8.3 The Shareholders
340 As set out at [13] above, on 13 August 2020 and 21 September 2020 the Shareholders were joined to the proceeding as the eighth and ninth defendants respectively. They sought to propound arguments in their own interests. At the time of their joinder and until 13 November 2020 Baker and McKenzie acted for the Shareholders. After that date no appearance was filed for the Shareholders and, despite them remaining as parties to the proceeding, there was no appearance by them or on their behalf at the hearing.
341 Notwithstanding that and because of the nature of the application made by the Liquidators, namely an application for directions and judicial advice, the Liquidators requested that the Court consider the claims made by the Shareholders so as to ensure a degree of finality to the issues raised. Relevantly, the Liquidators contend that the Shareholders' claim is hopeless and, on that basis, seek an order for payment of their costs incurred by reason of their joinder on an indemnity basis and calculated as a lump sum. I accept that it is desirable in the context of this matter for the Liquidators to achieve a level of finality in relation to the issue of distribution of the assets held in trust for clients of Halifax AU. In those circumstances, recognising that the Shareholders were given an opportunity to appear at the hearing to propound the arguments they raise (set out below), it is appropriate for me to consider those arguments.
342 The arguments propounded by the Shareholders are set out in a letter dated 3 July 2020 from Baker and McKenzie, their lawyers at the time, to the Liquidators (3 July Letter). In that letter the Shareholders notified the Liquidators that they intended to make submissions about the following matters in this proceeding in which, as described by those lawyers, directions were sought to distribute assets of Halifax AU which were acquired in connection with the trading of financial products by its clients (referred to as Assets):
(a) the Assets are beneficially owned by Halifax and were not acquired by clients of Halifax nor held on trust for clients of Halifax (for the reasons described below);
(b) the terms of each contract between Halifax and a client constituted pursuant to trading by Halifax clients on each of the trading platforms offered by Halifax are formed pursuant to the relevant Product Disclosure Statement (PDS) and Client Services Agreement (Halifax CSA) that were on issue at the time of the trade (as at the time of being placed into Voluntary Administration, we understand this to be the PDS dated 4 April 2018 and Halifax CSA dated 3 September 2018);
(c) notwithstanding that the layout of each of the trading platforms accessible by clients of Halifax may suggest otherwise, the effect of (b) above is that each client of Halifax, when buying or selling a product on a Halifax trading platform, was entering into a contract for difference (CFD) with Halifax;
(d) the Assets were acquired by Halifax to hedge their exposure under certain CFD transactions;
(e) Halifax undertook a small volume of "Agency Transactions" (as that term is described in the Halifax CSA) from time to time however, so fat as we are aware, no such transactions remain open; and
(f) all proofs of debt in relation to open positions of Halifax clients should be determined as at the time of appointment of the Voluntary Administrations given the nature of the contractual obligations between Halifax and the clients and noting that under the terms of the Halifax CSA Halifax had the power to close out transactions on the insolvency of Halifax.
(Footnotes omitted.)
343 The 3 July Letter went on to set out in detail the basis for each of contentions (a) to (e), which the Liquidators have summarised. That summary, which I adopt, is set out in part below.
344 First, in relation to the contentions at (b) to (e), the Shareholders say that Halifax AU clients never acquired any interest in shares and what may have looked like a share acquisition was really an acquisition of an unleveraged stock CFD. This was in part because "the Halifax directors at the time considered" this to be so. Clients paid the full and final purchase price of the CFD upfront at the commencement of the transactions (at a price approximately equal to the price of the underlying stock). The Shareholders say that Halifax AU "fully hedged" these "unleveraged CFD transactions" by acquiring the underlying shares and, having regard to the allegation that the "full and final purchase price" was paid up front, this was money paid to acquire a financial product and thus, having regard to s 981A(2)(c) of the Corporations Act, it was money to which Subdiv A did not apply with the consequence that the money was not required to be paid into an account designated as a s 981B account and, in turn, was not taken to be held on trust for clients of Halifax AU pursuant to s 981H of the Corporations Act.
345 In relation to the contention at (f) of the 3 July Letter, the Shareholders contend that the appointment of the administrators to Halifax AU on 23 November 2018 constituted a "Default Event" under the relevant CSAs which permitted Halifax AU to immediately terminate each CSA and close out all client transactions. The Shareholders say that it would be "most normal 'default' position for the Liquidators to treat debts owing (sic) to creditors, in relation to the investor/client obligations, as being crystallised" on the date of the appointment of the administrators to Halifax AU and to make an estimation of the value of the investor/client obligations as at that date. On that basis the Shareholders argue, in effect, that any increase in the value of assets held on behalf of clients after 23 November 2018 did not accrue to the benefit of the clients but to the benefit of Halifax AU.
346 By letter dated 20 July 2020 the Liquidators' solicitors, K&L Gates, responded to the 3 July Letter, setting out why the Liquidators disagreed with the arguments propounded by the Shareholders. They informed Baker & McKenzie that there was no merit in the position contended for by the Shareholders.
