Australian Securities Commission v Stephen Su No. SCGRG 94/188 Judgment No. 5061 Number of Pages 8 Statutes Interpretation

[1995] SASC 5061

COURT IN THE IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA KING(2) CJ, MOHR(3) AND OLSSON(1) JJ

CWDS
Statutes - interpretation - appeal - question of interpretation of section 1064(1) of the Corporations Law and Regulation 7.12.04 of the Corporations Regulations - section 1064 creates offence - exemption also created - exception to exemption for "person whose ordinary business is ... promotion of similar schemes" - creation of 3 separate trusts were steps incident of a single scheme - "ordinary business" does not include a single scheme - appeal dismissed. Corporations Laws 1064 and Corporations Regulations r7.12.04. Melbank Corporation v Doggett (1990) 8 ACLC 585, considered.

HRNG ADELAIDE, 29 November 1994 #DATE 13:4:1995 #ADD 26:6:1995

Counsel for appellant:     Mr W J N Wells QC with
   Mr S Vorreiter

Solicitors for appellant:    DPP (Cwlth)

Counsel for respondent:     Mr S Apps

Solicitors for respondent: Peter Kerin and Associates

ORDER
Appeal dismissed.

JUDGE1 OLSSON J This appeal raises what is, in reality, a question of discrete statutory interpretation arising in relation to the application of section 1064(1) of the Corporations Law ("the Law") and Regulation 7.12.04 of the Corporations Regulations ("the Regulations"). It derives from an information presented by the appellant against the respondent alleging eleven counts of breaches of that section.

2. The relevant narrative facts are of some complexity, but the legal issue is a simple one.

3. I first direct attention to the factual background.

4. In about mid 1991 the respondent and his co-accused Gary Wilson (who are professional accountants practising in South Australia) were introduced by a man called John Hanson to one James Allman (who was resident in Queensland).

5. Allman was the inventor of a machine capable of manufacturing an edible cup made of potato flour. This has consistently been referred to as a "potato cup", the use of which was contemplated in the selling of hot foods such as french fries and the like. The concept involved was that the potato cup would, in particular, replace items such as throw away chip containers. Because it was consumable or, at the very least, biodegradable, its use would have positive environmental effects.

6. As a consequence of the introduction, negotiations were entered into between the parties concerning a possible purchase of the right to manufacture and distribute potato cups, inter alia, in South Australia. These extended to the purchase of machines by means of which to manufacture the cups. Definitive discussions were eventually held by all parties concerned in Queensland on 14/15 July 1991.

7. The outcome of the discussions was summarised by the prosecutor in these terms:-
    "The negotiations which eventually were formalised in
    agreements contemplated that the machines would be
    manufactured in Queensland by a company associated with
    Allman called The Potato Cup Company Pty Limited. Another
    company associated with Allman Potato Cup Marketing Pty
    Limited was to license a company associated with Wilson and
    Su, namely Potato cup Australia Pty Limited as the exclusive
    licensee for the manufacture and distribution of potato cups
    in South Australia, Western Australia, Tasmania, Victoria
    and Northern Territory. Potato Cup Australia Pty Limited
    in turn assigned all its rights, obligations and benefits
    under the licence for South Australia to Potato Cup (SA) Pty
    Limited. Potato Cup (Name of State or Territory) were
    either established or contemplated with a similar assignment
    of rights and obligations. Potato Cup (SA) Pty Limited was
    given the right to appoint manufacturers for South Australia
    to manufacture the potato cups. Three manufactures (sic)
    were appointed and agreements were contemplated with Bango
    Pty Limited, Good Aim Pty Limited and Macrovale Pty Limited.
    The structure contemplated by these agreements was as in
    attachment A.

...

It was further contemplated that the number of machines
    available in each State or Territory was determined by the
    size of the population in each State or Territory on the
    basis of one per 200,000 population. Thus South Australia
    could have seven based on a population of just under 1.4m.
    A manufacturer would obtain a machine, equipment and
    materials to produce potato cups. Su was very much the
    'senior partner' in these negotiations. Significantly
    Wilson and Su informed Allman that they had access to their
    clients who either had expressed an interest in the venture
    or were potential investors."

8. As negotiations proceeded the respondent and his co-accused Wilson actively promoted among their South Australian clients the opportunity to become involved in a scheme to manufacture potato cups in this State. They directly approached clients and invited them to purchase a right to participate in profits to be derived from implementation of such a scheme. As the scheme unfolded it was eventually decided that the rights to be purchased should be in the form of units in unit trusts managed by trustee companies. The precise details of how the scheme was to be implemented clearly developed over quite a lengthy period of time.

9. Because there were to be three machines available in South Australia it was ultimately decided that, as a matter of convenience, there would be three separate unit trusts managed by trustee companies. The material before the Court does not indicate precisely when that decision was made, but the obvious inference to be drawn is that this was shortly prior to the time when they were actually brought into existence.

