Australian Securities & Investments Commission v Oliver Banovec

CATCHWORDS : CORPORATIONS - Investigation by ASIC - Application for orders under s 1323 of the Corporations Act 2001 (Cth) - Application for freezing orders in relation to property - Application for order restraining defendant from leaving Australia - Court's task in determining application an exercise in risk assessment and risk management - Court satisfied that there are persons to whom defendant is or may be or may become liable to make monetary compensation - No requirement that plaintiff demonstrate that there is a prima facie case that defendant liable to compensate such persons - Held that orders under s 1323 necessary or desirable to protect interests of such persons - Ambit of court's power to make orders under s 1323 - Orders made limited to those clearly justified by s 1323. - (Cth) Corporations Act 2001, s 1323

LEGISLATION CITED : Corporations Act 2001 (Cth) Australian Securities and Investments Commission Act 2001 (Cth)

CASES CITED : Australian Securities and Investments Commission v Carey (2006) 57 ACSR 307 ASIC v Adler (2001) 38 ACSR 266

Australian Securities & Investments Commission PARTIES : v Oliver Banovec

COUNSEL : Plaintiff: D R Stack Defendant: M Luitingh

SOLICITORS : Plaintiff: ASIC Defendant: N/A

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

1488/07 Australian Securities & Investments Commission v Oliver Banovec JUDGMENT 1 HIS HONOUR: This is an application by the Australian Securities and Investments Commission ("ASIC") under s 1323 of the Corporations Act 2001 (Cth). The orders sought are as follows: " 1. Until 5.00 pm on 13 August 2007, the Defendant is, by himself or his servants or agents or his employees, restrained from dealing with or disposing of any money which he may hold on behalf of his clients. 2. Until 5.00 pm on 13 August 2007, the Defendant is, by himself or his servants or agents or his employees, restrained from dealing with or disposing of any shares, property, futures contracts, options contracts or other commodities purchased or acquired by him, either directly or indirectly with money received by him from his clients. 3. Until 5.00 pm on 13 August 2007, the Defendant is, by himself, his servants or agents and employees, restrained from removing, or causing or permitting to be removed from Australia, or from selling, charging, mortgaging, or otherwise dealing with or disposing of, or causing or permitting to be sold, charged, mortgaged or otherwise dealt with or disposed of, all or any of his assets PROVIDED THAT this order: (a) Shall not prevent the Defendant from paying ordinary living expenses up to an amount of three thousand dollars ($3,000) per week.

(b) Shall not prevent the Defendant from paying costs reasonably incurred; and

(c) Shall not prevent any bank, building society or financial institution from exercising any right of set-off which it may have in respect of a facility afforded by to the Defendant prior to the date of this Order. 4. The Plaintiff has leave to give to: (a) The relevant authorities that record, control and regulate the ownership of real property;

(b) The relevant authorities that record, control and regulate the ownership of motor vehicles;

(c) The relevant authorities that record, control and regulate the ownership of maritime vessels and craft;

(d) Any bank, building society or other financial institution with which the Defendant operates any accounts; and

(e) Any other person or entity holding or controlling property belonging to the Defendant, notice of this Order by delivering a copy of a minute of this Order to a person apparently in the employ of that entity or person. 5. The Defendant is to deliver to the Registry of this Court by 5.00 pm on 15 May 2007, all passports held by him in his possession, custody or control and any airline tickets concerning any travel arrangements made for the twelve (12) month period commencing from the date of this Order and those documents are to be held by the Court until 5.00 pm on 13 August 2007. 6. Until 5.00 pm on 13 August 2007, the Defendant is restrained from leaving Australia and from coming within one hundred (100) metres of an Australian point of overseas departure. 7. The Parties have liberty to apply to the Corporations List Judge on reasonable notice. "