347 Thereafter, the Liquidators provided detailed written submissions setting out why, in their opinion, the contentions put by the Shareholders could not be sustained.
348 I have considered the Liquidators' detailed submissions responding to the Shareholders' contentions in the 3 July Letter. Those submissions, which I have summarised below, should be accepted. They explain why the Shareholders' contentions should be rejected in their entirety.
349 First, the contentions at (b)-(e) of the 3 July Letter are based on instructions which do not reflect the facts. As has been established by the evidence before me clients who invested through Halifax AU frequently acquired a beneficial interest in shares, both on the IB AU platform and the MT5 platform. The legal interest was held by IB, or a sub-custodian of IB, on behalf of Halifax AU as trustee for the client who acquired the beneficial interest in the shares.
350 More particularly, the contentions at (b)-(e) of the 3 July Letter can be rejected for at least the following reasons.
351 First, the Shareholders rely on the CSA dated 3 September 2018 (see [74] above). Relevantly, the CSA includes a definition of the term "Agency Transactions" (see [74(1)] above) and includes cl 3(a) which concerns "Agency Transactions" and provides that "[a]ny Agency Transaction entered into by the Client will be arranged by Halifax as agent for the Client, through a third party Broker" (see [74(2)(a)] above).
352 That is, cl 3 of the CSA described the transactions facilitated by Halifax AU through IB on behalf of clients (with Halifax AU acting as agent) pursuant to which shares were acquired beneficially by clients on the IB AU platform. These share acquisitions, both on behalf of clients trading on the IB AU platform and on behalf of clients trading on the MT5 platform (which was automatically linked to the IB AU platform) occurred in large volumes. Contrary to the Shareholders' assertion, Halifax did not undertake only a small volume of "Agency Transactions" nor is it the case that no such transactions remain open.
353 Secondly, the proposition that Halifax AU did not facilitate the investment by clients in shares, as distinct from CFDs, is inconsistent with the logo which appeared on many documents issued by Halifax AU and all activity statements issued by IB in respect of share acquisitions on the IB AU platform which referred to "global stocks, options, futures and forex" (emphasis added). There are also many examples in the evidence before me of Halifax holding itself out as facilitating investments in "stocks". That Halifax AU held itself out in this way is inconsistent with the proposition that its clients never in fact or in law acquired any interest in shares.
354 Thirdly, as explained by Mr Lum, from late 2015 all new non-corporate clients of Halifax AU trading on the IB AU platform were required to have a cash account, as opposed to a margin account or a portfolio margin account. After this time, Halifax AU clients who were individuals residing in Australia and who wished to trade in stock CFDs had to do so on the MT4 and MT5 platforms.
355 Fourthly, share acquisitions made on the IB AU platform were recorded in activity statements which could be generated either by the client or by Halifax AU through each IB client subaccount. Those activity statements recorded "stocks" acquired on behalf of each client including the volume acquired. Clients who already had a margin account or a portfolio margin account prior to late 2015 were able to retain those accounts and new corporate clients were also able to operate such accounts. The evidence before me demonstrated that the activity statements for those clients also recorded significant acquisitions in shares. Activity statements were issued in the names of the clients of Halifax AU, not in the name of Halifax AU. Notably, the "Notes/Legal Notes" appearing at the end of each activity statement are clearly principally concerned with share trading.
356 Fifthly, shares could not only be acquired on the IB AU platform, they could also be sold on that platform. Mr Lum explains that clients could execute these trade themselves through the IB AU platform, although sometimes they sought assistance from Halifax AU.
357 Sixthly, shares that had been acquired by clients on the IB AU platform could be and were transferred by IB (or its sub-custodian) to an external broker or from an external broker to IB (or its sub-custodian). Where such a transfer was to occur a form titled "Securities transfer request" was completed. That provided that it "is required to transfer stocks into and out of the Trader Workstation platform to/from the issuer. One document needs to be completed per SRN". The client had to provide their account details with Halifax AU, their personal details at the "receiving/delivery registry" and details of the asset to be transferred setting out "stock name", "symbol code/ISIN", "SRN" and "quantity".
358 Seventhly, activity statements generated for Australian resident individual clients made no reference to CFDs in shares. In contrast, activity statements generated for clients trading on the IB NZ platform recorded "stocks" and "CFDs" in shares. This difference is to be understood in light of the change that occurred in 2015, limiting trading on the IB AU platform for individual Australian residents to shares, and highlights the weakness in the Shareholders' argument that the acquisition of shares by clients of Halifax AU is to be regarded as an acquisition of a share CFD.
