Brennan v DCA Capital Pty Ltd, in the matter of DCA Capital Pty Ltd

A. INTRODUCTION 1 On 4 April 2024, I made ex parte interim orders as the Commercial and Corporations Duty Judge pursuant to s 1323(3) of the Corporations Act 2001 (Cth) (Act) appointing Scott Langdon, Jennifer Nettleton and John Mouawad (Receivers) as receivers and managers of the property of the first defendant, DCA Capital Pty Ltd (DCA), the second defendant, Digital Commodity Assets Pty Ltd (Digital), and the Digital Commodity Assets Fund (Fund), pending determination of the plaintiffs' claims for final relief in these proceedings (Interim Orders). 2 Each of the plaintiffs is an investor in the Fund, which is managed by DCA and Digital (together, Companies). A number of the plaintiffs have also invested significant monies with the Companies, and are creditors of one or both of the Companies. 3 The third defendant, Ashod Ohan Balanian, is the sole director of each of the Companies. 4 Each of the plaintiffs has sought repayment or redemption of their investment in the Fund. Those requests have not been honoured. 5 The plaintiffs sought interim relief in aid of their claims, by way of final relief, for compensation orders against the defendants pursuant to s 1317HA of the Act in respect of contraventions of s 911A(5B) and s 1020A of the Act, and s 1041I of the Act, or alternatively that the Companies be wound up either in insolvency or on just and equitable grounds. 6 The application for interim relief was supported by extensive affidavit evidence from the plaintiffs, investors in the Fund, and the plaintiffs' solicitors. The plaintiffs relied on the following affidavits: (a) the affidavit of Peter Brennan, the first plaintiff, affirmed on 3 April 2024; (b) the affidavit of Marcelle Bernard, the third plaintiff, affirmed on 4 April 2024; (c) the affidavit of Murray Plant, a director of the fourth plaintiff, affirmed on 4 April 2024; (d) the affidavit of David Rogers, a director of the fifth plaintiff, sworn on 3 April 2024; (e) the affidavit of Rachael Mahoney, an investor of the Fund, affirmed on 3 April 2024; (f) the affidavit of Michael Hackman, a trustee of the Hackman Superannuation Fund, which is an investor of the Fund, affirmed on 3 April 2024; (g) the affidavit of Robert Meredith, an investor of the fund, affirmed on 3 April 2024; (h) the affidavit of Blake O'Neill, solicitor for the plaintiffs, affirmed on 3 April 2024; (i) the affidavit of Mr O'Neill affirmed on 4 April 2024; and (j) the affidavit of Alexander Dennis Blackie, solicitor for the plaintiffs, affirmed on 4 April 2024. 7 These are my reasons for making the Interim Orders.

B. BACKGROUND 8 The background to the application for interim relief is set out in some detail in the affidavits relied upon by the plaintiffs. It is sufficient for present purposes to provide the following summary. 9 On 2 May 2018, the Fund was established by Mr Balanian, together with John Ellison and John Sinclair. 10 Mr Ellison is a former director of each of the Companies. He ceased to be a director of the Companies on 10 February 2023. 11 Mr Sinclair is a former director of Digital. He ceased to be a director on 21 December 2019. 12 The Fund is governed by a constitution (Constitution) and was established as a wholesale Australian unit trust to trade in digital commodities. Digital was designated as the responsible entity and trustee of the Fund. 13 The Fund engaged in "cryptocurrency arbitrate", where the Fund made trades that took advantage of monetary price differences across the many exchanges where cryptocurrency is traded. 14 On 5 November 2018, DCA was incorporated. 15 At some point after 5 November 2018 and before August 2021, DCA apparently became the trustee of the Fund, in place of Digital. The details surrounding the change are unknown to the plaintiffs. 16 From time-to-time, DCA issued information memoranda to potential investors. These included information memoranda issued in August 2018 and May 2021 to potential investors in the Fund. 17 In order to invest in the Fund, at least some of the plaintiffs filled out an application form. The application form stated that it accompanied the information memorandum issued by DCA in March 2021 in its capacity as the trustee of the Fund. The application form requested details of a nominated Australian bank account where the "credit of withdrawals and credit of distributions" were to be made, and included the following statements: When you complete this Application Form you make the following declarations: I/we have read and understood the [March 2021 Information Memorandum] to which this Application Form applies, including any supplemental information; … I/we agree to be bound by the provisions of the Trust Deed governing the Fund and the terms and conditions of the [March 2021 Information Memorandum], each as amended from time to time; . 