Australian Securities and Investments Commission v Cycclone Magnetic Engines Inc
[2009] QSC 58
•24 March 2009
SUPREME COURT OF QUEENSLAND
CITATION:
Australian Securities and Investments Commission v Cycclone Magnetic Engines Inc & Ors [2009] QSC 58
PARTIES:
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
(applicant)
v
CYCCLONE MAGNETIC ENGINES INC
(first respondent)
and
MICHEAL PETER NUGENT
(second respondent)
and
ROBERT GEORGE McCLELLAND
(third respondent)
and
STEVEN VINCENT FOSTER
(fourth respondent)FILE NO/S:
BS 2655 of 2007
DIVISION:
Trial Division
PROCEEDING:
Trial
ORIGINATING COURT:
Supreme Court of Queensland
DELIVERED ON:
24 March 2009
DELIVERED AT:
Brisbane
HEARING DATE:
18, 19, 20, 27 August 2008
JUDGE:
Martin J
ORDER:
The Applicant is to bring in appropriate minutes of order.
CATCHWORDS:
CORPORATIONS LAW – PROCEDURAL REQUIREMENTS - SHARES – ORDER TO PURCHASE – where respondents invited applications for shares and distributed share application forms – where shares were subsequently issued to applicants - where a no disclosure document was lodged with ASIC– whether the offering breached the 20/12 rule (‘small scale offering’) in s 708 Corporations Act – onus of proof - whether a disclosure document should have been lodged.
CORPORATIONS LAW – CONTRAVENTIONS – where respondents prepared and distributed a business plan – where respondents prepared and distributed a company newsletter promoting their business – where respondents created and displayed a web site promoting their business – where respondents made statements regarding the issue and sale of shares in their business – where respondents issued shares in their business - where respondents accused of conducting a ‘financial services business’ without a licence – where the issuing of shares was not the respondents’ primary business activity – where respondents claimed to be merely ‘raising capital’ - where issue was of a ‘one-off’ nature – meaning of ‘carrying on’ and ‘business’ – whether the respondents breached s 911A of the Corporations Act.
CORPORATIONS LAW – MISLEADING & DECEPTIVE CONDUCT – REPRESENTATIONS – where respondents hoped to develop a machine powered entirely by magnets – where a prototype was made - where respondents stated an attempt to run machine was ‘successful’ - where respondents warned of risks and uncertainties - where respondents alleged to have represented that their invention/prototype worked – where no one in particular was alleged to have been misled – whether a hypothetical person of the relevant class would likely have been mislead or deceived by the respondents’ representations – discussion of principles – whether respondents breached s 1041H of the Corporations Act.
CORPORATIONS LAW – MISLEADING & DECEPTIVE CONDUCT – REPRESENTATIONS – future matter - where respondents stated they had a ‘Patent Program’ – where respondents stated they expect to obtain patents for their invention - where no patents were obtained or applied for - where respondents made qualifying statements as to risks and uncertainties - whether the respondents had a reasonable basis for making the representations - whether a hypothetical person of the relevant class would likely have been mislead or deceived by the representations – discussion of principles – whether respondents breached s 1041H of the Corporations Act.
CORPORATIONS LAW – MISLEADING & DECEPTIVE CONDUCT – REPRESENTATIONS – future matter - where respondents made statements regarding future expenditure – where actual expenditure did not reflect projections - where respondents made qualifying statements – where respondents alleged to have made misleading representations - whether the respondents had a reasonable basis for making the representations – onus of proof – discussion of principles - whether a hypothetical person of the relevant class would likely have been mislead or deceived by the respondents’ representations – whether respondents breached s 1041H of the Corporations Act.
Australian Securities and Investments Commission Act 2001, ss 12BAB, 12BB, 12DA and 12DB
Corporations Act 2001, ss 9, 18, 583, 700, 706, 708, 727, 761A, 764A, 766B, 766C, 796C, 911A, 911D, 1041H, 1101B and 1324
Fair Trading Act 1999 (Vic.), s 9
Revised Explanatory Memorandum, Financial Services Reform Bill 2001
Trade Practices Act 1974 (Cth), s 51AF, s 52, s55A
Australian Patent Office’s Patent Manual of Practice and Procedures, 2.11.3.11
ASIC v Arafura Equities Pty Ltd [2005] QSC 376
ASIC v Edwards [2004] QSC 344
ASIC v FUELbanc Australia Ltd (2007) 162 FCR 174
ASIC v McDougall & Anor (2006) 57 ACSR 175
ASIC v Mapstone (2006) 59 ACSR 214
ASIC v Mauer-Swisse Securities Pty Ltd (2002) 42 ACSR 605
ASIC v Narain (2008) 169 FCR 211
ASIC v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561
ASIC v Sweeney [2001] NSWSC 114
ASIC v Varsity Lodge Pty Ltd [2007] QSC 376
Bill Acceptance Corporation Ltd v GWA Ltd (1983) 50 ALR 242
Bowler v Hilda Pty Ltd (1998) 80 FCR 191
Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592
Chugg v Pacific Dunlop Ltd (1990) 170 CLR 249
Campomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45
Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594
Domain Names Australia Pty Ltd v .Au Domain Administration Ltd (2004) 139 FCR 215
Downey v Carlson Hotels Asia Pacific Pty Ltd [2005] QCA 199
Fubilan Catering Services Pty Ltd v Compass Group (Australia) Pty Ltd [2007] FCA 1205
Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82
Hearn v O’Rourke (2003) 129 FCR 64
Hope v Bathurst City Council (1980) 144 CLR 1
Houghton v Arms (2006) 225 CLR 553McGrath and Anor v Australian Natural Care Products Pty Ltd (2008) 165 FCR 230
Medical Benefits Fund v Cassidy [2003] 135 FCR 1
NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90
National Exchange Pty Ltd v ASIC (2004) 49 ACSR 369
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 199Purkess v Crittenden (1965) 114 CLR 164 at 167-168
R v Jarvis (1756) 1 East 643, 102 ER 249
Re AIRC; ex parte ATOF (1990) 171 CLR 216
Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160
Sykes v Reserve Bank of Australia (1998) 88 FCR 511
Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177
Telstra Corporation Ltd v Optus Communications Pty Ltd (1997) ATPR §41-541
Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc (1992) 38 FCR 1
Wright v Wheeler Grace & Pierucci Pty Ltd [1989] ATPR 40-940“Statutory Injunction – Call for amendments to s1324 of the Corporations Act” (2006) 24 C&SLJ 41
COUNSEL:
Mr S J Keim SC with Ms E Longbottom for the applicant
Mr J B Rolls for the first and second respondents
Mr A J H Morris QC with Mr L Jurth for the third and fourth respondentsSOLICITORS:
Applicant on own behalf
Garland Waddington Solicitors for the first and second respondents
DLA Phillips Fox for the third and fourth respondents
Introduction
For hundreds of years people have been investing time, money and effort in attempts to create a perpetual motion machine. Even though such a machine would violate either or both of the first and second laws of thermodynamics, there has been a continual stream of these “inventions” since at least the twelfth century. Coincident with that has been the quest by the “inventors” for funding to support their creations. There are many examples of funds being raised to sustain these endeavours. There have also been many who have been willing to point out the impossibility of these attempts, sometimes with scathing condescension.[1] On other occasions the would-be inventor is met with bureaucratic intolerance.[2]
[1]“Oh, ye seekers after perpetual motion, how many vain chimeras have you pursued? Go and take your place with the alchemists.” Leonardo da Vinci
[2]The number of applications seeking patent protection for these devices became so great that the United States Patent and Trademark Office Manual of Patent Examining Practice was amended to include: “With the exception of cases involving perpetual motion, a model is not ordinarily required by the Office to demonstrate the operability of a device.” Similarly, Section 4.05 of the United Kingdom Patent Office Manual of Patent Practice states: “Processes or articles alleged to operate in a manner which is clearly contrary to well-established physical laws, such as perpetual motion machines, are regarded as not having industrial application.” In the Australian Patent Office’s Patent Manual of Practice and Procedures the following appears:
2.11.3.11 In many countries there is a statutory prohibition of inventions which contravene well-known laws of nature - e.g. perpetual motion machines. Under the Australian Patents Act, however, there is no such prohibition. The fact that an invention is apparently contrary to the laws of nature is likely to be manifested in a lack of utility of the invention or lack of full description. Inutility is not a ground of objection which is open to examiners to take prior to acceptance. If the applicant makes relevant assertions about the manner in which their invention works, the examiner may raise an objection that the specification does not fully describe the invention, since having regard to the known laws of nature the invention is not capable of performing in the manner described.
One of the ways in which it has been claimed that a machine can be created, which will require no external fuel input, is through the applied use of very strong magnets. That is the case here. In England the subject was studied during the reign of Queen Elizabeth, with a text on the properties of magnets being published in 1600.[3] Bishop John Wilkins,[4] in his book Mathematical Magick,[5] discusses the ”difficulty” of achieving perpetual motion, and considers in detail a device consisting of two tilted ramps, an iron ball, and a magnetic lodestone fastened at the top. He determined that the device could not work but concluded: “So that none of all these magnetical experiments which have been as yet discovered, are sufficient for the effecting of a perpetual motion, though these kind of qualities seem most conducible unto it; and perhaps, hereafter, it may be contrived from them.” The interaction among magnets, electricity and the generation of power has been investigated by giants of the field: Coulomb, Ampere, Faraday and Tesla.
[3]“De Magnete, Magneticisque Corporibus, et de Magno Magnete Tellure” William Gilbert and Christopher Clews
[4]The first Secretary of The Royal Society
[5]Published 1648
In this case, the applicant (‘ASIC’) says that the respondents have, in promoting a machine said to run solely on the power of magnets, engaged in misleading and deceptive conduct and have otherwise breached legislative provisions regulating fund raising by corporations. That simple description might lead one to the quick conclusion that the promotion of a “perpetual motion” machine must fall into the ‘misleading and deceptive’ basket, but looks can be deceptive in more than one way and the statutory remedies are not to be employed without careful scrutiny of what a promoter actually says and does.
The provisions of the Corporations Act 2001 (‘the Act’) which deal with misleading and deceptive conduct are not designed as a complete shield to protect individuals against their own avarice or cupidity. Just as people will continue to play games of chance in casinos (knowing that the odds are in favour of the house) or buy tickets in lotteries (knowing that the chance of winning is one in many millions) so people will continue to chance their money in investments which, to others, appear far too risky. They sometimes adopt the attitude of one of the deponents whose affidavit was relied upon by ASIC – they see the investment as a bit of a gamble.
The claims and the relief sought
ASIC alleges that each of the respondents has contravened the Act and the Australian Securities and Investments Commission Act 2001 (‘the ASIC Act’).
It is alleged that:
(a)During the period 16 March 2005 to 31 July 2006 (‘the fundraising period’) each respondent offered securities without a current disclosure document, contrary to s 727 of the Act;
(b)Each respondent carried on a ‘financial services business’ without the appropriate licence, contrary to s 911A of the Act; and
(c)Each respondent engaged in misleading or deceptive conduct in relation to the issue of shares, contrary to s 1041H of the Act and s 12DA and s 12DB of the ASIC Act.
ASIC seeks the following relief:
(a)Pursuant to s 583(c)(ii) of the Act, that the first respondent (‘CME’) be wound up on the just and equitable ground and that liquidators be appointed;
(b)A declaration that each of the respondents has made offers and distributed application forms for the offer of securities in CME in contravention of s 727 of the Act;
(c)A declaration that each of the respondents has carried on a financial services business in contravention of s 911A of the Act;
(d)A declaration that each of the second, third and fourth respondents, in respect of disseminating documents referred to in the material, has engaged in conduct that is misleading or deceptive or likely to mislead or deceive, in contravention of the provisions of s 1041H of the Act and s 12DA and s 2DB of the ASIC Act;
(e)An order, pursuant to s 1101B(1) and s 1324(1) of the Act that each of the respondents be permanently restrained from carrying on any form of financial services business in this jurisdiction without holding an appropriate licence;
(f)An order pursuant to s 1101B(1) and s 1324(1) of the Act that each of the respondents be permanently restrained from making offers or distributing application forms for the offer of securities that require disclosure to investors without lodging a suitable disclosure document.