2 The application arises from investigations by ASIC into suspected contraventions by the defendant of ss 180(1), 181(1), 184(1), 911A(1), 911B(1), 1041E and 1041H of the Corporations Act in relation to the affairs of Capital Securitisation Ltd ("CSL"), the "Capital Trust" and associated persons. 3 CSL appears to have carried on business, at least in part, of borrowing money on short-term loans at very high rates of interest. What it did with the money borrowed is part of ASIC's investigation. The defendant is a director of CSL. The Capital Trust was a business name owned by DC Corporation Australia Pty Limited, which has been described as the trustee of the trust. The defendant was a director of that company. It is currently being wound up. 4 An investigator employed by ASIC, Mr Peck, understands that DC Corporation was part of a group of four companies. The defendant is either the sole director or the sole Australian resident director of those companies. Two of the remaining three companies in the group are also being wound up. 5 ASIC is investigating, to put it generally, whether the defendant breached the financial services provisions in Chapter 7 of the Corporations Act, whether he engaged in false or misleading conduct in relation to the raising of funds from investors in or lenders to CSL, whether he breached his duties as a director, and whether he breached the fundraising provisions of Chapter 6 of the Corporations Act. 6 The defendant is an Austrian citizen and a permanent resident of Australia. Section 1323 of the Corporations Act provides: " 1323 Power of Court to prohibit payment or transfer of money, financial products or other property

(1) Where: (a) an investigation is being carried out under the ASIC Act or this Act in relation to an act or omission by a person, being an act or omission that constitutes or may constitute a contravention of this Act; or (b) a prosecution has been begun against a person for a contravention of this Act; or (c) a civil proceeding has been begun against a person under this Act; and the Court considers it necessary or desirable to do so for the purpose of protecting the interests of a person (in this section called an aggrieved person ) to whom the person referred to in paragraph (a), (b) or (c), as the case may be, (in this section called the relevant person ), is liable, or may be or become liable, to pay money, whether in respect of a debt, by way of damages or compensation or otherwise, or to account for financial products or other property, the Court may, on application by ASIC or by an aggrieved person, make one or more of the following orders: (d) an order prohibiting a person who is indebted to the relevant person or to an associate of the relevant person from making a payment in total or partial discharge of the debt to, or to another person at the direction or request of, the person to whom the debt is owed; (e) an order prohibiting a person holding money, financial products or other property, on behalf of the relevant person, or on behalf of an associate of the relevant person, from paying all or any of the money, or transferring, or otherwise parting with possession of, the financial products or other property, to, or to another person at the direction or request of, the person on whose behalf the money, financial products or other property, is or are held; (f) an order prohibiting the taking or sending out of this jurisdiction, or out of Australia, by a person of money of the relevant person or of an associate of the relevant person; (g) an order prohibiting the taking, sending or transfer by a person of financial products or other property of the relevant person, or of an associate of the relevant person: (i) from a place in this jurisdiction to a place outside this jurisdiction (including the transfer of financial products from a register in this jurisdiction to a register outside this jurisdiction); or (ii) from a place in Australia to a place outside Australia (including the transfer of financial products from a register in Australia to a register outside Australia); (h) an order appointing: (i) if the relevant person is a natural person - a receiver or trustee, having such powers as the Court orders, of the property or of part of the property of that person; or (ii) if the relevant person is a body corporate - a receiver or receiver and manager, having such powers as the Court orders, of the property or of part of the property of that person; (j) if the relevant person is a natural person - an order requiring that person to deliver up to the Court his or her passport and such other documents as the Court thinks fit; (k) if the relevant person is a natural person - an order prohibiting that person from leaving this jurisdiction, or Australia, without the consent of the Court. (2A) A reference in paragraph (1)(g) or (h) to property of a person includes a reference to property that the person holds otherwise than as sole beneficial owner, for example: (a) as trustee for, as nominee for, or otherwise on behalf of or on account of, another person; or (b) in a fiduciary capacity. (2B) Subsection (2A) is to avoid doubt, is not to limit the generality of anything in subsection (1) and is not to affect by implication the interpretation of any other provision of this Act. (2) An order under subsection (1) prohibiting conduct may prohibit the conduct either absolutely or subject to conditions. (3) Where an application is made to the Court for an order under subsection (1), the Court may, if in the opinion of the Court it is desirable to do so, before considering the application, grant an interim order, being an order of the kind applied for that is expressed to have effect pending the determination of the application. (4) On an application under subsection (1), the Court must not require the applicant or any other person, as a condition of granting an interim order under subsection (3), to give an undertaking as to damages. (5) Where the Court has made an order under this section on a person's application, the Court may, on application by that person or by any person affected by the order, make a further order discharging or varying the first-mentioned order. (6) An order made under subsection (1) or (2) may be expressed to operate for a specified period or until the order is discharged by a further order under this section. (7) Nothing in this section affects the powers that the Court has apart from this section. (8) This section has effect subject to the Bankruptcy Act 1966. (9) A person must not contravene an order by the Court under this section that is applicable to the person. (10) An offence based on subsection (9) is an offence of strict liability. Note: For strict liability , see section 6.1 of the Criminal Code. "

