Connelly as Receiver and Manager of “Digital Currency Assets” v NGS Crypto Pty Ltd
[2024] FCA 618
•11 June 2024
FEDERAL COURT OF AUSTRALIA
Connelly as Receiver and Manager of “Digital Currency Assets” v NGS Crypto Pty Ltd [2024] FCA 618
File number(s): QUD 302 of 2024 Judgment of: COLLIER ACJ Date of judgment: 11 June 2024 Catchwords: CORPORATIONS LAW – judicial advice sought by court-appointed receivers – defendants in business of investing in cryptocurrency – s 19 Federal Court of Australia Act 1976 (Cth) and r 14.23 Federal Court Rules 2011 (Cth) – whether judicial advice sought for commercial or business decision – pros and cons of un-staking digital currency assets – ex parte application relevant principles – powers of Court-appointed receivers – whether Court obliged to make directions to Court-appointed receivers Legislation: Federal Court of Australia Act 1976 (Cth)
Federal Court (Corporations) Rules 2000 (Cth)
Federal Court Rules 2001 (Cth)
Trustee Act 1925 (NSW)
Cases cited: Andrew Koh Nominees Pty Ltd v Receiver & Manager of the Balneum Joint Venture [2007] WASCA 152
Australian Securities and Investments Commission v Ludgates Corporate & Investment Advisory Services Pty Ltd [2003] FCA 1368
Bullock; Town & Country Sport Resorts (Holdings) Pty Ltd v Partnership Pacific Ltd [1988] 97 ALR 315
Gardner v London, Chatham and Dover Railway Co (1867) LR 2 Ch 201
Grain Technology Australia Ltd v Rosewood Research Pty Ltd (No 2) [2019] NSWSC 1744
Heenan, Ruby Apartments Pty Ltd (in liq) v Ralan Paradise No 1 Pty Ltd (in liq) (No 2) (2021) 156 ACSR 86
Kelly, in the Matter of Halifax Investment Services Pty Ltd (in liq) (No 8) [2020] FCA 533
One.Tel Networks Holdings [2001] NSWSC 1065
P Dawson Nominees Pty Ltd v Australian Securities and Investments Commission (No 2) [2009] 255 ALR 466
Palmer v Palmer [2023] QSC 278
Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409
Re Deputy Commissioner of Taxation v Best and Less (Wollongong) Pty Limited (Receiver and Manager Appointed); Brian Silvia and Mogul Stud Pty Limited [1992] FCA 140; (1991) 10 ACLC 520
Re Estate Late Chow Cho-Poon [2013] NSWSC 844
Re Mineral Securities Australia Ltd (in liq) [1973] 2 NSWLR 207
Rosanove v O’Rourke [1988] 1 Qd R 171
Division: General Division Registry: Queensland National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 45 Date of hearing: 11 June 2024 Counsel for the Plaintiff: Mr C Wilkins KC Solicitor for the Plaintiff: HopgoodGanim Lawyers ORDERS
QUD 302 of 2024 IN THE MATTER OF NGS CRYPTO PTY LTD ACN 624 825 065
BETWEEN: ANTHONY NORMAN CONNELLY, KATHERINE SOZOU AND MR WILLIAM JAMES HARRIS (AS RECEIVERS AND MANAGERS OF THE “DIGITAL CURRENCY ASSETS” AS DEFINED IN ORDERS MADE IN PROCEEDING QUD178/2024)
Plaintiff
AND: NGS CRYPTO PTY LTD ACN 624 825 065
First Defendant
NGS DIGITAL PTY LTD ACN 630 115 543
Second Defendant
NGS GROUP LTD HK COMPANY NUMBER 1963940 (and others named in the Schedule)
Third Defendant
ORDER MADE BY:
COLLIER ACJ
DATE OF ORDER:
11 JUNE 2024
THE COURT ORDERS THAT:
1.The application for judicial advice filed on 11 June 2024 be refused.
2.Pursuant to s 37AF(1)(b)(iv) of the Federal Court of Australia Act 1976 (Cth), on the grounds set out in s 37AG(1)(a), the two affidavits of Anthony Norman Connelly filed in support of the application by the Receivers be marked “confidential” on the electronic court file, and not be published (whether electronically or otherwise), or disclosed or accessed by any person other than:
(a)the Court;
(b)the Receivers and their legal representatives; and
(c)any person permitted access by an order of the Court.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
COLLIER ACJ:
Before the Court is an application for judicial advice, filed 11 June 2024 by Court-appointed receivers. For reasons that follow, I consider that the application should be refused.
