Australian Securities and Investments Commission v Arafura Equities Pty Ltd
[2005] QSC 376
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- Notable Unreported Decision
- Australian Securities and Investments Commission v Arafura Equities Pty Ltd[2005] QSC 376
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Australian Securities and Investments Commission v Arafura Equities Pty Ltd[2005] QSC 376
Australian Securities and Investments Commission v Arafura Equities Pty Ltd[2005] QSC 376
SUPREME COURT OF QUEENSLAND
CITATION: | Australian Securities and Investments Commission v Arafura Equities Pty Ltd & Ors [2005] QSC 376 |
PARTIES: | AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION |
FILE NO: | BS 9208 of 2005 |
DIVISION: | Trial Division |
PROCEEDING: | Application |
ORIGINATING COURT: | Supreme Court at Brisbane |
DELIVERED ON: | 16 December 2005 |
DELIVERED AT: | Brisbane |
HEARING DATE: | 16, 21 November 2005 |
JUDGE: | Atkinson J |
ORDER: | Application granted |
CATCHWORDS: | CORPORATIONS LAW – MANAGED INVESTMENT SCHEME – whether there is a serious question to be tried as to whether the respondents were carrying on a scheme – characteristics of a scheme – where investors moneys are pooled and used to trade in foreign currency – where the scheme is carried on without a license INJUNCTIONS – INTERIM INJUNCTION – whether ordinary equitable jurisdiction principles apply – held that the usual equitable principles apply with some statutory variations INJUNCTIONS – INTERIM INJUNCTION – discretion – receivers and managers – circumstances in which a receiver and manager will be appointed by the court in aid of an interim injunction Corporations Act 2001 (Cth), s 9, s 420, s 438D, s 601ED, s 601EE, s 601FA, s 761A, s 766A, s 766C, s 911A, s 1311, s 1323, s 1324 Adsteam Building Industries Pty Ltd v Queensland Cement and Lime Co Ltd [1984] 2 Qd R 1, followed Australian Securities and Investments Commission v Chase Capital Management Pty Ltd [2001] WASC 27, cited Australian Securities and Investments Commission v Cooke (1996) 22 ACSR 580, followed Australian Securities and Investments Commission v Drury Management Pty Ltd [2004] QSC 68, cited Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ASCR 403, cited Australian Securities and Investments Commission v Hutchings (2001) 38 ASCR 387, cited Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339, cited Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605, not followed Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd & Anor [2002] NSWSC 310, cited ASIC v Triton Underwriting Insurance Agency (2004) 22 ACLC 86, not followed ASIC v Young [2003] QSC 029, considered Australian Securities Commission v AS Nominees Ltd (1995) 18 ASCR 363, applied Australian Softwood Forests Pty Ltd v Attorney-General for the State of New South Wales (1981) 148 CLR 121, applied Beach Petroleum NL v Johnson (1992) ACSR 404, applied Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148, followed Cardile v LED Builders Pty Ltd (1999) 198 CLR 380, cited Corporate Affairs Commission v United Technologies Pty Ltd (1988) 6 ACLC 637, cited Jackson v Stirling Industries Ltd (1987) 162 CLR 612, cited Liquorland (Aust) Pty Ltd v Anghie (2001) 20 ACLC 58, followed National Companies and Securities Commission v Monsoon Nominees Pty Ltd (1990) 3 ASCR 361, followed Re Lawloan Mortgages Pty Ltd [2003] 2 Qd R 200, cited Re Scottish Properties Pty Ltd (1977) 2 ACLR 264, cited Westgold Resources NL v Precious Metals Australia Ltd (2002) 41 ACSR 672, followed |
COUNSEL: | D J Campbell SC with M Luchich for the applicant S Roberts (sol) for the first respondent D Tucker (sol) for the second respondent C D Coulsen for the third and fourth respondents M Drysdale for the fifth to eighth respondents |
SOLICITORS: | Australian Securities and Investments Commission for the applicant Holman Webb Lawyers for the first respondent Tucker and Cowen Solicitors for the second respondent Quinn & Scattini Lawyers for the third and fourth respondents Dibbs Abbott Stillman for the fifth to eighth respondents |
- The Australian Securities and Investments Commission (ASIC) filed an originating application against eight respondents. The first respondent was Arafura Equities Pty Ltd ACN 083 542 929 (Administrators Appointed) (“Arafura Equities”); the second respondent, Brett Tony Best, the sole director of the first respondent; the third respondent, Richard Stanley Harris; the fourth respondent, Future Secure Financial ABN 80 081 112 245; the fifth respondent, Patricia Rayleen Jenkins; the sixth respondent, Mrs Jenkins as trustee for the Solomon Trust; the seventh respondent, Mrs Jenkins as trustee for the Papaya Trust; and the eighth respondent was Jenkins Increase Pty Ltd ACN 106 627 749 as trustee for the Jenkins Family Trust. By consent, the name of the fourth respondent has been changed to Ricstan Enterprises Pty Ltd which is the company that operates under the business name, Future Secure Financial.
- The application was made under ss 461(k), 601EE, 1101B(1), 1101B(5), 1323(1)(a), 1323(1)(f), 1323(1)(h)(i), 1323(1)(h)(ii), 1323(3), 1324(1) and 1324(4) of the Corporations Act 2001 (Cth) (“the Act”) seeking injunctions, appointments of receiver and receiver and manager, winding up of an unregistered managed investment scheme and winding up of companies.
