HP Mercantile Pty Limited v Tumut River Orchard Management Limited (In Liquidation)
[2011] FCA 200
•10 March 2011
FEDERAL COURT OF AUSTRALIA
HP Mercantile Pty Limited v Tumut River Orchard Management Limited (In Liquidation) [2011] FCA 200
Citation: HP Mercantile Pty Limited v Tumut River Orchard Management Limited (In Liquidation) [2011] FCA 200 Parties: HP MERCANTILE PTY LIMITED ACN 097 362 877 v TUMUT RIVER ORCHARD MANAGEMENT LIMITED (IN LIQUIDATION) ACN 003 501 611, NICHOLAS JAMES DAVID CROUCH IN HIS CAPACITY AS LIQUIDATOR OF TUMUT RIVER ORCHARD MANAGEMENT LIMITED (IN LIQUIDATION) ACN 003 501 611, MERILBAH PTY LIMITED (IN LIQUIDATION) ACN 002 979 893, NICHOLAS JAMES DAVID CROUCH AND SHABNAM AMIRBEAGGI IN THEIR CAPACITY AS JOINT LIQUIDATORS OF MERILBAH INVESTMENTS PTY LIMITED (IN LIQUIDATION) ACN 002 979 893, NICHOLAS JAMES DAVID CROUCH AND SHABNAM AMIRBEAGGI File number(s): NSD 1267 of 2009 Judge: EMMETT J Date of judgment: 10 March 2011 Catchwords: CORPORATIONS – managed investment schemes as regulated by Chapter 5C of the Corporations Act – whether defendants are or were operating an unregistered managed investment scheme in contravention of the Corporations Act – where alleged unregistered managed investment scheme concerned the funding of investigations and possible litigation for the purpose of challenging the validity of certain debts purportedly assigned to plaintiff – whether benefits produced by alleged scheme fall within the s 9 definition of ‘managed investment scheme’ – effect of instrument of exemption given by Australian Securities and Investments Commission in connection with alleged scheme Legislation: Corporations Act 2001 (Cth) ss 9, 564, 596A, 596B, 601EA, 601EB, 601ED, 601FA, 601FB, 601FC, 601GA, 601GB, 601HA, 601QA
Federal Court Rules (Cth) O 29Cases cited: Australian Softwood Forests Pty Limited v Attorney-General (NSW) (1981) 148 CLR 121
Brookfield Multiplex Limited v International Litigation Funding Partners Pte Limited (2009) 180 FCR 11
National Australia Bank Ltd v Norman (2009) 180 FCR 243Date of hearing: 1, 2 and 4 February 2011 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 63 Counsel for the Plaintiff: M. J. Murray Solicitor for the Plaintiff: Versace McKenzie Counsel for the Defendants: G. K. Rich Solicitor for the Defendants: Addisons
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1267 of 2009
BETWEEN: HP MERCANTILE PTY LIMITED ACN 097 362 877
PlaintiffAND: TUMUT RIVER ORCHARD MANAGEMENT LIMITED (IN LIQUIDATION) ACN 003 501 611
First DefendantNICHOLAS JAMES DAVID CROUCH IN HIS CAPACITY AS LIQUIDATOR OF TUMUT RIVER ORCHARD MANAGEMENT LIMITED (IN LIQUIDATION) ACN 003 501 611
Second DefendantMERILBAH PTY LIMITED (IN LIQUIDATION) ACN 002 979 893
Third DefendantNICHOLAS JAMES DAVID CROUCH AND SHABNAM AMIRBEAGGI IN THE THEIR CAPACITY AS JOINT LIQUIDATORS OF MERILBAH INVESTMENTS PTY LIMITED (IN LIQUIDATION) ACN 002 979 893
Fourth DefendantNICHOLAS JAMES DAVID CROUCH
Fifth DefendantSHABNAM AMIRBEAGGI
Sixth Defendant
JUDGE:
EMMETT J
DATE OF ORDER:
10 MARCH 2011
WHERE MADE:
SYDNEY
THE COURT:
DECLARES THAT the first to fourth defendants were not, prior to 12 January 2010, operating an unregistered managed investment scheme in contravention of s 601ED(5) of the Corporations Act as alleged in paragraphs 22 to 33 of the further amended statement of claim.
DECLARES THAT the first to fourth defendants are not operating an unregistered managed investment scheme in contravention of s 601ED(5) of the Corporations Act as alleged in paragraphs 22 to 33 of the further amended statement of claim.
ORDERS THAT the proceeding be dismissed.
