Australian Securities and Investments Commission v Letten (No 5)
[2010] FCA 1047
FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v Letten (No 5)
[2010] FCA 1047
Citation: Australian Securities and Investments Commission v Letten (No 5) [2010] FCA 1047 Parties: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v MARK RONALD LETTEN (and others according to the attached schedule) File number: VID 95 of 2010 Judge: GORDON J Date of judgment: 24 September 2010 Catchwords: CORPORATIONS – unregistered managed investment scheme – whether property constitutes “scheme property” for the purposes of s 9 of the Corporations Act 2001 (Cth) – whether funds for the purchase of the property were funds contributed by investors of a scheme – attribution of knowledge – identity of the responsible entity for a scheme Legislation: Corporations Act 2001 (Cth)
Evidence Act 1995 (Cth)Cases cited: Australian Securities and Investments Commission v Atlantic 3-Financial (Aust) Pty Ltd [2004] 1 Qd R 591
Australian Securities and Investments Commission v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240
Australian Securities and Investments Commission v Edwards (2004) 22 ACLC 1469
Australian Securities and Investments Commission v Letten [2010] FCA 140Australian Securities and Investments Commission v Letten (No 3) [2010] FCA 512
Australian Securities and Investments Commission v McDougall (2006) 229 ALR 158
Australian Securities and Investments Commission v McNamara (2002) 42 ACSR 488
Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561
Australian Securities and Investments Commission v Risqy Ltd (No 2) (2008) 66 ACSR 679
Australian Securities and Investments Commission v Tasman Investment Management Ltd (2006) 59 ACSR 113
Beach Petroleum NL v Johnson (1993) 43 FCR 1
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89
Mier v FN Management Pty Ltd [2006] 1 Qd R 339
Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (in liq) (1999) 96 FCR 217
National Australia Bank Ltd v Norman (2009) 180 FCR 243
Re Stacks Managed Investments Ltd (2005) 219 ALR 532
Re GDK Financial Solutions Pty Ltd; Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699
The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 225 FLR 1Date of hearing: 25 August 2010 Date of last submissions: 25 August 2010 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 74 Counsel for the Plaintiff: P Murdoch QC and AP Trichardt Solicitor for the Plaintiff: Australian Securities and Investments Commission Counsel for the First Defendant: IG Waller SC and SJ Hibble Solicitor for the First Defendant: Baker & McKenzie Counsel for the Seventeenth Defendant: E Woodward Solicitor for the Seventeenth Defendant: Mills Oakley Counsel for the Receivers: R Strong Solicitor for the Receivers: Mallesons Stephen Jaques
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 95 of 2010
BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
PlaintiffAND: MARK RONALD LETTEN
First Defendant
(and others according to the attached schedule)
JUDGE:
GORDON J
DATE OF ORDER:
24 SEPTEMBER 2010
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
1.The questions stated by the Receivers be answered as follows:
Question:
(a)Is the legal and beneficial interest held by SY21 Retail Pty Ltd (SY21) in the property located at 720-760 Chapel Street, South Yarra, Victoria (certificate of title volume 10768 folio 918) (Chapel Street Property) or any part or share therein:
(i)property of the SY21 Scheme (as defined in the Orders made by this Court on 4 March 2010 (the 4 March Orders)) or the Schemes (including the SY21 Scheme) as defined in the Orders made by this Court on 25 February Orders (the 25 February Orders); and
(ii)“scheme property” of the SY21 Scheme or the Schemes for the purposes of section 9 of the Corporations Act 2001 (Cth) (the Act).
Answer:
(a)(i) No;
(a)(ii) No.Question:
(b)In the alternative to paragraph 1(a) above, is the share in SY21 held by Mark Ronald Letten and the amounts shown in the books of account of SY21 as the balance of monies supplied by LGH Holdings Ltd (LGHH) or a related or associated company:
(i)property of the SY21 Scheme or the Schemes for the purposes of the 4 March Orders and the 25 February Orders; and
(ii)“scheme property” of the SY21 Scheme or the Schemes for the purposes of section 9 of the Act.
Answer:
In relation to the share in SY21 held by Mark Ronald Letten:
(b)(i)It is unnecessary to answer this question because Mr Letten, the First Defendant, informed the Court that he accepted that his share in SY21 was property of the SY21 Scheme.
(b)(ii)No.
In relation to amounts shown in the books of account of SY21 as the balance of monies supplied by LGHH or a related or associated company:
(b)(i)Mr Letten informed the Court that he accepted that the amounts shown in the books of account of SY21 as the balance of monies supplied by LGHH or a related associated company was property of the SY21 Scheme. That amount is $192,308.
(b)(ii) No.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 95 of 2010
BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
PlaintiffAND: MARK RONALD LETTEN
First Defendant
(and others according to the attached schedule)
JUDGE:
GORDON J
DATE:
24 SEPTEMBER 2010
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
I. INTRODUCTION
This is the fifth judgment in a series about unregistered managed investment schemes in which Mr Mark Ronald Letten (Mr Letten), the first defendant, was involved. In Australian Securities and Investments Commission v Letten (No 3) [2010] FCA 512 at paragraphs [1] – [2] the history of the proceedings were described in the following terms:
[1]On 25 February 2010, the schemes numbered 1, 4 to 9 and 13 to 16 in Annexure A to these reasons for decision were wound up pursuant to s 601EE(1) of the Corporations Act 2001 (Cth) (the Act). Also on 25 February 2010, Mr Damian Templeton and Mr Phillip Hennessy of KPMG (the Receivers) were appointed as joint and several receivers and managers of certain property of each of the second to sixteenth and eighteenth to forty-fifth defendants (the Corporate Defendants) and as joint and several receivers and managers of identified property of each of the schemes listed in Annexure A (the Schemes) except for the scheme numbered 12: Australian Securities and Investments Commission v Letten [2010] FCA 140 (the 25 February Orders).
[2]On 4 March 2010, Orders were made appointing the Receivers as joint and several receivers and managers of the property of the scheme defined in those orders as “the funds invested, contributed or deposited by investors for the purpose of acquiring an interest in the project known as SY21 Retail Complex Project” (the SY21 Scheme), being the scheme numbered 12 in Annexure A (the 4 March Orders). The 4 March Orders also provided the SY21 Scheme be wound up pursuant to s 601EE(1) of the Act.
(Emphasis in italics added.)
These reasons for decision adopt the same abbreviations.
These reasons for decision primarily concern the SY21 Scheme. The effect of the 4 March Orders was that the SY21 Scheme was wound up pursuant to s 601EE(1) of the Act and the Receivers were appointed as receivers and managers of the Property of the SY21 Scheme to identify, collect and secure the Property of the SY21 Scheme, to provide a report to the Court and to commence the orderly winding up of the SY21 Scheme.