- The applicant alleged that the respondents operated an unregistered managed investment scheme. The requirements for registration of a managed investment scheme are set out in s 601ED of the Act. Section 601ED(1)(a) provides that a managed investment scheme must be registered if it has more than 20 members. Under subs 601ED(5) a person must not operate a managed investment scheme in Australia that this section requires to be registered unless the scheme is so registered. The word “operate” has its ordinary meaning and is not limited to ownership or proprietorship.[1] If the scheme is not registered, then ASIC may apply pursuant to s 601EE to have it wound up. Any person who operates such a scheme is guilty of an offence pursuant to s 1311 of the Act and is liable under Schedule 3 to a maximum penalty of 200 penalty units or imprisonment for five years, or both.
- “Scheme” is a word of very wide connotation. As the High Court held in Australian Softwood Forests Pty Ltd v Attorney-General for the State of New South Wales,[2] all that the word ‘scheme’ requires is that there should be ‘some programme, or plan of action’.[3]
- A “managed investment scheme” is defined in s 9 of the Act. For a scheme to be a managed investment scheme it must have the following features:
“(i)people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not);
- any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders);
- the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions);”
- In the originating application the scheme was defined to mean “the Arafura Equities Pty Ltd scheme” being a managed investment scheme operated by Arafura Equities and Brett Best and promoted to the public by Arafura Equities and Mr Best and their agents or representatives, namely the third to eighth respondents. The scheme was defined to be one whereby:
(1) investors contributed money to one or more of the respondents on the basis that they became investors pursuant to a loan agreement and were entitled to a return pursuant to such agreement; and
(2) the loan agreement entered into by investors was a written agreement entitled Deed of Agreement or Non-Recourse Agreement or was an oral representation of the terms as they stood in both documents; and
(3) the investors’ monies were held collectively with other investors’ monies by the first and second respondents, that is Arafura Equities and Mr Best, in order for the first and second respondents to trade in foreign currency on behalf of the investors; and
(4) the money received by Arafura Equities and Mr Best was pooled into a single receiving bank account; and
(5) there were more than 20 investors in the scheme in any 12 month period and the total sum of monies invested amounted to more than $2,000,000; and
(6) the respondents managed the day to day running of the scheme and the investors did not have day to day control over the monies; and
(7) monies purported to be profits of the foreign currency trading by Arafura Equities and Mr Best would be distributed to investors either by the first and second respondents or their agents or representatives namely the third to eighth respondents pursuant to their agreements entered into with the respondents; and
(8) the scheme was not registered with the applicant.
- The scheme in this case appears to have the features referred to in the statutory definition of a managed investment scheme. The scheme is not registered. There is evidence that the scheme was operated by each of the respondents.
- In the originating application ASIC sought by way of final relief the winding up of the scheme, the appointment of Lachlan McIntosh and Ginette Muller, Chartered Accountants of KordaMentha, as liquidators, injunctions restraining the respondents from conducting the scheme or promoting the scheme and various ancillary orders. By way of interlocutory relief, ASIC sought orders for appointment of receivers, injunctions restraining the respondents from dealing with their property and further promoting the scheme as well as ancillary orders. On 7 November interim orders were made by Justice Wilson and then when the matter came before me on 16 and 21 November 2005, I made further interim orders pending the question of whether or not receivers should be appointed and interim injunctions issued or continued.
- Specifically by way of interim relief, ASIC sought an order that, pursuant to s 1323(1)(h) and s 1323(3) of the Act, until the trial of these proceedings or earlier order, Lachlan McIntosh and Ginette Muller be appointed: (a) receivers of the property of each of the second to seventh respondents; and (b) receiver and manager of the property of each of the first and eighth respondents, for the purpose of: (1) identifying, collecting and securing the property in the possession, custody or control of each of the respondents; (2) protecting the property of each of the respondents in the interests of persons to whom the respondents are 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 securities, futures contracts or other property; (3) ascertaining the amount of the funds received by each of the first to eighth respondents in consequence of promoting, offering and/or operating the scheme; (4) identifying any dealings with, payments of, or distributions by or uses made of those funds by each of the first to eighth respondents; and (5) recovering such funds.
- In order to secure the objectives for which the receivers were to be appointed, ASIC sought that the receivers have all powers necessary to identify, collect and secure the property of each of the respondents and all the powers set out in s 420(1) and s 420(2) of the Act and, in the case of the second to seventh respondents, s 420(2) would apply mutatis mutandis as if those respondents were companies; and the power to apply to the court for directions and further orders.
- The application sought an order that within 28 days or such further period as may be ordered, the receivers should prepare and file a report to the Court as to the nature of the assets and property identified; the progress made in collecting and securing the property; potential claims available to third parties in relation to the property; the assets and liabilities of each of the respondents; the solvency of the scheme and each of the first to eighth respondents; whether the officers of each of the first to fifth respondents had kept proper records; whether there were grounds to suspect any of the first to eighth respondents or their officers, agents or employees had contravened the Act; the amount of funds and monies received by each of the first to eighth respondents in consequence of offering the scheme; any distributions or uses made of those funds by each of the first to eighth respondents; and the amount of such funds that were recovered. Further injunctions were sought pursuant to s 1324(1) and s 1324(4) of the Act, restraining the respondents from dealing with their property except to be paid ordinary living and operating expenses and legal expenses.
- During the second day of hearing of this application, ASIC and the fifth, sixth, seventh and eight respondents reached agreement both as to interlocutory and final relief and orders were made by consent, inter alia, appointing receivers of the property of the fifth to seventh respondents, issuing injunctions against the fifth to eighth respondents and putting the eighth respondent into liquidation.
- The interim relief sought against the remaining respondents concerned the appointments of receivers of the property of each of the other respondents and receivers and managers of the property of the first respondent pursuant to s 1323(1)(h) and s 1323(3) of the Act until the trial of the matter. In addition, injunctions were sought pursuant to s 1324, restraining the first to fourth respondents from promoting the scheme and disposing of assets or dealing with their property save for the purpose of living expenses and legal expenses and other expenses agreed to by the receivers. Interim orders were also sought prohibiting the second respondent leaving this jurisdiction or Australia without the consent of the Court. Slight changes to the definition of the scheme and changes to the interim orders sought were made to reflect different circumstances that arose during the hearing of the application including that consent orders had been made against the fourth to eighth respondents.
