Australian Securities and Investments Commission v West - [2007] SASC 140

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
ASIC v WEST & ANOR
[2007] SASC 140
Reasons of Judge Burley a Master of the Supreme Court
24 April 2007
CORPORATIONS
Application by plaintiff for interlocutory injunction - alleged managed investment scheme not registered - defendants conduct a loan and mortgage broking business - solicit investment of funds in loans with varying security - whether business consisted of a managed investment scheme which was required to be registered.
s 9 Corporations Act 2001. Part 5C.1 of Chapter 5C of that Act.
ASIC v Triton Underwriting Insurance Agency Pty Ltd (2003) 48 ACSR 249, Australian Broadcasting Commission v O'Neill (2006) 229 ALR 4(7) at [19], [65]-[71], Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618, American Cyanamid Co v Ethicon Ltd [1975] AC 396, Burton v Arcus [2006] WASCA 71 at [58]-[71], Kay v ASIC (2002) 43 ACSR 229, Lawloan Mortgages Pty Ltd v Lawloan Mortgages Pty Ltd [2002] QSC 302, referred to.

ASIC v WEST & ANOR
[2007] SASC 140

JUDGE BURLEY: By originating process filed on 15 March 2007, the plaintiff seeks declaratory and injunctive relief relating to an alleged management investment scheme said by the plaintiff to be operated by the defendants. Among other things the plaintiff seeks orders for the winding up of the scheme and of the second defendant.
By interlocutory process dated 15 March the plaintiff has sought the following orders:
2An injunction restraining each of the defendants until further order whether by themselves, their servants or agents or otherwise howsoever from:
2.1receiving or soliciting any money or other consideration from persons for the purpose of acquiring interests in:
2.1.1the managed investment scheme described in paragraph 14 of the affidavit of Jeremy Gordon Peel sworn herein on 15 March 2007 (the alleged scheme): or
2.1.2 a managed investment scheme that is required to be registered under section 601ED91) of the Act but is not so registered;
2.2entering into any loans in connection with the alleged scheme or any other managed investment scheme that is required to be registered under the Act but is not so registered; and
2.3 dealing with or disposing of any:
2.3.1 funds invested in the alleged scheme;
2.3.2proper (real or personal) of the alleged scheme or any property (real or personal) purchased or acquired directly or indirectly with funds invested in the alleged scheme, including but not limited to instruments of security provided by persons who have borrowed funds from the alleged scheme; and
2.3.3income of the alleged scheme whether interest paid by persons who have borrowed funds from the alleged scheme or otherwise.
3An order that the defendants until further order provide to the plaintiff on a fortnightly basis a full accounting of all moneys paid into the alleged scheme.
Interim orders have been made on an ex parte basis. The application for interlocutory injunctive relief was heard by me on 20 April 2007. I gave my decision and made interlocutory orders of the type sought by the plaintiff on 23 April 2007. These are the reasons for my decision.
The plaintiff and defendants handed up written submissions on hearing of the application for interlocutory relief.
Before turning to the relevant law and the facts, it is convenient to set out the approach taken by the defendants on this application. The primary contention of the defendants was that the plaintiff has failed to establish that there is a serious question to be tried, namely, whether or not the type of business conducted by the defendants constitutes a managed investment scheme within the meaning of s 9 of the Corporations Act 2001 (Cth) ("the Act"). If the defendants make good that contention, the application falls at the first hurdle.
In the event that the plaintiff is able to demonstrate that such a triable issue to be tried arises on the papers, the defendants have through their counsel, Mr Winter, proffered an undertaking to the court that, pending trial of the summons, they and each of them would not continue to promote the scheme and in particular they would not receive or solicit any money or other consideration from any person in pursuance of the mortgage broking business which they have operated for some years, nor would they enter into any further loans in connection with that business. It seems to me that the proffered undertaking covers paras.2.1 and 2.2 of the orders sought by the plaintiff on this application. However, I do not need to have recourse to it because, when I handed down my decision, the defendants preferred that orders should be made in lieu of the Court accepting their proffered undertaking.
As to para.2.3 of the interlocutory process, the defendants and each of them also proffered an undertaking that, to the extent that they receive any monies in respect of the loan transactions entered into pursuant to the mortgage broking business, whether by way of principle or interest, they will pay such monies into the trust account operated by the second defendant and then disburse those monies to the investors they regard as being entitled to receive such monies.
Such an undertaking does not cover para.2.3 of the interlocutory process. If an order were made in terms of para.2.3, the defendants would be required, at the very least, to retain monies received from borrowers in a bank account of some sort until the court determined whether or not, if a managed investment scheme exists, it should be wound up.
