Australian Securities and Investments Commission v iSignthis Limited

[2024] FCA 669

FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v iSignthis Limited [2024] FCA 669

File number(s):

VID 773 of 2020

Judgment of:

MCEVOY J

Date of judgment:

21 June 2024

Catchwords:

CORPORATIONS – continuous disclosure – alleged contraventions of ss 674(2) and 1041H of the Corporations Act2001 (Cth) – whether the company (iSignthis Limited) engaged in conduct, in relation to a financial product or a financial service, that was misleading or deceptive, or likely to mislead or deceive – whether the company failed to notify the Australian Securities Exchange (ASX) of certain information relating to the breakdown of its revenue and Visa’s termination of its relationship with iSignthis in breach of continuous disclosure obligations – whether non-disclosed information would, if generally available, have a material effect on the price or value of the company’s shares – whether exceptions to ASX Listing Rule 3.1 contained in Listing Rule 3.1A apply to second alleged contravention of s 674(2) – held: iSignthis Limited breached its continuous disclosure obligations on two separate occasions and s 1041H of the Corporations Act

CORPORATIONS – whether second defendant, Mr Karantzis (a director of the company), contravened s 674(2A) of the Corporations Act – whether knowingly concerned in the first contravention by the company of s 674(2) – whether second defendant had actual knowledge – held: the second defendant breached s 674(2A) of the Corporations Act

CORPORATIONS – provision of false or misleading information to ASX – whether the second defendant gave information to the ASX relating to the affairs of iSignthis that was false or misleading in a material particular and, or alternatively, omitted matters that, by their omission, rendered the information misleading in a material respect on two occasions arising in the context of Visa’s termination of its relationship with iSignthis – held: the second defendant breached ss 1309(2) and (12) on one of the occasions alleged

DIRECTORS’ DUTIES – directors’ duties – alleged contraventions of ss 180(1), 181, and 182 of the Corporations Act by second defendant – whether second defendant breached s 180(1) in relation to information provided to the market in relation to and during an analyst briefing relating to the breakdown of revenue of the company – whether second defendant breached s 180(1) in relation to the failure to disclose the termination of Visa’s relationship with the company – whether the second defendant breached s 182(1)(a) by using his position as a director improperly to gain advantage – whether the second defendant breached s 181(1) by failing to use powers and discharge duties in good faith in the best interests of the corporation and for a proper purpose – held: the second defendant breached s 180(1) on two separate occasions – no breaches of ss 181 and 182 of the Corporations Act  

Legislation:

Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) s 81

Corporations Act 2001 (Cth) ss 180(1), 181, 182, 674(2), 674(2A), 1041H, 1309(2), 1309(12), 1317G(1)(b)(iii), 1317S(2), 1318(1)

Evidence Act 1995 (Cth) s 140

Treasury Laws Amendment (2021 Measures No. 1) Act 2021 (Cth)

Corporations Regulations 2001 (Cth) reg 1.0.02A

ASX Listing Rules rr 3.1, 3.1A, 18.7, Guidance Note 8  

Cases cited:

Aaron’s Reefs Ltd v Twiss [1896] AC 273

Australian Broadcasting Corporation v Chau Chak Wing (2019) 271 FCR 632; [2019] FCAFC 125

Adams v Director of the Fair Work Building Industry Inspectorate (2017) 258 FCR 257; [2017] FCAFC 228

Anderson v Australian Securities and Investments Commission [2013] 2 Qd R 401; [2012] QCA 301

Angas Law Services Pty Ltd (In liq) v Carabelas (2005) 226 CLR 507; [2005] HCA 23

Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321; [1990] HCA 33

Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd (2014) 317 ALR 73; [2014] FCA 634

Australian Competition and Consumer Commission v Jayco Corp Pty Ltd [2020] FCA 1672

Australian Municipal, Administrative, Clerical and Services Union v Commissioner of Taxation [2022] FCA 1225

Australian Securities and Investments Commission v AGM Markets Pty Ltd (in liquidation) & Ors (No 4) (2020) 148 ACSR 511; [2020] FCA 1499

Australian Securities and Investments Commission v Australia and New Zealand Banking Group Limited (No 3) [2020] FCA 1421

Australian Securities and Investments Commission v Big Star Energy Limited (No 3) (2020) 389 ALR 17; [2020] FCA 1442

Australian Securities and Investments Commission v Cassimatis (No. 8) (2016) 336 ALR 209; [2016] FCA 1023

Australian Securities and Investments Commission v Citrofresh International Ltd(No 2) (2010) 77 ACSR 69; [2010] FCA 27

Australian Securities and Investments Commission v Dover Financial Advisers Pty Ltd (2019) 140 ACSR 561; [2019] FCA 1932

Australian Securities and Investments Commission v Drake (No 2) (2016) 340 ALR 75; [2016] FCA 1552

Australian Securities and Investments Commission v Fortescue Metals Group Ltd (No 5) (2009) 264 ALR 201; [2009] FCA 1586

Australian Securities and Investments Commission v GetSwift Ltd (Liability Hearing) [2021] FCA 1384

Australian Securities and Investments Commission v Mariner Corporation Ltd (2015) 241 FCR 502; [2015] FCA 589

Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052

Australian Securities and Investments Commission v Mitchell (No 2) (2020) 382 ALR 425; [2020] FCA 1098

Australian Securities and Investments Commission v Mitchell (No 3) (2020) 148 ACSR 630; [2020] FCA 1604

Australian Securities and Investments Commission v PE Capital Funds Management Ltd (external admins apptd) (2022) 159 ACSR 1; [2022] FCA 76

Australian Securities and Investments Commission v Vocation Ltd (In Liq) (2019) 371 ALR 155; [2019] FCA 807

Australian Securities and Investments Commission v Warrenmang Ltd (2007) 63 ACSR 623; [2007] FCA 973

Bing! Software v Bing Technologies (2009) 180 FCR 191; [2009] FCAFC 131

Briginshaw v Briginshaw (1938) 60 CLR 336

Campomar Sociedad, Limitada v Nike International Ltd (2000) 202 CLR 45; [2000] HCA 12

Cassimatis v Australian Securities and Investments Commission (2020) 275 FCR 533; [2020] FCAFC 52

Chan v Securities and Futures Commission [2020] 3 HKLRD 266

Chew v The Queen (1992) 173 CLR 626

Commonwealth v Fernando (2012) 200 FCR 1; [2012] FCAFC 18

Cruickshank v Australian Securities and Investments Commission (2022) 292 FCR 627; [2022] FCAFC 128

Diakovasili & Anor v Order of AHEPA NSW Incorporated [2023] NSWSC 1282

Domain Names Australia Pty Ltd v .au Domain Administration Ltd (2004) 139 FCR 215; [2004] FCAFC 247

Doyle v Australian Securities and Investments Commission (2005) 227 CLR 18; [2005] HCA 78

DSHE Holdings Ltd (receivers and managers apptd) (in liq) v Potts (2022) 405 ALR 70; [2022] NSWCA 165

Earglow Pty Ltd v Newcrest Mining Ltd (2015) 230 FCR 469 at 488

Eclairs Group Ltd v JKK Oil and Gas plc [2016] 3 All ER 641

Grant-Taylor v Babcock & Brown (in liq) (2015) 322 ALR 723; [2015] FCA 149

Grant-Taylor v Babcock & Brown Ltd (in liq) (2016) 245 FCR 402; [2016] FCAFC 60

Guy v Crown Melbourne Ltd (No 2) (2018) 355 ALR 420; [2018] FCA 36

Hylepin Pty Ltd v Doshay Pty Ltd (2021) 288 FCR 104; [2021] FCAFC 201

Jones v Dunkel (1959) 101 CLR 298

Macdonald v Australian Securities and Investments Commission (2007) 73 NSWLR 612; [2007] NSWCA 304

Masters v Lombe [2019] FCA 1720

Mills v Mills (1938) 60 CLR 150

Morley v Australian Securities and Investments Commission (2010) 274 ALR 205; [2010] NSWCA 331

Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449

News Ltd v South Sydney District Rugby League Football Club Ltd (2003) 215 CLR 563; [2003] HCA 45

Ngurli Ltd v McCann (1953) 90 CLR 425

Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191

Peek v Gurney (1873) LR 6 HL 377

Permanent Building Society (In Liq) v Wheeler (1994) 11 WAR 187

R v Byrnes (1995) 183 CLR 501

R v Kylsant (Lord) [1932] 1 KB 442

Re HIH Insurance Ltd (in prov liq);Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; [2002] NSWSC 171

Semantic Software Asia Pacific Ltd v Ebbsfleet Pty Ltd (2018) 124 ACSR 146; [2018] NSWCA 12

State of Escape Accessories v Schwartz & Anor (2020) 156 IPR 199; [2020] FCA 1606

State Street Global Advisors Trust Company v Maurice Blackburn Pty Ltd (No 2) (2021) 164 IPR 420; [2021] FCA 137

Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177

The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1; [2008] WASC 239

TPT Patrol Pty Ltd v Myer Holdings Limited (2019) 293 FCR 29; [2019] FCA 1747

United Petroleum Australia Pty Ltd v Herbert Smith Freehills (2018) 128 ACSR 324; [2018] VSC 347

Vines v Australian Securities and Investments Commission (2007) 63 ACSR 505; [2007] NSWCA 126

Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285

Division:

General Division

Registry:

Victoria

National Practice Area:

Commercial and Corporations

Sub-area:

Corporations and Corporate Insolvency

Number of paragraphs:

731

Date of hearing:

28 February 2023 and 1, 2, 3, 6, 7, 8, 9, 10 March 2023 and 5, 6, 7, 8, 26, 27 June 2023

Counsel for the Plaintiff:

M Borsky KC and R Kruse

Solicitor for the Plaintiff:

Ashurst Australia

Counsel for the Defendants:

P W Collinson KC and J S Mereine

Solicitor for the Defendants:

HWL Ebsworth Lawyers

ORDERS

VID 773 of 2020

BETWEEN:

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Plaintiff

AND:

ISIGNTHIS LIMITED

First Defendant

NICKOLAS JOHN KARANTZIS

Second Defendant

ORDER MADE BY:	MCEVOY J
DATE OF ORDER:	21 JUNE 2024

THE COURT ORDERS THAT:

1.On or before 4:00pm on 12 July 2024 the parties file and serve an agreed minute of orders to give effect to these reasons and for the further conduct of this proceeding; or, if there is no agreement, competing minutes of orders and short submissions (limited to 3 pages) as to their respective positions.

2.The further hearing of this proceeding be adjourned for case management hearing on a date to be fixed.

3.Costs be reserved.

4.There be liberty to apply.

