In the matter of Willmott Forests Limited (In Liquidation) and Willmott Finance Pty Ltd (In Liquidation)

[2011] VSC 348

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT

LIST E

No. 04435 of 2010

IN THE MATTER of WILLMOTT FORESTS LIMITED (IN LIQUIDATION)
(ABN 17 063 263 650) and WILLMOTT FINANCE PTY LTD  (IN LIQUIDATION)
(ABN 16 081 276 811)

WILLMOTT FORESTS LIMITED  (IN LIQUIDATION) (ABN 17 063 263 650)	First Plaintiff
WILLMOTT FINANCE PTY LTD  (IN LIQUIDATION) (ABN 16 081 276 811)	Second Plaintiff
v
PETER JAMIESON KUMNICK	Defendant

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JUDGE:	Davies J
WHERE HELD:	Melbourne
DATE OF HEARING:	13 July 2011
DATE OF JUDGMENT:	28 July 2011
CASE MAY BE CITED AS:	In the matter of Willmott Forests Limited (In Liquidation) and Willmott Finance Pty Ltd (In Liquidation)
MEDIUM NEUTRAL CITATION:	[2011] VSC 348

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PRACTICE AND PROCEDURE – Application for summary judgment – Strike out of Defence – Applicable principles for strike out – No real prospects of success – Rule 23.01 Supreme Court (General CivilProcedure) Rules 2005 – Section 61 Civil Procedure Act 2010

CORPORATIONS – Unregistered managed investment scheme – Notice given s 601MB(1) of the Corporations Act 2001 (Cth) to void scheme contracts – Application for declaration that notice invalid or ineffective on the basis that the preconditions to notice not satisfied – Defence relied on statutory presumption that the defendant was a retail client and based on that presumption that the plaintiffs had not complied with Division 2 of Part 7.9 of the Corporations Act 2001 (Cth) because the plaintiffs had not given the defendant a product disclosure statement when he invested in the managed investment scheme – Product disclosure statement required if the defendant was issued with an interest in the managed investment scheme as a retail client – Managed investment scheme offered only to wholesale clients – Declaration in defendants application for investment that he was a wholesale client – No pleading in the defence that the defendant was actually a retail client at time of investment – Reliance on statutory presumption to create circumstance that he was a retail client at time of investment bad in law – No foundation in fact in evidence that defendant was a retail client – Defence bound to fail – Division 2 of Part 7.9 of the Corporations Act 2001 (Cth) – Corporations Act 2001 (Cth) ss 601ED, 601MB, 601ED 761G, 761GA, 1012A, 1012B, 1012C

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr S. Hibble	Arnold Bloch Leibler
For the Defendant	Dr A.J. Greinke	K2 Law

TABLE OF CONTENTS

Introduction......................................................................................................................................... 2

Background......................................................................................................................................... 2

Section 601MB.................................................................................................................................... 3

The pleadings..................................................................................................................................... 6

Applicable principles for summary judgment............................................................................. 9

Decision below................................................................................................................................... 9

Decision.............................................................................................................................................. 10

Conclusion......................................................................................................................................... 15

HER HONOUR:

Introduction

1. On 8 June 2011 Daly AsJ entered judgment for the second plaintiff (“Willmott Finance”) against the defendant on a summary judgment application made under r 23.01 of the Supreme Court (General Civil Procedure) Rules 2005 (“SCR”) on the ground that the defendant’s defence as against Willmott Finance was bound to fail. Daly AsJ dismissed the summary judgment application by the first plaintiff (“Willmott Forests”), holding that there were factual and legal questions for determination that warranted a trial. Willmott Forests and the defendant have each appealed the orders of Daly AsJ. The appeals proceed as re-hearings de novo of the application before Daly AsJ.[1]

   [1]Supreme Court (General Civil Procedure) Rules 2005, r 77.06(7).