The parties
CME is a foreign company within the meaning of that term as defined in s 9 of the Act. It was incorporated in February 2004 under the laws of the State of Nevada in the United States of America.
The second respondent (‘Mr Nugent’) is a director of CME.
The third respondent (‘Mr McClelland’) was, between 11 May 2006 and 27 February 2007, and has been, since 28 March 2007, a director of CME.
The fourth respondent (‘Mr Foster’) was, between 11 May 2006 and 27 February 2007, and has been, since 28 March 2007, a director of CME.
None of the respondents was the holder an Australian financial services licence within the meaning of s 761A of the Act.
Background
CME is an unregistered foreign company.[6] It carries on business in Australia.[7] It conducts the business of developing the “cycclone magnetic engine” at premises at Gaven in Queensland.
[6]See s 9 of the Act
[7]Admitted by CME in Final Submissions. See s 21 of the Act
The principal activity and reason for existence of CME is to pursue the development of a “… commercially viable, environmentally friendly engine based on the use of permanent magnets to supply mechanical power on demand, without the need of external fuel input”.[8] Its efforts, so far as are material to this trial, have resulted in the creation of a prototype “cycclone magnetic engine”.
[8]Ex SPW 25, p 2
The original directors of CME were, from February 2004 and up to, at least, late March 2006, Mr Nugent, Oliver Douglas and Jonathon McArthur. In about March 2005, Messrs McClelland and Foster entered into employment with CME.
After Messrs Douglas and McArthur ceased to act as Directors from about 23 March 2006,[9] Messrs McClelland and Foster consented to becoming Directors as and from 11 May 2006.[10]
[9]See Trial Transcript, Day 2, page 16.55
[10]See Williamson’s first affidavit Exhibit SPW-36 at page 1064 and SPW-37 at page 1066
In the fundraising period more than 70 shares had been issued.
Offering Securities Without a Current Disclosure Document
ASIC alleges that the respondents:
· have offered securities,
· or distributed application forms,
· for an offer of securities,
· that needed disclosure to investors under Part 6D.2 of the Act,
· without lodging a disclosure document with ASIC, and
· without providing the lodged disclosure document to the offerees,
in contravention of s 727 of the Act.
The manner in which this was alleged to have occurred is set out in paragraph 8 of the Further Amended Statement of Claim (“FASOC”):
“(a) the First Respondent made offers of securities, as that term is used in s 761A of the Corporations Act, being shares or the legal or equitable right or interest in shares in the First Respondent, for issue, within the meaning of subsection 700(2) of the Corporations Act, by inviting applications for the issue of such shares in the First Respondent (‘the Offers’);
Particulars
(i) the Offers were made by means of a form under the banner of the First Respondent inviting applications for an issue of shares in the First Respondent as a "seed capital provider";
(ii) the Offers were made to persons located in this jurisdiction in that they were made to persons who were shareholders or who were members of the public from whom investments being the purchase of shares in the First Respondent were being sought;
(iii) such persons, referred to in the preceding paragraph, are located predominantly in the Gold Coast, Lismore, Wagga and Geelong;
(iv) the First Respondent was the person who had the capacity to issue the shares if the Offers were accepted.
(b)each of the Second to Fourth Respondents, on their own behalf; and as agents for the First Respondent, distributed application forms for the Offers.”
Before turning to the factual issues which arise it will assist if I set out the relevant provisions of the Act.
The relevant requirements of the Act commence with s 706:
“An offer of securities for issue needs disclosure to investors under this Part unless section 708 or 708AA says otherwise.”
For the purposes of this part of the Act, a “security” includes a share in a company.[11] An “offer of securities” is defined as:[12]
“(a)offering securities for issue includes inviting applications for the issue of the securities; and
(b)offering securities for sale includes inviting offers to purchase the securities.”
[11]See s 700 and s 761A of the Act.
[12]Section 700.
Section 706 directs attention to s 708 and s 708A. The latter is not relevant to these proceedings.
Section 708 sets out the types of offer which do not need disclosure. There are 11 types:
· Small scale offerings – these will be considered later;
· Sophisticated investors – this is determined by reference to, among other things, the amount payable for the securities, the net assets and the gross income of the offeree;
· Professional investors – as defined in s 9 of the Act or a person who has or controls gross assets of at least $10 million;
· Offers to people associated with the offering body;
· Certain offers to present holders of securities;
· Issues or sales for no consideration;
· Offers made under a Part 5.1 compromise or arrangement;
· Offers under a deed of company arrangement which, among other things, do not require consideration other than the release of the company from a debt;
· Offers made as consideration for an offer to acquire securities under a takeover bid;
· Offers of debentures of certain types of companies;
· Offers by exempt bodies.
“Small scale offerings” are dealt with in s 708 (1) – (7). It contains the so-called “20/12 rule” which provides:
“Small scale offerings (20 issues or sales in 12 months)
(1) Personal offers of a body's securities by a person do not need disclosure to investors under this Part if:
(a)none of the offers results in a breach of the 20 investors ceiling (see subsections (3) and (4)); and
(b)none of the offers results in a breach of the $2 million ceiling (see subsections (3) and (4)).
This subsection does not apply to an offer for sale to which subsection 707(3) (sale amounting to indirect issue) or (5) (sale amounting to indirect sale by controller) applies.
(2) For the purposes of subsection (1), a personal offer is one that:
(a) may only be accepted by the person to whom it is made; and
(b) is made to a person who is likely to be interested in the offer, having regard to:
(i) previous contact between the person making the offer and that person; or
(ii) some professional or other connection between the person making the offer and that person; or
(iii) statements or actions by that person that indicate that they are interested in offers of that kind.
(3) An offer by a body to issue securities:
(a) results in a breach of the 20 investors ceiling if it results in the number of people to whom securities of the body have been issued exceeding 20 in any 12 month period; and
(b) results in a breach of the $2 million ceiling if it results in the amount raised by the body by issuing securities exceeding $2 million in any 12 month period.
(4) An offer by a person to transfer a body's securities:
(a) results in a breach of the 20 investors ceiling if it results in the number of people to whom the person sells securities of the body exceeding 20 in any 12 month period; and
(b) results in a breach of the $2 million ceiling if it results in the amount raised by the person from selling the body's securities exceeding $2 million in any 12 month period.
(5) In counting issues and sales of the body’s securities, and the amount raised from issues and sales, for the purposes of subsection (1), disregard issues and sales that result from offers that:
(a)do not need a disclosure document because of any other subsection of this section; or
(b)are not received in Australia; or
(c)are made under a disclosure document.
…
(7) In working out the amount of money raised by the body by issuing securities, include the following:
(a)the amount payable for the securities at the time when they are issued;
(b)if the securities are shares issued partly‑paid—any amount payable at a future time if a call is made;
(c)if the security is an option—any amount payable on the exercise of the option;
(d)if the securities carry a right to convert the securities into other securities—any amount payable on the exercise of that right.”
The “ceiling” imposed by s 708 is the subject of s 727(4). It provides:
“Issue or transfer not to breach s 708 ceiling
(4) If a person relies on subsection 708(1) to make offers of securities without disclosure to investors under Part 6D.2, the person must not issue or transfer securities without disclosure to investors under that Part if the issue or transfer would result in a breach of the 20 investors ceiling or the $2 million ceiling (see subsections 708(3), (4), (5), (6) and (7)).”
The following matters are not in dispute:
(a) CME made offers of securities;
(b) No disclosure document was lodged;
(c) Messrs Nugent, McClelland and Foster distributed application forms for the offers; and
(d) The amount raised by CME in the relevant period was less than $2,000,000.
There are two questions which arise at this point:
(a) How does the exemption in s 708 for “small scale offerings” operate?
(b) Who bears the onus of proving the existence or non-existence of facts constituting that exemption?
How does the “small scale offering” exemption operate?
The “small scale offering” exemption (the 20/12 rule) applies when certain conditions are met. They are:
(a) The offer must be a “personal offer” as defined in s 708(2), namely:
(i) The offer may only be accepted by the person to whom it is made, and
(ii) It can only be made to a person who is likely to be interested in the offer having regard to certain criteria,
(b) The offer does not result in the number of people to whom securities have been issued exceeding 20 in any 12 month period,
(c) The offer does not result in the amount raised by the person from selling the body’s securities exceeding $2,000,000 in any 12 month period.
In s 708(1),(, (2), (3) and (4) the terms “personal offer” and “offer” are used. Where the word “offer” appears it is not, in those subsections, intended to mean anything other than “personal offer”. This follows from the first part of s 708(1)(a):
“(1) personal offers … do not need disclosure … if
(a) none of the offers results in a breach …”
It is clear that when the word “offers” is used in s 708(1)(a) it is intended to be a reference back to the term “personal offers” with which the section commences. Similarly, where “offer” appears in the s 708(2)(b), (3), (4) and (5), it means “personal offer”.
It was suggested in the course of submissions that this part of the Act should be construed to the effect that a disclosure document is always required but that, if one or more of the exemptions set out in s 708 are satisfied, then disclosure may have been unnecessary.[13] For example, it was contended that an offer of securities is always required to be disclosed but should the offeror come within the 20/12 rule then that disclosure would have been unnecessary. That construction is unacceptable and is inconsistent with the balance of chapter 6A of the Act.
[13]T 4.2-4.
Section 708 does not contemplate a situation where an offeror does not know whether disclosure should have taken place until after the event. Take, for example, the exemption in s 708(8) for sophisticated investors. It is clear that an offeror can mould an offer so that only a “sophisticated investor” could accept the offer. Similarly, with respect to the 20/12 rule, it would be open to an offeror to make the offers subject to conditions such that the 20/12 rule could not be breached. It is the clear intention of s 708 that offerors are to be relieved of the obligation to disclose if they can bring themselves within one of the exemptions and it is the offeror’s responsibility to remain within one or more of the exemptions for any relevant period if disclosure has not taken place. It is not the intention of s 708 that offerors are required to issue a disclosure document and, then, to be retrospectively relieved of a liability which they have already discharged by, for example, demonstrating that 20 or fewer people have been issued securities in the relevant period.
That construction is consistent with s 727(4).[14] That section proceeds on the basis that a person will rely on s 708(1) to make offers without disclosure and imposes a duty not to issue securities if, in doing so, the 20/12 rule would be breached.
[14]See above
Who bears the onus of proving the operation or not of the exemption?
ASIC, in paragraph 9 of its FASOC, pleads that the offers were not exempted by s 708 of the Act from disclosure. It particularises that allegation by claiming that shares were issued to over 70 persons in response to offers made by CME.
At [25] in its submission, ASIC argues that the onus of proving that the offers were “small scale offerings” lies on the respondents. This is disputed by the respondents.
Section 706 is clear. An offer of securities for issue needs disclosure “unless s 708 or s 708AA says otherwise”. Those named sections provide grounds upon which an offeror may be excused from complying with the requirements of s 706.
The question of how such a matter should be pleaded and upon whom the burden falls has exercised judicial minds since at least R v Jarvis.[15] Fortunately, it is not necessary to trace the development of the law since that time. In Chugg v Pacific Dunlop Ltd the High Court of Australia (Dawson, Toohey and Gaudron JJ with whom Brennan CJ and Deane J agreed) said this:[16]
“For the purpose of assigning the onus of proof, a distinction is made between a requirement which forms part of the statement of a general rule and a statement of some matter of answer, whether by way of exception, exemption, excuse, qualification, exculpation or otherwise (called an ‘exception’), which serves to take a person outside the operation of a general rule. See Vines v Djordjevitch … . The distinction does not depend on the rules of formal logic: Dowling v Bowie … . Rather, the categorization of a provision as part of the statement of a general rule or as a statement of exception reflects its meaning as ascertained by the process of statutory construction. Where some matter is said to be an exception to an offence, the question is whether there is to be discerned a legislative intention ‘to impose upon the accused the ultimate burden of bringing himself within it’: Director of Public Prosecutions v United Telecasters Sydney Ltd … . The intention may be discerned from express words or by implication. See Reg v Edwards … and Reg v Hunt … .
…
Although the form of language may provide assistance, ultimately the question whether some particular matter is a matter of exception is to be determined ‘upon considerations of substance and not of form’: Dowling v Bowie … .
