CORPORATIONS - unregistered managed investment scheme - winding up - application for directions as to distribution of funds deposited by particular categories of investors
Source
Original judgment source is linked above.
Catchwords
CORPORATIONS - unregistered managed investment scheme - winding up - application for directions as to distribution of funds deposited by particular categories of investors
Judgment (7 paragraphs)
[1]
Background
The investors, who were claimants with respect to the available funds, were placed in four groups, identified by the primary judge, Black J, as (a) the Westpac Investors; (b) the Post 21 April 2017 Westpac Investors; (c) the Mistaken Investors; and (d) two named persons, if they could satisfy the liquidators or the Court that the source of their deposits into the Westpac accounts was not the companies' funds. [1] The relevant groups were described by the primary judge in the following passage:
"[3] Several parties were joined, in their own right and as representatives of classes of creditors, for the determination of those issues. The First Defendant, J P Melocco Pty Ltd ('JPM'), represents itself and persons who deposited funds into the Companies' Westpac Accounts to participate in investment opportunities other than the 'Brexit Special' product, with the exclusion of several categories of persons who are largely separately represented. LifeSmart Trading Pty Ltd ('LifeSmart'), for itself and representing some of the Westpac Investors, contends for the position that the funds deposited into the Westpac Accounts are not held on trust for the Westpac Investors. That finding may be to the advantage of those investors if it has the result that amounts already paid to them cannot be taken into account by the application of 'hotchpot' principles in equity, in calculating their returns in the liquidation. The Third Defendants, Peter Caron and Anke Seidlitz, and those represented by them ('Post 21 April 2017 Westpac Investors') are investors who deposited funds after a freezing order took effect over the monies in the Westpac Accounts on 21 April 2017. The Fourth Defendant, Ralph Del Vecchio, and those represented by him ('Mistaken Investors') are persons who sought to invest in the Brexit Special product but mistakenly deposited funds into the Companies' Westpac 2 Account, rather than the NAB-1 Account nominated by the Companies for that product."
The appeal is brought by the third defendants in the proceedings below, and those represented by them identified as the Post 21 April 2017 Westpac Investors. Their complaint is, in substance, that the primary judge put them in the same category as the other Westpac Investors rather than making a separate, and more favourable, distribution available to them on the basis that their moneys were readily identifiable and separable.
The position of the appellants at trial was set out in the following passages in the primary judgment:
"[39] By an Interlocutory Process dated 12 February 2019, Mr Caron and Ms Seidlitz, for themselves and represented persons, sought a declaration that the Post 21 April 2017 Westpac Investors are the beneficial owners of the funds deposited by them into the Westpac Accounts on or after 21 April 2017 and an order that the amount of $60,000 withdrawn from the Westpac 2 Account on 21 April 2017 be deducted pro rata across all investor deposits in that account on 21 April 2017. Nine investors fall within the category of 'Post 21 April 2017 Westpac Investors'. Funds of four of those investors (referred to by the Liquidators as the 'Category E' investors) totalling $475,000, were deposited to the Westpac 2 Account on 21 April 2017, the same day as a freezing order was made by the Court on ASIC's application, but before a withdrawal of $60,000 from that account on that day. Funds of five of those investors (referred to by the Liquidators as the 'Category F' investors) totalling $300,000 were deposited into the Westpac 2 Account after 21 April 2017.
…
[42] It appears that there is still a contested issue as to whether the Post 21 April 2017 Westpac Investors should share in the amounts held in the Westpac Accounts pro rata with the Westpac Investors and I should address that question. Ms Beechey points out that their funds can be separately identified as part of the remaining funds in the Westpac Accounts, subject to the withdrawal of $60,000 to which I referred above. She points out that, by contrast, the Liquidators cannot separately identify the funds deposited by the Westpac Investors generally within the funds in the Westpac Accounts at the commencement of the winding up, due to the numerous withdrawals from those accounts.
…
[45] It seems to me that Ms Beechey's submissions, to which I referred in paragraph 43 above, have real force but, with hesitation, I am ultimately not able to accept them. The only significance of 21 April 2017 is that the Court made a freezing order on ASIC's application on that date, and that does not seem to me to provide a principled basis for distinguishing the position of the Post 21 April 2017 Westpac Investors from that of other Westpac Investors on the immediately preceding days. Other than for that matter, the position of the Post 21 April 2017 Westpac Investors is little different from that of investors on 20 April 2017, or 19 April 2017, or possibly 21 March or 21 February or 21 January 2017. Where that difference is ultimately only a matter of degree, it does not seem to me to be sufficient to support a different treatment of those investors from the other Westpac Investors."