Section 1323
- The first matter of which the court must be satisfied under s 1323 is that an investigation is being carried out under the ASIC 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. Of that, there is ample evidence.
- An investigation is being carried out by ASIC. The nature and extent of the investigation is deposed to by Regina Walsh who is an investigator with ASIC. A number of people have been examined pursuant to s 19 of the Australian Securities and Investments Commission Act (the ASIC Act). They include Brook Monahan, Brett Best, Patricia Jenkins and Richard Harris. Ms Walsh deposed that as a result of those investigations she was able to summarise what appear to be the facts. They are that Arafura Equities received funds from the public, which were then pooled in a Bank of Queensland account maintained by Arafura Equities. These funds were then traded in foreign currency by the sole director of Arafura Equities, Mr Best.[4] The interest rate of return offered to investors was five per cent per month.[5] While Mr Best held an authority from Barclay Wells Ltd, a licensed dealer based in Perth, Arafura Equities was not on the recommended product list of Barclay Wells Ltd.[6] He did therefore hold the appropriate Australian Financial Services licence. Investors of Arafura Equities were initially sought through word of mouth and were friends and associates of Mr Best, however Mr Harris, the third respondents and Mrs Jenkins, the fifth respondent, also referred people to Arafura Equities.[7]
- Mrs Jenkins formed a number of unit trusts to invest in Arafura Equities, namely the Solomon Trust, the Papaya Trust and the Jenkins Family Trust.[8] Mrs Jenkins is trustee of the Solomon Trust and the Papaya Trust. She is also sole director of Jenkins Increase Pty Ltd which is a trustee of the Jenkins Family Trust. From the evidence of Mrs Jenkins in the course of her s 19 examination, it appeared that she raised approximately $6,500,000 through the trusts.[9] The members of the trusts entered into individual agreements with one or other of the trusts and the trusts then entered into a similar agreement with Arafura Equities.[10] Arafura Equities would make six per cent monthly interest payments to Mrs Jenkins as trustee of the two trusts and as sole director of the trustee of the third trust and then Mrs Jenkins, in turn, would make interest payments to members of the respective trust at five percent, retaining one per cent interest for herself.[11] Mrs Jenkins disclosed in her s 19 examination that she used new investors’ capital to make interest payments to existing investors in the trusts.[12] It appeared to the investigators that Mrs Jenkins had received at least $500,000 by virtue of the payments of one percent received by her from Arafura Equities.[13]
- Mr Harris, operating under the registered business name of Future Secure Financial at Burpengary, apparently provided and signed promotional material under Arafura Equities letterhead to potential investors,[14] in some cases with, and in some cases without, the knowledge or consent of Mr Best, the director of Arafura Equities.[15] This material was apparently sent to investors to induce them to invest in Arafura Equities.[16] Mr Harris is unlicensed and holds no authority from any licensed dealer.[17] He appears to have received at least $70,000 by virtue of monies claimed from Arafura Equities for costs associated with managing the investors.[18]
- It is common ground that no application has been made by any of the respondents to ASIC for the registration of a managed investment scheme and no such scheme has been registered in relation to any activities of Arafura Equities. Pursuant to s 601FA of the Act, the responsible entity of a registered scheme must be a public company that holds an Australian Financial Services licence. Prior to 11 March 2002 a dealer’s licence was necessary, authorising it to operate a managed investment scheme. No such licences have ever been held by any of the respondents.
- The number of investors in Arafura Equities appears to be at least 200 persons and equities and trusts. Arafura Equities appears to have raised capital of more than $10,000,000. However as at 3 October 2005, there was only $1,048.39 in the Arafura Equities bank account held with the Bank of Queensland. Investigators were able to find that about $US119,000.00 had been transferred by Mr Best to an account in America. In the period 1 February to 15 September 2005, $507,500 was transferred from the Arafura Equities bank account to a bank account in the name of Aus-Intertrade Pty Ltd as trustee for the 911 Trader Trust account no 20096345. During the same period, $105,000 was transferred from the Aus-Intertrade account to the Arafura Equities account. The balance of the Aus-Intertrade account on 18 October 2005 was $242,045.27. However, $133,900 was withdrawn on 21 October 2005 and by 9 November 2005 the account was in debit by $55.
- Voluntary administrators were appointed to Arafura Equities on 21 October 2005. The administrators are Mr McIntosh and Ms Muller. A report was made by the administrators to ASIC as required under s 438D of the Act where it appears to the administrator that the director of a company may have been guilty of an offence in relation to the company. In their first report dated 9 November 2005, they expressed the opinion that it would be in the creditors’ interest for Arafura Equities to be wound up. The report estimated that unsecured creditors were owed between $17,000,000 and $25,000,000. There was $82,253 cash available of which $1,110.57 had been in a Suncorp Metway account, $6,142.72 had been in a Bank of Queensland account and $75,000 had been provided by Mr Best to enable the company administrators to undertake their investigations. The administrators were advised by Mr Best that $250,000 had been loaned to a registered managed investment scheme in December 2004. The administrators’ investigations reveal payments were made of $638,662.59 on 16 December 2004 to Conveyancing Works’ trust account and $200,000 to Brisbane Real Estate for the purchase of Mr Best’s current residence at Brookfield. Mr Best told the administrators that a portion of those funds had been returned to Arafura Equities. Investigations were continuing into that matter.