10. As the prosecutor expressed the situation:-
    "The scheme was promoted to clients in broadly similar
    terms. 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 product of the
    machines namely potato cups. The manufacturer was to
    receive 75% of the sale price of each cup, ie 15 out of 20
    cents. The clients which became investors were given
    promotional literature which explained the concept of the
    potato cup, its environment appeal and expected profit
    forecasts. In a financial sense the purpose of the
    investment was to make a profit."

11. As a result of the scheme promotion clients of the two accountants either actually invested, or agreed to invest, a total sum of $280,590. There is no evidence as to precisely when they did so. All moneys actually paid by investors were in fact lost, because a dispute arose as between the promoters in South Australia and Queensland, consequent upon which no machines were delivered and the head agreement was the subject of a purported rescission by the Queensland companies.

12. In the course of his reasons the trial magistrate recorded that Allman and/or his companies received most of the money subscribed. The respondent and Wilson made nothing out of the transaction and the investors made no complaint concerning their actions in relation to the transactions.

13. It was against that factual background that the appellant contended that, in relation to the investment transactions forming the subject of the 11 counts against the respondent, he and Wilson had breached section 1064 of the Law.

14. That section relevantly stipulates that:-
    "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."

15. The law elsewhere defines "prescribed interest" as meaning:-
    "(a) a participation interest; or
    (b) ...
    but does not include:
    (c) a right or interest, or a right or interest included in
    a class or kind 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; ..."

16. The phrase "participation interest" is, itself, separately defined so as, inter alia, to include:-
    "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;
    ..."

17. A perusal of the Regulations reveals that they expressly set out to identify a series of exempt rights or interests as recognised by subparagraph (c) of the definition of "prescribed interest". That which is relevant for present purposes is couched in these terms:-
    "(c) rights or interests in a trust or proposes 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;"

18. The critical proposition advanced by the appellant before the trial magistrate was that, even although, initially, when the invitations to investors were issued, it had not been determined how their proposed interests would be represented, in definitive legal and structural terms, nevertheless:-
    "... when it was later decided to set up three different
    unit trusts to represent the interest of the investors then,
    ... it became the 'ordinary business' of Potato Cup (S.A.)
    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 ... the 'ordinary business'
    of Potato Cup (S.A.) Pty. Ltd. was the 'promotion of similar
    schemes'."

19. So it was that the appellant contended that the above exemption created by Regulation 7.12.04 of the Regulations was inapplicable. The prosecutor conceded that it would have been otherwise had the scheme been implemented by setting up only one trust, instead of three.

20. Adopting, as he was bound to do, the rule that, in the case of a strict liability offence, the legislative provisions ought, generally, to be subject to strict construction, the learned magistrate had this to say:-
    "Mr Lane (counsel for the respondent) argued that
    irrespective of the fact that a joint decision was
    eventually made to better represent the interest 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
    (S.A.) 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.

...

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 (the
    prosecutor) that it was the intention of Potato Cup (S.A.)
    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'."

21. On that basis of reasoning the learned magistrate dismissed the charges.

22. The appellant thereupon appealed to a single judge of this Court against the dismissal.

23. In essence Bollen J agreed with the central reasoning of the learned magistrate. He commented:-
    "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 (S.A.)
    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.

In my opinion there was always one scheme - promotion of the
    cups made from potato flour. Potato Cup (S.A.) 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'. If it be thought, contrary to
    my opinion, that the promoter promoted more then 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'.

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."

24. On that basis of reasoning he dismissed the appeal.

25. The present appeal comes before this Court by leave of Bollen J, the grounds of appeal being stated in these terms:-
    "1. The Learned Judge erred in ruling that the invitations
    in respect of the rights or interests in the trusts related
    to 'one scheme' (judgement pp 8 and 9) and in the
    alternative that there were 'three identical schemes'
    (judgement p 9) AND THAT the Learned Judge ought to have
    held in construing Regulation 7.12.04 of the Corporate
    Regulations that:-
    (a) Regulation 7.12.04 could only exempt a single trust;
    (b) The 'scheme' referred to therein related to the trust
    deed which gave rise to the rights or interests the subject
    of the invitations'
    (c) As there was more than one trust deed and therefore
    trust, there was more than one 'scheme' within the meaning
    of Regulation 7.12.04.
    (d) Each of the three trusts was a similar scheme within the
    meaning of Regulation 7.12.04.

2. That the learned judge erred in holding that Potato Cup
    (SA) Pty Limited, on whose behalf the respondent promoted
    rights or interests in three trusts, was not in the business
    or promoting similar schemes."

26. It will at once be observed that these are simply a reiteration of the contentions which were rejected both by the learned magistrate and Bollen J.