The practical significance of the appeal was identified in an affidavit of Mr Said Jahani, one of the joint liquidators, dated 1 November 2019. He noted:
"27. There are approximately 600 Westpac Investors who have a total of approximately $150 million in capital outstanding (if previous returns on capital during the life of the scheme are taken in account). The Companies currently hold approximately $25 million (before costs) for distribution to investors so there is a large deficit in the fund.
28. There are nine Post 21 April 2017 Westpac Investors and their relevant deposits into the Westpac 2 Account on or after 21 April 2017 total $775,000. Additionally, on 21 April 2017, there was a $60,000 withdrawal from the Westpac 2 Account.
29. If the orders by Justice Black are upheld, the Liquidators anticipate that the funds held by the Liquidators will be distributed among all Beneficial Owners. The precise method of distribution and the way in which earlier returns paid to investors are taken into account, if at all, will be the subject of a further application to the Court for directions by the Liquidator. Depending on the method ultimately adopted, I estimate that the Beneficial Owners (including the Post 21 April 2017 Westpac Investors) will receive a maximum return of approximately 44 cents in the dollar (with some investors receiving less than that including no return at all).
30. For the Post 21 April 2017 Westpac Investors, if the appeal succeeds it will make a material difference to the distribution they receive. If the Court finds that the $775,000 deposited into the Westpac Accounts by the Post 21 April 2017 Westpac Investors should be distributed to those investors only, then the possible methods of calculating the distribution payable are set out at paragraph 4.37 of the Liquidators' Second Report; all Post 21 April 2017 Westpac Investors would receive at least 87.37 cents in the dollar (before costs).
31. I estimate that, if the appeal succeeds (without provisioning for any costs order), the maximum impact on an individual Westpac Investors' potential distribution payable is $25,880 (which equates to 0.9% of this particular Westpac Investor's total claim). All other Westpac Investors' dividends will reduce by less than that figure. Accordingly, it seems likely that the costs of defending this appeal will exceed the amount by which any single Westpac Investors' distribution will decrease if the appeal is successful."
[2]
Representation of investors other than the Post 21 April 2017 Westpac Investors
Against that background it is convenient to refer to the two notices of motion before the Court. First, there is a notice of motion filed by the liquidators of the companies dated 1 November 2019. The first order sought by the liquidators was an order that they, as the first respondents to the appeal, "are justified in defending the appeal on behalf of all beneficial owners other than the Post 21 April 2017 Westpac Investors"; they also sought "a direction, order or advice" that they "are justified in paying their legal costs and disbursements" in accordance with the terms of order (4), the details of which may be put to one side.
By way of alternative, the liquidators proposed that the fourth respondent, J P Melocco Pty Ltd, be appointed to represent itself and all other beneficial owners, other than those represented by the appellants: order (2). Order (3), presumably intended to be supplementary to order (2) only, sought a direction, order or advice that the liquidators "are justified in paying the legal costs and disbursements of the fourth respondent".
There is in evidence a copy of an email from the principal of J P Melocco to its solicitors, Ashurst, stating that it is willing to defend the appeal as a representative party if it is indemnified as to the costs.
The appeal involves a dispute as to the distribution of funds between two competing classes of investors. In broad terms, if the appellants succeed they will recover a larger proportion of their investments than will the other beneficiaries. If they fail, all beneficiaries will share proportionately without reference to the date of 21 April 2017, which was the date on which ASIC obtained a freezing order with respect to the companies' assets. The obvious course in such a case is for each group of beneficiaries to be represented by one party and for the liquidators to maintain a neutral position, which would not involve the incurring of significant costs. That is the alternative position proposed by the liquidators, the first being that they be appointed, in effect, to represent all the beneficiaries other than those represented by the appellants.
In my view, the second (alternative) approach is preferable, namely to appoint J P Melocco as the representative with an indemnity as to costs and to allow the liquidators to maintain a neutral position.
[3]
Appellants' application for leave
Turning to the appellants' motion, they seek two orders, namely (i) leave to commence an appeal against the companies in liquidation pursuant to s 471B of the Corporations Act 2001 (Cth) and (ii) an order that they be appointed pursuant to r 7.6 of the Uniform Civil Procedure Rules 2005 (NSW) to represent themselves and the other Post 21 April 2017 Westpac Investors.
The application for leave to begin proceedings against the companies is not opposed by the liquidator, it is well understood that the Court may grant such leave nunc pro tunc, as noted by Gleeson JA in Zervas v Burkitt [2019] NSWCA 112 at [20]. It is, however, necessary that the Court be satisfied that it is appropriate to grant leave: there is the need to be satisfied that there is a serious question to be tried and that it is otherwise, in effect, a contained and efficient way of disposing of the proceedings.