Background

1. The defendant is an investor in the Willmott Forests Professional Investor 2003 Project (the “Project”), an unregistered managed investment scheme managed by Willmott Forests. The defendant substantially funded his investment by loan funds obtained from Willmott Finance, which was the Project financier. On 23 July 2010, the defendant gave the plaintiffs notice under s 601MB(1) of the Corporations Act 2001 (Cth) (“the Act”) that he elected to void the scheme contracts on the alternative grounds that either the scheme was being operated in contravention of s 601ED(5) of the Act or that either or both of the plaintiffs had failed to comply with Division 2 of Part 7.9 of the Act when offering the interest in the Project. On 13 August 2010 the plaintiffs filed an originating process seeking a declaration that the notice was invalid and not a notice pursuant to s 601MB of the Act, and in the alternative a declaration pursuant to subsections 601MB(4) and (6) of the Act that the notice was of no effect. Although commenced as an originating process, the Court ordered pleadings and the plaintiffs filed points of claim on 22 December 2010, the defendant filed points of defence on 7 February 2011 and the plaintiffs filed a reply on 25 March 2011. On 8 April 2011 the plaintiffs made an application for summary judgment in the proceeding. The application was heard by Daly AsJ on 27 May 2011 who delivered judgment on 8 June 2011.

Section 601MB

1. Section 601MB provides as follows:

Voidable contracts where subscription offers and invitations contravene this Act

(1)     If:

(a) a managed investment scheme is being operated in contravention of subsection 601ED(5) and a person (the offeror) offers an interest in the scheme for subscription, or issues an invitation to subscribe for an interest in the scheme; or

(b) a person (the offeror) fails to comply with Division 2 of Part 7.9 when offering an interest in a registered scheme for subscription or issuing an invitation to subscribe for an interest in a registered scheme;

a contract entered into by a person (other than the offeror) to subscribe for the interest as a result of the person accepting the offer, or of the acceptance of an offer made by the person in response to the invitation, is voidable at the option of that person by notice in writing to the offeror.

(2)If the person gives a notice under subsection (1), the obligations of the parties to the contract are suspended:

(a)  during the period of 21 days after the notice is given; and

(b) during the period beginning when an application is made under subsection (4) in relation to the notice and ending when the application, and any appeals arising out of it, have been finally determined or otherwise disposed of.

(3)     Subject to subsection (6), the notice takes effect to void the contract:

(a)  at the end of 21 days after the notice is given; or

(b) if, within that 21 days, the offeror applies under subsection (4)—at the end of the period when the obligations of the parties are suspended under paragraph (2)(b).

(4)Within 21 days after the notice is given, the offeror may apply to the Court for an order declaring the notice to have had no effect.

(5)The Court may extend the period within which the offeror may apply under subsection (4), even if the notice has taken effect.

(6)On application under subsection (4), the Court may declare the notice to have had no effect if it is satisfied that, in all the circumstances, it is just and equitable to make the declaration.

1. There are conditions that must be satisfied before a notice of avoidance can be given under s 601MB(1). The giving of a notice under s 601MB will not have the effect of making a scheme contract voidable at the election of the investor unless either of the preconditions in s 601MB(1)(a) or (b) are met. An investor cannot rely on s 601MB to void a scheme contract by giving notice absent the circumstances that the legislature has identified as grounds of invalidation. But if a valid notice is given under s 601MB, the scheme contracts are voidable at the election of the subscriber. In Re York Street Mezzanine Pty Ltd (in liq)[2] Finkelstein J observed that:

   [2](2007) 240 ALR 567.

[47] If the conditions mentioned in s 601MB(1) are satisfied the contract to subscribe for the interest in the managed investment scheme is "voidable" at the option of the investor. If the investor wishes to exercise that option he must give a notice to that effect to the offeror. The offeror may within 21 days apply to the court to have the notice declared invalid: s 601MB(4). Such a declaration will be made if "in all the circumstances it is just as [sic] equitable to make the declaration": s 601MB(6). If no application is made then at the end of 21 days, or if an application is made and no declaration is made after the application and any appeals have been determined, "the notice takes effect to void the contract": s 601MB(3). I take this to mean that the contract is void ab initio, with the consequence that the investor can recover what he paid for his investment. In other words, the parties to the contract are to be restored as far as may be possible to the position they were in before the contract was made. The alternative and unconventional meaning of "void" is that the contract is only dissolved as regards to future performance. That construction would run counter to the plain object of the section.[3]

[3]Ibid 579 [47].

