Australian Securities and Investments Commission v Ross Investments (Aust) Pty Ltd
[2007] FCA 1433
•18 September 2007
FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v Ross Investments (Aust) Pty Ltd [2007] FCA 1433
CORPORATIONS – unsolicited offers to purchase debentures off-market – estimate of value in offer documents significantly below real value – meaning of “fair estimate of the value of the product” – whether adequate explanation of the basis on which estimates were made – single director of company – liability of director for aiding and abetting
Corporations Act 2001 (Cth) s 1019I(2)(c)
Gregory v Federal Commissioner of Taxation (1971) 123 CLR 547 cited
Holt v Cox (1994) 15 ACSR 313 cited
Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 cited
Spencer v Commonwealth (1907) 5 CLR 418 citedAUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v ROSS INVESTMENTS (AUST) PTY LTD and ROBERT DOUGLAS ROSS
VID 104 of 2007
FINKELSTEIN J
18 SEPTEMBER 2007
MELBOURNE
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VID 104 of 2007
BETWEEN:
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
PlaintiffAND:
ROSS INVESTMENTS (AUST) PTY LTD and
ROBERT DOUGLAS ROSS
DefendantsJUDGE:
FINKELSTEIN J
DATE OF ORDER:
18 SEPTEMBER 2007
WHERE MADE:
MELBOURNE
THE COURT DECLARES THAT:
1. By sending the:
(a) 2005 Cambridge offer documents to offerees; and
(b) 2007 Cambridge offer documents to offerees
(collectively “the Cambridge offer documents”)
the first defendant contravened section 1019I(2)(c) of the Corporations Act 2001 (Cth).
2.By causing the Cambridge offer documents to be sent to the offerees, the second defendant was knowingly concerned in the contravention of section 1019I(2)(c) of the Corporations Act 2001 (Cth) by the first defendant.
AND THE COURT ORDERS THAT:
3.Within three (3) business days of the date of this order the first defendant post to each offeree:
(a)who accepted the first defendant’s offer contained in the offer document dated 8 November 2005 or 23 November 2006 – a written notice in the form of Attachment A; or
(b)who accepted the first defendant’s offer contained in the offer document dated 9 November 2005 – a written notice in the form of Attachment B; or
(c)who accepted the first defendant’s offer contained in the offer document dated 16 January 2007 or 29 January 2007 – a written notice in the form of Attachment C; or
(d)who accepted the first defendant’s offer contained in the offer document dated 22 January 2007 – a written notice in the form of Attachment D
by prepaid ordinary post to the address to which the respective Cambridge offer documents had been sent.
4. Within seven (7) business days of the first defendant receiving:
(a)notification from an offeree that the offeree elects to terminate any agreement to sell their Cambridge debentures to the first defendant; and
(b)where the first defendant has paid the offeree for their Cambridge debentures – a refund of the purchase price paid by the first defendant in respect of those debentures
the first defendant shall:
(i)if it has not yet lodged the transfer form to effect the transfer of the Cambridge debentures from the offeree to it – return the transfer form to the offeree by prepaid ordinary post to the address to which the Cambridge offer document had been sent; or
(ii)if it has already effected the transfer of the Cambridge debentures from the offeree to it:
A)re-transfer the Cambridge debentures to that offeree; and
B)pay to the offeree any distribution the first defendant has received or is entitled to receive as a result of holding the Cambridge debentures
in accordance with the terms of the attachment sent to that offeree under paragraph 3 of this order.
5.Until 40 days after the first defendant sending the written notice in accordance with paragraph 3 above, the first defendant by itself, its officers or servants be restrained from:
(a)lodging for registration any transfer form and or taking any action whatsoever to give effect to the transfer of Cambridge debentures from an offeree; and
(b)disposing of any Cambridge debentures purchased by the first defendant from an offeree (unless such disposal is in accordance with paragraph 4(ii) above).
6.The defendants pay the plaintiff’s costs of this proceeding, such costs to be taxed in default of agreement.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
ATTACHMENT A
[ON LETTERHEAD OF ROSS INVESTMENTS (AUST) PTY LTD]
[INCLUDE DATE OF LETTER (BEING WITHIN
THREE DAYS OF THE DATE OF THE ORDER)]Dear Sir/Madam
OFFER MADE BY ROSS INVESTMENTS (AUST) PTY LTD TO PURCHASE YOUR CAMBRIDGE CREDIT CORPORATION LTD CUMULATIVE DEBENTURES
By letter dated 8 November 2005 or 23 November 2006 (which letter was incorrectly dated and should have read 23 November 2005), Ross Investments (Aust) Pty Ltd (“Ross Investments”) wrote to you offering to purchase your Cambridge Credit Corporation Ltd (“Cambridge”) cumulative debentures for 35.05 cents per $1 debenture.