359 Eighthly, it is clear from Halifax AU's records that, as at 31 July 2020, its clients who had traded on the IB AU platform held large open positions in stocks but held no positions at all in CFDs. As explained by Mr Lum, the same conclusions about trading in shares are available in relation to trading on the MT5 platform. As set out at [34(3)] above, from August 2016 Halifax AU facilitated trading by its clients (and those of Halifax NZ) on the MT5 platform. That platform permitted clients to acquire or dispose of their interest in shares by a contemporaneous link to the IB AU platform through which the acquisition or sale was effected. The MT5 platform was established following the termination of Halifax AU's rights to operate the Saxo platform. Upon its establishment, the majority of clients that had been trading on the Saxo platform were migrated to the MT5 platform and, as a result, open positions in shares acquired on the Saxo platform were recorded in new client "investor accounts" referable to the MT5 platform, with the shares themselves being transferred to IB or its sub-custodian. Clients of Halifax AU could also trade in CFDs in shares on the MT5 platform. Mr Lum explains that Halifax AU hedged the trades of all clients in stock CFDs on the MT5 platform by acquiring the shares but that hedging was distinct from the share acquisitions effected by clients. Mr Lum explains in some detail in his evidence how trades in shares and in stock CFDs were recorded on the MT5 platform. It is apparent, from spreadsheets that Mr Lum has compiled, that there were a very large number of share acquisitions effected by clients transacting on the MT5 platform up to the date of the appointment of the administrators to Halifax AU and, in a significant number of cases, those shares continued to be held as at September 2020, the date to which Mr Lum undertook his analysis.
360 Ninthly, putting to one side the fact that the acquisition and sale of shares on either the IB AU platform or the MT5 platform fell comfortably within the scope of "Agency Transactions", as defined in the CSA, the conduct of Halifax AU of its business and its own business records confirm that, as between Halifax AU and its clients when clients proceeded with a transaction on the IB AU platform styled "Stocks", Halifax AU was facilitating an acquisition of shares. It was clear that after late 2015 there was no ability for clients of Halifax AU to acquire share CFDs on the IB AU platform where those clients were non-corporate Australian residents. Indeed, the CFD option was "greyed out" for those clients when they accessed the platform. On the MT5 platform Halifax AU informed its clients that they could undertake transactions in relation to shares or CFDs in shares and, depending on the symbols selected by a client in undertaking the trade, Halifax AU was conveying that it was either facilitating an acquisition of shares or an acquisition of a CFD in shares.
361 Lastly, there are a number of examples in the evidence before me of exchanges which included Mr Worboys and/or Mr Barnett in which it was quite clear that clients of Halifax AU entered into share transactions, including descriptions of the business undertaken by Halifax AU which referred to trading in stocks. It is not necessary to set out that evidence in detail.
362 Having regard to the matters set out above, it is evident that clients of Halifax acquired shares both through the IB AU and MT5 platforms, the shares acquired by clients of Halifax AU were distinct from CFDs in shares and, in acquiring shares, clients were not contracting with Halifax AU as principle. Accordingly, any monies paid by clients for the purchase of shares was not money paid to "acquire a financial product" from the licensee, Halifax AU. The shares were acquired from their respective vendors. For the reasons already explained at [139]-[142] the exclusion in s 981A(2)(c) of the Corporations Act does not apply. Rather:
(1) monies paid to Halifax AU for share acquisitions was money paid to a financial services licensee in connection with a "financial service" to be provided to the client: see s 981A(1)(a)(I) of the Corporations Act;
(2) the relevant "financial service" within the meaning of s 766A(1)(b) was "dealing" in a financial product which, in turn, is defined to include issuing a financial product: see s 766C and s 761E of the Corporations Act;
(3) it follows that the money paid by clients to Halifax AU was in connection with a "financial service" to be provided to the client in that it was paid in connection with the acquisition by those clients of a financial product, namely shares. It is sufficient for the purposes of s 981A(1)(b)(I) that the money is paid "by the client";
(4) accordingly, for the reasons set out at [135]-[145] above, those monies were required to be held in an account complying with s 981B of the Corporations Act and to be held on trust for those clients in accordance with s 981H; and
(5) those clients are, in respect the money they paid to acquire shares and the shares so acquired, beneficiaries. They are not, as the Shareholders contend, unsecured creditors.
363 Given the conclusion I have reached in relation to the contentions in paras (b)-(e) the issue in para (f) does not arise. In any event, even if that was not the case, the contention is not made out.
364 The Shareholders rely on cl 20 of the CSA which is titled "Default" and which sets out the circumstances in which a "Default Event" will occur and the steps Halifax AU can take after a "Default Event" occurs (see [74(5)] and [74(6)] above).
365 Contrary to the Shareholders' contention, the appointment of the administrators to Halifax AU did not mean that it was or may become unlawful for Halifax AU to maintain or give effect to any or all of its obligations under the CSA or otherwise to carry on its business. That is particularly so given that an intended purpose of the process of voluntary administration is to permit a company in administration to continue to operate. Further, cl 20(b)(ii) and/or (iii) of the CSA permitted Halifax AU "in its absolute discretion" to close out any or all "Clients Transactions". Here, first the administrators and then the Liquidators, as the directing minds of Halifax AU, determined in their absolute discretion that they should not take that course. Relevantly, in Kelly (No 8) orders were made pursuant to s 90-15 of the IPS to the effect that the Liquidators were justified in refraining from realising any and all extant investments until the determination of the substantive issues in this proceeding.