ORDERS THAT the plaintiff pay the defendants’ costs of the proceeding.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1267 of 2009
BETWEEN: HP MERCANTILE PTY LIMITED ACN 097 362 877
PlaintiffAND: TUMUT RIVER ORCHARD MANAGEMENT LIMITED (IN LIQUIDATION) ACN 003 501 611
First DefendantNICHOLAS JAMES DAVID CROUCH IN HIS CAPACITY AS LIQUIDATOR OF TUMUT RIVER ORCHARD MANAGEMENT LIMITED (IN LIQUIDATION) ACN 003 501 611
Second DefendantMERILBAH PTY LIMITED (IN LIQUIDATION) ACN 002 979 893
Third DefendantNICHOLAS JAMES DAVID CROUCH AND SHABNAM AMIRBEAGGI IN THE THEIR CAPACITY AS JOINT LIQUIDATORS OF MERILBAH INVESTMENTS PTY LIMITED (IN LIQUIDATION) ACN 002 979 893
Fourth DefendantNICHOLAS JAMES DAVID CROUCH
Fifth DefendantSHABNAM AMIRBEAGGI
Sixth Defendant
JUDGE:
EMMETT J
DATE:
10 MARCH 2011
PLACE:
SYDNEY
REASONS FOR JUDGMENT
This proceeding is concerned with the operation of Chapter 5C of the Corporations Act 2001 (Cth) (the Corporations Act), which deals with managed investment schemes. The plaintiff, HP Mercantile Pty Limited (HP Mercantile), claims that the defendants are operating, or have in the past operated, an unregistered managed investment scheme in contravention of provisions of the Corporations Act.
Tumut River Orchard Management Limited (Tumut River) made loans to investors in horticultural projects operated by it. HP Mercantile claims to be entitled, by reason of various assignments, to the debts arising from the loans. The alleged scheme is concerned with the funding of investigations and possible litigation for the purpose of challenging the assignments.
The parties have asked the Court to determine two questions, pursuant to Order 29 of the Federal Court Rules, on the basis that, if those questions are answered favourably to the defendants, the proceeding must be dismissed. The parties have agreed facts on the basis of which the questions are to be considered. Before dealing with the questions, it is necessary to say something about the relevant provisions of the Corporations Act and the alleged managed investment scheme.
RELEVANT STATUTORY PROVISIONS
Chapter 5C of the Corporations Act consists of the following:
·Part 5C.1 – Registration of Managed Investment Schemes: ss 601EA – 601EE
· Part 5C.2 – The Responsible Entity: ss 601FA – 601FT
· Part 5C.3 – The Constitution: ss 601GA – 601GC
· Part 5C.4 – The Compliance Plan: ss 601HA – 601HI
· Part 5C.5 – The Compliance Committee: ss 601JA – 601JJ
·Part 5C.6 – Members’ Rights to Withdraw from a Scheme: ss 601KA – 601KE
· Part 5C.7 – Related Party Transactions: ss 601LA – 601LE
·Part 5C.8 – Effect of Contraventions (Civil Liability and Voidable Contracts): ss 601MA – 601MB
· Part 5C.9 – Winding Up: ss 601NA – 601NG
· Part 5C.10 – Deregistration: ss 601PA – 601PC
· Part 5C.11 – Exemptions and Modifications: ss 601QA – 601QB.
The critical provision for present purposes is s 601ED(5). That subsection provides that a person must not operate a managed investment scheme that s 601ED requires to be registered under s 601EB, unless the scheme is so registered. This prohibition calls for a consideration of the other sections in Part 5C.1.
Section 601ED(1) provides, relevantly, that a managed investment scheme must be registered under s 601EB if:
· it has more than 20 members,
·it is promoted by persons in the business of promoting managed investment schemes, or
·the Australian Securities and Investments Commission (the Commission) has declared that it is one of a number of managed investment schemes that are closely related, and the total number of members of all of the related schemes exceeds 20.
Under s 601EA, a person must lodge with the Commission an application to register a managed investment scheme. The application must state particulars of the proposed responsible entity, and a copy of the scheme’s constitution and compliance plan must be lodged with the application. Under s 601EB(1), the Commission must register the scheme, unless it appears to the Commission, inter alia, that:
· the application does not comply with s 601EA,
·the proposed responsible entity does not meet the requirements of s 601FA,
·the scheme’s constitution does not meet the requirements of s 601GA and s 601GB, or
·the scheme’s compliance plan does not meet the requirements of s 601HA.
The meaning of the term managed investment scheme is clearly critical to the scheme of Part 5C.1. The term is defined in s 9 of the Corporations Act, relevantly, as a scheme that has the following features:
(a)(i) people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent, and whether they are enforceable or not);
(a)(ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders);
(a)(iii) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions).
The word benefit is relevantly defined in s 9 to mean any benefit, whether by way of payment of cash or otherwise.
Under s 601FA, the responsible entity of a registered scheme must be a public company that holds an Australian financial services licence authorising it to operate a managed investment scheme. Under s 601FB(1), the responsible entity of a registered scheme is to operate the scheme and perform the functions conferred on it by the scheme’s constitution and by the Corporations Act. Under s 601FC(1), the responsible entity must, relevantly, ensure that scheme property is clearly identified as scheme property and is held separately from property of the responsible entity and the property of any other scheme. Under s 601FC(2), the responsible entity holds scheme property on trust for scheme members.
Section 601HA(1) deals with the contents of the compliance plan for a scheme. The compliance plan must set out adequate measures that the responsible entity is to apply in operating the scheme to ensure compliance with the Corporations Act and the scheme’s constitution. Those measures relevantly include the arrangements for ensuring that all scheme property is clearly identified as scheme property and held separately from property of the responsible entity and property of any other scheme, and for ensuring that the scheme property is valued at regular intervals appropriate to the nature of the property.
