Kay v ASIC
[2002] WASCA 299
•1 NOVEMBER 2002
KAY -v- AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION & ORS [2002] WASCA 299
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2002] WASCA 299 | |
| THE FULL COURT (WA) | |||
| Case No: | FUL:10/2002 | 2 SEPTEMBER 2002 | |
| Coram: | WALLWORK J MURRAY J BURCHETT AUJ | 1/11/02 | |
| 20 | Judgment Part: | 1 of 1 | |
| Result: | Appeal dismissed | ||
| A | |||
| PDF Version |
| Parties: | ROMANA MIKA KAY AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION KNIGHTSBRIDGE MANAGED FUNDS LTD (ACN 089 532 169) KNIGHTSBRIDGE FINANCE PTY LTD (ACN 008 716 872) |
Catchwords: | Corporations law Finance broking and management services Investors invested in separate mortgages Returns to investors independent on performance of individual investments Whether managed investment scheme |
Legislation: | Corporations Act (Cth) 2001, s 9, s 601HG, s 601ND(1)(a) |
Case References: | Advancing Housing Pty Ltd (In Liq) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230 ASIC v Chase Capital (2001) 36 ACSR 778 Australian Softwood Forests Pty Ltd v Attorney General (NSW) (Ex rel Corporate Affairs Commission) (1981) 148 CLR 121 Conlan v Registrar of Titles (2001) 24 WAR 299 Lawloan Mortgage Pty Ltd [2002] QSC 302 Re Investa Properties Ltd 187 ALR 462 ASIC v Austimber Pty Ltd (1999) 17 ACLC 893 ASIC v Chase Capital Management Pty Ltd [2001] WASC 27 ASIC v Knightsbridge (2001) 38 ACSR 734 Australian Securities and Investment Commission v Chase Capital Management Pty Ltd [2001] WASC 27 Australian Securities and Investment Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403 Australian Securities and Investment Commission v Enterprise Solutions 2000 Pty Ltd (2000) 35 ACSR 620 Australian Securities and Investments Commission v Hutchings & Ors (2001) 38 ACSR 387 Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561 Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504 Bahr v Nicolay (No 2) (1988) 164 CLR 604 Barlow Clowes International Ltd (In Liq) v Vaughan [1992] 4 All ER 22 Barnes v Addy (1874) LR 9 Ch App 244 Biala Pty Ltd v Mallina Holdings Ltd (No 4) (1993) 13 WAR 83 Bishopsgate Investment Management Ltd (In Liq) v Homan [1994] 3 WLR 1270 Blyth Chemicals v Bushnell (1933) 49 CLR 66 City & Suburban Pty Ltd & Ors v Smith (1998) 28 ACSR 328 Commissioner for Corporate Affairs v Harvey [1980] VR 669 Commonwealth Bank Ltd v Smith (1991) 42 FCR 390 Consolidated Trust Co Ltd v Naylor (1936) 55 CLR 423 Dempster v Mallina Holdings Ltd (1994) 13 WAR 124 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 Hart v Commissioner of Taxation [2002] FCAFC 222 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 James Roscoe v Winder [1915] 1 Ch 62 Kenna & Brown Pty Ltd v Kenna & Ors (1999) 17 ACLC 1183 Maguire v Makaronis (1997) 188 CLR 449 Mineral & Chemical Traders Pty Ltd v T Tymczyszyn Pty Ltd (1994) 15 ACSR 398 National Australia Bank Ltd & Ors v Market Holdings Pty Ltd (In Liq) (2001) 37 ACSR 629 Perrins v Bellamy [1899] 1 Ch 797 Public Trustee v Paradiso (1995) 64 SASR 387 Quatro Ltd v Agro Investments Ltd (1999) 32 ACSR 480 Queensland Mines Ltd v Hudson (1978) 18 ALR 1 Re Allan Fitzgerald Pty Ltd (In Liq) (1993) 11 ACLC 183 Re Biposo Pty Ltd (1995) 17 ACSR 730 Re Bruton Pty Ltd (1990) 2 ASCR 277 Re Corbenstoke Ltd (No 2) [1989] BCC 767 Re Eastern Capital Futures Ltd (In Liq) [1989] BCLC 371 Re Global Finance Group Pty Ltd; ex parte Read and Herbert [2002] WASC 63 Re Intercontinental Properties Pty Ltd (In Liq) (1977) 2 ACLR 488 Re KAL Assay Southern Cross Pty Ltd (In Liq) (1992) 9 ACSR 245 Re Keith Morris (1975) CLC 40-206 Re National Safety Council of Australia, Victorian Division [1990] VR 29 Re Nida Pty Ltd (1993) 10 ACSR 195 Re NRMA Ltd (2000) 33 ACSR 595 Re Stuart [1897] 2 Ch 583 Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 United Tool & Dye Makers Pty Ltd (In Liq) v JV Marine Motors Pty Ltd (1991) 9 ACLC 314 Waldron v Auer [1977] VR 236 Waldron v MG Securities Australasia Ltd [1975] VR 508 Westpac Banking Corporation v Totterdell (1998) 20 WAR 150 Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 35 ACSR 363 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA TITLE OF COURT : THE FULL COURT (WA) CITATION : KAY -v- AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION & ORS [2002] WASCA 299 CORAM : WALLWORK J