- The administrators’ initial investigations into the company’s trading with brokers revealed that the company had apparently traded at a loss over the previous 18 months. Preliminary investigation suggested that Arafura Equities had traded whilst insolvent. Proofs of debt had been lodged by 4 November 2005 in the sum of $17,100,607.74. Mr McIntosh deposed that from the records of Arafura Equities it appeared that there were a further 110 creditors who were yet to lodge proofs of debt.
- In his section 19 interview, Mr Best asserted that he did not ever make a public offer to invest funds on behalf of other people but that he was approached and, on his version, even some times inundated, by people who wanted to give him their money so that he would invest it. Problems arose because he took on too much work, an overseas organisation to which he sent funds went into bankruptcy and he was forced to use capital sums to repay both interest that he had promised to pay and capital. Mr Best swore in an affidavit that he believed that losses (ie “loss of capital placed by people”) were about $5,000,000 to $6,000,000. Mr Taylor, Mr Best’s solicitor, deposed that at a meeting of creditors of Arafura Equities on 17 November 2005, Mr McIntosh said he had received proofs of debt for $18,000,000. The terms of a proposed deed of company arrangement were discussed.
- Mr Tucker, on Mr Best’s behalf, argued that the moneys said to have been paid to Arafura Equities by investors as part of the scheme were in fact paid as bona fide loans evidenced by deeds of agreement. The deed of agreement[19] to which he referred did not inspire confidence that this was the case. It was in standard form and signed and it is true that various blanks such as the amount lent and the name of the “lender” called therein Party A and date on which the agreement was made had been filled in. On the other hand, the agreement was very sparse in its terms and there were a number of blanks not completed, such as the date the agreement was to commence, the indicative term and how and where interest payments were to be made to “Party A”. Contrary to Mr Tucker’s submissions, this was not compelling evidence that it was not a managed investment scheme.
- Mr Best admitted in his affidavit borrowing $838,662.59 from Arafura Equities to purchase his residential property at Brookfield but said he had paid as much into Arafura Equities at various times from moneys he received from other sources. He sought to explain this situation by saying his “accounting of those matters was not done in accordance with normal accounting procedures.”
- Mr Best said that a document entitled “A Note from the Manager’s Desk” on Arafura Equities letterhead was drafted by Mr Harris in 2003. Mr Best denied detailed knowledge of its contents or to whom it was distributed. The document proclaimed the advantages of putting money into the Arafura Equities “fund”, saying, “The fund gives opportunity for depositors to leverage their funds on the overnight money market just like many banks do. The ‘leveraged funds’ yield ten times higher profits to the ‘small guy’ than a conventional interest bearing deposit can.” Mr Best also denied knowledge of a document entitled “Conditions for depositing funds with the Arafura Equities Loan Fund” which demonstrated how there was a programme or plan of action whereby members of the public (who could be described as lenders or investors) contributed money into a pooled fund over which the investors did not have day to day control which was intended to produce financial benefit to the investors. There were more than twenty such members of the public. In other words it provides strong evidence that there was an unregistered managed investment scheme.[20] Mr Best’s denials of the truth of material found in those documents themselves contained evidence which nevertheless suggested that he, and others, operated a managed investment fund through Arafura Equities. He also confirmed that Mr Harris and Mrs Jenkins obtained funds from their clients to put into Arafura Equities and the manner in which a return was to be paid by Arafura Equities to Mr Best’s clients and through Mr Harris and Mrs Jenkins to their clients.
- There is evidence that Mr Harris dealt with approximately 80 investors who provided a total of approximately $4,500,000 to Arafura Equities, and was thereby operating a managed investment scheme. He had made a considerable amount of money and said he was owed a great deal more. There is evidence which, if accepted at trial, suggests that he held himself out not only as promoting the scheme but also as speaking on behalf of the scheme.
- There is also evidence which suggests that not all money received from investors was paid to Arafura Equities. At Mr Harris’s direction, some of it was paid to entities or persons associated with Mr Harris.[21] ASIC investigator, Ms Walsh, was told by Christine Rich that when Ms Rich needed money she mortgaged her house and on the advice of Jeremy Harris, Richard Harris’s son, she invested $110,000 in Arafura Equities. On Jeremy Harris’s instructions she made out the cheque to Future Secure Financial. On 3 October 2005, Ms Rich received a memorandum from Richard Harris on the letterhead of Creative Mortgage Solutions which was said to be a division of Ricstan Enterprises saying with regard to the recent ASIC “audit” of Arafura Equities that “the outcome has been favourable and as a result further information is required by ASIC.” How anyone could form the conclusion that the outcome of the ASIC “audit” had been favourable defies belief.
- On 9 September 2005, Mr Best, as director of Arafura Equities, gave the following undertakings to ASIC:
“1)That I am not trading any funds at present on behalf of Arafura
2)That to the best of my knowledge there are no contracts open in the market for any clients of Arafura
3)That all funds lent to Arafura for the purpose of trading on the currency futures market will be repaid by Arafura on or before 16 September 2005, such repayment to include all amounts of capital and any interest owing
4)That it is my clear intention as a director of Arafura, after repayment of all amounts presently owing by Arafura to all of its trading clients has been made, to lodge for registration the requisite offer document with ASIC so that Arafura is permitted to operate a fully regulated managed investment fund.”
The repayments referred to in paragraph 3 of all funds lent to Arafura for trading on the currency futures market did not occur.
- In summary it appears, as counsel for ASIC submitted, that the scheme involved obtaining from members of the public a very large sum of money (many millions of dollars) which preliminary investigations indicate may be completely lost. The investors in the scheme have no security protecting their investment nor are there presently any identifiable assets owned by Arafura Equities and an investigation of the scheme as a whole needs to be undertaken to determine whether any money can be recovered and generally to protect the public.