Thus, the defendant’s notice, if valid, had the effect of voiding ab initio, those contracts that fell within the statutory description of “a contract entered into by a person (other than the offeror) to subscribe for the interest as a result of the person accepting the offer, or of the acceptance of an offer made by the person in response to the invitation”.[4] The defendant asserted in his notice that:

[4]Corporations Act 2001 (Cth) s 601MB.

(a)        the Loan Agreement between himself and Willmott Finance dated 19 May 2004;

(b)      the Forestry Management Agreement between himself and Willmott Forests dated 19 May 2004; and

(c)       a Lease Agreement dated 30 June 2004 –

together constituted the “managed investment scheme” for the purposes of the Act, which he elected to void.

1. The condition prescribed in s 601MB(1)(a) of the Act is the operation, without registration, of a managed investment scheme required by s 601ED of the Act[5] to be registered. Section 601ED(1) relevantly provides:

[Criteria for registration]

(1)Subject to subsection (2), a managed investment scheme must be registered under section 601EB if:

(a)  it has more than 20 members; …

[5]Section 601ED(5) provides that a person must not operate in this jurisdiction a managed investment scheme that [section 601ED] requires to be registered under s 601EB unless the scheme is so registered.

It was common ground that the Project has more than 20 members. However, that fact alone did not mean that the Project should have been registered as s 601ED(1) must be read subject to s 601ED(2). Section 601ED(2) provides:

[Issue of interests would not have required PDS]

(2)A managed investment scheme does not have to be registered if all the issues of interests in the scheme that have been made would not have required the giving of a Product Disclosure Statement under Division 2 of Part 7.9 if the scheme had been registered when the issues were made.

The Project was not required to be registered if Willmott Forests was not obliged by Division 2 of Part 7.9 of the Act to give a Product Disclosure Statement (“PDS”) to any of the persons who invested in the Project. That obligation did not arise if the Project was not issued to investors as “retail clients”,[6] as the term “retail client” is used in Division 2 of Part 7.9 of the Act.[7] In Division 2 of Part 7.9 of the Act a distinction is made between “wholesale clients” and “retail clients”. For the purposes of Division 2 of Part 7.9 of the Act a financial product is provided to a person as a wholesale client if it is not provided to that person as a retail client.[8]

[6]See Corporations Act 2001 (Cth) ss 1012A(3)(c), 1012B(4)(c), 1012C(3)(c).

[7]Corporations Act 2001 (Cth) ss 761G(4), 761G(7)(d), 761GA

[8]Corporations Act 2001 (Cth) s 761G(4)

1. The condition prescribed in s 601MB(1)(b) is the failure to give a Product Disclosure Statement that a person is obliged by Division 2 of Part 7.9 of the Act to give. Thus, the same issue arises for present purposes, viz: were the interests in the Project issued to the defendant as a retail client?

The pleadings

1. The plaintiffs sought a declaration that the notice was invalid and not a notice pursuant to s 601MB of the Act, alternatively that the notice was of no effect. The claim for declaratory relief is based upon the following material facts:

(a)The Project was established by an investment deed dated 28 August 2002.[9]  This is not admitted by the defendant “since the allegation cannot be admitted or denied until inspection of the document”.[10]

[9]Points of Claim (filed 22 December 2010), [3].

[10]Points of Defence (filed 7 February 2010), [2].

(b)In or about 2003 Willmott Forests offered interests in the Project to investors pursuant to an information memorandum.[11]  This is admitted by the defendant.[12]

[11]Points of Claim (filed 22 December 2010), [4].

[12]Points of Defence (filed 7 February 2010), [1].

(c)On 5 May 2004 the defendant applied to Willmott Forests for 50 hectares in the Project.[13]  This is admitted by the defendant.[14]

(d)Amongst other things, the defendant’s application declared that he was eligible to invest in the Project; included a cheque for $70,000 being a deposit of $1400 per hectare; and indicated that he would be seeking finance for the remaining  $315,000 being the balance of $6300 per hectare.[15]  This is admitted by the defendant.[16]

(e)The defendant executed a Forestry Management Agreement with Willmott Forests on 30 June 2004 and a Lease Agreement with Willmott Forests on 30 June 2004.[17]  The defendant has denied personally executing the agreements, alleging that the agreements were executed on his behalf.  He has not admitted the date of execution “since the allegation cannot be admitted or denied until completion of the interlocutory steps”.[18]