On 23 July 2010, the Receivers filed an interlocutory process seeking orders or directions determining questions in the receivership of the SY21 Scheme or the Schemes (as that term is defined in the 25 February Orders), namely:
(a)Is the legal and beneficial interest held by SY21 Retail Pty Ltd (SY21) in the property located at 720-760 Chapel Street, South Yarra, Victoria (certificate of title volume 10768 folio 918) (Chapel Street Property) or any part or share therein:
(i)property of the [SY21] Scheme or the Schemes for the purposes of the [4 March Orders] and the [25 February Orders]; and
(ii)“scheme property” of the [SY21] Scheme or the Schemes for the purposes of section 9 of the Corporations Act 2001.
(b)In the alternative to paragraph 1(a) above, is the share in SY21 held by Mark Ronald Letten and the amounts shown in the books of account of SY21 as the balance of monies supplied by LGH Holdings Ltd [(LGHH)] or a related or associated company:
(i)property of the [SY21] Scheme or the Schemes for the purposes of the [4 March Orders] and the [25 February Orders]; and
(ii)“scheme property” of the [SY21] Scheme or the Schemes for the purposes of section 9 of the Corporations Act 2001.
It is unnecessary to answer the whole of paragraph (b). Counsel for Mr Letten informed the Court that Mr Letten accepted that the share in SY21 he held, and the amounts shown in the books of account of SY21 as the balance of monies supplied by LGHH or a related or associated company, were property of the SY21 Scheme for the purposes of the 4 March Orders and “scheme property” of the SY21 Scheme for the purposes of s 9 of the Act. However, there is a dispute between the Receivers and SY21 as to whether the balance of the monies supplied by LGHH or a related or associated company is $192,308 or $342,308. That dispute I deal with in section [V(3)] of these reasons for decision.
Before turning to consider the questions in dispute, it is necessary to set out aspects of the statutory and factual context.
II. STATUTORY CONTEXT
The relevant statutory regime concerning managed investment schemes was discussed in Australian Securities and Investments Commission v Letten [2010] FCA 140 at [11] – [13] and [22]. In the present case, it is necessary to restate some essential aspects of that statutory regime.
First, in National Australia Bank Ltd v Norman (2009) 180 FCR 243, Gilmour J (with whom Spender J agreed at [5]), summarised some of the features of the statutory regime as follows:
[118]The regulation of managed investment schemes is dealt with in Ch 5C of the Act. The history of the law leading to the present statutory regime is set out at length in Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339 at [38]–[44].
…
[125]All that the word “scheme” requires is that there should be some “programme or plan of action”: Australian Softwood Forests Pty Ltd v A-G (NSW); Ex rel CAC (1981) 148 CLR 121 at 129 per Mason J, Gibbs CJ and Stephen J concurring.
[126]This has been applied in numerous cases including Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403; Knightsbridge Managed Funds [2001] WASC 339 at [45].
[127]Barrett J in Australian Securities and Investments Commission v Takaran Pty Ltd (2002) 170 FLR 388 at [15] applied the following gloss:
The essence of a “scheme” is a coherent and defined purpose, in the form of a “programme” or “plan of action”, coupled with a series of steps or course of conduct to effectuate the purpose and pursue the programme or plan. In some cases, the scope of the scheme will readily be gathered from some constitutive document in the nature of a blueprint setting out all relevant matters.
[128]Finkelstein J in Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699 at [2], citing Takaran 170 FLR 388 at [16] observed that a “scheme … is the combination of these things necessarily connected by design”, while “[t]he scheme may also include those things or attributes that ‘contribute to the coherence and completeness’ of the three essential elements”. Goldberg J in Australian Securities and Investments Commission v Primelife Corp Ltd (2006) 235 ALR 328 at [33] described a scheme as “a network of contractual rights and contractual obligations”.
[129]Further, as is explicit in the definition, a “managed investment scheme” contemplates a pooling of contributors’ funds or of a “common enterprise” as between the contributors.
(Emphasis added.)
To that summary I would add the following observations. “Scheme” is not defined in s 9 of the Act. “Managed investment scheme” is defined in s 9 of the Act and means:
(a) a scheme that has the following features:
(i) people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not);
(ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders);
(iii) the members do not have day‑to‑day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); …
“Scheme property” of a registered scheme is defined broadly in s 9 of the Act to mean:
(a) contributions of money or money’s worth to the scheme; and
(b) money that forms part of the scheme property under provisions of this Act or the ASIC Act; and
(c) money borrowed or raised by the responsible entity for the purposes of the scheme; and
(d) property acquired, directly or indirectly, with, or with the proceeds of, contributions or money referred to in paragraph (a), (b) or (c); and
(e) income and property derived, directly or indirectly, from contributions, money or property referred to in paragraph (a), (b), (c) or (d).
The SY21 Scheme was not a registered scheme. As a result, the definition of scheme property in s 9 of the Act does not apply. In Mier v FN Management Pty Ltd [2006] 1 Qd R 339 at [28], Keane JA (as he then was) held that the definition of “scheme property” for a registered scheme must serve as a guide to what should be considered to be the scheme property of an unregistered scheme. Further, as Keane JA explained in Mier at [26] – [29]:
[T]here can be no doubt that the scheme property of an unregistered scheme is to be identified by reference to the terms of the scheme in relation to the contribution of assets to the enterprise involved in the scheme.
(emphasis added.)
I emphasise enterprise because a scheme, unlike a company, need not involve the existence of a legal identity separate from that of its members: Mier at [20]. It was accepted by all parties in these proceedings that the definition of “scheme property” in s 9 of the Act was to be adopted in deciding what is the property of the unregistered SY21 Scheme or the Schemes.
Section 601EE of the Act confers on the Court power to wind up an unregistered managed investment scheme if a person “operates” a managed investment scheme in contravention of s 601ED(5). If the managed investment scheme is no longer “operating”, the Court’s power to order the winding up of a scheme cannot be invoked: see Norman at [75] and [4]. (The word “operate” refers to acts constituting the “management of or carrying out of activities which constitute the managed investment scheme”: Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561 at [55] per Davies AJ. See also Australian Securities and Investments Commission v Edwards (2004) 22 ACLC 1469 at [31] and [34] per McMurdo J; Australian Securities and Investments Commission v McDougall (2006) 229 ALR 158; Australian Securities and Investments Commission v McNamara (2002) 42 ACSR 488; Australian Securities and Investments Commission v Risqy Ltd (No 2) (2008) 66 ACSR 679 at [5]-[6]).
Thirdly, s 601EE(2) of the Act confers on the Court power “to make any orders it considers appropriate for the winding up of the scheme” (emphasis added). It is a very broad power: Re Stacks Managed Investments Ltd (2005) 219 ALR 532 and Australian Securities and Investments Commission v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240 at 243-244 and Mier at [16]. Courts have construed s 601EE(2) of the Act as conferring jurisdiction throughout the course of the winding up:
1.to make orders to resolve issues that arise in the course of that winding up: see Re GDK Financial Solutions Pty Ltd; Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699 at [42] and the authorities cited; see also Australian Securities and Investments Commission v Atlantic 3-Financial (Aust) Pty Ltd [2004] 1 Qd R 591 at [28] and the authorities cited and Mier at [16];
2.to make orders and declarations identifying the scheme property (Mier at [16]). However, Courts have also held that the Court’s statutory and inherent powers do not generally permit it to make orders that depart from the proprietary rights of the scheme participants: Australian Securities and Investments Commission v Tasman Investment Management Ltd (2006) 59 ACSR 113.