Under s 9, scheme property is defined to mean:
(a)contributions of money or money’s worth to the scheme,
(b)money that forms part of the scheme property,
(c)money borrowed or raised by the responsible entity for the purposes of the scheme,
(d)property acquired, directly or indirectly, with, or with the proceeds of, contributions of money referred to in (a), (b) or (c), and
(e)income and property derived, directly or indirectly, from contributions, money or property referred to in (a), (b), (c) or (d).
Under s 601GA(1), the constitution of a scheme must make adequate provision for the consideration that is to be paid to acquire an interest in the scheme, the powers of the responsible entity in relation to making investments of, or otherwise dealing with, scheme property, the method by which complaints by members are to be dealt with, and winding up the scheme. Under s 601GB, the constitution must be contained in a document that is legally enforceable as between the members and the responsible entity.
Part 5C.11 of the Corporations Act is also relevant. Section 601QA(1) relevantly provides that the Commission may exempt a person from a provision of Chapter 5C. The exemption must be in writing and the Commission must publish notice of the exemption in the Gazette.
THE INVESTOR DEBTS
During the period from 1991 to June 1998, Tumut River promoted, established, managed and operated eight horticultural projects. Each project involved the execution of various documents by, inter alios, Tumut River and the investors in the various projects. Most of the investors also entered into an Investor Loan Agreement with Tumut River, whereby Tumut River lent to the investor the amount required to subscribe for the investor’s interest in the relevant project. Each Investor Loan Agreement imposed an obligation on the investor to repay the loan and to pay interest and other fees and charges to Tumut River. For each of the projects there were in excess of 90 investors who entered into an Investor Loan Agreement with Tumut River. In total, 2,332 investors entered into such Investor Loan Agreements. There remain approximately 1,200 Investor Loan Agreements in respect of which there is a debt still owing by the relevant investor.
During the period 1996 to 1998, Tumut River purportedly assigned its right, title and interest in the debts due under the Investor Loan Agreements (Investor Debts) to one or other of:
· Core Finance Pty Limited (Core),
· Symsung Pty Limited (Symsung),
· Treetop Projects Limited (Treetop).
At some time between 15 March 2000 and 31 October 2000, each of Core, Symsung and Treetop purportedly assigned its right, title and interest in and to Investor Debts to Merilbah Investments Pty Limited (Merilbah). On 31 August 2001, Merilbah purportedly assigned its right, title and interest in and to Investor Debts to HP Mercantile. Since 2002, HP Mercantile has commenced and prosecuted various proceedings for the recovery of Investor Debts. A principal, although not the only, issue in dispute in the proceedings between HP Mercantile and investors is the validity and efficacy of the assignments from Tumut River to Core, Symsung and Treetop, from Core, Symsung and Treetop to Merilbah, and from Merilbah to HP Mercantile.
THE ALLEGED MANAGED INVESTMENT SCHEME
On 28 April 1999, Messrs M. W. Prentice and V. C. Barilla were appointed joint liquidators of Tumut River, following a resolution of creditors that Tumut River be wound up. In January 2006, Tumut River was deregistered.
In the course of conversations in January and February 2008 between Mr Nicholas Crouch, a registered company liquidator, and Mr Tim Galic, a Perth solicitor who was acting for some of the investors who are defendants in proceedings brought by HP Mercantile, it was agreed as follows:
·Mr Crouch would be appointed liquidator of Tumut River and Merilbah,
·Mr Galic would arrange for funding to be provided to Mr Crouch, which was to be sourced from investors for whom Mr Galic acted,
·Mr Crouch would use the funds so provided as he saw fit to investigate the affairs of Tumut River and Merilbah, and in particular the validity of the various assignments of Investor Debts.
On 7 February 2008, a bank account with Australia and New Zealand Banking Group Limited was opened by Mr Crouch (the Bank Account).
On 7 February 2008, pursuant to an order of the Supreme Court of Western Australia, Merilbah was wound up in insolvency and Mr Crouch and Mr Shabnam Amirbeaggi were appointed joint liquidators of Merilbah. On 7 July 2008, the registration of Tumut River was reinstated pursuant to an order of the Supreme Court of New South Wales, and Mr Crouch was appointed liquidator of Tumut River.
On 23 May 2008, Mr Galic sent a circular to investors. By the circular, Mr Galic invited investors to join a group that would fund contributions to facilitate a challenge to HP Mercantile’s alleged title to Investor Debts to defeat the claims made by HP Mercantile. The circular proposed that, if HP Mercantile took legal action against an investor, Mr Galic’s firm would represent the investor. It was proposed that the cost associated with pursuing any action or defence proceedings would be shared on a pro rata basis among those who contributed. The circular said that those who contributed would benefit from information that had been provided to Mr Galic’s firm by former directors and staff of Tumut River and Treetop. A contribution of a proportion of the potential “risk exposure” was suggested in the circular.
Mr Crouch and Mr Galic engaged in further conversations in August 2008, when it was agreed that, if Mr Crouch discovered sufficient evidence to challenge the assignments of Investor Debts and was successful in that challenge, Mr Crouch would seek orders under s 564 of the Corporations Act to the effect that:
·those investors who funded Mr Crouch’s initial investigation be rewarded with the ownership of their respective Investor Debts claimed to be payable to HP Mercantile, and
·those investors who funded Mr Crouch’s investigations receive a premium on the distribution of any assets on the liquidation of Tumut River and Merilbah.