Section 1019I(2)(c) of the Corporations Act2001 (the “Act”) requires an offer document of the kind sent by us in respect of your Cambridge debentures to include a fair estimate of the value of the debentures at the date of the offer, and an explanation of the basis on which that estimate was made.
The offer document sent to you did not state a fair estimate of the market value of the Cambridge debentures as at the date of the offer.
The Australian Securities and Investments Commission (“ASIC”) has commenced proceedings in the Federal Court of Australia against Ross Investments and against me personally in respect of the offer to purchase your Cambridge debentures. In that proceeding, ASIC has alleged that Ross Investments did not provide you with all the necessary information required under the Act at the time the offer to purchase your Cambridge debentures was made. In that proceeding, ASIC seeks among other things declarations, injunctions and corrective orders against Ross Investments.
On 18 September 2007, the Federal Court ordered that Ross Investments:
- 2 -
(a)write to you to inform you of the market value of the Cambridge cumulative debentures as at the date of our offer; and
(b)give you the opportunity to terminate the agreement and recover your Cambridge cumulative debentures together with the amount that you would have received as a distribution had you still held the Cambridge debentures. If you decide to terminate the agreement and recover your Cambridge cumulative debentures you will need to notify us of that fact, return or repay any money that we have paid to you for your debentures, and we will then take all necessary steps to transfer the Cambridge debentures back to you and pay to you the distribution you would have received.
Information about the market value of the Cambridge cumulative debentures
A fair estimate of the Cambridge cumulative debentures as at 8 November 2005 or 23 November 2005 was $[insert fair estimate]. This information should have been included in the offer document that we sent to you. This fair estimate is based on [insert basis for the fair estimate].
You should also note that a fair estimate of the Cambridge cumulative debentures as at the date of this letter is [insert fair estimate]. This fair estimate is based on [insert basis for the fair estimate].
On [dates] distributions were paid to Cambridge debenture holders. Had you not sold your Cambridge cumulative debentures to Ross Investments you would have received [insert amount].
This information may be important to any decision that you make about whether or not to terminate the agreement and recover your Cambridge cumulative debentures from us.
- 3 -
Terminating the agreement and recovering your Cambridge cumulative debentures
If you decide to terminate the agreement and recover your Cambridge cumulative debentures you will need to notify us of that fact within 30 days of the date of this letter.
You may elect to terminate the agreement and recover your [insert number of] Cambridge cumulative debentures together with the amount that you would have received as a distribution had you still held the Cambridge debentures. You will be required to return to us $[insert amount], being the amount that we paid you for your Cambridge cumulative debentures.
To terminate the agreement and recover your [insert number of] Cambridge cumulative debentures you must within 30 days of the date of this letter:
(1)complete and return to us by regular post (c/ PO Box 929 Bendigo, Victoria, 3552) the attached debenture transfer form [ATTACH DEBENTURE TRANSFER FORM]; and
(2)provide us with a cheque or money order for the amount of $[insert amount].
We will then, within seven (7) days, complete the debenture transfer form and send it and all other required paperwork to the Cambridge debenture registry in order for the Cambridge cumulative debentures to be transferred back to you.
We will also, within seven (7) days, send you a cheque for the sum of [insert amount], being the amount that you would have received as a distribution on [date] had you still held the Cambridge debentures.
PLEASE NOTE: If you wish to terminate the agreement and have the Cambridge cumulative debentures returned to you, you have 30 days from the date of this letter within which to notify us (and to take any other required action). AFTER THE 30 DAY PERIOD EXPIRES YOU WILL NOT BE ABLE TO RECOVER YOUR CAMBRIDGE DEBENTURES.
- 4 -
You should obtain independent legal and or financial advice in relation to the contents of this letter.
Yours faithfully
RD Ross
DirectorATTACHMENT B
[ON LETTERHEAD OF ROSS INVESTMENTS (AUST) PTY LTD]
[INCLUDE DATE OF LETTER (BEING WITHIN
THREE DAYS OF THE DATE OF THE ORDER)]Dear Sir/Madam
OFFER MADE BY ROSS INVESTMENTS (AUST) PTY LTD TO PURCHASE YOUR CAMBRIDGE CREDIT CORPORATION LTD ORDINARY DEBENTURES
By letter dated 9 November 2005, Ross Investments (Aust) Pty Ltd (“Ross Investments”) wrote to you offering to purchase your Cambridge Credit Corporation Ltd (“Cambridge”) ordinary debentures for 2.15 cents per $1 debenture.
