Australian Securities and Investments Commission v Letten (No 7)
[2010] FCA 1231
FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v Letten (No 7)
[2010] FCA 1231
Citation: Australian Securities and Investments Commission v Letten (No 7) [2010] FCA 1231 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: 11 November 2010 Catchwords: CORPORATIONS – unregistered managed investment schemes – receivers and managers appointed – whether receivers are justified in distributing property of the schemes on a pooled basis – method of distribution of the property of the schemes – power of the Court to make the directions sought by the receivers Legislation: Australian Securities and Investments Commission Act 2001 (Cth)
Corporations Act 2001 (Cth)
Federal Court of Australia Act 1976 (Cth)
Federal Court RulesCases cited: Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2001] QSC 082
Australian Securities and Investments Commission v Letten (No 1) [2010] FCA 140
Australian Securities and Investments Commission v Letten (No 3) [2010] FCA 512
Australian Securities and Investments Commission v Letten (No 4) [2010] FCA 571
Australian Securities and Investments Commission v Letten (No 5) [2010] FCA 1047
Australian Securities and Investments Commission v Letten (No 6) [2010] FCA 1048
Australian Securities and Investments Commission v Nelson [2003] NSWSC 129
Australian Securities Investments Commission v Tasman Investment Management Ltd (2006) 202 FLR 343
Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22
Birtchnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384
Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321
Concrete Pty Ltd v Parramatta Design and Developments Pty Ltd (2006) 229 CLR 577
Devaynes v Noble (1816) 35 ER 781
Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (In Liquidation) (2008) 173 FCR 472
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62
John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd; Walker Corporation Pty Ltd v White City Tennis Club Ltd (2010) 266 ALR 462
Law Society of New South Wales v Milios (1999) 48 NSWLR 409
Law Society of Upper Canada v Toronto Dominion Bank (1998) 169 DLR (4th) 353
Lehman Brothers International (Europe) (in administration) v CRC Credit Fund Limited & Others [2010] EWCA Civ 917
Mariconte v Batiste (2000) 48 NSWLR 724Parker; Re Purcom No 34 Pty Ltd (in Liq) (2009) 262 ALR 85
Re Brighton Joint Venture Partner No 2 Scheme; Australian Securities and Investments Commission v Primelife Corp Ltd (2005) 54 ACSR 177
Re French Caledonia Travel Services Pty Ltd (in Liq) (2003) 59 NSWLR 361
Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674
Re Global Finance Group Pty Ltd (in liq)(supervisor appointed); Ex parte Read (2002) 26 WAR 385
Re Joscelyne; Allen’s Plaster Products Pty Ltd v Prudential Assurance Co Ltd [1963] Tas SR 4
Re Laughton [1962] Tas SR 300
Re Magarey Farlam Lawyers Trust Accounts (No 3) (2007) 96 SASR 337
Re One.Tel Networks Holdings Pty Ltd (2001) 40 ACSR 83
Re TVSN Limited [2005] NSWSC 692
Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165
United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1
University of Western Australia v Gray (No 6) [2006] FCA 1825
Xenou v Katsaras (2002) 7 VR 335Jacobs’ Law of Trusts in Australia (7th ed, 2006)
Law Book Company, McPherson’s Law of Company Liquidations (2010)Date of hearing: 7 and 8 October 2010 Date of last submissions: 19 October 2010 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 337 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 Receivers: R Strong Solicitor for the Receivers: Mallesons Stephen Jaques Counsel for Bridgehead Pty Ltd (a non-party): Mr E Woodward Solicitor for Bridgehead Pty Ltd (a non-party): Mills Oakley Counsel for Light Investments Pty Ltd and Light Carden Investments Pty Ltd (both non-parties): Mr A J Kelly SC (pro-bono) Counsel for Matclair Properties Pty Ltd (a non-party): Mr McLean Solicitor for Matclair Properties Pty Ltd (a non-party): Kyard Business Law Mr Nulley (a non-party investor): Appeared in person Dr Sykes (a non-party investor): Appeared in person Mr McCulloch (a non-party investor): Appeared in person
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:
11 NOVEMBER 2010
WHERE MADE:
MELBOURNE
For the purpose of this order, Property, Receivers, Scheme and Secured Lender have the meanings ascribed to them respectively in the Orders made in this proceeding on 25 February 2010, 4 March 2010 and 30 July 2010.
Additional Scheme has the meaning given to it in the 30 July 2010 Orders.
Corporate Defendants means each of the corporate defendants to this proceeding.
Schemes means each Scheme and each Additional Scheme.
THE COURT DIRECTS THAT:
1.Pursuant to ss 601EE(2) and 1323 of the Corporations Act 2001 (Cth) (the Act), alternatively ss 23 and 57 of the Federal Court of Australia Act 1976 (Cth) and O 26 r 7 of the Federal Court Rules:
(a)the Receivers are justified in paying the following amounts out of the proceeds of sale of each asset of the Schemes and the Corporate Defendants, in the following order of priority:
(i)priority receivership costs, as fixed by the Court, to the Receivers;
(ii)any liabilities which are secured by that asset to the relevant Secured Lender;
(iii)the amount of trust creditor claims in respect of the relevant Corporate Defendant (if any) in respect of which the relevant Corporate Defendant has a right of indemnity and lien to the relevant Corporate Defendant; and
(iv)the balance (if any) into a bank account held in the name of the Receivers and designated as the “Common Fund” account (Common Fund); where:
priority receivership costs are the Receivers’ fees, costs and expenses which:
(i) relate to getting in, preserving or realising a relevant asset; or
(ii)if a priority deed or other agreement is entered into by the Receivers with a relevant secured creditor, have priority under that deed or other agreement;
as approved by the Court.
trust creditor claims, in respect of an asset, are claims against the Corporate Defendant which is the trustee of that asset and in respect of which the Corporate Defendant has a right of indemnity and lien against the asset.
(b)Notwithstanding the terms and conditions of any joint venture agreement or other instrument governing the administration, management or winding up of the Schemes, the Receivers are justified in proceeding and making distributions out of the funds comprising the Common Fund:
(i)as if and on the basis that the Common Fund includes the “scheme property” of each of the Schemes;
(ii)as if and on the basis that the Common Fund constitutes a single fund; and
(iii)in the following order of priority:
(A)first, to the Receivers, all fees, costs and expenses incurred by the Receivers in respect of the receiverships of each of the Corporate Defendants and the Schemes, which have not been paid by the Corporate Defendants (and not covered by paragraph 1(a)(i) of these Directions), as fixed by the Court; and
(B)second, to Claimants, a rateable share of the balance of the Common Fund, calculated by reference to the amount adjudged by the Receivers to be the amount of their respective Claims, where:
Claimants means any person who has a Claim; and
Claim means:
·in respect of members of each Scheme, the members’ total net contributions to a Scheme or Schemes as established by that member pursuant to the proof of claim process conducted under Direction 1(c) below; and
·in respect of all other Claimants, any net proprietary claim on the Common Fund which can be established by the Claimant pursuant to the proof of claim process conducted under Direction 1(c) below.
(c)For the purposes of effecting distributions in accordance with Direction 1(b) above, the Receivers shall conduct a proof of claim process, which to the extent practicable conforms with (and is governed by the rules and regulations applicable to) the proof of debt or claim process applicable in a liquidation, pursuant to which the existence and value of Claims will be finally determined by the Receivers, subject to all rights of appeal to the Court (including pursuant to s 1321 of the Act).
2.Nothing in paragraph 1 above is to affect the rights of any person to claim that they have, or any other person has, an entitlement to distribution from an asset of a Scheme or a Corporate Defendant (or the proceeds of sale of such asset) which differs from the distribution which they would receive pursuant to the process outlined in paragraph 1 above.
AND THE COURT ORDERS THAT:
3.The proceedings be adjourned to a date to be fixed.
4.Costs reserved.
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:
11 NOVEMBER 2010
PLACE:
MELBOURNE
INDEX
CONTENT
PARA(S)
A
Introduction
[2] – [6]
B
Procedural History
[7] – [12]
C
History of Current Application
[13] – [22]
D
Relevant Factual Findings
[23] – [260]
(1) Description of the Schemes
[28] – [237]
1998 Scheme 15 – Yarra Valley Golf Joint Venture
[31] – [64]
1999 Scheme 18 – Aurora Park Project
[65] – [74]
2000
(1) Scheme 1 – 211 Wellington Road Joint Venture
[75] – [84]
(2) Scheme 13 – The Glen Centre Joint Venture
[85] – [91]
2001 Scheme 11 – Simms Investment Project
[92] – [100]
2002
(1) Scheme 16 – Glenbelle Project
[100] – [108]
(2) Scheme 2 – Healesville Walk Shopping Centre Joint Venture
[109] – [210]
(3) Scheme 3 – Howleys Road Joint Venture
[121] – [129]
(4) Scheme 14 – Twinview Joint Venture
[130] – [137]
2003 Scheme 4 – George Street Joint Venture
[138] – [143]
2004
(1) Scheme 8 – Low Head Joint Venture
[144] – [154]
(2) Scheme 6 – Reef House Resort
[155] – [163]
(3) Scheme 7 – Queen Street Joint Venture
[164] – [170]
(4) Scheme 21 – Mount Hutt Project
[171] – [178]
(5) Scheme 17 – Tomasetti House Joint Venture
[179] – [186]
2005 Scheme 12 – SY21 Joint Venture
[187]
2006
(1) Scheme 9 – Nicholson Street Joint Venture
[188] – [198]
(2) Scheme 5 – Cimitiere House Joint Venture
[199] – [206]
(3) Scheme 10 – National Boulevard Joint Venture
[207] – [218]
(4) Scheme 20 – Cass Bay Spur Project
[219] – [226]
(5) Scheme 19 – Moorhouse Shopping Centre Project
[227] – [237]
(2) Establishment of a trust
[238] – [248]
(a) Investments pursuant to joint venture agreements
[240] – [241]
(b) Alternative forms of investment
[242] – [248]
(3) Manner in which Schemes were Operated
[249] – [260]
(a) Receivers’ attempts to trace investor contributions
[250] – [251]
(b) Lack of reliability in the accounting records
[252] – [257]
(c) Costs associated with an attempted reconstruction of the financial and accounting data and the possible outcomes
[258] – [260]
E
Court’s Power to Make Pooling Directions and the Relevant Legal Principles
[261] – [274]
(1) Schemes Wound up Pursuant to s 601EE(2) of the Act
[263] – [268]
(2) Concluded Schemes
[269] – [271]
(3) Corporate Defendants
[272] – [274]
F
Legal Framework for the Method of Distribution
[275] – [286]
(1) The Rule in Clayton’s Case
[276] – [277]
(2) The Lowest Intermediate Balance Rule
[278] – [279]
(3) The North American Model
[280]
(4) Distribution According to Intention
[281]
(5) Rateable Distribution
[282] – [286]
G
Submissions for and against Pooling
[287] – [331]
(1) Introduction
[287]
(2) Receivers
[288] – [297]
(3) The Light Interests
[298] – [314]
(4) Mr Letten
[315] – [317]
(5) Dr Sykes
[318] – [320]
(6) Mr Nulley
[321] – [323]
(7) Mr McCulloch
[324] – [325]
(8) Other Investors
[326] – [327]
(9) Bridgehead Pty Ltd and Matclair Properties Pty Ltd
[328] – [329]
(10) ASIC
[330] – [331]
H
Analysis and Conclusion
[332] – [337]
REASONS FOR JUDGMENT
In these reasons for decision, Property, Receivers, Scheme and Secured Lender have the meanings given to them in the 25 February Orders, the 4 March Orders and the 30 July Orders. Additional Scheme has the meaning given to it in the 30 July Orders. Corporate Defendants means each of the corporate defendants to this proceeding and Schemes means each Scheme and each Additional Scheme.
