Australian Securities & Investments Commission v Mercorella

…the managed investment scheme operated by the first defendant whereby the first defendant: (a) obtained moneys from investors; (b) pooled those moneys in a National Australia Bank Business Cheque Account, number 53-600-1597 held in the name of the first defendant and/or National Australia Bank, account number 5796-36963 and/or Australia and New Zealand Banking Group Limited, account number 5796-36963 and/or in any other account; (c) represented and/or agreed with investors that the moneys were to be invested for various periods; (d) represented and/or agreed with investors that in return for advancing funds, investors would receive a right to interest payments as agreed with the first defendant; (e) was to use the funds to fund investments with a view to generating a profit out of which interest payments were to be paid to investors; and (f) had day to day control over the moneys obtained from investors.

6 Each of the Scheme companies was wound up, and Mr Nicol was appointed as liquidator of each of the Scheme companies, by order of this Court made on 29 September 2005.

7 By Order of the Court made on 8 November 2005, Mr Zappia (among others) was ordered to attend for oral examination about the examinable affairs of the ten Scheme companies. Mr Zappia and, through him, three companies of which he is a director, were also ordered to produce books and documents in their possession relating to the examinable affairs of the ten Scheme companies. 8 During the course of Mr Zappia's subsequent examination, an issue arose as to its permissible extent. Mr Zappia objected to questions relating to dealings between Mr Zappia or his associated entities and Mr Mercorella as operator of the Scheme, as distinct from transactions between the Zappia interests and the ten Scheme companies themselves. The former category of dealings, it was said, were not encompassed within the examinable affairs any of the ten Scheme companies listed in the order and summons, and thus beyond the legitimate scope of the examination. 9 Mr Nicol therefore applied for an order under s 601EE(2) to vary the order and summons to Mr Zappia for examination and production. The intent of the proposed amendments was to make clear that Mr Nicol is entitled to examine Mr Zappia about the examinable affairs of the Scheme. The amendment was simply the addition, to the list of Scheme companies set out in the order, summons and relevant attached schedules the words 'the Scheme, as defined in the Order of His Honour Justice Lander dated 8 August 2005 made in the within proceedings'. Several other inconsequential amendments to the order and summons were also proposed, to reflect the widened scope of the examinable entities.

issues 10 Mr Zappia contended that: (1) s 601EE(2) of the Act did not authorise the Court to vary the summons and order in the terms proposed, and alternatively (2) it was not appropriate in the circumstances to exercise that power.

(a) The power under s 601EE(2) 11 Section 601EE of the Act provides: '(1) If a person operates a managed investment scheme in contravention of subsection 601ED(5), the following may apply to the Court to have the scheme wound up: (a) ASIC; (b) the person operating the scheme; (c) a member of the scheme. (3) The Court may make any orders it considers appropriate for the winding up of the scheme.' 12 Section 601EE(2) has been used by the courts to appoint liquidators, receivers and managers to unregistered managed investment schemes. Liquidators appointed under s 601EE(2) have been granted powers similar to those conferred upon company liquidators, including powers which are binding on third parties: see the review of authorities in Re Stacks Managed Investments Ltd (2005) 54 ACSR 466 at [27]-[37], per White J (Re Stacks). 13 In Australian Securities and Investments Commission v ABC Fund Managers Ltd (No 3) [2001] VSC 397, Warren J specifically conferred upon the liquidator of a series of unregistered managed investment schemes the powers under Pt 5.9 Div 1 of the Corporations Act. Her Honour observed that s 601EE(2) 'vests a wide and unqualified discretion in the court' and that 'the liquidator of the schemes should have every power as if the schemes were corporations ordered to be wound up': at [5]-[6]. Some doubt was expressed as to the extent of the court's power and the consequences of its exercise by White J in Re Stacks at [35]. However, as that case concerned the power to give directions as to the winding up of a registered scheme under s 601NF(2), White J found it unnecessary to express a conclusion regarding the reach of s 601EE(2). 14 The scope of the court's power under s 601EE(2) was put beyond doubt, for present purposes, by the Court of Appeal of the Supreme Court of Queensland in Mier v FN Management Pty Ltd (2005) 56 ACSR 93. Keane JA, with whom McMurdo P and Douglas JA concurred, canvassed the 'essential characteristics' of the winding-up process and said, at [16]: '[Section] 601EE(2) must be read as empowering a court to make such orders as it considers appropriate in order to apply such a procedure to an unregistered managed investment scheme. It may also be accepted that the terms of the section allow for further orders to be made as needed so long as they are required for the "due conduct and completion of the winding up" [Australian Securities and Investments Commission v Takaran Pty Ltd (No 2) (2002) 194 ALR 743 at [12]]. The necessary corollary is that an order that could not reasonably be seen as advancing this procedure would not be authorised by s 601EE(2). The comprehensive survey of authority undertaken by White J in Re Stacks Managed Investments Ltd shows that courts have used the power granted by s 601EE to appoint persons to act as receivers, managers or liquidators with powers commensurate with those that would be possessed by persons fulfilling similar roles in the winding up of a company.' [footnotes omitted]