BACKGROUND
In a related matter QUD178/2024 also currently before the Court, by an originating application filed on 9 April 2024 the Australian Securities and Investments Commission (ASIC) sought relief against a number of defendants, namely:
·NGS Crypto Pty Ltd ACN 624 825 065 (NGS Crypto);
·NGS Digital Pty Ltd ACN 630 115 543 (NGS Digital);
·NGS Group Ltd HK Company Number 1963940 (NGS Group HK);
·Brett Allan Mendham, who is the director of NGS Crypto;
·Mark James Ten Caten, who is the director of NGS Group HK; and
·Ryan Todd Brown, who is the director of NGS Digital.
It is convenient to refer to the three corporations collectively as “the NGS Business” or “the NGS Group”.
The relief sought by ASIC against the NGS Group and the individuals who are directors of companies in the group included declarations and orders for injunctive relief in respect of the provision of advice or the dealing with financial products in the investment of blockchain mining. ASIC also sought the appointment of a receiver, asset preservation orders and other ancillary orders.
Relevantly for present purposes, in orders made by Justice Meagher on 10 April 2024, “Digital Currency” and “Digital Currency Assets” were defined as :
Digital Currency: means property, as defined under section 9 of the Corporations Act, that is a digital currency, virtual currency, cryptocurrency or similar.
Digital Currency Assets: means Digital Currency held or controlled by the Defendants.
Her Honour further relevantly ordered:
Interim receiver and asset preservation orders
6.Pursuant to sections 1323(1)(h) and (3) of the Corporations Act, effective on and from 6:00am AEST on Thursday, 11 April 2024, until further order, Anthony Norman Connelly, Katherine Sozou and William James Harris of McGrath Nicol, Level 15, 175 Eagle Street, Brisbane 4000 QLD, are appointed as joint and several receivers and/or receivers managers (Receiver), without security, over the Digital Currency Assets, whether within or without the State of Queensland, for the purpose of identifying and securing the Digital Currency Assets.
7. The Receiver has the powers set out in sections 420(2)(a), (b), (e), (f), (g), (k), (n), (p), (q), (r) and (t) of the Corporations Act and can exercise these powers with respect to the Digital Currency Assets.
8. The Receiver has the power to apply to the Court for directions or further orders.
…
12. The Receiver’s costs and expenses are payable from the Digital Currency Assets.
When the matter returned before Justice Derrington on 30 April 2024 his Honour varied the orders of 10 April 2024. Relevantly, the definitions of “Digital Currency” and “Digital Currency Assets” were amended to read as follows:
Digital Currency: means any legal or equitable estate or interest (whether present, future, vested or contingent) including a thing in action, in or to any digital currency, virtual currency, cryptocurrency, digital token, blockchain asset, or right or interest which is recorded or transacted with using blockchain technology, or anything similar..
Digital Currency Assets: means any and all Digital Currency held or controlled by the Defendants or any of them.
Orders 6, 7 and 8 of 10 April 2024 were also amended to read as follows:
Interim receiver and asset preservation orders
6.Pursuant to sections 1323(1)(h) and (3) of the Corporations Act, effective on and from 6:00am AEST on Thursday, 11 April 2024, until further order, Anthony Norman Connelly, Katherine Sozou and William James Harris of McGrath Nicol, Level 15, 175 Eagle Street, Brisbane 4000 QLD, are appointed as joint and several receivers and managers (Receivers), without security, over the Digital Currency Assets, whether within or without the State of Queensland, for the purpose of identifying and securing the Digital Currency Assets.
7. The Receivers have the powers set out in sections 420(2)(a), (b), (e), (f), (g), (k), (n), (p), (q), (r) and (t) of the Corporations Act and can exercise these powers with respect to the Digital Currency Assets.
8. The Receivers have the power to apply to the Court for directions or further orders.
The matter returned before me for case management on 16 May 2024. I made case management orders on 20 May 2024. Order 9 of those Orders was as follows:
9.By 4.00pm on 24 May 2024, the First, Third, Fourth and Fifth Defendants file and serve on the parties and the Receivers any application to vary or set aside the asset preservation, asset disclosure or travel restraint orders, made 10 April 2024 and varies on 30 April 2024 together with written submissions not exceeding 10 pages supporting that application.