…One indication that a matter may be a matter of exception rather than part of the statement of a general rule is that it sets up some new or different matter from the subject matter of the rule. See Darling Island Stevedoring & Lighterage Co Ltd v Jacobsen … , per Dixon J. Such is ordinarily the case where, in the terms used in Reg v Edwards … , there is a prohibition on the doing of an act ‘save in specified circumstances or by persons of specified classes or with specified qualifications or with the licence or permission of specified authorities’. See Reg v Hunt … , where Lord Griffiths considered the statement from Reg v Edwards … ‘an excellent guide to construction’. If the new matter is a matter peculiarly within the knowledge of the defendant, then that may provide a strong indication that it is a matter of exception upon which the defendant bears the onus of proof.” (emphasis added)[15](1756) 1 East 643, 102 ER 249
[16](1990) 170 CLR 249
Examination of the terms of the relevant sections discloses:
(a) Section 706 expresses a general rule;
(b) Section 708 and s 708AA express exceptions which take an offeror outside the operation of the general rule; and
(c) The exceptions are matters which, ordinarily, would be peculiarly within the knowledge of the offeror.
Further, it is clear that the intention of s 706 is to require the provision of important, relevant information to prospective purchasers.
In those circumstances, then, considerations of substance and of form lead to the conclusion that the principles enunciated in Chugg require that I hold that the burden of establishing the exception lies on the respondents. The fact that the applicant has pleaded the absence of an exception does not discharge the respondents from satisfying the burden otherwise cast upon them. In other words, to obtain the benefit of the small scale offerings exemption the respondents need to adduce evidence to establish on the balance of probabilities that the exemption applied.
Was s 727 contravened?
None of the respondents called any evidence on this issue. They relied on what they argued was a failure by ASIC to demonstrate that the offers made resulted in securities being issued to more than 20 people in the relevant period. I have already determined that ASIC did not bear the onus on that point.
Section 727 (1) of the Act provides:
“(1) A person must not make an offer of securities, or distribute an application form for an offer of securities, that needs disclosure to investors under Part 6D.2 unless a disclosure document for the offer has been lodged with ASIC.”
Section 706 provides that, subject to the specified exemptions, an offer of securities needs disclosure. The other elements of s 727(1) are satisfied by the admissions referred to above. Thus, a breach by CME (by making an offer of securities) and breaches by each of the natural respondents (by distributing application forms for such an offer) have been established.
Should my apprehension of where the burden on the issue of proving an exemption be wrong, then I will refer, briefly, to evidence which was called by ASIC which would otherwise satisfy me that there has been a contravention.
The evidence to which ASIC referred as establishing a breach of s 727 consisted of a number of documents such as: completed share application forms, deposit forms, share certificates and the like.[17] ASIC also relied upon the evidence of Mr Nugent[18] and affidavits of four investors.[19] That evidence demonstrates the making of offers, the receipt of application forms and the issuing of shares to more than 20 persons (being those persons who had made the applications) in the relevant period. The natural respondents have admitted that they distributed application forms. There is no evidence to suggest that any application forms were made available in any other way.
[17]See the first Cole affidavit at [4]-[18] and exhibit MC9, the 6th Williamson affidavit at exhibit SPW 17 (share certificates)
[18]T2.20-24
[19]The affidavits of Luff, Brown, Robertson and Purnell-Webb
It was argued against ASIC that it had to demonstrate the causal link between the making of an offer and the issuing of a share or shares. This arises from the words of s 708(3):
“An offer by a body to issue securities:
(a) Results in a breach … if it results in the number of people exceeding 20 …”
In other words, it was submitted that ASIC had to show that the offer made led to shares in excess of 20 being issued.
The facts which have been either established or admitted provide grounds for drawing inferences as follows:
(a) That the number of shares issued exceeded 20 in the relevant period; and
(b) That the shares were issued as a result of the offer to issue being accepted by people through the making of applications.
Those inferences arise from, among other things, the fact that the persons who applied did so on the application forms given to them by the natural respondents. The inferences are also supported by the absence of any evidence from the respondents on these points and the omission to pursue these points with Mr Nugent when he was in the witness box.
Carrying on a “Financial Services Business” without the Appropriate Licence
Section 911A(1) of the Act provides:
“(1) Subject to this section, a person who carries on a financial services business in this jurisdiction must hold an Australian financial services licence covering the provision of the financial services.
Note 1: Also, a person must not provide a financial service contrary to a banning order or disqualification order under Division 8.
Note 2: Failure to comply with this subsection is an offence (see subsection 1311(1)).”
In s 761A, “financial services business” is defined to mean a business of providing financial services. Section 766A(1) of the Act tells us when a person provides a financial service:
“(1) For the purposes of this Chapter, subject to paragraph (2)(b), a person provides a financial service if they:
(a) provide financial product advice (see s 766B); or
(b) deal in a financial product (see s 766C); or
(c) make a market for a financial product (see s 766D); or
(d) operate a registered scheme; or
(e) provide a custodial or depository service (see s 766E); or
(f) engage in conduct of a kind prescribed by regulations made for the purposes of this paragraph.”
Section 766B of the Act defines “financial product advice” in the following way
“Meaning of financial product advice
(1) For the purposes of this Chapter, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:
(a) Is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products; or
(b) could reasonably be regarded as being intended to have such an influence.
…
(2) There are 2 types of financial product advice: personal advice and general advice.
(3) For the purposes of this Chapter, personal advice is financial product advice that is given or directed to a person (including by electronic means) in circumstances where:
(a)the provider of the advice has considered one or more of the person's objectives, financial situation and needs (otherwise than for the purposes of compliance with the Anti‑Money Laundering and Counter‑Terrorism Financing Act 2006 or with regulations, or AML/CTF Rules, under that Act); or
(b) a reasonable person might expect the provider to have considered one or more of those matters.
(4) For the purposes of this Chapter, general advice is financial product advice that is not personal advice.”
Section 766C(1) relevantly defines “dealing in a financial product” to include the following conduct:
“(a) applying for or acquiring a financial product;
(b) issuing a financial product;
…
(d) varying a financial product;
(e) disposing of a financial product."
Section 766C(2) of the Act extends this definition to include:
“(2) Arranging for a person to engage in conduct referred to in subsection (1) is also dealing in a financial product, unless the actions concerned amount to providing financial product advice.”
Section 763A(1) of the Act, defines a “financial product” as follows:
“General definition of financial product
(1) For the purposes of this Chapter, a financial product is a facility through which, or through the acquisition of which, a person does one or more of the following:
(a) makes a financial investment (see section 763B);
(b) manages financial risk (see section 763C);
(c) makes non-cash payments (see section 763D).”
Section 764A(1)(a) specifically defines a “financial product” to include a “security” which, in turn, is defined in s 761A of the Act to include a “(a) a share in a body” or “(c) a legal or equitable right or interest in a security covered by paragraph (a) or (b)” .
Section 911D of the Act provides a definition of when a financial services business is taken to be carried on in this jurisdiction:
“When a financial services business is taken to be carried on in this jurisdiction
(1) For the purposes of this Chapter, a financial services business is taken to be carried on in this jurisdiction by a person if, in the course of the person carrying on the business, the person engages in conduct that is:
(a)intended to induce people in this jurisdiction to use the financial services the person provides; or
(b)is likely to have that effect;
whether or not the conduct is intended, or likely, to have that effect in other places as well.
(2) This section does not limit the circumstances in which a financial services business is carried on in this jurisdiction for the purposes of this Chapter.”
In its pleading, ASIC asserts that Messrs Nugent, McClelland and Foster, on their own behalf and as agents of CME, made recommendations or statements of opinion or reports or either of those things that were intended to influence a person or persons in making a decision in relation to a security, being shares or the legal or equitable right or interest in shares in the first respondent, or, alternatively, could reasonably be regarded as being intended to have such an influence.
Further, ASIC alleges that the following constituted the carrying on of a financial services business:
(a) The preparation by Mr Nugent of a business plan for CME which was then distributed by Messrs Nugent, McClelland and Foster to potential shareholders;
(b) The preparation and distribution of a newsletter in the same way relating to CME;
(c) The creation of a web site, in part by Mr Nugent, about CME and references to it by Messrs Nugent, McClelland and Foster; and
(d) The making of statements by each of Messrs Nugent, McClelland and Foster at meetings with persons regarding the issue and sale of shares in CME.
The first response by each of the respondents to this claim is that, whatever they did, it did not amount to a financial services business within the meaning of the Act. Before going to that argument, it will assist to set out some further sections of the Act which are required to be taken into account when determining whether or not a financial services business has been conducted. Those sections are in chapter 1 of the Act, they provide:
“18 Carrying on business: otherwise than for profit
A reference to a person carrying on business, carrying on a business, or carrying on a business of a particular kind, includes a reference to the person carrying on business, carrying on a business, or carrying on a business of that kind, as the case may be:
(a) in any case – otherwise than for profit; or
(b) in the case of a body corporate – otherwise than for the profit of the members or corporators of the body.
19 Businesses of a particular kind
A reference to a business of a particular kind includes a reference to a business of that kind that is part of, or is carried on in conjunction with, any other business.
20 Carrying on a business: alone or together with others
A reference in this Act to a person carrying on a business, or a business of a particular kind, is a reference to the person carrying on a business, or a business of that kind, whether alone or together with any other person or persons.”
Assuming, for the sake of the consideration of this point, that the assertions by ASIC are made out with respect to the respondents and that each of them for themselves or for CME made recommendations intended to influence persons in making a decision in relation to shares in CME, it is not a sufficient answer for the respondents to say that the parties are agreed that CME had “as its principal business activity and reason for existence, the development and promotion of a purported invention known as the “Cycclone Magnetic Engine”. As is set out above, s 19 of the Act provides that a reference to a business of a particular kind (such as a financial services business) includes a reference to a business of that kind that is part of, or is carried on in conjunction with, any other business.
It must, though, be a business and it is on that point that the respondents argue that what they were doing was nothing more than the raising of capital. A similar issue was considered by PD McMurdo J in ASIC v Edwards.[20] In that case, his Honour had to consider the actions of a company registered in Mauritius which, he found, had been offering securities without the necessary disclosure. After making certain other findings, his Honour had to consider whether there was jurisdiction to wind up the particular company. This required consideration of whether it was a Part 5.7 body which, in turn, required consideration of whether it had carried on business here. His Honour said:
“[61] In its case however, it is not so clear that its conduct did involve the carrying on of a business. In each of the cases of Carsworthy Limited and Edwardian Associates Limited, the company carried on business by the operation of a managed investment scheme. By operating that scheme to the extent that it did within Australia, it carried on business here. In the case of Coppertone Investments Limited, the moneys paid were by way of subscription for shares in the company itself. It is not immediately clear then that the offering of its shares is itself the carrying on of any business. Ordinarily, there is a distinction between the raising of capital by a company, by offering and issuing its shares, and the application of that capital in the conduct of its business.”
[62] The question of whether the company’s conduct within Australia involved the carrying on of a business is a question of fact: Luckins at 186. Because it is a factual question, its answer is the result of all of the circumstances of the particular case. The factual question is addressed not only by reference to the context of the particular statute … but also with an understanding of the particular nature of the enterprise which constituted the company’s business. In Town Investments Ltd v Department of the Environment [1978] AC 359, Lord Diplock said at 383:
“The word ‘business’ is an etymological chameleon; it suits its meaning to the context in which it is found. It is not a term of legal art and its dictionary meanings, as Lindley LJ pointed out in Rolls v Miller (1884) 27 Ch D 71, 88 embraced ‘almost anything which is an occupation, as distinguished from a pleasure – anything which is an occupation or duty which requires attention is a business’”.
In Hope v Bathurst City Council (1980) 144 CLR 1 at 8, Mason J said that the word “business” denoted “activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis”.