On 25 August 2008, Mr Crouch sent an email to Mr Galic confirming that, as liquidator, he supported a litigation funding arrangement, whereby indemnifying creditors would receive a premium on the distribution of any assets as provided by s 564 and the acquisition of any chose in action or debt payable by an investor to Tumut River. Mr Crouch said that the possible benefit to creditors was discretionary, but that the courts typically agree to permit a liquidator to pay indemnifying creditors two to five times what normal creditors would get and that, in some cases, they have set aside up to 30 to 70 percent of the funds available to be shared among only the funding creditors.
From May 2008 to October 2008, payments by Mr Galic’s firm totalling $45,000 were credited to the Bank Account. Those payments were made pursuant to the conversations of February and August 2008 between Messrs Galic and Crouch.
In conversations in early December 2008 between Mr Crouch and Mr Barry Coates of Horticultural Operations Limited (HOL), it was agreed:
·that HOL would provide funding of $15,000 to Mr Crouch to conduct investigations as he saw fit in respect of the affairs of Tumut River and Merilbah, and in particular to conduct public examinations of the directors of Tumut River and Merilbah, and
·that should Mr Crouch, through his investigations, uncover sufficient evidence to enable investors who contributed funds to projects of Tumut River through HOL to challenge successfully the validity of the claimed assignments, Mr Crouch would seek orders pursuant to s 564 of the Corporations Act to the effect that those investors would be entitled to ownership of their respective Investor Debts.
Pursuant to that conversation, HOL paid $15,000 to Mr Crouch, which was credited to the Bank Account.
On 25 May 2009, Mr Crouch, in his capacity as liquidator of Tumut River and Merilbah, sent a circular to investors and creditors of those companies. The purpose of the circular was stated to be to apprise investors as to the outcome of his investigations to date and to seek funding for further investigation and thereafter litigation against HP Mercantile to challenge the ownership of its right, title and interest in Investor Debts. Mr Crouch said that, if the assignments were not valid, ownership of the Investor Debts might revert to him as liquidator. Mr Crouch also said that he planned to undertake further public examination of HP Mercantile’s directors and associates, and invited expressions of interest from all former investors and creditors to fund his proposed public examination and investigation generally. He said that he would support a litigation funding arrangement whereby those who provided funding received a premium on the distribution of any assets recovered in the liquidation. He also said that the terms of the arrangement would be negotiated once he had expressions of interest from those prepared to fund the liquidation. He went on to say that, if he found sufficient evidence to challenge the ownership of Investor Debts and was successful in the challenge against HP Mercantile, he would make an application to the Court for an order that any investor or creditor who funded his investigation adequately would be rewarded with the ownership of the Investor Debt claimed to be payable to HP Mercantile, Tumut River or Merilbah. Therefore, he said, the funder should be relieved of the obligation to pay anything in respect of an Investor Debt. The circular specified a funding rate for investors who wanted to contribute.
On 11 September 2009, Mr Crouch, in his capacity as liquidator of Tumut River and Merilbah, sent a further circular to investors and creditors. He said that, following his earlier circular, approximately 40 percent of investors had indicated that they would support the process of funding further investigations. He again said that the purpose of the circular was to apprise investors as to the outcome of his investigations to date and seek funding for further investigation and thereafter litigation against HP Mercantile to challenge the ownership of and right, title and interest in Investor Debts. Mr Crouch said that the evidence gathered seemed to suggest that there was no legal or statutory assignment of Investor Debts or, at least, that there was a question as to the validity of the assignments. Mr Crouch said that he planned to undertake further public examinations and invited funding from all former investors and creditors to assist his proposed public examinations and investigation generally. He repeated what he had said in his circular of 25 May 2009 concerning an application to the Court. On 16 September 2009, Mr Crouch sent another circular to investors and creditors in terms substantially identical to the circular of 11 September 2009.
In a conversation in December 2009 between Mr Crouch and Mr Galic, it was agreed that $2,000 would be provided in part payment of fees owing to counsel. On 22 December 2009, $2,000 was credited to the Bank Account.
On 27 April 2010, Mr Crouch, in his capacity as liquidator of Tumut River and Merilbah, sent a further circular to creditors and investors. After reporting on the background of the liquidation, he said that he planned to undertake further public examinations of HP Mercantile’s officers and associates, and invited funding from all former investors and creditors to assist his proposed public examinations and investigation generally. Again he said that, if he discovered sufficient evidence to challenge the ownership of Investor Debts, and was subsequently successful in that challenge against HP Mercantile, he proposed to make an application to the Court for an order that any investor or creditor who had funded his investigation be rewarded under s 564 of the Corporations Act. He said that he would recommend to the Court that an appropriate reward would be forgiveness, in whole or in part, of the relevant Investor Debt claimed to be payable. He said that, where an investor partially paid the voluntary funding sought, he would recommend to the Court that an appropriate order would be that that investor’s Investor Debt be forgiven on a pro rata basis.
In a conversation in June 2010 between Mr Crouch and Mr Galic, Mr Crouch said that he wanted to retire as liquidator of Tumut River and Merilbah, but had incurred significant costs in conducting his investigations into their affairs, and had not received adequate funding from investors to meet those costs. Following that conversation, Mr Galic paid the sum of $50,000 to Mr Crouch on 11 June 2010. Upon receipt of that sum, Mr Crouch requested Mr Galic to provide clarification as to the basis on which the funds were provided and the purposes for which they were intended to be applied. Mr Crouch did not receive a satisfactory response. On 14 September 2010, Mr Crouch repaid the sum of $50,000 to Mr Galic.