7 There is no dispute that ASIC is carrying out an investigation of the kind described in s 1323. The questions to be decided are whether:

(a) it is necessary or desirable to make any or all of the orders sought in order to protect the interests of persons to whom the defendant may be or become liable to pay money, or to account for financial products or other property; and

(b) whether the orders sought fall within s 1323. 8 On 7 December 2006, Mr Phillip Peck, an investigator employed by ASIC, formally commenced an investigation pursuant to s 13 of the Australian Securities and Investments Commission Act 2001 (Cth) ("the ASIC Act") in relation to the suspected contraventions of the Corporations Act by the defendant. The investigation has been widened. The investigation arose from complaints made by Mr Avanish Mookhy in November 2006. In substance, Mr Mookhy complained to the effect that between October 2004 and July 2005, he was induced to lend a little under $1,300,000 to the defendant, or to CSL, at very high rates of interest on the faith of representations that his money would be on-lent to named individuals on second mortgage security. ASIC's investigations revealed that between November 2004 and about 31 October 2005, Mr Mookhy received interest payments on his advances, but that only $150,000 of principal has been repaid. 9 The defendant says that Mr Mookhy was provided with notes clearly recording that his advances were made on an unsecured basis and were loans to CSL. The defendant says that it was made clear that CSL was not on-lending money on his behalf to third party borrowers. Rather, it, and it alone, was the borrower, and Mr Mookhy, it is said, accepted CSL's unsecured promise to pay interest and to repay principal. The high rates of interest reflected the risk that the principal would not be repaid. 10 However, there are clear grounds for ASIC to continue its investigation that Mr Mookhy was induced to lend money by false representations. There is no dispute that letters were sent by facsimile to Mr Mookhy shortly before his advances were made. Those facsimiles represent that loans were to be made, in some cases by CSL, or in some cases by him to named borrowers, at high rates of interest on second mortgage security over specified properties. Statements have been provided to ASIC by some of the named borrowers to the effect that whilst they had had dealings with the defendant, there never was a proposal for such borrowings. Thus, one of the persons named as an intending borrower of $92,000 for a term of 30 days at interest of 4% per month has provided a statement that the defendant had acted as his finance broker in arranging refinance, but that he knew nothing about a suggested loan of $92,000. There are similar statements from three other persons named as intending borrowers of loans to be made by CSL. 11 Whether or not Mr Mookhy understood he was to lend money to CSL, there are serious questions for ASIC to investigate as to whether he was induced to make advances on the faith of representations that moneys would be lent to named intending borrowers, and whether such representations were misleading, and whether they were known to be false. 12 During an examination by ASIC, the defendant said that about $2,000,000 was raised by CSL as a result of the defendant's "contacts". Before me the defendant said that the only money raised by CSL was money borrowed from Mr Mookhy in an amount of about $1,300,000. However, ASIC's investigations properly extend to whether other persons were induced to lend moneys or to otherwise invest moneys with CSL. 13 The defendant says that Mr Mookhy is not an aggrieved person within the meaning of s 1323. Mr Mookhy commenced proceedings against CSL and the defendant in about February 2006. Those proceedings are still pending. However, the defendant says that he and Mr Mookhy have reached an agreement for the settlement of those proceedings. He says that the agreement is that Mr Mookhy will be paid $600,000 in four instalments over the next three years, with the first such payment to be made within 30 days of a deed being entered into. 14 The alleged settlement has not been reduced to writing. It would be unusual, but not impossible, for such an agreement to be immediately binding, even though a formal deed is contemplated. However, whether or not such a settlement has been reached is not presently to the point. If such an agreement has been reached, Mr Mookhy is a person to whom it appears the defendant is liable to pay money. If not, Mr Mookhy is a person to whom the defendant may be or become liable to pay money. In either case, he is an aggrieved person within the meaning of s 1323 whose interests may call for protection. 