A. INTRODUCTION
This is the seventh judgment in a series about unregistered managed investment schemes in which Mr Mark Ronald Letten (Mr Letten), the First Defendant, was involved.
The current issue is an application for directions by the Receivers that they are justified in pooling the assets of the Schemes and the Corporate Defendants by first paying certain amounts out of the proceeds of sale of the assets of the Schemes and the Corporate Defendants and then placing any surplus into a Common Fund for distribution rateably between claimants who have a claim.
Notice of the pooling application was given to the parties to the proceeding, to the Secured Lender and to investors in the Schemes (the Investors). The Court received submissions from the Receivers, from the Australian Securities and Investments Commission (ASIC) (written and oral), from Light Investments Pty Ltd and Light Carden Investments Pty Ltd (collectively the Light Interests) (written and oral), from Mr Letten (written and oral) and written submissions from 99 Investors. In addition to Counsel representing the Light Interests, three investors appeared in person and made helpful oral submissions. The detailed content of these submissions will be addressed in further detail below. Written submissions were also received from a non-party creditor to several Schemes, Bridgehead Pty Ltd (Bridgehead). At the hearing of the application for pooling, Bridgehead’s submissions were supported by another non-party creditor, Matclair Pty Ltd (Matclair).
In general terms, ASIC supports the Receivers’ revised proposal. The Light Interests oppose any wholesale order for pooling and submit that such an order would be inimical to the overriding object of protecting and preserving, inter alia, the interests of Investors: Re Brighton Joint Venture Partner No 2 Scheme; Australian Securities and Investments Commission v Primelife Corp Ltd (2005) 54 ACSR 177 at [13]. The views of Investors were not consistent. However, the hardships faced and still being faced by Investors as a result of their involvement in these Schemes was consistent. The hardship is real, distressing and, in many cases, has resulted in dire consequences including loss of life, loss of marriages and relationships, the loss of the family home and loss of security for the future. These realities cannot be ignored.
For the reasons that follow, I would grant the Receivers directions in the form ultimately sought. As will become apparent, both the form of the relief and the extent of the relief were substantially amended during the course of the hearing.
B. PROCEDURAL HISTORY
The initial history of these proceedings was summarised in Australian Securities and Investments Commission v Letten (No 3) [2010] FCA 512 at paragraphs [1] – [2] 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).
2On 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.
On 13 April 2010, the Receivers filed Disclosure Reports in relation to each Scheme except for Schemes numbered 6, 15 and 16. The Disclosure Reports for Schemes numbered 6, 15 and 16 were filed on 28 April 2010.
On 6 May 2010, Orders were made (the 6 May Orders) requiring the Receivers to file and serve, inter alia:
1.draft minutes of orders relating to the proposed realisation of the property of the “Letten Property Schemes” and the “Letten Operating Business Schemes”;
2.any written submissions in relation to the realisation of the property of the Letten Property Schemes or the Letten Operating Business Schemes; and
3.any written submissions in relation to the distribution of property of the Schemes (after payment of amounts due to any Secured Lender and other priority creditors).
The 6 May Orders also provided that any Investor could make an application in relation to distribution of property of the Schemes. Between 17 May and 15 October 2010, submissions from 99 Investors were received. Many Investors had invested in multiple schemes. As noted earlier, the content of these submissions will be considered in further detail below.
On 25 May 2010, the Court granted the Receivers the power of sale in relation to the Schemes numbered 4, 5, 8, 9, 13 and 14 (Letten (No 3)) and, on 28 May 2010, the Court made orders about the manner in which the Receivers would initially deal with any proceeds from disposal of the assets of the Schemes numbered 4, 5, 9, 13 and 14 (Australian Securities and Investments Commission v Letten (No 4) [2010] FCA 571). On 4 June 2010, the Court granted the Receivers the power of sale in relation to assets of the Schemes numbered 6, 15 and 16 (Letten (No 4) [2010] FCA 571).
By order two on 30 July 2010, the Receivers were also appointed joint and several receivers and managers of identified property of five additional Schemes numbered 17 – 21 (inclusive) (the Additional Schemes). The Schemes numbered 19, 20 and 21 were wound up pursuant to s 601EE(1) of the Act (the 30 July Orders). Disclosure Reports were received for the Additional Schemes on 30 August 2010.
C. HISTORY OF CURRENT APPLICATION
On 29 July 2010, the Receivers filed a preliminary outline of submissions about distribution of property of the Schemes. At that time, the Receivers recommended that the “scheme property” of each of the Schemes be distributed:
(a)to creditors, via the winding up of the Letten Entities, on a company by company basis; and
(b)to Investors, in effect, on a pooled basis.
On 17 September 2010, the Receivers filed proposed orders purportedly pursuant to s 601EE(2) of the Act which, in general terms, proposed:
1.the creation of a common fund into which would be contributed the surplus, after payment of certain costs, of what were described as “the proceeds of sale of each of the assets which are the subject of the Schemes”; and
2.any and all claims between the Corporate Defendants were to be satisfied upon the creation of the common fund.
On 5 October 2010, the Receivers filed further submissions and further proposed orders. The supplementary submissions proposed amendments to the “pooling” orders which had the effect of ensuring that any scheme property which properly belonged to third parties was not expropriated for the benefit of Investors. The power for granting the relief was amended. The amended proposed orders stated that the orders were sought pursuant to ss 424 and 601EE(2) of the Act and s 23 of the Federal Court of Australia Act 1976 (Cth) (the FCA) for the creation and management of a common fund from the proceeds of sale of each of the assets which are the subject of Schemes, net of what were described as “priority receivership costs”, any liabilities which are secured by a Scheme asset and the amount of trust creditor claims in respect of the relevant Corporate Defendant (if any) in respect of which the relevant Corporate Defendant has a right of indemnity and lien. “Priority receivership costs” and “trust creditor claims” were defined terms.
Prior to the hearing, the Court requested that the Receivers consider the form of relief sought in light of the decision of Austin J in Australian Securities Investments Commission v Tasman Investment Management Ltd (2006) 202 FLR 343 at [27] – [32] (citing McLelland J in Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674) where His Honour stated:
30.By analogy, it seems to me probable that, whether or not s 601EE(2) permits the court to make binding orders about entitlements in a form that affects third parties, the court is likely to prefer to make directions having the limited effect described by McLelland J. There are several consequences of doing so. One is that the rights of claimants to the scheme funds distributed on winding up will be unaffected by the court’s directions, except in one limited respect. The limited impact on claimants’ rights is this: if the court directs that the receiver would be justified in implementing a scheme of distribution, after full and fair disclosure of the material facts has been made, and the receiver complies with the court's directions, the receiver will be protected from liability for any alleged breach of duty as receiver, to a creditor or beneficiary of the scheme, for anything done in accordance with the direction. It will therefore remain open to anyone who disagrees with the distribution sanctioned by the court to take proceedings to seek to recover the alleged overpayment. This is important in the case of the winding up of a managed investment scheme, in contrast with the winding up of a company, because the winding up does not lead to the dissolution of any of the entities that conducted the scheme and might subsequently be defendants in an action by an aggrieved investor or scheme trustee.
31.Another consequence of the court confining itself to directions in limited form is that the application may be dealt with by a relatively informal procedure analogous to the procedure on an application by a trustee for judicial advice or an application by a liquidator for directions. In HIH Casualty & General Insurance Ltd (in liq) v Building Insurers’ Guarantee Corporation (2004) 51 ACSR 21, Barrett J observed (at [18]) that, where a liquidator applies for directions under s 479(3), the practice is for the applicant to place before the court a statement of facts identifying the particular matter upon which directions are sought. The court makes its decision on the basis of the facts presented to it by the liquidator, and if they are not presented fully and fairly, the liquidator loses the protection that would otherwise apply to conduct undertaken in accordance with the court's direction.
(Emphasis added.)
The form of the relief sought, and the consequences of the form of that relief, are important. As Austin J made clear, if any person or entity has a provable legal or beneficial interest in a particular asset of a scheme or schemes, then it is open to that person or entity to commence proceedings to seek to recover that interest. The orders initially proposed by the Receivers did not achieve that objective.
When the matter was called on for hearing, the Receivers informed the Court that the relief sought would be amended to be limited to directions. Counsel for the Receivers was asked to list the entities and persons the Receivers considered might be affected by pooling. At that time, the list included the following entities and persons:
Person or Entity
Person(s) potentially affected
1 Schemes wound up pursuant to s 601EE(2) of the Act: Schemes numbered 1, 4 to 9, 12 to 16 and 19 to 21 in Attachment A. Joint Venture investors
Equity deposit bond holders
Equity mortgage investment investors
2 Schemes not wound up because they were not operating: Schemes numbered 2, 3, 10, 11, 17 and 18 in Attachment A.
Joint Venture investors 3 Corporate Defendants Creditors
Secured Lenders
4 LGH Administration Pty Ltd (LGHA) Project Reserve Bondholders
“War Chest” investors
5 The LGH Family Trust
Beneficiaries
As is apparent, contrary to the Receivers’ amended proposed orders that had been provided to the Court on 5 October (see [15] above), the Court’s power to make the pooling direction in relation to each category listed in [18] above could not be ss 424 and 601EE(2) of the Act and s 23 of the FCA. To take just one example, s 424 of the Act is concerned with the ability of a controller of property of a corporation to apply to the Court for directions in relation to any matter arising in connection with the performance or exercise of any of the controller’s functions and powers as controller. It is doubtful whether that section applies to receivers appointed to property of managed investment schemes: see Australian Securities and Investments Commission v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240.