Section 1019I(2)(c) of the Corporations Act 2001 (the “Act”) requires an offer document of the kind sent by us in respect of your Cambridge debentures to include a fair estimate of the value of the debentures at the date of the offer, and an explanation of the basis on which that estimate was made.
The offer document sent to you did not state a fair estimate of the market value of the Cambridge ordinary debentures as at the date of the offer.
The Australian Securities and Investments Commission (“ASIC”) has commenced proceedings in the Federal Court of Australia against Ross Investments and against me personally in respect of the offer to purchase your Cambridge debentures. In that proceeding, ASIC has alleged that Ross Investments did not provide you with all the necessary information required under the Act at the time the offer to purchase your Cambridge debentures was made. In that proceeding, ASIC seeks among other things declarations, injunctions and corrective orders against Ross Investments.
On 18 September 2007, the Federal Court ordered that Ross Investments:
- 2 -
(a)write to you to inform you of the market value of the Cambridge ordinary debentures as at the date of our offer; and
(b)give you the opportunity to terminate the agreement and recover your Cambridge ordinary debentures together with the amount that you would have received as a distribution had you still held the Cambridge debentures. If you decide to terminate the agreement and recover your Cambridge ordinary debentures you will need to notify us of that fact, return or repay any money that we have paid to you for your debentures, and we will then take all necessary steps to transfer the Cambridge ordinary debentures back to you and pay to you the distribution you would have received.
Information about the market value of the Cambridge ordinary debentures
A fair estimate of the Cambridge ordinary debentures as at 9 November 2005 was $[insert fair estimate]. This information should have been included in the offer document that we sent to you. This fair estimate is based on [insert basis for the fair estimate].
You should also note that a fair estimate of the Cambridge ordinary debentures as at the date of this letter is [insert fair estimate]. This fair estimate is based on [insert basis for the fair estimate].
On [dates] distributions were paid to Cambridge debenture holders. Had you not sold your Cambridge ordinary debentures to Ross Investments you would have received [insert amount].
This information may be important to any decision that you make about whether or not to terminate the agreement and recover your Cambridge debentures from us.
Terminating the agreement and recovering your Cambridge ordinary debentures
If you decide to terminate the agreement and recover your Cambridge ordinary debentures you will need to notify us of that fact within 30 days of the date of this letter.
- 3 -
You may elect to terminate the agreement and recover your [insert number] Cambridge ordinary debentures together with the amount that you would have received as a distribution had you still held the Cambridge debentures. You will be required to return to us $[insert amount], being the amount that we paid you for your Cambridge ordinary debentures.
To terminate the agreement and recover your [insert total number] Cambridge ordinary debentures you must within 30 days of the date of this letter:
(1)complete and return to us by regular post (c/ PO Box 929 Bendigo, Victoria, 3552) the attached debenture transfer form [ATTACH DEBENTURE TRANSFER FORM]; and
(2)provide us with a cheque or money order for the amount of $[insert amount].
We will then, within seven (7) days, complete the debenture transfer form and send it and all other required paperwork to the Cambridge debenture registry in order for the Cambridge ordinary debentures to be transferred back to you.
We will also, within seven (7) days, send you a cheque for the sum of [insert amount], being the amount that you would have received as a distribution on [date] had you still held the Cambridge debentures.
PLEASE NOTE: If you wish to terminate the agreement and have the Cambridge ordinary debentures returned to you, you have 30 days from the date of this letter within which to notify us (and to take any other required action). AFTER THE 30 DAY PERIOD EXPIRES YOU WILL NOT BE ABLE TO RECOVER YOUR CAMBRIDGE DEBENTURES.
You should obtain independent legal and or financial advice in relation to the contents of this letter.
Yours faithfully
RD Ross
DirectorATTACHMENT C
[ON LETTERHEAD OF ROSS INVESTMENTS (AUST) PTY LTD]
[INCLUDE DATE OF LETTER (BEING WITHIN
THREE DAYS OF THE DATE OF THE ORDER)]Dear Sir/Madam
OFFER MADE BY ROSS INVESTMENTS (AUST) PTY LTD TO PURCHASE YOUR CAMBRIDGE CREDIT CORPORATION LTD ORDINARY DEBENTURES
By letter dated 16 January 2007 or 29 January 2007, Ross Investments (Aust) Pty Ltd (“Ross Investments”) wrote to you offering to purchase your Cambridge Credit Corporation Ltd (“Cambridge”) ordinary debentures for 3.05 cents per $1 debenture.
Section 1019I(2)(c) of the Corporations Act 2001 (the “Act”) requires an offer document of the kind sent by us in respect of your Cambridge debentures to include a fair estimate of the value of the debentures at the date of the offer.