On 27 May 2024 the third and fifth defendants (namely NGS Group Ltd and Mr Ten Caten) (the Caten Defendants) filed an interlocutory application seeking the following orders:
Rescinding or discharging the orders made on 10 April 2024, and varied on 30 April 2024
1.Pursuant to the general jurisdiction of this Honourable Court to control its own processes rescind and fully discharge the orders made by the Court on 10 April 2024, and varied on 30 April 2024 (Freezing Orders).
2.Further or alternatively, pursuant to section 1101B(11) of the Corporations Act, the Freezing Orders be rescinded.
3.Further or alterantively, pursuant to section 1323(5) of the Corporations Act, the Freezing Orders be discharged.
4.With effect from 6:00am on 12 June 2024, the appointment of the jointly and severally receivers and/or receiver managers, Anthony Norman Connelly, Katherine Sozou and William James Harris of McGrath Nicol, Level 15, 175 Eagle Street, Brisbane in the State of Queensland (Receivers) cease.
5.Within 7 days of the date of this order, the Receivers deliver up to each relevant Defendant all material, documents, devices and information provided by any Defendant under orders 9, 13, 14, 16 and 17 of the Freezing Orders and do all such things necessary to ensure that no information provided by any Defendant is retained by the Receivers or the Plaintiff.
6.To the extent necessary, the Plaintiff give a copy of the authenticated orders made this day to a person apparently in the employ of:
(a)any bank, building society, cryptocurrency exchange, or other financial institution through which, to the best of the Plaintiff’s belief, Digital Currency Assets belonged to the Defendants;
(b)any other person or entity, holding or controlling Digital Currency Assets, which, to the best of the Plaintiff’s belief, belonged to the Defendants;
(c) the relevant authorities that issue and control passports;
(d) the Australian Border Force; and
(e) the Receiver.
7. The costs and expenses of the Receivers be paid by ASIC.
Variation of the orders made by the Court on 10 April 2024, and varied on 30 April 2024
8.Alternatively, the Orders made on 10 April 2024, as varied on 30 April 2024 be further varied under section 1101B(11) of the Corporations Act 2001 (Cth) and/or section 1323(5) of the Corporations Act as set out in paragraphs 9 to 20 below.
9.The definition of “Australian Member” be removed and the following definition be inserted:
Australian Member: includes any person, whether as an individual or a body corporate, based or registered in Australia, who prior to 10 April 2024 had entered into any agreement (however described) with the third defendant to invest in Block Chain Mining.
10.The definition of “Business” be varied by the removal of “and” after sub-clause (b)(a) and the removal of sub-clause (b)(b).
11.The definition of “Digital Currency” be removed and the following definition be inserted:
Digital Currency: means a digital representation of that can be digitally traded and functions as:
a medium of exchange; and/or
a unit of account; and/or
a store of value,
but excludes e-money (fiat).
12.The definition of “Digital Currency Assets” be removed and the following definition be inserted:
Digital Currency Assets: means Digital Currency held or controlled by any Defendant in Australia.
13.The definition of “Investor Funds” be varied by the removal of “and” after sub-clause (b)(a) and the removal of sub-clause (b)(b).
14.A new definition, “Overseas Customers” be inserted:
Overseas Customers excludes any Australian Member and includes any person, whether as an individual or a body corporate not based in Australia or registered in Australia.
15.Order 9 be removed and the following clause 9 be inserted:
The Defendants shall immediately deliver up to the Receiver all books, records and things, which relate to the Digital Currency Assets including, but not limited to:
(a)all relevant credentials and passwords for access to any Digital Currency in Australia held by any Defendant, including but not limited to, the public and private access keys and/or addresses of any hot or cold wallet held or controlled by any Defendant.
(b)any or all authentication devices within Australia required to facilitate access, operation or control of any Digital Currency held by any Defendant in Australia.
(c)all relevant credentials and passwords for access to the authentication devices or systems held in Australia, including emails, SMS or mobile apps, that facilitate access, operation or control of Digital Currency held or controlled by any Defendant in Australia;
(d)any hard wallet device in Australia containing Digital Currency held by any Defendant together with the device’s access code,
other than such books, records and things relating to the Digital Currency Assets of any Overseas Customer.
17. A new Order 13A be inserted:
To assist in the preservation of the value of the Digital Currency, the Third Defendant, as the sole director of the Fifth Defendant and the Receiver, will work co-operatively to promptly unstake any Digital Asset relating to any Australian Member, as and when the Fifth Defendant requests.