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

TABLE OF CONTENTS

INTRODUCTION	[1]
THE CONDUCT OF THE HEARING, THE EVIDENCE AND THE PLEADINGS	[14]
FACTUAL BACKGROUND	[30]
The One-off Revenue period	[31]
The Performance Milestones	[32]
The integration agreements	[37]
The One-off Revenue representation timeline	[44]
The Visa termination period	[62]
Achieving principal membership	[64]
A breakdown of relations	[69]
Communications with the Central Bank of Cyprus	[88]
Communications with the ASX and further disclosures	[93]
ONE-OFF REVENUE REPRESENTATION CLAIMS	[105]
ASIC’s submissions that iSignthis contravened s 1041 of the Act	[108]
iSignthis’ response to ASIC’s One-off Revenue Representation claims	[137]
One-off Revenue Representation: “in writing”	[137]
One-off Revenue Representation: “orally”	[143]
Relevant principles	[148]
Determination	[153]
ASIC’s allegations that Mr Karantzis contravened ss 674(2A) and 180(1) of the Act	[160]
Mr Karantzis’ response to the allegation that he contravened s 180(1) of the Act	[168]
Determination	[173]
BREACH OF CONTINUOUS DISCLOSURE OBLIGATIONS – ONE-OFF REVENUE/COSTS	[181]
ASIC’s submissions that iSignthis contravened s 674(2) of the Act	[181]
Not generally available? The relevance of the 30 June 2018 Appendix 4C statement	[194]
Materiality: the lay evidence	[199]
Materiality: the expert evidence	[203]
iSignthis’ responses to ASIC’s breach of continuous disclosure obligation allegations	[227]
The alleged breakdown was not required by the accounting standards	[229]
Report to shareholders for the fourth quarter of FY2018 – Appendix 4C statement	[230]
Materiality	[240]
Determination	[260]
ASIC’s allegations that Mr Karantzis contravened ss 674(2A) and 180(1) of the Act	[276]
Mr Karantzis’ response to allegations that he contravened ss 674(2A) and 180 (1) of the Act	[287]
Any contravention of ss 674(2A) and/or 180(1) of the Act was not serious	[291]
Any contravention by Mr Karantzis should be excused	[292]
Determination	[293]
NON-DISCLOSURE – VISA INFORMATION	[299]
ASIC’s allegations that iSignthis contravened s 674(2) of the Act	[299]
Was there a Listing Rule 3.1A defence between 17 April and 12 May 2020?	[304]
ASIC’s submissions	[310]
iSignthis’ submissions	[321]
Determination	[336]
Was there a Listing Rule 3.1A defence between 12 May and 21 May 2020?	[344]
ASIC’s submissions	[345]
iSignthis’ submissions	[348]
Determination	[355]
Did iSignthis notify the ASX immediately or at all after 21 May 2020?	[359]
ASIC’s submissions	[361]
iSignthis’ submissions	[365]
Determination	[374]
Was the information material?	[377]
ASIC’s submissions	[378]
The lay evidence	[378]
The expert evidence	[384]
Suspension from trading	[399]
iSignthis’ submissions	[401]
Determination	[420]
ASIC’s allegations that Mr Karantzis contravened s 180(1) of the Act	[435]
Mr Karantzis’ response to the allegation that he contravened s 180(1) of the Act	[443]
The preservation of iSeM’s licence was in the best interests of iSignthis	[444]
iSignthis’ shares were suspended	[448]
If there were contraventions of ss 674(2) and 180(1) of the Act they were not serious	[453]
Mr Karantzis ought fairly be excused for the contravention	[454]
Determination	[455]
THE PROVISION OF FALSE AND MISLEADING INFORMATION TO THE ASX BY MR KARANTZIS	[470]
ASIC’s submissions	[472]
The 25 May 2020 response	[477]
The 17 August 2020 response	[501]
Mr Karantzis’ response to the allegation that he contravened s 1309(2) and (12) of the Act	[504]
The 25 May 2020 response	[513]
Question 1(b)	[515]
Question 1(e)	[518]
Question 2(b)	[527]
Question 2(d)	[529]
Question 2(e)	[531]
Question 2(f)	[533]
The 17 August 2020 response	[536]
If there was a contravention of s 1309(2) of the Act it was not serious	[540]
Mr Karantzis ought fairly be excused for any contravention	[544]
Determination	[545]
The 25 May 2020 response	[545]
Question 1(b)	[547]
Question 1(e)	[548]
Question 2(b)	[549]
Question 2(d)	[550]
Question 2(e)	[551]
Question 2(f)	[552]
Mr Seyfort’s advice does not provide a defence	[553]
Mr Karantzis’ contravention of s 1309(2) of the Act was serious, and he should not be excused for any contravention	[561]
17 August 2020 response	[565]
DID MR KARANTZIS BREACH HIS DIRECTOR’S DUTIES IN RELATION TO THE PERFORMANCE SHARES?	[569]
Section 182: use of position to gain an advantage	[570]
The evidence relied upon by ASIC	[574]
Relevant principles	[591]
Did Mr Karantzis breach s 182 of the Act?	[601]
The existence of a legitimate business purpose	[602]
(a) iSignthis’ cash flow positive commercial goal	[611]
(b) The knowledge gained was subsequently applied for faster integrations	[618]
(c) Revenue earned in each 6-month period after 21 December 2018	[619]
(d) iSignthis’ commercial and revenue purpose in entering the integration contracts	[634]
OT Markets	[638]
Corp Destination	[640]
Fcorp	[648]
IMMO	[658]
Rodeler Limited: a missed commercial opportunity	[668]
The June invoices: Corp Destination, Fcorp and IMMO	[671]
(e) An alternate fee structure for the service contracts?	[674]
The Northwood/Moore emails	[683]
Revenue recognition / FY2018 Audit	[692]
Jones v Dunkel inferences against Mr Karantzis?	[719]
Section 181: failure to discharge duties for a proper purpose	[724]
ASIC’s submissions	[726]
Mr Karantzis did not breach s 181 of the Act	[727]
CONCLUSION	[729]

REASONS FOR JUDGMENT

MCEVOY J:

INTRODUCTION

1. This proceeding is brought by the Australian Securities and Investments Commission (ASIC) against the first defendant, iSignthis Limited (otherwise known as ISX or the company), and the second defendant, its former chief executive officer and managing director, Mr Nickolas John Karantzis (collectively, the defendants).

2. iSignthis claims that until a demerger of its European operations in October 2021, it was a leading payments, electronic money and identity technology company. It was listed on the Australian Securities Exchange (ASX) and the Frankfurt Stock Exchange. iSignthis was headquartered in Melbourne, had its operations centre in Nicosia, Cyprus, and had sales offices in Australia, Amsterdam, Lithuania, Malta and the United Kingdom. iSignthis was suspended from trading on the ASX on 2 October 2019 and delisted in November 2022.

3. At the times which are the subject of this proceeding, iSignthis, through its subsidiaries, operated a business providing remote identity verification, payment authentication with electronic money issue, transactional banking, and payment processing services. iSignthis’ primary services were achieved by way of patented platforms – a payment processing service known as “ISXPay®”, and a remote identity verification service known as “Paydentity™” which utilised “know your customer” (KYC) data allowing service delivery in the anti-money laundering (AML) regulated sector. iSignthis’ wholly owned subsidiaries included iSignthis eMoney Ltd (iSeM) (incorporated in Cyprus), Authenticate BV (incorporated in the Netherlands) and Authenticate Pty Ltd (incorporated in Australia).

4. The events giving rise to this proceeding arise broadly from two separate periods and sets of circumstances. The first is what the parties have termed the One-off Revenue period. This period has its genesis in March 2015 and extends until 3 August 2018. Predominantly, however, it relates to certain events in 2018 involving the recognition by iSignthis of approximately $3 million in revenue for one-off integration and set up services provided to clients under various integration agreements and the achievement of certain performance milestones at the same time as the company incurred approximately $2.85 million in one-off costs for out-sourcing services it provided under these integration agreements.

5. The second set of circumstances concerns the termination by Visa Inc of its relationship with iSignthis and the disclosure (or non-disclosure) of information about that termination to the Central Bank of Cyprus (CBC), the ASX and the market. This relates to events spanning the period from 4 October 2017 to 17 August 2020, although the focus of attention is on the period from March to August of 2020.

6. The factual background to these sets of circumstances, giving rise to the allegations which ASIC makes, is outlined further below.

7. In the context of these different events, ASIC alleges that iSignthis has contravened:

   (a)the duty not to engage in conduct which is (or is likely to be) misleading or deceptive in relation to a financial product, pursuant to s 1041H of the Corporations Act 2001 (Cth) in the One-off Revenue period; and

   (b)its continuous disclosure obligations under s 674(2) of the Act on two separate occasions (in both the One-off Revenue period and in relation to the Visa termination).

1. Arising out of the same series of events, ASIC alleges that Mr Karantzis has contravened:

   (a)s 180(1) of the Act, being the duty of a director of a corporation to exercise their powers and discharge their duties with due care and diligence, in respect of information he gave to the market during the One-off Revenue period;

   (b)s 674(2A) of the Act by reason of his involvement in iSignthis’ contravention of s 674(2) of the Act during the One-off Revenue period;

   (c)s 180(1) of the Act in relation to the Visa termination by failing to discharge his duties with the due care and diligence insofar as the disclosure of Visa’s termination of its relationship with iSignthis to the market is concerned;

   (d)ss 1309(2) and (12) of the Act, by giving information to the ASX relating to the affairs of iSignthis that was false or misleading in a material particular and, or alternatively, omitted matters that, by their omission, rendered the information misleading in a material respect on two occasions arising in the context of Visa’s termination of its relationship with iSignthis;

   (e)s 182(1)(a) of the Act, being the duty of a director not to use their position as a director improperly to gain an advantage for themselves or someone else, insofar as he caused iSignthis to enter into the integration agreements to achieve certain performance milestones; and

   (f)s 181(1) of the Act, being the duty of a director to exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose, also insofar as iSignthis’ entry into the integration agreements to achieve the performance milestones is concerned.

2. For the reasons that follow, I have reached the following conclusions with regard to ASIC’s allegations against iSignthis and Mr Karantzis.

3. First, that iSignthis has engaged in conduct that was misleading or deceptive in relation to a financial product pursuant to s 1041H of the Act in the One-off Revenue period. I have also concluded that iSignthis breached its continuous disclosure obligations pursuant to s 674(2) of the Act in both the One-off Revenue period and in relation to the Visa termination.

4. Secondly, I have concluded that Mr Karantzis has contravened s 180(1) of the Act in respect of representations he made during the One-off Revenue period and in his conduct during the Visa termination period. I have also concluded that Mr Karantzis contravened s 674(2A) of the Act by reason of his involvement in iSignthis’ contravention of s 674(2) of the Act during the One-off Revenue period. Finally, I have concluded that Mr Karantzis contravened ss 1309(2) and (12) of the Act by giving information to the ASX that was false or misleading and which omitted matters that, by their omission, rendered the information misleading, on one occasion in May 2020 in the context of the Visa termination (but not the second occasion which is the subject of ASIC’s allegations).

5. Insofar as the allegations against Mr Karantzis concerning the achievement of the performance milestones are concerned, that is to say the alleged breaches of ss 182(1)(a) and 181 of the Act, I have concluded that ASIC has not made out its case against Mr Karantzis in relation to these matters.

6. Before turning to the detail of these allegations it is convenient to deal with certain preliminary matters and provide some further information by way of background.

   THE CONDUCT OF THE HEARING, THE EVIDENCE AND THE PLEADINGS

7. The hearing of this matter commenced on 28 February 2023 and took place over 15 hearing days: 28 February 2023 to 3 March 2023, 6 March 2023 to 10 March 2023, then 5 June 2023 to 8 June 2023, followed by oral closing submissions on 26 and 27 June 2023. The hearing covered all questions in the proceeding relating to liability, and ASIC seeks declarations against iSignthis and Mr Karantzis in relation to the various contraventions of the Act which it alleges. The amount of any pecuniary penalty to be paid by reason of any contravention of the Act was not considered. ASIC’s position is that it will seek pecuniary penalties against iSignthis and Mr Karantzis and orders disqualifying Mr Karantzis from managing corporations in the event that it succeeds in obtaining declarations of contraventions.

