Australian Securities Commission v Stephen Su No. SCGRG 94/188 Judgment No. 4672 Number of Pages 8 Corporations Companies Offences (1994) 12 Aclc 537 (1994) 13 Acsr 818

[1994] SASC 4672

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA BOLLEN J

CWDS
Corporations - companies offences - Corporations Law - s1064 prohibition on offering for subscription or purchase of any prescribed interest - exempt rights or interests Regulation 7.12.04(c)(i) - creating of three trusts to "run" the scheme - "right or interest in a trust or proposed trust" still exempt despite the setting up of three trusts because the "scheme" was always the one scheme. Corporations Laws1064, s9, s1311. Australian Securities Commission v Woods and Ors (1991) 6 ACSR 191, distinguished.

HRNG ADELAIDE, 30 June 1994 #DATE 15:7:1994

Counsel for appellant:     Mr S.F Vorrieter

Solicitors for appellant:    DPP (Cwlth)

Respondent in person

ORDER
Appeal dismissed.

JUDGE1 BOLLEN J I need not identify the appellant nor recite the nature of its work.

2. The appellant as informant charged the respondent on 11 counts on Information. Each count alleged a breach of section 1064(1) of the Corporations Law. By way of example I recite count 1.
    "1. Between 1st July 1991 and 31st August 1991 at
    Adelaide in the State of South Australia, being persons
    other than a public corporation, issued an invitation to
    John Adrian Fitzgerald to subscribe for or buy a
prescribed interest within the meaning of Section 9 of
    the Corporations Law; contrary to Section 1064(1) of the
    Corporations Law. Particulars (a) At all relevant times
    the defendants were the promoters of a business scheme
    to manufacture and market food containers known as
    'Potato Cups' within the State of South Australia.
    (b) The defendants invited John Adrian Fitzgerald to
    invest monies in the said business scheme in return for
    a right to participate in the profits and assets of the
    said business scheme.
    (c) At all relevant times the defendants were not public
corporations within the meaning of Section 9 of the
    Corporations Law and were not the servants or agents of
    any relevant public corporation."

3. The respondent denied each charge. The parties agreed that the Information could be heard as a summary matter.

4. The Information was heard "on" agreed facts. The facts were those stated by the prosecuting counsel, Mr Vorreiter, in opening.

5. The opening statement was a clear and thorough statement of fact and law.

6. Section 1064(1) of the Corporations Law is:-
    2 "A person, other than a public corporation, must not
    make available, offer for subscription or purchase, or
    issue an invitation to subscribe for or buy, any
    prescribed interest."

7. The magistrate stated the facts and the relevant statutory provisions very clearly and as succinctly as was possible. I transfer from his reasons to these reasons what he said without any further indication of that transfer. What follows now from the words "A breach" until the words "... defendant and Wilson" is a passage taken verbatim from the reasons of the magistrate.
     "A breach of s.1064 is made an offence by operation of
    s.1311 of the Law. The elements of the offence are: (a)
    a person (b) not being a public corporation (c) issues
    an invitation (d) to subscribe for or buy (e) any
    prescribed interest. A 'prescribed interest' is defined
in s.9 of the Law as:- '(a) a participation interest; or
    (b) a right, whether 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 of interest,
    or a right or interest included in a class or kind of
    rights or interests, declared by regulations to be an
    exempt right or interest, or a class or kind of exempt
    rights or interests, for the purpose of Chapter 7; ...'

A 'participation interest' is in turn defined as, inter
    alia; '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 (b) in any common enterprise whether in
    Australia or elsewhere, in relation to which the holder
    of the right or interest is led to expect profits,
    rent or interest from the efforts of the promoter of the
    enterprise or a third party; ...'

