Australian Securities Commission v Cooke
[1996] FCA 1101
•23 OCTOBER 1996
CATCHWORDS
EQUITY - injunctions - interim - letter to unit holders offering gratis one for one issue in offshore trust - whether serious question letter constitutes invitation to subscribe without prospectus - whether "excluded issue exemption" applicable - balance of convenience
CORPORATIONS LAW - receiver and manager - whether appointment appropriate
Corporations Law, s9, s66(2)(c), s92, s1018, s1064, s1065, s1114, s1323, s1324(4)
Corporations Regulations, reg7.12.04
Adsteam Building Industries Pty Ltd v Queensland Cement and Lime (1984) 2 QdR 1
Attorney General (New South Wales) v Australian Fixed Trusts Ltd (1974) 1 NSWLR 110
Beach Petroleum NL v Johnson (1992) 9 ACSR 404
Broken Hill Pty Company Limited v Bell Resources Limited (1984) 2 ACLC 157
CAC v M.G. Securities Australia Ltd (1974) ACLC 27,761
Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148
NCSC v Monsoon Nominees Pty Ltd (1990) 3 ACSR 361
O'Brien v Melbank Corporations Ltd (1992) 10 ACLC 197
Wade v A Home Away Pty Ltd (1981) VR 475
AUSTRALIAN SECURITIES COMMISSION v ALLAN COOKE and ETHICAL TECHNOLOGY BROKERS PTY LTD
NO WG 3038 OF 1996
CORAM:R D NICHOLSON J
PLACE:PERTH
DATE:23 OCTOBER 1996
IN THE FEDERAL COURT OF AUSTRALIA )
WESTERN AUSTRALIA DISTRICT REGISTRY )
GENERAL DIVISION ) NO WG 3038 OF 1996
B E T W E E N: AUSTRALIAN SECURITIES COMMISSION
Applicant
and
ALLAN COOKE
First Respondent
and
ETHICAL TECHNOLOGY BROKERS PTY LTD
Second Respondent
MINUTE OF ORDER
JUDGE MAKING ORDER: R D NICHOLSON J
DATE OF ORDER: 23 OCTOBER 1996
WHERE MADE: PERTH
THE COURT ORDERS THAT:
Until the hearing of this application or further order, the first respondent by himself or his servants, agents or otherwise be and is restrained from issuing invitations to subscribe for securities in the Enviro Trust, or being in any way directly or indirectly knowingly concerned in or party to the making of such an invitation, unless the making of the invitation is authorised by the Corporations Law ("CL").
Until the hearing of this application of further order, the first respondent by himself or his servants, agents or otherwise be and is restrained from being in any way directly or indirectly knowingly concerned in or party to the issue of securities in the Enviro Trust, unless the issue of those securities is authorised by the CL.
Until the hearing of this application or further order, the second respondent by itself, its officers, servants, agents or otherwise be and is restrained from issuing invitations to subscribe for securities in the Enviro Trust, or being in any way directly or indirectly knowingly concerned in or party to the making of such an invitation, unless the making of the invitation is authorised by the CL.
Until the hearing of this application or further order, the second respondent by itself or its directors, servants, agents or otherwise be and is restrained from being in any way directly or indirectly knowingly concerned in or party to the issue of securities in the Enviro Trust, unless the issue of those securities is authorised by the CL.
Norman Mel Ashton of Ashton Read, Level 6, 225 St George's Terrace, Perth, ("the Receiver and Manager") be appointed receiver and manager of the property of the Earth Family Trust until the hearing of this application or further order.
The Receiver and Manager have the power to do all things necessary or convenient to be done for and in connection with, or incidental to, the attainment of the objectives for which the Receiver and Manager was appointed, namely:
(a)to investigate what property the subject of the Earth Family Trust; and
(b)to take into his possession, custody or control that property.