8. As will be apparent, the hearing was conducted in two tranches. The first was ASIC’s opening and the company’s case, together in part with the position of Mr Karantzis in relation to certain of the claims. The claims relating to false or misleading information given to the ASX and breaches of director’s duties by Mr Karantzis were considered in the second tranche of the trial because these were claims only made against Mr Karantzis. In circumstances where ASIC seeks civil penalties against Mr Karantzis he exercised his right to rely on the penalty privilege; that is to say, the privilege from self-exposure to a penalty: see Macdonald v Australian Securities and Investments Commission (2007) 73 NSWLR 612; Anderson v Australian Securities and Investments Commission [2013] 2 Qd R 401. There was a more complete opening of Mr Karantzis’ case in relation to these matters after ASIC had substantially closed its case.

9. For present purposes then ASIC relied upon the following lay evidence:

   (a)affidavits of Mr Adam Boscoscuro, a senior lawyer employed by ASIC, sworn on 7 August 2021 and 18 October 2022;

   (b)an affidavit of Mr Scott Tilden, a program manager employed by ASIC, affirmed on 6 August 2021;

   (c)an affidavit of Ms Shanny Chen, an accountant employed by ASIC, affirmed on 6 August 2021; and

   (d)an affidavit of Mr Richard Plews, head of compliance at Morgans Financial Limited, affirmed 31 May 2023.

10. The affidavits of Mr Boscoscuro, Ms Chen, and Mr Tilden broadly relate to the custody of evidence obtained by ASIC on its investigation, the provenance of a certain audio recording, and in relation to various queries raised by ASIC regarding some accounting matters. The affidavit of Mr Plews relates to off-market share trading. Mr Boscoscuro was cross-examined. Mr Tilden, Ms Chen and Mr Plews were not cross-examined.

11. In addition, ASIC tendered a number of documents.

12. iSignthis relied on the following evidence of lay witnesses:

    (a)an affidavit of Ms Anna Ilina, the Anti-Money Laundering Compliance Officer for iSeM responsible for reporting to the CBC and MOKAS (the Unit for Combating Money Laundering in Cyprus) in relation to AML and counter-terrorism financing laws in Cyprus, sworn on 20 September 2021;

    (b)an affidavit of Mr Timothy Hart, the independent non-executive chairman of iSignthis, and, from December 2021 the executive chairman of iSignthis, sworn on 21 September 2021 (First Hart Affidavit);

    (c)an affidavit of Ms Elizabeth Warrell, the chief financial officer of iSignthis from 2 September 2019 and its joint company secretary from 1 November 2019, and the chief financial officer of iSeM from October 2021 until August 2022 when she resigned from iSignthis to focus on the business of iSeM (which is now known as ISX Financial EU Plc), sworn on 21 September 2021 (Warrell Affidavit); 

    (d)an affidavit of Mr Scott William Minehane, a non-executive director of iSignthis since November 2011, sworn on 21 September 2021; and

    (e)an affidavit of Ms Linda Luu, Head of Legal, Australia, New Zealand and South Pacific for Visa AP (Australia) Pty Ltd, sworn on 12 October 2022 and filed by Visa AP in the proceeding in relation to objections to a subpoena issued by the defendants on 8 March 2022 seeking the production of documents and communications broadly relating to the suspension and/or termination of iSignthis and/or iSeM from around 2019-2020. 

13. In addition to the lay evidence filed by iSignthis, Mr Karantzis relied on the following further lay evidence:

    (a)affidavits of Mr Anthony Seyfort, a partner of the firm HWL Ebsworth, sworn on 7 March 2023 and 10 May 2023; and

    (b)a second affidavit of Mr Timothy Hart, sworn on 7 March 2023 (Second Hart Affidavit).

14. Ms Ilina and Ms Luu were not cross-examined. Mr Hart, Mr Minehane, Ms Warrell and Mr Seyfort were each cross-examined.

15. The defendants also tendered a number of documents.

16. ASIC called Mr Andrew Sisson as an expert witness on the question of materiality as it arose in relation to various parts of the case. Mr Sisson provided three reports, the first dated 20 October 2021 and the second dated 4 February 2022. He also provided a supplementary expert report dated 24 May 2023, which was in response to a supplementary expert report of the defendants’ expert, Mr Gregory John Houston.  

17. ASIC also filed an expert report of Mr Pambos Ioannides dated 2 February 2022 in relation to relevant Cypriot law.

18. Insofar as their expert evidence is concerned, iSignthis and Mr Karantzis rely on:

    (a)affidavits of Mr Houston, sworn 1 December 2021, and 7 March 2023, each an annexing expert report in relation to the question of materiality;

    (b)an affidavit of Mr Polyvios G Polyviou, sworn 29 November 2021, annexing a report relating to relevant Cypriot law; and

    (c)affidavits of Mr Timothy Heughan, a senior manager at Computershare, sworn 19 May 2023 and 5 June 2023, annexing an expert report and a supplementary report relating to off-market trading in iSignthis’ shares.

19. Mr Heughan was cross-examined. Mr Polyviou and Mr Ioannides prepared a joint expert report dated 3 March 2022 (Cypriot Joint Report) and ultimately were not cross-examined. Mr Sisson and Mr Houston also prepared a joint expert report dated 15 March 2022 (Materiality Joint Report). Mr Sisson and Mr Houston gave evidence and were cross-examined concurrently in both tranches of the hearing.

20. I consider and evaluate in some detail the evidence of Messrs Sisson and Houston below. I also consider and evaluate below, as necessary, the evidence of Messrs Polyviou, Ioannides and Heughan, and the relevant evidence of the lay witnesses.  

21. The issues to be determined are set out in the parties’ pleadings, but with one minor exception to which I will come in due course, it is unnecessary to linger at this juncture with a description of the parties’ cases as they are put in the pleadings. This will become clear in my consideration below of ASIC’s various allegations, and the defences advanced to them by iSignthis and by Mr Karantzis. My consideration of the various parts of ASIC’s case in these reasons is ordered consistently with the way the parties presented matters in their written closing submissions.

22. I record, however, that the final iteration of ASIC’s pleading is the further amended statement of claim dated 9 March 2023. The final iteration of the first defendant’s defence is that dated 15 December 2021, and the final iteration of the second defendant’s defence is that dated 8 March 2023 (and filed 9 March 2023).  ASIC also filed a reply dated 15 March 2021.

    FACTUAL BACKGROUND

23. Under cover of this introduction I turn to those background matters which it is necessary to understand in order to grapple with the case which ASIC brings, and the defendants’ responses. As has been mentioned, there are broadly two periods of time relevant to the alleged contraventions. These periods, and the relevant circumstances, are as follows.

    The One-off Revenue period

24. The One-off Revenue period begins in March 2015 and runs through until 3 August 2018, but with relevant facts that extend until 15 November 2019. The circumstances relate to:

    (a)iSignthis’ satisfaction, as at 30 June 2018, of a series of contractual conditions related to its revenue performance, the satisfaction of which led to the issuing of shares in iSignthis to other persons and entities; and

    (b)representations made by iSignthis and Mr Karantzis that, ASIC alleges, were false or misleading (at the earliest on 18 June 2018 and at the latest on 3 August 2018) about the proportion of iSignthis’ total revenue for the final quarter of FY2018 that was made up of one-off revenue and/or upfront fees, as opposed to recurring revenue.

    The Performance Milestones

25. In March 2015 iSignthis was reverse-listed on the ASX after it acquired 100 per cent of the shares in two entities involved in the provision of online identification and payment authentication services (iSignthis BV and ISX IP Ltd) from iSignthis Limited BVI (the acquisition). iSignthis Limited BVI is a company incorporated in the British Virgin Islands (and also named iSignthis Limited) and controlled by Mr Karantzis, who was both its director and shareholder.

26. The consideration received by iSignthis Limited BVI (as vendor) for the acquisition was the issuing by iSignthis of some 300,000,000 Ordinary Shares and 366,666,667 Performance Shares. The Performance Shares were issued on terms that each class would convert on a one for one basis into Ordinary Shares upon iSignthis meeting certain Performance Milestones by 30 June 2018. The Performance Milestones required iSignthis to achieve revenue of $2.5 million (for Class A), $3.75 million (for Class B), and $5 million (for Class C) over a six-month reporting period.

27. In the event that iSignthis did not achieve the Performance Milestone for a class of Performance Shares before 30 June 2018, all the Performance Shares in that class would convert into a single Ordinary Share. However, as matters controversially transpired, iSignthis was successful in meeting all of the Performance Milestones by 30 June 2018 in the final six-month reporting period before the deadline, being the third and fourth quarters of FY2018, resulting in the issue of the 366,666,667 Ordinary Shares.

28. The Ordinary Shares issued as a result of the achievement of the Performance Milestones were transferred on Mr Karantzis’ direction substantially in accordance with pre-existing share arrangements, including to iSignthis Limited BVI (approximately 149 million shares worth approximately $27 million as at 30 June 2018), and under which other directors and officers of the company, including Mr Karantzis’ brother Andrew,  and Mr Karantzis' mother, also benefited through the transfer to them of approximately 187 million Ordinary Shares (worth approximately $34 million as at 30 June 2018). 

29. It is relevant to note, on ASIC’s case, that iSignthis had not achieved any of the Performance Milestones in any six-month period to 31 December 2017 following the acquisition. However, in the six-month period ending 30 June 2018, iSignthis reported revenue of approximately $5.5 million. Further detail as to the timing and source of this revenue is outlined below in considering whether Mr Karantzis breached his director’s duties in relation to the Performance Shares.

    The integration agreements

30. The significant rise in revenue in the reporting period ending 30 June 2018 was due to iSignthis having entered into a series of what have been referred to as integration agreements in that period. These agreements involved iSignthis contracting with particular client entities to integrate those entities into online trading platforms (such as the “Panda” platform) and/or payment platforms, and to secure the relevant licensing services for the client. iSignthis had previously integrated customers onto trading/payment platforms. The agreements entered into in the first half of 2018, however, involved a new and more remunerative integration structure for the company. 

31. At a high level, the structure of these agreements was that iSignthis, through a wholly owned subsidiary (Authenticate BV), would contract with the relevant entity to provide some combination of licensing, software, and integration services and simultaneously enter into a corresponding outsourcing agreement with another company to provide those services. iSignthis, through its subsidiary, would therefore book as revenue upfront the full amount of contracted for fees under the integration agreements (including the licensing and other service fees charged by the end-licensor), which would then be passed onto the corresponding out-sourcing party as costs incurred under the outsourcing agreement, less a project management fee of approximately 7.5 per cent.

32. Integration agreements broadly of this type were concluded by Authenticate BV, with a number of start-up companies. These were Corp Destination Pty Ltd, Fcorp Services Ltd, and IMMO Servis Group s.r.o.. There was later a variation agreement with Corp Destination. Corresponding outsourcing agreements were entered into with Fino Software Technologies Ltd, a Cyprus company outsourcing the licencing and integration services to be provided by Authenticate BV to Corp Destination and to Fcorp. An outsourcing agreement in relation to IMMO was entered into with another company, GibiTech Ltd. The relevant details of these agreements are considered further below.  