On the second morning of the hearing, the Receivers filed two documents: “Further Revised Proposed Minutes of Orders” and a Summary of Investments, Entities and Persons which were affected by the pooling direction sought. The matter was stood down to enable the parties and the Court to review the Receivers’ revised position. A number of significant changes had been made. First, the purported power to grant the directions was expanded to include s 57 of the FCA as well as s 23 of the FCA and s 601EE(2) of the Act. Reliance on s 424 of the Act was eschewed. Secondly, the definition of priority receivership costs was amended. Thirdly, and no less significantly, the revised proposed minutes of orders included, for the first time, a proposed order that the pooling direction would not “affect the rights of any person to claim that they have, or any other person has, an entitlement to distribution from an asset of a Scheme or a [Corporate Defendant] … which differs from the distribution which they would receive” pursuant to the pooling direction.
Finally, the Receivers’ application for directions that the Receivers were justified in pooling was now limited to categories (1), (2) and (3) (see [18] above), namely the assets of the Schemes and the Scheme property (if any) held by of the Corporate Defendants. The Court’s power to make such a direction was said to be s 601EE(2) of the Act. For the reasons set out in Australian Securities and Investments Commission v Letten (No 1) [2010] FCA 140 at [19] to [23], I expressed the view at that time that s 601EE(2) of the Act was not applicable to those Schemes which were not operating, namely category (2) in [18] above (the Concluded Schemes). After the hearing, the Receivers filed further submissions seeking to explain the basis on which the Court was entitled to make a direction concerning pooling for the Concluded Schemes and the Scheme property held by the Corporate Defendants. Those submissions contended that the basis for the directions was:
1.s 1323 of the Act or alternatively, ss 23 and 57 of the FCA and O 26 r 7 of the Federal Court Rules in relation to the Concluded Schemes; and
2.s 601EE(2) and s 1323 of the Act or alternatively, ss 23 and 57 of the FCA and O 26 r 7 of the Federal Court Rules in relation to the property of the Corporate Defendants which is property of the Schemes.
The Receivers also filed “Further Revised Proposed Minutes of Order” to reflect that submission.
The remaining issues to be considered are addressed under the following headings:
D. Relevant factual findings;
E.Court’s power to make pooling directions and the relevant legal principles;
F.Legal Framework for the Method of Distribution;
G. Submissions for and against pooling;
H. Analysis and Conclusion.
D. RELEVANT FACTUAL FINDINGS
At the outset, it must be noted that the following factual findings are primarily based on the current state of the Receivers’ investigations into the Schemes. Whilst the Receivers informed the Court that they had placed before the Court all the facts within their knowledge, there are apparent gaps in the facts. Undoubtedly, there are other errors and omissions which are not so apparent. The following factual analysis is primarily extracted from the Disclosure Reports prepared by the Receivers (see [8] and [12] above).
Because the issues to be decided and the facts that bear on those issues are complicated it is important to set out a summary of the principal points that are to be made in the balance of these reasons.
The Schemes to which the Receivers have been appointed have not all been wound up: see [21] above. Those Concluded Schemes which are no longer operating cannot be wound up.
Investors and creditors have claims which they would seek to make against the “Schemes”. But the “Schemes” have no separate legal personality: Mier v FN Management Pty Ltd [2006] 1 Qd R 339 at [20]. Because of the way in which Mr Letten and companies associated with him (including the Corporate Defendants) conducted the Schemes, it is not possible to say now what are the net assets of any Scheme. There appear to have been so many inter-scheme transactions that it is not possible to say what assets were acquired by what scheme using whose money.
The Receivers initially sought to have the Court decide how the assets they hold should be applied. Ultimately, the Receivers sought directions that a particular course of action could be followed. That course of action would allow claimants to prove their claims to particular assets or against particular entities or assets, but then permit the Receivers to proceed to apply what remained after those claims were determined rateably among all remaining claimants.
(1) DESCRIPTION OF THE SCHEMES
There are 21 Schemes: see Attachment A to these reasons for decision. Each Scheme was or is a separate unregistered managed investment scheme in which it appears that investors contributed money as consideration to acquire rights to benefits intended to be produced by the acquisition of a particular asset or assets. At the time of preparing the Disclosure Reports, the Receivers estimated that 916 Investors invested in the Schemes in the period from 1998 to 2009.
The form and timing of the investment in each Scheme was not consistent within Schemes or between Schemes. Some investors executed joint venture agreements. Other investors bought or invested in what were described as “equity deposit bonds” or “equity mortgage investments”. Others appear to have contributed money to the Scheme without executing any documentation. Other investments occurred by way of “rollovers” from other Schemes. Some investors invested after the asset was bought. Others invested before the asset was acquired. Some investors fall into more than one of these categories. The varying forms of investment are complicated further by the fact that many Schemes received contributions through a combination of these methods.
I will deal with each Scheme in the order in which they appeared to have occurred.
1998 – Scheme 15 – Yarra Valley Golf Joint Venture
The Yarra Valley Golf (YVG) Joint Venture was the first of the Schemes established by Mr Letten and the group of companies collectively defined as the “Letten Entities”, being LGH Administration Pty Ltd, the tenth defendant (LGHA), LGH Finance Pty Ltd, the 11th defendant (LGHF) and LGH Holdings Ltd, the second defendant (LGHH). It is undoubtedly the most complicated of the Schemes. As will become apparent, investments in the YVG Joint Venture occurred in a variety of ways to a variety of entities and sub-entities, the details of which, taken at their highest, are a vague, and often inaccurate, reflection of the actual investment.
In Letten (No 4), the YVG Joint Venture was summarised as follows:
[20]The Disclosure Report identifies the property of the scheme numbered 15 as the Heritage Golf Club and Country Club, Corner of Hughes and Yarraview Roads, Chirnside Park, Victoria (the YVG Property). The YVG Property is described by the Receivers as follows:
The … property is situated within the Heritage Golf Club and Country Club Complex. This includes residential, hotel, day spa, conference and golf facilities (albeit these have different owners).
The … property comprises the two golf courses (St John & Henley), clubhouse, residential development land and 92% of the shares in HGCC Pty Ltd. HGCC Pty Ltd in turn operates the Heritage Golf Club and Country Club (an unincorporated association). The St John course is subject to a lease to HGCC Pty Ltd. It was originally intended that a similar lease be provided to HGCC Pty Ltd once the subdivision of the relevant land occurs.
[Yarra Valley Golf Pty Ltd] is responsible for the day to day management of the golf operations and the development, marketing and sale of the residential land. The hotel operations including conference and day spa facilities are not owned by [Yarra Valley Golf Pty Ltd].
[21]The Disclosure Report set out the “key” steps and processes by which the project was established. For present purposes, it is sufficient to note that the Receivers stated that:
The investor funding for the development of [Yarra Valley Golf Pty Ltd] has been sourced from many different investors and in different forms over a long period of time and as such may constitute separate schemes.
There are a number of issues which make it difficult to identify the scheme property for each of the schemes. These include:
•The fact that a number of [Joint Venture Agreements] appear to relate to the same physical assets (even though different corporate managers were appointed pursuant to the [Joint Venture Agreements]).
•Any separate schemes are effectively ‘cross collaterised’ as the secured finance in relation to [Yarra Valley Golf Pty Ltd] has not been quarantined to particular assets of the schemes.
•The substantial number of investors who invested in various aspects of the [Yarra Valley Golf Pty Ltd] development.
On any view, the arrangements are complicated. So, for example, the initial source appears to have been provided in the mid 1990’s with the creation of a partnership and the acquisition of the St John and Henley land. The current status of that partnership is an issue which remains unresolved.
As noted in Letten (No 4), the initial source of funds for YVG was raised by way of a partnership between what the Receivers identified as “a small group of largely sophisticated investors” (the original partners). The original partners entered into a partnership agreement in July 1996 with FBN Property Pty Ltd (a Letten related entity), Keywear Pty Ltd and Yarra Valley Golf Pty Ltd, the 21st defendant (described in the partnership agreement as the “manager”). According to the partnership agreement, the purpose of the partnership was “the acquisition of the Land, the development of the Land and the Heritage Golf & Country Club thereon and the sale or lease of the Land and the development thereon”. The “Land” was described as “the land in Yarra Valley known as the St John of God land and the Henley Farm land and such other land acquired by the Partnership for the purposes of the Partnership”. In the 1995 to 1997 financial years, the original partners collectively invested approximately $6.9 million.
On 25 July 1997, Mr Letten wrote to the original partners advising that the project was facing significant challenges and that an administrator would need to be appointed to the project in the absence of both significant additional equity and an equity restructure. According to the Receivers, Mr Letten subsequently converted the original partners’ investment into an interest bearing loan in the name of LGHA. Certain original partners have been repaid a portion of their investments but the Receivers are unaware of the specific terms surrounding the repayments other than that they occurred at the direction of Mr Letten. The Receivers do not treat the investments by the original partners as part of the current application or part of the Scheme.
Investments in the YVG Joint Venture the subject of the 25 February Orders fell into a number of categories:
1.those who invested in the joint venture, of which there were two subcategories being (a) direct joint venture investors and (b) indirect joint venture investors; or
2.investments which fell outside of the joint venture but which the Receivers categorised as investments in “sub-schemes” of the YVG Joint Venture. Within this category there were two subcategories being (a) equity deposit bonds and (b) an equitable mortgage in what is defined as “The Sebel Heritage Lodge Investment Stage 2”.
Direct Joint Venture Investors in Yarra Valley Golf
In the financial years ended 30 June 1998, 1999 and 2000, approximately $18 million was raised for the YVG Joint Venture from those the Receivers defined as “direct joint venture investors”. The Receivers identified the nature of the direct joint venture investments as follows:
•Investors entered into [Joint Venture Agreements] pursuant to which each of the investors invested in a project which was described in the [Joint Venture Agreements] only as ‘The Heritage Golf & Country Club’;
•pursuant to the joint venture agreements, a number of corporate managers were appointed …, the assets of the joint venture were to be held on trust for investors by the relevant corporate manager and investors were to beneficially own any profits and be liable to contribute any losses or liabilities of the joint venture in proportion to their investments;
•[the Receivers] have not been able to identify the existence of any documented arrangements between the corporate managers and YVG in relation to the direct joint venture investments;
•it does not appear that any joint venture assets were actually directly held by the relevant corporate managers (i.e. no land was registered in their names) and it appears that all direct investors funds were deposited with YVG … We have not verified whether the funds raised from Investors were deposited directly with YVG or deposited initially with LGHA then deposited with YVG.