15 On the basis of statements made by the defendant in the course of his examination under s 19 of the ASIC Act, it appears there is also a potential class of persons, who are as yet unidentified, whom the defendant described as "contacts", who may have advanced about another $700,000 to CSL. 16 The defendant does not hold a financial services licence. ASIC is continuing to investigate possible breaches of Chapter 7. If such persons exist, it is difficult at this stage to say what claim they may have against the defendant. That may be because such persons do not exist. It may be because the circumstances do not give rise to any claim. It may be because ASIC has not yet ascertained the relevant facts. 17 A further aspect of the investigation concerns the Capital Trust. Its trustee is in liquidation. Two other companies in liquidation are thought to be associated with the activities of the trust. In respect of one of those companies, the liquidator has lodged a report under s 533 of the Corporations Act advising that he considers that the directors, including the defendant, may have allowed the company to incur debts whilst insolvent in contravention of s 588G of the Corporations Act. In the case of another company in liquidation, the liquidator has reported that he considers that there were breaches of ss 180 to 184, 588G, 590 and 596 of the Corporations Act. These are matters still being investigated. 18 I am satisfied that there are persons to whom the defendant is or may be or may become liable to make monetary compensation. In Australian Securities and Investments Commission v Carey (2006) 57 ACSR 307, French J (at [26]) aptly described the task of deciding whether it is necessary or desirable to make an order under s 1323 to protect the interests of such persons as an exercise in risk assessment and risk management. It is not necessary for ASIC to demonstrate that there is a prima facie case that the defendant is liable to compensate affected persons. Nor is it necessary for it to show the defendant is likely to dissipate assets unless restrained, although these would be powerful discretionary considerations in favour of making an order under s 1323 (ASIC v Adler (2001) 38 ACSR 266 at [7]; ASIC v Carey at [26]). 19 An important element of the task of risk management and risk assessment is fairness to the defendant. It must be recognised that no claims have been established against him. It must also be recognised that orders under s 1323 would impose a drastic limitation on his freedom to deal with his own property and on his freedom to travel. 20 The current investigation began in November 2006 and was formally commenced on 7 December 2006. On 14 February 2007, ASIC obtained orders ex parte restraining the defendant from travelling and restraining dealings with his assets. Those orders have been continued, with modifications consented to by the parties, up to 14 May 2007. On that day, they were continued further by me until today. 21 Prima facie this period for inquiry ought to have been sufficient for ASIC to have determined with some precision whether there was a prima facie case of contravention by the defendant of the Corporations Act which might lead to a claim for monetary compensation by persons other than Mr Mookhy. In the case of Mr Mookhy, who has had proceedings on foot for about eighteen months, it might be thought that he could protect his own position by seeking Mareva relief if there are grounds for doing so. 22 However, ASIC's investigation has been delayed. Partly that has been due to adjournments of the defendant's examinations under s 19 of the ASIC Act to meet the convenience of the defendant's legal representatives. More importantly, the delay arises because it was only on 3 April 2007 that the defendant produced eighty compact discs containing data in response to notices for production of documents served in February 2007. On 5 April 2007, the defendant produced a computer hard drive in further response to those notices. The compact discs and hard drives, including a hard drive from a different source, contain over 800,000 files. The imaging and indexing of those files was not finished until about 30 April 2007. 23 The defendant says that ASIC's notices for production of documents were oppressive. That is not an issue before me. There is no reason for me to assume - and I do not - that the notices were oppressive. It appears to me that it is the defendant himself who is the cause of ASIC's investigations not having reached a further point. 24 ASIC says the defendant is a "flight risk". He is an Austrian citizen. However, he is also a permanent resident of Australia. He has family in Austria. His mother resides there. He owns no real property in Australia. However, the defendant points to business connections he has in this country. 