33. iSignthis also had another commercial opportunity presented to it during the fourth quarter of FY2018 which did not proceed. That was the opportunity to provide an integrated third-party customer relationship management (CRM) system and trading platform to Rodeler Limited, working with BitTech Advanced Technologies Ltd. Reference will also be made to this below.

34. Upon contracting with the relevant clients, and in some instances before the contracts were executed, iSignthis, under Mr Karantzis’ direction, issued invoices for the contracted-for fees. All of the revenue was recorded before 30 June 2018. iSignthis recorded a significant increase in revenue for this period on the back of agreements which were substantively low-margin and concluded on a one-off transactional basis.

35. The provision of these integration services was a well-established part of iSignthis’ business. From around 2017, iSignthis sought to “integrate”, or provide customers with a payment services platform, to enable it to generate recurring transactional revenue by processing funds on behalf of its customers. Transactional revenue was based on and calculated by multiplying a merchant service fee (MSF) of approximately 1 per cent (or 100 basis points (bps)) by gross processed turnover volume (GPTV), the latter of which being the value of client funds which iSignthis had processed and from which it deducted its fees. 

36. However, notwithstanding the substantial rise in revenue in the reporting period ending 30 June 2018, in the second half of calendar year 2018 iSignthis recorded revenue of only $1,111,365. iSignthis maintains that this decline was due to a number of issues. Namely, that the National Australia Bank Limited (NAB) ceased to process merchants classified under the merchant category code that included iSignthis’ subsidiary (Authenticate BV); that a change in Apple’s policy of protecting user privacy had restricted transaction volumes to below contracted GPTV maximums; and that iSeM lost access to Kobenhavns Adelkasse Bank (KAB), meaning it could not receive deposits and therefore settlements from card schemes and Worldline (the regulated financial institution for clearing and settling the European card transactions of iSeM).

    The One-off Revenue representation timeline

37. As was mentioned at the outset, during the quarter ending 30 June 2018, iSignthis recognised revenue under the integration agreements totalling approximately €1,905,025, or approximately AUD$3 million. This one-off integration and setup services revenue under the integration agreements equated to approximately 75 per cent of the reported total unaudited revenue of AUD$3.95 million, and iSignthis incurred approximately AUD$2.85 million in one-off costs for out-sourcing services under the out-sourcing agreements (this being what has been referred to as the One-off Revenue/Costs Information).  

38. iSignthis had earlier published a report to shareholders for the 2018 half year results on 28 February 2018 and a report to shareholders for the third quarter of 2018 ending 31 March 2018 on 26 April 2018 highlighting the increase in revenue in each quarter, as well as the proportion of revenue that was “settlement revenue” or “total operating revenue”.

1. In response to the 28 February 2018 report, in March 2018 Patersons Securities Limited, market analysts, published a research note titled “1H18 Result, Monetisation Ramping up!” which stated that “[i]n 2H18, settlement activity is expected to dominate the revenue and earnings profile, with c.65% of revenues in the 3Q18 to date being settlement related settlement activity”.

2. ASIC contends that iSignthis was aware of the One-off Revenue/Costs Information as early as 18 June 2018 when it issued invoices under the integration agreements for providing services under those agreements and took steps to recognise that revenue within the 30 June 2018 quarter. On 19 June 2018 there was a meeting of the iSignthis board of directors attended by all directors, including Mr Karantzis, where the directors were provided with the draft accounts for May 2018.

3. On 22 June 2018 iSignthis made an announcement titled “Cash Receipts - Performance Rights” which stated that “Cash receipts now in excess of AUD$3.75m for H2 of AUS FY2017/18” and announcing that the Class A and B Performance Milestones would be satisfied. In response to this announcement, on 26 June 2018, Patersons published a research note in relation to iSignthis titled “Moving to Profitability” which considered iSignthis’ revenue from the quarter on an “annualised run-rate basis”. 

4. On 31 July 2018, iSignthis published its quarterly report for the period ending 30 June 2018. That report noted that iSignthis would hold an online Analyst Briefing on 3 August 2018. The 31 July 2018 quarterly report attached iSignthis’ Appendix 4C for that quarter, being the quarterly report for entities subject to Listing Rule 4.7B of the ASX Listing Rules (or Listing Rules).

5. After the publication of the report, Mr Martyn Jacobs, an analyst from Patersons, contacted Mr Karantzis via email on 31 July 2018 asking, “[a]re you able to say how much of the revenue was integration based?”. Mr Karantzis responded “[n]o - those other questions are for the annual report post audit - I don’t [sic] have data”.

6. On 1 August 2018, Patersons published a research note in relation to iSignthis entitled “Momentum and opportunity building”. The research note stated “[w]e have also rolled over our model resulting in a c.13% increase in the valuation to $0.45 / share” and noted that the valuation used a “DCF” (discounted cash flow) methodology.

7. Also on 1 August 2018, Mr Jacobs sent a further email to Mr Karantzis which attached a list of questions for the Analyst Briefing on 3 August 2018. Several of these questions were in relation to the breakdown of the proportion of total revenue comprised of one-off revenue versus recurring revenue, including “[p]lease advise the % of revenue in the June qtr that can be considered genuine recurring business activity as opposed to one-off integration type revenue?”. Mr Karantzis responded to Mr Jacobs and stated that “[s]ome of these are just nonsense”, Mr Jacobs then replied “I expected you would say that, but these are my questions to help my understanding, and frankly that of the market in general, who largely rely on me to help them …”. Mr Karantzis responded to this email stating:

   You cannot seriously expect us to answer questions that will expose sensitive strategy …

   Together, they make your questions appear very amateurish, and detract from the intelligent ones you have asked..

   So, we will limit these to what makes sense to us – not to you  

8. Mr Jacobs responded to Mr Karantzis at 11.43am attaching the Patersons research note of 1 August 2018.

9. At the Analyst Briefing on 3 August 2018, Mr Karantzis gave a presentation to both market analysts and investors regarding the performance of iSignthis in the fourth quarter of FY2018. The presentation was accompanied by a PowerPoint presentation which has been referred to by the parties as the Analyst Brief.

10. At page 3, the Analyst Brief stated: “[r]evenue in Q418 was in excess of $3.95m”. At page 6, the Analyst Brief stated: “[o]ne off Fees / One off Setups (Integrations) < 15% of revenue (recur on each new agreement) – Invoiced at milestone on 30 day terms”. It will be recalled that the true proportion of one-off revenue for the relevant period was approximately 75 per cent.

11. After he had finished his presentation, Mr Karantzis took questions from attendees including a question from Mr Mark Davies about the percentage of revenue in the previous quarter that was from upfront and one-off fees, to which Mr Karantzis responded that they had “cited a figure in the pack of less than 15 per cent”.  

12. An audio recording of the analyst briefing, including Mr Karantzis’ exchange with Mr Davies, was published on the ASX market announcement platform.

13. On 6 August 2018, Patersons published another research note on iSignthis entitled “June Qtr conference call insights” (6 August Patersons research note). This note stated that “[r]ecurring business activity constituted c. 85% of revenues, with the balance being one-off integration related revenues”. That same research note was forwarded to Mr Karantzis by Mr Jacobs on 7 August 2018.

14. On 15 October 2019, the ASX wrote to iSignthis requesting a detailed breakdown of iSignthis’ contracted service fees revenue by services/solutions listed in the March 2018 quarter Appendix 4C for the six months ended 31 December 2017, 30 June 2018 and 31 December 2018. iSignthis responded in writing to the ASX on 25 October 2019, stating that the relevant figure for “Integration / Set up” services for the six-month period ending 30 June 2018 was AUD$26,860.  That figure was not accurate.

15. After a further query letter from the ASX on 31 October 2019 with respect to how the IMMO and Fcorp integration agreements had been categorised, iSignthis responded on 15 November 2019. iSignthis stated that the figure provided in the 25 October 2019 response was mistaken and that the true figure for “Integration / Set up” services in the six-month period ending 30 June 2018 was AUD$3,056,187.

16. Further aspects of the One-off Revenue period will be canvassed below, as relevant to the consideration of the alleged contraventions.

    The Visa termination period

17. The Visa termination period has its genesis on 4 October 2017 and runs through, relevantly until 17 August 2020. While there is some overlap between this timeframe and the One-off Revenue period, the transactions and other facts giving rise to ASIC’s allegations with respect to Visa’s termination of iSignthis are distinct from the basis for the allegations arising out of the One-off Revenue period.

18. For the sake of simplicity, the multiple entities operating under the umbrella of Visa Inc (except Visa AP) are referred to in these reasons simply as Visa.

    Achieving principal membership

19. On 4 October 2017, iSignthis announced that one of its subsidiaries, iSeM, had been granted Visa principal membership status in Europe. The Visa principal membership was highlighted in a number of subsequent iSignthis announcements and was mentioned in the 3 August 2018 Analyst Briefing and the Analyst Brief to which reference has already been made. The Analyst Brief and the Analyst Briefing also highlighted elements of the company’s Paydentity service and its KYC and AML capabilities. 

20. iSignthis identified the significance of being granted such status as enabling it to process payments made using Visa products rather than having to rely on a third party (which is itself a principal member) to perform that service on an entity’s behalf. This became of particular value to iSignthis because of the fact that the NAB and Worldline, which had previously processed (as principal members) transactions on iSignthis’ behalf, had indicated that they would no longer process transactions in high-risk markets, such as online gambling, in which iSignthis operated extensively.

21. On 8 August 2019, iSignthis announced, with some fanfare, that it had been granted Visa principal membership status in Australia, along with its own unique bank identification number (BIN).

22. From late 2017 and into 2020, iSignthis consistently highlighted its principal member status with Visa (as well as with other major card providers, such as Mastercard and JCB) to investors and to the market as demonstrative of the successful establishment of its ideal operating business model. Examples of iSignthis drawing attention to this fact include:

    (a)the Analyst Brief (in which Mr Karantzis’s presentation included reference to Visa’s 56 per cent market share in the card market);

    (b)the Annual Report for the year ending 30 June 2018;

    (c)a 27 November 2018 email to investors (attaching a market announcement of the same day), in which it was announced that iSignthis’ own payment processing system, ISXPay, was about to go live with respect to Visa and Mastercard, allowing iSignthis to process Visa and Mastercard transactions directly; and

    (d)the Annual Report for the year ending 31 December 2019.

23. As will be seen, however, before long the relationship with Visa would hit stormy waters and would ultimately founder.

    A breakdown of relations

24. Under cover of an email sent on 9 March 2020, Visa sent a letter dated 6 March 2020 to iSignthis and iSeM, addressed to Mr Karantzis, advising of the suspension of the acquiring bank identification numbers for each company in Europe and Australia, and its activities as a registered third party for any other Visa members or clients, effective immediately (the 6 March letter). The 6 March letter raised a number of “serious concerns” that Visa had with regard to compliance and application of the Visa rules by iSignthis and iSeM, namely:

    (a)“AML concerns” regarding:

    1. Unusual transaction activity – Visa’s Financial Intelligence and Analytics (“FIA”) program conducts ongoing monitoring of IsignThis’ activities to alert Visa to any unexpected behaviour which should be investigated further. The FIA program identified an unexpectedly high volume of cross-border transactions at IsignThis merchants by United States cardholders. In addition, the FIA program identified a high number of transactions with merchant category codes (“MCCs”) often found to be associated with miscoded and/or illegal gambling. This indicates a potential violation of the Unlawful Internet Gambling Enforcement Act 2006. Visa contacted IsignThis via e-mail on 31 October 2019 to highlight the unusual transaction activity and requested further information relating to IsignThis’s AML/ATF program, as well as supporting evidence including, amongst others, a copy of the latest AML policy and e-copies of merchant onboarding documents. IsignThis provided responses including supporting evidence on 5 November 2019 but this was not sufficient to satisfy Visa’s AML program thresholds. In particular, the information provided, compared to the activity identified by the FIA program, has shown that (i) there does not appear to be a reasonable explanation for the high volumes of transactions being processed at these merchants; and (ii) there does not appear to be a clear rationale as to why such a large percentage of these transactions are being carried out by United States cardholders.