Regulation 7.12.04 of the Corporations Regulations
    provides inter alia as follows:
    'For the purposes of the definition of "prescribed
interest" in s.9 of the Corporations Law, the following
    rights or interests are declared to be exempt rights or
    interests for the purposes of Chapter 7 of the Law:
    (a) not relevant
    (b) not relevant
    (c) rights or interests in a trust or proposed trust,
    unless:
     (i) the trust deed or proposed trust deed relates to a
     scheme promoted by or on behalf of a person, or an
     associate of a person, whose ordinary business is or
     includes the promotion of similar schemes, whether or
     not that person is, or is to become, a party to that
     deed or a beneficiary of that trust;'

The prosecution alleges that in the middle of July, 1991
    John Hanson introduced Garry Allan Wilson (tax
    agent/accountant) and Stephen Su (the defendant who is
    also a practicing (sic) accountant) to a business scheme
    involving the manufacture, marketing and sale of an
    edible, biodegradable cup made from potato flour for the
    purpose of holding hot chips or other food items. The
    concept was invented and developed by a Jim Allmann of
    Queensland. The use of such a cup was contemplated in
    the selling of hot foods and would replace the
    throw-away containers and thereby have positive
    environmental effects. Wilson and Su, through Hanson,
    entered into negotiations with Allman for the purchase
    of the rights to manufacture and distribute potato cups
    in various States of Australia, including South
    Australia. The negotiations also concerned the purchase
    of machines from Allman to enable the manufacturing to
    take place. The negotiations were eventually formalised
    in agreements which contemplated that the machines would
    be manufactured in Queensland by a company associated
    with Allman called The Potato Cup Company Pty Ltd.,
    and another company also associated with Allman called
    Potato Cup Marketing Pty Ltd., was to license a
    company associated with Wilson and Su, namely Potato Cup
    Australia Pty Ltd., as the exclusive licensee for the
    manufacture and distribution of potato cups in South
    Australia, Western Australia, Tasmania, Victoria and the
    Northern Territory. Potato Cup Australia Pty Ltd in
    turn assigned all its rights, obligations and benefits
    under the license for South Australia to Potato Cup
    (SA) Pty Ltd and it was contemplated that similar
    assignment of rights and obligations would occur for the
    other States and Territory. Potato Cup (SA) Pty.
    Ltd was given the right to appoint manufacturers for
    South Australia to manufacture the potato cups and would
    have the right to charge the manufacturers an
    establishment fee. It was further contemplated that the
    number of machines available in each State or Territory
    would be determined by the size of the population, on
    the basis of one machine per 200,000 populations. Thus,
    South Australia could have up to seven machines based on
    a population of approximately 1.4 million. Initially it
    was intended to have three machines in South Australia,
    and Wilson and Su promoted the opportunity by way of a
    direct approach to their clients and invited them to buy
    a right to participate in the profits to be derived by
    the scheme. They were invited to invest and participate
    in the business of obtaining a machine and producing
    potato cups along with other investors. Profits, of
    which they were to have their share in accordance with
    the amount they invested, were to be derived from the
    sale of the produce of the machines, namely potato cups.
    The manufacturer was to receive 75% of the sale of each
    cup, i.e. 15 out of 20 cents. The clients which became
    investors were given promotional literature which
    explained the concept of the potato cup, its
    environmental appeal and expected profit forecasts.
    There were a number of meetings and discussions over a
    period of time before the precise structure of the
    scheme evolved. Initially it was not determined how the
    interests of these various investors would be
    represented, whether by way of a joint venture, a
    partnership or through a Company. Eventually it was
    decided to establish three trusts to purchase and
    operate the three individual machines. By Deeds of
    Trust executed on 18/12/91, the Bongo Unit Trust, the
    Good Aim Unit Trust and the Macrovale Unit Trust were
    established, the Trustees being: Bongo Pty Ltd., Good
    Aim Pty Ltd., and Macrovale Pty Ltd respectively,
    and the investors' rights were represented in the form
    of units in one of these three unit trusts. One unit
    trust was established in respect of each of the three
    machines that these investors understood were to be
    obtained. A total of $280,590 was either paid or agreed
    to be paid by the investors in respect of which the
    charges are laid. All monies paid amounting to $260,000
    have been lost, because a dispute arose between the
    South Australian and Queensland parties, as a result of
    which no machines were delivered and the head agreement
    has purportedly been rescinded by the Queensland
    Companies. It is interesting to note that Allman and/or
    his companies received most of the money and that the
    defendant and Wilson made nothing out of it and it would
    appear the investors have no complaint against the
    actions of the defendant and Wilson."