In this case, I am satisfied that there is a serious question to be tried. It is a contained and limited question turning on the relevance of the date of the ASIC freezing order and the resulting separable nature of the funds deposited on or after that date. It is a question which is entitled to have the consideration of the Court of Appeal in circumstances where the primary judge expressed his own caution in approaching it and expressed the view that it might well have substance: Courtenay House at [45]. In those circumstances, the first order sought by the appellants should be made.
[4]
Appellants' representation order
The second order (appointment to represent the group) is only necessary to the extent that orders made in the court below do not operate with respect to the appeal. To the extent that these are new proceedings with different issues that course is appropriate. I assume that the order below was made as a matter of expediency pursuant to r 7.6(2)(c). No reasons have been suggested why a similar order should not be made for the purposes of the proceedings in this Court and in the circumstances noted with respect to the leave application that order is appropriate.
[5]
Costs
Order (3) in the appellants' notice of motion sought a direction that the legal costs and disbursements of the appellants, the liquidators and the other respondents representing classes of beneficiaries be paid or recouped on an indemnity basis out of funds held in the Westpac accounts or otherwise out of assets of the companies in liquidation. Order (4) was said to be an alternative to order (3) and set out the mechanism for payment by the liquidators of the appellants' costs, apparently in any event. With one qualification, the costs orders proposed by the liquidators are to be preferred. Each active party, and the liquidator in its role as a submitting party, should have security for payment of its and their costs of the appeal from the funds available in the Westpac accounts.
So far as the cost orders sought by the appellants are concerned, it is not necessary for the Court to order that their costs be payable from a common fund when their appeal is designed to improve their position at the expense of other beneficiaries. At least on the face of it, and in accordance with the criteria referred to by Campbell JA in BE Australia WD Pty Limited (subject to a deed of company arrangement) v Sutton, [2] these are in substance adversarial proceedings between two groups of investors seeking distribution of a fund. At this stage it is at least possible that costs would follow the event; however, as representative parties, both the appellants and fourth respondent should have the protection as to their entitlement to recover their costs.
The basis of the appellants' claim is that their funds can readily be identified from the rest of the funds held by the litigators. Black J did not reject that premise. Accordingly, if it were thought appropriate in the ordinary course for an adverse costs order to be made against the appellants, that could take effect as a requirement to pay out of the identifiable funds which they and those they represent seek to recover in full. A similar order could be made if J P Melocco is unsuccessful, by reference to the other funds. No direction is necessary or appropriate at this stage to give effect to that contingency. It is sufficient that there be a direction which would remove the risk that the successful group would not recover their costs from the funds under the control of the liquidators.
In these circumstances the appropriate course is to authorise the liquidators to pay the relevant costs from the funds under their control, accounting separately for the costs as between the funds in accordance with any order made by the court hearing the appeal. The orders will reserve to that court the power to vary the allocation of costs as between parts of the common fund, which will be, in effect, an accounting exercise and able to be undertaken after the event.
The appellants' costs of the motions today should be their costs in the appeal.
In accordance with those proposals I make the following orders:
1. An order under s 471B of the Corporations Act 2001 (Cth) that the appellants have leave to begin and proceed with the appeal against the second respondent and the third respondent.
2. Pursuant to r 7.6 of the Uniform Civil Procedure Rules 2005 (NSW) (the UCPR) and further or alternatively, the Court's equitable jurisdiction, an order that the appellants be appointed to represent themselves and the Post 21 April 2017 Westpac Investors (as defined in Annexure A to the judgment) in this appeal.
3. Pursuant to r 7.6 of the UCPR and further or alternatively, the Court's equitable jurisdiction, order that the fourth respondent, J P Melocco Pty Ltd, be appointed to represent itself and all beneficial owners other than the Post 21 April 2017 Westpac Investors in this appeal.
4. Pursuant to s 90-15 of the IPS and s 63 of the Trustee Act 1925 (NSW), give a direction and order or advice that -
1. the first respondents are justified in paying the legal costs and disbursements of the appellants and the fourth respondent incurred in relation to and incidental to this appeal; and
2. the first respondents' own costs of both motions and of a submitting appearance in the appeal -
in accordance with the process set out in order (5) below.