    2. Suspicious merchant activity – a review of a sample of the websites of merchants processing high volumes with IsignThis has raised suspicion as to the true origin of the transactions. In particular, transactions were not always possible on their websites and some websites were not indexed, therefore were unidentifiable by search engines such as Google. Visa has not been able to identify a reasonable explanation as to how such merchants can be operating at these transaction volumes under such circumstances. A review of a merchant’s website is a fundamental element of an effective merchant due diligence program, and this indicates gaps in the AML program of IsignThis.

    3. Derogatory news regarding IsignThis – Visa’s ongoing monitoring program has identified press coverage which raises concerns about Isignthis’ internal governance as well as its client portfolio. In particular, there are numerous press articles in respect of the step taken by the Australian Securities Exchange to suspend IsignThis from trading in October 2019 for alleged lack of adherence to listing rules. It appears that the stock is currently subject to reviews by the Australian Securities and Investment Commission and the Australian Securities Exchange. Additionally, an article in the Sydney Morning Herald on 18 December 2019 alleges that an IsignThis client, FCorp, has been ordered to stop all trading by the German financial regulator as it is trading without a licence. Given these allegations, the latter article raises further concerns about the effectiveness of the due diligence being performed by IsignThis and warrants explanation.

    In relation to these concerns Visa concluded that it considered iSignthis to be in violation of “Visa Rule ID# 0000652;” and

    (b)ongoing “[r]isk concerns” including: 

    Visa has also identified a number of on-going Risk concerns, leading to an attempted risk review in August 2019 (the “Attempted Review”). IsignThis did not cooperate with the Attempted Review, as required by the Visa Rules, and has repeatedly indicated that it would continue to refuse to provide the required information to complete such a review. In such circumstances, Visa must rely on the information available through the Visa Compliance Programs, and there has been a significant number of cases since April 2019 when IsignThis has been highlighted as a cause for concern on the leading indicators for fraud, dispute and illegal activity. In addition, there has been a sharp increase in gaming transactions (MCC 7994), credit voucher transactions and transactions on MCC 6540 (stored value card purchase / load) following the Attempted Review. IsignThis has also breached the VAMP thresholds for excessive reported fraud in January and February 2020.

    In addition, Visa has alerted IsignThis to a significant quantity of suspected cases of transaction laundering (alerts dated 5 November 2019, 9 December 2019 and 23 December 2019). The responses from IsignThis do not provide Visa with confidence that sufficient investigation by IsignThis has taken place. There does not appear to be any evidence of robust investigation into the suspicious cross border activity or further analysis of the concerns this level of activity raises.

    The ongoing alerts from the Visa Compliance Programs and the suspected transaction laundering identifications lead Visa to reasonably conclude that IsignThis is introducing excessive risk into the Visa payment system and is not operating in sound and safe manner.    

25. Further, the 6 March letter called for iSignthis to make available certain information to Visa by 16 March 2020.

26. As is noted in the 6 March letter, it appears that Visa had previously identified a number of on-going risk concerns with iSignthis resulting in an “attempted risk review” in August 2019. Visa contended that iSignthis did not cooperate with this review.

27. Mr Karantzis, on behalf of iSignthis and iSeM, replied to the 6 March letter on both 9 March 2020 (by email) and 11 March 2020. On 14 March 2020 Visa asked for further information. Mr Karantzis sent emails to Visa on 17, 19 and 25 March 2020 seeking, amongst other things, to “bring services back to an agreed subset of merchants whilst [the] review is undertaken”, citing the impacts of the COVID-19 pandemic and the suspension, and providing updated merchant listings as to deactivated and terminated merchants. 

28. Matters came to a head on 17 April 2020 with a letter from Visa to iSignthis and iSeM, communicating that Visa was terminating its relationship with iSignthis and iSeM and those entities’ licences and that they must cease acting as a registered third party agent for any other Visa members or clients (the 17 April letter). The letter advanced a number of reasons for the decision, which are considered further below.

29. Adopting termination introduced by ASIC, this decision will be referred to as the Visa Termination Decision.

30. The following matters were noted by Visa (in the 17 April letter) as the reasons for its having decided to terminate its relationship with, and the licences of, iSignthis and iSeM:

    (a)“Inadequate merchant on-boarding processes”;

    (b)“Inadequate merchant due diligence”;

    (c)“The transaction monitoring program is not fit-for-purpose” that “had failed to identify the unusual transactional behaviour ”;

    (d)“General lack of proactive investigation and management”; and

    (e)“Failure to register and disclose the use of third-party agents”. 

31. The 17 April letter set out steps to be taken by both parties “to effect the termination of iSignthis as a Visa client”. The letter stated:

    The IST Response has not allayed the concerns outlined in the Suspension Letter, and in fact further evidence has been provided that IsignThis is not operating appropriate programs to manage Anti-Money Laundering and Risk. Therefore, in accordance with the Visa Rules, and to safeguard Visa’s global payment system from the excessive level of risk presented by the IsignThis relationship, Visa has decided to terminate its relationship with IsignThis in Europe and Australia. It must also cease acting as a registered third party for any other Visa members or clients.

32. Mr Karantzis and Mr Hart exchanged a number of emails on 18 April 2020 in which Mr Karantzis’ observed that Visa’s 17 April letter “couldn’t [sic] be worse” and “lets [sic] see what we can do re appeal etc”. Also on 18 April 2020, Mr Hart sent an email to Mr Karantzis providing what appears to be a draft announcement to the market.

33. Mr Seyfort of HWL Ebsworth, the company’s principal external legal adviser, received a telephone call from Mr Karantzis on 18 April 2020 in relation to the 17 April letter. Mr Seyfort asked Mr Karantzis a “large number” of questions about the importance of Visa to iSignthis’ business, and the apparent dispute with Visa. Shortly after the call, Mr Seyfort received emails from Mr Karantzis containing the 17 April letter with some of Mr Karantzis’ commentary and emails Mr Karantzis had sent to Mr Hart, including Mr Hart’s suggested form of a potential announcement. Mr Seyfort deposes that over the weekend of 18 and 19 April 2020 he had conversations with Mr Hart and Mr Karantzis about the 17 April letter, and that Mr Karantzis informed him that iSignthis and iSeM disputed and intended to challenge the contentions in the letter. Mr Seyfort’s evidence is that he informed them that he was inclined to the view that iSignthis did not need to make an announcement on the ASX market platform, but that he would reflect on the matter.

34. On 19 April 2020 Mr Karantzis emailed Mr Hart and Mr Seyfort, with the subject line “Hail Mary”, and set out a draft email he intended to send to Visa. In the email Mr Karantzis stated that “there are two theories at play here” being that:

    1. Visa want us out and this was just the medium used. Could be that we represent far too much brand risk for them, decision made at high level, irrevocable or

    2. Our friend …, who threatened to "shut us down" mid last year, has succeeded in doing so. Given he would have been one of the authors of this letter, and his newfound rise in authority, and also with a brand new … and also a brand new … - it would not be difficult for him to pull wool over and steer this to where it needs to be.  

35. On 20 April 2020, Mr Seyfort spoke to Mr Karantzis and advised him that iSignthis did not need to make an announcement at that time on the basis that, in his view, it could rely on the incomplete negotiation exception to Listing Rule 3.1 of the ASX Listing Rules, and that it was doubtful that the Visa relationship was material to the price or value of iSignthis’ shares. On 20 April 2020, Mr Seyfort also emailed Mr Dominic White a colleague or friend of his who was Head of Merchant Sales & Acquiring, UK and Ireland at Visa to seek advice as to the best way to engage productively with Visa. Mr White responded later that day asking who iSignthis had been dealing with at Visa.

1. On 21 and 27 April 2020, Mr Karantzis, on behalf of iSignthis and iSeM, sent emails disputing the basis for the Visa Termination Decision and, therefore, the decision itself, and requesting that Visa withdraw its decision. Mr Karantzis also provided additional documents to Visa with those emails. In the 27 April 2020 email Mr Karantzis stated iSignthis’ position that there were “serious factual errors” in Visa’s 17 April letter, that evidence “for or against matters raised had not been established” and contended that there had been “a failure to afford procedural fairness, natural justice and due process to iSignthis”.  Consequently, Mr Karantzis contended that, in iSignthis’ view, “the termination was wrongful and not in accordance with either of Visa’s regulatory or contractual obligations”.

2. Not long afterwards, on 29 April 2020, iSignthis released a business activity report for the first quarter of the 2020 calendar year. Amongst other things this report stated:

   Processing to merchants across the Visa network was also suspended for parts of March pending response to Visa re queries on ASX “investigation”, concerns re “derogatory media” and the focus on high risk merchants. The Company is providing Visa with information regarding the ASX “investigation” and other matters. Visa has notified that their response times on this matter have been impacted by COVID-19.

   It is noteworthy that this business activity report did not mention either that Visa had notified its response to iSignthis in the 17 April letter, or that Visa had communicated in that letter that the suspension had been escalated to a termination of its agreement with iSignthis and iSeM.

3. On 1 May 2020, Visa responded by way of letter to the two emails which Mr Karantzis had sent (on behalf of iSignthis and iSeM) on 21 and 27 April 2020. This letter stated:

   We appreciate that Visa’s decision to terminate iSignThis’ membership is not a welcome one, and it is not one that is taken lightly.

   …

   As a gesture of goodwill, we have reviewed the documents you sent following the Termination Letter. Unfortunately, this information is not sufficient to impact the decision to terminate.

   …

   We trust that iSignThis has now had sufficient opportunity to disclose evidence of the IST Risk Programs, and nothing substantive has been omitted. Consequently, Visa will not review any further documentation from iSignThis on Visa’s findings

   …

   While it is unfortunate that we have had to terminate Visa’s relationship with iSignThis, it is the most appropriate course of action in this case and we are confident that Visa is acting within its rights. We will continue to communicate with you on final matters relating to the process of off-boarding.

4. Mr Karantzis responded to Visa’s letter dated 1 May 2020 on 5 May 2020 on behalf of iSignthis and iSeM. Mr Karantzis sought to address Visa’s concerns as disclosed in the preceding correspondence, providing reasons and evidence which iSignthis and iSeM believed should be sufficient for Visa to reverse its decision, and noting that they wished to avoid “a referral by iSignthis for regulatory intervention and/or judicial review”. Mr Karantzis concluded as follows: 

   In the interests of avoiding what will be a very public spectacle that will be further damaging to our brand and Visa’s, and noting the above very serious issues with Visa’s current position, we would be pleased to discuss the above with a decision maker of Visa in order to resolve the matter.