The offer document sent to you did not state a fair estimate of the market value of the Cambridge debentures as at the date of the offer, and an explanation of the basis on which that estimate was made.
The Australian Securities and Investments Commission (“ASIC”) has commenced proceedings in the Federal Court of Australia against Ross Investments and against me personally in respect of the offer to purchase your Cambridge debentures. In that proceeding, ASIC has alleged that Ross Investments did not provide you with all the necessary information required under the Act at the time the offer to purchase your Cambridge debentures was made. In that proceeding, ASIC seeks among other things declarations, injunctions and corrective orders against Ross Investments.
On 18 September 2007, the Federal Court ordered that Ross Investments:
- 2 -
(a)write to you to inform you of the market value of the Cambridge ordinary debentures as at the date of our offer; and
(b)give you the opportunity to terminate the agreement and recover your Cambridge ordinary debentures. If you decide to terminate the agreement and recover your Cambridge ordinary debentures you will need to notify us of that fact, return or repay any money that we have paid to you for your debentures, and we will then take all necessary steps to transfer the Cambridge debentures back to you.
Information about the market value of the Cambridge ordinary debentures
A fair estimate of the Cambridge ordinary debentures as at 16 January 2007 and 29 January 2007 was $[insert fair estimate]. This information should have been included in the offer document that we sent to you. This fair estimate is based on [insert basis for the fair estimate].
You should also note that a fair estimate of the Cambridge ordinary debentures as at the date of this letter is [insert amount]. This fair estimate is based on [insert basis for the fair estimate].
On [date] a distribution was paid to Cambridge debenture holders. Had you not sold your Cambridge ordinary debentures to Ross Investments you would have received [insert amount].
This information may be important to any decision that you make about whether or not to terminate the agreement and recover your Cambridge ordinary debentures from us.
Terminating the agreement and recovering your Cambridge ordinary debentures
If you decide to terminate the agreement and recover your Cambridge ordinary debentures you will need to notify us of that fact within 30 days of the date of this letter.
You may elect to terminate the agreement and recover your [insert number] Cambridge ordinary debentures. You will be required to return to us $[insert amount], being the amount that we paid you for your Cambridge ordinary debentures.
- 3 -
To terminate the agreement and recover your [insert number] Cambridge ordinary debentures you must within 30 days of the date of this letter:
(1)complete and return to us by regular post (c/ PO Box 929 Bendigo, Victoria, 3552) the attached debenture transfer form [ATTACH DEBENTURE TRANSFER FORM]; and
(2)provide us with a cheque or money order for the amount of $[insert amount].
We will then, within seven (7) days, complete the debenture transfer form and send it and all other required paperwork to the Cambridge debenture registry in order for the Cambridge ordinary debentures to be transferred back to you.
PLEASE NOTE: If you wish to terminate the agreement and have the Cambridge ordinary debentures returned to you, you have 30 days from the date of this letter within which to notify us (and to take any other required action). AFTER THE 30 DAY PERIOD EXPIRES YOU WILL NOT BE ABLE TO RECOVER YOUR CAMBRIDGE DEBENTURES.
You should obtain independent legal and or financial advice in relation to the contents of this letter.
Yours faithfully
RD Ross
DirectorATTACHMENT D
[ON LETTERHEAD OF ROSS INVESTMENTS (AUST) PTY LTD]
[INCLUDE DATE OF LETTER (BEING WITHIN
THREE DAYS OF THE DATE OF THE ORDER)]Dear Sir/Madam
OFFER MADE BY ROSS INVESTMENTS (AUST) PTY LTD TO PURCHASE YOUR CAMBRIDGE CREDIT CORPORATION LTD CUMULATIVE DEBENTURES
By letter dated 22 January 2007, Ross Investments (Aust) Pty Ltd (“Ross Investments”) wrote to you offering to purchase your Cambridge Credit Corporation Ltd (“Cambridge”) cumulative debentures for 36.05 cents per $1 debenture.
Section 1019I(2)(c) of the Corporations Act 2001 (the “Act”) requires an offer document of the kind sent by us in respect of your Cambridge debentures to include a fair estimate of the value of the debentures at the date of the offer, and an explanation of the basis on which that estimate was made.
The offer document sent to you did not state a fair estimate of the market value of the Cambridge cumulative debentures as at the date of the offer.
The Australian Securities and Investments Commission (“ASIC”) has commenced proceedings in the Federal Court of Australia against Ross Investments and against me personally in respect of the offer to purchase your Cambridge debentures. In that proceeding, ASIC has alleged that Ross Investments did not provide you with all the necessary information required under the Act at the time the offer to purchase your Cambridge debentures was made. In that proceeding, ASIC seeks among other things declarations, injunctions and corrective orders against Ross Investments.