18 The plaintiffs' rights are primarily governed by the Constitution. Clause 2.1 of the Constitution provides that each unitholder has a beneficial interest in the Fund but not in any specific part or assets of the Fund. 19 The Constitution of the Fund includes specific provisions governing the manner in which withdrawal requests were to be treated. These include that once a "Redemption Request Form" was issued to Digital, then, in accordance with cl 2.35 of the Constitution, it was incumbent on Digital within 21 days of the "Valuation Time" on which the unit price of the "Units" is (or was) determined in accordance with cl 2.36, to cause the redemption of that plaintiff's interest in the Fund in an amount equal to the amount of the withdrawal. 20 None of the steps required to be undertaken under the Constitution in response to the withdrawal requests made by the plaintiffs appear to have been undertaken. To the contrary, numerous redemption requests made by the plaintiffs have not been answered or fulfilled. 21 In an apparent attempt to defer compliance with redemption requests, it appears that Mr Balanian purported to alter the method by which redemption requests were required to be made by seeking to impose a requirement that investors "roll over" their investment into a new fund. 22 The information memorandum for the Fund issued in May 2021 included the following representations: (a) DCA was the trustee of the Fund, and was the issuer of units in the Fund and the investment manager of the Fund; (b) DCA was an Australian incorporated company and an Australian financial services authorised representative; (c) the offer to subscribe for a Class of units in the Fund was made only to "Wholesale Clients"; (d) DCA was party to an authorised intermediary arrangement with Lanterne Fund Services Pty Ltd ACN 098 472 587 (Lanterne), holding AFSL 238198, and Lanterne acted as the placing agent on behalf of DCA to arrange for the issue of units in the Fund, in accordance with s 911A(2)(b) of the Act; (e) the Fund was not required to be and was not registered as a managed investment scheme under the Act; and (f) the information memorandum constituted an offer by Lanterne to arrange for DCA to issue to the intending investor units in the Fund pursuant to the terms set out in the information memorandum (which was said to have been prepared by DCA). 23 Searches undertaken by the solicitors for the plaintiff on 4 April 2024 of the ASIC Connect Professional Registers reveal that (a) neither DCA nor Digital held or had ever held an Australian Financial Services License (AFSL) in its own name, (b) in the period 12 October 2020 to 11 November 2022, DCA was the authorised representative of Lanterne, and (c) in the period 12 December 2017 to 1 February 2021, Digital was the authorised representative of Lanterne, and (d) neither DCA nor Digital was an authorised representative of any AFSL holder after November 2022. 24 In or about 2018, Ms Mahoney, who gives evidence in these proceedings, invested a total of $600,000 in the Fund and commenced working for DCA pursuant to an informal arrangement, whereby she would refer investors to Mr Balanian and Mr Ellison, and assist with the decoration of DCA's offices and Mr Balanian's house in Rydalmere. Approximately 12 to 18 months later, Ms Mahoney invested a further $100,000 on two separate occasions. 25 Initially, Ms Mahoney would invoice DCA for those services but ultimately an agreement was reached that she was to receive a commission of 1% per annum on investments made by investors who she had introduced to the Fund. 26 Ms Mahony gave evidence that she had understood that from around November 2022, DCA commenced using the AFSL of Gibraltar Capital Pty Limited (Gibraltar). Factually that cannot be correct, given the content of the ASIC Connect Professional Registers. Nevertheless, a company of which Mr Balanian was a director, Polychain Pty Ltd (Polychain) is recorded in the ASIC Connect Professional Registers as an authorised representative of Gibraltar in the period 12 November 2022 to 10 August 2023. It is possible that Mr Balanian purported to rely on Gibraltar's AFSL to operate the Fund during this period. 27 Digital, however, was holding itself out as the trustee of the Fund as recently as 25 October 2023. 28 Ms Mahoney also gave evidence that (a) in or about the middle of 2023, the Fund ceased providing net asset value statements to any investors and some investors had not received any net asset value statements since February 2021, and (b) to her understanding the Fund had investments of some $20 million in 2020 but this had increased to approximately $90 million or more by February 2023. 