- In addition to the allegations that the respondents unlawfully operated a managed investment scheme, ASIC alleged that none of the respondents held an Australian Financial Services licence required under s 911A of the Act for people who carry on a financial services business. There is evidence[22] that the respondents, if they were operating a managed investment scheme, were by reason of that, carrying on a financial services business because they were providing a “financial service”[23] relating to dealing in a “financial product”[24] and that none of them held the necessary licence.
- The orders sought under s 1323 were for interim relief pursuant to s 1323(3) relating to the orders that may be granted under s 1323(1)(h)(j) and (k) that is:
“(h)an order appointing:
- 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
- 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 or that person;
- 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;
- 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.”
- Such an order may be granted where the court considers it “necessary or desirable” to do so for the purpose of protecting the interests of a person to whom the person being investigated is liable, or may become liable, to pay money. The application may be made by ASIC to protect the interests of the actual and potential creditors of the person under investigation.
- As Finn J held in Australian Securities Commission v AS Nominees Ltd:[25]
“The well accepted purpose of the remedies provided in s 1323, is to protect the interests of persons who might have claims against corporations and their managers (whether or not these claims flow from a breach of the Corporations Law itself: Corporate Affairs Commission (SA) v Lone Star Exploration NL (No 2) (1988) 50 SASR 24; 14 ACLR 499 at 503). It achieves this by keeping secure the assets of the person, corporate or natural, against whom the relevant claims may lie: Corporate Affairs Commission (NSW) v Walker (1987) 11 ACLR 884 at 888; 5 ACLC 991; and Corporate Affairs Commission (NSW) v Lombard Nash International Pty Ltd (No 3) (1987) 12 ACLR 113; 5 ACLC 1020 at 1022.”
- 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.[26] Although the appointment of a receiver may be considered, as Finn J observed,[27] 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.[28]
- In this case it would be appropriate to protect the creditors’ interests by appointing a receiver. No further harm will be done to Arafura Equities by the appointment of a receiver as it is already under administration. This is so even though a deed of company arrangement has been proposed for Arafura Equities by Mr Best. The receiver will report to the court on the company’s affairs.
- There is evidence which suggests that the other respondents have gained inappropriate financial advantage from moneys put in to the first respondent by investors and that their assets should, at least on an interim basis, be protected by the appointment of receivers with the power to investigate. Again the receivers will report to the court.
- Receivers will, as von Doussa J observed in Beach Petroleum NL v Johnson[29] be able to make an objective assessment of the financial position of each respondent and to what extent their current financial position has been enhanced by the alleged contraventions of the Act. This case is therefore quite unlike ASIC v Young, where Muir J declined to appoint receivers in a situation where the investors’ funds were not at risk. In that case, on every occasion on which an investor had requested repayment of moneys advanced under the scheme, that request had been complied with.
- In this case it is imperative that receivers be appointed on an interim basis to preserve the respondents’ assets, investigate their financial affairs and report to the Court. There will also be the benefit of ensuring, should it be necessary, that there will be no further breaches of the Act. There is no lesser order that will achieve those objectives.
- No property of the respondents vests in the receiver, either at law or in equity, by virtue of the appointment.[30] However the orders appointing receivers over the property of the respondents should specifically exclude property which is subject to a security interest if the appointment of a receiver would put that respondent in breach of the security document. The Brookfield property may however be in a different category since it was arguably purchased using funds taken directly from scheme assets.
Section 1324
- The material filed by the applicant also satisfies the first matter of which the court must be satisfied under s 1324, namely that a person has engaged in conduct that constituted a contravention of the Act or has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of the Act. The alleged contraventions are operating a managed investment scheme which was not registered and carrying on a financial services business whilst not holding an Australian Financial Services licence covering the provision of the financial services.
- Section 1324 gives the court power to order an interim injunction. With due respect to others who have taken a different view,[31] the usual equitable principles apply to such an application ie is there a serious question to be tried and what is the balance of convenience.[32] However, there are some statutory variations to the usual equitable principles so that the court may grant an injunction whether or not it appears to the court that the person intends to engage again, or to continue to engage, in conduct of that kind, whether or not the person has previously engaged in conduct of that kind, and whether or not there is an imminent danger of substantial damage to any other person if the person engages in conduct of that kind. That limitation is applicable to this case as it is irrelevant for the respondents to argue that an interim injunction should not be granted where there is no present danger of the respondents continuing to breach the Act. There is, however, in my view, some risk of the dissipation of assets by the respondents. Furthermore the court may not require ASIC to give an undertaking as to damages. This is because ASIC is presumed to be acting in the public interest.[33] That presumption has not been displaced in this case.
- There is a serious question to be tried as to whether or not the respondents have unlawfully operated an unregistered managed investment scheme and have done so with or without the required Australian Financial Services licence. Further, the balance of convenience clearly favours preserving the assets of the respondents who are alleged to have gained financially from the alleged contraventions while the litigation, which is being pursued in the public interest, is pending. There are no discretionary considerations that would persuade me that such relief should not be granted. The interim injunctions sought should be issued. They were not opposed by the second, third or fourth respondents. They will be subject to the respondents having reasonable living, business and legal expenses as set out in the order.[34]
Orders and Directions
Definitions
In this Order, unless the contrary intention appears:-
“Act” means the Corporations Act 2001 (Cth)
“Property” means all real or personal property, assets or interests in property of any kind, within or outside Australia including, by virtue of section 1323(2A) any property held otherwise than as sole beneficial owner.
“Investor” means a person or entity who has contributed moneys in respect of the Scheme.
“Investor funds” means monies contributed by Investors for the purposes of investing in the Scheme.