Without limiting the generality of the power in the previous Order, the Receiver and Manager have the following powers:
(a)the powers specified in CL s420;
(b)the power to require, by written request, the first respondent, the second respondent and any officer, employee, agent, banker, solicitor, stock broker or accountant of any of the respondents to provide such reasonable assistance to the Receiver and Manager as from time to time is specified by the Receiver and Manager; and
(c)all the powers of the trustee of the Earth Family Trust as set out in the Deed of Trust constituting that trust dated 11 December 1990.
During the period of receivership and management the Receiver and Manager shall be entitled to reasonable remuneration and reasonable costs and expenses properly incurred in the performance of his duties and exercise of his powers as receiver and manager to be calculated on the basis of the time reasonably spent by the Receiver and Manager in accordance with Insolvency Practitioners' Association Scale of Fees or such other scale as the Registrar may decide, such fees to be paid out of the assets of the second respondent as a first charge.
The Receiver and Manager have liberty to apply.
10.The Application shall be set down for directions on 8 November 1996 at 12.15pm.
11.The respondents jointly and severally pay the applicant's costs of the application for interim orders.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
WESTERN AUSTRALIA DISTRICT REGISTRY )
GENERAL DIVISION ) NO WG 3038 OF 1996
B E T W E E N: AUSTRALIAN SECURITIES COMMISSION
Applicant
and
ALLAN COOKE
First Respondent
and
ETHICAL TECHNOLOGY BROKERS PTY LTD
Second Respondent
CORAM:R D NICHOLSON J
DATE:23 OCTOBER 1996
PLACE:PERTH
REASONS FOR JUDGMENT
This is an urgent notice of motion for interim orders pursuant to Corporations Law ("the CL") s1324(4) or alternatively s1114. The orders sought are an interim injunction and the appointment of a receiver and manager. The interim injunctions are sought to restrain the respondents from issuing invitations to subscribe for securities in an overseas trust.
INTERIM INJUNCTIVE RELIEF
The approach taken to the granting of interim orders under the Corporations Law follows that taken in respect of an interlocutory injunction: see Adsteam Building Industries Pty Ltd v Queensland Cement and Lime (1984) 2 QdR 1 at 526; NCSC v Monsoon Nominees Pty Ltd (1990) 3 ACSR 361 at 363. As is normal on such applications, the applicant must establish there is a serious question to be tried and the balance of convenience favours the making of the order: see Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 at 153.
The essential facts on which the application for injunctive relief on an interim basis is sought are relatively straight forward. On 23 September 1996 the first respondent on behalf of trustees of the Earth Family Trust ("EFT"), of which the second respondent is trustee, sent a letter ("the letter") inviting unit holders in the Earth Family Trust to subscribe for units in Enviro Trust. The core of the invitation is in the following terms:
"To formalise matters an offer has been made to Earth Family Trust by Enviro Trust, an off‑shore registered trust; the offer states that Enviro is prepared to offer existing unit holders in Earth Family Trust a 1 for 1 issue in Enviro Trust. The value of each unit issued will be US$0.20, which effectively increases the value of each holding of EFT units by at least 20 per cent at the current rate of exchange.
Earth Family Trust will transfer its shares (which are held on behalf of its unit holders) gratis to Enviro Trust, thereby fulfilling its obligations as Trustee to its current unit holders."
It is admitted in the affidavit of R R T Cooke, Director and Secretary of the second respondent, that the letter contained what was described as a restructuring proposal which was sent to all contactable unit holders of EFT on or around the date which the letter bears.
From its description in the letter, Enviro Trust appears to be a unit trust. It is proposed by the letter to issue unit holders in EFT units in Enviro Trust. The consideration for the issue, as stated in the letter, would be that the person subscribing for a unit in the Enviro Trust would pass over that subscriber's unit in the EFT.
Whether serious question
Against those facts it is necessary to ask whether a serious question arises to be tried at law.