29 The investors in the Fund were not limited to "sophisticated investors" as that term is defined in s 761GA of the Act. They included Mr Meredith who was a 76 year old pensioner with limited assets but who gave evidence that he was induced to invest a total of $75,000 in the Fund after being told by Mr Ellison that: The fund is for what is known as sophisticated investors, which you are not, but in your case because we know you, we'll take it on. 30 The investors in the Fund also included at least four persons or entities that invested sums of less than the prescribed threshold of $500,000 in reg 7.1.18(2) of the Corporations Regulations 2001 (Cth) (Regulations) for investments by retail clients in s 761G(7)(a) of the Act and who otherwise did not provide a certificate in the form contemplated by the Act and the Regulations to the effect that they had net assets of over $2.5 million or a gross income for each of the past two financial years of at least $250,000. 31 On 1 November 2023, Mr Balanian informed investors that the Fund would "close" on 12 February 2024. 32 On 16 January 2024, winding up petitions were filed in the Supreme Court of New South Wales in respect of both Companies. 33 No steps were apparently taken to "close" the Fund on 12 February 2024. 34 On 6 March 2024, Mr Balanian met with some 70 investors in the Fund and advised them that some $55 million was held in a "Fireblocks custodian fund" and resisted a proposal that three investors be appointed as a group to verify the funds still under the control of the Fund. 35 A formal investor meeting was then convened for 26 March 2024 but an hour before the meeting was scheduled to commence, Mr Balanian sent an email cancelling the meeting without any explanation.

C. RELEVANT PRINCIPLES 36 Section 1323 of the Act relevantly provides that where a civil proceeding has begun against a person under the Act and the Court considers it necessary or desirable in order to protect the interests of a person (aggrieved person) to whom another person (relevant person) is liable or may become liable to pay money, whether by way of a debt, by way of damages or compensation or otherwise, it may make orders including, if the relevant person is a body corporate, an order appointing a receiver and manager over all or part of the property of the relevant person: Re Richstar Enterprises Pty Ltd (No 3) (2006) 232 ALR 577; [2006] FCA 433 at [22] (French J, as his Honour then was). 37 The principles governing the operation of s 1323 of the Act are well settled. 38 The purpose of the remedies provided in s 1323 of the Act is to protect the interest of persons who might have claims against corporations and others who are subject to the provisions of the Act (whether or not those claims flow from a breach of the Act). It achieves this by securing (a) the assets of the person or corporate, against whom the relevant claims may lie for the purpose of providing security for those claims or (b) assets for which that person may be liable to account in such a claim: Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504 at 525 (Finn J). 39 The Court's power to make interim orders under s 1323(3) of the Act is enlivened when it is established that "it is desirable" to do so: Corporate Affairs Commission v Home Buyers Finance Ltd (1987) 5 ACLC 706 at 707 (McLelland J). 40 In this context, the overriding concern in the exercise of the discretion under s 1323 is the protection of assets for the benefit of those who might become entitled to them, which directs attention to the security of the assets which are subject of the application which, in turn, requires consideration of the manner in which similar assets have been dealt with by the relevant person in the past: Australian Securities and Investments Commission v Linchpin Capital Group Ltd [2018] FCA 1104 at [62] (Derrington J). 41 In deciding whether to grant relief, the Court engages in a "risk assessment" process often in circumstances where the available evidence is insufficient to establish definitively the nature and extent of the assets of the persons under investigation, their liability to aggrieved persons and that dissipation of assets has occurred or is likely to occur: Re Richstar at [30]. 42 Of particular relevance to the application by the plaintiffs for interim relief in this case are the following statements of principle by Atkinson J in Australian Securities and Investments Commission v Arafura Equities Pty Ltd (2005) 56 ACSR 429; [2005] QSC 376 at [34]: The criterion of whether or not a receiver should be appointed when an investigation is under way is that the court considers it necessary or desirable in order to protect the interests of creditors. In this case, there is, prima facie, a huge shortfall between the moneys invested in the scheme and the moneys left in the scheme. There are therefore significant sums of money owing to creditors and moneys that need to be traced. Although the appointment of a receiver may be considered, as Finn J observed, a "drastic remedy", a receiver will be appointed on an interim basis where to do so will protect the interests of persons who might have claims against the respondents and a lesser remedy is not adequate. If the allegations that the respondents are operating an unregistered managed investment scheme are proved to be true, there is no doubt that it will be wound up. (Footnotes omitted.)