25 The defendant openly says that if he is not restrained, he intends to travel to Europe. He advances three reasons for doing so, namely: " (a) I need to sell a property so as to allow me to bring approximately $300,000 into Australia for the purposes of settling the dispute with Mr Mookhy; (b) My mother is currently aged 63 and may need to be hospitalised for treatment in the next few months. I would like to be there to support her; and (c) I would like to travel to Sweden to meet a potential investor who is considering purchasing one of our development properties. " 26 None of the suggested reasons is persuasive. I am not satisfied, on the evidence adduced on this application, that a settlement has in fact been reached with Mr Mookhy. However, even if it has, no details were forthcoming as to why the defendant's presence overseas was needed for him to sell a property to raise funds for the purposes of the settlement. There were no details of the property which allegedly needs to be sold. 27 As to the second ground, in cross-examination the defendant struggled to identify the reason his mother may need hospitalisation. I had the impression that he was searching for plausible reasons, or plausible details, to support his contention. 28 No details were advanced in respect of the third ground. 29 I do not accept the defendant's evidence that he needs to travel overseas for the reasons he advances, or at all. 30 The defendant quotes his established business connections in Australia. He says that two companies associated with him, namely, St Ives Securities Pty Limited and The Crescent Securities (TCS) Pty Limited, have residential developments in train. He also refers to the construction of a residential home which he says has a completed project value of $3,800,000. No details are given as to these projects. 31 St Ives Securities Pty Limited and The Crescent Securities (TCS) Pty Limited have issued prospectuses to raise funds. ASIC has placed orders that no securities be offered, issued, sold or transferred under the prospectuses. There is no evidence as to the current state of those developments or how they are expected to be completed without the funds sought to be raised by the embargoed prospectuses. 32 In those circumstances, I do not consider that the defendant's business connections in Australia are such as to give rise to any grounds for confidence that the defendant would return to Australia if permitted to travel. Nor do they provide grounds for confidence that the defendant has property in Australia which is unlikely to be transferred or dealt with which would in any event be available to meet the monetary claims of aggrieved persons. I consider that there is a significant risk that if the defendant is permitted to leave Australia, he may not return. I am not satisfied that any particular circumstance requires his attendance overseas. 33 The orders sought by ASIC are sought for a period of about three months, that is, up to 13 August 2007. The only potential prejudice with any specificity to which the defendant pointed was the asserted need for him to travel to raise moneys to satisfy his obligations under the asserted settlement with Mr Mookhy. However, the orders will provide for liberty to apply. If it is established that such a settlement has been reached and that the defendant needs to travel overseas so as to raise funds as a result of such a settlement, then the defendant can exercise that liberty. The question will then be considered whether the orders should be continued in the circumstances which then obtain. 34 For these reasons, I am of the view that orders under s 1323 are necessary or desirable to protect the interests of persons to whom the defendant is, or may be liable, or to whom he may become liable to make monetary compensation. 35 There was no argument as to the form of the orders sought. However, the question is one of jurisdiction. Wide though s 1323 is, it does not, as it presently appears to me, extend to simply restraining a defendant from dealing within Australia with his or her own property. I will need to be persuaded that the proposed orders 1-3 (to which the proposed order 4 is incidental) and parts of the proposed orders 5 and 6 are orders authorised by s 1323. I will hear further submissions on the form of the proposed orders. 36 The parties have sought further time to make submissions as to the precise orders which ought to be made. The current orders expire at 5.00pm today. Because of the doubts I have as to the jurisdiction of the Court to make part of the orders which have been made up to today, I do not propose to continue those orders further. I will make orders under s 1323 until a convenient time next week, being orders which appear to me, as presently advised, would be clearly justified by the section. 37 I order that until 5.00pm on Wednesday 23 May 2007, or earlier further order, the defendant shall not, without the leave of the Court:

(b) transmit or cause to be transmitted any funds from Australia to any destination outside Australia. 38 I also order that by 5.00pm on 17 May 2007, the defendant deliver to the Registry of this court any passport of his in his possession, custody or control. 39 I stand over the proceedings for further submissions on 23 May 2007 at 10.00am. I direct that the parties exchange submissions and provide copies to my associate by 5.00pm on Monday 21 May.

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