27. Mr Wells QC, of senior counsel for the appellant, argued that, to the extent that Bollen J held that the three trusts were not similar schemes, such reasoning was incorrect and incompatible with the decision in Melbank Corporation v Doggett (1990) 8 ACLC 585 at 592 where Marks J commented that the regulation does not mandate that a relevant promotion be in relation to schemes which are the "same", but only that they be "similar". As the learned Judge pointed out, the latter characteristic does not require that the parties be identical in each case. It is apt to describe schemes which involve different parties, but which are, in essence, of a like general nature.

28. More fundamentally, he submitted that it was patently erroneous to conclude that there was only a single scheme. He said that the undisputed situation was that the respondent was associated with Potato Cup (SA) Pty. Ltd., whose sole and ordinary business was to promote a series of schemes, by means of separate unit trusts, to sell machines and manufacture potato cups as separate entities. It was, he said, simply not open to the magistrate to view what had taken place as a single scheme. Whilst a question of fact and degree was often involved, the proper characterisation of the situation in the instant case was clear beyond doubt. The arrangement involved investing in three separate trusts, related to three different groups of beneficiaries, each trust being formed to carry on a quite discrete and separate business operation. They were similar, but not identical trusts because they necessarily involved different groups of people.

29. One particular evidentiary problem arose during the course of this appeal. No oral evidence was led at trial and the parties seem to have been content to have the trial magistrate proceed on the factual basis outlined in the prosecutor's opening - although his reasons suggest that he also made some reference to certain particulars supplied by the prosecution in a letter written by it.

30. An aspect which was left in a particularly unsatisfactory state related to the historical events leading up to the consummation of the three trusts in question. It seems clear that the relevant trust deeds were all executed on 18 December 1991. The head agreement with Potato Cup (SA) Pty. Ltd. was executed on 10 October 1991. However, it was said that the offences alleged were committed between 1 July 1991 and 31 August 1991. Against that background the prosecutor said:-
    "... The promotion involved a direct approach to clients and
    was part of a joint or common enterprise between Wilson and
    Su to invite persons to buy a right to participate in the
    profits to be derived from the scheme. Su adopted a
    background role in the issuing of the invitations to
    Wilson's clients. Su directly issued the invitation to his
    own client, Gerald Casey. The invitations did not
    necessarily take place at one meeting but was a course of
    conduct and the ultimate form of the right or interest was
    defined at a later stage, in some cases after the investors
    had paid for their share in the investment. The right or
    interest was ultimately defined as units in unit trusts
    managed by trustee companies. The trustee companies were
    Bango Pty Limited; Good Aim Pty Limited and Macrovale Pty
    Limited which respectively managed unit trusts of the same
    name. Ultimately 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 the investors understood were to be obtained."

31. This is to be contrasted with some more specific statements in a letter of particulars written by the prosecutor.

32. However, it is apparent that the parties had not put the content of the particulars before the trial magistrate as agreed factual material and it cannot be regarded in that light.

33. It seems to me that, at the end of the day, it must be concluded that the appellant's contentions foundered upon the basis that they fail to accord the word "scheme" its usual , correct meaning. That word carries with it the notion of a plan or programme of action, a notion which is not dispelled by the express definition of "scheme" contained in regulation 7.12.01.

34. Such expressions are apt to describe the overall strategy evolved, during the period specified in the information, whereby Potato Cup (SA) Pty Ltd was subsequently brought into existence, the head agreement entered into with it and the three separate trusts created. Each of these steps was but an incident of a single scheme to market the relevant equipment in South Australia. It is quite unreal to suggest that there were in fact three separate schemes, simply because there were three separate trusts. In this respect it is of significance that the invitations were issued well before the three trusts were actually set up as part of the detailed machinery to give effect to the single, overall strategy which had been agreed upon some time earlier.

35. This was obviously the reasoning adopted by Bollen J and I am unable to perceive how it can properly be said that he fell into error.

36. Moreover, given the history to which I have referred, it is impossible, logically, to conclude that, as asserted by the appellant, it was "the ordinary business" of Potato Cup (SA) Pty Ltd to promote "schemes" of any relevant nature. The plain fact of the matter was that it was brought into existence for the sole purpose of carrying into effect a single scheme for the marketing of the machines in South Australia, in relation to which the impugned invitations had already been consummated. As to this, it is not without interest that, as Mr Apps of counsel for the respondent pointed out, the appellant in its information and particulars specifically made reference to a single scheme "the precise details of the structure" of which "evolved over a period of time". In my opinion this was an accurate description of what actually occurred.

37. I would therefore dismiss the appeal.

JUDGE2 KING CJ In my opinion the appeal should be dismissed for the reasons given by Olsson J.

JUDGE3 MOHR J I agree.