resisted the plaintiff's application for an adjournment. He pointed out that the date fixed for the trial is imminent, and if the hearing of the motion proceeded only on 16 July 2008 or thereabouts, the trial date would almost certainly have to be vacated. Although Mr Senathirajah intimated that the plaintiff would, if it were unsuccessful in defending the motion, consent to any such adjustment to the trial date as was then considered to be appropriate, and, at least implicitly, accepted that the plaintiff would be responsible for such costs of the defendants as were thrown away, Mr Levine said that the defendants were anxious to have the trial proceed on the date fixed, and that a costs order would not sufficiently compensate them for the delay occasioned by any deferral of the commencement of the trial. In this latter respect, Mr Levine referred to orders made by Middleton J on 11 July 2007 that the third and sixth defendants be restrained from parting with possession of, encumbering, or disposing of, their assets. Mr Levine described these as "freezing orders", and submitted that any deferral of the trial would prolong the interlocutory burden under which these defendants were labouring in relevant respects. 9 Before ruling on the plaintiff's application for an adjournment, I invited Mr Levine to make his submissions in support of his clients' motion, so that I might understand the strength of their case, and get a feeling of the extent to which a proper response to it by the plaintiff would be likely to require the attention of counsel who settled the statement of facts and contentions. 10 Mr Levine submitted that his case involved the following elements: 1. The statement of facts and contentions did not disclose an arguable case. 2. To allow the matter to continue to trial on the strength of what was in the statement of facts and contentions would amount to an abuse of process. 3. The plaintiff's allegations had not been properly particularised. Mr Levine invited the court to act under O 20 r 2(1), particularly to the extent to which it empowers the court to order that a proceeding be stayed or dismissed, either generally or in relation to any claim for relief, if no reasonable cause of action were disclosed; under O 11 r 16(a), which empowers the court to order that the whole or any part of a pleading be struck out if it discloses no reasonable cause of action; and under what he described as the "inherent power of the court" to prevent an abuse of process. Mr Levine submitted that his case on the motion involved a challenge to the sufficiency of the statement of facts and contentions and to that of the affidavits upon which the plaintiff proposed to rely. He said that his clients did not understand the case which had been alleged against them. 11 The defendants' objections to the statement of facts and contentions are to be understood as proposing both that a reasonable cause of action is not disclosed and that, because of the deficiencies in the statement, the defendants were being denied procedural fairness and, in that sense, that the continuation of the proceeding would amount to an abuse of process. 12 As noted previously, a significant element of the plaintiff's case is that the defendants operated a managed investment scheme contrary to s 601ED(5) of the Corporations Act. Mr Levine submitted that his clients did not know what acts, facts and circumstances were to be relied upon by the plaintiff as amounting to the "operation" of the scheme to which the plaintiff refers. In this respect, he drew my attention to what was said by Davies AJ in Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561 at 574: The term is not used to refer to ownership or proprietorship but rather to the acts which constitute the management of or the carrying out of the activities which constitute the managed investment scheme. Mr Levine submitted that the material upon which the plaintiff proposed to rely, including its statement of facts and contentions, contained no clear allegation, and no proper particulars, as to the facts and circumstances which amounted to the "operation" of the scheme alleged, at least in relation to certain of the defendants. 13 The structure of the statement of facts and contentions is broadly as follows. It is contended that the third, fourth, fifth, sixth and seventh defendants were incorporated, and that the third, fourth and seventh defendants still are. It is contended that the fifth and sixth defendants were deregistered on 1 June 2008 and 10 September 2007 respectively. A series of contentions as to shareholding in, and directorships of, the corporate defendants is then set out. It is said that the second defendant (which is not involved in the present Notice of Motion) was incorporated for the purpose of providing finance to, and the refinancing of, property developers under financial pressure, the acquisition of development property on trust, the development of trust property thereby acquired, and the distribution of profits to beneficiaries. In the statement, these activities are referred to as "the Australvic Scheme". 14 The detailed components of the Australvic Scheme are then set out in the statement of facts and contentions. In relevant respects, the statement refers to the first, third and fourth defendants, and to the roles which, it appears, it is alleged that they played in relation to the scheme. So far as I can see, and so far as Mr Senathirajah was able to assist me, the fifth, sixth and seventh defendants are not specifically referred to in these details; however, the statement says that their participation in the scheme "is to be inferred from their commonality of members, directors, place of business and names and their dates of incorporation." 