18.Order 14 be removed and the following clause 14 be inserted:
Order 13 does not prevent:
(i)any bank, building society or financial institution from exercising any right of set-off whih it may have in respect of a facility afforded by it to any Defendant prior to the date of this Order;
(j)the First, Second or Third Defendant from authorising the payment of any monies including Digital Currency, to the account of a hot or cold crypto wallet of an Australian Member or Overseas Customer, representing any returns with that person’s investment;
(k) upon request by an Australian Member or Overseas Customer to divest from or cease their investment in accordance with the terms of the agreement between the First, Second or Third Defendant and any requesting Australian Member or Overseas Customer, the First, Second or Third Defendant paying to that Australian Member or Overseas Customer any money or Digital Currency representing that Australian Member’s or Overseas Customer’s investment sum and interest associated with their investment.
19.If orders sought in paragraphs 1 to 7 are made (discharging or rescinding the interim Freezing Orders), the Plaintiff pay the Defendants their costs in the proceeding.
20.Alternatively, if the orders sought 8 to 18 are made (varying the interim Freezing Orders), the plaintiff pay the costs of and incidental to the application.
…
PRESENT PROCEEDING
This morning Anthony Norman Connelly, Katherine Sozou and William James Harris (the Receivers) filed an interlocutory application ex parte, seeking the following orders in this matter:
A. DETAILS OF APPLICATION
This application is made under Federal Court of Australia Act 1976 (Cth), s.19, Federal Court (Corporations) Rules 2000 (Cth), r.1.3, and Federal Court Rules 2001 (Cth), r.14.23.
On the facts stated in the supporting affidavit(s), the applicants (Anthony Norman Connelly, Katherine Sozou and William James Harris) apply for the following relief, in which:
(a)the “10 April Orders” means the orders made by this Court on 10 April 2024, as varied by orders made on 30 April 2024 and 20 May 2024;
(b) the “Digital Currency Assets” has the same meaning as in the 10 April Orders;
(c) the “Receivers” means Anthony Norman Connelly, Katherine Sozou and William James Harris, the receivers and managers appointed by the Court by the 10 April Orders; and
(d) the “Interlocutory Application” means the application made by the third and fifth defendants for, amongst other things, an order discharging the 10 April Orders, which is returnable for hearing on Wednesday, 12 June 2024.
1. The Receivers are justified in not un-staking Digital Currency Assets in their control before the determination of the Interlocutory Application.
2.Alternatively to 1, the Receivers are justified in un-staking Digital Currency Assets in their control before the determination of the Interlocutory Application by applying the “Proposed Approach” as defined in the affidavit of Anthony Norman Connelly sworn on 10 June 2024.
3. Pursuant to Federal Court of Australia Act 1976 (Cth), s.37AF(1)(b)(iv), on the grounds set out in s.37AG(1)(a), the two affidavits of Anthony Norman Connelly filed in support of the application by the Receivers be marked “confidential” on the electronic court file, and not be published (whether electronically or otherwise), or disclosed or accessed by any person other than:
(a) the Court;
(b) the Receivers and their legal representatives; and
(c) any person permitted access by an order of the Court.
4. The Receivers’ costs of and incidental to the application made by this interlocutory process be their costs and expenses of the receivership payable from the Digital Currency Assets in accordance with Order 12 of the 10 April Orders.
AND
5. Such further or other order or direction as may be just.
The interlocutory application was supported by two affidavits of Mr Connelly, one of the receivers, dated 10 June 2024 and 11 June 2024. The Receivers have sought suppression of both affidavits. I have had regard to the detailed evidence in both affidavits. I am prepared to suppress those affidavits as the Receivers have sought.
SUBMISSIONS OF THE RECEIVERS
The Receivers filed two sets of submissions in this matter. Their Counsel also made oral submissions in Court.
In summary, they submitted:
·The Receivers could not make application under s 424 of the Corporations Act because that section only applied to privately appointed receivers.
·That the Caten Defendants had applied to discharge the orders of 10 April 2024 did not mean there was any doubt as to the validity of those orders.
·The concern the Receivers have is that:
(a)as matters presently stand, they have not done what they were appointed to do in relation to those Digital Currency Assets which are staked assets; they have not secured those assets; and
(b)if the Caten Defendants fail in their application to have the 10 April Orders discharged, they might decide to, and could, take the Digital Currency Assets which are staked (albeit in a reduced amount given the losses which would be caused by un-staking them).