8. I ask the reader to turn back to the record of Regulation 7.12.04. That Regulation says that certain interests are exempt for the purposes of Chapter 7 (the relevant Chapter here) of the Law. The Regulation provides that rights or interest in a trust or proposed trust are declared to be exempt rights or interests unless ... And it is that proviso, coming after the word "unless", which produces the contest and the appeal here.

9. The magistrate dismissed each count, dismissed the Information.

10. The appellant, the Informant, appeals. The ground of appeal is:-
    "The Learned Magistrate erred in deciding that
    Regulation 7.12.04(c) operated to exempt the rights or
    interests the subject of the information for the
    purposes of the definition of 'prescribed interests; in
    section 9 of the Corporations Law."

11. The respondent came to the hearing of the appeal without counsel. He explained that proposed counsel had an engagement elsewhere. The respondent said he could not afford the expense of engaging other counsel. I offered an adjournment to give him time to see if he could get counsel. He said that he had spoken with counsel who had been retained and with help from him had prepared a written submission. I received it. He said that with that and his own understanding of the matter he thought he "would be alright". He, therefore, declined the offer of an adjournment. He is a literate, articulate and intelligent man. He in writing and in oral submissions offered sensible and relevant comments in support of the decision of the magistrate. He proffered to me, in effect, the same argument as his counsel had successfully proffered to the magistrate.

12. Counsel for the respondent (defendant) had proffered another argument which failed. I say no more about it.

13. The magistrate said of the successful argument and of his opinion of it this:-
    "... even if that argument was flawed: (2) the
    'prescribed interests' in this case fall within the
    category of exempt rights or interests as described in
    regulation 7.12.04; namely rights or interest in a trust
    or proposed trust and that the trust deed does not
    relate to a scheme promoted by or on behalf of a person
    whose ordinary business is, or includes, the promotion
    of similar schemes.

It was submitted that these were central and decisive
    issues to the case and I was asked to consider this as a
    preliminary point before proceeding to a full and formal
    hearing of the case. Mr Vorreiter for the prosecution,
    submitted that as far as the first point raised by Mr
    Lane, the precise rights and interests of the investors
    do not have to be defined at the date of the issue of
    the invitation as the legislation speaks of any right to
    participate in any common enterprise in relation to
    which the holder of the right or interest is led to
    expect profits. In this case the investors were invited
    to invest in a business scheme from which they
    eventually expected to receive substantial profits, even
    though their interest were not defined until much later
    when the unit trusts were created. I agree with Mr
    Vorreiter's interpretation and Mr Lane's first
    submission therefore fails. On the second issue,
    however, Mr Vorreiter submits that even though initially
    when the invitations to the investors were issued, it
    was not determined how the interests of the investors
    would be represented: whether by way of joint venture, a
    partnership or through a Company, when it was later
    decided to set up three different unit trusts to
    represent the interests of the investors then, he
    contends, it became the 'ordinary business' of Potato
    Cup (SA) Pty Ltd to promote schemes whereby a
    manufacturer is to be appointed to manufacture potato
    cups in return for an establishment fee. Three such
    schemes were promoted with the potential for more, and
    thus contends that the 'ordinary business' of Potato Cup
    (SA) Pty Ltd was the 'promotion of similar schemes'.
    It is for this reason that the exemption in
    Corporation's Regulation 7.12.04 does not apply. Mr
    Vorreiter did concede though that if they had set up one
    trust instead of the three, then the exemption would
    apply. Mr Lane argued that irrespective of the fact
    that a joint decision was eventually made to better
    represent the interests of the investors by setting up
    the three unit trusts to each own one machine, it was
    nevertheless the promotion of the one business scheme.
    It was never the intention of Potato Cup (SA) Pty Ltd.
    to promote 'similar schemes'. It was promoting the one
    scheme through identical Unit Trusts. Similar means
    alike in characteristics and appearance, but not
    identical. As this is also a strict liability offence
Von Lieven v Stewart, 3 ACSR 118, then it is settled law
    that the legislation in question will be subject to the
    rule of strict construction. I disagree with Mr
    Vorreiter's application of the phrase 'similar schemes'
    in the context of this case. It is straining the
    intended meaning of that phrase beyond what is a literal
    and reasonable interpretation of the wording of
    regulation 7.12.04. it is quite clear from the
    particulars provided and admissions made by Mr Vorreiter
    that it was the intention of Potato Cup (SA) Pty Ltd
    to promote the business scheme involving the
    manufacture, marketing and sale of an edible,
    biodegradable cup made from potato flour and just
    because eventually for the sake of convenience it was
    decided to set up three individual trusts to carry into
    effect the intended scheme does not, I believe, bring it
    within the meaning of 'ordinary business' of promoting
    'similar schemes'. I therefore agree with Mr Lane's
    submissions that the prosecution's case is fundamentally
    flawed and cannot succeed. I dismiss the charges."