15 The plaintiff also alleges that the third and fourth defendants are insolvent, and that the seventh defendant "does not trade and has never traded". According to the plaintiff's statement of facts and contentions, therefore, all of the defendants, with the exception of the first defendant, are either insolvent or deregistered, or, in the case of the seventh defendant, have never traded. 16 I have perused the affidavits upon which the plaintiff proposes to rely at trial. I have been assured by Mr Senathirajah that the whole of the plaintiff's evidentiary case is contained within the four corners of affidavits which have been filed and served. He submitted that the defendants could be in no doubt as to the case they have to meet. 17 Having considered the submissions made today, and having perused the documents, the sufficiency of which is challenged by the defendants, I propose to refuse the plaintiff's application for an adjournment, and to refuse the defendants' motion. My reasons for adopting this course are as follows. 18 Since the proceeding is not being conducted on pleadings, and since the statement of facts and contentions is itself not a pleading, O 11 r 16 of the Rules of Court has no application in the circumstances. The question, therefore, is whether I should act under O 20 r 2 upon the basis that no reasonable cause of action is disclosed, either by the statement of facts and contentions or by the affidavits, or upon the basis that the proceeding is an abuse of process of the court. Since I have power to act under that rule if the circumstances are appropriate, I do not see any point in further considering the extent of the so called "inherent power" of the court to protect itself from an abuse of process. 19 In the case of the first, third and fourth defendants, I am satisfied that the material filed by the plaintiff (in which expression I include the affidavits as well as the statement of facts and contentions) discloses a cause of action and, at least in a way which is sufficient for those defendants to have a fair trial, discloses aspects of their involvement in the alleged scheme which go beyond what Davies AJ referred to as ownership or proprietorship. In the circumstances, it is appropriate that I keep my observations in that regard to the minimum necessary to dispose of the defendants' motion. I note, however, that the first defendant appears to be, at least as alleged, a significant actor in the facts and circumstances said to constitute the workings of the scheme, and that the third and fourth defendants are said to have made, or received, payments of funds as part of the workings of the scheme. It is not my role to consider the strength or sufficiency of the plaintiff's case in relevant respects, but I have read enough in the material filed by the plaintiff to satisfy me that the motion of the first, third and fourth defendants should be refused. 20 The position is different with respect to the fifth, sixth and seventh defendants. As I have said earlier, no particular activity on their part is referred to in the statement of facts and contentions. Rather, the plaintiff says that their operation of the scheme is to be inferred from their commonality of members, directors, place of business and names, and their dates of incorporation. Mr Senathirajah was not in a position to develop the basis of that inference, or to make further submissions as to the other facts and circumstances, if any, by reference to which the operation of the scheme by these defendants might be inferred. This was, he submitted, an aspect of the justification for his application for an adjournment. 21 However, it is not suggested - and nor, on the material filed by the plaintiff, could it be suggested - that the defendants are not fairly on notice of the main component elements of the scheme which is alleged. In that sense, the material discloses a reasonable cause of action. Does it fail to do so in relation to the fifth, sixth and seventh defendants because their operation of the scheme is particularised only by reference to relationships which, if the defendants are correct, may not, on one view of the law, amount to "operation" in the statutory sense? I do not believe that I should, pre-trial, be astute to draw such a conclusion. The exercise of the power to which O 20 r 2 refers is reserved for very clear cases, and, particularly since it seems that relationships will of themselves lie at, or near, the centre of the plaintiff's evidentiary case as to the workings of the scheme, I should not exclude the fair prospect that what the plaintiff says about the involvement of the fifth, sixth and seventh defendants will, when understood in the context of the whole evidence in the case, be sufficient to justify a conclusion by the trial Judge that those defendants operated the scheme, at least to an extent. If it should be found that they did not, they will succeed in this aspect of their case. 22 There is no risk that the fifth, sixth and seventh defendants, or any of them, will be surprised by evidence not already filed and served. Further, unless the plaintiff secures the leave of the trial Judge to proceed otherwise, I must assume that it will be held to the particulars presently provided as to the extent of the involvement of those defendants in the scheme alleged. I do, therefore, take the view that those defendants have not shown that there is no reasonable cause of action disclosed by the materials filed by the plaintiff; nor that they are not fairly on notice of the nature of the case which they have to meet. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jessup.