The difference between the parties in this regard relates to the way in which loan funds are to be directed to investors. It is the plaintiff's case that there exists a managed investment scheme which, if it were wound up, would require a distribution pari passu to the investors. The defendants contend that the nature of the loan and mortgage broking business was a direct investment between the investor and borrower such that the investor (lender) could only have recourse to a specific loan transaction and any security that accompanied it.
Given that the plaintiff does not object to the defendants receiving money from investors in respect of existing loans and securities, it would then be necessary to determine whether such monies are to be paid into and retained, pending trial, in a bank account or whether the defendant should be permitted to make payments to the investors they consider entitled to the monies.
I should also at this stage refer to the order sought in para.3 of the interlocutory process. That requires fortnightly accounting of monies paid to the defendants in pursuance of the alleged managed investment scheme. The interim orders made to date includes such provision and I do not understand the defendant to have argued that, if the plaintiffs succeed in respect of para.2 of the interlocutory process, an order in terms of para.3 should not be made.
Because of the position taken by the defendants, it is necessary first to decide whether or not a triable issue has been established, namely, whether or not the conduct of the loan and mortgage broking business as described in the affidavits of all of the parties, is a managed investment scheme as defined in s 9 of the Act.
The Affidavits
The plaintiff relied on the affidavits of Mr Peel, Ms Prosser and Ms Sheldon. The defendants relied upon the affidavit of the first defendant
The Law – s 1324(4) of the Act
Submissions were put by the plaintiff relating to the approach to be taken by the court on an application for injunctive relief sought pursuant to sub-s 1324(4) of the Act and the principles applicable to determining whether or not there existed a management investment scheme which would require to be registered pursuant to s 601ED of the Act.
It has been submitted by the plaintiff that if such a managed investment scheme exists and if it is required to be registered, the defendants have contravened sub-s.(601)ED(5) of the Act because, it is common ground, the scheme has not been registered pursuant to the provisions of 5 Part 5C.1 of Chapter 5C of the Act.
Mr Ower, counsel for the plaintiff referred to the decision of Barrett J in ASIC v Triton Underwriting Insurance Agency Pty Ltd (2003) 48 ACSR 249 where his Honour referred to the approach to be taken on an application for injunctive relief under s 1324(4) of the Act. His Honour said (at [25]):
…the court is not constrained by the traditional methods of equity. But there is no doubt that those methods represent a sound basis for undertaking a preliminary assessment which would then be reviewed against the statutory role ASIC plays and the wider question of what is "desirable" in the statutory context.
The relevant equitable principles to which his Honour referred have been considered recently by the High Court in Australian Broadcasting Commission v O'Neill (2006) 229 ALR 4 (7) at [19], [65]-[71]. The High Court referred to Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618, where the expression "prima facie case” was referred to and contrasted with the language of the House of Lords in American Cyanamid v Ethicon Ltd [1975] AC 396.. It is clear from O'Neill's case that in determining whether or not a serious question to be tried has been made out, the court must consider that question on the basis that, if the evidence remains as it is, what is the probability that the plaintiff will make out its case in relation to the relevant point. It seems to me that that is the appropriate starting point for this application.
Managed Investment Scheme
I now turn to the applicable legal principles relating to the question of whether or not, on the facts, the defendants could be said to have operated a managed investment scheme in contravention of the provisions of the Act.
The relevant parts of the definition of "managed investment scheme" are as follows (s 9 of the Act):
(a)     A scheme that has the following features:
(i)    people contribute money or monies worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospect or contingent and whether they are enforceable or not);
(ii)    any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interest from holders);
(iii)     the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions)…
It was not in dispute that a given scheme might have features in addition to the three features referred to in the definition and yet remain a managed investment scheme for the purposes of s 9.
According to the evidence of Mr Peel (exhibit 38), as at May 2006, there were 55 current loans valued at $7,871,000 and between 28 November 1998 and May 2006 there were a total of 80 loans, valued at $10,336,500.
The essential differences between the parties as to how the business operated by the defendants are as follows. The plaintiff says that the business operated by the defendants constituted a scheme whereby people contributed money to acquire rights to benefits produced by the scheme; that the contributions of the individual investors were to be pooled or used in a common enterprise to produce financial benefits for the members and the members do not have the day-to-day control over the operation of the scheme.