(f)On 5 May 2004 the defendant applied to Willmott Finance for a loan to fund the balance of $315,000 required to fund his investment of 50 hectares in the Project.[19]  This is admitted by the defendant.[20]

(g)On 30 June 2004 the defendant executed a Loan Agreement with Willmott Finance for the sum of $315,000 required to fund his investment of 50 hectares.[21] This is admitted by the defendant.[22]

(h)Pursuant to a Loan Transfer Deed dated 30 June 2006 amongst other things Willmott Finance sold the loan with the defendant to MIS Funding No 1 Limited (“MIS Funding”).[23]  This is not admitted “on the grounds the allegation cannot be admitted or denied until completion of the interlocutory steps”.[24]

(i)Commencing from July 2009 the defendant began to fail to make payments to MIS Funding in accordance with the Loan Agreement.[25]  The defendant has admitted that notices of demand were issued to him but he has not admitted that the monies were unpaid.[26]

(j)On 21 June 2010 MIS Funding issued a statement of claim in the District Court of NSW seeking an amount of $330,867.88 from the defendant in default of the Loan Agreement.[27] This is admitted by the defendant.[28]

(k)On 23 July 2010 the defendant served a notice on Willmott Forests and Willmott Finance pursuant to section 601MB(1) of the Act purporting to terminate the Forestry Agreement, Lease Agreement and Loan Agreement.[29] This is admitted by the defendant.[30]

[13]Points of Claim (filed 22 December 2010), [5].

[14]Points of Defence (filed 7 February 2010), [1].

[15]Points of Claim (filed 22 December 2010), [6].

[16]Points of Defence (filed 7 February 2010), [1].

[17]Points of Claim (filed 22 December 2010), [7].

[18]Points of Defence (filed 7 February 2010), [3].

[19]Points of Claim (filed 22 December 2010), [8].

[20]Points of Defence (filed 7 February 2010), [1].

[21]Points of Claim (filed 22 December 2010), [9].

[22]Points of Defence (filed 7 February 2010), [4].

[23]Points of Claim (filed 22 December 2010), [10].

[24]Points of Defence (filed 7 February 2010), [5].

[25]Points of Claim (filed 22 December 2010), [11].

[26]Points of Defence (filed 7 February 2010), [6].

[27]Points of Claim (filed 22 December 2010), [12].

[28]Points of Defence (filed 7 February 2010), [1].

[29]Points of Claim (filed 22 December 2010), [13].

[30]Points of Defence (filed 7 February 2010), [1].

1. It is also alleged in paragraph 18 that the Project was not operated in contravention of s 601ED(5)[31] and that Willmott Forests did not fail to comply with Division 2 of Part 7.9 of the Act when offering the interests in the Project.[32] This is denied.[33]

   [31]        601ED  When a managed investment scheme must be registered

   (5)A person must not operate in this jurisdiction a managed investment scheme that this section requires to be registered under section 601EB unless the scheme is so registered.

   [32]Points of Claim (filed 22 December 2010), [18].

   [33]Points of Defence (filed 7 February 2010), [21].

1. The defendant’s positive defence as pleaded was that “in relation to” the Loan Agreement, the Forestry Agreement and the Lease Agreement (“the products”):

[16] … the defendant was a “retail client” within the meaning of Part 7.9 of the Act, as to which the defendant relies on the presumption in subsection 761G(9) of the Act.

[17] In the above premises, the plaintiffs were required by section 1012B of the Act to provide the defendant with a [PDS] at or before the time the plaintiffs made the offer of the above products.

[18]    The plaintiffs offered the products to the defendant on 19 May 2004.

[19]    The plaintiffs failed to provide a [PDS] to the defendant by 19 May 2004 or at all.

[20] The plaintiffs thereby failed to comply with section 1012B, being a provision within Division 2 of Part 7.9 of the Act.

[21]    The defendant denies paragraph 18 since by reason of the matters set out above:

[21.1] the [Project] was being operated in contravention of subsection 601ED(5) of the Act; and

[21.2] the plaintiffs failed to comply with Division 2 of Part 7.9 of the Act.[34]

[34]Ibid, [16]-[21].

