BINNA BURRA LODGE LIMITED And AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

[2010] AATA 857

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 857

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No  2010/1843

GENERAL ADMINISTRATIVE DIVISION		)
Re		BINNA BURRA LODGE LIMITED

Applicant

And  AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

Respondent

DECISION

Tribunal  Senior Member Bernard J McCabe

Date2 November 2010

Place Brisbane

Decision  The Tribunal affirms the decision under review.

...................[SGD]...........................

Senior Member

CATCHWORDS

TREASURY – refusal to exempt from regulatory requirements – plans to sell apartments subject to lease-back arrangement – variations to proposal – obligations of registrable managed investment schemes – power to exempt – policy objectives – regulatory detriment outweighs commercial benefit – decision affirmed.

Corporations Act 2001 (Cth), ss 601EB, 601ED, 601QA, 911A, 992A, 992B, 992AA, 1020F

Trade Practices Act 1974 (Cth)

REASONS FOR DECISION

2 November 2010  Senior Member Bernard J McCabe        

1. Binna Burra Lodge Ltd (“BBLL”) is looking for investors in a building project that it is considering. BBLL plans to sell apartments in a complex subject to a lease-back arrangement. Owners of the properties would become entitled to a share of the pooled rental returns on the complex. The proposal originally envisaged no more than 18 investors, but variations in the development would now permit up to 24 investors to buy into the project. BBLL says it should be exempt from some of the regulatory requirements in Chapter 5C of the Corporations Act 2001 (Cth) (“the Act”) that apply to managed investment schemes with more than 20 members. The Australian Securities and Investments Commission (“ASIC”) declined to grant the exemption. The dispute has now come before the Tribunal.

The facts

2.      There is no real dispute over the factual background. BBLL owns and operates an eco-tourism resort in the Gold Coast hinterland. It has proposed the development of a series of strata title apartments known as “Sky Lodges” that would complement its existing accommodation offerings. There are to be four Sky Lodges, each containing a mix of apartments. The original plan approved by the local council envisaged 18 apartments.

3.      BBLL proposes selling the apartments to investors subject to a lease-back arrangement.  It works like this: a lot in the complex would be sold by BBLL to the investor who would agree to enter into a long term lease in favour of Binna Burra Sky Lodges Pty Ltd, a subsidiary of BBLL. The lease in each case would provide for BBLL to manage the lot. BBLL would rent the lots to its guests as part of its larger resort operations. The rental returns on the Sky Lodges would be paid into a pool which would then be distributed amongst the lot owners according to an agreed formula in each lease.

4.      BBLL received feedback on the proposal as it prepared its marketing campaign. BBLL now wants to change the mix of apartments on offer. In particular, it proposes reconfiguring some of the three bedroom apartments so that they become “dual key” apartments: in effect, a three bedroom apartment would become a one bedroom lot and a two bedroom lot that could be sold separately. If the reconfiguration proceeds, there will be 24 lots offered for sale to investors instead of 18. And therein lies the problem.

The legislation

5. Chapter 5C of the Act deals with managed investment schemes. If a scheme is registrable under the Act, the promoter is required to comply with a number of obligations that do not apply if the scheme is not registrable. In particular, the promoter of a registrable scheme is required to:

·hold an Australian Financial Services Licence (“AFSL”) pursuant to s 911A,

·comply with the anti-hawking provisions in ss992A and 992AA; and

·prepare and issue a product disclosure statement to potential investors pursuant to the provisions of Div 2 of part 7.9.

6. A scheme must be registered under s 601EB if it satisfies the criteria in s 601ED. Section 601ED(1) says, relevantly, that a managed investment scheme must be registered if:

(a)  it has more than 20 members; or

(b)  it was promoted by a person, or an associate of a person, who was, when the scheme was promoted, in the business of promoting managed investment schemes;

7. Section 601ED also includes several qualifications of that general rule, but the qualifications do not concern us here.

8.      BBLL is promoting a managed investment scheme within the meaning of s 9, but it is not in the business of promoting such schemes. The dispute in this case turns on the fact that BBLL’s revised proposal for the development would have more than 20 members. BBLL says it should be exempted from the requirements that are ordinarily imposed on registrable schemes even though its revised proposal contemplates 24 members.