[63] The particular terms in which shares in Coppertone were offered and subscribed for make this an unusual case and have led me to the conclusion that the company did carry on business in Australia. …
…
[65] The result of this is that the business of Coppertone Investments Limited involved the investment of specific sums deposited with it for the benefit of the depositor, so that profits less a management fee were credited against a depositor’s capital account. This was notwithstanding that the depositor received, at the same time, an issue of shares. Moreover the investment had an agreed duration of 12 months, the parties having agreed that the shareholders’ agreement would not be terminated within that time. I do not suggest that the overall structure of this investment is internally consistent. But the nature of Coppertone’s enterprise, or at least as it was represented to be, was somewhat different from a company which was simply raising capital by issuing shares for the conduct of its own business. Under this regime, a shareholder’s funds were treated as some discrete sum which was distinctly managed by the ‘Provider’ on the shareholder’s behalf.” (emphasis added)
[20][2004] QSC 344
The extensive meaning of “business” has often been the subject of consideration: “Of all words, the word ‘business’ is notorious for taking its colour and its content from its surroundings …” ;[21] and “[w]hile the word ‘business’ in any particular context takes its meaning from that context, normally it is a ‘wide and general’ word.”[22]
[21]Re AIRC; ex parte ATOF (1990) 171 CLR 216 at 226
[22]NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90 at [66]
The reasons of Mason J in Hope v Bathurst City Council are of particular importance because of their context.[23] In that case consideration had to be given to a statutory provision which contained the words: “carrying on the business … of grazing”. His Honour said:
“Although it has been common ground that ‘business’ is used in its ordinary meaning in s 118 (1), the courts below have refrained from saying what that meaning is. This is perhaps understandable because, as a glance at the Shorter Oxford Dictionary will show, the word has many meanings. Ironically it is the last meaning given by the Shorter Oxford Dictionary, ‘19. A commercial enterprise as a going concern’, that comes closest to the popular meaning which the courts appear to have acted on in the present case. In truth it is the popular meaning of the word as used in the expression ‘carrying on a business’, rather than the popular meaning of the word itself, that is enshrined in the statutory definition. It is the words ‘carrying on’ which imply the repetition of acts … and activities which possess something of a permanent character. This conclusion serves to emphasize that it is necessary to engage in a process of construction in order to arrive at the meaning of the word in s 118 (1).” [24] (emphasis added)
[23](1980) 144 CLR 1
[24]At 8-9
Section 911A(1) applies to a “person who carries on a financial services business”. Section 911D refers to a “person carrying on the business”. Applying the reasoning in Hope v Bathurst City Council, one would, when considering whether someone was carrying on a financial services business, look for a “repetition of acts” and “activities which possess something of a permanent character”. It is possible to find a repetition of acts in what the respondents did but the nature of their activity did not possess something of a permanent character.
Assistance in the construction of these provisions can be obtained by reference to the Revised Explanatory Memorandum for the Financial Services Reform Bill 2001 (which introduced these provisions). It contains the following comment on the meaning of “financial services business”:
6.116The common law meaning of ‘carrying on a business’ encompassing elements of system, repetition and continuity suggests that one-off transactions relating to the provision of financial services and financial products are unlikely to be caught by this regime. So, for example, a one-off issue of securities would be unlikely to fall within the definition of ‘carrying on a financial services business’.
This is, not surprisingly, consistent with the authorities referred to above.
The reference to “a one-off issue of securities” would comprehend what occurred in this case. The issue of shares took place over a limited period – a period which the Act uses for the purposes of assessing the small scale offering exemption – and has not continued.
CME and the other respondents were “raising capital by issuing shares for the conduct of its own business”. In doing so, they were not “carrying on a financial services business” because, by engaging in the conduct alleged, they were not carrying on a business. There are two reasons for drawing this conclusion:
(a) I respectfully agree with PD McMurdo J that: “It is not immediately clear then that the offering of its shares is itself the carrying on of any business.” Merely promoting the issue of shares in one’s own company does not, of itself, constitute a business.
(b) The “one-off” nature of the behaviour does not constitute a business.
Assuming, in ASIC’s favour, that ASIC can establish the allegations it makes against the respondents, that does not constitute the “carrying on of a financial services business” and, so, none of the respondents were required to hold an Australian financial services licence.
Misleading and Deceptive Conduct
ASIC pleads that the respondents engaged in misleading and deceptive conduct under four heads:
(a)The Invention Representations;[25]
(b)The Patent Representations;[26]
(c)The Expenditure Representations;[27] and
(d)The Prototype Representation.[28]
[25]FASOC at [18(a)].
[26]FASOC at [18(b)].
[27]FASOC at [18(c)].
[28]FASOC at [18A].
I will deal first with the allegations so far as CME is concerned. ASIC alleges that the natural respondents are also liable as principals or, alternatively, as accessories.
It is ASIC’s case that all the representations were:
(a)made:
(i)in relation to a financial product within the meaning of s.1041H of the Act;[29]
[29]FASOC at [20].
(ii)in relation to financial services, within the meaning of ss.12BAB and 12DA of the ASIC Act;[30]
[30]FASOC at [21(b)(ii)(A)].
(iii)in connection with the supply or possible supply of financial services, within the meaning of ss.12BAB and 12DA of the ASIC Act;[31] and
[31]FASOC at [21(b)(ii)(B)].
(iv)in connection with the promotion by any means of the supply or use of financial services within the meaning of ss.12BAB and 12DA of the ASIC Act.[32]
[32]FASOC at [21(b)(ii)(C)].
(b)misleading and deceptive, or likely to be so:
(i)in relation to a financial service in contravention of s.1041H of the Act;[33]
[33]FASOC at [28(b)(i)].
(ii)in relation to financial services in contravention of s.12DA of the ASIC Act;[34]
(iii)in connection with the supply or possible supply of financial services, or in connection with the promotion by any means of the supply or use of financial services in contravention of s.12DB of the ASIC Act.[35]
[34]FASOC at [28(b)(ii)].
[35]FASOC at [28(b)(iii)].
As was noted by counsel for Messrs McClelland and Foster, no case under s.52 of the Trade Practices Act 1974 (Cth) of misleading and deceptive conduct in the course of general trade or commerce is pleaded. No doubt, ASIC took this course because the introduction of s 51AF into the Trade Practices Act in 1998 excluded the operation of ss 52 and 55A from applying to conduct engaged in relation to financial services.[36] But, the provisions are relevantly the same and, so, decisions on the cognate Trade Practices Act provisions must inform consideration of the relevant sections of the Act and the ASIC Act.
[36]The absence of a TPA claim in the alternative means that relief is not available should ASIC prove misleading and deceptive conduct but not prove that it occurred in relation to financial services.
The conduct alleged to be misleading or deceptive is limited by the Act and the ASIC Act to conduct:
(a) in relation to financial products or financial services;
(b) in connection with the supply of financial services; and
(c) in connection with the promotion of the supply or use of financial services.
Section 1041H of the Act relevantly provides:
“Misleading or deceptive conduct (civil liability only)
(1) A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.
Note 1: Failure to comply with this subsection is not an offence.
Note 2: Failure to comply with this subsection may lead to civil liability under section 1041I. For limits on, and relief from, liability under that section, see Division 4.(2) The reference in subsection (1) to engaging in conduct in relation to a financial product includes (but is not limited to) any of the following:
(a) dealing in a financial product;
(b) without limiting paragraph (a):
(i)issuing a financial product;
(ii)publishing a notice in relation to a financial product;
…”
Allegations are made that some representations (patent and expenditure) concerned future matters. In that regard, s 769C of the Act is relevant:
“Representations about future matters taken to be misleading if made without reasonable grounds
(1)For the purposes of this Chapter, or of a proceeding under this Chapter, if:
(a)a person makes a representation with respect to any future matter (including the doing of, or refusing to do, any act); and
(b)the person does not have reasonable grounds for making the representation;
the representation is taken to be misleading.
(2)Subsection (1) does not limit the circumstances in which a representation may be misleading.
(3)In this section:
proceeding under this Chapter has the same meaning as it has in section 769B.”
The applicant also relies on the following sections of the ASIC Act:
“12DA Misleading or deceptive conduct
(1)A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.
(1A)Conduct:
(a)that contravenes:
(i)section 670A of the Corporations Act (misleading or deceptive takeover document); or
(ii)section 728 of the Corporations Act (misleading or deceptive fundraising document); or
(b)in relation to a disclosure document or statement within the meaning of section 953A of the Corporations Act; or
(c)in relation to a disclosure document or statement within the meaning of section 1022A of the Corporations Act;
does not contravene subsection (1). For this purpose, conduct contravenes the provision even if the conduct does not constitute an offence, or does not lead to any liability, because of the availability of a defence.
(2)Nothing in sections 12DB to 12DN limits by implication the generality of subsection (1).
12DB False or misleading representations
(1)A person must not, in trade or commerce, in connection with the supply or possible supply of financial services, or in connection with the promotion by any means of the supply or use of financial services:
(a)falsely represent that services are of a particular standard, quality, value or grade; or
(b)falsely represent that a particular person has agreed to acquire services; or
(c)represent that services have sponsorship, approval, performance characteristics, uses or benefits they do not have; or
(d)represent that the person has a sponsorship, approval or affiliation it does not have; or
(e)make a false or misleading representation with respect to the price of services; or
(f)make a false or misleading representation concerning the need for any services; or
(g)make a false or misleading representation concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy.
Note: Failure to comply with this subsection is an offence (see section 12GB).
(2)Conduct:
(a)that contravenes:
(i) section 670A of the Corporations Act (misleading or deceptive takeover document); or
(ii) section 728 of the Corporations Act (misleading or deceptive fundraising document); or
(b)in relation to a disclosure document or statement within the meaning of section 953A of the Corporations Act; or
(c)in relation to a disclosure document or statement within the meaning of section 1022A of the Corporations Act;
does not contravene subsection (1). For this purpose, conduct contravenes the provision even if the conduct does not constitute an offence, or does not lead to any liability, because of the availability of a defence.
(3)An offence under subsection 12GB(1) relating to subsection (1) of this section is an offence of strict liability.
Note: For strict liability, see section 6.1 of the Criminal Code.”
Section 12BB of the ASIC Act relates to representations about future matters:
“Misleading representations
(1) For the purposes of Subdivision D (sections 12DA to 12DN), if a person makes a representation about a future matter (including the doing of, or the refusing to do, any act) and the person does not have reasonable grounds for making the representation, the representation is taken to be misleading.
(2) For the purpose of applying subsection (1) to a proceeding concerning a representation made by a person about a future matter, the person is taken not to have had reasonable grounds for making the representation unless it adduces evidence to the contrary.
(3) Subsection (1) does not limit by implication the meaning of a reference in this Division to:
(a)a misleading representation; or
(b)a representation that is misleading in a material particular; or
(c)conduct that is misleading or is likely or liable to mislead.”
In summary, in order to be successful:
(a) Under s 1041H of the Act an applicant must show that the conduct complained of:
(i) is in relation to a financial product or financial service; and
(ii) is misleading or deceptive or likely to mislead or deceive.
(b) Under s 769C of the Act where a person makes a representation (in relation to a financial product or financial service) with respect to any future matter then, in order to establish that the representation is misleading, the applicant must show that the person did not have reasonable grounds for making the representation.
(c) Under s 12DA of the ASIC Act an applicant must show that the conduct complained of:
(i) is in trade or commerce;
(ii) is in relation to financial services; and
(iii) is misleading or deceptive or likely to mislead or deceive.
(d) Under s 12DB of the ASIC Act an applicant must show that the conduct complained of:
(i) is in trade or commerce; and
(ii) is in connection with the supply or possible supply of financial services; or
(iii) is in connection with the promotion by any means of the supply or use of financial services; and
(iv) falsely represents or is a false or misleading representation about one or several matters listed in the section.
(e) Under s 12BB of the ASIC Act, if:
(i) a person makes a representation about a future matter, and
(ii) the person does not have reasonable grounds for making the representation (a person is taken not to have reasonable grounds unless it adduces evidence to the contrary), then
the representation is taken to be misleading.
Considerable assistance can be obtained from the examination of the relevant principles by Dowsett J in National Exchange Pty Ltd where, after considering Campomar Sociedad Limitada v Nike International Ltd,[37] his Honour listed the following propositions as being relevant to the application of s 1041H(1) of the Act: [38]
[37](2000) 202 CLR 45
[38]National Exchange Pty Ltd v Australian Securities and Investments Commission (2004) 49 ACSR 369 at [18]
“• Conduct will only be misleading or deceptive, or likely to mislead or deceive, if there is a nexus between such conduct and any actual or anticipated misconception or deception.