1. In reply, the plaintiffs have alleged (amongst other things) that the interests in the Project were not issued to retail clients and that therefore there was no requirement to provide a PDS under Division 2 of Part 7.9 of the Act.[35]  The plaintiffs further alleged that the defendant was not a retail client when he subscribed for his interest in the Project.[36]

   [35]Reply (filed 25 March 2011), [6].

   [36]Ibid, [2D].

Applicable principles for summary judgment

1. The application was made under r 23.01(1)(a) of the SCR on the ground that the defence did not disclose an answer or was frivolous and vexatious. Before the enactment of s 61 of the Civil Procedure Act 2010 (Vic) the Court would not make an order under this rule unless it was clear on the pleadings or from extrinsic evidence that the defence was unsustainable in fact or in law.[37] The test applicable for summary judgment under r 23.01(1)(a) has now been changed by s 61 of the Civil Procedure Act 2010 (Vic) which provides that a plaintiff in a civil proceeding may apply for summary judgment on the ground that a defendant’s defence “has no real prospect of success”. [38]   This is a less stringent test.  Certainty of failure need not be demonstrated.  In Matthews v SPI Electricity and SPI Electricity Pty Ltd v Utility Services Corporation Ltd (Ruling No 2)[39] J Forrest J followed English authority on the test of “no real prospect of succeeding on the claim or issue” to hold that a court may dismiss a claim where it determines that the prospects of success are fanciful, rather than real.[40] 

   [37]Onus v Alco of Australia Ltd (1981) 149 CLR 27, 57; Spencer v The Commonwealth (2010) 241 CLR 118.

   [38]Spencer v The Commonwealth (2010) 241 CLR 118, [56].

   [39][2011] VSC 168.

   [40]Ibid [21]-[22].

Decision below

1. As this appeal proceeds as a rehearing de novo it is not strictly necessary to refer to the decision of Daly AsJ but it is helpful to do so in order to understand why Her Honour gave judgment for Willmott Finance but not Willmott Forests. In short compass, Her Honour concluded that there were factual and legal issues for determination on whether the defendant was a retail client and thus that the defendant had an arguable claim that his notice under s 601MB was valid and effective to void those “contracts” that were within the terms of s 601MB. Her Honour, however, held that the defendant’s notice could not operate to void the defendant’s Loan Agreement with Willmott Finance for the reason that the Loan Agreement was not a “contract” within the terms of s 601MB. Accordingly Her Honour gave summary judgment for Willmott Finance but not for Willmott Forests.

Decision

1. I have reached a different conclusion to Daly AsJ.  In my view, the defence must fail because it is bad in law.    

1. The defence as pleaded rests solely on the allegation that the defendant was a “retail client” within the meaning of Part 7.9 of the Act “as to which the defendant relies on the presumption on sub-section 761G(9) of the Act”.[41] Section 761G(9) of the Act provides as follows:

   [41]Points of Defence (filed 7 February 2010), [16].

(9)     If:

(a)it is alleged in a proceeding under this Chapter (not being a prosecution for an offence), or in any other proceeding (not being a prosecution for an offence) in respect of a matter arising under this Chapter, that a particular financial product or financial service was provided to a person as a retail client; and

(b)the product or the service is one to which subsection (7) applies;

it is presumed that the product or service was provided to the person as a retail client unless the contrary is established.

Note 1:       There is no such presumption in relation to the provision of a product or service that is or relates to a general insurance product, a superannuation product or an RSA product. Whether or not such a product, or a service relating to such a product, was provided to a person as a retail client is to be resolved as provided in subsection (5) or (6), as the case requires.

Note 2:       In criminal proceedings, a defendant bears an evidential burden in relation to the matters in paragraphs (7)(a) to (d) (see subsection (8)).

The argument was that the defendant is entitled to the benefit of that statutory presumption because he has alleged in this proceeding that he was a retail client. It was argued for the defendant, on the basis of that presumption, that the burden of proof passed to the plaintiffs to prove that the issue of interests in the Project did not require a PDS to be given to any investor, including the defendant, under Division 2 of Part 7.9.[42] It was further argued that this required the plaintiffs to prove positively that an exception under Division 2 of Part 7.9 applied in relation to each other investor, as well as the defendant, in order for the plaintiffs to be entitled to the declaratory relief sought in the originating process. It was further submitted that the plaintiffs had not adduced that evidence but, in any event, on the summary judgment application were met with the statutory presumption that applied in the defendant’s favour that he was a “retail client” who required a PDS to be given to him in accordance with s 1012B(4) of the Act.

