Australian Securities and Investments Commission v A.B.C. Fund Managers Ltd (No 3)

[2001] VSC 397

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

CORPORATIONS LIST

No. 7654 of 2000

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION	Plaintiff
v
A.B.C. FUND MANAGERS LIMITED AND OTHERS	Defendants

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JUDGE:	Warren J
WHERE HELD:	Melbourne
DATE OF HEARING:	12 and 15 October 2001
DATE OF JUDGMENT:	15 October 2001
CASE MAY BE CITED AS:	ASIC v A.B.C. Fund Managers Ltd & Ors (No. 3)
MEDIUM NEUTRAL CITATION:	[2001] VSC 397	Revised 19 October 2001

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Corporations – orders for winding up on just and equitable ground.

Managed Investment Schemes – winding up orders – powers of liquidator – potential conflict alleged with trust deed.

Costs – costs sought on solicitor and client basis – whether justified in part.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr B. Ussher	ASIC
For the Defendants	Mr T. Davies	Oakley Thompson

HER HONOUR:

1. I published reasons for judgment in this proceeding and adjourned the matter to enable orders to be prepared.  Arising from the reasons, ASIC seeks orders for the winding up of the 22 subject schemes, a permanent injunction restraining the second defendant from dealing with the funds of the schemes, a declaratory order that all the defendants breached specific sections of the Corporations Act, a permanent injunction restraining the defendants from promoting any unregulated schemes without registration and from carrying on a securities business, orders winding up the first and third to fifth defendants and the appointment of a liquidator thereof and of the schemes. ASIC seeks orders granting powers to the liquidator of the schemes pursuant to s.477 of the Act and other orders, together with an order that the defendants pay the costs of ASIC on a solicitor/client basis.

1. As a starting point, it is to be recalled that in the reasons I delivered[1], I made significant findings against the defendants.  In summary with respect to the 22 trusts they were, first, that the trusts were managed investment schemes; secondly, that the 22 trusts were mismanaged; thirdly, that the defendants' conduct of the 22 trusts was misleading and deceptive; fourthly, that there were no or insufficient financial records relating to the trusts; fifthly, that the trusts did not purchase assets or invest in profit making ventures such as to enable a profit to be derived for distribution; and sixthly, that the trusts were an integral part of round robin transactions.  These findings led to the conclusion expressed in the reasons that the 22 schemes ought be wound up.  The winding up of the schemes was not opposed at trial although resisted up until that time.

   [1][2001] VSC 383

1. In summary, in relation to the defendants the findings were, first, that they mismanaged the subject schemes; secondly, they failed to meet the requirements of the Corporations Act including the keeping of financial records; thirdly, the defendants promoted trusts that did not comply with the Act; fourthly, that the defendants used the trusts or schemes as vehicles for a sham arrangement devised to defraud the Australian Taxation Office and investors; and fifthly, that the first and third to sixth defendants ought be wound up on the just and equitable ground.

1. The Commission seeks orders that have been the subject of consideration by the defendants over four days. Having heard argument and on the basis of the reasons previously published, I consider it appropriate to make such orders. I observe that ss.601EE whilst empowering the court to order the winding up of managed investment schemes does not specify the powers of a liquidator appointed by the court for that purpose. There is no equivalent, for example, of s.477 of the Corporations Act where a company is ordered to be wound up.

1. Sub-section (2) of s.601EE vests a wide and unqualified discretion in the court, where a scheme is ordered to be wound up. It will be a matter for the court in each case to make orders as appropriate for a winding up. In the present proceeding, the findings against the defendants as managers and operators of the schemes in relation to the management of the schemes and the fraudulent purpose for which those schemes were used by the defendants lead to the conclusion that the liquidator must have very broad powers and be unfettered in the exercise of his or her duties, save for any orders by the court.

1. The defendants submitted that the proposed powers of the liquidator of the schemes may contradict or conflict with the terms of the trust deeds of the various trusts.  However, no contradiction or conflict was identified.  In any event, in all likelihood, the provisions of the Corporations Act would prevail given that the trusts constitute managed investment schemes.  I am satisfied that the liquidator of the schemes should have every power as if the schemes were corporations ordered to be wound up. 