14. This reveals the reasoning and decision. Mr Vorreiter challenged it. In my opinion no decided case helps in the decision here. It is a matter of interpretation.

15. Mr Vorreiter began his argument by saying:-
    "This matter the Australian Securities Commission
    considers to be of general importance. It goes to the
    heart of the regulation of fundraising activities by the
    community, particularly the commercial and investment
    community."

16. I have kept this in mind. A right or interest in a trust or in a proposed trust is exempt for the purposes of the definition of "prescribed interest" unless anything contemplated by Regulation 7.12.04(c) is established. We are concerned with the proviso in Regulation 7.12.04(c)(i). So a making available, offering for subscription or purchase, or issue of an invitation to subscribe for or buy any right or interest in a trust or proposed trust is not an offence under section 1064(1) unless something prevents the right or interest from being an exempt right or interest. For our purposes that "something" is found, if at all, in Regulation 7.12.04(c)(i).

17. As the offence is one of "strict" liability the legislation must be given a "strict" interpretation. I mention this but I do not think it decisive. I have, in the recitation of some of the remarks of the magistrate, stated the arguments put to him. They were, in effect, repeated to me.

18. There is no doubt but that the trust deed or deeds related to a scheme. And in my opinion it related to one scheme. That scheme was the making and selling of cups made from potato flour. That was the scheme, the one scheme. It was to be carried out in South Australia by Potato Cup (SA) Pty Ltd. Eventually unit trusts were created. There was then more than one trust formed to carry out the scheme, still the one scheme. The decision was made to set up the three trusts each to own one machine for making potato cups. Mr Su told me that the investors decided to do that. Mr Vorreiter's argument before the magistrate about the result of setting up three trusts is already here recorded. He put the same argument to me.

19. In my opinion there was always one scheme - promotion of the cups made from potato flour. Potato Cup (SA) Pty Ltd always intended to promote that one scheme. Business convenience caused the decision to set up three trusts. Still there was the one scheme. The scheme was never promoted by a person whose ordinary business was the promotion of similar schemes. The ordinary business of the promoter here was to promote this one scheme. Nor were there any "similar schemes".

20. If it be thought, contrary to my opinion, that the promoter promoted more than one scheme it was in my opinion a promotion of three identical schemes. All were concerned with the making of potato cups from flour. "Identical" is not the same as "similar".

21. Mr Vorreiter emphasised the use of the singular - "Trust deed or proposed Trust deed" in the proviso to the regulation but I think the words in the singular can embrace the plural or, indeed, the collective singular.

22. I said that no case was helpful. I was referred to the decision of Australian Securities Commission v Woods and Ors (1991) 6 ACSR 191. I think that case is distinguishable. If not, I respectfully differ from the reasoning of Pincus J on the point debated here.

23. I agree with the reasoning and decision of the magistrate. I dismiss the appeal.