[42]Corporations Act 2001 (Cth) s 601ED(2).

1. The defence based on the statutory presumption contained in s 761G(9) is flawed and utterly without merit. It is not pleaded that the defendant actually invested and acquired his interests in the Project in May 2004 as a retail client. Rather, the defence is to the effect that his presumed status as a “retail client”, arising by virtue of s 761G(9), prima facie meant that the Project was operated in contravention of s 601ED and Division 2 of Part 7.9 because, as a retail client, Division 2 of Part 7.9 required the plaintiffs to give him a PDS, which they had not done. Therefore, the argument went, that the pre-condition for the giving of a valid notice was met.

1. The argument is a misapplication of s 761G(9). The statutory presumption does not have any operative effect – the presumption simply shifts the burden onto the issuer of the product to establish that the product was not provided to the person as a retail client. Section 761G(9) cannot be invoked in aid of creating the circumstance, after the giving of the notice, that interests in the Project were issued to the defendant as a retail client and thus that the defendant was a person to whom a PDS was required to be given. Section 761G(9) is not a substantive provision. It was incumbent on the defendant to found its defence in the operative provisions of Division 2 of Part 7.9. That is to say, a necessary element of the defence must be that the plaintiffs were obliged under Division 2 of Part 7.9 to give the defendant a PDS. The presumed status arising upon the issue of proceedings contesting the validity of the notice could not, in law, found a defence that the plaintiffs were in breach of Division 2 of Part 7.9. On the defence as pleaded, the essential element is missing – viz that the preconditions in s 601MB were satisfied at the date of the giving of the notice.

1. Thus, the defendant’s reliance on s 1012B(4) of the Act to found the claim that the plaintiffs were required to provide him with a PDS at or before the time that the investment was offered was totally misconceived and bad in law. Section 1012B(4) is in the following terms:

(4)A regulated person must give a person a Product Disclosure Statement for a financial product if:

(a)  the person makes an offer to the regulated person to acquire the financial product; and

(b)  the person would acquire the financial product by way of the issue of the product to the person (rather than the transfer of the product to the person); and

(c)  the financial product is to be issued to the person as a retail client.

The Product Disclosure Statement must be given to the person before the person becomes bound by a legal obligation to acquire the financial product pursuant to the offer and must be given in accordance with this Division.

Critically the section does not operate to impose the obligation on the offeror to provide a person with a PDS for a financial product unless the three specified conditions are met.  They include that the financial product “is to be issued to the person as a retail client”.[43]  The statutory presumption cannot be relied on by the defendant to create this element required for his defence and, as I have stated, it was not part of the defendant’s defence on the pleadings that he actually invested and acquired his interests in the project as a retail client.

[43]Cf Corporations Act 2001 (Cth) s 761G(2): For the purposes of [Chapter 7], a person to whom a financial product … is provided as a retail client is taken to acquire the product … as a retail client.

1. Next, the presumption is rebuttable, in any event, and on the available material before the Court, the defence lacked any foundation in fact. It was patently not the case that the defendant invested and acquired his interests in the project as a retail client, as evidenced by the documents relied on by the plaintiffs in support of their application for summary judgment. Those documents included the Information Memorandum and the defendant’s signed application for investment in the Project. The Information Memorandum unequivocally spelt out that only investors who satisfied the “wholesale” investor test were eligible to apply for interests in the Project and applicants for interests in the Project had to declare in their applications that they had read the Information Memorandum and were eligible. In making his application for investment in the Project, the defendant declared that he met the eligibility requirements. The defendant has admitted in his defence both that the Project was offered pursuant to that Information Memorandum and that his application contained the declaration. These admissions are complete answers for the plaintiffs. The Project was not offered to retail clients nor were the defendant’s interests in the project issued to him “as a retail client” but rather as a “wholesale investor”. Section 1012B(4) has no application to the defendant as his interests in the Project were not issued to him as a retail client.