• In identifying such nexus regard must be had to the circumstances of the particular case, including the remedies sought. Section 52 of the TP Act does not confer any entitlement to a remedy for breach or anticipated breach. One must look elsewhere in the TP Act for such entitlement and construe the act as a whole.
• In some cases, a representation may be made to identified individuals; in other cases the representation may be to the public at large or to a section thereof. In the former case the process of deciding whether or not the representation is misleading or deceptive or likely to be so may be ‘direct and uncomplicated’. In the latter case ‘the issue with respect to the sufficiency of the nexus between the conduct or the apprehended conduct and the misleading or deception or likely misleading or deception of prospective purchasers is to be approached at a level of abstraction not present where the case is one involving an express untrue representation allegedly made only to identified individuals’. (I infer that the word ‘representation’ in [100] of Nike should be ‘misrepresentation’, relying upon the relevant passage in Taco Bell to which the High Court was referring.)
• When the representation is made to the public or to a section thereof, one must consider its effect upon an ordinary or reasonable member of the class in question. Although such class may include a wide range of persons, the ordinary or reasonable member will objectively be identified as having certain characteristics. In particular he or she can be expected to take reasonable care for his or her own interests and otherwise to behave reasonably.
• It is necessary to inquire as to how a particular or anticipated misconception has arisen or may arise. In so doing, the Court will consider ‘the effect of the relevant conduct on reasonable members of the class’.
• Conduct will only be misleading or deceptive or likely to mislead or deceive if the representee ‘labours under some erroneous assumption’ or may be expected so to labour. Such an assumption or anticipated assumption may be obvious, predictable or fanciful.
• In assessing the reactions or likely reactions of the ordinary or reasonable member of the class, the court may decline to treat as reasonable, assumptions which are extreme or fanciful. The initial question which must be determined is whether the misconception or deception, alleged or anticipated, is properly attributable to an ordinary or reasonable member of the class.
• The ‘question whether particular conduct causes confusion or wonderment cannot be substituted for the question whether the conduct answers the statutory description contained in s 52.’”[39] (emphasis added)
[39]At [18]
Dowsett J adopted (as did the other members of the Court) the four-step inquiry for determining whether conduct was misleading or deceptive or likely to mislead or deceive propounded by Finkelstein J at first instance, namely:[40]
“• Was there a false representation?
• What was the intention underlying the conduct in question? (His Honour identified correctly that intention to mislead was not essential but nonetheless was relevant to the inquiry.)
• Was the conduct such as to lead to an erroneous assumption on the part of representees?
• Did the conduct mislead or deceive or was it likely to do so, having regard to the behaviour of a reasonable representative of the whole class of representees?”
[40]National Exchange Pty Ltd at [35] Finkelstein J had identified these steps as constituting the inquiry proposed in Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177.
It must also be borne in mind that a provision such as s 1041H of the Act “is not intended to benefit those who fail to take reasonable care of their own interests.”[41] As Gibbs CJ said in Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd:[42]
“Section 52 does not expressly state what persons or class of persons should be considered as the possible victims for the purpose of deciding whether conduct is misleading or deceptive or likely to mislead or deceive. It seems clear enough that consideration must be given to the class of consumers likely to be affected by the conduct. Although it is true, as has often been said, that ordinarily a class of consumers may include the inexperienced as well as the experienced, and the gullible as well as the astute, the section must in my opinion by regarded as contemplating the effect of the conduct on reasonable members of the class. The heavy burdens which the section creates cannot have been intended to be imposed for the benefit of persons who fail to take reasonable care of their own interests. What is reasonable will of course depend on all the circumstances.” (emphasis added)
[41]National Exchange Pty Ltd at [66]
[42](1981) 149 CLR 191 at 199
Before moving to the specific representations, I should deal with one of the points which applies to all of the alleged misrepresentations. That is: what is the correct approach when the persons who may be misled are not identified individuals but are members of a class?
ASIC does not assert that any particular person was misled by the respondents. It asserts, generally, that the conduct of the respondents breached the identified provisions of the Act and the ASIC Act. ASIC did rely on affidavits from four shareholders but none of them said that they had been misled or deceived. There was evidence that ASIC had interviewed other shareholders but no evidence was adduced as to their attitude. It can be inferred that ASIC could not, despite its efforts, find anyone who claimed to have been misled. That, though, is not the answer to the question.
This area of inquiry has been considered in some detail in Domain Names Australia Pty Ltd v .Au Domain Administration Ltd.[43] In that case the appellant had sent out hundreds of thousands of notices to Australian businesses inviting them to engage it to register particular domain names. The trial judge found that the notices contained representations which were misleading or deceptive. On appeal, the Full Court dealt with the applicable principles in the following way:
“[17] It has long been established that:
· When the question is whether conduct has been likely to mislead or deceive it is unnecessary to prove anyone was actually misled or deceived: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 198.
· Evidence of actual misleading or deception is admissible, and may be persuasive, but is not essential: Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 at 87.
· The test is objective and the Court must determine the question for itself: Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 at 202.
· Conduct is likely to mislead or deceive if that is a real or not remote possibility, regardless of whether it is less or more than 50%: Global Sportsman.
[18] The likelihood of recipients of a representation being misled or deceived is not a matter to be proved by evidence (testimony, documents or things), or by judicial notice or its statutory equivalent (these are alternative methods of proof; Mathieson, DL, Cross on Evidence (7th ed, 2004) discusses judicial notice in Chapter Two which is entitled ‘Facts which need not be proved by evidence’). The existence or otherwise of such a likelihood is a jury question for the trier of fact: Australian Competition and Consumer Commission v Telstra Corp Ltd (2004) 208 ALR 459 per Gyles J.
[43](2004) 139 FCR 215
…
[22] Consideration of these difficulties shows the practical wisdom of the firm rule that the likelihood of conduct being misleading or deceptive is a question for the tribunal of fact and not for any witness to decide: General Electric Co (USA) v General Electric Co Ltd [1972] 1 WLR 729 at 738 per Lord Diplock, applied in a s 52 context by Gummow J, with whom Black CJ and Lockhart J agreed, in Interlego AG v Croner Trading Pty Ltd (1992) 39 FCR 348 at 387.
[23] Lord Diplock points out in General Electric that a different rule applies in the case of sales not to the general public but in specialised markets concerning persons engaged in a particular trade. In the present case the relevant market is that in which the consumers are business users of domain names. Such users constitute large sections of the public and are not participants in a specialised market in the sense discussed by Lord Diplock.(2) Reference to a hypothetical individual
[24] His Honour (at [16]) summarised the text [sic] formulated by the High Court in Campomar Sociedad, Limitada v Nike International Ltd (2000) 202 CLR 45 in these terms:‘First, where the persons allegedly misled are not identified individuals but are members of a class it is necessary to isolate ‘a representative member’ of the class and enquire whether this hypothetical individual is likely to be deceived. Second, when considering the likely effect of the misrepresentation on this hypothetical person he (or she) should be judged as an ‘ordinary’ or ‘reasonable’ member of the class. In this way, reactions to the representation that are ‘extreme’ or ‘fanciful’ will be disregarded.’ (emphasis added)
Having identified the test his Honour then said (at [21]):
‘How then is one to identify and give characteristics to Campomar Sociedad's hypothetical individual? Logic demands that if one is dealing with a diverse group then, for the purpose of determining whether particular conduct has the capacity to mislead, it is necessary to select a hypothetical individual from that section of the group which is most likely to be misled. If the court is satisfied that this hypothetical individual is likely to have been misled by that conduct, that would be sufficient.’
[25] The appellants’ complaint appears to be that his Honour should have considered the effect of the notices on the ‘ordinary or reasonable’ recipient.
[26] However in our view his Honour accurately summarised the Campomar test. There is no inconsistency between testing the effect of the representation by reference to ordinary or reasonable members of the class and by reference to the hypothetical individual. The attribution of characteristics to the ordinary and reasonable members of the class must be objective in order to allow for the wide range of persons who would in factnot[sic] make up the class: National Exchange Pty Ltd v Australian Securities and Investments Commission (2004) 49 ACSR 369 per Jacobson and Bennett JJ. Within a large class there may be a number of subclasses of ordinary and reasonable people. Thus in the present case there may be ordinary and reasonable persons who were well informed about the internet and the domain name registration system and other persons, equally ordinary and reasonable, who were not.” (emphasis added)On the basis of the reasoning in Domain Names I intend to assess the alleged misrepresentations from the point of view of an ordinary or reasonable member of the relevant class. The extension of that class by Finkelstein J (and apparently approved by the Full Court in Domain Names) to a section “which is most likely to be misled” is, in my respectful opinion, not able to be drawn from what the High Court said in Campomar and is inconsistent with what Gibbs CJ said in Puxu. [44] The test set out in Campomar does not support the extension to a section “which is most likely to be misled”:
“[102] It is in these cases of representations to the public, of which the first appeal is one, that there enter the ‘ordinary’ … or ‘reasonable’ … members of the class of prospective purchasers. Although a class of consumers may be expected to include a wide range of persons, in isolating the ‘ordinary’ or ‘reasonable’ members of that class, there is an objective attribution of certain characteristics. Thus, in Puxu … , Gibbs CJ determined that the legislation did not impose burdens which operated for the benefit of persons ‘who fail[ed] to take reasonable care of their own interests’. In the same case, Mason J concluded that, whilst it was unlikely that an ordinary purchaser would notice the very slight differences in the appearance of the two items of furniture in question, nevertheless such a prospective purchaser reasonably could be expected to attempt to ascertain the brand name of the particular type of furniture on offer … .
[103] Where the persons in question are not identified individuals to whom a particular misrepresentation has been made or from whom a relevant fact, circumstance or proposal was withheld, but are members of a class to which the conduct in question was directed in a general sense, it is necessary to isolate by some criterion a representative member of that class. The inquiry thus is to be made with respect to this hypothetical individual why the misconception complained has arisen or is likely to arise if no injunctive relief be granted. In formulating this inquiry, the courts have had regard to what appears to be the outer limits of the purpose and scope of the statutory norm of conduct fixed by s 52 … . Thus, in Puxu, Gibbs CJ observed that conduct not intended to mislead or deceive and which was engaged in ‘honestly and reasonably’ might nevertheless contravene s 52 … Having regard to these ‘heavy burdens’ which the statute created, his Honour concluded that, where the effect of conduct on a class of persons, such as consumers, was in issue, the section must be ‘regarded as contemplating the effect of the conduct on reasonable members of the class’ … .”[45] (emphasis added)[44](1982) 149 CLR 191 at 199
[45](2000) 202 CLR 45
In considering the ordinary or reasonable member of the class I should also bear in mind what Mason J said in Puxu. That case concerned a particular type of furniture, and its cost was relevant in defining the attributes of a potential purchaser:
“ … Lockhart J. is correct in stating that here "the relevant class of persons likely to be exposed to the alleged misleading or deceptive conduct would be anyone interested in purchasing lounge suites or chairs in the higher price range". As his Honour noted, the class protected by s. 52 must vary according to the facts of each case. In furniture of this price range in the order of $1,500 for a three piece lounge suite one would in the ordinary course expect persons within the admittedly wide range of potential purchasers to exercise somewhat more vigilance than may be the case with the purchase of items of less financial significance having less impact on the appearance of the home (cf. Jafferjee v. Scarlett (1936) 57 CLR 115, at p. 124).”[46] (emphasis added)
[46]Puxu at 209
The Invention and Prototype Representations
In its pleading, ASIC defines the “Invention” as “the concept of using permanent magnets in a configuration that supplies mechanical power on demand”.[47] The representation alleged to have been made was that the Invention works (the ‘Invention Representation’).
[47]FASOC at [18(a)]
Further, and in the alternative, ASIC defines the “Prototype” as the “three dimensional proof of concept model (CX3) of a Cycclone Magnetic Engine”.[48] The representation alleged to have been made was that the Prototype works (the ‘Prototype Representation’).