“the Scheme” means the “Arafura Equities Pty Ltd scheme” being a managed investment scheme operated or managed by the First to Eighth Respondents whereby:
- Investors contribute monies to one or more of the Respondents on the basis that they become investors pursuant to a loan agreement and are entitled to a return pursuant to such agreements; and
- The loan agreement entered into by investors is a written agreement entitled Deed of Agreement or Non-Recourse Agreement or is an oral representation of the terms as they stand in both documents; and
- the Investors’ funds are held collectively with other investors’ funds by the First Respondent in order for First and Second Respondents to trade in foreign currency on behalf of the investors; and
- the money received by the First to Eighth Respondents is pooled into a single receiving bank account; and
- There were more than 20 investors in the Scheme; and
- the Respondents manage the day to day running of the Scheme and the Investors do not have the day to day control over the funds; and
- Money purporting to be profits of the foreign currency trading by the first and Second Respondents would be disbursed to Investors either by the First and Second Respondents or the Third to Eighth Respondents pursuant to the agreements entered into with the Respondents.
Receivers
- Pursuant to section 1323(1)(h) and section 1323(3) of the Act, until the trial of these proceedings or earlier order, Lachlan Stuart McIntosh and Ginette Dawn Muller, Chartered Accountants of KordaMentha, 22 Market Street, Brisbane be appointed, jointly and severally:
- Receivers of the Property of each of the First to Fourth Respondents (hereinafter collectively referred to as “the Receivers”) save for the property of the Second Respondent listed in Schedule 1 and the property of the Third Respondent listed in Schedule 2 hereto, for the purposes of:
- Identifying, collecting and securing Property of the Scheme;
- identifying, and securing the Property in the possession, custody or control of each of the Respondents;
- protecting the Property of each of the Respondents in the interests of persons to whom the Respondents are 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 securities, futures contracts or other property;
- ascertaining the amount of the funds received by each of the First to Fourth Respondents in consequence of promoting, offering and/or operating the Scheme (“the Funds”);
- identifying any dealings with, payments of, or distributions by or uses made of the Funds by each of the First to Fourth Respondents;
- identifying any Property purchased or acquired with the Funds;
- recovering the Funds; and
- providing a report to the Court in accordance with paragraph 7 of this Order.
- For the purpose of attaining the objectives for which the Receivers are appointed, the Receivers shall have the following powers:
- all powers necessary to identify, and secure the Property of each of the First to Fourth Respondents; and
- all powers necessary to collect the Funds;
- without limiting subparagraph (a) and (b) hereof, all the powers set out in sections 420(1) and 420(2)(a), (e), (f), (k), (n), (p), (q), (r) and (u) of the Act and, in the case of the Second to Fourth Respondents, sections 420(1) and 420(2) will apply mutatis mutandis as if those Respondents were companies; and
- the power to apply to the Court for directions or further orders, including orders varying the terms of these orders.
- The officers, agents and/or employees of the First to Fourth Respondents shall use their best endeavours to assist the Receivers in the carrying out of their functions and the exercise of their powers pursuant to these orders (including the exercise of power to bring or defend any proceeding in the name of or on behalf of the First to Fourth Respondents) and to provide such information as may reasonably be requested by the Receivers from time to time.
- The First to Fourth Respondents shall immediately deliver up to the Receivers all the books, records and other papers in their possession, custody or control which relate to the Scheme and to the Property of the Second to Fourth Respondents.
- Within 7 days of the date of this order the Second and Third Respondents each deliver to the Applicant and the Receivers an affidavit sworn by him setting out:
- the name and address of any bank, building society or other financial institution or organisation wheresoever situated in which there is an account or accounts (including trading accounts) that are held in the First to Fourth Respondents’ own name or jointly with any other person, company or entity, or that are held in the names of nominees or trustees for the First to Fourth Respondents, or that are under the control of the Respondents, together with the description and number of such account and the balance therein.
- the names and addresses of any person or persons indebted to the First to Fourth Respondents, or to any entities controlled by the First to Fourth Respondents, and to the Scheme, and the amount of the debt or debts owed by such person, persons or entitles, and particulars of the circumstances in which such debt or debts arose.
- the names and addresses of any person or persons to whom the First to Fourth Respondents, or any entities controlled by the First to Fourth Respondents, and the Scheme, is indebted, and the amount of the debt or debts owed by them to such person, persons or entities, and particulars of the circumstances in which such debt or debts arose.
- an itemised inventory of each asset or item of property whether real or personal wheresoever situate whether within Australia or outside Australia of the value of A$1,000 or greater in respect of which the First to Fourth Respondents or any entities controlled by the First to Fourth Respondents, and the Scheme, has an interest (including assets or items of property acquired whether wholly or partially with funds raised by, contributed to, or generated by the Scheme), and particulars of the nature of the interest in such assets or item of property.
- in respect of any of the assets or items of property referred to in subparagraph (d) above, whether it has been given as security for any debt or liability and if so, the nature of the security and the debt or liability so secured.
- the name of any trust in which the First to Fourth Respondents and the Scheme has an interest whether as trustee, beneficiary, trust object, settlor or otherwise, and full particulars thereof of such trust and interest therein.
- the name and address of any bank, building society or other financial institution or organisation wheresoever situate in which monies advanced to the First to Fourth Respondents or any entities controlled by First to Fourth the Respondents, and the Scheme, by persons pursuant to the Scheme have been deposited, specifying the amount of such deposit.
For the avoidance of doubt in the case of the Third Respondent, such affidavit shall address the matters set out in subparagraphs (a) to (g) on behalf of the Fourth Respondent.
- The Second and Third Respondents answer such questions about the contents of their affidavits referred to in paragraph 5 above as the Receivers may reasonably require them to answer, as to the identification of accounts, assets and liabilities of the First to Fourth Respondents and the Scheme. This order is subject to any right the Second and Third Respondents may have against self incrimination.