III. ISSUES TO BE DETERMINED
As noted above, the Receivers’ interlocutory process asks the Court to determine whether one or more of the following items of property were “scheme property” of the SY21 Scheme or the Schemes:
1.the Chapel Street Property;
2.Mr Letten’s share in SY21; and
3.the amounts shown in the books of accounts of SY21 as the balance of moneys supplied by LGHH or a related or associated company (the LGH Group).
Only the first and third questions remain in issue: see [4] above. The answer to the first question requires close examination of the terms of the unregistered managed investment scheme to ascertain the property interests which have been contributed, or which are otherwise subject, to the scheme: Mier at [30]. In the present case, it was common ground that the “blueprint” of the scheme (Mier at [30] and [31]) was a five page document which was sent to investors and which I will consider in further detail shortly.
IV. FACTS
The Alleged Profit Sharing Arrangements between Mr Bate and Mr Letten
The factual analysis must start some years prior to the purchase of the Chapel Street Property. From about 1997, Mr Peter Bate (Mr Bate) has been engaged in property development projects undertaken by or at the direction of Mr Letten. Mr Bate was generally the project manager of those projects, for which Mr Bate’s company, Bridgehead Properties Pty Ltd (Bridgehead) was paid a fee. From time to time, Mr Bate negotiated with Mr Letten a profit share arrangement for each of those projects. Mr Bate is the sole director and a 50% shareholder of Bridgehead.
Two profit share arrangements were allegedly entered into in 2003. Mr Bate gave evidence that, in early 2003, he and Mr Letten agreed orally that he would receive $100,000 as a share of the profits from a residential sub-development at the Heritage Golf and Country Club (Heritage) called St John Terrace. The fee represented approximately 10 percent of the profit. At the time of the agreement, five of the six townhouses in the St John Terrace development had been sold and settled. Mr Bate also gave evidence that in November 2003, he and Mr Letten orally agreed that he would receive $50,000 as a share of the profits from another residential sub-development at Heritage called Muirfield Mews. At the time of the latter agreement, the four townhouses had been sold and the project was approximately 60 percent constructed. Finalisation of these alleged profit sharing arrangements is one of the issues to be determined in relation to the Chapel Street Property.
Events of 2004
On or about 16 January 2004, Bridgehead entered into an agreement with Mirvac Projects Pty Ltd (Mirvac) for the purchase by it or its nominee of the Chapel Street Property for $1 million plus GST, subject to contract. Bridgehead paid a holding deposit of $20,000. On 19 January 2004, the LGH Group reimbursed the holding deposit to Bridgehead.
SY21 was registered as a company on 5 February 2004 by Mr Bate. At all material times, Mr Letten and Mr Bate each held one of the two ordinary shares in SY21 and were the directors of SY21. Mr Letten was also the company secretary. (Mr Letten resigned as a director and secretary on 25 February 2010.)
Mr Bate gave evidence that in March 2004, LGH Administration (LGHA) (by its director and ultimate controller Mr Letten) agreed with Mr Bate (for and on behalf of Bridgehead), that the $150,000 owing to Bridgehead under the profit sharing arrangements (see [15] and [16] above) would be held by LGHA pending deposit payment and settlement of the Chapel Street Property and then applied by LGHA to meet capital expenses associated with the purchase and development of the Chapel Street Property (the March Agreement). The $150,000 was said to be comprised of the $50,000 profit share agreement relating to Muirfield Mews and the $100,000 profit share agreement relating to St John Terrace. Evidence of the March Agreement is contained in a handwritten note of Mr Bate dated 22 March 2004. The note records, under the words “MRL” (which Mr Bate explained was a reference to Mr Letten) and a heading entitled “South Yarra – SY21”, the words “PRB: Muirfield $50K St John $100K”. The consequence of these arrangements was that Mr Bate’s interests contributed $150,000 to the purchase of the Chapel Street Property. They contributed that sum by agreeing that the debt owed by LGHA for the share of profit in respect of the St John Terrace and Muirfield Mews ventures was to be applied by LGHA to the purchase of the Chapel Street Property.
The Receivers submitted that Mr Bate’s evidence of the arrangement should not be accepted, as the arrangement was for the most part completely oral and the Court should have “reservations about how accurate Mr Bate’s recollection of these matters was”. I reject the Receivers’ contentions. The file note was contemporaneous with the March Agreement. Under the heading “South Yarra – SY21”, the note records the names of the relevant projects and the amounts. Mr Bate was cross examined about the alleged agreement and the note. His oral evidence was less than satisfactory. It was apparent that the arrangements between Mr Bate and Mr Letten were at best informal. The arrangements were in some respects imprecise and appeared to be based on an understanding that the division of profits on a development (both as to amount and timing of payment) depended largely on what was fair and available depending on other projects.
Notwithstanding the deficiencies in the evidence of Mr Bate, there was no challenge to the authenticity of the note produced by Mr Bate. In this context, it is important to recall that Mr Letten was not called to give evidence by any party. The Plaintiff, the Australian Securities and Investments Commission, had subpoenaed him to give evidence but did not call on that subpoena after receiving written submissions from Mr Letten’s Counsel that he should not be obliged to answer any questions on the grounds of self incrimination: s 128 of the Evidence Act 1995 (Cth). I accept Mr Bate’s evidence that, pursuant to the March Agreement, Mr Bate’s interests contributed $150,000 to the Chapel Street Property. The Receivers and SY21 accepted that a consequence of this finding was that Mr Bate was a creditor of SY21 in that sum. Further resolution of that issue is outside the scope of these reasons for decision.
April 2004
On 7 April 2004, a contract of sale was entered into in respect of the Chapel Street Property under which SY21 “and / or nominee” agreed to purchase the Chapel Street Property from Mirvac for $1 million plus GST (the Contract of Sale). Under the Contract of Sale, a deposit of $100,000 payable by SY21 was satisfied as to $20,000 by application of the holding deposit previously paid and as to $80,000 by a cheque from LGHA.
August 2004 – October 2004
No earlier than August 2004, (some months after SY21 had agreed to buy the Chapel Street Property and Mr Letten and Mr Bate had agreed that Mr Bate would contribute $150,000 to the purchase price) a number of investors were invited by a five page document to invest up to $1,224,400 in what was described in that document as the “SY21 Retail Complex Joint Venture, 720-760 Chapel Street South Yarra Victoria” (the Memorandum). The Memorandum included statements that:
1.“LGH [had] acquired a unique retail site in Chapel Street. The property is situated at 720-760 Chapel Street South Yarra and forms part of the Mirvac developed SY21 residential precinct”.
2. “It is rare to be able to acquire property in this area and it is the aim of LGH to Tenant the retail space and hold the investment for a 5 year term (please note the investment term of 5 years is only an indicative time frame and may be either shortened or lengthened depending on the most optimal time to sell the Joint Venture Property).”