[48]FASOC at [18A]
It is then alleged that the Invention Representation or the Prototype Representation or both, were misleading or deceptive (or likely to mislead or deceive) because neither the Invention nor the Prototype:[49]
(a) is scientifically feasible,
(b) can move under its own power, or
(c) can be a source of power.
[49]FASOC at [22]
Further, it is alleged that the Invention Representation or the Prototype Representation or both were likely to mislead a reasonable person into the assumption that, by acquiring shares in CME, the person was investing in a proven technology.[50]
[50]FASOC at [23]
Further, it is alleged that the Invention Representation or the Prototype Representation or both:[51]
(a) falsely represented that shares in CME were of a particular quality, that is, an investment in a proven technology; and further, or alternatively
(b) represented that shares in CME had a performance characteristic or benefit that they did not have, namely, an investment in a proven technology.
[51]FASOC at [24]
Further, it is alleged that, by making the representations, each of the respondents engaged in conduct in relation to a “financial product” as that term is used in s 1041H of the Act.[52] The term “financial product” is defined, for the purposes of s 1041H, as including a “security”,[53] which, in turn, is defined to include “(a) a share in a body” or a “legal or equitable right or interest in a security covered by paragraph (a) or (b)”.[54]
[52]FASOC at [20]
[53]s 764A, the Act
[54]s 761A, the Act
ASIC then pleads that the facts as alleged also support allegations that the representations were made: [55]
[55]FASOC [21]
(a) in trade or commerce; and
(b) in relation to issuing shares in CME
and that, in making the representations, each of the respondents:
(c) was engaging in conduct within the meaning of s 12BA of the ASIC Act, and that such conduct was:
(i) in relation to financial services within the meaning of s 12BAB and s 12DA of the ASIC Act; and, or alternatively
(ii) in connection with the supply or possible supply of financial services within the meaning of s 12BAB and s 12DB of the ASIC Act; and, or alternatively
(iii) in connection with the promotion by any means of the supply and use of financial services within the meaning of s 12BAB and s 12DB of the ASIC Act.
ASIC identifies the representations as having been made in four ways:
(a) in a newsletter published by CME, designated “Volume 1, Issue 1” and dated 14 March 2005;[56]
(b) in a document published by CME entitled “Business Plan”;
(c) on a web site conducted by CME; and
(d) in statements made by Mr McClelland during meetings concerning the invention.
[56]Ex SPW 27
The respondents answer these allegations in a number of ways:
(a) the alleged representations that the invention (or the prototype) worked were not made;
(b) the statements made, when read in context, are not misleading or deceptive; and
(c) there is no evidence that the statements were made in relation to a financial product or a financial service.
What is the “invention / prototype”?
Before going any further, I should provide some details of the “invention/prototype”. It is described in the Business Plan in this way:[57]
“CME is the concept of using permanent magnets in a configuration that supplies mechanical power on demand. To offer an alternative to the ubiquitous internal combustion engine that is commercially viable, the technology must imitate the manner and principles that the internal combustion engines operate under. CME believes that it is able to meet this criteria [sic] by concentrating development on the control and configuration of the applied magnets.”
[57]Ex SPW 25
On the web site conducted by CME the following description is given:[58]
“Practically all of the research and development work carried out in the race to create a power source utilizing the attraction and repulsion of magnets has been derived from linear motion. Cycclone magnetic engines combine cyclic motion with the use of spinning metals that clone the magnetic pole, hence the name cyc-clone.”
[58]>
It is not surprising that there is very little detail about the manner in which the engine is constructed or how it operates. CME has no (and has not applied for any) patents relating to the engine. The inventor (Mr Nugent) was called by ASIC to give evidence of a fairly mundane character but, notably, was not asked any questions by his own counsel about the invention or the prototype or any other matter. Mr Morris QC cross-examined him (mostly) about matters going to the position of Messrs McClelland and Foster.
Mr Nugent was asked about the engine’s operation in the examination conducted under s 19 of the ASIC Act. The relevant part reads:[59]
[59]Ex SPW 15
“Q. Right. So just explain to me how that engine works?
A. .... The magnetic engine works wholly and solely with the attraction repulsion of permanent magnets. The objective of it is to produce an engine that doesn't require external input, either electrical or fuel. It's so that the engine runs purely on the attraction and repulsion of permanent magnets. In its geometric configuration that does not try to challenge perpetual motion but to use mechanical advantage.
Q. So it doesn't require any input or any source from an external battery system –
A. That’s correct.
Q. -- or any back up electricity or anything like that. It's just a self propelling engine run on magnets; is that right?
A. That's correct.
Q. And are the magnets - just so I can get my head around - are the magnets housed inside the actual engine, are they?
...
Yes. It is permanent magnets inside the housing.
Q. How many magnets would there be inside a housing?
A. There's 48 – .... There's 48 magnets in the current configuration that is shown in the public sense. The current engine that is shown in the public sense.
Q. Micheal can I ask you a question about the input energy. I've seen a piece of footage from your web site which actually shows, it looks like a car battery hooked up to your magnetic engine and it appears as though the power is actually generated from that battery in order for the magnets to then start operating and for the engine to run. So can you explain that for me? That's from the Cycclone Magnetic Engines web site?
A. Yes. .... The two batteries are only used to turn the fly wheel. Once - the video does not show the battery cables being disconnected and the engine running by itself. Other people have seen that where we drop the cables off. The two batteries are purely there to start.
Q. To start the fly wheel off?
A. That’s correct.
Q. And then once that kicks over, the magnets take - well, they'd be going at the same time, would they, and then once the magnets have started rotating, you turn the fly wheel off, is that right, or you turn the batteries off?
A. .... Yes. We the batteries are disconnected.
Q. Can you just clarify the question that you gave previously then to Miss Gibson in relation to the input energy then, so there is some input energy from an external source in order to start the engine running or was that only a situation which isn't normal?. You don't normally have a battery hooked up to it to actually get the engine started?
A. No. .... We use batteries to set it in motion and then we disconnect the batteries.
Q. So there is some input energy into the engine to actually get it started? You can't get it started without that battery?
A. .... We could hand rotate it but with the configuration that we're using there we use batteries for simplistic reasons.
Q. Just so it's clear in my mind, is there input energy or no input energy whatsoever?
A. .... Input energy at start up.
Q. Is it similar to starting off a big Easter [sic] generator. You know how some of those big old generators start with a hand cranking shaft and you initially kick it over with a hand cranking, you know, handle and then once it's kicked off it just propels by itself but the magnets keep it propelled. Is that how it works?
A. .... Yes.
Q. How do you stop the engine? How do you stop it from running?
A. .... You increase the air gap between magnets.
Q. How do you do that?
A. If you have a look I’m operating a hand throttle.”
Further, the case for CME and Mr Nugent on this point was inconsistent. In their Defence they denied that there were no reasonable grounds for making the representations:
“ … because the Expenditure Representations were made in good faith in reliance upon figures calculated by Jon McArthur, a former director and registered chartered accountant.”[116]
[116]Amended Defence, para. 21(d)
No evidence was called to support that positive assertion. To the contrary, in their written submissions they said:
“The Court is ignorant of what role, if any, Mr McArthur played in assisting Mr Nugent in the drafting of this document.”[117]
[117]At [143]
It follows, then, that ASIC has made out its allegation that the expenditure representations were misleading or deceptive for the purposes of s 12DA of the ASIC Act.
Liability of the natural respondents – as principals
In addition to that which it has alleged against CME, ASIC asserts that each natural respondent is liable as a principal on the following bases:
(a) Nugent prepared both the Business Plan[118] and the Newsletter[119] and was aware that they were distributed to potential investors and investors in CME;[120]
[118]Ex SPW 15, p. 68, line 18 – p. 70 line 1.
[119]ASIC submits that this can be inferred from the newsletter itself and Ex SPW 15, p. 88 to 93.
[120]Ex SPW 15 at p. 68, lines 7 – 12, p. 93, lines 1 – 13.
(b) McClelland distributed the Business Plan to potential investors in CME,[121] referred potential investors to the Website and made the Invention Representation to potential investors in CME;[122]
[121]Ex SPW 16 p. 62, lines 11 – 15.
[122]Ex SPW 16, p. 52, lines 22 – 24 and p. 58, lines 7 - 9.
(c) Foster distributed the Business Plan to potential investors in CME[123] and referred potential investors to the Website.[124]
[123]Ex SPW 17 at p. 55, lines 8 – 11.
[124]Ex SPW 17 at p. 39, lines 16 – 27.
I will deal first with Mr McClelland and Mr Foster. They were employees of CME from March 2005 until 11 May 2006. From the latter date they were directors of CME until 27 February 2007. It was argued on their behalf that they were merely “conduits” and that they were not responsible for, nor could they have known about, the misleading nature of the representations which I have found to be established. Mr Nugent’s evidence established those latter propositions to my satisfaction. Even after they became directors they were not exercising the ordinary duties of directors. As he put it, after they were appointed the ASIC action began and that halted any sort of advancement.[125] Similarly, I find that they would not have been aware of the disparity between what they were being paid and what was represented in the Business Plan. They had only been engaged on higher remuneration for a short period and they did not have the training, experience or background to fully comprehend the contents of the expenditure representations. Similarly, they were entitled to accept what Mr Nugent told then about the engine and the technology. He had qualifications and experience in the field – they did not.
[125]T2 p.42
Nevertheless, s 1041H of the Act and s 12DA and 12DB of the ASIC Act each commence with the words:
“A person must not …”
Those words, of course, are in contrast to those used in s 52 of the TPA which refer to a corporation and which (subject to the extended application available under s 6) do not capture employees of corporations. Under the sections relied upon by ASIC, employees are caught and can be made liable for misleading and deceptive conduct. A similar situation was considered in Houghton v Arms.[126] In that case, it was argued that s 9 of the Fair Trading Act 1999 (Vic.) (which provided that: “A person must not, in trade or commerce …”) did not apply to employees as the conduct was that of the employer not the employee and that the “trade and commerce” must be that of the employer. This was unanimously rejected by the High Court, which held that the employees were liable notwithstanding that they had been engaged in the trade or commerce of their corporate employer and not of themselves.
[126](2006) 225 CLR 553
Neither Mr McClelland nor Mr Foster adduced evidence of “reasonable grounds” as referred to in s 12BB of the ASIC Act. They are in the same position as CME with respect to the allegations about future matters. It follows, then, that both have contravened the sections asserted by ASIC with respect to:
(a) the expenditure representation because they each distributed the Business Plan; and
(b) the invention representation because they each directed prospective investors to the web site.
Mr Nugent was, I have no doubt, the prime force behind CME. He is the person with the engineering experience and he, as the author of most of the Business Plan, set out the direction of the company. He also must have known that the engine did not work as proposed on the web site. The conduct he engaged in was the creation and provision to prospective investors of the Business Plan.[127] I was not referred to any evidence which established that he directed people to the web site. He has, therefore, contravened the sections asserted by ASIC with respect to the expenditure representation.
[127]Ex SPW 15, p 68
Relief
Of the matters complained about by ASIC in its statement of claim, it has succeeded with respect to the following:
(a) CME:
(i) breach of s 727 of the Act;
(ii) breach of s 1041H of the Act with respect to the invention representation and the expenditure representation;
(iii) breach of s 12DA of the ASIC Act with respect to the invention representation and the expenditure representation; and
(iv) breach of s 12DB of the ASIC Act with respect to the invention representation.
(b) Mr Nugent:
(i) breach of s 727 of the Act;
(ii) breach of s 1041H of the Act with respect to the expenditure representation; and
(iii) breach of s 12DA of the ASIC Act with respect to the expenditure representation.
(c) Mr McClelland and Mr Foster:
(i) breach of s 727 of the Act;
(ii) breach of s 1041H of the Act with respect to the invention representation and the expenditure representation;
(iii) breach of s 12DA of the ASIC Act with respect to the invention representation and the expenditure representation; and
(iv) breach of s 12DB of the ASIC Act with respect to the invention representation.