The “screed” (as the Receivers described it), or promotional material distributed to potential investors, for the direct joint venture investments in the financial years ended 30 June 1998 and 1999 (defined by the Receivers as direct JV #1 and direct JV # 2 respectively) was identical in both years: the project was identified as “The Heritage Golf & Country Club Project”. In the joint venture agreements themselves, the recitals provided that:
The Investors and the Manager have agreed to associate themselves as Joint Venturers for the purpose of acquiring an Interest in the Heritage Golf and Country Club (hereinafter defined) and to hold the same as an investment and to earn income therefrom (“the Project”).
(Emphasis added.)
For direct JV #1, there were five identified managers. Only one joint venture agreement between an investor and a manager was produced by the Receivers. The phrase “Heritage Golf and Country Club” was not defined. “Interest” was defined as a “share or interest in the investment known as S10 HGCC Investment”.
For direct JV #2, there were six identified managers. Example joint venture agreements were produced for all six managers. The recitals were identical to that in the JVA for direct JV#1. Also like the joint venture agreement for direct JV#1, “Heritage Golf and Country Club” was not defined. Unlike direct JV #1, “Interest” was defined as a “share or interest in the investment known as ‘The Heritage Golf and Country Club’”.
The screed for the direct joint venture investments in the financial year ended 30 June 2000 (direct JV#3) specifically identified the investment opportunity as the “S10” site of the Heritage Golf and Country Club. There were six identified managers of direct JV#3. Example joint venture agreements were produced for all six managers. The recitals were identical to that in the JVA for direct JV#1 and direct JV#2. Like the other two direct joint venture investments, “Heritage Golf and Country Club” was not defined. “Interest” was defined in all agreements as “a share or interest in the investment known as ‘S10 HGCC Investment’”.
The Receivers identified 581 direct joint venture investors, of which 546 are still active. Under the relevant joint venture agreements, direct joint venture investors were not entitled to annual distributions during the life of the project. Distributions were not paid to direct JV investors.
The following chart summarises the number of direct joint venture investors who initially contributed funds to one of the entities and also identifies the total investor contribution (as reflected in the YVG Disclosure Report and subsequent submissions of the Receivers):
Form of Investment
Entity (JV Manager)
$ Raised by investors (net)
No. of Investors (Active)
LGH takeover/ buyout of investor
Distributions
Total investor contribution $
Direct JV #1
Adina Rise Pty Ltd (22nd Def)
$3,919,000
48
($702,000)
-
$3,217,000
Hallmark Corporation Pty Ltd (32nd Def)
$220,000
6
($8,000)
-
$212,000
Norton Ridge Pty Ltd (34th Def)
$813,000
5
($200,000)
-
$613,000
Tulloch Downes Pty Ltd (41st Def)
$1,595,800
7
-
-
$1,595,800
Virtual Mlmer Pty Ltd (39th Def)
$526,000
4
($45,000)
-
$481,000
Direct JV #2
Albright Investments Pty Ltd (23rd Def)
$1,713,965
40
($157,500)
-
$1,556,465
Bradfield Corporation Pty Ltd (25th Def)
$1,079,000
36
($108,000)
-
$971,000
Devlin Way Pty Ltd (27th Def)
$1,069,500
36
($135,000)
-
$934,500
Glenvale Way Pty Ltd (30th Def)
$1,153,000
48
($32,000)
-
$1,121,000
Moorleigh Holdings Pty Ltd (33rd Def)
$2,495,500
31
($350,000)
-
$2,145,500
Raleigh Glen Pty Ltd (35th Def)
$97,500
5
-
-
$97,500
Sutton Rise Pty Ltd (38th Def)
$690,000
43
-
-
$690,000
Direct JV #3
Ashfield Rise Pty Ltd (24th Def)
$576,000
42
($15,000)
-
$561,000
Copeland Enterprises Pty Ltd (24th Def)
$813,000
41
($12,000)
-
$801,000
First Hazelwood Pty Ltd (28th Def)
$740,000
39
($55,000)
-
$685,000
Greenview Lane Pty Ltd (31st Def)
$600,000
39
($70,000)
-
$530,000
Suri Corporation Pty Ltd (37th Def)
$1,419,805
37
($195,000)
-
$1,224,805
Tivendale Pty Ltd (40th Def)
$500,000
39
($5,000)
-
$495,000
Indirect Joint Venture Investors in Yarra Valley Golf
As a result of a tax audit conducted by the Australian Taxation Office (the circumstances of which are not relevant to the present application), Mr Letten determined not to introduce any further direct joint venture investments to the YVG Joint Venture. As an alternative, funds were raised by LGHA through the use of what the Receivers describe as “sub joint venture entities” and the funds were “injected to YVG”. The Receivers define this group of investors as “indirect joint venture investments”.
The Receivers summarised the nature of the indirect joint venture investments as follows:
•Investors entered into joint venture agreements pursuant to which each of the investors appears to have intended to invest in a particular aspect of the YVG development …
•pursuant to the joint venture agreements, a number of corporate managers were appointed, the assets of the joint venture were to be held on trust for investors by the relevant corporate manager and investors were to beneficially own any profits and be liable to contribute any losses or liabilities of the joint venture in proportion to their investments;
•[the Receivers] have not been able to identify the existence of any documented arrangements between the corporate managers, LGHA and YVG in relation to the indirect joint venture investments;
•it does not appear that any joint venture assets were actually held by the relevant corporate managers and it appears that all investor funds were paid directly to LGHA.
There were six indirect joint venture investments identified by the Receivers.
The manager of the first indirect joint venture was Allblue Pty Ltd, the 44th defendant (Allblue). However, exactly which project Allblue was said to be managing was not clear. For instance, the Receivers state in their report that Allblue was the designated manager for “Yarraview 1 and 2”. However, the joint venture agreements produced to the Court for Allblue referred to the project as “St Johns East House & Land Subdivision”, which the Receivers acknowledge is a different (closed) joint venture. St Johns East House & Land Subdivision was not defined in the joint venture agreements for Allblue. The screed that the Receivers produced as being the relevant screed for Allblue does not in fact mention Allblue, and relates to the St John’s East Land Subdivision, not Yarraview.
The manager for the second indirect joint venture investment identified by the Receivers for YVG was Aranbay Pty Ltd, the 45th defendant (Aranbay). Aranbay is stated by the Receivers to be the designated manager for “Henley Golf Course Funding”. No screed or promotional material for Aranbay was produced by the Receivers. The joint venture agreement for Aranbay notes that the “Project” for investors in Aranbay was the acquisition of an interest in the “Henley Golf Course Project”. “Henley Golf Course Project” was not defined.
The manager for the third indirect joint venture investment identified by the Receivers for YVG was Topglen Pty Ltd, the 43rd defendant (Topglen). Like Allblue, it is difficult to identify which project Topglen was in fact managing. The Receivers submitted that Topglen was the manager of a project described as “Henley House”. However, the screed produced by the Receivers to the Court, and the joint venture agreement, refer to the Topglen project as “Yarraview”. The screed appears to have been prepared by LGHH and does not mention Topglen. Further, in the relevant joint venture agreement, “Yarraview” is not defined.
The manager for the fourth indirect joint venture investment identified by the Receivers was Mainking Pty Ltd, the 42nd defendant (Mainking). The Receivers submitted that Mainking was the designated manager for a project known as “Botanica Stage 3 funding”. Again, details of this project are scant. The Receivers produced a screed entitled “Stage 3 Real Estate Joint Venture at the Heritage Golf & Country Club” which they submitted “seems to relate to stage 3”. The document was prepared by Mr Letten “for the manager of the Joint Venture”, but does not identify Mainking as the manager. The joint venture agreement between the investors and Mainking identified the project as “Stage 2A Real Estate at Heritage Golf & Country Club” but, like the other joint venture agreements, does not otherwise provide a definition.
The manager for the fifth indirect joint venture investment was LGHH and related to a project known as “Sebel Heritage Lodge Investment Stage 2”. No joint venture agreement was produced to the Court for the fifth indirect joint venture investment. The relevant screed produced by the Receivers provides:
[YVG] will develop the new 32 Suites in Stage 2 of the Sebel Heritage Lodge. Glenbelle Pty Ltd (the Owner of the present conference facilities) will develop and retain the new Conference space.
The Joint Venture Participant will develop and own the new Hotel Suites with [YVG] (until the Joint Venture decides to sell them to third party buyers see risks). The Joint Venture Participant will fund their involvement in the Joint Venture via funds held from the sale of Stage 1 of the Sebel Heritage Lodge Rooms.
…
[YVG] has decided to use a Joint Venture structure for this project. The Joint Venture will be represented by a specific purpose Management Company. This company will not act as Manager for any other current Joint Venture. Please note that the Manager will be a company associated with both [YVG] and [LGHH].
As is apparent, the screed was not accurate. The manager was not “a company associated” with LGHH, but LGHH itself. Further, notwithstanding the statement in the screed that the management company would not act as a manager for any other current joint venture, LGHH was in fact a manager for many other joint ventures.
Finally, the manager for the sixth indirect joint venture investment was also LGHH and concerned a project known as “Augusta”. There was no screed or joint venture agreement produced for the Augusta project.
Under the relevant joint venture agreements produced to the Court, investors in the indirect joint ventures were not entitled to receive annual distributions during the life of the project. However, investors were paid annual distributions by LGHA. At the direction of Mr Letten, these distributions ceased in September / October 2008. The total distributions paid to indirect joint venture investors was $9.4 million.