On 18 September 2007, the Federal Court ordered that Ross Investments:
- 2 -
(a)write to you to inform you of the market value of the Cambridge cumulative debentures as at the date of our offer; and
(b)give you the opportunity to terminate the agreement and recover your Cambridge cumulative debentures. If you decide to terminate the agreement and recover your Cambridge cumulative debentures you will need to notify us of that fact, return or repay any money that we have paid to you for your debentures, and we will then take all necessary steps to transfer the Cambridge cumulative debentures back to you.
Information about the market value of the Cambridge cumulative debentures
A fair estimate of the Cambridge cumulative debentures as at 22 January 2007 was $[insert fair estimate]. This information should have been included in the offer document that we sent to you. This fair estimate is based on [insert basis for the fair estimate].
You should also note that a fair estimate of the Cambridge cumulative debentures as at the date of this letter is [insert fair estimate]. This fair estimate is based on [insert basis for the fair estimate].
On [date] a distribution was paid to Cambridge debenture holders. Had you not sold your Cambridge cumulative debentures to Ross Investments you would have received [insert amount].
This information may be important to any decision that you make about whether or not to terminate the agreement and recover your Cambridge debentures from us.
Terminating the agreement and recovering your Cambridge cumulative debentures
If you decide to terminate the agreement and recover your Cambridge cumulative debentures you will need to notify us of that fact within 30 days of the date of this letter.
You may elect to terminate the agreement and recover your [insert number] Cambridge cumulative debentures. You will be required to return to us $[insert amount], being the amount that we paid you for your Cambridge cumulative debentures.
To terminate the agreement and recover your [insert number] Cambridge cumulative debentures you must within 30 days of the date of this letter:
- 3 -
(1)complete and return to us by regular post (c/ PO Box 929 Bendigo, Victoria, 3552) the attached debenture transfer form [ATTACH DEBENTURE TRANSFER FORM]; and
(2)provide us with a cheque or money order for the amount of $[insert amount].
We will then, within seven (7) days, complete the debenture transfer form and send it and all other required paperwork to the Cambridge debenture registry in order for the Cambridge cumulative debentures to be transferred back to you.
PLEASE NOTE: If you wish to terminate the agreement and have the Cambridge cumulative debentures returned to you, you have 30 days from the date of this letter within which to notify us (and to take any other required action). AFTER THE 30 DAY PERIOD EXPIRES YOU WILL NOT BE ABLE TO RECOVER YOUR CAMBRIDGE DEBENTURES.
You should obtain independent legal and or financial advice in relation to the contents of this letter.
Yours faithfully
RD Ross
Director
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VID 104 of 2007
BETWEEN:
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
PlaintiffAND:
ROSS INVESTMENTS (AUST) PTY LTD and
ROBERT DOUGLAS ROSS
Defendants
JUDGE:
FINKELSTEIN J
DATE:
18 SEPTEMBER 2007
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
The first defendant, Ross Investments (Aust) Pty Ltd, is the holder of an Australian Financial Services Licence. Subject to the conditions of that licence, including compliance with the applicable financial services laws and regulations, Ross Investments is licensed to deal in (issue, acquire and dispose of) securities and retirement savings accounts to retail clients. The second defendant, Robert Douglas Ross, is the sole director of Ross Investments and is identified as the “key person” for the purposes of Ross Investments’ financial services licence. Mr Ross holds a majority of the ordinary shares in Ross Investments.
Cambridge Credit Corporation Ltd was a significant property developer and financier. It was placed in receivership in 1974, following a period of high interest rates and falling property prices. At the time, Cambridge Credit owed substantial sums to debenture holders under instruments not traded on the Australian Stock Exchange. For the past 33 years, the receivers have been developing and selling the company’s significant land holdings. During the course of the receivership property prices increased and the sale of Cambridge Credit’s property has enabled debenture holders to be repaid their principal in full. Debenture holders do, however, remain entitled to interest.
There are two types of debenture holders: ordinary debenture holders who hold debentures with various coupon rates which are calculated and paid quarterly; and cumulative debenture holders who hold debentures with various coupon rates which are calculated quarterly and accumulate until maturity. Given the nature of the debentures, the interest entitlement of ordinary debenture holders does not continue to grow whereas the interest entitlement of cumulative debenture holders continues to accrue.
In November 2005, and again on several occasions in January 2007, Ross Investments made unsolicited offers to purchase from retail debenture holders ordinary and cumulative debentures in Cambridge Credit. The offers were contained in offer documents sent to ordinary debenture holders on 9 November 2005 and 16 and 29 January 2007 and to cumulative debenture holders on 8 and 23 November 2005 and 22 January 2007.