The relief sought, putting to one side that which related to claims which have been dismissed, is as follows:
(a) An order, pursuant to subsection 583(c)(ii) of the Corporations Act, that the first respondent be wound up on the ground that it is just and equitable that the first respondent be wound up;
(b) A declaration that each of the first to fourth respondents has made offers and distributed application forms for the offer of securities, namely shares, in the first respondent in contravention of sub-sections 727(1) and 727(2) of the Corporations Act in circumstances where the offers required disclosure to investors under Part 6D.2 of the Corporations Act and no such disclosure document has been lodged with the applicant;
(c) A declaration that each of the Second to Fourth respondents, in respect of disseminating documents identified in the supporting affidavits as the business plan and the internet web site of the First Respondent has engaged in conduct that is misleading and deceptive, or likely to mislead or deceive, in contravention of the provisions of section 1041H of the Corporations Act and section 12DA and 12 DB of the ASIC Act.
(d) An order, pursuant to subsection 1101B(1) and 1324(1) of the Corporations Act, that each of the first to fourth respondents be permanently restrained, whether by themselves, their servants, agents and employees or otherwise, from making offers or distributing application forms for the offer of securities that require disclosure to investors under Part 6D.2 of the Corporations Act without lodging a disclosure document for the offer with the applicant and including the disclosure document in the offer or application form as required by s 727 of the Corporations Act.
Winding up
I have found that there have been breaches of the Act as set out above. ASIC seeks the winding up of CME on two bases:
(a) That public interest considerations warrant the making of an order winding up CME; and
(b) Given that the invention has no proper scientific basis, there is no proper basis or substratum for the existence of the company.
CME is, for the purposes of this claim, a Part 5.7 body under the Act. Section 583(c)(ii) provides:
“Subject to this Part, a Part 5.7 body may be wound up under this Chapter and this Chapter applies accordingly to a Part 5.7 body with such adaptations as are necessary, including the following adaptations:
…(c)the circumstances in which a Part 5.7 body may be wound up are as follows:
…
(ii) if the Court is of opinion that it is just and equitable that the Part 5.7 body should be wound up;”
Breaches of the Act have been established but they, in themselves, are insufficient to justify a winding up order. It is not uncommon for corporations to be the subject of adverse findings, so far as breaches of consumer protection provisions are concerned. They will not ordinarily justify a winding up order.
There are other matters which also militate against the making of such an order:
(a) As this is a company which is incorporated pursuant to foreign laws, a winding up order in Australia will not serve to bring the company’s existence to an end.
(b) Apart from Mr Robinson, no shareholder has supported the winding up of the company, even in the light of material advanced by ASIC. Mr Williamson’s evidence was that “generally the other shareholders don’t seem to support the winding up application.”[128]
(c) There was uncontradicted evidence from Mr Potts that, if CME directed its efforts towards “the storage of recovered energy and its reuse on demand … that patents and products will flow in abundance from their ingenuity.”
(d) There are no outstanding debts of any significance.
(e) If the company was wound up now it would, on Mr Hellen’s understanding of the financial position of CME, result in no return to any of the investors. Whatever funds are currently held by the company would inevitably be dissipated in paying the persons who would otherwise be charged with the winding up of the company in Australia.
(f) No notice of the winding up application has been given.
[128]T2 p.63/10
Declaration of contravention
ASIC seeks a declaration that the respondents have contravened sections 727(1) and 727(2) of the Act. The utility of such a declaration is one which attracts some doubt. ASIC submitted that “the making of a declaration is an appropriate vindication of the operation of legislation designed to protect public rights”.[129] The operation of Commonwealth legislation does not require to be vindicated by way of a declaration in this matter. A declaration such as the one sought by ASIC would be no more than a recording of the finding of fact which I have made above with respect to this particular contravention.
[129]ASIC written submissions [85]
There is another important consideration to be taken into account. In the examination of Mr Nugent, conducted pursuant to s 19 of the ASIC Act, he was referred to the notice which had been served upon him concerning the examination and the fact that it related to, among other things, a suspected contravention of s 408C[130] of the Queensland Criminal Code for the period 1 January 2004 to 14 July 2006.
[130] “408C Fraud
Similar notifications were given to Messrs Foster and McClelland, referring to s 408C of the Criminal Code.
I agree with the remarks of Bryson J in Telstra Corp Ltd v AAPT Ltd when, referring to the TPA Act, he said:
“Declaratory orders are not made as of course when remedies are granted under the Trade Practices Act, and in my opinion they should not be… A declaratory order is a form of relief, and should not be added to other relief granted to a party unless it has some real effect as relief. A declaratory order is not made only to give other remedies an air of completeness or of symmetry.” [131]
[131][1999] NSWSC 853 at [56], [57]
In Australian Securities and Investments Commission v Intertax Holdings Pty Ltd (“Intertax”),[132] Fryberg J expressed the view that[133]:
“[w]here the possibility of prosecution is open, it would, in my judgment, be contrary to the ordinary practice for the authority of this Court to be given to a declaration which, in substance, amounted to a declaration that a defendant had committed a crime. One should not make a declaration which might be falsified by a subsequent acquittal in proceedings between the same parties”
[132][2006] QSC 276.
[133][2006] QSC 276 at [13]
That approach is consistent with the view expressed by Finkelstein J in Australian Securities and Investments Commission v HLP Financial Planning (Aust) Pty Ltd & Ors[134]:
“The English and Australian authorities that warn of the dangers of a civil court becoming involved in criminal conduct continue to apply in an appropriate company case. The general rule in a company case is that a civil court will usually be the appropriate court to deal with a contravention of the Corporations Act. But the court should be wary of granting relief, including the grant of a declaration or an injunction, if the case is likely to end up before a criminal court. Ordinarily, a civil court should not intervene in those circumstances unless its failure to do so will result in irreparable injury. That strict rule need not be applied if the case involves undisputed facts and the issue raised gives rise to a question of pure law. Then a declaration can be a very useful remedy. As Barwick CJ said in Commonwealth v Sterling Nicholas Duty Free Pty Ltd (1972) 126 CLR 297 at 305 that is the kind of case “which contributes enormously to the utility of the jurisdiction.”
[134](2007) 164 FCR 487 at [58]..
ASIC referred to the decision of Heerey J in ASIC v FUELbanc Australia Ltd, in which his Honour said:[135]
[135](2007) 162 FCR 174 at p 181-186
“[51] While courts are still reluctant to grant declaratory relief on issues which are theoretical or hypothetical (see Zamir and Woolf, op cit, 117 et seq), the Intertax argument against the grant of declaratory relief is based on a hypothetical fact, indeed a hypothesis upon a hypothesis — that there will be a prosecution and that such prosecution will result in an acquittal.
[52] There is high authority against the supposed limitation on the exercise of the discretionary power to grant declaratory relief. In Sankey v Whitlam (1978) 142 CLR 1 the High Court, in respect of then current committal proceedings (ie actual, not hypothetical, criminal proceedings), made declarations that (i) certain documents were privileged from production and that (ii) the information laid against Mr Whitlam was bad in law. Gibbs ACJ said (at 20-21):
‘It is well established that the power of the court to make a declaration, under a provision such as s 75 of the Supreme Court Act 1970 (N.S.W.), as amended, or O. 26, r. 19 of the Rules of this Court, is a very wide one: Forster v. Jododex Aust. Pty. Ltd. (1972) 127 CLR 421, at pp 435-436. It is clear enough that the power of the court is not excluded because the matter as to which a declaration is sought may fall for decision in criminal proceedings. Indeed in Dyson v. Attorney- General [1911] 1 KB 410, which is one of the foundations of the law on this subject, it was held that the court had power to make a declaration that the plaintiff was not under any obligation to comply with the requisitions contained in a notice sent to him by the Commissioners of Inland Revenue, notwithstanding that neglect to comply with the notice was an offence… Since that time there have been many cases in which the courts have made declarations in relation to questions which could have fallen for decision in criminal proceedings.’
…
[55] In Intertax [2006] QSC 276 at [8] Fryberg J distinguished Australian Softwood 148 CLR 121 on the ground that the High Court’s approval
‘… was to the proposition that a declaration could be granted notwithstanding that an injunction would not be granted.’
If by this his Honour meant that the High Court only granted a declaration because, with the consent of the parties, they did not grant an injunction, then I do not agree. Gibbs CJ said (at 125):
‘With all respect, Hutley JA was not correct in saying that declarations “are little more than prefatory averments to the grant of an injunction”. In my opinion it was proper to grant a declaration in the present case although it is now agreed that an injunction is not an appropriate remedy.’
…
[60] …[T]he consistent practice [of making such declarations] is a matter of considerable weight.[136]
[61] I conclude that I should not follow Intertax [2006] QSC 276. It is appropriate to make the declarations sought. It is sometimes said that a declaration is an appropriate way of marking the Court’s disapproval of the contravening conduct…
…
In the present case the legislation contravened protects public rights by regulating the conduct of those who seek investment from the public. Declarations as to the contraventions provide a formal vindication of the law’s operation.”[137] (emphasis added)
[136]The cases are: Australian Securities and Investments Commission v Atlantic 3 Financial (Aust) Pty Ltd [2006] QCA 540 (Queensland Court of Appeal); Australian Securities and Investments Commission v PFS Business Development Group Pty Ltd (2006) 57 ACSR 553 (Hargrave J, Supreme Court of Victoria); McDougall 229 ALR 158 (Young J, Federal Court); Australian Securities and Investments Commission v Preston [2005] FCA 1805 (Finkelstein J, Federal Court); Australian Securities and Investments Commission v Drury Management Pty Ltd [2004] QSC 068 (Jones J, Supreme Court of Queensland); Australian Securities and Investments Commission v Young (2003) 173 FLR 441 (Muir J, Supreme Court of Queensland); Pegasus 41 ACSR 561 (Davies AJ, Supreme Court of New South Wales); Australian Securities and Investments Commission v Hutchings (2001) 38 ACSR 387 (Windeyer J, Supreme Court of New South Wales); Australian Securities and Investments Commission v Sweeney [2001] NSWSC 114 (Austin J, Supreme Court of New South Wales).
[137]At p.181 to 186
The view expressed by Heerey J was supported by Young J in ASIC v McDougall & Anor where his Honour said:[138]
“[55] Since Australian Softwood Forest Pty Ltd v Attorney-General (NSW) (1981) 148 CLR 121…esp at CLR 125…, the courts have recognised that the grant of declaratory relief on the application of a statutory body such as ASIC may serve important law enforcement purposes: see Corporate Affairs Commission (NSW) v Transphere Pty Ltd(1988) 15 NSWLR 596 at 603…; Australian Securities and Investments Commission v Sweeney[2001] NSWSC 114 at [30]–[31]; and Pegasus at 571. ASIC is charged with the administration and enforcement of the Act, and there will be many cases where it is in the public interest for the courts to make a declaration on ASIC’s application that the Act has been contravened in specified respects. The making of such a declaration does not simply record the outcome of enforcement proceedings; it may also be an appropriate way of marking the court’s disapproval of the contravening conduct: see Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc (No 2) (1993) 41 FCR 89 at 97–9 and 106, 110.” (emphasis added)
[138](2006) 57 ACSR 175
ASIC did not give any undertaking that it would not seek to have criminal proceedings commenced against any of the respondents. In the light of the manner in which each of the natural respondents was questioned, I think it would be inappropriate to describe the prospect of a criminal prosecution as merely hypothetical. I am persuaded by the reasoning of Fryberg J in ASIC v Varsity Lodge Pty Ltd where, after considering the views of Heerey J in FUELbanc, his Honour said:[139]
“Having regard to the reasons given to me for the utility of the declaration it seems to me that there might be two problems which could arise from the making of declaratory orders in the present case. The first is that, in the event that the proceedings which the evidence suggests are quite a serious possibility are in fact started, there will be a declaration on the record of a superior court of record foreclosing the outcome of those proceedings. In the event of an acquittal, there will be inconsistent curial outcomes. Even without that result, there is the serious possibility of embarrassment in the course of the proceedings.
Second, I was informed by Mr Derrington that both of the offences created by the two sections are indictable offences and that they would be tried by jury. That, it seems to me, creates a substantial factor operating in a way which conflicts with what ASIC proposes to do with the declarations, that is to say to publicise them.
It is, I think, elementary that it is generally undesirable for a jury to be made aware of declarations of this sort.
Those, then, are powerful factors, in my judgment, which would tend against the granting of the declarations sought.