- Within 21 days of the date of this order the Receivers shall prepare and file a report to the Court as to the following:
- the nature of the assets and Property of the Respondents and the Scheme identified;
- the progress made in collecting and securing the Property of the Scheme;
- the progress made in securing the Property of the Respondents;
- potential claims available to third parties in relation to the Property;
- the assets and liabilities of each of the Respondents and of the Scheme;
- the solvency of the Scheme and each of the First to Fourth Respondents;
- whether the officers of each of the first and Fourth Respondents have kept proper records;
- whether there are grounds to suspect any of the First to Fourth Respondents or their officers agents or employees have contravened the Act;
- the amount of the Funds;
- any Property purchased or acquired with the Funds by each of the First to Fourth Respondents;
- any distributions or uses made of the Funds by each of the First to Fourth Respondents; and
- the amount of the Funds that were recovered.
- For the purpose of this order the Receivers power to “secure” property does not include a power to require either of the Second or Third Respondents to vacate any residential property or to seize any personal property of a Second or Third Respondent.
- The exercise by the Receivers of the powers conferred by these orders is subject to the control of the Court, and the Applicant and each of the First to Fourth Respondents may apply to the Court with respect to the exercise or proposed exercise of any of these powers.
- The Receivers’ remuneration be calculated as determined by the Court on the basis of the time occupied respectively by the Receivers, the Receivers’ partners and the Receivers’ employees in addition to payment or reimbursement of such expenses and disbursements as shall be incurred or made in the due course of the receivership, such remuneration, expenses and disbursements to be paid by the Receivers from the assets of the Scheme as a first charge.
- For clarification, receivers are not appointed over the property of Ricstan Enterprises Pty Ltd trading as Creative Mortgage Solutions.
- This order is made upon the Third and Fourth Respondents undertaking that:
- all books and records of the business carried on by the Fourth Respondent under the registered business name “Creative Mortgage Solutions” shall be forthwith made available to the Receivers, at the offices of the Receivers, for inspection and copying;
- they shall not withdraw, transfer, encumber or otherwise deal directly or indirectly with or cause or permit to be withdrawn, transferred, encumbered or otherwise dealt with directly or indirectly, funds held in or standing to the credit of, form time to time, the ANZ account of Ricstan Enterprises Pty Ltd trading as Creative Mortgage Solutions being account number 041-524 352911772 other than in the ordinary course of business of Creative Mortgage Solutions.
Injunctions
- Pursuant to section 1324 of the Act, until the trial of these proceedings or earlier order the First to Fourth Respondents be restrained and an injunction be granted restraining them whether by themselves or their officers, employees, agents or otherwise howsoever from:
- further promoting or operating the Scheme or any other managed investment scheme; and
- from doing any act in furtherance of the Scheme; and
- from receiving or soliciting any funds in connection with the Scheme; and
- from disposing of, destroying, amending, altering, parting with possession of, removing from their present location, or causing, procuring, assisting or permitting to be disposed of, destroyed, amended, altered, possession parted with or removed from their present location all and any books, papers, records, books of account, ledgers, journals, banking records, computer records or other documents of any type whatsoever recording or evidencing any dealings of all the Respondents in relation to the Scheme.
- For clarification, nothing in this paragraph should be taken to fetter the administrators of the First Respondent from carrying out their duties pursuant to the Corporations Act. Pursuant to Sections 1324(1) and 1324(4) of the Act, until the trial of these proceedings or earlier order, each of the Second to Fourth Respondents (“the Respondents”) be restrained and an injunction be granted restraining them whether by their officers, employees, agents or otherwise howsoever from:
- removing from Australia or causing, procuring, assisting or permitting to be removed from Australia or from the jurisdiction of this Court; or
- selling, charging, mortgaging, encumbering, securing, diminishing, disposing of, parting with possession, making any declaration of trust in relation to, exercising any power to vary or modify any trust deed or interest under any trust in relation to removing from their present locations; or
- otherwise dealing with,
all or any of their property, whether such property be in any of the Second to Fourth Respondents’ own names or jointly with any other person, company or entity or in the names of nominees or trustees of any of the Second to Fourth Respondents;
PROVIDED THAT THIS ORDER:
- will not prevent each of the Second, Third and Fourth Respondents from paying ordinary living expenses;
- will not prevent each of the Second, Third and Fourth Respondents from paying their reasonable costs of and incidental to these proceedings and in obtaining legal advice and representation in relation to the investigations by ASIC, and legal costs in relation to the receivership pursuant to these orders and the administration and any other external administration of the First Respondent;
- will not prevent each of the Respondents from paying whatever expenses as agreed to in writing by the Receivers prior to such expenditure.
AND THAT:
In respect to the payment of those costs and expenses the Respondents are not in any way prevented by these orders from paying those expenses and costs from the property.
- will not prevent any bank, building society or financial institution from exercising any right of set off which it may have in respect of any facility afford to it by any of the Respondents prior to the date of this order.
- from disposing of, destroying, amending, altering, parting with possession of, removing from their present location, or causing, procuring, assisting or permitting to be disposed of, destroyed, amended, altered, possession parted with or removed from their present location all and any books, papers, records, books of account, ledgers, journals, banking records, computer records or other documents of any type whatsoever recording or evidencing any dealings of any of the First to Fourth Respondents in relation to the Scheme.
- It is further directed that these orders and in particular Order 14 herein is not to apply to the following bank accounts held by the Third and Fourth Respondents respectively:
NAB Account:RF and DL Harris
Number:084577469673501
ANZ Account:Ristdale Developments Pty Ltd
Numbers:014524498551984 and 014524497728709.
- It is further directed that these orders apply to the Bank of Queensland account in the name of Aus-Intertrade Pty Ltd as trustee for the 911 Trader Trust, Account number 20096345.