15 Senior counsel for Mr Zappia did not expressly contend that that decision was plainly wrong. As a considered decision of the Court of Appeal of a State, I consider it appropriate to follow it. In my view, the order of 8 August 2005, including that quoted in [5] above, was clearly authorised. It follows that s 601EE(2) empowered the Court to make the amendment sought by Mr Nicol.

(b) Appropriateness of proposed amendment 16 Counsel for Mr Zappia resisted the amendment in the form proposed by Mr Nicol. He argued that it would lead to uncertainty as to what is meant by 'the Scheme', despite the definition set out in the Order of 8 August 2005. He further submitted that, while the examinable affairs of Mr Mercorella as the operator of the Scheme may be an appropriate area of examination, the examinable affairs of the Scheme itself was not. A more certain framework for the examinations, it was said, would be to limit Mr Nicol's questions to the examinable affairs of the parties to the Scheme, being the ten Scheme companies and Mr Mercorella. 17 However, when invited to do so during oral argument, Mr Zappia's counsel was not able to point to any line of questioning that would be permissible under the terms of Mr Nicol's proposed amendment, but not under Mr Zappia's proposed alternative, other than questions directed towards transactions wholly unrelated to the Scheme. Such questions would, in any event, not be authorised in the course of the examination. 18 In addition, in my view, it is a reasonable line of inquiry for Mr Nicol to investigate, and if possible to trace, money that passed through Mr Mercorella which is suspected to be Scheme money. It would be artificial and unduly restrictive to draw a sharp line between an inquiry into the assets and affairs of Mr Mercorella and of the Scheme companies on the one hand from those of the Scheme itself on the other. There is in reality likely to be an intersection of those inquiries. The liquidator of the Scheme should not be vulnerable to such a distinction in fulfilling his functions. It is no accident that Mr Nicol has been appointed liquidator of the Scheme and of the Scheme companies as well as receiver and manager of Mr Mercorella's property. 19 I further had regard to the fact that Mr Zappia's examination pursuant to the amended summons would be subject to legitimate objections to certain questions. I think the appropriate time to determine whether a particular transaction or document is relevant to the Scheme is during the said examination, and in the context of questions at that time. 20 For those reasons, I considered the proposed amendment to the order for Mr Zappia's examination and for the production of documents, and to the summons itself, should be made. 21 I accordingly ordered that the order for the examination of Domenico Zappia dated 2 November 2005 and made on 8 November 2005 be varied in the terms referred to above. I also amended the summons for examination and the production of documents by Domenico Zappia made on 8 November 2005 by substituting therefore the summons for his examination and production of documents as now in force (to give effect to that variation). 22 I ordered further that the costs of and incidental to the application and of the examination of Mr Zappia be paid to Mr Nicol out of the property of the Scheme and the Scheme companies. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.

Solicitor for Mr Zappia: Sydney G Maidment Lawyers