There is, in my opinion, a serious question to be tried that the letter contains a solicitation to unit holders in EFT to receive the issue of a unit in Enviro Trust (that being a prescribed interest) and thus the letter contains an invitation to subscribe for units in Enviro Trust, in contravention of CL ss1018 and 1065(1). Those sections relevantly read:
"1018(1) A person shall not offer for subscription, or issue invitations to subscribe for, securities of a corporation unless:
(a)a prospectus in relation to the securities has been lodged;
(b)the prospectus complies with the requirements of this Division; and
(c)if the prospectus is a registrable prospectus - the prospectus has been registered by the Commission under s1020A."
"1065(1) A person shall not issue, offer for subscription or purchase, or issue invitations to subscribe for or buy, any prescribed interest unless, at the time of the issue, offer or invitation, there is in force, in relation to the interest, a deed that is an approved deed for the purposes of this Division or a corresponding law."
Section 92 relevantly provides:
"92(1) Subject to this section, "securities" means:
(a)debentures, stocks or bonds issued or proposed to be issued by a government; or
(b)shares in, or debentures of, a body; or
(c)prescribed interests; or
(d)units of such shares or of prescribed interests; or
(e)an option contract within the meaning of Chapter 7;
but does not include a futures or an excluded security.
92(2)The expression "securities", when used in relation to a body, means:
(a)shares in the body;
(b)debentures of the body;
(c)prescribed interests made available by the body; or
(d)units of such shares or prescribed interests;
but does not include a futures contract or an excluded security."
Section 9 relevantly provides:
""prescribed interest" means:
(a)a participation interest; or
(b)a right, wether enforceable or not, whether actual, prospective or contingent and whether or not evidenced by a formal document, to participate in a time‑sharing scheme;
but does not include:
(c)a right or interest, or a right or interest included in a class or king of rights or interests, declared by the regulations to be an exempt right or interest, or a class or kind of exempt rights or interests, for the purposes of Chapter 7; or
(d)an exempt prescribed interest in relation to this jurisdiction (as defined by section 68A);"
""participation interest" means any right to participate, or any interest:
(a)in any profits, assets or realisation of any financial or business undertaking or scheme whether in Australia or elsewhere;"
The units in the Enviro Trust are arguably "participation interests" within CL s9 and thus a "prescribed interest" and "securities" for the purposes of CL s9 and s92. A unit in a unit trust under general law conveys an equitable interest in the assets of the trust which in this case is a financial or business undertaking or scheme in Belize.
It is arguable the letter constitutes an invitation to subscribe for securities in a corporation because the term "securities" includes prescribed interests made available in a unit trust: see CL s92(2).
For the respondents it was argued the letter does not fall within the phrase "offer for subscription or purchase, or issue invitations to subscribe for or buy" a prescribed interest in CL 1065(1). However, it is apparent that phrase encompasses any solicitation to enter into a course of negotiations calculated to result in the issue of a prescribed interest: Attorney General (New South Wales) v Australian Fixed Trusts Ltd (1974) 1 NSWLR 110 at 117; O'Brien v Melbank Corporations Ltd (1992) 10 ACLC 197 at 211. The term "issue" includes "make available": see CL s9.
Other matters which may affect this conclusion are:
(1)Exemption
The exemption to the definition of "prescribed interest" in par(c) does not appear to apply given that units in Enviro Trust will be issued to all 140 unit holders in EFT and the Enviro Trust is promoted by the respondents whose ordinary business is or includes the promotion of similar schemes: see reg7.12.04 of the Corporations Regulations.
(2)Absence of consideration
The fact that the consideration for the issue of units in the Enviro Trust is the subscriber's units in EFT does not foreclose the conclusion there is a serious issue to be tried. Section 66(2)(c) provides:
"66(2) An issue or allotment of securities is an excluded issue if, and only if:
...
(c)no consideration is paid or provided in respect of issue or allotment; or
..."