The plaintiff, Australian Securities and Investments Commission, alleges that the offers did not comply with Division 5A of Part 7.9 of the Corporations Act 2001 (Cth). Division 5A regulates unsolicited off-market offers to purchase financial products. Specifically, ASIC contends that Ross Investments did not comply with the requirements of s 1019I of the Corporations Act. That section relevantly provides that where there is an unsolicited offer to purchase a financial product off-market and there is no market value for the financial product on a licensed market, an offer document must contain “a fair estimate of the value of the product as at the date of offer, and an explanation of the basis on which that estimate was made”: s 1019I(2)(c).
ASIC seeks declarations that by sending the Cambridge offer documents to retail investors Ross Investments contravened s 1019I(2)(c) and that by causing the offer documents to be sent Mr Ross aided, abetted, counselled, procured or was knowingly concerned in, or party to, that contravention. ASIC also seeks an order, in the form of a mandatory injunction, that Ross Investments post to each debenture holder who accepted an offer a notice advising them of the market value of their debenture and informing them that, should they wish to terminate their agreement with Ross Investments and recover the debentures sold by them, they should do so within 30 days of receiving the notice. The final order sought is that Ross Investments return or re-transfer the debentures, along with any distribution it may have received from the receivers, to any debenture holder who elects to terminate their agreement to sell within the stipulated period.
It is common ground that Ross Investments made unsolicited offers to purchase ordinary and cumulative debentures in Cambridge Credit from retail debenture holders by way of the offer documents sent to debenture holders. The only issues in dispute are whether the offer documents contained “a fair estimate of the value of the [debentures] as at the date of offer” and an explanation of the basis upon which each estimate was made, as required by s 1019I(2)(c).
The offer price for ordinary debentures was 2.15c, 3.05c and 3.05c respectively. The offer documents did not include, as a separate figure to the offer price, a fair estimate of the value of the ordinary debentures. However each offer document contained the following statement: “This fair estimate of value of the ordinary debentures is made by Robert D Ross on behalf of Ross Investments (Aust) Pty Ltd and is not the product of other independent research”.
The offer price for cumulative debentures was 35.05c, 35.05c and 36.05c respectively. The offer document sent to holders of cumulative debentures differed from the offer document sent to holders of ordinary debentures in that it referred to a circular issued by Permanent Trustee Company, the trustee organisation for the debenture stock. Thus, the offer document dated 8 November 2005 stated:
“Fair Estimate of Value: Debenture holders have previously received payment of their principal IN FULL. On 1 December 2003, a circular to Cumulative Debenture holders was issued by Permanent Trustee Company Limited stating that “Debenture holders’ entitlements as at 1 December 2003 exceed $116 million and accordingly, debenture holders may ultimately receive a further 18 to 20 cents in the dollar on your entitlement of outstanding accrued interest” (See enclosed “Background to this offer).”
The offer (apart from the offer dated 22 January 2007) enclosed a document entitled “Background to this offer”. The background document extracted a paragraph from a circular issued by the trustee. This is what was said:
“FAIR ESTIMATE OF THE VALUE
An explanation of the basis on which the offer was made:
In a letter dated 1st December 2003, Permanent Trustee Company Ltd, the Trustee for the debenture holders stated:
‘Debenture holders’ entitlements as at 1 December 2003 exceed $116 million and accordingly, debenture holders may ultimately receive a further 18 to 20 cents in the dollar in your entitlement of outstanding accrued interest. However, it must be stressed that this indication of worth is based on present circumstances and information which may be effected by future market and economic conditions. It should not be taken as a valuation of debenture stock’.
There has been no further communication or material regarding distributions in relation to the debenture since 1 December 2003.”The offer document dated 22 January 2007 did not include the background document, nor did it extract the trustee’s statement to the effect that that the trustee’s estimate of further dividends was based on present circumstances and should not be taken as a valuation of debenture, despite the trustee’s circular having included words to that effect.
The defendants filed an affidavit of Kevin Young, a chartered accountant, which provided an opinion as to the fair value of each ordinary debenture on each of the dates the offer was sent. Mr Young said that in his opinion, after discounting for delays in payment, the fair value of each ordinary debenture was 9.725c. As regards the cumulative debentures, Mr Young said that, after discounting, the fair value of each cumulative debenture on each of the dates those offers were sent was $1.195.