The following chart summarises the number of indirect joint venture investors who contributed funds to one of the entities, the project identified for that investment and the distributions (as reflected in the YVG Disclosure Report and subsequent submissions of the Receivers):
Form of Investment
Entity (JV Manager)
Project identified by the Receivers
$ Initially Raised by investors
$ return on investment/ transfer
No. of Investors (Active)
Distributions
Indirect JV #1 (Phases 1 and 2)
Allblue (44th Def)
Yarraview 1&2
$1,415,065 initially raised
$124,266 subsequently invested
-
21
$224,114
Indirect JV #2
Aranbay (45th Def)
Henley Golf Course Funding
$5,195,083 initially raised
$495,090 subsequently invested
($233,500) returned
104
$2,967,078
Indirect JV #3 (Phases 1 and 2)
Topglen (43rd Def)
Henley House
$1,060,363 initially raised
$59,725 subsequently invested
($18,000) returned
($65,330) transferred
17
$247,788
Indirect JV #4 (Stage 1 and 2)
Mainking (42nd Def)
Botanica Stage 3
$7,906,059 initially invested
$1,466,588 subsequently invested
($1,704,063) returned
($1,322,628) transferred
85
$2,847,688
Indirect JV #5
LGHH
(2nd Def)
Sebel Heritage Lodge Investment Stage 2
$5,440,125 initially invested
$99,416 subsequently invested
($2,524,950) returned
($333,100) transferred
48
$1,050,830
Indirect JV #6
LGHH
(2nd Def)
Augusta
$5,490,328 initially raised
$625,987 subsequently invested
($270,570) returned
70
$872,359
As noted above, funds were raised by indirect joint venture investors for the purpose of undertaking specific projects at YVG. The “Yarraview 1 & 2” and “Augusta” projects have still not commenced and the Receivers were informed by Mr Letten that those funds were paid to LGHA. The Receivers were also informed by Mr Letten that the indirect investor funds were contributed to the YVG Joint Venture via an LGHA working capital loan. The Receivers have been unable to ascertain the monthly movements in the working capital loan and therefore, as at the date of preparing their Disclosure Report, were unable to confirm whether the funds raised by indirect joint venture investors were used for their intended purpose or whether they were even invested by LGHA in the YVG Scheme.
Equity Deposit Bonds in Yarra Valley Golf
The Receivers identified a number of investors’ contributions to the YVG Joint Venture were made pursuant to “Equity Deposit Bonds”. At the time of preparing the Disclosure Report for the YVG Joint Venture, the Receivers were unable to locate any formal documentation for the Equity Deposit Bonds. Prior to the hearing, the Receivers were only able to locate a limited number of screeds in relation to YVG Equity Deposit Bonds. In addition to the material produced by the Receivers, ASIC produced further information it received from Mr Letten concerning the Equity Deposit Bonds. Equity deposit bonds were apparently issued in relation to YVG in 2003 (Equity Deposit Bond 2003), May 2005 (Equity Deposit Bond 2005) and May 2007 (Equity Deposit Bond 2007).
The screed for Equity Deposit Bond 2003 (as produced by the Receivers) stated:
This investment replaces the Heritage Equity Mortgage & HGCC Deposit Bond Investments.
We are rolling over the Investors from these two investments to allow them a continuity of investment plus a staged repayment program which will provide an excellent ongoing income plus capital gain.
The basis of the new arrangement is as follows:
• Investment period is 24 months from rollover date.
•Interest rate on the investment is 7.5% per annum payable monthly and to be adjusted as per the capital repayments (see below).
•The capital gain for the 24 month period is 15% fixed on the original rollover amount invested, irrespective of the receipt of the partial capital repayments over the life of the investment.
…
Neither the property nor the joint venture manager is identified in the screed, although the material was published by LGHH.
According to ASIC, in course of their examination of Mr Letten pursuant to s 19 of the Australian Securities and Investments Commission Act 2001 (Cth), Mr Letten stated to ASIC that the “Heritage Equity Mortgage”, the “HGCC Deposit Bond Investments” and the “Equity Deposit Bond” investments were the same project, with funds being rolled over from time to time and related to the YVG Joint Venture.
The Equity Deposit Bond 2005 replaced the Equity Deposit Bond 2003. The documents produced by ASIC and the Receivers concerning the Equity Deposit Bond 2005 were inconsistent. The screed produced by ASIC, which they state was provided by Mr Letten, identified the properties that Equity Deposit Bond 2005 related to as (1) 49 Mitchell Road, Brookvale, New South Wales (2) Patterson Street, Launceston, Tasmania and (3) Nicholson Street, Brunswick, Victoria. Only one of those properties (Nicholson Street) is in these proceedings, and according to Mr Letten the former two relate to concluded joint venture projects. The screed produced by the Receivers bore the same date as the screed produced by ASIC, but did not identify any property. Both of the screeds produced for the Equity Deposit Bond 2005 do not identify the joint venture manager.
According to ASIC, although the material they had been provided stated that the investment related to the three properties identified at [58] above, Mr Letten informed ASIC that all of the investments related to the YVG Joint Venture and that LGHH was the manager of these investments.
ASIC also produced a joint venture agreement for the Equity Deposit Bond 2005. That agreement identified LGHH as the manager. “Equity Deposit Bond 2005” is not defined in the joint venture agreement.
The screed for the Equity Deposit Bond 2007 provided that the project replaced the Equity Deposit Bond 2005. Neither the property nor the joint venture manager related to the Equity Deposit Bond 2007 investment was stated in the screed.
The following chart summarises the number of investors who contributed funds via the Equity Deposit Bonds, the amount invested, and any distribution (as reflected in the YVG Disclosure Report and subsequent submissions of the Receivers). As the amounts were rolled over from one phase to the next, only the total amount is listed:
Form of Investment
Entity (JV Manager)
No. of Investors (Active)
$ Initially Raised by investors
$return on investment / transfer
Distributions
Equity Deposit Bonds (2003, 2005 and 2007)
Unknown (presumably LGHH)
33
$3,357,840 initially raised
$262,675 by subsequent investment
($1,153,010) returned
($181,723) transferred
$985,709
Sebel Heritage Lodge Investment Stage 2 – Equity Mortgage
In addition to the fifth indirect joint venture managed by LGHH concerning the project known as “The Sebel Heritage Lodge Investment Stage 2”, the Receivers also identified an equity mortgage investment in which a Mr Geoff Mitchell invested. According to the equity mortgage investment screed, the equity mortgage investment concerned a $15,000 investment with 10% interest per annum payable monthly secured by a “1st Registered Mortgage over the property known as ‘S13 and S14,’ which is located next to the Sebel Heritage Lodge Site”. The documents produced by the Receivers concerning the equity mortgage investment indicated that on 22 May 2003 Mr Mitchell was offered the opportunity to roll his funds into a new investment, an Equity Deposit Bond. Those documents also contain an (undated) Equity Deposit Bond in the name of Mr Mitchell and his wife. According to the YVG Disclosure Report, Mr and Mrs Mitchell rolled over their investment (which by this time was $25,000) into an Equity Deposit Bond on 16 June 2003. It is unknown whether there are any other investments in YVG by way of these kind of “equity mortgage” arrangements.
A consolidated cash flow statement prepared by the Receivers reveals that there was approximately $155,158,000 of capital expenditure expended on the Scheme. The Disclosure Report for the YVG Joint Venture records that a substantial proportion of this capital expenditure was land and development costs and plant and equipment. The Receivers were unable to identify the source of the funds for the capital expenditure. The capital expenditure significantly exceeded the surplus generated through the residential and land sales ($106,478,000) and, as already identified, cannot be traced to the funds contributed by the investors. It is likely that funds were sourced from other Schemes.
1999 – Scheme 18 – Aurora Park Project
The Aurora Park Project Scheme was a Concluded Scheme. It was not wound up on 30 July 2010. At the time of the appointment of the Receivers, there were no secured creditors and the previous property of the Scheme – the subdivision and development of the site located at 443-447 Warringah Road, Frenchs Forest in New South Wales – had been sold.
The property had been owned by Tilley Lane Pty Ltd, the 47th defendant (Tilley Lane). However, the subdivision and development of certain lots appears to have been undertaken through different entities, namely:
Lot Number
Entity (joint venture manager)
Lots 9 and 13
Tobago Holdings Pty Ltd, the 54th defendant (Tobago)
Lot 9 (said to be a different lot)
Maywood Investments Pty Ltd, the 51st defendant (Maywood)
Lot 8
Sagebay Pty Ltd, the 53rd defendant (Sagebay)
Lots 2-7 and 10-12
Acetrain Pty Ltd, the 52nd defendant (Acetrain)
The Receivers are not aware of any documentation which records the arrangements between these entities and Tilley Lane. The Receivers have concluded that there were probably separate schemes relating to the four separate entities.
Investors in the Aurora Park Project invested by a number of mechanisms:
1.execution of a joint venture agreement;
2.roll over from another Scheme;
3.payment of funds without the execution of a joint venture agreement or any other document;
4.investing in the ABC Equity Mortgage Investment.
Regardless of the mechanism through which they invested, the investors paid the funds directly to LGHA and not to the Scheme or sub-scheme. LGHA may be understood to have performed a central treasury function on behalf of Tilley Lane and each of the joint venture managers.
The following chart summarises the number of investors who initially contributed funds to one of the entities and the method or methods of investment and also identifies the number and value of the remaining investors:
Lot Nos
Entity
$ Initially Raised
Initial No. of Investors
Form of Investment
Return of investment
Distributions
Outstanding Number of investors and $
Lots 9 and 13
Tobago (54th Def)
$3,940,080
$1,833,802 (subsequent investment)
115
Joint Venture Agreement
No documentation signed
ABC Equity Mortgage Investment
($5,146,882)
$2,521,856
9 investors
($627,000)
Lot 9 (said to be a different lot)
Maywood (51st Def)
$2,005,000
$80,000 (subsequent investment)
29
Joint Venture Agreement
No documentation signed
($160,000)
$735,267
26 investors
($1.93m)
Lot 8
Sagebay
(53rd Def)
$2,103,000
41
Joint Venture Agreement
No documentation signed
($2,103,000)
$376,097
Nil
Lots 2-7 and 10-12
Acetrain (52nd Def)
$2,681,400
$325,000 (subsequent investment)
45
ABC Equity Mortgage Investment
($2,855,400)
$924,394
4 investors
($151,000)
The screed and the joint venture agreements were defective and inconsistent. For instance, the screed for each of the investment opportunities (Tobago, Maywood, Sagebay and Acetrain) offered two types of return for investors; a yearly income from the respective property payable monthly and a capital return payable on the sale of the property. However, although the joint venture agreements produced by the Receivers only provided for the latter (a capital return), as can be seen from the table in [69] above, the investors are recorded as having received periodic payments. Further, as in many other of the joint venture agreements, the recitals identified the particular project, for example “Lot 9 Aurora Business Park Project” as “hereinafter defined”, but it was not defined.
In the case of the ABC Equity Mortgage Investment, copies of the relevant screeds and investment certificates which the Receivers had been able to locate were produced to the Court. The investment certificate was entitled “ABC Equity Mortgage Investment Version 2002” and provided:
Interest Rate: 7.5% per annum – payable monthly.
Investment Term: Estimated to be 2 years from 15 August 2002, due for maturity on 15 August 2004. The investment term is related to Stage 2 of the ABC Site.
Investment Return: It is estimated that the profit return on 15 August 2004 will be 18% of the initial investment.