It is argued for the respondents by reference to s66(2)(c) that a true analysis of the letter is that the unit holders in the EFT are asked to give up their units in exchange for another unit and there is not therefore a situation where there is any consideration. In my opinion there is no arguable legal substance in that submission given the wording of the first paragraph of the quoted portion of the letter: see Broken Hill Pty Ltd v Bell Resources (1984) 2 ACLC 157 at 164-5.
(3)Absence of territorial nexus
It is argued that because the letter, arguably characterised as an offer, was made by an overseas unit trust, s1065 cannot apply to it. In my opinion that is not correct. The definition of "participation interests" exhibits a clear intent to include within its scope interests which may be located outside of Australia. Specifically, the definitions of the first two limbs of "participation interests" in CL s9 expressly extend to undertakings or enterprises (respectively) "whether in Australia or overseas". A "prescribed interest" includes a "participation interest": CL s9. See generally Wade v A Home Away Pty Ltd (1981) VR 475 at 478‑9.
Furthermore, the relevant territorial nexus for the provisions in the CL is that the relevant offer or invitation by the overseas entity is made in Australia. The offer or invitation will be made in Australia if it is received in Australia. Compare, for example, the reasoning in CAC v M.G. Securities Australia Ltd (1974) ACLC 27,761 at 27,767.
(4)True character of letter
For the respondents it is argued the letter was only an in‑principle document and if sufficient authority was obtained from unit holders in response to it, the respondents would have ensured compliance with the CL. However, the question which arises at law is whether it is arguable the letter is itself caught by the provisions of the CL. I have given reasons why I consider that to be arguable.
(5)Unit holder approval
It is also said for the respondents that the result of sending the letter is that over seventy five percent of the present unit holders have approved the course of action set out in the letter. I accept the submission made for the applicant that this can be of no consequence where it is arguably the case that the unit holders have reached their judgment on the proposition in the absence of the information required to be forwarded to them by law.
(6)Compliance with special resolution requirement
It is also said for the respondents that, the sending of the letter was in accord with the trust document of the EFT. There is no foundation for that submission. The requirement for a special resolution (being seventy five per cent approval) in that deed is a requirement for a resolution passed as special business at a duly convened general meeting. See: EFT Trust Deed cl1(17). There is no evidence of any such meeting having been convened. In any event, even if the trust deed authorised the letter that would not cure any arguable non compliances with the CL. The responses exceeding seventy five per cent from present unit holders in no way constitutes a special resolution in accordance with the trust deed which can in any way authorise the action.
For these reasons, I conclude that there is a serious question to be tried whether the respondents have contravened CL ss1018 and 1065.
Balance of convenience
Turning to the balance of convenience, it is apparent that if the respondents continued to issue invitations to subscribe for units in Enviro Trust investors could be induced to make investment decisions resulting in their assets going offshore to a tax haven without the benefit of a prospectus. However, if the application is ultimately unsuccessful the only prejudice to the respondents is their activities seeking subscription of units in Enviro Trust will have been deferred for a short period of time. Given there is a serious issue to be tried of the nature to which I have referred, I consider that the balance of convenience is in favour of making the orders for interim injunctive relief.
No objection having been taken to the form of orders I consider orders should be made in terms of pars1 to 4 of the notice of motion.
APPOINTMENT OF RECEIVER AND MANAGER
Turning to the second aspect of the notice of motion, the application for the appointment of receiver and manager, it is necessary to turn to the provisions of s1323 of the CL, which relevantly reads:
"1323(1) Where:
(a)an investigation is being carried out under the ASC Law or this Law in relation to an act or omission by a person, being an act or omission that constitutes or may constitute a contravention of this Law;
(b)a prosecution has been begun against a person for a contravention of this Law; or
(c)a civil proceeding has been begun against a person under this Law;
and the Court considers it necessary or desirable to do so for the purpose of protecting the interests of a person (in this section called an "aggrieved person") to whom the person referred to in paragraph (a), (b) or (c), as the case may be, (in this section called the "relevant person"), is liable, or may be or become liable, to pay money, whether in respect of a debt, by way of damages or compensation or otherwise, or to account for securities, future contracts or other property, the Court may, on application by the Commission or by an aggrieved person, make one or more of the following orders:
...
