Australian Securities Commission v Smith, Leonard John

[1998] FCA 964

FEDERAL COURT OF AUSTRALIA

CORPORATIONS - no power to order distribution, by receiver appointed under s 1323 Corporations Law, of funds gathered by receiver in absence of consents by all persons with possible interests in those funds - Corporations Law, s 1323.

Corporations Law, s 1323

Beach Petroleum NL v Johnson (1992) 9 ACSR 404, applied

AUSTRALIAN SECURITIES COMMISSION v LEONARD JOHN SMITH & ORS
QG 23 OF 1998

DRUMMOND J
5 AUGUST 1998
BRISBANE

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	QG 23 of 1998

BETWEEN:

AUSTRALIAN SECURITIES COMMISSION
APPLICANT

AND:

LEONARD JOHN SMITH
FIRST RESPONDENT

COASTAL ASSET MANAGEMENT CORPORATION
IBC NO 2499/97
SECOND RESPONDENT

NATIONAL AUSTRALIA BANK LIMITED
ACN 004 044 937
THIRD RESPONDENT

LEN J SMITH PTY LTD
ACN 002 730 732
FOURTH RESPONDENT

COASTAL FINANCIAL SERVICES PTY LTD
ACN 003 362 141
FIFTH RESPONDENT

JUDGE:	DRUMMOND J
DATE OF ORDER:	5 AUGUST 1998
WHERE MADE:	BRISBANE

THE COURT ORDERS THAT:

1. The receiver transfer all funds held in the “Coastal Financial Group United States Currency Account; Account number COAF1USDO1” with National Australia Bank Limited, to the National Australia Bank Account No 694988243 in the name of “Coastal Financial Group Trust Account”.

1. The receiver distribute all funds held in the National Australia Bank Account No 694988243 in the name of “Coastal Financial Group Trust Account” after compliance with Order 1 hereof, in accordance with the interest of each investor in those funds listed in column 3 of exhibit “SJR1” to the affidavit of Sean James Riordan dated 24 July 1998.

1. Upon clearance of all cheques used to make the distribution, the receiver be released from all duties in relation to these proceedings.

1. The Australian Securities Commission pay the receiver’s costs and disbursements in relation to this matter.

1. Orders 1 to 4 hereof, inclusive, are conditional upon the Australian Securities Commission first filing an affidavit by Mr NF Coburn confirming that the consents he has obtained to the pro rata distribution of the frozen funds sought are from every one of the lenders, ie, from every person listed in exhibit “SJR1” to Mr Riordan’s affidavit, dated 24 July 1998, save only Mr L Spicer.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	QG 23 of 1998

BETWEEN:

AUSTRALIAN SECURITIES COMMISSION
APPLICANT

AND:

LEONARD JOHN SMITH
FIRST RESPONDENT

COASTAL ASSET MANAGEMENT CORPORATION
IBC NO 2499/97
SECOND RESPONDENT

NATIONAL AUSTRALIA BANK LIMITED
ACN 004 044 937
THIRD RESPONDENT

LEN J SMITH PTY LTD
ACN 002 730 732
FOURTH RESPONDENT

COASTAL FINANCIAL SERVICES PTY LTD
ACN 003 362 141
FIFTH RESPONDENT

JUDGE:	DRUMMOND J
DATE:	5 AUGUST 1998
PLACE:	BRISBANE

REASONS FOR JUDGMENT

This is an application for an unusual order: the Australian Securities Commission (“ASC”) seeks an order that a receiver appointed by the Court, on its application under s 1323 the Corporations Law, to take control of certain of the property of others, make a distribution of that property to unsecured creditors of those others.  There has been no adjudication of the rights of any of these creditors against those others. 

Earlier this year, the ASC commenced proceedings under s 1323 which have resulted now, following a number of interlocutory hearings, in the freezing of funds, substantial in amount, in two bank accounts, the one operated by the fourth respondent, the other operated by the fifth respondent, and the placing of those funds under the control of the receiver.