The document attached to the certificate did not define “Stage 2 of the ABC” but otherwise provided:
… The balance of the subdivision is owned by LGH and comprises Lots 1 to 8 and Lots 10 to 12 …
LGH is in the process of developing these sites. We are offering investors the opportunity to participate with us in the holding and development of these sites.The Investment is as follows:
·Investors contribute $1,200,000 to the ABC Equity Mortgage Version 2002 secured by an unregistered mortgage over the site.
·The investment is for 2 years and will complete on the 15/08/2004.
·LGH recognises the importance to Investors of monthly income on their investments. Therefore in this regard the investment will pay income of 7.5% per annum for the 2 years payable on a monthly basis.
·At the end of the 2-year period the Investor will receive a profit share payment of 18%.
·Therefore for the 2-year period their income and capital gain will equate to 16.5% per annum.
As the table at paragraph [69] above reveals, payments were made to investors over the life of the Scheme in the form of distributions ($4.56 million in total) and a return to investors upon leaving the Scheme or transferring to another Scheme ($10.26 million). According to the Receivers, there has been a net overall “overpayment” to investors in the Scheme of $2.3 million, notwithstanding that there is still approximately $2.7 million said to be owing to certain investors. The Receivers submitted that the overpayments appear to have been funded by LGHA and / or other Schemes.
At day one, the deficit for the Aurora Park Scheme of approximately $2,198,000 (as a result of the initial acquisition of property) was funded by LGHA. The Receivers submitted that it was not clear whether LGHA had the resources to undertake the transaction and that it was likely that investor funds from other Schemes were used.
Further, the consolidated cash flow statement prepared by the Receivers reveals that the Scheme had incurred an overall deficit of $2,265,000. Contributing to that deficit was approximately $2,923,000 of capital expenditure in relation to the Scheme, in addition to $6,325,000 expended on the purchase of property. Notwithstanding these expenses and the overall deficit, distributions were made to investors. The Receivers were unable to identify the precise source of funds for the capital expenditure and other expenses and, as already identified, the expenses cannot be traced to funds contributed by investors. It is likely that funds were sourced for the various projects from other Schemes.
2000
(1) Scheme 1 – 211 Wellington Road Joint Venture
The Scheme was wound up on 25 February 2010. At the time of the appointment of the Receivers, there were no secured creditors and the Scheme asset – 211 Wellington Road, Mulgrave, Victoria – had been sold.
Investors in the 211 Wellington Road Scheme invested by a number of mechanisms. The form of investment fell into two broad groups – those who invested in the joint venture (approximately 117 investors) and those who invested through what were described as Equity Deposit Bonds (approximately 58 investors).
LGHA may be understood to have performed a central treasury function on behalf of this Scheme. LGHA collected all receipts from any debt and / or investment raising undertaken by the Scheme. LGHA also funded distributions paid to the investors (see [82] below) and settled some amounts owing to third party suppliers / financiers on behalf of the Scheme.
For the joint venture investors, 60 of the 117 investors executed joint venture agreements, 5 had investments rolled over from another scheme, and up to 52 invested without executing a joint venture agreement. The joint venture agreements for 211 Wellington Road Scheme, where they exist, are vague. The manager of the joint venture agreement was 211 Wellington Road Pty Ltd, the third defendant. Unlike many other joint venture agreements, “Interest” is defined as a “share or interest in the property (rather than the Project) located at 211 Wellington Road”. The screed for the Scheme offered two types of return for investors; an “income” return at an estimated annual rate of 8% payable monthly and a capital return to be paid upon sale of the joint venture asset and termination of the joint venture. However, although the joint venture agreements produced by the Receivers only provided for the latter (a capital return), the investors received periodic payments.
The Receivers produced to the Court the terms of the instruments and the relevant screeds for the Equity Deposit Bonds. One of the screeds was entitled “The 211 Wellington Road Equity Investment” and provided that the investment would operate as follows:
·The investors would contribute $1,200,000 to the 211 Wellington Road Equity Investment.
·The investment is for 18 months commencing from the 15th November 2002 and completing on the 15th March 2004.
·The investors will be paid a monthly income of 7.5% per annum for the 18-month period. The first payment of interest will be the 15th December 2002.
·At the end of the 18th month period the Investor will receive a profit payment of 13.5%.
·Therefore for the 18-month period the Investors income and capital will equate to 16.5%.
Another screed produced by the Receivers dated 1 May 2005 entitled “The 211 Wellington Road Joint Venture Equity Project” provided, inter alia:
This new 211 Wellington Road Joint Venture (211WJV) replaces the previous 211 Wellington Road Equity Project.
…
To that end we are offering our fellow Project Participants the following arrangement:
·Firstly, to pay out their profit share of 10% in the next 90 days from 1 May 2005.
·Secondly, to with continue their capital in the Project for another 2 years from 1 May 2005 until 30 April 2007 …
·Project Participants will continue to receive a monthly income return based on 8% per annum payable monthly …
·On or around 30 April 2007 … the Joint Venture anticipates a budgeted gain of 16% calculated on the Joint Venture capital should be available for distribution …
According to the Receivers, of the 58 Equity Deposit Bond investors, only 26 investors produced to the Receivers executed equity deposit bond certificates. As at the date of the Disclosure Report, the Receivers were unable to determine the validity of the claims and accordingly did not reflect that amount in the balance sheet.
The following chart summarises the method or methods of the investment, the number of investors who initially contributed funds to one of the entities and also identifies the number and value of the remaining investors:
Nature of Investment
$ Initially Raised
Initial No. of Investors
Return of investment
Distributions
Outstanding Number of investors and $
Joint Venture Investment
$5,786,815
$2,250 subsequently invested
117 (101 active)
($450,812) returned
($186,650 transferred)
$3,042,387
101 investors
($5,151,610)
Equity Deposit Bonds
$3.8 million
58
Unknown
Unknown
Unknown
Despite the sale of the property, only minimal funds have been returned to investors. Mr Letten informed the Receivers that the investors’ funds were retained by LGHA at the request of the investor until a subsequent project was found. The Receivers do not have any information or documentation to support that assertion.
In addition to the distributions and returns to investors, a consolidated cash flow statement prepared by the Receivers reveals that there was approximately $587,000 of capital expenditure in relation to the Scheme. The cumulative surplus of assets over liabilities over the life of the Scheme was approximately $10,763,000 (including $3.8 million contributed by Equity Deposit Bonds). The capital expenditure and other expenses identified in the Receivers’ Disclosure Report cannot be traced to the funds contributed by the investors. Given the central treasury role that LGHA played in relation to this Scheme and the other Schemes, it is likely that the funds were sourced from other Schemes.
(2) Scheme 13 – The Glen Centre Joint Venture
The Glen Centre Joint Venture was wound up on 25 February 2010. The property was described by the Receivers as a retail complex comprising 16 shops, a restaurant and dance studio at 673-681 Glenferrie Road, Hawthorn (the Glen Centre Property). At the time of the appointment of the Receivers, Westpac had a secured claim over the property of $7.95 million. The Receivers were granted the power of sale and orders were made governing the Receivers’ dealing with the proceeds from the disposal of the assets of the Scheme: see [11] above.
According to the Receivers, the Glen Centre Property was purchased by The Glen Centre Hawthorn Pty Ltd, the 18th defendant (Glen Centre), in October 1999. The deposit was paid by LGHA. Prior to inviting investors to participate in the Scheme, Mr Letten sold a 15% interest in the Glen Centre Property to one investor and a further 15% to a group of three investors. Of the remaining 70% of the project, 65% was initially sold to approximately 92 investors, with the remaining 5% held by LGHA. Mr Letten informed the Receivers that LGHA purchased the 15% interest from the investor which increased LGHA’s share in the Scheme to 20%. No agreement was signed recording that subsequent arrangement.
Investments in the Scheme occurred through by following means:
1.execution of a joint venture agreement;
2.roll over from another Scheme;
3.payment of funds without execution of a joint venture agreement or any other document.
The joint venture agreements were largely entered into between the investor and Glen Centre, the manager of the Scheme. However, the Receivers identified a small number of joint venture agreements for the Scheme that were entered into between individual investors and Castello Holdings Pty Ltd, the 19th defendant, whose relationship to the Scheme is not clear. The recitals to the joint venture agreement provided:
The Investors and the Manager have agreed to associate themselves as Joint Venturers for the purpose of acquiring an Interest in the Glen Centre Hawthorn (hereinafter defined) and to hold the same as an investment and to earn income therefrom (“the Project”).
(Emphasis added.)
“Interest” was defined as a “share or interest in the investment known as ‘The Glen Centre Hawthorn’”. “The Glen Centre Hawthorn” was not defined. The joint venture agreement only provided for capital growth and not an income return. Notwithstanding that term of the joint venture agreement, over the life of the Scheme, investors received distributions.
The promotional material for the Scheme produced by the Receivers described the investment proposal in vague terms. It provided:
The proposal is to hold the property for a medium to long term period and in the process, steadily improve the asset by:
- Replacing shop fronts and mall.
- Renewing façade and awnings to Glenferrie Road frontage.
- Changing tenant mix.
- Improve trading conditions to car park and mall tenancies.with the ultimate aim to subdivide the property and ‘sell off’ the individual tenancies on very firm yields which are currently being evidenced and improving dramatically in this retail precinct.
There were initially 92 investors in the Scheme who contributed $4,779,000. 22 initial investors have left the Scheme. The Receivers were informed by Mr Letten that, upon leaving, these investors may have agreed a “handshake” agreement with Mr Letten whereby the investors were entitled to share in any capital gain on wind-up of the Scheme. However, no documentation has been produced to the Receivers to support such an agreement. A total of $530,000 was returned to investors exiting the scheme and $45,000 was transferred to other Schemes. Further, a total of $2,844,921 in distributions was made to investors from the inception of the Scheme until October 2008. Those distributions were funded by LGHA.
As at 25 February 2010, the Scheme has 70 investors who have contributed $3,775,000 to the Scheme. In addition to that sum, there is an additional $0.3 million that was acquired by LGHA from another investor, increasing the total funds from active investors to $4,075,000. There is also a secured loan from Westpac for $7.95 million. The estimated surplus for the Scheme is only $1,227,000 which represents the total amount owed to the Scheme by LGHA given the central treasury funding model adopted by this Scheme. According to the Receivers, the main uses of cash during the life of the Scheme included the purchase of property and associated improvements ($8.3 million) as well as distributions paid to investors ($2.8 million). Although the distributions paid were higher than the retained profits during the life of the Scheme (and therefore had to be funded from another source), the Receivers noted that once property revaluations were taken into account, the Scheme appeared to have sufficient retained profits to pay those distributions.