3.“LGH has bought the site on the basis of nil Tenancies … ”
4.“LGH … decided to use a Joint Venture structure for this Project” .
5.The Joint Venture would be represented by a specific purpose Management Company. The specific purpose management company was not named in the Memorandum but was to be “a company associated with [LGHH]”. It was not to act as Manager for any other joint venture.
6.The sum to be subscribed by Joint Venture Participants (including LGH) was $1,224,400 less any mortgage sum advanced against the Chapel Street Property by 15 August 2004.
7.LGH had a financial interest in the project and was said to be a related party to the transaction.
8.Under a heading “Borrowing Obligations”, it stated that the property would be mortgaged to assist with the settlement.
Although there is no dispute that a number of investors subscribed to the SY21 Scheme, there is a dispute about the amount subscribed and the identity of the investors. Moreover, as will already be apparent, a number of the facts stated in the Memorandum were inaccurate. Not least among these inaccuracies were the suggestions that LGH had acquired the Chapel Street Property. The consequence of the errors and omissions in the Memorandum will be the subject of the further analysis below.
In August and September 2004, Bridgehead on behalf of SY21 applied to ANZ and to Westpac for finance of $900,000 on the security of the Chapel Street Property. Bridgehead secured an agreement with Westpac to lend that amount to SY21.
Between 12 August 2004 and 4 October 2004, LGH received funds from investors. According to a General Ledger annexed to the Fifteenth Affidavit of Damian John Templeton, the amount subscribed as at 4 October 2004 by some 42 investors (counting joint investors as one person) was $1,492,850. (On the hearing of the interlocutory process, SY21 reserved its position on the question of the total sums subscribed pending the determination of the question of whether the Property of the SY21 Scheme or the Schemes included the entire beneficial interest in the Chapel Street Property.) The funds contributed by investors were paid directly to the LGH Group rather than SY21 and were intermingled in the bank accounts of the LGH Group.
Between August 2004 and October 2005, investors each executed a document entitled “Joint Venture Agreement” (JVA) between the relevant investor or investors and SY21 (described in the JVA as “the Manager”). The JVA’s were prepared by Ms Rosemary Pope (Ms Pope), a personal assistant employed by LGHH. Ms Pope was responsible for entering relevant details into each JVA including the name of the “Manager” to the JVA, the name and description of the “Project”, the subject of the JVA and the names of the parties to the JVA in the execution clause. Ms Pope was responsible for arranging for the JVAs to be signed on behalf of the relevant “Manager” entity. From 2001 to 2004, JVAs relating to other schemes or projects had been executed by Mr Letten on behalf the relevant entity. In around 2004, Mr David Honey was authorised by Mr Letten to sign the JVAs. In 2005, Mr Honey relocated offices and no longer was able to execute the JVAs. It was at this time that Ms Pope received a stamp with Mr Lane’s signature and she was directed to use the stamp to execute the JVAs on behalf of the Manager of the entities. Ms Pope could not recall who directed her to use the stamp.
As noted earlier, the directors of SY21 were, at the relevant times, Mr Letten and Mr Bate. Mr Bate was not aware until the commencement of these proceedings that Mr Lane purported to execute the JVAs, nor had he authorised or held out Mr Lane as having authority to act for SY21 or sign any documents on its behalf. Counsel for the Receivers accepted that the actions of Mr Letten and Ms Pope did not bind SY21 to the JVAs. Counsel for the Receivers further accepted that Mr Letten could not have given actual or apparent authority for SY21 to execute the JVAs. It is therefore necessary to put the JVAs to one side.
On 4 October 2004, settlement of the Chapel Street Property was completed. At settlement, a total of $1,000,881.90 was paid to Mirvac, of which $880,000 was financed by drawing down the Westpac facility and $120,881.90 was paid by the LGH Group. Mirvac also paid to SY21 a sum of $16,500 as a rebate or discount. It was common ground that $220,881.90 was sourced in the first instance from one of the LGH Group and consisted of:
1.a holding deposit of $20,000 which had been paid by Bridgehead in January 2004 and immediately reimbursed from monies controlled by one of the LGH Group (although the source has not been identified) (see [17] above);
2.the balance of the deposit ($80,000) was paid at the time of the execution of the Contract of Sale by a cheque drawn from LGHA (see [22] above);
3.an amount of $120,881.90 provided at settlement appears to have come from an account in the name of Twinview Nominees Pty Ltd (Twinview), the 20th Defendant, an account controlled by one of the LGH Companies.
SY21 was and remains on title as the registered proprietor of the Chapel Street Property.
Central to the issues in dispute is whether the money paid by LGH at settlement ($120,881.90) coupled with the funds already sourced from the LGH Group (the holding deposit of $20,000 and the balance of the deposit of $80,000), a total of $220,881.90, should be taken to have been supplied on behalf of and in furtherance of the SY21 Scheme. There is a dispute concerning where the funds for settlement came from. The Receivers acknowledged that the funds subscribed by the investors ($1,492,850) could not be traced as a source of the funds supplied for the purchase of the Chapel Street Property. In fact, a copy of a bank statement of a business options overdraft account held by Twinview shows that on 4 October 2004, a sum of $120,881.90 was debited from Twinview’s business options overdraft account. The Receivers therefore accepted, and as noted earlier it was common ground, that it was “likely” that the funds at settlement came out of Twinview. On the other hand, SY21 submitted (based on the agreement between Mr Bate and Mr Letten described in [19]- [21] above) that at least half of the $220,881.90 came from Bridgehead and not the LGH Group. These submissions will be addressed in further detail below.
The second $150,000 payment
On or around 3 March 2005, a company associated with Mr Letten known as Hampton Park Central Pty Ltd (Hampton Park) settled the sale of Hampton Park Shopping Centre to Centre One Pty Ltd for $13,000,000. Bridgehead was involved in management of the development and was entitled to a fee which included a profit share amount. The fee was calculated at seven and a half percent of the inflation-adjusted gain in the value of the properties. When asked by Counsel for the Receivers why this amount (seven and a half percent) was different to the amount negotiated for Muirfield Mews and St John Terrace (approximately 10 percent), Mr Bate said the two investments were different types. St John Terrance and Muirfield Mews were “turnkey developments” for the development of houses and the Hampton Park project was “investment improvement”.
Mr Bate gave evidence that on or around 21 March 2005, he and Mr Letten agreed that a portion of the fee for Hampton Park would be applied as Mr Bate’s contribution to the reduction of the debt facility of SY21. This arrangement was said to be confirmed in an email on 24 March 2005 from Mr Bate to Mr Letten, which stated that the sum of $150,000 (out of a total of $324,737.45) would be applied to reduce the loan facility of SY21 (the second $150,000 payment). In cross examination, Mr Bate rejected the proposition put to him by Counsel for the Receivers that, in light of the fact the email of 24 March 2005 makes no reference to Westpac, the reference in that email to “loan reduction” was in fact a reference personal loan Mr Bate owed to Mr Letten. Also on 24 March 2005, $174,373.45 was deposited into the account of Bridgehead Westpac Business Cheque Plus Account (i.e. the balance of the $324,737.45 that would remain if $150,000 were applied to reduction of the loan facility of SY21). As will be discussed further below, SY21 no longer makes a claim concerning the second $150,000 payment.