ASIC obtained a report from Anthony McGrath of McGrathNicol, a chartered accountant, setting out his estimate of the value of the Cambridge Credit cumulative and ordinary debentures at the time each offer was sent. Mr McGrath said that a fair estimate of the Cambridge ordinary debentures at the relevant dates was between 7.2 and 8.8 cents (on 9 November 2005) and between 7.1 and 8.7 cents (on each of 16 January and 29 January 2007). As regards the cumulative debentures, Mr McGrath said that a fair estimate of their value was between 99.2 and 120.8 cents (on each of 8 November 2005 and 23 November 2005) and between 100.9 and 123.0 cents on 22 January 2007. These estimates, as was the case with Mr Young’s, are well in excess of the amounts offered by Ross Investments.
The requirement in s 1019I(2)(c) can be broken into three components: did the offer document contain an estimate of the value of the product as at the date of the offer; was that estimate a “fair” estimate of the value of the product; and did the offer document explain the basis upon which the estimate was made?
The defendants’ case is that the offer documents included an estimate of the value of the relevant debentures, either by reference to the “indication of worth” given by the trustee or by reference to the amount being offered by Ross Investments which should be taken to be its estimated value. I am prepared to accept that the offer documents for cumulative debentures included an estimate of value, albeit by reference to the trustee’s statements. The case is less clear in relation to the offer documents for ordinary debentures. In my view, however, a reasonable debenture holder would take the statement “this fair estimate of value” to refer to the offer price for each debenture, there being no other figure to which the comment could relate. In my view, therefore, the offer documents did contain an estimate of the value of the debentures. The question remains, however, whether those estimates were “fair” estimates of the value of the debentures.
The defendants submit that “if a measure of value is the amount that a person is willing to pay for something, then the offer documents themselves are key components in assessing the value of the Cambridge debentures”. I do not accept that the amount one offeror is willing to pay for a debenture is, by itself, a proper measure of the value of that debenture. Rather, the value of a debenture would be its exchange value or the price that it would bring when exposed to competition. (I put to one side the situation, that sometimes arises, where it is necessary to value an item that is not marketable). The cases say that value is to be determined by reference to the amount that an hypothetical ordinary purchaser who is willing but not anxious to buy would be prepared to pay for the debenture, and an hypothetical ordinary seller who is also willing but not anxious to sell would be prepared to accept for it, assuming both parties were fully informed and had regard to all the circumstances which might affect value: see Spencer v Commonwealth (1907) 5 CLR 418, 432 and 440-441; Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494, 514; Holt v Cox (1994) 15 ACSR 313, 333-334; Gregory v Federal Commissioner of Taxation (1971) 123 CLR 547. Where there is a regular market for a product, the market price should reflect the exchange value of a product. Where, as here, there is no regular market for a product, it is necessary to estimate the (exchange) value.
Proceeding on the basis that the offer documents do contain an estimate of the value of the debenture, it is necessary to decide whether this estimate is a “fair estimate” for the purposes of s 1019I(2)(c). The defendants submit that the fairness (or otherwise) of an estimate of the value of a debenture refers not to whether the estimate is “accurate” or “precise”, but rather whether the estimate has been given in the absence of bias, dishonesty or injustice, and whether it has legitimately been arrived at. They rely on the definition of “fair” in the Macquarie Dictionary, being “free from bias, dishonesty or injustice” or “that which is legitimately sought, pursued, done or given”. If by their argument the defendants mean that any estimate will be fair provided it is not arrived at dishonestly or for an improper purpose then I disagree. However, if the defendants mean that an estimate will be fair if it is honestly obtained using of an appropriate or suitable valuation method, then they are obviously right. The word “fair” in s 1019I(2)(c), in my view, refers to the method by which the estimate is arrived at; it means reasonable, proper or satisfactory. An estimate of the value of a product will be “fair” if it is obtained by a proper method of valuation that attempts to determine, or at least closely reflect, the underlying (or exchange) value of the product.
Mr McGrath’s report outlines the valuation methodology he adopted in order to arrive at his estimates of the value of the debentures. His preferred method of valuation was the discounted cash flow method. This method estimates the value of a debenture as the net present value of expected cash flows arising from the debenture, discounted at a rate that reflects the time value of money and the risk of the cash flows. According to Mr McGrath this method is appropriate as it “allows assumptions to be drawn regarding the future cashflows arising from distributions from the receivership, the timing of those cashflows, and the risks associated with these two elements…” For context, Mr McGrath also applied the net asset value methodology which takes a balance sheet assessment of the realisable value of the underlying assets less outstanding liabilities. These methods of valuation are widely accepted in the marketplace. Plainly, the estimates provided by Mr McGrath are a “fair estimate of the value” of the debentures.