5. Mr Karantzis also emailed Visa’s Chief Risk Officer for Australia, New Zealand and the South Pacific (Mr Sam Gianniotis) on 6 May 2020, seeking to set up a call with someone to see if it was possible to “work this out”. Mr Gianniotis responded on 7 May 2020 that he would get some information and revert back to Mr Karantzis. 

6. On 12 May 2020, Visa sent a letter in response to iSignthis’ letter of 5 May 2020. This letter stated:

   We write in response to your letter dated 5 May 2020 (the “5 May Letter”), following the termination letter from Visa, dated 17 April 2020 (the “Termination Letter”), and subsequent correspondence.

   In a gesture of good faith, we have reviewed all of the information provided in the 5 May Letter, however Visa has not altered its decision to terminate the relationship with IsignThis.

   We will continue to communicate with you on final matters relating to the process of off-boarding, however please note that we will not review any further information relating to the basis of the decision to terminate, which is final.

   Please refer to the Termination Letter for the ‘Next Steps’ for effecting termination, particularly in relation to timeframes.

7. iSignthis accepts that after receiving the letter dated 12 May 2020 from Visa, it recognised that it was no longer possible to negotiate a commercial outcome with Visa. Accordingly, on 13 May 2020, Mr Karantzis, on behalf of iSignthis and iSeM, sent an email to Visa which acknowledged Visa’s termination of the agreement but continued to dispute the basis of the termination.

   Communications with the Central Bank of Cyprus  

8. On 15 May 2020, an employee of the CBC, Ms Maria Kontou, sent an email to Ms Anna Ilina, the AML Compliance Officer for iSeM who was responsible for reporting to the CBC and The Unit for Combating Money Laundering in Cyprus (MOKAS), requesting information about the Visa suspension. 

9. In response, between 15 and 18 May 2020, a written notification to the CBC was prepared by iSignthis.

10. iSeM provided a letter of response to Ms Kontou of the CBC on 18 May 2020.

11. It is to be noted that iSeM’s 18 May 2020 letter in response did not disclose that Visa had, according to the terms of the 17 April letter, terminated its relationship with iSignthis and iSeM, nor that one of its stated reasons for coming to such a decision was a concern regarding iSignthis’ and iSeM’s AML programmes.

12. On 21 May 2020, Ms Ilina spoke with Ms Kontou of the CBC by telephone and Ms Kontou acknowledged receipt of iSignthis’ letter and confirmed that no further clarification was required.

    Communications with the ASX and further disclosures

13. A fortnight earlier, on 7 May 2020, the ASX had sent a letter to iSignthis pursuant to Listing Rule 18.7 (the 7 May query letter). Listing Rule 18.7 provides that a listed entity “must give ASX any information, document, or explanation” that the ASX asks for to enable the ASX to be satisfied that the entity “is, and has been, complying with, or will comply with, with the listing rules or any conditions or requirements imposed under the listing rules”. The letter related, inter alia, to queries surrounding the fact that iSeM had been listed, on Visa’s Global Registry of Service Providers, as “SUSPENDED BY AML” and, in that context, sought disclosure of information from iSignthis in answer to a series of questions posed by the ASX.

14. Between 13 May 2020 and 21 May 2020 Mr Karantzis, on behalf of iSignthis, and the ASX exchanged heated correspondence relating to the 7 May query letter. Mr Karantzis provided responses on 13 May 2020 and 20 May 2020 which the ASX deemed to be “not acceptable”.

15. On 24 May 2020, iSignthis sent a letter to its shareholders and to the ASX for release to the market titled “Letter to Shareholders re Visa Relationship & ASX Suspension”. This letter stated that iSignthis would “end its contractual relationship with Visa as a principal member in approximately 90 days”. That letter advised that the reason for the termination was that Visa had amended its rules, and that this amendment led to anti-competitive concerns. The letter is reproduced in full below. The 24 May 2020 letter did not expressly state that Visa had, by the terms of the 17 April letter, terminated its agreement with iSignthis; nor did it state that Visa’s reasons for such termination included concerns about iSignthis’ and iSeM’s AML programmes.

16. On 25 May 2020, Mr Karantzis, on behalf of iSignthis, sent an email to the ASX with attachments that included a copy of the 24 May 2020 letter and a document on iSignthis’ letterhead dated 25 May 2020 purporting to be a response to ASX’s 7 May query letter and the questions therein.

17. The 25 May 2020 response noted that:

    (a)Visa’s audit of iSeM related to compliance and risk review, rather than to AML (or related) concerns;

    (b)iSignthis had not received the results of the Visa audit because it had been referred to a third-party independent auditor;

    (c)Visa’s reasons for suspension of iSeM were founded upon brand risk, including in relation to ASX’s investigation into iSignthis and “derogatory media”; and

    (d)any and all allegations of issues relating to money laundering appeared to have “originated with certain elements of the Australian media” and were not part of Visa’s audit.

18. It will be necessary to return in some detail to the terms of the ASX’s 7 May query letter, and Mr Karantzis’ response in his 25 May 2020 letter.

19. Over approximately the next two months the ASX obtained copies of correspondence which had been exchanged between iSignthis and Visa. This correspondence included the 6 March letter and the 17 April letter.

20. On 5 August 2020, the ASX sent a query letter to iSignthis (the 5 August query letter), pursuant to Listing Rule 18.7, requiring that iSignthis answer a series of further questions, and provide further information to the ASX in relation to the breakdown of iSignthis’ relationship with Visa. For present purposes, the 5 August query letter specifically sought explanations from iSignthis as to why it had not disclosed the fact of the Visa termination, nor the reasons for the termination, to the ASX.

21. Mr Karantzis, on behalf of iSignthis, responded to the 5 August query letter by way of its own letter dated 17 August 2020 (the 17 August 2020 response). The 17 August 2020 response did not answer the specific questions which had been put to iSignthis in the 5 August query letter. It did, however, assert that review of the full series of relevant correspondence between iSignthis and Visa showed the “true position” that iSignthis and Visa “were engaged in robust negotiations for a number of months” because Visa had “expressed concern about doing business with [iSignthis] because of the controversy surrounding [iSignthis]”. The 17 August 2020 response asserted that the “controversy ha[d] been massively fuelled, if not caused, by ASX”. 

22. The 17 August 2020 response went on to note that that “[u]ltimately, the relationship was terminated in the context of rule changes by Visa that are inconsistent with the business model of [iSignthis]” alleging, further, that such rule changes were anti-competitive. The letter also stated that Visa’s AML “risk speculation” is not supported by iSignthis’ independent AML audit and the lack of concern by AML regulators.

23. Once again, it will be necessary to return to the terms of the 5 August query letter and the 17 August 2020 response.  

24. Against this background I turn to consider each of the sets of allegations made by ASIC against iSignthis and Mr Karantzis. I deal first with what the parties have referred to as the One-off Revenue Representation claims, before moving to the alleged non-disclosure of the One-off Revenue/Costs Information. I then deal with the non-disclosure of the Visa termination information, before addressing the allegations that Mr Karantzis gave false and misleading information to the ASX arising from the Visa termination. Finally, I address the breach of directors’ duties allegations against Mr Karantzis in relation to the achievement of the Performance Milestones.

    ONE-OFF REVENUE REPRESENTATION CLAIMS 

25. As has been mentioned, ASIC alleges that iSignthis contravened s 1041H of the Act by engaging in conduct, in relation to shares in iSignthis, that was false or misleading.

26. Section 1041H of the Act provides:

    (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.

27. The issue for the court to determine is whether iSignthis’ conduct in presenting the Analyst Briefing on 3 August 2018, and representing that in the fourth quarter to 30 June 2018 revenue from one-off or up-front fees accounted for less than 15 per cent of the total revenue (the One-off Revenue Representation, as defined in paragraph 26 of the further amended statement of claim dated 9 March 2023), was false or misleading.

    ASIC’s submissions that iSignthis contravened s 1041 of the Act

28. ASIC submits and I accept that the following matters are not in dispute:

    (a)On 3 August 2018, iSignthis held an online interactive session for market analysts and investors about the company’s financial results and performance in the fourth quarter of the financial year ending 30 June 2018 which has been referred to as the Analyst Briefing. The Analyst Briefing was presented by Mr Karantzis and accompanied by a PowerPoint presentation, which has been referred to as the Analyst Brief.

    (b)The Analyst Brief PowerPoint presentation stated:

    (i)under the heading “Quarterly summary”, that “Revenue in Q418 was in excess of $3.95m”; and

    (ii)under the heading “Discussing the ‘Cash to Revenue Lag’” under “Questions Received”, that “One off Fees / One off Setups (Integrations) < 15% of revenue (recur on each new agreement) - Invoiced at milestone on 30 day terms”.

    (c)During the Analyst Briefing, the following verbal exchange occurred between Mr Karantzis and one of the participants, Mr Davies:

    Mr DAVIES: Thanks, thanks for that. Good presentation. I just wanted to ask you a couple of questions. Look, you've largely covered them but what, what percentage of the revenue last quarter was from one, from upfront and one-off fees? And, and an easy one for you. Are you, are you expecting to continue revenue growth in the next quarter? 

    Mr KARANTZIS:        We’ve actually cited a figure in the pack of less than 15 per cent on the first question.

    (Emphasis added.)

    (d)Following the Analyst Briefing, a link to an audio recording of the presentation was published on the ASX Market Announcement Platform.

29. ASIC alleges that the conduct of iSignthis and Mr Karantzis in making the One-off Revenue Representation in the Analyst Brief and during the Analyst Briefing, and publishing the documents on the ASX Market Announcement Platform, was conduct done in relation to shares in iSignthis. iSignthis admits that the shares were a “financial product” within the meaning of ss763A and 764A of the Act.

30. As has been mentioned, it is not in dispute that in the fourth quarter to 30 June 2018 iSignthis recognised revenue under the integration agreements totalling approximately $3 million, which is approximately 75 per cent of the reported total unaudited revenue of $3.95 million. 

31. Consistently with Mr Hart’s evidence, ASIC submits that if, therefore, having regard to the information in the Analyst Brief and the answer given by Mr Karantzis during the Analyst Briefing, iSignthis represented that in the fourth quarter to 30 June 2018 revenue for one-off or up-front fees accounted for less than 15 per cent of total revenue (the One-off Revenue Representation), that information would have been false and misleading and in contravention of s 1041H which ought to have been corrected by iSignthis.

32. Insofar as the broader context in which the representations were made is concerned, ASIC submits that it includes the following surrounding facts and circumstances.

33. First, that the Analyst Briefing was made in circumstances where previous disclosures and reports made by the company had generated a narrative of a startup company building recurring transactional (or “settlement”) revenue through the processing of GPTV from integrated clients.

34. The following iSignthis publications are advanced by ASIC in support of this contention:

    (a)In October 2017, iSignthis published a report to shareholders for the first quarter of FY2018 ending on 30 September 2017. The report stated that cash receipts were up quarter on quarter and transaction growth was continuing. A graph represented that “total recurring transactions” were progressively increasing quarter on quarter from zero in the first quarter of FY2017 to over 600,000 transactions in the first quarter of FY2018.