2001 – Scheme 11 – Simms Investment Project
Receivers were appointed to the Simms Investment Project on 25 February 2010. The Scheme was not wound up as it was a Concluded Scheme. The property was described as 626 Pittwater Road, Brookvale, New South Wales and was acquired by Simms Investments Pty Ltd, the 16th defendant, in March 2001 and sold to Australand in October 2007.
According to the Receivers, investment in the Scheme occurred in two “stages”. Further, investments in the Scheme came about by the following means:
1.execution of a joint venture agreement (nine investors);
2.roll over from another scheme (15 investors);
3.payment of funds without execution of a joint venture agreement or any other document (14 investors).
LGHA may be understood to have performed a central treasury function on behalf of this Scheme. LGHA collected all receipts from any debt and / or equity raising undertaken by the Scheme. LGHA also funded distributions paid to investors in the Scheme and settled some accounts owing to third party suppliers / financiers on behalf of the Scheme.
During oral submissions, the Light Interests referred extensively to the recent decision of the Court of Appeal (Civil Division) of England and Wales in Lehman Brothers International (Europe) (in administration) v CRC Credit Fund Limited & Others [2010] EWCA Civ 917. That case concerned the resolution of ownership attaching to client funds held by Lehman Bros International Europe (Lehman Brothers) in circumstances where that money should have been segregated by Lehman Brothers from its own accounts. There were discrepancies in the movement of client moneys such that some accounts had been oversubscribed and others undersubscribed. The Court of Appeal was required to consider from what point in time the client moneys were held on a statutory trust and the manner in which such funds were to be distributed following Lehman Brothers’ entry into administration. As part of that analysis, the Court of Appeal concluded that the distribution from the pool should be assessed by reference to their contractual claims, and not their contributions to the pool.
Mr Kelly SC emphasised the conclusion of Arden LJ at [154] that the “underlying concept of ‘client money entitlement’” was that of a contractual entitlement, and that the effect of this was “that some clients [would] benefit from a distribution even if they have no proprietary claim to that money”. Lord Neuberger MR agreed at [234] where his Honour concluded:
I have come to the conclusion, in agreement with Arden LJ, that the claims basis, rather than the distribution basis, is correct, and that the basis for sharing in the pool is the amount which ought to have been segregated for each client, rather than the amount which was in fact segregated for each client.
However, that case differs from the present case in many respects. Importantly, the decision that moneys should be distributed on a contractual basis, rather than a contribution basis, was based on the interpretation of “client money entitlement” in Ch 7 of the Client Asset Sourcebook (CASS7) issued by the Financial Services Authority pursuant to s 139 of the Financial Services and Markets Act 2000 (UK). Further, the conclusion that the distribution should occur on a contractual basis was qualified by Arden LJ:
…. [I]t was open to the [Financial Services Authority] to determine that the failure of the firm should be treated as a common misfortune in which those who had claims to the recovery of client money should share without distinction.
Here, there is not one single contractual or statutory definition to which the Court can turn for guidance as to the appropriate method of distribution. The joint venture agreements lack definition and do not provide the same guidance as the CASS7 before the Court of Appeal in Lehman Brothers. Unlike Lehman Brothers, this case also involves a number of agreements with a trustee or trustees that were not the subject of any written agreement. On those bases, as well as the circumstances of this case identified in the Receivers’ submissions at [293] and [309] to [310] above, this case can be distinguished from Lehman Brothers.
(4) Mr Letten
Counsel for Mr Letten appeared. He also filed short written submissions.
Mr Letten provided the Court with a copy of a letter sent to the Receivers’ solicitors which stated, in part:
… Mr Mark Letten … will consent to the Pooling Application.
… [F]or the avoidance of doubt, Mr Letten will also accept that:
(a)any share or interest that he may personally have in any of the Schemes; and
(b)subject to the issues raised [below], any monies supplied by LGHA or a related or associated company;
are scheme property for the purposes of:
(c)the orders made by the Federal Court on 25 February 2010, 4 March 2010 and 30 July 2010; and
(d)section 9 of the [Act].
(Emphasis added.)
The phrase “issues … below” was a reference to the fact that LGHA, in addition to having a central treasury function, was also the trustee of the LGH Family Trust. Neither the LGH Family Trust nor the beneficiaries of that trust were before the Court. It was for that (but not only that) reason that I determined that the Court should not make final or binding orders. In the end, it is unnecessary to address these issues at this stage in the winding up of the Schemes because the course of action proposed by the Receivers would allow claimants to prove their claims to particular assets or against particular entities or assets but then permit the Receivers to proceed to apply what remained after those claims were determined rateably among all remaining claimants. That process would allow for any claim on behalf of the LGH Family Trust or a beneficiary of that trust.
(5) Dr Sykes
Dr Sykes, a medical specialist, filed written submissions and travelled from interstate with his wife to attend the hearing of the Receivers’ application for directions. Dr Sykes’ submissions were of assistance to the Court.
Dr Sykes invested in a number of Schemes and stands to lose a considerable amount of money. He filed written submissions which summarised some of the history of his involvement in the Schemes. During Dr Sykes’ oral submissions, he explained to the Court the manner in which he became involved in the Schemes. He and his wife were introduced to the Schemes through a Mr Mark Debeljak, not Mr Letten. Dr Sykes understood that Mr Debeljak was a business partner of Mr Letten. Mr Debeljak was Dr Sykes’ accountant until the middle of 2010. According to Dr Sykes, he was also encouraged to join the Schemes after discussions with a Mr Tom Avelsgaard, his Amway business mentor whose accountant and “financial and business coach” was Mr Letten. Dr Sykes said that he was not given a choice or option as to which Scheme to invest in and one investment got rolled into another. In January 2009, he received an email from Mr Debeljak which stated that Dr Sykes and his wife had a number of investments which were “quite sound”. Dr Sykes submitted that he and his wife would “do quite well with segmented pooling” but added an important caveat – “that’s not where [they] necessarily started life, … that’s where [they] ended life.”
Dr Sykes explained that after sitting through the hearing of the Receivers’ application and speaking to Mr Templeton, one of the Receivers, he had decided that because there is a lack of a paper trail and it is difficult, if not impossible, to work out where the money actually went, that common pooling was a much fairer option. Dr Sykes wants the greatest return possible to the Investors – Investors who stand to lose a considerable amount of money. Ultimately, Dr Sykes accepted that there should be pooling and that the pooling should be “common” and not segmented.
(6) Mr Nulley
Mr Nulley, an investor, invested in two Schemes and stands to lose a considerable amount of money. His investment in the Schemes has had a catastrophic impact on him and his family. He filed written submissions which supported pooling as the only practical way forward without further eroding the limited funds available for distribution to investors. Mr Nulley also submitted that he considered pooling “the most cost effective and equitable way to distribute funds back to investors given the complex tracing of individual transactions, the absence of detailed accounting records and the incorrect accounting practices evident in the preparation of the management accounts”.
His oral submissions reinforced the apparent inter-connectedness between the Schemes. Mr Nulley submitted to the Court that on the sale of properties in some of the Concluded Schemes in which he had invested, he received written advice that he had earned a capital gain (on which he paid tax). However, the capital gain was not paid to him but reallocated for other purposes – investment in another Scheme.
Mr Nulley also submitted that the capital gain, together with the capital originally invested, should be considered as the Investor’s rateable claim on the common fund. It is also unnecessary to address this submission at this stage in the winding up of the Schemes. As I said earlier, the course of action proposed by the Receivers has two components. It would allow claimants to prove their claims to particular assets or against particular entities or assets but then permit the Receivers to proceed to apply what remained after those claims were determined rateably among all remaining claimants. The components or elements of a claim are to be identified by an investor lodging a proof with the Receivers. The existence and value of claims will be finally determined by the Receivers, subject to all rights of appeal to the Court (including pursuant to s 1321 of the Act).
(7) Mr McCulloch
Mr McCulloch did not file written submissions on the question of pooling. Mr McCulloch’s oral submissions were forceful. He reinforced the pain being suffered by a whole range of people affected by their involvement in the Schemes. As Mr McCulloch submitted, as happens in any situation, some people handle it well, some people handle it poorly. He identified that for a number of investors marriages have disappeared, family relationships have been broken, business interests have dissolved, houses have been lost and retirement funds have dissipated.
Secondly, unsurprisingly, Mr McCulloch was concerned to ensure that the Receivers identified any third parties which may have in some way contributed to the position in which the investors now find themselves. As I said during the course of the hearing, potential claims against third parties have been raised by the Receivers. What those claims are and whether they are to be pursued will be determined by the Receivers as a result of further work and after taking any necessary advice.
(8) Other Investors
As noted above, 99 Investors took the opportunity to file written submissions in relation to the pooling application. As Attachment A demonstrates, the views expressed in the submissions were not consistent. A number of investors opposed pooling. I have read the written submissions filed by each investor. The submissions are heart wrenching. It is neither necessary nor appropriate to address each submission separately. I say that for a number of reasons. First, the issues raised by them in favour of, and against, pooling I have addressed when dealing with the other submissions.
Secondly, many of the investors who were against pooling were concerned to ensure that all the elements or components of their claim were included. As I have said above, the course of action proposed by the Receivers has two components. It will allow claimants to prove their claims to particular assets or against particular entities or assets (if they have such a claim) and then permit the Receivers to proceed to apply what remained after those claims were determined rateably among all remaining claimants. The components or elements of a claim are to be identified by an investor lodging a proof with the Receivers. The existence and value of the claims will be determined by the Receivers, subject to all rights of appeal to the Court (including pursuant to s 1321 of the Act).
(9) Bridgehead Pty Ltd and Matclair Properties Pty Ltd
These entities assert they are creditors of identified Corporate Defendants. Each expressed concern that should the Court give the Receivers directions that the Receivers were justified in pooling the scheme property of the Schemes (which by definition includes scheme property held by the Corporate Defendants), then on liquidation of the Corporate Defendants, the creditors would be disadvantaged because they would lose any opportunity to claw back payments made to related companies.
In my view, these concerns were addressed by the final form of the directions sought by the Receivers (see [16] to [21] above) for a number of reasons. First, the Receivers have concluded that none of the Corporate Defendants beneficially own any assets which are not property of the schemes. Secondly, para 1(a)(iii) of the directions provides that “trust creditor claims” are to receive priority in payment from the proceeds of sale of each asset of the Schemes and the Corporate Defendants before the creation of the common fund: see, by way of explanation: Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (In Liquidation) (2008) 173 FCR 472 at [35] to [37], Law Book Company, McPherson’s Law of Company Liquidations (2010) at 11.120 and Jacobs’ Law of Trusts in Australia (7th ed, 2006) at para 2114. “Trust creditor claims” in respect of each asset, are defined as “claims against the Corporate Defendant which is the trustee of that asset and in respect of which the Corporate Defendant has a right of indemnity and lien against that asset”. In those circumstances, I consider that the creditors’ concerns have been addressed.