The total amount paid into the Bank Account was $228,950. Apart from the sums of $45,000, $2,000 and $15,000 referred to above, the balance was paid by individual investors as a consequence of one or more of the circulars of 25 May 2009, 11 September 2009, 16 September 2009 and 27 April 2010.
THE PROCEEDING
In this proceeding, Tumut River is named as the first defendant and Merilbah is named as the third defendant. Mr Crouch, in his capacity as liquidator of Tumut River, is named as second defendant and, in his personal capacity, is named as fifth defendant. Messrs Crouch and Amirbeaggi are named as fourth defendants, in their capacity as liquidators of Merilbah, and Mr Amirbeaggi is named as sixth defendant, in his personal capacity.
By its further amended originating process of 19 November 2009, HP Mercantile claims a declaration that the arrangement or scheme established by Tumut River, Merilbah, Mr Crouch, Mr Amirbeaggi or any of them, for the purpose of raising and receiving funds, and the application of those funds for the conduct of public examinations, the carriage and conduct of enquiries and investigations into HP Mercantile’s right, title and interest to the Investor Debts, the funding of litigation brought by HP Mercantile, the invalidation or obstruction of HP Mercantile’s right, title and interest to the Investor Debts and the discharge by Messrs Crouch and Amirbeaggi of their duties as liquidators of Tumut River and Merilbah, is a managed investment scheme. HP Mercantile also claims a declaration that that scheme is an illegal scheme in that it is not registered, and that Tumut River, Merilbah and Messrs Crouch and Amirbeaggi in their capacity as liquidators, or any of them, are operating that scheme in contravention of s 601ED. In addition, HP Mercantile claims an injunction to restrain those defendants from continuing to manage or operate the scheme or apply any funds in the scheme towards the purposes outlined above. Finally, HP Mercantile also seeks an injunction or order compelling the return of the funds to their original contributors.
In its further amended statement of claim of 10 December 2010, HP Mercantile makes allegations that may be summarised as follows:
22. Each of Tumut River, Merilbah and Messrs Crouch and Amirbeaggi has a programme and plan of action that consists of at least the following:
·Messrs Crouch and Amirbeaggi in their capacity as liquidators of Tumut River and Merilbah are to raise funds from investors;
·Mr Crouch is to conduct public examinations for the purpose of gathering evidence to determine whether the assignments of the Investor Debts are valid and effective to give HP Mercantile right, title and interest in the Investor Debts;
·Messrs Crouch and Amirbeaggi are to carry out and conduct enquiries and investigations into HP Mercantile’s right, title and interest to the Investor Debts;
·Tumut River, Merilbah and Messrs Crouch and Amirbeaggi, in their capacity as liquidators, are to fund and participate, as a party and otherwise, in litigation to challenge HP Mercantile’s right, title and interest to the Investor Debts;
·Tumut River and Merilbah are to acquire all right, title and interest in the Investor Debts if HP Mercantile’s right, title and interest is successfully set aside or invalidated.
23. Each of Messrs Crouch and Amirbeaggi, in their capacity as liquidators, have been soliciting, and continue to solicit, funds from investors for the purposes referred to in 22.
24. Investors have contributed money to Messrs Crouch and Amirbeaggi for the purposes referred to in 22.
25. Accordingly, each of those investors has contributed money within the meaning of the definition of ‘managed investment scheme’ in the Corporations Act.
26. Each of the investors who has contributed money has or will acquire a right to at least the following benefits:
(i)the opportunity to obtain information and/or evidence with which to challenge HP Mercantile’s right, title and interest to the Investor Debts;
(ii) reduced litigation costs in challenging that right;
(iii) protection from adverse costs orders;
(iv) reduced stress and anxiety;
(v)the prospect of eliminating and destroying HP Mercantile’s right, title and interest to the Investor Debts;
(vi)the promise of recommending the release and discharge of the Investor Debts and the prospect of the Court sanctioning that release;
(vii) a greater understanding of the investor’s project;
(viii)the opportunity to obtain declarations that the assignments of the Investor Debts were null and void and thereby avoid liability to HP Mercantile;
(ix) the opportunity to be assigned the Investor Debts;
(x)the opportunity to receive a premium on the distribution of any assets on the liquidation of Tumut River and Merilbah;
(xi)the opportunity to obtain evidence that may enable the successful challenge to the validity of the assignments and thereby avoid liability to HP Mercantile.
27. Accordingly each of those investors has acquired a right to a benefit within the meaning of ‘managed investment scheme’ in the Corporations Act.
28. The monetary contributions referred to in 24 have been pooled for the purposes of the scheme.
29. Each of the investors has or will acquire the financial benefits and/or rights or interest in property referred to in 26.
30. The members do not have the day-to-day control of the scheme within the meaning of ‘managed investment scheme’ in the Corporations Act.
31. The scheme described in 22-30 requires registration pursuant to s 601EB of the Corporations Act.
32. The scheme is not registered.
33. Accordingly, each of Tumut River, Merilbah and Messrs Crouch and Amirbeaggi is operating an unregistered managed investment scheme in contravention of s 601ED of the Corporations Act.