D. CONSIDERATION 43 I was satisfied that the Interim Orders sought by the plaintiffs should be made for the following reasons. 44 First, I was satisfied that the plaintiffs had standing to seek orders under s 1323 of the Act. Both s 1020A and s 911A(5B) of the Act are civil penalty provisions pursuant to s 1317E of the Act, and s 1020A is categorised as a financial services provision in the table in s 1317E(3) of the Act. Pursuant to s 1317HA(1) of the Act, the Court may order a person who has contravened a financial services civil liability penalty provision to compensate a person who has suffered loss or damage by reason of that contravention. In addition, any other persons who suffers damage in relation to a contravention, or alleged contravention, of a financial services civil liability penalty provision may apply for a compensation order under s 1317HA. As the plaintiffs seek, amongst other matters, compensation pursuant to s 1317HA of the Act, the proceeding is a "civil proceeding" for the purposes of s 1323 of the Act. 45 Second, I was satisfied that the plaintiffs have established a prima facie case that the Fund has operated as an unregistered managed investment scheme, in circumstances where it was required to be registered, in breach of s 601ED of the Act. On the evidence before me, the Fund had more than 20 members and no Product Disclosure Statement was issued, notwithstanding that it included investors who were not "sophisticated investors" and therefore had it been registered it would have required the issue of a Product Disclosure Statement. 46 Third, I was satisfied that the plaintiffs have also established prima facie cases that the defendants have variously contravened (a) s 1020A of the Act by operating an unregistered managed investment scheme that was required to be registered, (b) s 911A of the Act by carrying on a financial services business without holding an AFSL covering the provision of the financial services, at least in the period between 11 August 2023 and 21 November 2023, (c) s 1041H of the Act by engaging in conduct that was misleading or deceptive or likely to mislead in relation to a financial product and by reason of s 1041I of the Act, the plaintiffs are able to recover from the defendants the amount of the loss and damage they have suffered by making investments in the Fund in reliance on that conduct. 47 Fourth, there have been a number of unfulfilled withdrawal requests by investors in the Fund and no explanation has been proffered for the failure to comply with those requests. 48 Fifth, there have been a number of unexplained changes, or purported changes, of the trustee of the Fund. 49 Sixth, Digital held itself out as trustee of the Fund after October 2023, when the "gate provisions" were implemented, contrary to the earlier issued information memoranda and communications. Further, even if Digital held that role, there was no evidence that it held an AFSL, or was an authorised representative of any AFSL holder at that time, or at any time prior to that time. 50 Seventh, I was satisfied there was evidence to support a concern that the Fund may be insolvent, or may be the subject of a winding up order. 51 Eighth, the assets held by the Fund are readily movable and difficult to trace, such that any later recovery steps may be hampered. The assets in which the Fund appears to have invested, cryptocurrencies, are highly illiquid and difficult to trace. 52 Ninth, the quantum of losses may well be significant, and the monies currently held by the Fund appear to be in excess of $50 million, and may be as much as $90 million or more.

E. DISPOSITION 53 For these reasons, I made orders substantially in the form sought by the plaintiffs. I certify that the preceding fifty-three (53) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Halley.

Associate: Dated: 8 May 2024 SCHEDULE OF PARTIES NSD 368 of 2024 Plaintiffs Fourth Plaintiff: PBG PTY LTD (ACN 631 764 997) Fifth Plaintiff: BROADVIEW INVESTMENTS PTY LTD (ACN 007 533 806)