9. ASIC’s power to make exemptions and provide relief from the operation of specific provisions is scattered throughout the Act. In particular, the power to exempt a promoter from:

·the requirement that the scheme be registered is found in s 601QA(1)(a);

·the requirement that it obtain an AFSL is found in s 911A(2)(l);

·the application of the anti-hawking provisions is found in s 992B(1)(a); and

·the requirement that it produce a PDS is found in s 1020F(1)(a).

ASIC policies

10.     ASIC has developed policies that inform its consideration of applications for exemption and relief. Regulatory Guide 51: Applications for Relief (“RG51”) discusses ASIC’s approach to applications for relief from a variety of provisions in the Act. RG51.11 says the discretion to provide relief should be exercised with a view to achieving consistency and definite principles. RG51.12 goes on to say that relief (in new policy applications, at least) would usually only be available “where there is a net regulatory benefit, or any regulatory detriment is minimal and is outweighed by the commercial benefit”. That all seems fair enough.

11.     There are two other relevant policies: Regulatory Guide 136: Managed Investments: Discretionary Powers and closely related schemes (“RG136”) and Regulatory Guide 140: Serviced Strata Schemes (“RG140”). Both policies contemplate that the provisions of the Act will apply according to their terms but refer to a set of “underlying principles” that should be consulted when deciding whether or not to give relief. RG136.12 provides that the decision-maker should consider whether:

(a) strict compliance with the Law would be impossible or disproportionately burdensome;

(b) people acquiring or holding interest in a scheme would still have the protection that they were intended to by parliament to have; and

(c) there would be commercial benefit to the parties to the scheme.

12.     RG140.10 is expressed in almost identical terms. I accept the principles are appropriate and I will observe them in this case.

13.     BBLL’s submissions take issue with ASIC’s application of the policies in this case. At a minimum, BBLL argues that the decision-maker should acknowledge “the reality” that BBLL’s scheme as approved by the local government authority had only 18 lots and that BBLL only sought to make a minor variation to the plans that would increase the number of lots to 24 without making significant changes to the physical and legal nature of what was planned. The submissions pointed out (at [9]):

The physical size of the building remains unchanged, the number of bedrooms and the people that can be accommodated remains unchanged, it is simply the potential number of separate owners that may increase from eighteen (18) to twenty four (24).

14.     BBLL added that ASIC’s approach was inconsistent with the policy objectives of the legislation that were referred to in the explanatory memorandum to the Financial Services Reform Bill 2001. Clause 1.5 of the explanatory memorandum noted that parliament intended to “reduc[e] administrative and compliance costs and remove[e] unnecessary distinctions between products”. The bill was also intended to “facilitate innovation and promote business while at the same time ensuring adequate levels of consumer protection and market integrity”. BBLL said its proposal was really “an exempt scheme seeking a minor variation”: submissions at [18]. I was invited, in effect, to accept that BBLL’s proposal should effectively be treated as if it still had 18 members, even thought the membership had blown out to 24.

15.     I have no argument with the policy objectives that BBLL has identified, but they need to be read in context. They also need to be read in conjunction with the remarks in the explanatory memorandum to the Managed Investments Bill 2001 which introduced Chapter 5C into the Act. Paragraph [2.8] makes it clear that concerns for simplicity, efficiency and a reduction in the compliance burden were behind the parliament’s decision to include an exemption for schemes with less than 20 members in the first place. And parliament was precise in its definition of which schemes were exempt: it specified schemes with 20 or fewer members. It did not refer to “schemes with 20 members or such larger number as ASIC deems appropriate”. Once a scheme has more than 20 members, it is no answer to say that it is like a scheme with fewer than 20 members in every respect – apart from the fact it has more than 20 members.

16. It is irrelevant that there are few if any substantive changes to the building project. The Act focuses in particular on the number of investors and makes special provision for smaller schemes with 20 or fewer members. If the number of investors exceeds 20, the regulatory regime applies in the ordinary course unless relief is given. Relief is therefore only available in exceptional cases. I accept that the criteria ASIC applied (set out in RG136.12 and its analogue in RG140) are appropriate in determining whether the scheme should be exempted. I do not think it helps to see the scheme as if it were almost exempt to begin with, as if the line drawn by parliament was a technicality that could be readily ignored.