1. Given the seriousness of the findings with respect to the management of the trusts and the desirability of the liquidator being able to embark on the winding up without unnecessary delay, I am satisfied it is appropriate to make orders substantially in the terms proposed by the Commission.  The main orders will be:

1.        The unregistered managed investment schemes known as

A.B.C. Maxi Earnings Growth Fund [No. 1] ("MEG 1")

A.B.C. Maxi Earnings Growth Fund [No. 2] ("MEG 2")

A.B.C. Maxi Earnings Growth Fund [No. 3] ("MEG 3")

A.B.C. Maxi Earnings Growth Fund [No. 4] ("MEG 4")

A.B.C. Maxi Income and Growth Fund ("MIGF")

A.B.C. Income & Growth Trust [No. 1] ("ABC IG 1")

A.B.C. Income & Growth Trust No. 2 ("ABC IG 2")

A.B.C. Income & Growth Trust No. 3 ("ABC IG 3")

A.B.C. Income & Growth Trust No. 4 ("ABC IG 4")

A.B.C. Income & Growth Trust No. 5 ("ABC IG 5")

A.B.C. Income & Growth Trust No. 6 ("ABC IG 6")

A.B.C. Income & Growth Trust No. 7 ("ABC IG 7")

A.B.C. Income & Growth Trust No. 8 ("ABC IG 8")

A.B.C. Income & Growth Trust No. 9 ("ABC IG 9")

Leveraged Equity Investment Trust [No. 1] ("LEIT 1")

Leveraged Equity Investment Trust No. 2 ("LEIT 2")

Leveraged Equity Investment Trust No. 3 ("LEIT 3")

Leveraged Equity Investment Trust No. 4 ("LEIT 4")

Leveraged Equity Investment Trust No. 5 ("LEIT 5")

Leveraged Equity Income & Growth Fund [No. 1] ("LEIG 1")

Leveraged Equity Income & Growth Fund No. 2 ("LEIG 2")

Leveraged Equity Income & Growth Fund No. 3 ("LEIG 3")

("the schemes" referred to in the deeds set out in paragraph 24 of the affidavit of Morris Haim Broder affirmed 17 November 2000)) be wound up under the provisions of s.601EE(1) of the Corporations Act 2001 ("the Act").

2.That pursuant to s.601EE of the Act and ss.1323 and 1324 of the Act the second defendant by itself, its servants and agents be restrained on a permanent basis from transferring or otherwise dealing with or parting with possession of any funds received either directly or indirectly from investors or subscribers to the schemes save and except as ordered by the Court or in the incurring of any necessary and reasonable expense in complying with this order.

3.The Court declares that the defendants in the promotion of the schemes, contravened ss.601ED, 780, 1018, 1064 and 1065 of the Corporations Act.

4.Pursuant to ss.1114 and 1324 of the Corporations Act the second defendant be restrained:-

a.from promoting any scheme similar to the schemes without registering the scheme in accordance with s.601ED and otherwise complying with Part 5C.1 and any other applicable provisions of the Act;

b.from carrying on a securities business, including promoting or offering for sale interests of the type offered under the schemes in contravention of s.780 of the Act.

5.The firstnamed, thirdnamed, fourthnamed, fifthnamed and sixthnamed defendants be wound up under the provisions of s.461(1)(k) of the Corporations Act 2001.

6.That the requirements of s.465A of the Act and of Order 5.6 of the Supreme Court (Corporations List) Rules be dispensed with.

7.That Lindsay Philip Maxsted of KPMG, accountants, 161 Collins Street, Melbourne be appointed, as an officer of the Court:-

a.As liquidator of the firstnamed, thirdnamed, fourthnamed, fifthnamed and sixthnamed defendants.

b.As liquidator of the schemes.

8.In relation to his appointment as liquidator of the schemes:-

a.the liquidator shall have all the powers that a liquidator of a company would have pursuant to s.477 of the Corporations Act as if each of the schemes was a company;

b.the liquidator shall have the power to investigate or cause to be investigated any deficiency in the schemes and to exercise the powers under Part 5.9 Division 1 of the Corporations Act as if the schemes were corporations being wound up;

c.the exercise by the liquidator of the powers conferred by these orders is subject to the control of the Court, and the plaintiff may apply to the Court with respect to the exercise or proposed exercise of any of those powers;

d.each of the defendants deliver all books and records in their possession or power relating to the conduct of the schemes to the liquidator by 5.00 p.m. on 18 October 2001.