I emphasise that I am not now talking about speculative hypothesis, but about matters which, on the evidence, are real possibilities. The same was true in Intertax.” (emphasis added)
[139][2007] QSC 376
It follows, then, that I am of the view that a declaration is an inappropriate means of relief so far as s 727 is concerned. The breaches of s 1041H of the Act and s 12DA and s 12DB of the ASIC Act are in a different category. No criminal sanctions attach to those breaches and it is appropriate that current investors and any prospective investors be made aware of that conduct. Appropriate declarations will achieve that result.
Injunction
Apart from the film which was, at the trial, still able to be viewed on the web site, there is no evidence that any of the respondents intend to recommence activity of a kind which I have found to be in breach of the Act.
By way of final relief ASIC seeks an order pursuant to subsection 1101B(1) and 1324(1) of the Act that CME, and each of Messrs Nugent, McClelland and Foster:
(a) be permanently restrained, whether by themselves, their servants, agents and employees or otherwise from carrying on any form of financial services business in this jurisdiction without holding an Australian Financial Services Licence as required by s.911A of the Act;
(b) be permanently restrained, whether by themselves, their servants, agents and employees or otherwise from making offers or distributing application forms for the offer of securities that require disclosure to investors under Part 6D.2 of the Act without lodging a disclosure document for the offer with ASIC and including the disclosure document in the offer or application form as required by section 727 of the Act.
The first injunction is not appropriate given the findings above.
Section 1101B(1) of the Act provides:
“Power of Court to make certain orders
Court's power to make orders in relation to certain contraventions
(1) The Court may make such order, or orders, as it thinks fit if:
(a) on the application of ASIC, it appears to the Court that a person:
(i) has contravened a provision of this Chapter, or any other law relating to dealing in financial products or providing financial services; or
(ii) has contravened a condition of an Australian market licence, Australian CS facility licence or Australian financial services licence; or
(iii)has contravened a provision of the operating rules, or the compensation rules (if any), of a licensed market or of the operating rules of a licensed CS facility; or
(v) has contravened a condition on an exemption from the requirement to hold an Australian market licence or an Australian CS facility licence; or
(vi) is about to do an act with respect to dealing in financial products or providing a financial service that, if done, would be such a contravention; or
…
However, the Court can only make such an order if the Court is satisfied that the order would not unfairly prejudice any person.
Note:For examples of orders the Court could make, see subsection (4).
…
Examples of orders the Court may make
(4) Without limiting subsection (1), some examples of orders the Court may make under subsection (1) include:
(a) an order restraining a person from carrying on a business, or doing an act or classes of acts, in relation to financial products or financial services, if the person has persistently contravened, or is continuing to contravene:
(i) a provision or provisions of this Chapter; or
(ii) a provision or provisions of any other law relating to dealing in financial products or providing financial services; or
(iii) a condition on an Australian market licence, Australian CS facility licence or Australian financial services licence; or
(v) a condition of an exemption from a requirement to hold an Australian market licence or Australian CS facility licence; or
(vi) a provision of the operating rules, or the compensation rules (if any), of a licensed market or of the operating rules of a licensed CS facility; or
…”
Section 1324 provides:
“(1) Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:
(a) a contravention of this Act; or
(b) attempting to contravene this Act; or
(c) aiding, abetting, counselling or procuring a person to contravene this Act; or
(d) inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or
(e) being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or
(f) conspiring with others to contravene this Act;
the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first‑mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.
…
(6) [Where court may restrain action] The power of the Court to grant an injunction restraining a person from engaging in conduct may be exercised:
(a) 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; and
(b) whether or not the person has previously engaged in conduct of that kind; and
(c) whether or not there is an imminent danger of substantial damage to any person if the first-mentioned person engages in conduct of that kind.”
ASIC relies on the observations of Austin J in ASIC v Sweeney where his Honour said:[140]
[140][2001] NSWSC 114.
“[34] According to s 1(2) of the Australian Securities and Investments Commission Act 1989 (Cth), in performing its functions and exercising its powers, the plaintiff must strive to achieve various objectives, including:
·to promote the confident and informed participation of investors and consumers in the financial system;
·to administer the laws that confer functions and powers on it effectively and with a minimum of procedural requirements; and
·to take whatever action it can take, and is necessary, in order to enforce and give effect to the laws that confer functions and powers on it.
[35] These provisions imply that it is appropriate for the commission to take civil proceedings for declaratory and injunctive relief in respect of past events, even if there is no risk of repetition, where the outcome may establish that the conduct complained of was wrongful (and thereby mark the court’s and the community’s disapproval of it) and may deter other wrongdoers. It is appropriate for the court to take these matters into account in the exercise of its discretion to grant or refuse such relief.
[36]Thus, the Court has jurisdiction to grant relief of the kinds sought by the plaintiff in these proceedings. The granting of that relief will depend on the exercise of the Court's discretion.” (emphasis added)That decision (and others) was the subject of a very helpful analysis in an article by Lang Thai: “Statutory Injunction – Call for amendments to s1324 of the Corporations Act”[141]. The author demonstrates that there are authorities which apply s 1324 by using well-accepted equitable principles and others which eschew the use of such principles. In the latter category, reference is made to ASIC v Pegasus Leveraged Options Group Pty Ltd [142]. In that case, the court rejected ASIC’s claim for an injunction, not by referring to equitable principles, but on the basis of Austin J’s analysis in ASIC v Sweeney. Davies AJ said:
“[109] However, although the court has a wide discretion and is relieved by s 1324(6) and (7) from the shackles which would otherwise be imposed by the well understood principles of equity, nevertheless, the court should not grant an injunction simply because it has been requested to do so. An injunction should not be granted unless the order is directed to and appropriate to achieve an end such as enforcing and giving effect to the statute.” (emphasis added)
[141](2006) 24 C&SLJ 41
[142](2002) 41 ACSR 561
Further consideration to this issue has been given by Palmer J in ASIC v Mauer-Swisse Securities Pty Ltd[143] where is Honour referred to Pegasus Leveraged Options Group Pty Ltd. He considered a number of the authorities and said:
[143](2002) 42 ACSR 605
“[36]At the risk of some repetition, I summarise the principles which I draw from the presently applicable authorities:
·the jurisdiction which the court exercises under CA s 1324 is a statutory jurisdiction, not the court's traditional equity jurisdiction;
·Parliament has made it increasingly clear by successive statutory enactments that the court, in exercising its statutory jurisdiction under s 1324, is not to be confined by the considerations which would be applicable if it were exercising its traditional equity jurisdiction;
·among the considerations which the court must take into account in an application for an injunction under CA s 1324 are the wider issues referred to by Austin J in Sweeney and Parkes, and by Davies AJ in Pegasus; they may be gathered under the broad question whether the injunction would have some utility or would serve some purpose within the contemplation of the Corporations Act;
·these considerations are to be taken into account regardless of whether the application is for a permanent injunction under s 1324(1) or for an interim injunction under s 1324(4);
·where an application under s 1324(4) is made by ASIC rather than a private litigant the court is more likely to give greater weight to the broad question whether the injunction would serve a purpose within the contemplation of the Corporations Act;
·where there is an appreciable — that is, not fanciful — risk of particular future contraventions of the Corporations Act by a defendant, it would serve a purpose within the contemplation of the Corporations Act that the court grant not only a permanent injunction but, in an appropriate case, an interim injunction restraining such conduct. Section 1324 evinces an intention that the possibly severe consequences and the relative promptness of proceedings for contempt of court be added to criminal prosecutions as a deterrent to contraventions of the Corporations Act;
·although the questions whether there is a serious question to be tried and where the balance of convenience lies will not circumscribe the court's consideration in an application for an interim injunction under s 1324(4), the interests of justice will always require that those questions be examined carefully when restrictions are sought to be imposed before the case has been properly examined by the court, even where the protection of the public is said to be involved: see per Young J (as his Honour then was), in Corporate Affairs Commission (NSW) v Lombard Nash International Pty Ltd(1986) 11 ACLR 566 at 570–1;
·the balance of convenience will be viewed differently according to whether the applicant under s 1324(4) is ASIC or a private litigant. Where ASIC is acting to protect the public interest, the absence of an undertaking as to damages, exempted by s 1324(8), will usually be of little consequence. However, where the proceedings are brought to advance a plaintiff's private interests, then if such an undertaking is not proffered even though it is likewise exempted by subs (8), the court may take that circumstance into account as a matter of practicality, common sense and fairness in determining where the interests of justice lie and whether “it is desirable” to grant the injunction: see per Young J in Lombard Nash at 571.” (emphasis added)
His Honour’s analysis, so far as it applies to interim or interlocutory injunctions, is not something to which I can subscribe. On an application which does not seek final relief I think that the ordinary principles (relating to whether there is a serious question to be tried and the balance of convenience) should be applied.[144] The analysis otherwise is, in my respectful opinion, a correct apprehension of the operation of s 1324 subject to the overriding consideration referred to by Davies AJ in Pegasus Leveraged Options Group Pty Ltd, that is: “An injunction should not be granted unless the order is directed to and appropriate to achieve an end such as enforcing and giving effect to the statute.”
[144]ASIC v Arafura Equities Pty Ltd [2005] QSC 376; ASIC v Mapstone (2006) 59 ACSR 214
In terms of whether or not an injunction is “desirable” ASIC contends that the contravening behaviour (offering securities without a current disclosure document) will be continued because the “future continuation of the activities of CME must be dependent on continuing breaches of the Act and the ASIC Act”.[145] I do not understand that submission because I do not understand any of the evidence to support a finding that CME can only continue to operate if it does not comply with the disclosure regime under the Act.
[145]ASIC’s written submissions [92(a)]
As I have noted previously, Mr Nugent, although called by ASIC was not questioned by his own counsel about anything. Nothing was sought from him which would serve to explain his conduct concerning the film or to support a submission that he had reasonable grounds for making the expenditure representation. The only conclusion which I can draw in all the circumstances is that he could not say anything which would have assisted his case. In addition to the findings I have made about his role in the conduct of CME I think it is important to bear in mind his unworthy conduct concerning the provision of the engine to ASIC. In the absence of any evidence from Mr Nugent on these issues, in the light of his lengthy and intimate connection with CME and its actions, and the fact that the material on the web site (the film and associated text) was not removed, I think it is appropriate that injunctions issue restraining both CME and Mr Nugent from dealing with the breaches I have found to have occurred.
While I have found that Messrs McClelland and Foster have breached provisions of both Acts, I find that their circumstances were such that those breaches were unwitting and unintended. They were, at all material times, either employees or directors in name only and their involvement was at such a low level that no order will be made concerning them.
The Applicant is to bring in minutes of order reflecting the findings I have made. I will hear the parties on costs.
(1) A person who dishonestly—
(a) applies to his or her own use or to the use of any person—
(i) property belonging to another; or
(ii) property belonging to the person, or which is in the person’s possession, either solely or jointly with another person, subject to a trust, direction or condition or on account of any other person; or
(b) obtains property from any person; or
(c) induces any person to deliver property to any person; or
(d) gains a benefit or advantage, pecuniary or otherwise, for any person; or
(e) causes a detriment, pecuniary or otherwise, to any person; or
(f) induces any person to do any act which the person is lawfully entitled to abstain from doing; or
(g) induces any person to abstain from doing any act which that person is lawfully entitled to do; or
(h) makes off, knowing that payment on the spot is required or expected for any property lawfully supplied or returned or for any service lawfully provided, without having paid and with intent to avoid payment;commits the crime of fraud.
(2) An offender guilty of the crime of fraud is liable to imprisonment for 5 years save in any of the following cases when the offender is liable to imprisonment for 12 years, that is to say—
(a) if the offender is a director or member of the governing body of a corporation, and the victim is the corporation;
(b) if the offender is an employee of another person, and the victim is the other person;
(c) if any property in relation to which the offence is committed came into the possession or control of the offender subject to a trust, direction or condition that it should be applied to any purpose or be paid to any person specified in the terms of trust, direction or condition or came into the offender’s possession on account of any other person;
(d) if the property, or the yield to the offender from the dishonesty, or the detriment caused, is of a value of$30000 or more.…”;
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