1. Pursuant to s 90-15 of the IPS and s 63 of the Trustee Act, a direction and order or advice that:
1. the first respondents are justified in paying those legal costs and disbursements incurred pursuant to order (4), calculated at the usual rates of the solicitors and counsel engaged by them, in an amount as approved in accordance with orders (5)(b) and (c) below;
2. the first respondents are justified in paying the amounts referred to in order (5)(a) above upon the passage of resolutions by the Committees of Inspection approving such payments;
3. if the first respondents do not receive approval from the Committees of Inspection to pay the amounts referred to in order (5)(a) above, then any application for approval of legal costs and disbursements on an indemnity trustee basis, is to be referred to a Registrar of the Court of Appeal for examination and approval, and the Registrar's decision in that respect is to be subject to review in the same manner as a registrar's decision approving the remuneration of a liquidator;
4. pursuant to r 1.8 of the Corporations Rules, the provisions of rr 9.4(3) to (7) of the Corporations Rules apply mutatis mutandis to an application for approval of legal costs and disbursements pursuant to order (5)(c) above, save that:
1. to the extent those Corporations Rules require the service of documents by the applicant, service of those documents may be effected by publishing those documents, together with a copy of these orders, on the Website; and
2. any document served in accordance with order (5)(d)(i) above is deemed to have been served on the date it is published on the Website.
1. until further order, and on an interim basis, any amounts approved in accordance with orders (5)(b) or (c) above are to be paid from the Westpac Accounts.
2. the first respondents are justified in paying from the Westpac Accounts the amounts approved pursuant to orders (5)(b) and (c) above.
3. the question of the fund or funds to which the above costs are allocated is reserved for the determination of the court hearing the appeal.
1. Direct that the appeal be relisted before the Registrar for the fixing of a timetable for further interlocutory steps, such relisting to be at a time convenient to the appellants and the fourth respondent.
2. Otherwise dismiss the motions brought by the appellants and liquidators.
3. The appellants' costs of the motions to be costs in the appeal.
4. Terms used above have the meanings identified in Annexure A to the liquidators' notice of motion filed 1 November 2019, which is incorporated in these orders.
ANNEXURE A
Definitions
Mistaken Investors means the investors referred to in categories G and H of the Liquidators' Second Report.
Post 21 April 2017 Westpac Investors means the investors referred to in Categories E and F of the Liquidators' Second Report.
Website means the website maintained by Grant Thornton Australia Limited.
Westpac Accounts means, together, the following bank accounts:
Bank Account Number Name of Account
Westpac 490253 Courtenay House Capital Trading Group Pty Limited (in liquidation) ATF Courtenay House Capital Trading and Investment Group Trust
Westpac 265692 Courtenay House Pty Limited (in liquidation) ATF lervasi Capital Trust
Westpac 819577 Courtenay House Capital Trading Group Pty Limited (in liquidation) ATF Courtenay House Capital Trading and Investment Group Trust
[6]
Westpac Investors means the investors who deposited funds into the Westpac Accounts (or any of them) to participate in investment opportunities other than the investment identified by the Companies as the "Brexit Investment" excluding:
(i) David Sipina and related entities (referred to in Category J of the Liquidators' Second Report dated 1 November 2018);
(ii) Athan Papoulias and related entities (referred to in Category J of the Liquidators' Second Report dated 1 November 2018); and
(iii) Vanessa and Bozo Relja (referred to in Category I of the Liquidators' Second Report dated 1 November 2018).
[Signed] [Signed]
[7]
Endnotes
In the matter Courtenay House Capital Trading Group Pty Ltd (In liq) and Courtenay House Pty Ltd (In liq) [2019] NSWSC 1113 ("Courtenay House") at [61].
(2011) 82 NSWLR 336; [2011] NSWCA 414 at [213]-[214].
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 11 December 2019
Parties
Applicant/Plaintiff:
Caron
Respondent/Defendant:
Said Jahani and John McInerney as joint and several liquidators of Courtenay House Capital Trading Group Pty Ltd
Legislation Cited (4)
Insolvency Practice Schedule (Corporations) Uniform Civil Procedure Rules 2005(NSW)
PROCEDURE - appeal - civil - application for leave to commence proceedings against companies in liquidation - application for appointment of representative parties - directions as to payments of costs out of common fund
Legislation Cited: Corporations Act 2001 (Cth), s 471B, Sch 2 - Insolvency Practice Schedule (Corporations)
Uniform Civil Procedure Rules 2005 (NSW), r 7.6
Cases Cited: BE Australia WD Pty Limited (subject to a deed of company arrangement) v Sutton (2011) 82 NSWLR 336; [2011] NSWCA 414
Zervas v Burkitt [2019] NSWCA 112
Category: Procedural and other rulings
Parties: Peter Caron (First Appellant)
Anke Seidlitz (Second Appellant)
Solicitors:
Jones Day (Appellants)
Colin Biggers & Paisley (First to Third Respondents)
Ashurst Australia (Fourth Respondent)
File Number(s): 2019/00301319
Decision under appeal Court or tribunal: Supreme Court
Jurisdiction: Equity
Citation: [2019] NSWSC 1113
Date of Decision: 28 August 2019
Before: Black J
File Number(s): 2017/269831