1. In addition to putting into evidence the Information Memorandum and signed application from the defendant, the plaintiffs also put into evidence (amongst other things) a letter from Bob Ritchie from Alchemy Pty Ltd, accountants, in which the author wrote:

RE: WILLMOTTS PROFESSIONAL INVESTOR APPLICATION – MR PETER KUMNICK

I wish to confirm that my client, Mr Peter Kumnick, meets the Professional Investor definition under the “$250,000 of gross income in the last two financial years”. 

The significance of the gross annual income of $250,000 is that it provided the threshold for the purposes of s 761G(7)(c).[44]  Section 761G(7) provides that for the purposes of Chapter 7, if a financial product is not a general insurance product, a superannuation product or an RSA product (none of which apply to the project), the product is provided to the person “as a retail client unless”, relevantly:

(c)the financial product…is not provided for use in connection with a business, and the person who acquires the product … gives the provider of the product …, before the provision of the product …, a copy of a certificate given within the preceding 6 months by a qualified accountant (as defined in section 9) that states that the person:

(i)…

(ii)has a gross income for each of the last 2 financial years of at least the amount specified in regulations made for the purposes of this sub-paragraph a year.

Regulation 7.1.28 of the Corporations Regulations 2001 (Cth) specifies $250,000 for the purposes of s 761G(7)(c)(ii). There was some debate as to whether the letter constituted a certificate for the purposes of s 761G(7) but that does not need to be decided. The probative value for present purposes is the representation to Willmott Forests which, on face value, was to the effect that the defendant invested and acquired his interest in the Project as a wholesale, not retail client.

[44]Regulation 7.1.28 of the Corporations Regulations 2001 (Cth).

1. An affidavit in opposition to the summary judgment was filed on behalf of the defendant that was sworn by his solicitor on information and belief.  In the affidavit sworn 23 May 2011, the solicitor deposed:

7I am informed by the defendant Peter Kumnick and verily believe that at trial his evidence will be that:

7.1he was not aware of making any representation to the plaintiffs as he did not read the declaration on the application form or the Information Memorandum;

7.2he did not know that Alchemy Pty Ltd had sent the letter dated 24 May 2004, and did not even know of the existence of that letter until these proceedings;

7.3Bob Ritchie and Alchemy Pty Ltd did not have his authority to send such a letter or any form of certificate to the plaintiffs;

7.4the representation in the letter, that he had gross income of at least $250,000 for each of the previous financial years was factually wrong;

7.5he did not know or intend for the plaintiffs to rely on any assumption or expectation that he was other than a retail client.

1. The contents of paragraph 7 are not relevant to any issue in the proceeding, having regard both to the fact that the defence has not raised as an issue that the defendant actually was a retail client in relation to his investment in the Project and to the admissions in the defence.  The defendant has admitted (1) that Willmott Forests offered interests in the Project pursuant to an Information Memorandum, which the plaintiffs have established by evidence was offered only to wholesale clients; (2) the application that he made to Willmott Forests, in which he declared that he was eligible to invest in the Project; and (3) that he applied to Willmott Finance for a loan to fund his investment and his entry into a loan agreement with Willmott Finance.  That Loan Application was before the Court. It contained the representation made by the defendant that he had a monthly gross income of $30,000 per annum (which would translate into a gross annual income of more than $250,000).  Furthermore, it is not the defendant’s case as pleaded that he actually was a retail client.  Thus the matters deposed to in paragraph 7 by the defendant’s solicitors are wholly irrelevant to the issues raised by the pleadings. 

1. Moreover the contents of paragraph 7 have no probative value.  The bare assertions contained in that paragraph are not evidence of the matters asserted.  No evidence was provided by the defendant in support of the assertions made and no evidentiary foundation was made out for a claim that the defendant was a retail client.  To the contrary the evidence before the Court contradicted the assertions which, in the face of that material, had no proper basis in fact.  Absent any proper basis in fact, the making of the assertions exposes a potential abuse of process.  Legal practitioners and their clients have a duty to the Court not to make any claim that is without a sufficient basis in fact on the material available to them.

Conclusion

1. In conclusion, the defence is untenable in law and no relevant facts in dispute were established by the defendant.  The plaintiffs are entitled to summary judgment because the defendant has not shown that the defence has any real prospect of success.  The defence is bad in law.  In view of my conclusion it is unnecessary for me to consider the other basis upon which the plaintiffs sought to support their claim for declaratory relief.

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