(10) ASIC
ASIC endorsed the approach of the Receivers. ASIC further submitted that although the submissions on behalf of the Light Interests had a superficial attraction, the Court should not adopt them for the reasons stated by Counsel for the Receivers.
Counsel for ASIC submitted that at the heart of the Light Interests’ submissions was the contention that because some people invested in Schemes where the projects might be described as good projects and others invested in projects that were not good projects where the Investors were always going to lose their money, the second group ought not participate in the common fund. ASIC challenged the factual foundation for such a submission. ASIC submitted that there was simply no evidence to support it. Further, ASIC submitted that it was not known where the funds provided by investors were in fact deployed and, in particular, whether the moneys that were advanced by various investors (including investors in so called bad projects) were actually used to enhance the value of some of the projects which appear to be viable.
H. ANALYSIS AND CONCLUSION
The facts of the present case disclose circumstances which may be classified as exceptional. Circumstances in which the general principle (that there should be no distribution of surplus assets other than to those entitled to the assets in proportion to their relevant entitlements) must yield to pragmatism. Why? Because in the present case, in addition to the matters raised in paragraph [250] and [259] above, it is to no-one’s advantage that a very long time and very large costs be spent in working out the entitlements and liabilities on a Scheme by Scheme basis (see [249] to [260] above and Re TVSN Limited [2005] NSWSC 692 at [17]ff) where:
1.as a result of the way in which Mr Letten and companies associated with him (including the Corporate Defendants) conducted the Schemes, it is not possible to say now what are the net assets of any Scheme and there appear to have been so many inter-Scheme transactions that it is not possible to say what assets were acquired by what Scheme using whose money;
2.the Receivers have been unable to trace investor contributions because receipts and payments in relation to each Scheme were made through four primary LGHA bank accounts and funds frequently were moved between these accounts, the LGHA bank accounts were often in overdraft and payments were commingled;
3.a number of the Schemes were oversubscribed in that the amount of investor contributions in relation to a particular Scheme exceeded the funding requirements for that Scheme. These oversubscriptions were not refunded or returned to investors: see, by way of example, Schemes numbered 14 (Twinview, see [135] above), 8 (Low Head - see [148] above) and 5 (Cimitiere House, see [205] above);
4.a significant proportion (up to $38 million) of investor contributions to Schemes appears to have been used to pay distributions to investors in other Schemes in circumstances where there were not sufficient profits or funds in the other Schemes to fund payment of distributions: see, by way of example, Scheme numbered 18 (Aurora Park, see [72] above);
5.the tracing of funds is further complicated and, I consider, rendered impossible by the lack of reliable financial and accounting data and the estimated cost ($18 million). Such a cost and burden would reduce what is already a limited expected return with no guarantee of any certainty of outcome.
Such a conclusion is consistent with authority: see [275] to [286] above. In each of Nelson, Enterprise Solutions 2000 and Tasman, the fund available for distribution to beneficiaries of the trust or members of the scheme (as applicable) was not substantial and the liquidators in each were concerned about the impact that the costs of making further investigations would have on the prospects of making a distribution. On that basis, the liquidators sought, and were granted, orders or directions for rateable distribution of the fund rather than to incur further costs in carrying out further investigations. Here, there is a mixed fund that has been conducted for a period of at least 12 years during which time there was in excess of 110,000 transactions through the relevant bank accounts. The relationship between the Schemes and Corporate Defendants is far from clear and the accounts cannot be traced.
As noted earlier, in Re French Caledonia Travel Services, the Supreme Court of New South Wales addressed the possibility that where there was evidence that various claimants ought be divided into separate classes with differential dividends, such an order should be made. In my view, given the complicated facts which the Receivers and the Court now face in the present case, proposed paragraph 2 of the directions preserves the possibility that a claimant may seek to prove that it should be entitled to a different dividend.
Subject to the proof of claim process, there is no basis for distinguishing the claims of investors whose contributions to the relevant Scheme are governed by a joint venture agreement as the terms of each of the joint venture agreements are similar (but not identical). In relation to investors whose contributions to Schemes are not governed by joint venture agreements, the claims are substantially equal to the claims of those who contributed by joint venture agreements. Their funds were treated on the same basis by LGHA (and the other Letten Entities) and by the other Corporate Defendants. To adopt the same language as the Court of Appeal in Lehman Brothers, the investors suffered a “common misfortune”, and any method of distribution should reflect that fact. Put simply, the alternative – distribution of Scheme property in a particular Scheme to those entitled to the property in proportion to their entitlements – is practically impossible at a number of levels. Given the manner in which these Schemes were operated and the difficulties identified in unscrambling the affairs of the Schemes, no rational person would undertake or engage in that task.
That leaves the question of method or basis of distribution. In my view, not only should the surplus be pooled but the surplus should be distributed rateably – the distributions made proportionally to the claims assessed by the Receivers: see [282] – [286] above. For the sake of completeness, the effect of the directions sought, and granted, does not affect the rights of any person to claim that they have, or any other person has, an entitlement to distribution from an asset of a Scheme or a Corporate Defendant (or the proceeds of sale of such an asset) which differs from the distribution which they would receive if the pooling process identified by the Receivers is adopted.
For those reasons, I would grant the Receivers the directions they ultimately sought.
I certify that the preceding three hundred and thirty-seven (337) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.
Associate:
Dated: 11 November 2010
ATTACHMENT A
No.
Scheme Name
Status of the Scheme Property
Investment Description
Estimated No of Investors
Total Amount Invested (approx)
Distributions (Approx)
No. of Investor Subs about pooling[1]
Investors in favour of pooling
Investors opposed to pooling
1
211 Wellington Road
Property sold prior to appointment of Receivers
Joint Venture
117 (101 active)
$5.8m
$3m
30
21
5
Equity Deposit Bonds
58
$3.8m
unknown
2
Healesville Walk Shopping Centre JV
(Concluded Scheme)
Property sold prior to appointment of Receivers
Joint Venture
117
$5.9m
$3.284m
12
9
2
Healesville Equity Mortgage
30
$3m
unknown
3
Howleys Road JV
(Concluded Scheme)
Property sold prior to appointment of Receivers
Joint Venture
113 (24 active)
$5.5m
$3.4m
3
0
3
4
George Street JV
Asset acquired before any specific fund raising
Property still held at time of Receivers’ appointment.
Receivers granted power of sale over property in May 2010
Joint Venture
25
$1.16m
$0.35 m
5
1
3
5
Cimitiere House JV
Property still held at time of Receivers’ appointment.
Receivers granted power of sale over property in May 2010o
Joint Venture
106 (100 active)
$8.7m
$0.9m
15
6
5
6
Reef House Resort
Manager of the Scheme has no asset.
Property still held at time of Receivers’ appointment.
Receivers granted power of sale over property in June 2010.
Joint Venture
127 (93 active)
$8.6m
$2m
17
9
5
7
Queen Street JV
Property sold prior to appointment of Receivers
Joint Venture
103
$5.6 m
$2.8 m
7
4
2
8
Low Head JV
Property still held at time of Receivers’ appointment.
Receivers granted power of sale over property in May 2010
Joint Venture
69 (55 active)
$4.8m
$1.1m
7
3
3
9
Nicholson Street JV
Asset acquired before any specific fund raising.
Property still held at time of Receivers’ appointment.
Receivers granted power of sale over property in May 2010
Joint Venture
145 (141 active)
$9.7m
$1.2m
20
12
4
10
National Boulevard JV
(Concluded Scheme)
Property sold prior to appointment of Receivers
Fund Raising Undertaken before contract to acquire property.
Joint Venture
86
$3.9m
$0.8m
1
-
-
11
Simms Investment Project
(Concluded Scheme)
Property sold prior to appointment of Receivers
Joint Venture
38 (19 of which have not received their initial investment)
$2.1 m
$0.8 million
2
1
1
12
SY 21 JV
Property still held at time of Receivers’ appointment.
Joint Venture
42
$1.85m
$0.4m
7
4
1
13
The Glen Centre JV
Property still held at time of Receivers’ appointment. Receivers granted power of sale over property in May 2010
Joint Venture
92 (70 active)
Joint Venture Agreement
$4.8 m
$2.8 m
14
11
2
14
Twinview JV
Property still held at time of Receivers’ appointment.
Receivers granted power of sale over property in May 2010
Joint Venture
82 (75 active)
$3.5m
$1.9m
11
5
4
15
Yarra Valley Golf JV
Manager of the Scheme has no asset.
Property still held at time of Receivers’ appointment.
Receivers granted power of sale over property in June 2010.
Joint Venture
581 direct investors (546 active)
345 indirect investors
$42.7 m
(to indirect investors)
$9.4 m
51
24
9
Equity deposit Bonds June 2003, 2005 and 2007
33 (active)
$3.62 m
$0.985 m
The Sebel Heritage Lodge Investment Stage 2 (Equity Mortgage)
1
$15,000
16
Glenbelle Project
Fund Raising Undertaken before contract to acquire property.
Property still held at time of Receivers’ appointment.
Receivers granted power of sale over property in June 2010.
Joint Venture
165
$7.3m
$3.4m
18
8
4
17
Tomasetti House
(Concluded Scheme)
Property sold prior to appointment of Receivers
Joint Venture
122 (78 active)
$8.68m
$2.4m
6
3
2
18
Aurora Park
(Concluded Scheme)
Property sold prior to appointment of receivers
Manager of the Scheme has no asset.
Joint Venture
115 for Tobago Holdings (9 active)
29 Investors for Maywood (26 active)
41 Investors for Sagebay (0 active)
45 Investors for Acetrain (4 active)
$13 m
$4.56 m
5
5
0
ABC Equity Mortgage Investment
19
Moorhouse Shopping Centre
Manager of the Scheme has no asset.
Joint Venture
227 (193 active)
$16.35m
$2.69m
12
10
1
20
Cass Bay Spur
Manager of the Scheme has no asset.
Joint Venture
46 (24 active)
$2.96m
$0.49m
N/A
-
-
21
Mount Hutt
Manager of the Scheme has no asset.
Joint Venture
59 (43 active)
$3.42m
$0.65m
3
1
0
[1] A number of submissions received did not state whether they opposed or supported pooling.
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
151
11
0