Distributions to investors
As part of their investigations, the Receivers have concluded that from October 2005 to June 2009, the LGH Group made the following distributions (monthly) to investors in the SY21 Scheme (rounded to the nearest $1000):
Period Amount Oct 04 – June 05 $74,000 July 05 – June 06 $97,000 July 06 – June 07 $112,000 July 07 – June 08 $112,000 July 08 – June 09 $39,000 Total $434,137.00
Although these amounts were paid, the making of the payments does not bear upon whether the Chapel Street Property was or is scheme property.
Application to increase the Westpac Facility in 2008
As noted earlier, in August and September 2004, Bridgehead on behalf of SY21 had applied to ANZ and to Westpac for finance of $900,000 on the security of the Chapel Street Property and secured an agreement with Westpac to lend that amount: see [24] above.
In January 2008, Mr Bate began negotiations with Westpac about increasing the loan facility so that a shop-front in the SY21 complex could be fitted out appropriately as a café- style restaurant. On 28 March 2008, Bridgehead on behalf of SY21 forwarded to Westpac a finance application for an increase in the limit of the current debt facility for SY21. On or around 18 April 2008, Bridgehead for and on behalf of SY21, forwarded an amendment to the 28 March finance application requesting an increase in the total loan facility from $900,000 to $1,250,000. On or around 29 April 2008, Mr Letten and Mr Bate on behalf of SY21 executed the increased loan facility documents with Westpac.
The person primarily responsible for preparing the SY21 finance applications was Ms Kirsten Leigh McCallum (Ms McCallum), the financial controller at Bridgehead. Ms McCallum gave evidence of the process involved in preparing the finance application. She described the different components of the finance application and, in particular, the annexure to the application headed “Financial Statements”. Her evidence was that she noticed in those statements the reference to “SY21 Retail Pty Ltd (as manager)” and assumed this was a reference to SY21’s role as the manager of the project. She also recalled seeing references to “equity” and “distributions” and assumed these “had something to do with the entitlements of Mr Letten and Mr Bate”. Ms McCallum did not recall showing this information to Mr Bate, and Mr Bate confirmed in his evidence that he did not recall seeing the Financial Statements at that time.
Mr Bate’s evidence was that it was around this time that he realised that the second $150,000 payment had not been applied by Mr Letten in reduction of SY21’s debt to Westpac. To that extent, there was some inconsistency in Mr Bate’s evidence. Mr Bate was shown an email he sent to Mr Letten dated 25 June 2007 entitled “Projects & Investment Update”. In an attachment to that document it lists the bank loan as $900,000. In cross-examination, Mr Bate conceded that he was “fully aware” in June 2007 that the loan amount for SY21 retail was $900,000, and that what he meant:
was that the $150,000 would be applied to actually cover the capitalising the interest on the loans, that there would be a separate amount to actually take care of the interest if it was required to be paid.
The significance of this inconsistency is reduced because SY21 no longer claims an interest in the property referable to the second $150,000 payment. What remains significant is that the Receivers’ contention that the money raised by the mortgage from Westpac was money borrowed or raised by the “responsible entity” for scheme purposes.
V. ANALYSIS
1. IS THE CHAPEL STREET PROPERTY SCHEME PROPERTY OF THE SY21 SCHEME OR THE SCHEMES?
The Receivers accept that the contention that the Chapel Street Property is scheme property of the SY21 Scheme is based on a “difficult set of propositions”, where success depends upon acceptance of each and every proposition. The propositions are more than difficult. They are impenetrable hurdles.
The propositions may be summarised as follows:
1.On 4 October 2004, SY21 purchased the Chapel Street Property using money advanced by Westpac and approximately $221,000 supplied by Mr Letten or interests associated with him. The Receivers contend that the $221,000 supplied by Mr Letten or interests associated with him was an indirect subscription of investors funds within ss (a) and (e) of the definition of “scheme property” in s 9 of the Act;
2.In relation to the money raised by mortgage from Westpac, the Receivers contend that the money was borrowed or raised by SY21 as the responsible entity for scheme purposes (i.e. the SY21 Scheme) within ss (c) of the definition of “scheme property” in s 9 of the Act.
The second proposition itself raises four subsidiary questions or issues:
1.Was the Westpac mortgage in fact raised for the SY21 Scheme?
2.Was SY21 the responsible entity of the SY21 Scheme?
3.Does SY21 need to have knowledge that it was the responsible entity of the SY21 Scheme or can it be the responsible entity of the SY21 Scheme unwittingly?
4.If knowledge is required, is there a basis for attributing Mr Letten’s knowledge to SY21?
I reject the Receivers’ contentions. The Chapel Street Property is not scheme property of the SY21 Scheme. That conclusion requires explanation.
As noted earlier (see [6] and [14] above), the scope of a scheme may readily be gathered from some constitutive document in the nature of a “blueprint” setting out all relevant matters. Here, it was common ground that the “blueprint” was the Memorandum: see [14] above. The investors contributed funds in response to the Memorandum. That constitutive document set out a number of relevant matters: see [23] above. In particular:
1.“LGH”, as the promoting party, had acquired the Chapel Street Property and had to perform the terms set out in the Memorandum.
2.LGH had decided to use a Joint Venture structure for the Project;
3.The Joint Venture would be represented by a specific purpose management company; and
4.“The sum to be subscribed by Joint Venture Participants (including LGH) [was] $1,224,400 less any mortgage sum advanced against the [Chapel Street] Property by 15 August 2004”.
Each of these statements was false, omitted vital information or both. The information given “was a nonsense”: Pegasus at [19].
First, “LGH” was not defined. The entity responsible for the matters identified in [23] and [41(1)] lacked any particularity. Given the complexity of the structure of the companies in what might broadly be described as the “LGH Group”, it is not possible to identify which of the entities is being referred to. It is at least arguable that the reference to “LGH” is not a reference to LGHH because that company was separately referred to and identified in the Memorandum: see [23] above. Secondly, even if “LGH” was properly identified or identifiable, it did not acquire the Chapel Street Property – SY21 did. Thirdly, although there was to be a specific purpose management company, it was not named in the Memorandum. It was simply to be “a company associated with [LGHH]”.
Fourthly, two facts are clear. The “LGH Group” provided the initial $100,000 for the deposit for the Chapel Street Property before the Memorandum was sent to the investors and that $100,000 did not and could not have come from investor funds: see [22] and [28] above. Next, the additional sum of $120,881.90 provided at settlement was likely to have come direct from Twinview: see [30] above. There was no evidence to suggest that any investor funds went into Twinview or the account of Twinview.