It was the defendant's contention that there was no pooling of resources nor was there a pooling of the benefits of the investment loans for the purposes of payments to all of the original investors. The rights of the investor were determined by reference to the loan documentation and any security documentation. The direct relationship between the investor/lender and the borrower consisted of the loan and security documentation and nothing else. This was so, it was argued, even though the loan and security documentation does not mention the name of the original investor. Rather, such documentation named the second defendant as the party contracting with the borrower. Nevertheless, as between the defendants and the investor/lender, a document was issued, referred to by the defendant as a "promissory note", whereby the defendants notified the investor/lender that their monies would be placed with a named borrower on the basis of specified security.
On the basis of these facts, about which there was no dispute, the defendants say that there was not an over-arching scheme covering all investors, nor was there a pooling of resources, nor an accumulation of and pooling of profits which were then paid to the investors.
If the loan and security documentation had named the investor, a good argument could be put that a managed investment scheme of the type and extent contended for by the plaintiffs did not arise. However, as I have stated earlier, the loan and security documentation purports to be between the second defendant and the borrower. In addition, a higher interest rate is stipulated in the loan and security documentation than that advised to the investor/lender. In at least one instance, in the documents exhibited to Mr Peel's affidavit, the documentation between the defendants and the investor state an interest rate of 2 per cent per month and the loan and security documentation states for the same borrower an interest of 3 per cent per month. The documents recording the receipt of monies from the borrower and the disbursement of those monies also show that in the case of the same borrower, a return of 2 per cent per month was disbursed to the lender and the remaining 1 per cent was paid to interests associated with the defendants. The defendants contended that that payment of interest constituted their fee, payable by the borrower, for arranging the loan. It was not a one-off procuration fee but rather an amount of 1 per cent interest per month.
It was the plaintiff's submission that such a dealing with the monies of the investor constitute a pooling of monies received from all of the investors, particularly as the documentation gave rise to the inference that the second defendant then loaned the pooled monies to various borrowers. Reliance was placed by the plaintiff on the decision of the West Australian Court of Appeal in Burton v Arcus [2006] WASCA 71 at [58]-[71]. In that case the investment monies placed by various investors, unknown to each other until they made payment of their investment monies, were paid into a trust account and thereafter lent to a borrower. That, and a number of the authorities reviewed by the Court of Appeal, involved circumstances where there was more clearly a pooling of monies. In this case, the inference of "pooling" is said, by the plaintiff, to arise from the fact that the actual loan and security transactions named the second defendant as the contracting party rather than the individual investor.
Another case relied upon by the plaintiff is Kay v ASIC(2002) 43 ACSR 229. The facts of that case were closer to the facts of this case. Investors funds were banked into a cash management account and were held in trust for the investor. The scheme allowed an investor to obtain a direct interest in a particular secured loan and the investor was to obtain a benefit of the income generated in related to that loan. The company into whose trust account the funds were originally placed was required to act on the investors behalf, keep the investor informed as to the conduct of the loan. The court held that each separate investment was part of an overall scheme which thereby came within the definition of s 9 of the Act.
A decision to the contrary, Lawloan Mortgages Pty Ltd v Lawloan Mortgages Pty Ltd [2002] QSC302 was relied upon by the defendants. It is the decision of a single Judge, Holmes J. His Honour considered that the scheme under consideration did not constitute a pooling of monies and the joint sharing by the various investors in the income obtained from such monies.
It is neither possible nor appropriate on this application to resolve the differences of approach taken in the cases. It is sufficient to say that, if the line of authority relied upon by the plaintiff iss held to be applicable to the facts of this case (as contended for by the plaintiff) and if the facts (based on the evidence adduced by the plaintiff) remain the same, there is a probability that the Court will conclude that the alleged managed investment scheme was one which is required to be registered. In this sense, in my opinion, a triable issue has been demonstrated by the plaintiff.
Given that conclusion and the fact that the defendants proffered an undertaking not to promote the scheme nor to solicit clients until trial, I understand the defendants not to have contested the submission that the balance of convenience favours the granting of injunctive relief as sought in paras 2.1 and 2.2 of the interlocutory process.
I now turn to the question of whether or not monies received by the defendants in pursuant of the alleged scheme should be placed and retained in a specified banking account. In my opinion, the balance of convenience clearly favours the retention of such monies in the specified bank account because, to do otherwise might result in payments to investors to which they are not entitled. For example, as a matter of law, it might be held that on the winding up of the alleged scheme, the investors are only entitled to distribution of monies pari passu. For that reason I made orders requiring the retention of the moneys received in the specified trust account..
It does not appear to me that the plaintiff has pursued its application for an order in terms of para.2.3.2. The defendants did not oppose an order in terms of para 3.