1. I turn then to consider the matter of costs.  The defendants do not resist an order against them for costs on the usual party/party basis.  Nevertheless, ASIC seeks costs on a solicitor/client basis.  It does so on a number of grounds.  It is said that from the time of the s.19 examinations, the  defendants, through Messrs Wharton and Gillies as director and secretary of the defendants, knew or ought to have known that their defence of the proceeding was hopeless.  It is also said that from the commencement of the proceeding, notwithstanding the s.19 examinations and the admissions extracted, the defendants conducted their defence right up until the trial on a basis of total denial.  Point is made of the blanket denial in the defence and a claim for privilege against self incrimination to avoid the filing of witness statements in advance of trial.  Further emphasis is made of the fact that ASIC was caused to file and prepare vast amounts of affidavit and documentary evidence, the bulk of which was not challenged at trial.

1. It is said also that the defendants put ASIC to the preparation of its proofs and waited until the trial to then concede the winding up of the schemes but nevertheless resisted the winding up of the defendant companies and the making of declarations against breaches of the Corporations Act that are said to have been obvious.

1. For the defendants, it is said that they were entitled to put ASIC to its proofs because of the seriousness of the allegations and the potential for prosecution of the defendants and possibly their director and office bearers.  It was also said that the defendants were hamstrung in the defence of the present proceeding by the need to invoke privilege against self-incrimination because of the fear of prosecution.  Of course, the claim for privilege against self incrimination was made by Wharton only and even then in his personal capacity.  Privilege was not and could not be claimed by the defendants as corporations: Trade Practices Commission v Abbco Ice Works Pty Ltd (1994) 42 FCR 96; also, s.1316A Corporations Act 2001. It was also submitted on behalf of the defendants that they did not accept that the s.19 examinations rendered their defence hopeless, rather that Messrs Gillies and Wharton at that time purported to clarify the investment and profit aspects of the round robin transactions. It was also suggested that the defendants had done no more than engage in a tax minimisation scheme.

1. The principles are clear: a party cannot conduct itself in a way that is high handed, see Australian Guarantee Corporation v Jager (1984) VR 483; a party cannot knowingly make false allegations of fraud that are not then made out at trial, see Australian Transport Insurance Pty Ltd v Graeme Phillips Road Transport Insurance Pty Ltd (1986) 10 FCR 177; also, Fountain Selected Meat (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 3987; a party should be hesitant to pursue a hopeless case, see J-Corp Pty Ltd v Australian Builders Labourers Federation Union of Workers (1993) 46 IR 301, also Colgate Palmolive v Cussens (1993) 46 FCR 225. Indeed, the relevant principles are set out at length in Colgate Palmolive by Sheppard J (at 232-234). 

1. Having considered this matter very carefully and weighing up and giving due consideration to the submissions made on behalf of the defendants, I am satisfied that from the time of the filing of the initial affidavit of Morris Haim Broder of 17 November 2000, it was or it ought to have been obvious to the defendants that their case was one that should not have been defended.  To a large extent this was borne out by the fact that at trial, the defendants acquiesced to the winding up of the schemes.  As I have stated already in my reasons, the relationship between the schemes and the defendants and their related entities was one that was inextricably interwoven.  It does appear somewhat incongruous, to say the least, that the defendants would wait until trial and then accede to the winding up of the schemes but resist in strong terms, the winding up of the companies that managed those schemes.  This view is particularly borne out by the approach and observations of Owen J in the Chase case adverted to in the course of my reasons.  ASIC v Chase Capital Management Pty Ltd (2001) 19 ACLC 476.

1. In the prevailing circumstances of this matter, I am satisfied that the Commission should be entitled to its costs and, in part, on a solicitor and client basis.  Costs will be ordered on the basis of party/party costs up to the date of service of the affidavit of Mr Broder of 17 November 2000, and thereafter the defendants will be ordered to pay the costs of the Commission on a solicitor and client basis. 

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