In their defence to the further amended statement of claim, the defendants essentially put in issue the allegations in the paragraphs summarised above. In addition, they plead, as an answer to all of the claims made by HP Mercantile, the effect of an instrument of exemption given by the Commission on 12 January 2010 (the Exemption). While there is no dispute as to the validity of the exemption, there is a dispute as to its effect.
By the Exemption, the Commission, under s 601QA(1)(a), exempted Mr Crouch, in his capacity as liquidator of Tumut River, and Messrs Crouch and Amirbeaggi, in their capacity as joint liquidators of Merilbah:
…from section 601ED of the [Corporations] Act, to the extent the arrangements for participating in, conducting and funding the liquidators’ public examinations referred to in Schedule B constitutes the operation of a managed investment scheme.
Schedule B is in the following terms:
The solicitation of funds by the persons referred to in Schedule A…. for the purpose of conducting public examinations under s 596A or s 596B of the Act.
On 19 November 2010, the Court ordered, by consent, that the following question be determined separately from, and in advance of all, other issues in the proceeding:
Are the first to fourth defendants operating an unregistered managed investment scheme in contravention of s 601ED(5) of the Corporations Act as alleged in paragraphs 22 to 33 of the further amended statement of claim?
In the course of the hearing, the parties asked that, in the light of the Exemption, the following further question also be determined:
Were the first to fourth defendants operating an unregistered managed investment scheme in contravention of s 601ED(5) of the Corporations Act as alleged in paragraphs 22 to 33 of the further amended statement of claim, prior to 12 January 2010?
MANAGED INVESTMENT SCHEME
Clearly enough, there is no responsible entity, no constitution and no compliance plan for the scheme alleged by HP Mercantile. Thus the alleged scheme is not capable of registration under s 601EB. Indeed, to convert the alleged scheme into a scheme that is capable of registration would require a complete recasting of the arrangements between persons who made contributions to the Bank Account, on the one hand, and Messrs Crouch and Amirbeaggi, on the other hand.
Of course, there would be difficulties in reading down the definition of ‘managed investment scheme’ by reference to the possible unintended consequences on everyday commercial transactions of a literal reading. Where a definition is general and all-embracing, it may well be difficult to conclude that it excludes particular transactions that appear to be covered by its general words (see Australian Softwood Forests Pty Limited v Attorney-General (NSW) (1981) 148 CLR 121 at 130). Apart from any considerations that may be derived from the general context in which such a definition appears, there is no good reason for reading down the words of the definition. The relevant context is that of prohibitions against issuing or offering to the public for subscription or purchase or inviting the public to subscribe for or purchase interests unless certain prerequisites have been satisfied (Australian Softwood Forests Pty Limited at 129).
Many schemes that satisfy the requirements of the definition in s 9 will not require registration. The definition excludes some 13 categories and, in addition, there is power to exclude other kinds of schemes. Section 601ED further narrows the range of schemes that must be registered, and Part 5C.11 provides for exemption and modification orders (Brookfield Multiplex Limited v International Litigation Funding Partners Pte Limited (2009) 180 FCR 11 at [26]). The proper approach to the application of the definition in s 9 is to identify whether or not the necessary features are present. If so, and assuming that there is no exemption under the subsequent parts of the definition, the question is whether or not the scheme must be registered under s 601ED. It is not possible to limit the operation of the definition by reference to some implied limitation to be derived from the regulatory scheme of Chapter 5C itself (Brookfield Multiplex Limited at [33]). While it is appropriate, when construing the definition in s 9, to consider the interaction of its parts, it may not necessarily be appropriate to look at the operative provisions of Chapter 5C in that process. If, in construing a definition that identifies the subject matter to be regulated by a regulatory regime, it is clear that a key regulatory provision cannot apply to a particular arrangement or situation that prima facie falls within the definition, there may be some justification for a narrower reading of the definition. On the other hand, if other regulatory provisions are capable of application, then it may not be appropriate to adopt that approach. In such a situation, it could not be said that there is a clear intention that the regulatory regime should not apply to the particular arrangement or situation. It may be unwise to construe the definition narrowly merely because there may be difficulties in applying part of the regulatory regime where the definition is construed more broadly. The scheme of the Corporations Act is to define the term ‘managed investment scheme’ in s 9 and to regulate some of those schemes in accordance with Chapter 5C. Thus, if a scheme falls within the definition and it is required to be registered, then it must be constituted and conducted so as to comply with Chapter 5C. It follows that it is not permissible to conclude that a particular scheme is not within the definition simply because its structure does not comply with the requirements of Chapter 5C. If a scheme must be registered, it must be constituted and conducted so as to permit registration (Brookfield Multiplex Limited at [55] and [56]).
Nevertheless, the definition in s 9 must be construed in its context as part of the overall effect and regime into which it is required to fit. Chapter 5C is concerned only with managed investment schemes. The definition of that term must be construed in the context of a definition that is to inform the way and manner in which Chapter 5C will apply. It is against that background that the activities and conduct of the defendants must be examined to determine whether they have features (a)(i) and (a)(ii) of the definition of ‘managed investment scheme’ in s 9.