The funds “contributed” by investors were recorded in a general ledger headed “SY21”. It is apparent from that general ledger that some funds were new contributions, whilst others were “rolled over” from other investments through the Letten Group of Companies. However, regardless of how the funds were “contributed”, those funds cannot be traced. In particular, the funds “contributed” by investors cannot be traced into the purchase price of the Chapel Street Property. It is not known where the funds went. At its highest, it was suggested that by reference to past practice, the funds went to the “LGH Group”.
A report prepared by the Receivers entitled “LGH Companies’ Report” dated 9 June 2010 provided details, inter alia, of the financial position and the historical trading of LGHA, LGHH and LGH Finance Pty Ltd (collectively defined in that report as the “LGH Companies”). That report records that LGHA was the central treasury and that money was moved around and mixed inextricably without any regard for where the money had come from or where it went. The Receivers accept that as between the LGH Group and the investors, and that as between SY21 and the investors, there was no formal relationship.
Having regard to the contents of the Memorandum and what in fact happened, including the way in which the LGH Group operated, I reject the Receivers’ contention that the legal and beneficial interest held by SY21 in the Chapel Street Property or any part or share therein was property of the SY21 Scheme or “scheme property” of the SY21 Scheme for the purposes of s 9 of the Act.
Moreover, for the reasons already stated, I also reject the Receivers’ contention that having regard to the contents of the Memorandum and what in fact happened including the way in which the LGH Group operated, that any part of the $220,881.90 was indirectly provided from scheme funds contributed by the investors. It was not: see, by way of example, [28] and [30] above. I accept that the Memorandum stated that “[t]he sum to be subscribed by Joint Venture Participants (including LGH) [was] $1,224,400 less any mortgage sum advanced against the [Chapel Street] Property by 15 August 2004”, however that statement only has force if the balance of the “blueprint” was in fact put in place. As noted earlier, it was not: see [23], [43] to [46] above.
As a result, I also do not accept that SY21 has received money which represents contributions of money or money’s worth to the SY21 Scheme within ss (a) of the definition of “scheme property” in s 9 of the Act. SY21 received nothing. It borrowed money from Westpac for the acquisition of the Chapel Street Property and did that for the benefit of SY21, a company which had two shareholders and two directors – Mr Bate and Mr Letten. SY21 was not carrying on or operating the SY21 Scheme. SY21’s acquisition of the Chapel Street Property, borrowing of money and managing the Chapel Street Property all took place independent of and without knowledge of the blueprint of the “SY21 Scheme”: cf Pegasus at [56]. More particularly, the contract to buy the land was made before the Memorandum that constituted the blueprint was distributed to the investors. The borrowing from Westpac was organised by Mr Bate who knew nothing of the Memorandum. It was Mr Bate, not Mr Letten, who acted on behalf of SY21 in managing the property. These same facts support the conclusion that the Westpac mortgage was not raised for the purposes of the SY21 Scheme.
The Receivers submitted, however, that for the Chapel Street Property to be property of the SY21 Scheme, it is not a necessary pre-condition that SY21 have any actual knowledge or even constructive notice that it was operating a managed investment scheme or a material part of it and was therefore in the position of a “responsible entity” in relation to the Chapel Street Property. I reject that contention.
First, this was an unmanaged investment scheme. The only provision of the Act that is immediately applicable to the SY21 Scheme is s 601EE dealing with applications to wind up and the winding up of an unregistered managed investment scheme. In the context of the present application, a careful reader of the section will notice that it describes the operator of the scheme as the “person operating the scheme”, not the responsible entity: see [11] above. And it was not shown that SY21 did anything that fell within the description of “operating the scheme”. The Receivers took the Court to the meaning of the word “operate” in Pegasus at [55]:
The word “operate” is an ordinary word of the English language and, in the context, should be given its meaning in ordinary parlance. The term is not used to refer to ownership or proprietorship but rather to the acts which constitute the management of or the carrying out of the activities which constitute the managed investment scheme. The Oxford English Dictionary gives these relevant meanings:
5.To effect or produce by action or the exertion of force or influence; to bring about, accomplish, work.
6. To cause or actuate the working of; to work (a machine, etc)
7.To direct the working of; to manage, conduct, work (a railway, business, etc); to carry out or through, direct to an end (a principle, an undertaking, etc)…
Counsel for the Receivers submitted that SY21 was carrying out acts which constituted part of the scheme, namely the acquisition of property with funds provided by investors, which was sufficient to make it a responsible entity “for the purposes of the analogy that has to be drawn”. However, that submission fails at a number of levels. By way of example, it is contrary to the facts (see [28] and [30] above) and is predicated on SY21’s knowledge that it was undertaking acts as “responsible entity”. That has not been established: see [51] above.
Next, s 601EE provides that the Court may wind up the scheme if that person operates a managed investment scheme in contravention of s 601ED(5), which incorporates by reference the requirements of ss 601EB (registration of a managed investment scheme), 601EA (the requirements for the application), 601FA (the requirements to be a responsible entity), 601GA, 601HA, 601HC and 601HG (the requirements of the constituent documents). The failure to comply with these provisions provides a basis for the Court to wind up an unregistered managed investment scheme. Except for s 601EE, the other provisions of Ch 5C of the Act do not apply. Critically, where there is no responsible entity of an unregistered managed investment scheme, the relief is twofold – either wind up the unregistered managed investment scheme or bring the scheme within the Ch 5C of the Act by complying with the requirements of the Part. Moreover, on a winding up of an unregistered managed investment scheme, a liquidator of a scheme has no power to collect, realise on behalf of scheme members, assets to which the scheme members as scheme members have no right, title, or interest: Mier at [21]; Tasman at [22] and Edwards.
In the present case there is nothing to suggest that SY21 as the registered proprietor of the Chapel Street Property was subject to obligations in favour of other persons and, in particular, the investors in the SY21 Scheme. No satisfactory basis for doing so was identified by the Receivers. The provisions of the Act relating to registered managed investment schemes are not engaged: see [53]. The Receivers accepted that they could not point the court to any authority that had considered the point, and admitted that the argument was “unchartered waters”. During oral submissions, Counsel for the Receivers was careful to refer to SY21 as “the equivalent of a responsible entity”. It was not explained how or why the term “responsible entity” should be applied. Further, even if the expression could be applied, the consequences of putting that label on it were not explained. The Receivers accept that there was no formal relationship between the investors and SY21.
This is not a case in which investors’ contributions can be identified as having been applied in connection with the purchase of the Chapel Street Property. No doubt it must be observed that the name of the company (SY21) is similar to the name of the scheme which investors thought they were investing in when they contributed on the basis of what was said in the Memorandum. But despite what was said in that document, no step was ever taken to bring the Chapel Street Property within the operation of the SY21 Scheme.
The Receivers’ contention that it is unnecessary that SY21 have actual knowledge or even constructive notice that it was “carrying out” or operating a managed investment scheme and is therefore a “responsible entity” in relation to Chapel Street Property therefore fails. It is contrary to the facts. It is unsupported by any authority. No less importantly, it is not consistent with the provisions of the Act or the mischief that the Act was intended to address. No other basis was identified by the Receivers to suggest a foundation for the conclusion that SY21 as the registered proprietor of the Chapel Street Property was subject to obligations in favour of the investors in the SY21 Scheme.
