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Caron v Jahani (No 2)

Caron v Jahani (No 2)

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Case Copied 18 June 2020 84 min read

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Court of Appeal

Supreme Court

New South Wales

Summary available

Medium Neutral Citation: Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) & Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2) [2020] NSWCA 117
Hearing dates: 21 April 2020
Date of orders: 18 June 2020
Decision date: 18 June 2020
Before: Bathurst CJ at [1]; Bell P at [7]; Macfarlan JA at [185]
Decision:
1.   Appeal allowed.

2.   Set aside the orders of the primary judge and, in lieu thereof, direct that subject to application of principles of hotchpot, the Liquidators are justified in determining the amounts to be distributed to the Post 21 April 2017 Westpac Investors on the basis that:

(a)    the $60,000 withdrawn from Westpac 2 on 21 April 2017 be deducted pro-rata across all investors with claims in respect of deposits made on or before 21 April 2017;

(b)    the Category E investors are entitled to the amount of the relevant investment, less

(i)   a pro-rata share of the $60,000 deduction; and

(ii)   costs in accordance with the general law and the orders of the court below;
(c)   the Category F investors are entitled to the amount of the relevant investment, less costs in accordance with the general law and the orders of the court below.
Catchwords:
CORPORATIONS – unregistered managed investment scheme – two companies operating a Ponzi scheme – freezing order on companies’ bank accounts – deposits made to companies’ bank accounts on day of and in days after freezing order by unsuspecting investors – liquidators appointed – Court directions sought as to method of distribution of limited funds in bank accounts – mixed and co-mingled accounts – whether rule in Clayton’s Case, simple pari passu approach or lowest intermediate balance rule to be applied – tracing – role of “hotchpot”.

EQUITY – blended or co-mingled fund in context of a Ponzi scheme – where multiple deposits and withdrawals made from companies’ bank accounts – companies in liquidation – nature of investors’ interests in moneys held in bank account – bank accounts subject to charge or equitable lien – tracing – relationship between tracing and lowest intermediate balance rule.
INSOLVENCY – unregistered managed investment scheme – Ponzi scheme – winding up – freezing order on companies’ bank accounts – whether investors who deposited funds into bank account after freezing order was made should be treated differently in terms of distribution of limited funds compared to investors who deposited funds into bank account prior to freezing order – whether deposits made into bank account after freezing order should be treated differently as such deposits could be separately identified and had not been dissipated – consideration of lowest intermediate balance rule and pari passu distribution – relevance of ability to trace – principles of hotchpot.
Legislation Cited: Corporations (Investigation and Management) Order (No 2) 2003 (NZ)
Corporations Act 2001 (Cth) ss 77, 1114, 1324, 601ED; Vol 6, Sch 2, s 90-15
Trustee Act

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2020] NSWCA 117
Decision Date: 18 June 2020

CaseChat Overview and Summary

In *Caron v Jahani (No 2)*, the Court of Appeal of New South Wales considered an appeal concerning the distribution of limited funds held in the bank accounts of two companies that operated a Ponzi scheme. The dispute arose after liquidators were appointed to the companies and sought directions from the court regarding how to distribute the mixed and co-mingled funds in the companies' bank accounts, particularly in light of deposits made by unsuspecting investors both before and after a freezing order was imposed.

The central legal issues before the Court of Appeal were how to determine the nature of investors' interests in the blended funds within the bank accounts, and consequently, the appropriate method for distributing those limited funds. Specifically, the court had to decide whether the rule in *Clayton's Case*, a simple *pari passu* approach, or the lowest intermediate balance rule should apply. The court also considered the relevance of tracing, the principles of *hotchpot*, and whether investors who deposited funds after the freezing order should be treated differently from those who deposited funds prior to it.

The Court of Appeal allowed the appeal, setting aside the primary judge's orders. The court reasoned that the lowest intermediate balance rule, in conjunction with the principle of *hotchpot*, provided the most equitable method for distribution. This approach acknowledged that the funds in the bank accounts were not static and that withdrawals could dissipate investor funds. The court directed that the liquidators were justified in determining distributions by first deducting a specific withdrawal made after the freezing order on a pro-rata basis across all investors who deposited funds prior to that date. Subsequent distributions were to account for this deduction and any applicable costs.

Orders

Orders of the court

1. Appeal allowed.

2. Set aside the orders of the primary judge and, in lieu thereof, direct that subject to application of principles of hotchpot, the Liquidators are justified in determining the amounts to be distributed to the Post 21 April 2017 Westpac Investors on the basis that:

(a) the $60,000 withdrawn from Westpac 2 on 21 April 2017 be deducted pro-rata across all investors with claims in respect of deposits made on or before 21 April 2017;

(b) the Category E investors are entitled to the amount of the relevant investment, less

(i) a pro-rata share of the $60,000 deduction; and

(ii) costs in accordance with the general law and the orders of the court below;

(c) the Category F investors are entitled to the amount of the relevant investment, less costs in accordance with the general law and the orders of the court below.

Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

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Ratio Decidendi

Legal Principle Established

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Medium Neutral Citation:	Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) & Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2) [2020] NSWCA 117
Hearing dates:	21 April 2020
Date of orders:	18 June 2020
Decision date:	18 June 2020
Before:	Bathurst CJ at [1]; Bell P at [7]; Macfarlan JA at [185]
Decision:	1. Appeal allowed. 2. Set aside the orders of the primary judge and, in lieu thereof, direct that subject to application of principles of hotchpot, the Liquidators are justified in determining the amounts to be distributed to the Post 21 April 2017 Westpac Investors on the basis that: (a) the $60,000 withdrawn from Westpac 2 on 21 April 2017 be deducted pro-rata across all investors with claims in respect of deposits made on or before 21 April 2017; (b) the Category E investors are entitled to the amount of the relevant investment, less (i) a pro-rata share of the $60,000 deduction; and (ii) costs in accordance with the general law and the orders of the court below; (c) the Category F investors are entitled to the amount of the relevant investment, less costs in accordance with the general law and the orders of the court below.
Catchwords:	CORPORATIONS – unregistered managed investment scheme – two companies operating a Ponzi scheme – freezing order on companies’ bank accounts – deposits made to companies’ bank accounts on day of and in days after freezing order by unsuspecting investors – liquidators appointed – Court directions sought as to method of distribution of limited funds in bank accounts – mixed and co-mingled accounts – whether rule in Clayton’s Case, simple pari passu approach or lowest intermediate balance rule to be applied – tracing – role of “hotchpot”. EQUITY – blended or co-mingled fund in context of a Ponzi scheme – where multiple deposits and withdrawals made from companies’ bank accounts – companies in liquidation – nature of investors’ interests in moneys held in bank account – bank accounts subject to charge or equitable lien – tracing – relationship between tracing and lowest intermediate balance rule. INSOLVENCY – unregistered managed investment scheme – Ponzi scheme – winding up – freezing order on companies’ bank accounts – whether investors who deposited funds into bank account after freezing order was made should be treated differently in terms of distribution of limited funds compared to investors who deposited funds into bank account prior to freezing order – whether deposits made into bank account after freezing order should be treated differently as such deposits could be separately identified and had not been dissipated – consideration of lowest intermediate balance rule and pari passu distribution – relevance of ability to trace – principles of hotchpot.
Legislation Cited:	Corporations (Investigation and Management) Order (No 2) 2003 (NZ) Corporations Act 2001 (Cth) ss 77, 1114, 1324, 601ED; Vol 6, Sch 2, s 90-15 Trustee Act