The defendants accept that, at all relevant times, there was and there now is in place a scheme within the meaning of that term when used in the definition of ‘managed investment scheme’. They also accept that that scheme has more than 20 members within the meaning of s 601ED(1)(a). Further, in so far as there is and has been a scheme in existence, they accept that the members of that scheme do not have day to day control over the operation of the scheme within the meaning of paragraph (a)(iii) of the definition of ‘managed investment scheme’. Nevertheless, the defendants dispute that the scheme that is or has been operated by them is a managed investment scheme within the meaning of that term as defined in s 9 of the Corporations Act.
In order to satisfy the definition in s 9, the scheme must have the features referred to in paragraphs (a)(i) and (a)(ii). Each of those features has several aspects or elements. Those aspects or elements are as follows:
· people must contribute money or money’s worth;
·the money or money’s worth must be consideration for the acquisition of rights;
·the rights acquired must be rights to benefits produced by the scheme, whether actual, prospective or contingent, and whether enforceable or not;
·any of the contributions must be pooled or used in a common enterprise;
·that pooling or use must be for the purpose of producing either financial benefits or benefits consisting of rights or interests in property;
·the financial benefits or rights or interests in property must be for the persons who hold interests in the scheme, whether as contributors to the scheme or as persons who have acquired interests from holders.
The defendants accept that investors contributed money to a scheme. HP Mercantile does not contend that any member of the alleged scheme has contributed anything other than money. HP Mercantile contends that the money was to be used in a common enterprise, and was contributed by investors as consideration to acquire rights to 11 different benefits that were said to be produced by the alleged scheme.
The defendants dispute that the so-called benefits are benefits within the meaning of the definition of ‘managed investment scheme’. They also say that an investor who contributed money did not acquire any right to any such benefit as consideration for the money contributed by that investor.
So-called benefits (i), (ii), (iii), (viii) and (xi) can be considered together. The benefits are:
(i) the opportunity to obtain the provision of information and/or evidence;
(ii) reduced litigation costs;
(iii) protection from adverse costs orders;
(viii) the opportunity to avoid liability to HP Mercantile;
(xi) the opportunity to obtain evidence.
It may be that the public examinations and investigations proposed to be carried out would have the practical effect of revealing information, reducing future litigation costs, enabling investors to avoid adverse costs orders and avoiding liability to HP Mercantile in respect of Investor Debts. However, no person who has contributed or will contribute money for the purposes of funding examinations, investigations or litigation will thereby acquire any right to such benefits. Those benefits will be the consequence of successful investigation, examination and litigation, whether or not an investor contributes money in response to the invitations from Mr Crouch. The same benefits will be available to any investor, whether or not that investor has contributed money to fund the examinations, investigations and any litigation that may be conducted by Mr Crouch or Mr Amirbeaggi. In so far as the matters identified in those paragraphs are benefits, those benefits are the consequence of what will be done by Mr Crouch and Mr Amirbeaggi. No investor who contributes money acquires any right to those benefits in any sense as consideration for the contribution. Those benefits do not evidence feature (a)(i) in the s 9 definition.
So-called benefit (v) is the prospect of eliminating HP Mercantile’s right to the Investor Debts. That prospect exists, irrespective of whether an investor contributes money to the alleged scheme. It is not a right that an investor acquires as consideration for the contribution of money.
So-called benefits (iv) and (vii) can also be considered together. They are as follows:
(iv) reduced stress and anxiety;
(vii) greater understanding of the original investment.
Those benefits are related to those in the first category in that they appear to be states of mind arising from the so-called benefits in the first category. Thus, reduced stress and anxiety is a consequence of avoiding litigation costs, avoiding possible adverse costs orders, and not being personally involved in litigation. A greater understanding of the project in which an investor participated appears particularly ephemeral, in that it is difficult to differentiate from information with which to challenge liability to HP Mercantile.
It would be very curious to speak of acquiring a right to acquire a particular state of mind. These so-called benefits are not exclusive to investors who participate in the funding of the proposed investigations, examinations and litigation. An investor who does not contribute will have precisely the same benefit without risking the money contributed by those who do. There is no benefit within feature (a)(i).
So-called benefits (vi), (ix) and (x) are of a similar character to each other. They appear to be connected with the prospect of an application being made under s 564 of the Corporations Act. The so-called benefits are:
(vi)the promise of recommending release of the Investor Debts and the prospect of the Court sanctioning the release;
(ix) the opportunity to be assigned the Investor Debts;
(x) the opportunity to receive a premium on the distribution of any assets.
Section 564 of the Corporations Act relevantly provides that where, in any winding up, (a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or (b) expenses in relation to which a creditor has indemnified a liquidator have been recovered, the Court may make such orders as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them. Thus, s 564 is concerned with giving an advantage to some creditors over other creditors. It is difficult to see how s 564 would be applied in the present circumstances.
HP Mercantile eschews any suggestion that investors who participate in the alleged scheme are creditors of either Tumut River or Merilbah. In those circumstances, it is difficult to see how any order under s 564 would have any application to the investors who contribute money. If the assignments were set aside, the consequence may be that the Investor Debts owed by investors would be assets available for distribution to creditors of Tumut River or Merilbah. There is no evidence as to the nature or extent of the creditors of Tumut River and Merilbah who might benefit from the realisation of those assets.