For those reasons, I reject the Receivers contention that the Westpac facility was borrowed or raised by SY21 as the responsible entity for scheme purposes (i.e. the SY21 Scheme) within ss (c) of the definition of “scheme property” in s 9 of the Act.
For the sake of completeness, I should also address the Receivers’ contention that the fact that SY21 was operating a managed investment scheme or a material part of it and was therefore in the position of a “responsible entity” in relation to the Chapel Street Property should be imputed to SY21 from the knowledge of Mr Letten. That contention fails on two principal bases. First, the analysis at [53] – [58] applies with equal force. Secondly, and in any event, the facts upon which the Receivers rely to impute knowledge do not provide a sufficient or any basis for such an imputation whether those facts are taken alone or collectively.
The Receivers identified four facts or matters as providing a basis for the alleged imputation:
(a)on the evidence of Ms Pope, it should be concluded that the Scheme was promoted on the instructions and authority of Mr Letten, and that funds were supplied to SY21 on the like instructions and authority. Mr Letten therefore had full knowledge of the facts relevant to the conclusions for which the Receivers contend;
(b)on Mr Bate’s evidence, …., that the task of sourcing funds for the purpose of SY21’s acquisition of the Chapel Street Property was left entirely to Mr Letten;
(c)the arrangements in fact made, and the fact that the funds were sourced from the proceeds of the Scheme, is a matter about which Mr Letten was under a duty to inform the directors of SY21, and on conventional principles, this is sufficient to fix SY21 with knowledge as against the investors in the Scheme;
(d)if the Court were satisfied that Mr Bate, the other director, did not have such knowledge or notice, this would not prevent the imputation of Mr Letten’s knowledge to SY21.
I will deal with each fact or matter in turn. First, the evidence of Ms Pope supports a finding that the SY21 Scheme was promoted on the instructions and authority of Mr Letten (not SY21). The evidence also supports a finding that “Mr Letten’s” contribution of funds to SY21 was made on the instructions of Mr Letten. However, the facts do not support, let alone establish, that the funds contributed by Mr Letten were sourced directly or indirectly from the investors in the SY21 Scheme: see [23] to [30] above.
Next, the Receivers submitted that on Mr Bate’s affidavit evidence, the task of sourcing funds for the purpose of SY21’s acquisition of the Chapel Street Property was left entirely to Mr Letten. This fact is not supported by the evidence. The paragraphs of Mr Bate’s affidavit evidence referred to by the Receivers are, in fact, to the opposite effect. The evidence was that the Westpac facility was sourced by Mr Bates’ company, Bridgehead. At least $900,000 of the funds was therefore sourced by Mr Bate. As to the balance of the money sourced by LGH for the purpose of SY21’s acquisition of the Chapel Street Property, the following exchange took place between Counsel for the Receivers and Mr Bate in cross examination:
[MR STRONG:] Yes. Now from the point at which as you say that arrangement was made, you left it to Mr Letten to make, in fact, the practical arrangements for SY21 to meet its obligations to pay the deposit and to settle the contract of sale, did you not?
[MR BATE:]Yes, I did.
[MR STRONG:] Yes. So it was up to him to ensure that when the contract of sale was signed, there was another $80,000 available to meet the deposit?
[MR BATE:] That’s correct.
[MR STRONG:] And it was up to him to ensure that when the contract of sale came to be settled that SY21 was in a position to pay whatever was required over and above the amount that had been claimed?
[MR BATE:]Correct.
However, that evidence must be read in light of Mr Bate’s consistent evidence that, so far as he was aware, the SY21 project was entirely funded by debt funding from Westpac and contributions to capital and expenses made directly by himself and Mr Letten or their respective companies. The task of sourcing funds was not left entirely to Mr Letten. That evidence was unshaken by the cross examination and should be accepted.
The third and fourth contentions – that (3) the arrangements in fact made, and the fact that the funds were sourced from the proceeds of the Scheme, is a matter about which Mr Letten was under a duty to inform the directors of SY21, and on conventional principles, this is sufficient to fix SY21 with knowledge as against the investors in the Scheme and (4) the fact that Mr Bate did not know, does not prevent knowledge being imputed to SY21 – are, in my view, contrary to established legal principles.
In Beach Petroleum NL v Johnson (1993) 43 FCR 1, von Doussa J considered imputation of the knowledge of directors to a corporation. A number of propositions emerged from his Honour’s analysis of the authorities including:
1.in ordinary circumstances, if a director of a company knows information important to the company’s affairs, the director is under a duty to communicate that information and to receive it: Beach at [22.21];
2.subject to (3), provided that a director of a company is acting within the scope of his authority, then in civil proceedings the state of a mind of a director will ordinarily be attributed to the company where there is a duty on that director to communicate his knowledge to the company: Beach at [22.34];
3.where a director is acting totally in fraud of the company - where all the director’s activities are directed against the interests of the company and not partly for the benefit of the company - the state of a mind of a director will not be attributed to the company: Beach at [22.34];
4.if the director is guilty of fraudulent conduct which is not totally in fraud of the company and by design or result the fraud benefits the company, the knowledge of the director will be attributed to the company: Beach at [22.34].
In the present case, Mr Letten’s actions were a “frolic” of his own: Beach at [22.35]. The result of his conduct was totally contrary to the interests of SY21. According to a general ledger of SY21 maintained by Mr Letten (and not by SY21), when SY21 completed the purchase of the property on 4 October 2004, it would have resulted in the investors being creditors of SY21 for in excess of $1.492 million, a fact which was never communicated to SY21 or to the other director, Mr Bate. And not only would SY21 have then owed investors nearly $1.5 million, it had borrowed $900,000 from Westpac to purchase the Chapel Street Property for a little more than $1 million. Mr Letten’s intentions cannot be and should not be imputed to SY21.
For the same reasons as those outlined in [43] to [65], I also reject the Receivers’ contention that the Chapel Street Property is scheme property of the Schemes (as defined in the 25 February Orders) for the purposes of s 9 of the Act.
2. IS THERE AN EQUITABLE CONTRIBUTION TO THE CHAPEL STREET PROPERTY THAT CONSTITUTES SCHEME PROPERTY OF THE SY21 SCHEME OR THE SCHEMES?
As an alternative argument, the Receivers submitted that the $220,881.90 “equity” contribution for the purchase of the Chapel Street Property was scheme property of the SY21 Scheme. That contention is also rejected.
First, as noted earlier, at the time of the payment of the first $100,000, the investors had contributed no funds to the SY21 Scheme: see [22] above. That leaves the balance ($120,881). Those funds appeared to have come from Twinview, not from the investors: see [30].
Thirdly, the Receivers did not establish that SY21 had the requisite knowledge of the essential facts giving rise to the existence of a trust, a breach of fiduciary duty by LGH or of any fraudulent design on the part of LGH: The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 225 FLR 1 at [4740] – [4749], especially at [4748]; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [112]-[129]. Mr Letten was not the directing mind and will of the company: Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (in liq) (1999) 96 FCR 217 at [48]. And, in the circumstances of this case, any knowledge of Mr Letten is not to be imputed to SY21: see [59] to [65] above.