(h)an order appointing:
(i)...
(ii)if the relevant person is a body corporate - a receiver or receiver and manager, having such powers as the Court orders, of the property or of party of the property of that person."
The applicant has standing to seek orders pursuant to this section.
There are certain preconditions to the exercise of the power. It is apparent on the evidence that the precondition in CL s1323(1)(a) is satisfied, namely, an investigation is being carried out under the ASC law or the CL in relation to an act or omission by the respondents, being an act or omission that may constitute a contravention of the CL.
There must next be what that section describes as an "aggrieved person"; that is, a person in relation to whom the Court considers it is necessary or desirable to take action pursuant to the section, "for the purpose of protecting the interests of a person". The aggrieved persons relied upon for the applicant are the unit holders in EFT, particularly the minority unit holders. It is not the case the applicant asserts only those who have provided information to the applicant or the one unit holder who has formally complained to the applicant are "aggrieved persons". That is important because if the interests of the unit holders as a whole, irrespective of whether they have replied affirmatively to the letter, have complained or have not answered it, are, in the
opinion of the Court needing protection, the Court has the appropriate ground on which to act. It is the interests of all those unit holders to which the Court must have regard.
The need for protection is said to arise in the case of the applicant because the units in EFT were issued and funds raised from unit holders, arguably in contravention of CL ss1018, 1064 and 1065. It is said to follow the second respondent as trustee of the EFT may become liable to repay the moneys raised illegally to unit holders. The applicant has taken steps and announced its intention to seek civil enforcement action against the respondents in respect of breaches of the CL relating to fundraising carried out by the EFT. Orders will be sought in those actions for the return of remaining funds to unit holders not associated with the respondents.
In addition, the need for protection in the submission of the applicant is based upon evidence that the books of account for the second respondent do not adequately record the financial position of EFT, in particular the assets it owns. There is evidence making that issue arguable. Further, there is evidence which makes arguable the fact the second respondent as trustee of EFT acted in a manner which did not pay due regard to the interests of the unit holders in EFT.
It follows there is evidence satisfying the second precondition in CL s1323 for there to be an aggrieved person. The respondents may be liable to pay money whether in respect of a debt, by way of damages or compensation or otherwise, or to account for securities, futures contracts or other property to the person for whose benefit the orders are sought, namely, the aggrieved persons to whom I have referred.
The preconditions being satisfied, the Court then has a discretion to be exercised in accordance with law and on the balance of the evidence whether to make orders in terms of pars(d) to (k) of CL s1323. The order which is sought would flow from par(h)(ii), namely, the appointment of a receiver and manager. It then becomes necessary to consider the factors which are relevant to the appointment of such a person.
I accept the submission for the respondents, and it is not contested on behalf of the applicant, that the appointment of a receiver and manager is a drastic step not to be taken lightly. The party seeking such a remedy must make out a clear case, not only that the interests of people to whom the company or person may be or become liable require protection, but also that a lesser remedy which does not involve removing the administration of the company and the directors would not fit the circumstances of the case: see Beach Petroleum NL v Johnson (1992) 9 ACSR 404 at 406. At 406 the Court held it is not necessary for the applicant to show an active intention on the part of respondents to prevent the aggrieved persons from recovering judgment. It is enough if the applicant establishes that, in the absence of relief, there is a danger assets will be dealt with in a way which will prevent the aggrieved persons recovering the judgment.
The primary fact on which the applicant relies to demonstrate the need for the appointment of a receiver and manager is that it is said there would be a real risk the assets of the EFT would be dissipated offshore to a tax haven unless a receiver and manager is appointed. However, in accordance with an undertaking given to the Court, the respondents have deposited with the Court what are said to be the certificates for the shareholding of EFT. The question therefore arises whether that deposit provides a lesser remedy which is more appropriate than the appointment of a receiver and manager.