The language of Mr Crouch’s circulars suggests a possible misapprehension as to the terms of s 564. The communications between Mr Crouch and Mr Galic in August 2008, concerning a premium on the distribution of any asset in the winding up of the companies, being benefit (x), seem somewhat incomprehensible. There would be no distribution of any assets on the liquidation of Tumut River and Merilbah to investors who are debtors of those companies. As I have said, the investors are debtors, not creditors. There is no suggestion that they might also be creditors in some other capacity.
In any event, if there is some obligation on Mr Crouch and Mr Amirbeaggi to make an application to the Court, that is not a benefit that would be produced by the scheme. Rather, it is the price paid in exchange for the contribution of money by an investor. Assuming that an order under s 564 of the nature contemplated could be made, the promise to make an application is the quid pro quo for the contribution of money. The promise of so-called benefit (vi) and the opportunities of so-called benefits (ix) and (x) are not benefits produced by the alleged scheme.
I do not consider that the scheme alleged by HP Mercantile has feature (a)(i). Assuming, however, contrary to my conclusion, that the alleged scheme does have feature (a)(i), it must also have feature (a)(ii) for HP Mercantile to succeed.
That feature requires, in the present case, that the money contributed will be pooled for a particular purpose, namely, to produce financial benefits or benefits consisting of rights or interests in property. Those benefits or rights or interests must be for the people who have acquired rights as consideration for the contribution of money. The use of the word people signifies pluralities, indicating pooling for the members as a whole (see National Australia Bank Ltd v Norman (2009) 180 FCR 243 at [150]). There is nothing in the scheme contended for by HP Mercantile whereby the money contributed by investors will produce a financial or proprietary benefit for those investors as a whole, as members of the scheme. Rather, contributions of money have been solicited for the express purpose of spending that money, principally in legal fees, in connection with proposed public examinations, other investigations and possible litigation. The object of that expenditure is to ascertain whether the Investor Debts truly belong to Tumut River or Merilbah, and are therefore available for distribution to the creditors of those companies.
There was clearly no intention that each investor who contributed money would acquire an interest in the pool. Rather, the benefit that each investor who contributed money would acquire under the scheme contended for by HP Mercantile would be unchanged, regardless of how many investors contributed money to the pool and regardless of how large the pool may have been. It is fair to characterise the arrangements between Mr Crouch and Mr Amirbeaggi, on the one hand, and investors, on the other hand, as a series of bilateral arrangements rather than an aggregation. Consequently, I do not consider that the alleged scheme has feature (a)(ii).
I consider that the scheme presently being operated by the defendants is not a managed investment scheme. Accordingly, it was not required to be registered.
THE EXEMPTION
The language of the Exemption is not particularly felicitous. It is unfortunate that there is ambiguity as to its effect. In the light of the conclusion that I have reached concerning the principal question, it is not strictly necessary to consider the effect of the Exemption. However, since the matter has been argued, I shall make some brief observations concerning the Exemption.
The defendants accept that the Exemption had no effect prior to 12 January 2010. They do not contend for any retrospective operation of the Exemption. They say, however, that since 12 January 2010, the Exemption has applied, and that there is no reason to grant, nor any utility in granting, the relief now sought by HP Mercantile. They say that, even if they were previously operating a managed investment scheme contrary to s 601ED of the Corporations Act, they are no longer doing so.
HP Mercantile contends that the moneys contributed before 12 January 2010 were raised for purposes that were outside the terms of the Exemption. They say that the Exemption is limited to the soliciting of funds for the conduct of public examinations under s 596A or s 596B of the Corporations Act, whereas the objects of the alleged scheme include the investigation of the circumstances of the assignments of Investor Debts, as well as possible litigation to challenge the effect and validity of the assignments. HP Mercantile points particularly to the statements by Mr Crouch in his circulars that, if he discovers sufficient evidence to challenge the ownership of Investor Debts and is successful in that challenge against HP Mercantile, he will make an application to the Court.
It is difficult to see what utility the Exemption would have if it is to be construed as HP Mercantile would have it construed. The arrangements for participating in, conducting and funding the public examinations referred to in schedule B of the Exemption could hardly constitute the operation of a managed investment scheme. The arrangements for participating in, conducting and funding public examinations, as referred to in schedule B, simply involve the solicitation of funds by the liquidators of Tumut River and Merilbah. In order to make sense of the Exemption, it should be construed as exempting the liquidators from operating a scheme that consists of soliciting funds for the purpose of participating in, conducting and funding public examinations. That of itself could not possibly constitute a managed investment scheme.
On that basis, there may be a justification for construing the Exemption as relating to all of the arrangements surrounding the solicitation of funds for those purposes, including the possibility of further investigations, litigation as to the effect of the assignments and any possible application under s 564 of the Corporations Act. Whether the Exemption could be construed as extending to a scheme that consisted of those matters may depend upon what information was provided to the Commission in seeking the grant of the exemption. That material is not presently before the Court.
CONCLUSION
It follows from what I have said that the second question proposed during the hearing should be answered in the negative. In those circumstances, the question posed by the order made on 19 November 2010 would also be answered in the negative. It would be appropriate to make declarations to that effect. It also follows that the proceeding should be dismissed with costs.
I certify that the preceding sixty-three (63) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.
Associate:
Dated: 10 March 2011
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