For the same reasons, I also reject the Receivers’ contention that the $220,881.90 “equity” contribution for the purchase of the Chapel Street Property was scheme property of the Schemes (as defined in the 25 February Orders) for the purposes of s 9 of the Act.
3. IS $342,308 SCHEME PROPERTY OF THE SY21 SCHEME OR THE SCHEMES?
It was common ground that the SY21 books of account did not properly reflect the respective contributions to SY21 of Mr Letten or entities associated with him. A “sources and uses of funds” statement tendered in evidence recorded that a net sum of $42,308 had been contributed by or on behalf of Mr Letten to SY21 over the life of the project.
Counsel for Mr Bate conceded that that figure did not include the second $150,000 payment and that the net contribution was in fact $192,308. Mr Bate did not oppose a declaration that $192,308 reflected the balance of monies supplied by LGHH or a related or associated company to SY21 and that that amount was scheme property of the SY21 Scheme. Mr Letten also conceded that any surplus of monies supplied by LGHH or a related or associated company to SY21 was scheme property of the SY21 Scheme.
The Receivers, however, submitted the surplus was $342,308, and not $192,308. Acceptance of the Receivers’ contention depended on the Court rejecting Mr Bate’s evidence about the March Agreement: see [19] above. In light of the conclusions I reached about the existence and terms of that agreement (see [21] above), the scheme property of the SY21 Scheme is limited to the surplus of $192,308. There is nothing to suggest that the surplus is scheme property of the Schemes.
VI. CONCLUSION
For these reasons, the questions asked by the Receivers should be answered in the manner set out in the orders.
I certify that the preceding seventy-four (74) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon. Associate:
Dated: 24 September 2010
SCHEDULE OF PARTIES
LGH HOLDINGS LIMITED (ACN 007 191 943)
Second Defendant211 WELLINGTON ROAD PTY LTD (ACN 092 663 860)
Third DefendantBLUEMIST HOLDINGS PTY LTD (ACN 097 306 922)
Fourth DefendantDELLWOOD HOLDINGS PTY LTD (ACN 098 505 803)
Fifth DefendantENMORE ENTERPRISES PTY LTD (ACN 082 158 487)
Sixth DefendantFIRBANK ARCH PTY LTD (ACN 059 464 381)
Seventh DefendantGLENLINE PTY LTD (ACN 098 532 364)
Eighth DefendantGERLING HOLDINGS PTY LTD (ACN 091 726 457)
Ninth DefendantLGH ADMINISTRATION PTY LTD (ACN 007 165 069)
Tenth DefendantLGH FINANCE PTY LTD (ACN 078 859 248)
Eleventh DefendantLOW HEAD VILLAGE PTY LTD (ACN 091 731 958)
Twelfth DefendantNICHOLSON STREET PTY LTD (ACN 069 104 089)
Thirteenth DefendantHOLLOWAY CREST PTY LTD (ACN 091 731 967)
Fourteenth DefendantROSEBERY ENTERPRISES PTY LTD (ACN 091 826 229)
Fifteenth DefendantSIMMS INVESTMENTS PTY LTD (ACN 093 504 511)
Sixteenth DefendantSY21 RETAIL PTY LTD (ACN 107 874 564)
Seventeenth DefendantTHE GLEN CENTRE HAWTHORN PTY LTD (ACN 089 906 543)
Eighteenth DefendantCASTELLO HOLDINGS PTY LTD (ACN 088 204 175)
Nineteenth DefendantTWINVIEW NOMINEES PTY LTD (ACN 097 307 278)
Twentieth DefendantYARRA VALLEY GOLF PTY LTD (ACN 066 632 479)
Twenty-First DefendantADINA RISE PTY LTD (ACN 083 181 122)
Twenty-Second DefendantALBRIGHT INVESTMENTS PTY LTD (ACN 088 204 166)
Twenty-Third DefendantASHFIELD RISE PTY LTD (ACN 093 504 806)
Twenty-Fourth DefendantBRADFIELD CORPORATION PTY LTD (ACN 088 204 371)
Twenty-Fifth DefendantCOPELAND ENTERPRISES PTY LTD (ACN 093 504 824)
Twenty-Sixth DefendantDEVLIN WAY PTY LTD (ACN 088 264 813)
Twenty-Seventh DefendantFIRST HAZELWOOD PTY LTD (ACN 093 505 303)
Twenty-Eighth DefendantGLENBELLE PTY LTD (ACN 097 306 646)
Twenty-Ninth DefendantGLENVALE WAY PTY LTD (ACN 088 287 021)
Thirtieth DefendantGREENVIEW LANE PTY LTD (ACN 093 505 312)
Thirty-First DefendantHALLMARK CORPORATION PTY LTD (ACN 093 505 312)
Thirty-Second DefendantMOORLEIGH HOLDINGS PTY LTD (ACN 088 287 058)
Thirty-Third DefendantNORTON RIDGE PTY LTD (ACN 078 821 066)
Thirty-Fourth DefendantRALEIGH GLEN PTY LTD (ACN 088 204 380)
Thirty-Fifth DefendantREDCREST HOLDINGS PTY LTD (ACN 100 836 486)
Thirty-Sixth DefendantSURI CORPORATION PTY LTD (ACN 093 505 321)
Thirty-Seventh DefendantSUTTON RISE PTY LTD (ACN 088 204 399)
Thirty-Eighth DefendantTHE VIRTUAL MLMER PTY LTD (ACN 065 374 665)
Thirty-Ninth DefendantTIVENDALE PTY LTD (ACN 093 505 349)
Fortieth DefendantTULLOCH DOWNES PTY LTD (ACN 078 895 048)
Forty-First DefendantMAINKING PTY LTD (ACN 100 790 485)
Forty-Second DefendantTOPGLEN PTY LTD (ACN 096 857 564)
Forty-Third DefendantALLBLUE PTY LTD (ACN 100 836 388)
Forty-Fourth DefendantARANBAY PTY LTD (ACN 098 532 319)
Forty-Fifth DefendantMELVILLE CORPORATION PTY LTD (ACN 091 911 045)
Forty-Sixth DefendantTILLEY LANE PTY LTD (ACN 086 136 361)
Forty-Seventh DefendantHPSC PTY LTD (ACN 059 930 139
Forty-Eighth DefendantJENSDALE PTY LTD (ACN 098 367 974)
Forty-Ninth DefendantOAKDALE RISE PTY LTD (ACN 091 598 908)
Fiftieth DefendantMAYWOOD INVESTMENTS PTY LTD (ACN 091 599 218)
Fifty-First DefendantACETRAIN PTY LTD (ACN 100 820 282)
Fifty-Second DefendantSAGE BAY PTY LTD (ACN 097 306 628)
Fifty-Third DefendantTOBAGO HOLDINGS PTY LTD (ACN 093 504 520)
Fifty-Fourth Defendant
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