For the applicant, it is contended there is a question whether the shares which have been deposited do in fact constitute the entire shareholding of EFT. The affidavits for the respondent, although time was given for filing of extensive affidavit material by way of adjournment, are extraordinarily sparse and absent any detail on the assets or current viability of the second respondent and of the EFT. An inference adverse to the second respondent must arise from the absence of that evidence.
The applicant also argues that, given the arguable case in relation to deficiencies in accounting records, the Court can not be satisfied that all the shareholding has been accounted for. It is to be noted in relation to the deposit of shareholding that there is no affidavit evidence all the shares deposited with the Court are in fact the entirety of the shares required to be deposited.
In addition, it is contended the Court should be concerned whether the trustee (EFT) would adequately control the affairs of the trust. This is because there are arguable breaches of further undertakings given to the Court on the last occasion in terms of subsequent dealings by officers on behalf of the trust with unit holders.
Reference was also made to the communality of directorships which exist between the companies in which the second respondent as trustee for the trust holds its shares.
In my opinion, those factors have a sure footing in the evidence before me which was not put in issue by evidence for the respondents. This provides a good reason why the lesser remedy of deposit of share scrip with the Court would not be satisfactory in the circumstances.
Other factors which must weigh with the Court are the arguable case that the original issue of units in the EFT was made and funds raised in contravention of the CL as previously referred to.
I have referred to the nature of the affidavit filed for the second respondent. In particular in paragraphs 10 and 11 reference is made to considerations which raise a question, perhaps not intended by the deponent, but nevertheless appearing on the face of the evidence, as to the viability of the second respondent.
I have also been concerned at the issue of costs in regard to the appointment of a receiver and manager. When that issue was raised on the last occasion the orders sought the appointment of a receiver and manager for a wider purpose than is presently proposed. The present orders seek the appointment of a receiver and manager of the property of the EFT, whereas the former orders sought the appointment of a receiver and manager of the property of the second respondent. It is submitted, and I accept that, the appointment of a receiver and manager in the more limited term would limit the necessity to incur costs. If it is the case that all of the shareholding of EFT has been deposited in the custody of the Court then the receiver and manager will have his or her work limited as a consequence so high costs can not be anticipated.
It is proposed for the respondents the lesser remedy of the appointment of an independent trustee would satisfy the position. There is no approved deed and consequently no approved independent trustee available. I would not regard a so called independent trustee chosen by the respondents as satisfying the condition of independence.
A further consideration raised for the respondents was that the appointment of a receiver and manager would bring to an end any possibility that the offer made by Enviro Trust, which it should be noted has presently lapsed by effluxion of time, might be renewed. However, during the hearing, I have been informed and it is not contested that the applicant is bringing winding up proceedings against each of the companies in which EFT holds shares. The appointment of a receiver and manager must therefore be considered in the context that those winding up applications will be known to all persons concerned with those companies involved with EFT. In those circumstances it is not the appointment of a receiver and manager which will adversely impact on the future viability of EFT. Rather it is the ability of EFT and the companies in which it is involved to answer the contentions brought on the substantial application.
For those reasons I consider that on balance and in the exercise of the discretion based on the evidence which has been brought before me on this interlocutory application, it is appropriate to accede to the application for the appointment of a receiver and manager. The order are in terms of paragraphs 5 to 9 of the minute of proposed orders.
I certify that this and the preceding 12 pages are a true copy of the Reasons for Judgment of his Honour Justice R D Nicholson.
Associate:
Date:23 October 1996
APPEARANCES
Counsel for the Applicant: Mr M Gething
Solicitors for the Applicant: Australian Securities Commission
First Respondent appeared in person
Advocate for the Second Respondent: Mr R Cooke
Date of Hearing: 23 October 1996
Date of Judgment: 23 October 1996
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