The defendants attacked Mr McGrath’s report on several bases. One was that it ignored the fact that Ross Investments’ offer had been accepted by some debenture holders and those acceptances showed that the offer price was fair value. This is not a logical argument. The defendants’ second complaint was that some aspects of the annual reports for Cambridge Credit, particularly the net realisable values of inventories, cannot be verified. While not ideal, this is to be expected. In the absence of any evidence to the contrary (and none was available) it was proper for Mr McGrath to have regard to the information in the Cambridge Credit annual reports for the purpose of his valuation. The defendants’ final complaint with the report was that the costs incurred by Ross Investments in making the offers and the actual positions of the offerors or offerees (age, preferences) had not been properly taken into account. They submit, for example, that “it is reasonable to assume that tens of thousands of dollars were spent… in order to make the offers contained in the offer documents” and that “it is reasonable to assume that a significant proportion of such a class of debenture holders is likely to value immediate cash payments substantially more favourably than uncertain and irregular distributions in the future”. However, to take those matters into account would amount to speculation and Mr McGrath cannot be criticised for refusing to do that.
While it is less clear how Mr Young arrived at his estimates of the value of the debentures, it may be inferred from the fact that his estimates were broadly comparable to those of Mr McGrath that Mr Young’s methodology (briefly outlined in his report) also resulted in a “fair estimate of the value” of the debentures. The same cannot be said of the defendants’ estimates. Not only did the offer documents not adequately explain to debenture holders the method by which the estimates of value were determined, but the estimates themselves, when compared to the estimates given by Mr McGrath and Mr Young, strongly point to the conclusion, which I think must inevitably be reached, that the estimates were not “fair estimates” of the value of the debentures.
Even if this were not the case, it is apparent that each of the offer documents failed to provide an explanation of the basis upon which the estimates were made. The defendants’ argument was that the obligation was discharged because the offers for the cumulative debentures expressly referred to the indication of worth given by the trustee and the offers for ordinary debentures stated that the amount being offered was “a purely subjective matter of judgment”. This cannot be regarded as an appropriate explanation. Not only did the circulars issued by the trustee expressly state that “this indication of worth… should not be taken as a valuation of the debenture stock”, but even if, contrary to the trustee’s express statement, the indication was to be taken as an estimate of the value of the cumulative debentures, there is no further explanation of how the valuation was arrived at. Likewise, even if the amount offered by Ross Investments for the ordinary Cambridge debentures was to be taken as its estimate of their value, the mere statement that the amount was a “purely subjective matter of judgment” does not disclose the basis upon which that estimate was made. Were statements such as these sufficient to discharge Ross Investments’ obligations, the requirement to explain the basis of each estimate imposed by s 1019I(2) would, for all practical purposes, be illusory. At a minimum, in order to satisfy the statutory requirement, any explanation must disclose the key factors and assumptions upon which the estimate is based.
The result is that Ross Investments contravened s 1019I(2)(c). There will be declarations to that effect and orders made as sought against Ross Investments.
I note in passing the defendants’ submission that, as a holder of an Australian Financial Services Licence, Ross Investments is required, as a condition of its licence, to include in any offer a statement to the effect that “the licensee is not recommending that the offeree should accept the offer”. The defendants contend that “in this context” Ross Investments is “constrained by the nature and detail of information which it can properly set out in any offer document to purchase off-market financial products”. I must admit I do not fully understand this submission. Not only is the condition referred to by the defendants not inconsistent in its terms with the obligations imposed by s1019I(2), but it is an express condition of Ross Investments’ financial services licence that it establish and maintain compliance measures that ensure, as far as is reasonably practicable, that it complies with the provisions of the financial services laws: condition 4. In any event, the conditions of a financial services licence cannot modify the operation of an Act of Parliament so as to relieve Ross Investments of its obligations under Division 5A of Part 7.9.
The second defendant, Mr Ross, was the sole director of Ross Investments at the time each offer was sent out. It was not contested that Mr Ross was aware of the contents and approved and authorised the sending of the offer documents. Each offer document bears his signature. According to the offer documents, Mr Ross personally provided the estimate of value contained in the offer documents sent to ordinary debenture holders. As the key officer of Ross Investments Mr Ross was well aware, or should have been, of the obligations imposed on Ross Investments by the Corporations Act. It is clear that Mr Ross was the conscious moving force behind the infringing act, the knowing aider or abettor. I will therefore make the orders sought against Mr Ross.
As regards costs, I see no reason why they should not follow the event. There will be an order that the defendants pay ASIC’s costs.
I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein. Associate:
Dated: 18 September 2007
Counsel for the Plaintiff: S Rubenstein Solicitor for the Plaintiff: Australian Securities and Investments Commission Counsel for the Defendants: N Dragojlovic Solicitor for the Defendants: Cahills Date of Hearing: 29 May 2007 Date of Judgment: 18 September 2007
0
5
0