    (b)In January 2018, iSignthis published a report to shareholders for the second quarter of FY2018 ending 31 December 2017. The note stated:

    •Total recurring transactions (Tx) for the December quarter outperformed expectations, increasing +153% vs the September quarter:

    •This outperformance was driven by stronger than expected platform usage from existing customers and the addition of new customers in November and December 2017

    •The Company expects growth to normalise to more sustainable levels and provides guidance for the March quarter Tx volumes of approximately 30% QoQ

    The report contained an updated graph of “total recurring transactions” showing an increase over the first quarter of FY2018 (of over 600,000 transactions) to approximately 1.6 million transactions in the second quarter of FY2018. It also contained a section “revenue from recurring transactions” with a graph “total recurring revenue” showing a progressive increase from zero in the first quarter of FY2017 to over €100,000 in the first quarter of FY2018 and over €300,000 in the second quarter of FY2018.

    (c)On 28 February 2018, iSignthis published a report to shareholders for the FY2018 half year results to 31 December 2017. Under the heading “operational trading outlook”, the report stated that “Settlement revenues now make up over 65% of our revenue by vertical and will be the primary driver of revenues going forward”. Settlement revenue or transaction processing revenue was considered by the company and described in its reports as being recurring.

    (d)On 26 April 2018, iSignthis published a report to shareholders for the third quarter of FY2018 ending 31 March 2018. It said that unaudited revenue for the March quarter was $1.48 million. The report stated that contracted GPTV had increased to more than $500 million, and it included a graph of “Total Operating Revenue” showing a progressive increase from zero in the first quarter of FY2017 to over €300,000 in the second quarter of FY2018 and over €1,000,000 in the third quarter of FY2018.

    (e)On 31 July 2018, as has been mentioned, iSignthis released a report to shareholders for the final quarter of FY2018, ending 30 June 2018. The report presented the unaudited financial results of iSignthis for the final quarter ($3.95 million revenue) and the 6 months to 30 June 2018 ($5.5 million revenue), and stated that the Performance Milestones for each of Class A, B and C would be met. Under the heading “business update”, the report stated:

    The Company is pleased with the continual transaction volume growth quarter on quarter and the generation of revenue in excess of 167% when compared with the previous quarter. Whilst we are seeing revenues from a relatively low number of integrated customers, it is pleasing to see that strong numbers are now being delivered across each of our industry verticals (Identity verification, processing and card acquiring settlement services). 

35. Secondly, ASIC notes that these announcements were followed and reported on by Mr Jacobs at Patersons as follows:

    (a)In response to the company’s 28 February 2018 announcement, in March 2018 Patersons published a research note titled “1H18 Result, Monetisation Ramping up!”. The note stated: “In 2H18, settlement activity is expected to dominate the revenue and earnings profile, with c.65% of revenues in the 3Q18 to date being settlement related.”

    (b)In response to iSignthis’ 22 June 2018 announcement, on 26 June 2018 Patersons published a research note titled “Moving to Profitability”. The note stated:

    Our interpretation is that ISX is close to achieving the $5m revenue target (c.$10.0m annualised). If this is correct, it suggests that ISX has generated c.$3.5m revenue in the June qtr or c.$14.0m on an annualised run-rate basis, as compared with c.$0.7m reported in FY17. Achieving such revenue levels would indicate that ISX has finally hit profitability and should attract a new level of investor interest. It would also suggest an earnings upgrade could be warranted for our FY19 forecasts. The recent transaction banking announcements are a sign of positive progress and we expect this new activity has had some influence in the forthcoming June qtrly.

    The note continued:

    If ISX hits $5m or goes close to it, it would mean that ISX has generated c.$3.5m in revenue for the June qtr, up from c.$1.5m in the March qtr. Subsequently, ISX would be operating at a run rate of c.$14m revenue pa. This equates to our full-year forecast revenue for FY19 and would imply a future upgrade is warranted.

1. In my assessment nothing much turns on the substance of the Northwood/Moore emails. If it be relevant they do not seem to me to be supportive of an argument that Mr Karantzis had a concern about whether he would meet the Performance Milestones. If anything (and as Mr Karantzis submits) they may suggest relative indifference to achieving the Performance Milestones. On balance, however, I do not regard them as especially significant in the context of the other evidence about the reasons the integration agreements were entered into. Notwithstanding the submissions of both ASIC and Mr Karantzis on the Jones v Dunkel inferences that might be drawn by the fact that Mr Northwood was not called, in all the circumstances I rejected the proposition that any useful inference can be drawn.

   Revenue recognition / FY2018 Audit

2. The final matter which underlies my conclusion that ASIC has not proven to the requisite standard that Mr Karantzis made an improper use of his position in relation to the performance shares and thereby breached s 182 of the Act concerns what Mr Karantzis identifies as the process by which revenue was recognised in the context of the FY2018 Audit.

3. In concluding his case in response to ASIC’s allegations about the performance shares, Mr Karantzis  returns to the focus of ASIC’s pleaded case, which is that Mr Karantzis used his position “to ensure that iSignthis recognised” the “contracted-for fees” as revenue in the period prior to 30 June 2018; and that his reason for doing so was “to ensure that… iSignthis would achieve the one or more of the Performance Milestones”. Mr Karantzis  submits in this regard that although Mr Hart was a member of the Audit Committee, he was barely cross-examined in relation to these allegations.

4. To the extent that this aspect of ASIC’s case is pressed, Mr Karantzis  makes the following  further submissions.

5. First, he says that there is no evidence that his “actuating motive” for asking Mr Shahbenderian and Mr Richards to raise invoices on behalf of Authenticate BV in respect of the integration agreements was to “ensure that” iSignthis would meet the Performance Milestones. Rather, Mr Karantzis submits, the evidence shows that when Authenticate BV entered into the agreements to provide services to each of Corp Destination, Fcorp and IMMO, it also entered into agreements to acquire services from third party platform providers known as Fino and GibiTech Ltd. As a director of Authenticate BV, Mr Karantzis submits that he had a duty to ensure that Authenticate BV raised the invoices so that the company could collect the revenue and be able to pay each of Fino and Gibitech Ltd.

6. Secondly, and in any event, Mr Karantzis submits that recognition of revenue in iSignthis’ accounts for the financial year ended 30 June 2018 was a matter governed by Accounting Standards AASB 118 Revenue and AASB 111 Construction Contracts. This was subject to the control of iSignthis’ auditors and iSignthis’ Audit Committee, and not him.

7. Thirdly, Mr Karantzis submits (although there does not appear to be evidence about this one way or the other) that during the audit of iSignthis’ accounts for the financial year ended 30 June 2018, he did not communicate with the auditors, Grant Thornton.

8. Fourthly, Mr Karantzis submits that he did not come up with the idea of obtaining an acknowledgement from the customers that the work was completed. Rather, Mr Niall McDonald of Grant Thornton sent an email to Mr Richards which said:

   … we have noted that each of the work in relation to each of these projects has been completed at 30 June 2018. In terms of evidence we could obtain in order to verify this, what sort of information are you able to provide? Ideally, we would be looking for evidence of some sort of acknowledgement from the customer that the work on the project has been completed.

9. Mr Karantzis submits (although again there does not appear to be evidence about this one way or the other) that Mr Richards subsequently informed him of the auditors’ request for verification evidence. In response, Mr Karantzis says, he drafted the Certificates of Practical Completion and sent them to his brother in Cyprus. Mr Karantzis submits that he did not “instruct” Corp Destination, Fcorp and IMMO to sign the Certificates of Practical Completion. He says that he had no communication with them. Whatever be the position, it would seem that in due course each of the customers returned a completed and signed Certificate of Practical Completion, which Mr Richards then provided to the auditors.

10. Mr Karantzis submits that the evidence does not support ASIC’s allegation that he “caused” iSignthis to report that all of the work under the integration agreements had been performed by 30 June 2018 and “took steps to ensure” that iSignthis recognised revenue under the integration agreements in the six months to 30 June 2018. Those assertions, he submits, fail to recognise the role of iSignthis’ auditors (including in requesting the Certificates of Practical Completion) and the company’s Audit Committee (which did not include him) in relation to iSignthis’ FY2018 financial reports.

11. By reference to the relevant documentary evidence, Mr Karantzis submits that in 2018 Grant Thornton concentrated on revenue recognition as Accounting Standard AASB 15 was “steadily approaching”. Mr Richards was the chief financial officer and company secretary of iSignthis and, according to Mr Hart (as one would expect), the Audit Committee was responsible for overseeing and supervising the company’s audit processes and procedures. The iSignthis Audit Committee was comprised of Mr Minehane, who was the chairman of the committee, Mr Hart, Mr Barnaby Egerton-Warburton and Mr Richards. Mr Brad Taylor of Grant Thornton was the lead auditor. Leydin Freyer were iSignthis’ bookkeepers.

12. Mr Karantzis submits, generally having regard to the relevant evidence, that during the audit of iSignthis’ financial accounts for the year ended 30 June 2018 (FY2018 Audit):

    (a)Mr Richards was responsible for communicating with, and providing information to, representatives of Grant Thornton, including Mr Taylor, Mr Brad Krafft and Mr Niall McDonald, on behalf of iSignthis.

    (b)The auditors asked Mr Richards whether it was possible to obtain an acknowledgement from each of Corp Destination, Fcorp and IMMO that the work on the project had been completed.

    (c)He did not instruct Corp Destination, Fcorp and IMMO to sign Certificates of Practical Completion, he had no communication with them and they did so of their own volition (although it is to be noted that it is not clear that there is evidence about this).

    (d)On 23 August 2018 the iSignthis Audit Committee met with the auditors and Leydin Freyer to review the draft full year annual report and accounts for FY2018 and what the minutes referred to as the Auditor’s Findings Report, but Mr Karantzis did not attend that meeting.

    (e)Having met with the auditors on 23 August 2018, the Audit Committee recommended to the Board of iSignthis that the financial accounts for FY2018 should be finalised and signed off for lodgement with the ASX.

    (f)On 29 August 2018, the Board’s sub-committee, comprised of Mr Minehane and Mr Hart, approved the release of iSignthis’ FY2018 financial accounts.

13. By reference to the relevant documentary evidence Mr Karantzis submits that in anticipation of the FY2018 Audit, on 12 July 2018 Mr Richards updated his “Capital Projects” spreadsheet, which he first prepared on 8 June 2018, and sent it to him and to his brother for them to review. He also asked them to confirm a number of matters, including the “[s]ervice deliverables as at 30 June” and “[g]o live / production dates”.

14. Mr Karantzis notes his response, which was as follows:

    Todd

    •Corp Destination – platform ready, awaiting go live. Work completed.

    •Immo A (the Change, now live and trading)

    •Immo B (platform ready, awaiting branding)

    •FCorp – Hoch (live yesterday and trading, following platform changes)

    I make out that there is some EUROS 576k outstanding for work completed. AK advises that this is due circa month end or week after.

    Contracts – have many, not all. Im relying on the operating (Payment agreements) – as these are project agreements that enable the long term payment processing agreements. One leads to the other, as the projects are lead ins, not stand alone. Kind of hard to get contracts signed once work is done and payments are processing (the result of the project).

15. Mr Karantzis notes that the following day Mr Richards also sent his “Capital Projects” spreadsheet to Hoogeveen Partners and told them that “[a]ll merchants have been invoiced prior to 30 June and some of the COGS have been invoiced/paid”. Further, in the period from 16 July 2018 to 20 July 2018, Mr Richards answered questions asked by, and provided information to, the auditors.