·The Receivers therefore sought judicial advice about whether they should un-stake the Digital Currency Assets before determination of the application made by the 3rd and 5th defendants to discharge the 10 April 2024 Orders.
·The Receivers anticipate that the Caten Defendants would oppose the Receivers being given judicial advice.
·The Receivers were uncertain as to whether the Caten Defendants might decide to deal with the staked Digital Currency Assets notwithstanding the orders of the Court. This was in circumstances where, inter alia,
·those defendants are not domiciled in Australia,
·they have been slow in responding to the Receivers,
·there is significant difference between the amount which has been invested (on the plaintiff’s evidence) compared to the value ascribed by the Caten Defendants to what they have delivered up to the Receivers (ie more than AUD$50 million versus US$5 million),
·the Receivers’ investigations indicated that 64% and 90% of the funds paid by investors have been transferred to NGS Indonesia,
·the Receivers do not consider that those defendants have complied with Order 9 of the 10 April 2024 Orders,
·Mr Ten Caten’s evidence in his affidavit affirmed 24 May 2024 lacks credibility.
·The Receivers are concerned that Digital Currency Assets to which they have been appointed are held by NGS Indonesia and have not been delivered up.
·Un-staking all the staked Digital Currency Assets in the non-exclusive control of the Receivers will result in the loss of a significant part of the current value, and a larger part of the potential future value, of the Staked Assets. If un-staking is an appropriate course of action to pursue, the Receivers propose a more moderate approach – the “Proposed Approach” – whereby un-staking would occur in cases where the losses to be occasioned are less than the complete forfeiture of rewards (current and future) plus 25% of the principal value of the staked asset.
·The task of identifying the principal value of each staked asset in the non-exclusive control of the Receivers and the rewards associated with that staked asset is a difficult one. The Receivers conclude that the application of the “Proposed Approach” to the staked Digital Currency Assets in their non-exclusive control would secure about US$331,208 of the Digital Currency Assets, but would result in the loss of:
·potential future rewards which can be quantified in the amount of approximately USD $156,634;
·other potential future rewards on some assets which will continuously accrue for an indefinite period of time if the stake is left invested under its current terms as opposed to invested in some other way;
·current rewards which can be quantified in the amount of approximately USD $6,651; and
·using a conservative approach which assumed that any lost value is to be detracted from principal first (before rewards) where that is otherwise unclear – the principal value of those staked assets in the amount of approximately $USD 27,004.
The submissions of the Receivers conclude:
Neither of the two alternative proposed approaches is attractive. The first approach involves the risk that the Receivers might completely lose about USD$331,208 of the Digital Currency Assets. The second course would see the Receivers secure Digital Currency Assets in that amount, but the price payable for achieving that would be incurring losses which would reduce the value of the Digital Currency Assets. But the Receivers need to proceed somehow. It is submitted that the course which is appropriate is the lesser of the two evils. If the Court is concerned about the possibility that the third and fifth defendants, or one of them, might decide to deal with the staked Digital Currency Assets in contravention with the Court’s orders if they fail to get the 10 April Orders discharged, then the lesser of the two evils is the “Proposed Approach”.
By a supplementary set of submissions filed late today, the Receivers advanced further arguments as to why the Court should not decline to give the advice sought by the Receivers on the ground that what they are faced with is a business or commercial decision. In summary those submissions were:
·Justice Goldberg in Re Ansett Australia Ltd (2001) 39 ACSR 355 at [66] recognised the principle that the Court should give advice where it is needed to protect liquidators and administrators from claims that they have acted unreasonably in entering into particular transactions;
·Where there exists controversy, dispute or acrimony, or the clear potential therefor, the Court will be more inclined to regard the case as an appropriate one for the giving of judicial advice. Clearly a controversy exists in this case.
·If the Receivers decided to un-stake the Digital Currency Assets in those wallets it appears very likely that there will be an attack on the propriety or reasonableness of that decision. It follows that this is precisely the kind of case where the Court should provide judicial advice to the Receivers to protect them from an attack upon their conduct. Were the Court to refuse to do that, it would be leaving its appointee exposed to that attack.
·As matters stand, the Receivers are exposed to being attacked by the plaintiff for not un-staking and exposed to being attacked by the third and fifth defendants for un-staking. They are between a rock and a hard place. They need – and they are entitled to receive – judicial advice about what they should do to provide them with the protection to which they are entitled as the Court’s appointees.