The funds now under the receiver’s control, although substantial in amount, represent part only of the whole of the funds procured by the first respondent from a total of exactly two hundred persons.  The first respondent procured these funds from these persons under a peculiar form of so-called investment scheme in connection with which he used a form of loan agreement, an example of which is exhibit “NC4” to the affidavit of Mr Coburn filed on 24 March 1998.  The form of agreement contains extraordinary secrecy provisions, and even more extraordinary promises of benefit to participants, including a promise of 50% interest payable each quarter on the amount of each advance to the first respondent.  The view I take of the nature of the relationship between the first respondent and each lender is that it is a relationship of debtor and unsecured creditor only.  The ASC undertook an investigation into the activities of the first respondent and companies associated with him and then took the action I have already referred to.

I refused to make the order sought when the matter first came before me; I adjourned it at the ASC’s request to enable further evidence to be obtained.  The position now is that the evidence before me shows that the ASC has identified every investor, or rather every lender, who placed money with the first respondent, and which he channelled into the two bank accounts I have mentioned.  The evidence further indicates that every one of these lenders has been contacted by the ASC, and consents to a distribution of the frozen funds to each, pro rata to the amount of the advance each originally made to the first respondent, save that one of the lenders, a Mr Spicer, is not to participate.  He was apparently able by his own efforts to recover the whole of the funds which he placed with the first respondent in connection with this particular scheme.

I also have before me evidence that there are no external administration proceedings in progress against either of the fourth or fifth respondents, and that the first respondent is not (and has never previously been) bankrupt:  there is no insolvency administration on foot that would make the distribution now sought by the ASC impermissible.

The evidence before me also includes consents on behalf of the first, second, fourth and fifth respondents, given by their solicitor, to the distribution of the frozen funds proposed and to the making of all the orders sought in the notice of motion I have before me, save only an order that the first respondent pay certain costs.  The evidence is that the first respondent is the sole director, and also the secretary, of each of the fourth and fifth respondents.  The ASC does not press for this costs order.  The ASC, for reasons it no doubt considers proper, is prepared to bear all the costs of this litigation, including the receiver’s remuneration, even though it was brought, in part at least, for the benefit of people prepared to hand over their money to the promoter of the scheme I have described.

The evidence also indicates that the third respondent, the National Bank of Australia Limited, which presently holds some of the funds now under the receiver’s control in an account in the name of the fourth respondent, also has no objection to the course the ASC proposes.

In my opinion, the proceedings brought by the ASC under s 1323 are not proceedings in which a court would ordinarily be justified in giving any authorisation to the receiver who has collected assets under an order under the section to make any distribution of those assets. The purpose of s 1323 has been described correctly, in my respectful opinion as protective, pending the establishment of legal rights: see Beach Petroleum NL v Johnson (1992) 9 ACSR 404 at 405. Its whole object is to ensure that the assets of a person under investigation, and against whom proceedings may well lie at the behest of persons who may have been injured by the activities of that person, are frozen, pending the determination, in appropriate proceedings, of the rights of the persons claiming to be injured against that person. As I have said, no such proceedings have been brought against any of the respondents in this case.

In my opinion, however, I am justified in making the order for the pro rata distribution sought having regard to the evidence which satisfies me that all lenders, who may have any interest in the frozen funds, have been identified and that the interests of none of the lenders will be disadvantaged in any way by the order sought.  I am also satisfied, in view of the fact that I have consents to the course proposed by the ASC on behalf of all the respondents and, in particular, the first, fourth, and fifth respondents, who appear to be the only respondents with any claim to the funds, apart from the lenders, that it is proper for me to make the orders sought.

I will make an order in terms of paragraph 1 of the draft.  The second order I will make will be that the receiver distribute all funds held in a National Australia Bank Limited account number 694988243 in the name of Coastal Financial Group Trust Account, after compliance with order 1 hereof, in accordance with the interest of each investor in those funds listed in column 3 of exhibit “SJR1” to the affidavit of Sean James Riordan dated 24 July 1998.  I will make an order in terms of para 3 of the draft, and I will make an order in terms of para 4 of the draft.

The orders are all conditional upon the ASC first filing an affidavit by Mr NF Coburn confirming that the consents he has obtained to the pro rata distribution of the frozen funds sought are from every one of the lenders, ie, from every person listed in exhibit “SJR1” to Mr Riordan’s affidavit, save only Mr Spicer.

I certify that this and the preceding three (3) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Drummond

Associate:

Dated:             5 August 1998

Counsel for the Applicant:	RM Derrington
Solicitor for the Applicant:	Australian Securities Commission
Date of Hearing:	4 and 5 August 1998
Date of Judgment:	5 August 1998