17.     I turn firstly to RG13.12(a) and its analogue in RG140. I should say at once there is no suggestion that it would be impossible for BBLL to comply strictly with the usual requirements imposed on schemes with more than 20 members. The scheme could be registered and BBLL could issue a PDS and it could observe the anti-hawking provisions, even though there might be cost and inconvenience were it required to do so. The fact that BBLL is a not-for-profit corporation without the financial wherewithal (according to its submissions) to fund compliance does not change anything. Indeed, it is hard to see how the applicant’s case is assisted by evidence suggesting that the applicant or its scheme are so marginal that the scheme may not be viable if the usual rules to protect investors were imposed. 

18.     BBLL could also proceed with the original proposal with only 18 members, although it may be less profitable. No doubt BBLL would prefer not to comply with the regime applicable to schemes with more than 20 members, but there is no reason to suppose it is impossible for it do so. The real issue is whether it would be disproportionately burdensome if BBLL were required to comply.

19.     BBLL says that requiring it to comply with the regime applicable to larger schemes would impose a burden that was disproportionate to the size and scale of the venture. The commercial viability of the whole project could be called into question, I was told. But I do not think that is what the policy meant when it used the expression “disproportionately burdensome”. I think the policy refers to the situation where a promoter might have greater difficulty than other promoters of schemes with more than 20 members in complying with the usual requirements. There is no evidence that BBLL will experience significantly more cost or difficulty than any other promoter of a scheme with a similar number of members. It is not to the point that it will have greater cost or difficulty complying with the regulations than a scheme with 20 or fewer members because schemes of that size are not registrable by virtue of their small membership.

20.     I turn then to RG 136.12(b). On the face of it, parliament intended that investors in a scheme like this (that is, a scheme with more than 20 members) should have the protections that apply to a registrable scheme – principally because this is a registrable scheme. BBLL says investors would continue to enjoy the protections afforded by the general provisions of the Act, the Trade Practices Act 1974 (Cth) and other legislation that is thought sufficient to protect investors in smaller schemes.

21.     I do not think BBLL has demonstrated why the members of this scheme should not be covered by the regulatory requirements that parliament has ordained for schemes of this size. There is no alternative regulatory regime referred to in evidence, for example.

22.     That brings me to RG 136.12(c). I accept there would be a commercial benefit to BBLL if it did not have to incur the expense and inconvenience associated with complying with the requirements that would otherwise be imposed. I also accept that its venture might be more successful if it is able to sell the lots in a different configuration to that which was originally envisaged. Investors who were interested in hazarding less of their money might welcome the opportunity to participate in the scheme by purchasing one of the smaller, cheaper lots that would be created under the revised plan.

23.     RG51.57 suggests that commercial benefit should be weighed against the regulatory detriment that might flow from granting an exemption. (I do not understand there to be any suggestion that giving an exemption in this case would actually generate a regulatory benefit. I do not see how such a suggestion could be made, in any event.) ASIC says the detriment is serious: there is a point to having stable, consistent and predictable rules, and departures from the norm come at a price. It is difficult to quantify that price, although the recent travails of property funds in Australia and the disastrous experience of some investments in places with less sophisticated regulatory regimes overseas suggest the argument cannot be dismissed lightly.

24.     The applicant’s argument boils down to this: “There is not much difference from a regulatory point of view between 18 and 24 members, so the decision-maker should treat the scheme as if it only involved 18 members. Where’s the harm?” But that approach does not take adequate account of the fact that parliament thought the number of investors was of real significance. It determined that schemes with more than 20 members should be treated differently. The applicant has not identified a principled reason for exempting it from the requirements that ordinarily apply to a scheme of its size. The absence of a principled reason for exemption threatens the realisation of parliament’s objective of creating a stable, consistent and comprehensive regulatory scheme. I am not persuaded that the commercial benefit that would flow from giving an exemption outweighs the potential detriment that could follow.

Conclusion

25.     The decision under review is affirmed.

I certify that the 25 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member Bernard J McCabe.

Signed: ......................[SGD].....................................................
  Patrick MacDonald

Date of Hearing  Heard on the papers 
Date of Decision  2 November 2010