CONSIDERATION
As a general proposition, “the fundamental reason (and it is a legitimate one) for seeking judicial advice is to ensure that the propriety of the trustee’s action is finally determined and cannot be reopened in subsequent proceedings” (Grain Technology Australia Ltd v Rosewood Research Pty Ltd (No 2) [2019] NSWSC 1744 per Parker J at [25]).
Section 424 of the Corporations Act contemplates receivers seeking judicial advice, however only receivers appointed under a power contained in an instrument (s 424(2) Corporations Act). The Receivers instead apply for such advice:
·under the original jurisdiction of this Court pursuant to s 19 of the Federal Court of Australia Act 1976 (Cth); and
·the power of a receiver to apply to the Court for authority to do any act or thing in a proceeding in the receiver's name, pursuant to r 14.23 of the Federal Court Rules 2011 (Cth).
Justice Allsop (as his Honour then was) in Australian Securities and Investments Commission v Ludgates Corporate & Investment Advisory Services Pty Ltd [2003] FCA 1368 provided judicial advice to a liquidator pursuant to O 26 R 7 of the Federal Court Rules 1979 (Cth) which, like r 14.23 of the present rules, empowered the Court to authorise an action of a Receiver. In doing so, his Honour found as follows:
[23] … I do propose to, pursuant to O 26 r 7, authorise the receivers to complete the contract entered into by the second defendant with Rentfile Pty Ltd.
[24] I should add that no party has raised the question of jurisdiction of the Court. Naturally, since 2001 the Corporations Act has been clearly a federal statute and s 39B(1)(a)(c) of the Judiciary Act makes plain this Court's jurisdiction in terms of matters arising in law at the parliament. French J, in a recent case, Hedge as Administrator of Goldfields Medical Fund (No 2) [2002] FCA 1498 dealt with the questions of what might be called, non-controversial “matters”, and their legitimacy as “matters” in a constitutional sense. I have no doubt that the use of the traditional method of receivers and liquidators obtaining directions is a matter properly within the jurisdiction of the Court exercising federal jurisdiction.
I am satisfied that the Court has jurisdiction to provide judicial advice to a Court-appointed receiver pursuant to s 19 of the Federal Court of Australia Act and r 14.23 of the Federal Court Rules 2011.
It does not necessarily follow however that that the Court should provide direction in respect of every quandary encountered by a receiver. As noted by Goldberg J in Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409 at 428 [65]:
… the prevailing principle adopted by the courts, when asked by liquidators and administrators to give directions, is to refrain from doing so where the direction sought relates to the making and implementation of a business or commercial decision, either committed specifically to the liquidator or administrator or well within his or her discretion, in circumstances where there is no particular legal issue raised for consideration or attack on the propriety or reasonableness of the decision in respect of which the directions are sought. There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give its imprimatur to a business decision simply to alleviate a liquidator’s or administrator’s unease. There must be an issue calling for the exercise of legal judgment.
(emphasis added)
More recently Downes J in Heenan, Ruby Apartments Pty Ltd (in liq) v Ralan Paradise No 1 Pty Ltd (in liq) (No 2) (2021) 156 ACSR 86 at 96 to 98 [50]-[57] summarised relevant principles in respect of judicial advice to receivers. In particular, her Honour noted that:
[57]In Re Mirabela Nickel at [89], Vaughan J noted that the following principles emerge from Preston, Re Sandalwood Properties Ltd [2018] FCA 547 as to the nature and scope of available directions under s 424:
(1)The directions that may be provided are a form of personal guidance or advice; they articulate the approach the controller is justified in taking having regard to the known circumstances and relevant legal principles.
…
(4)There must be an issue calling for the exercise of legal judgment, ie a legal issue of substance or procedure or an issue of power, propriety or reasonableness. It must be more than a business or commercial decision. However, the fact that a legal question may have significant commercial consequences does not make the giving of directions inappropriate. The court does not give advice as to how the controller should act but rather whether there is legal justification to so act.
(5)Once the jurisdictional requirement is satisfied the court has a discretion whether to provide advice of the kind contemplated by the statutory provision.
(6)The making of directions is not an adjudication. It will not be determinative of parties’ rights. The court is not determining the rights of persons and has no power to provide directions that would have that consequence.
(7)The fact that directions are sought in the context of an adversarial dispute does not mean that it is inappropriate to provide directions. There is a need to consider the nature of any underlying dispute. Nevertheless, the existence of such a dispute, and the circumstance that the subject matter for advice is an issue in adversarial proceedings, may be relevant to whether the court is willing to give directions and in what terms.