- Pursuant to section 1324(1) AND 1324(4) of the Act, until the trial of these proceedings or further earlier order, each of the Second to Fourth Respondents be restrained and an injunction be granted restraining them whether by themselves or their officers, employees, agents or otherwise howsoever from:
- dealing in any way, whether directly or indirectly with any funds or monies standing to the credit of or under the control of the Second to Fourth Respondents in relation to the operation of the Scheme; and
- dealing in anyway, whether directly or indirectly, with any property, real or personal, acquired wholly or partly with funds received as a result of the operation of the Scheme.
Other
- Pursuant to section 1323(1)(k) of the Act until the trial of these proceedings or further earlier order the Second Respondent:
- be prohibited from leaving this jurisdiction, or Australia, without the consent of the Court; and
- be restraining and an injunction be granted restraining the Second Respondent from applying for a replacement or alternative travel documents, in any name, without the leave of the Court.
- Pursuant to section 1323(1)(j) of the Act that the Second Respondent shall, pending the trial of these proceedings or further earlier order forthwith surrender to the Court any passport held by him under any name, if that has not already occurred.
- By consent the name of the Fourth Respondent be amended to Ricstan Enterprises Pty Ltd (ACN 081 112 245).
- All parties have liberty to apply.
- Costs reserved.
- This application to proceed as if it had been commenced by a Claim.
FURTHER, IT IS DIRECTED THAT:
- The Applicant file and serve an Amended Originating Application and a Statement of Claim within 21 days after receipt of the Receivers’ Report.
- Each of the Respondents file and serve their Defences (if any) within 28 days after the receipt of the Amended Originating Application and Statement of Claim.
- The Applicant file and serve a Reply (if any) to each of the Defences within 14 days after receipt of the Defences.
- The matter be listed for further direction on Monday 20 March 2005 at 10.00am.
Schedule 1
- 6 Boundary Road, Camp Hill.
Schedule 2
- 36 Rebecca Street, Burpengary.
- Lot 217 Dukes Lane, Cooyar.
- 125 Beaufort Place, Deception Bay.
Footnotes
[1] Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd [2002] NSWSC 310 at [55]-[56]; (2002) 41 ACSR 561 at 574; Re Lawloan Mortgages Pty Ltd [2003] 2 Qd R 200 at 218.
[2] (1981) 148 CLR 121 at 129 per Mason J quoting Clowes v Federal Commissioner of Taxation (1954) 91 CLR 209 at 225.
[3] This wide definition has been applied to s 9 of the Act: see ASIC v Young [2003] QSC 029 at [36]-[37]; Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (supra); Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339; Australian Securities and Investments Commission v Chase Capital Management Pty Ltd [2001] WASC 27 at 57 and Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403.
[4] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW2 p42; RMW4 pp77-80; Exhibit RMW6 p59; Exhibit RMW8 p33.
[5] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW2 p45; Exhibit RMW4 p117; Exhibit RMW6 p58; Exhibit RMW8 pp55-56.
[6] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW2 pp26,89.
[7] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW4 pp53-54, 57-58.
[8] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW4 pp59-61; RMW6 pp30-33.
[9] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW6 pp35-38; RMW7.
[10] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW6 pp32,55; Exhibit RMW7.
[11] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW4 pp36-37; RMW6 p58.
[12] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW6 pp89, 90, 110-111.
[13] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW6 p65.
[14] Affidavit of Spiros Pandelakis sworn 3 November 2005; but see affidavit of Richard Stanley Harris filed 7 November 2005.
[15] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW4 pp24-25, 28-29; Exhibit RMW8 pp27-28, 35-38.
[16] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW8 pp39, 43.
[17] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW8 p115.
[18] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW8 pp52-53, 57.
[19] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW5 pp 246-248.
[20] See Australian Securities and Investments Commission v Hutchings (2001) 38 ACSR 387 at 393, [13].
[21] Affidavit of Milorad Radulovic filed 15 November 2005 paras 3-7; but cf affidavit of Richard Stanley Harris filed by leave on 16 November 2005.
[22] Affidavit of Regina Maree Walsh filed 1 November 2005 Exhibit RMW2 p 26; Exhibit RMW4 pp 101-103; Exhibit RMW6 p 13; Exhibit RMW8 p 115.
[23] Corporations Act s 766A, s 761A.
[24] Corporations Act s 766C; see ASIC v Young (supra) at [62]-[64], 13.
[25] (1995) 18 ACSR 363 at 366.
[26] See eg Corporate Affairs Commission v United Technologies Pty Ltd (1988) 6 ACLC 637 at 643.
[27] (supra) at 367. See also Beach Petroleum NL v Johnson (1992) ACSR 404 at 406.
[28] Australian Securities and Investments Commission v Drury Management Pty Ltd [2004] QSC 68 (29 March 2004) at [44].
[29] (supra) at 412.
[30] Re Scottish Properties Pty Ltd (1977) 2 ACLR 264 at 271.
[31] Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605.
[32] Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 at 153; Liquorland (Aust) Pty Ltd v Anghie (2001) 20 ACLC 58 at [51]; Adsteam Building Industries Pty Ltd v Queensland Cement and Lime Co Ltd [1984] 2 Qd R 1 at 5-6; National Companies & Securities Commission v Monsoon Nominees Pty Ltd (1990) 3 ACSR 361 at 363; Australian Securities and Investments Commission v Cooke (1996) 22 ACSR 580 at 580-581; Westgold Resources NL v Precious Metals Australia Ltd (2002) 41 ACSR 672; cf ASIC v Triton Underwriting Insurance Agency (2004) 22 ACLC 86 at 92, [25].
[33] Australian Securities and Investments Commission v Mauer-Swisse (supra) at [21], 610.
[34] Jackson v Stirling Industries Ltd (1987) 162 CLR 612 at 642 per Gaudron J; Cardile v LED Builders Pty Ltd (1999) 198 CLR 380 at 410.