16. As has been mentioned, Mr Karantzis emphasises that on 23 July 2018 Mr McDonald of Grant Thornton noted that the work in relation to the projects had been completed by 30 June 2018 and said to Mr Richards that evidence to verify this would be required.

17. Mr Karantzis points to the fact that the following day, further emails passed between Mr Richards and Mr McDonald. In particular, at about 10:09am, Mr Richards said:

    The work has been completed on our side as at 30 June…

    This is evidenced to some extent by the fact that approximately 75% of the invoiced amount has been received.

    We will see what we can get from the merchant but these guys are generally not good on responding to requests and completing paperwork!

18. Mr Karantzis  submits, by reference to the relevant documents, that on the morning of 25 July 2018 Mr Richards asked him whether they were able to obtain an acknowledgement from the customers that the work on the projects had been completed. That afternoon Mr Karantzis sent the email to his brother Andrew which attached unsigned Certificates of Practical Completion addressed to Authenticate BV from each of Fcorp and IMMO. Mr Karantzis said that the documents needed to be “completed and signed” and asked his brother to make sure that the person actually typed in their name and position. Two days later, on 27 July 2018, Mr Richards resent the unsigned Certificates of Practical Completion for each of Fcorp and IMMO to his brother and asked him for an update.

19. Mr Karantzis notes, again by reference to the relevant documents, that on 30 July 2018 Mr Richards received a copy of a Certificate of Practical Completion dated 25 July 2018, which was signed by a director of Fcorp, and sent it to Mr McDonald and Mr Krafft of Grant Thornton.

20. Mr Karantzis also notes, by reference to the documents, that on 1 August 2018, Mr Richards received a copy of a Certificate of Practical Completion dated 25 July 2018, which was signed by a director of IMMO. The next day Mr Richards sent the IMMO Certificate to Mr McDonald and Mr Krafft of Grant Thornton. The Certificate of Practical Completion signed by a director of Corp Destination was dated 14 August 2018. Mr Richards received it on 4 September 2018 and sent it to Mr McDonald the next morning.

21. Mr Karantzis notes also, by reference to the minutes of the meeting, that on 23 August 2018, Mr Richards, Mr Minehane, Mr Hart and Mr Egerton-Warburton attended the iSignthis Audit Committee meeting with Mr Taylor and Mr Krafft of Grant Thornton as well as Mr Watkins of Leydin Freyer (Mr Karantzis was not a member of the iSignthis Audit Committee and he did not attend the meeting). The main purpose of the Audit Committee meeting was to review iSignthis’ draft full year annual report and accounts for FY2018.

22. Mr Karantzis submits, by reference to Mr Hart’s evidence, that prior to the Audit Committee meeting Mr Hart had read the Audit Findings Report for FY2018 and noted that on page 5 the auditors had concluded that the revenue was not materially misstated.

23. Mr Karantzis submits also, by relevance to the minutes of the meeting, that during the Audit Committee meeting the Auditors’ Findings Report was reviewed and it was noted that there were no significant findings. The Audit Committee discussed certain elements of the report, including revenue recognition and revenue. Mr Taylor and Mr Krafft of Grant Thornton explained that they had applied a greater focus on revenue recognition, given the new revenue streams and the increase in company revenue. They were satisfied the revenue was accurately recorded and that the revenue targets, which had been disclosed in the 2014 Prospectus, had been met. It was Mr Hart’s evidence that in Mr Richard’s absence, Mr Taylor told the Audit Committee that they had no matters of concern, there were no issues in relation to Mr Richards or the management team, and that they had been very co-operative throughout the FY2018 Audit.

24. Mr Karantzis  submits, by reference to the documents, that revenue was a key audit matter in the Auditors’ Findings Report. In respect of the existing Accounting Standards AASB 118 Revenue and AASB 111 Construction Contracts, the auditors concluded that “[r]evenue does not appear to be materially misstated”. Insofar as the new Accounting Standard AASB 15 was concerned, the auditors concluded that “no material changes are deemed necessary for the adoption of the new revenue standard.” The auditors were satisfied that customers were paying fees “based on the total commitment” in the agreements but rightly recommended that the schedules to the agreements be reviewed before execution to ensure that the terms are correct.

25. Mr Karantzis submits, again by reference to the minutes of the meeting, that the Audit Committee resolved to approve the full year report and recommend that the Board move to sign the required declaration. It was also resolved to recommend that the Board accept the management representation letter as provided and move to sign it as required.

26. Mr Karantzis submits that on 27 August 2018 Mr Richards received from Grant Thornton a copy of the management representation letter which was required to be signed. The email from Mr Krafft said that the “representations will largely be similar to the prior year letter”. Later that morning the Board met and were advised by the chairman of the Audit Committee (Mr Minehane) that the committee had met, reviewed the accounts with the auditors and were able to recommend to the Board that the accounts should be finalised and signed off for lodgement with the ASX as soon as remaining tasks were completed. The Board discussed and reviewed the draft Annual Report, with a particular focus on revenue and revenue recognition. It resolved that a sub-committee consisting of Mr Minehane and Mr Hart would undertake a final review of the draft Annual Report and financial accounts following any minor edits to the wording and once satisfied, and if any changes were immaterial, the sub-committee had approval to release iSignthis’ FY2018 Annual Report and financial accounts to the ASX.

27. On 29 August 2018, the sub-committee met and approved the release of the accounts. Later that day ISX’s audited Annual Report for FY2018 was released to the market.

28. Although aspects of Mr Karantzis’ submissions in relation to his involvement in the process of revenue recognition in FY2018 might be regarded as little more than assertion on his part, the picture which emerges with tolerable clarity from the underlying documents is that the revenue recognition which occurred was an Audit Committee driven exercise, rather than a process controlled by Mr Karantzis. In this sense, therefore, I accept Mr Karantzis’ submission that the revenue recognition which occurred in FY2018 is not something which supports ASIC’s s 182 case against him.

    Jones v Dunkel inferences against Mr Karantzis?

29. I note, finally, ASIC’s submission that in circumstances where Mr Karantzis did not give evidence an inference is available to the effect that his evidence would not have assisted his case, and that the court may draw with greater confidence the inference that the back-to-back fee structure was designed to achieve high volumes of up-front revenue before 30 June 2018: Morley at 322 [634] (Full Court). That inference, ASIC contends, is already available and compelling on the evidence and no other inference explains the back-to-back fee structure. Mr Karantzis, ASIC submits, was the engineer of the back-to-back fee structure, was closely involved in relevant transactions and invoicing, and no reason has been given, including by Mr Hart, to explain his failure to give evidence: see, in this regard, GetSwift at [139] (Lee J).

30. At one level it may be accepted that a Jones v Dunkel inference is available to the effect that Mr Karantzis’ evidence would not have assisted his case. Nonetheless, as Dixon CJ emphasised in Jones v Dunkel at 304-305, the facts which have been proved must give rise to a reasonable and definite inference, not merely to conflicting inferences of equal degree of probability so that the choice between them is a mere matter of conjecture. See also Girlock (Sales) Pty Ltd v Hurrell (1982) 149 CLR 155 at 161-162 (Stephen, Mason, Murphy, Aickin and Brennan JJ); Trustees of the Property of Cummins (A Bankrupt) v Cummins (2006) 227 CLR 278 at [34] (Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ).

31. Relevantly also, in Australian Broadcasting Corporation v Chau Chak Wing (2019) 271 FCR 632 the Full Court observed at [134]:

    … In assessing a circumstantial case, it is important to bear in mind that the facts ultimately to be proven are those that are in issue, and not necessarily all the circumstantial facts themselves. As Dawson J observed in Shepherd v The Queen (1990) 170 CLR 573 at p 580, “[T]he probative force of a mass of evidence may be cumulative, making it pointless to consider the degree of probability of each item of evidence separately.” This invites consideration of the combined weight of circumstantial facts, for it is the essence of a circumstantial case that the combined force of its components should be considered, and proof of some circumstantial facts may be affected by the court’s assessment of other circumstantial facts: Chamberlain v The Queen (No 2) (1984) 153 CLR 521 at p 535 (Gibbs CJ and Mason J). Courts may fall into error by compartmentalising circumstantial facts, rather than standing back and assessing the broader picture. In Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VR 125 at p 141 Tadgell JA observed that a true picture is to be derived from an accumulation of detail –

    The overall effect of the detailed picture can sometimes be best appreciated by standing back and viewing it from a distance, making an informed, considered, qualitative appreciation of the whole. The overall effect of the detail is not necessarily the same as the sum total of the individual details: cf. Hall (Inspector of Taxes) v Lorimer [1992] 1 WLR 939 at 944; Shepherd v R (1990) 170 CLR 573 at 579-80.

32. In the present circumstances, for the reasons I have explained, the combined weight of the circumstantial facts does not enable the drawing of an inference that Mr Karantzis designed the so-called back to back fee structure to achieve high volumes of upfront revenue before 30 June 2018 and thereby meet the Performance Milestones, notwithstanding Mr Karantzis’ failure to give evidence.

33. For these reasons therefore I would not make a declaration that Mr Karantzis has breached his duties as a director in s 182 of the Act insofar as the achievement of the Performance Milestones is concerned.

    Section 181: failure to discharge duties for a proper purpose

34. Section 181 of the Act provides:

    (1)A director or other officer of a corporation must exercise their powers and discharge their duties:

    (a)in good faith in the best interests of the corporation; and

    (b)       for a proper purpose.

35. ASIC contends that, in contravention of s 181(1), Mr Karantzis failed to exercise his powers in good faith in the best interests of the corporation and for a proper purpose.

    ASIC’s submissions

1. For the reasons submitted in respect of the alleged contravention of s 182 of the Act, ASIC submits that Mr Karantzis’ conduct was not in the best interests of the company, or the company’s shareholders. That is because as at June 2018, on ASIC’s case, the purpose and effect of the back-to-back fee structure of the integration agreements was to achieve high volumes of very low margin revenue with little benefit to the company in terms of profitability or sustainable growth. ASIC submits that the evidence leads to the conclusion that Mr Karantzis’ conduct was not in good faith, and was done for the substantial and improper purpose of causing the company to achieve the Class A, B and C Performance Milestones and, consequently, to secure a financial gain for himself and others, as distinct from being conduct in the best interests of the company and all of its shareholders.

   Mr Karantzis did not breach s 181 of the Act

2. Having regard to my conclusions in relation to the alleged breaches of s 182 of the Act, it cannot be accepted that ASIC has proven to the requisite standard that Mr Karantzis failed to exercise his powers in good faith in the best interests of the corporation and for a proper purpose.

3. Accordingly, therefore, I would not make a declaration that Mr Karantzis has breached his duties as a director in s 181 of the Act insofar as the achievement of the Performance Milestones is concerned.

   CONCLUSION

4. Having regard to the conclusions I have expressed above, and therefore to what will now be the next stage of the proceeding, there will be an order that the parties bring in an agreed minute of orders to give effect to these reasons and for the further conduct of the proceeding.

5. If the parties are unable to agree they can file competing minutes of orders and short submissions in support.

6. The further hearing of the proceeding will be listed for case management and, for the moment, I will reserve costs. The issue of costs to date will need to be the subject of submissions if it cannot be agreed.

I certify that the preceding seven hundred and thirty-one (731) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McEvoy.

Associate:

Dated:       21 June 2024