…
(emphasis added)
In the present case the Receivers’ application for judicial advice was also made ex parte, notwithstanding that there are ongoing proceedings involving ASIC, the Receivers, and the defendants in QUD178 of 2024.
An application heard ex parte is ordinarily made in circumstances of urgency or where:
… justice could not be done unless the subject matter of the suit were preserved, and, if that is in danger of destruction by one party, or if irremediable or serious damage be imminent, the other may come to the Court, and ask for its interposition even in the absence of his opponent, on the ground that delay would involve greater injustice than instant action.
(Thomas A Edison Ltd v Bullock [1912] HCA 72; (1912) 15 CLR 679 at 681-682)
As a result of the prejudice to an opponent who is not given the opportunity to defend an application, an applicant for an ex parte order is under a heavy burden to disclose all relevant facts (Bullock; Town & Country Sport Resorts (Holdings) Pty Ltd v Partnership Pacific Ltd [1988] 97 ALR 315 at 317; P Dawson Nominees Pty Ltd v Australian Securities and Investments Commission (No 2) [2009] 255 ALR 466 at [137]-[138]).
In circumstances where judicial advice is sought ex parte, Lindsay J in Re Estate Late Chow Cho-Poon [2013] NSWSC 844, in contemplation of s 63 of the Trustee Act 1925 (NSW), stated:
[199]… First, s 63 reflects a compromise between a procedure for affording private advice to trustees and the need for affected persons to be given a hearing in some cases: 237 CLR 92 [65]. Secondly, even if (as s 63 contemplates) the rights of a person potentially affected by a provision of judicial advice will not necessarily be affected without notice of the advice or of pending s 63 proceedings, the ability of the court to provide well measured advice may be affected to the extent that it is not given the benefit of a full appreciation of what competing interests might say if allowed an opportunity to inform the court of a perspective different from that presented by a trustee appearing ex parte.
[200]There is an element of forensic judgement required of a trustee in deciding to make an application for judicial advice and in the preparation of materials to be placed before the court. And there is, likewise, an element of judgement required on the part of the court upon a consideration whether judicial advice should be given without notice to interested parties. Nice questions of case management may arise in order to minimise the risk of proceedings becoming unmanageable.
(emphasis added)
Plainly in this case the Court has not had the benefit of a contradictor advancing argument either against the provision of judicial advice, or more specifically, the specifics of the judicial advice sought by the Receivers.
The Receivers in the present case submitted, effectively, that the Court has an obligation to advise them, because they were appointed by order of the Court. In this respect they relied on observations of Cairns LJ in Gardner v London, Chatham and Dover Railway Co (1867) LR 2 Ch 201 at 211 that:
When the Court appoints a manager of a business or undertaking, it in effect assumes the management into its own hands; for the manager is the servant or officer of the Court, and upon any question arising as to the character or details of the management, it is the Court that must direct and decide.
I note, however, that immediately after this passage Cairns LJ went on to say:
The circumstance that in this particular case the persons appointed were previously the managers employed by the company is immaterial. When appointed by the Court they are responsible to the Court, and no orders of the company, or of the directors, can interfere with this responsibility. Now, I apprehend that nothing is better settled than that this Court does not assume the management of a business or undertaking except with a view to the winding up and sale of the business or undertaking. The management is an interim management; its necessity and its justification spring out of the jurisdiction to liquidate and to sell; the business or undertaking is managed and continued in order that it may be sold as a going concern, and with the sale the management ends.
(emphasis added)
Clearly the authority on which the Receivers rely supports the proposition that:
As to the position of the receiver appointed by the court, he is the officer and servant of the court and not of the partners. As I pointed out in the case of Burt, Boulton and Hayward v Bull [1895] 1QB 276 only the court can dismiss him or give him directions as to the mode of carrying on the business or interfere with him if he is not carrying on the business properly and he is in no sense the servant of the partnership.
Lord Esher MR in Re Flowers [1897] 1 QB 14 at 15
See also Rosanove v O’Rourke [1988] 1 Qd R 171 at 174; Andrew Koh Nominees Pty Ltd v Receiver & Manager of the Balneum Joint Venture [2007] WASCA 152 at [24]; Palmer v Palmer [2023] QSC 278 at [59].
I do not accept that these cases impose a requirement on the Court to give direction to a receiver appointed by the Court. Rather, they simply articulate the principles that a Court-appointed receiver is an independent officer of the Court, and that the Court may direct an appointed Receiver in relation to the carrying out of the duties for which they were appointed.
As Professor O’Donovan explained in Company Receivers and Administrators (Thomson Reuters) at [23.60], where a receiver is appointed by the Court, the scope of the receiver’s powers are determined by the Court and vary depending on the nature and purpose of the appointment. In determining the range of powers to be conferred on a receiver, the court needs to strike a balance between maintaining close supervision of the court appointees and granting them sufficient power to achieve the objectives of their appointment. In all cases the court's order must be scrutinised to establish the ambit of the receivers' powers. Certain incidental powers may be implied from the express terms of the order, but such extensions are limited and rare.
Pursuant to Order 7 of the Orders of Meagher J of 10 April 2024, as varied on 30 April 2024, the Receivers have the powers set out in ss 420(2)(a), (b), (e), (f), (g), (k), (n), (p), (q), (r) and (t) of the Corporations Act and can exercise these powers with respect to the Digital Currency Assets. The Receivers are not permitted to exercise the other powers contained in s 420(2).
Un-staking the relevant Digital Currency Assets, or alternatively deciding not to un-stake them, are decisions which potentially fall within the powers of the Receivers pursuant to ss 420(2)(a), (b) and/or (g) of the Corporations Act.
In the present case the Receivers have set out in great detail their concerns regarding the conduct of the Caten Defendants. They have equated the present circumstances with “leaving a Ferrari in the street, with the Caten Defendants in possession of a key such that they could take the car”. The Receivers have also invited the Court to make negative findings concerning the conduct of the Caten Defendants.
The Receivers have expressed concern at the dilemma they submitted they face in respect of a choice of action concerning relevant Digital Currency Assets. With respect, the Receivers appear to be concerned with the ramifications of making any decision at this point referable to the Digital Currency Assets.
However, I am not prepared in the present circumstances to make the Receivers’ decision for them.
This is not a case where the Receivers have concerns that they may lack power to take action they wish to take. On the basis of the evidence before me, it appears that the Receivers not only have power, but are potentially justified in making either of the decisions they describe – namely un-staking in terms of the Proposed Action, or not un-staking. The Receivers have explained the nature of the actions they could take, and in detail, the pros and cons of those actions.
The Receivers, in substance, ask the Court to choose which action they should take. However, as Mr Connelly explained in his affidavits, either of the actions the Receivers propose involve some form of risk.
As Street CJ in Eq explained in Re Mineral Securities Australia Ltd (in liq) [1973] 2 NSWLR 207 at 232:
When the court is required to pronounce upon the commercial prudence of a transaction, it enters upon a slippery and uncertain field. Apart from the lawyer's disclaimer of expert qualifications in matters of business prudence, the very process of litigation and the necessary limitations upon the scope of admissible evidence restrict the available material to far less than is necessary for the making of a commercial decision.
See also One.Tel Networks Holdings [2001] NSWSC 1065 at [30] and Re Deputy Commissioner of Taxation v Best and Less (Wollongong) Pty Limited (Receiver and Manager Appointed); Brian Silvia and Mogul Stud Pty Limited [1992] FCA 140; (1991) 10 ACLC 520 at [6].
The Receivers are experts in their field. They plainly understand the ramifications of each of their possible decisions in the complex field of cryptocurrency investments. This is not a case where the Receivers have made a decision, and have come to Court seeking judicial advice as to whether they would be justified in giving effect to it, as was the case for example in Kelly, in the Matter of Halifax Investment Services Pty Ltd (in liq) (No 8) [2020] FCA 533. Rather – this is a case where, to paraphrase comments of Goldberg J in Ansett at [65], the Receivers have a feeling of apprehension or unease about possible business decisions open to them in respect of the relevant Digital Currency Assets. It is not for the Court to make the choice of which decision the Receivers should make.
In my view it is appropriate to refuse to make orders in the nature of the judicial advice sought.
In the circumstances I make no order as to costs.
I certify that the preceding forty-five (45) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Acting Chief Justice Collier. Associate:
Dated: 11 June 2024
SCHEDULE OF PARTIES
QUD 302 of 2024 Defendants
Fourth Defendant:
BRETT ALLAN MENDHAM
Fifth Defendant:
MARK JAMES TEN CATEN
Sixth Defendant:
RYAN TODD BROWN
Seventh Defendant:
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
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