- MURRAY J
BURCHETT AUJ
- Appellant (Person Heard)
AND
AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION
First Respondent (Plaintiff)
KNIGHTSBRIDGE MANAGED FUNDS LTD (ACN 089 532 169)
Second Respondent (First Defendant)
KNIGHTSBRIDGE FINANCE PTY LTD (ACN 008 716 872)
Third Respondent (Second Defendant)
(Page 2)
Catchwords:
Corporations law - Finance broking and management services - Investors invested in separate mortgages - Returns to investors independent on performance of individual investments - Whether managed investment scheme
Legislation:
Corporations Act (Cth) 2001; s 9, s 601HG, s 601ND(1)(a)
Result:
Appeal dismissed
Category: A
Representation:
Counsel:
Appellant (Person Heard) : Mr D H Solomon
First Respondent (Plaintiff) : Mr N W McKerracher QC
& Ms W F Buckley
Second Respondent (First Defendant) : Mr K L Christensen
Third Respondent (Second Defendant) : Mr K L Christensen
Solicitors:
Appellant (Person Heard) : Solomon Brothers
First Respondent (Plaintiff) : Michael Gething
Second Respondent (First Defendant) : Tottle Christensen
Third Respondent (Second Defendant) : Tottle Christensen
Case(s) referred to in judgment(s):
Advance Housing Pty Ltd (In Liq) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230
ASIC v Chase Capital (2001) 36 ACSR 778
Australian Softwood Forests Pty Ltd v Attorney General (NSW) (Ex rel Corporate Affairs Commission) (1981) 148 CLR 121
(Page 3)
Conlan v Registrar of Titles (2001) 24 WAR 299
Lawloan Mortgage Pty Ltd [2002] QSC 302
Re Investa Properties Ltd 187 ALR 462
Case(s) also cited:
ASIC v Austimber Pty Ltd (1999) 17 ACLC 893
ASIC v Chase Capital Management Pty Ltd [2001] WASC 27
ASIC v Knightsbridge (2001) 38 ACSR 734
Australian Securities and Investment Commission v Chase Capital Management Pty Ltd [2001] WASC 27
Australian Securities and Investment Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403
Australian Securities and Investment Commission v Enterprise Solutions 2000 Pty Ltd (2000) 35 ACSR 620
Australian Securities and Investments Commission v Hutchings & Ors (2001) 38 ACSR 387
Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561
Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504
Bahr v Nicolay (No 2) (1988) 164 CLR 604
Barlow Clowes International Ltd (In Liq) v Vaughan [1992] 4 All ER 22
Barnes v Addy (1874) LR 9 Ch App 244
Biala Pty Ltd v Mallina Holdings Ltd (No 4) (1993) 13 WAR 83
Bishopsgate Investment Management Ltd (In Liq) v Homan [1994] 3 WLR 1270
Blyth Chemicals v Bushnell (1933) 49 CLR 66
City & Suburban Pty Ltd & Ors v Smith (1998) 28 ACSR 328
Commissioner for Corporate Affairs v Harvey [1980] VR 669
Commonwealth Bank Ltd v Smith (1991) 42 FCR 390
Consolidated Trust Co Ltd v Naylor (1936) 55 CLR 423
Dempster v Mallina Holdings Ltd (1994) 13 WAR 124
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672
Hart v Commissioner of Taxation [2002] FCAFC 222
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
James Roscoe v Winder [1915] 1 Ch 62
Kenna & Brown Pty Ltd v Kenna & Ors (1999) 17 ACLC 1183
Maguire v Makaronis (1997) 188 CLR 449
Mineral & Chemical Traders Pty Ltd v T Tymczyszyn Pty Ltd (1994) 15 ACSR 398
(Page 4)
National Australia Bank Ltd & Ors v Market Holdings Pty Ltd (In Liq) (2001) 37 ACSR 629
Perrins v Bellamy [1899] 1 Ch 797
Public Trustee v Paradiso (1995) 64 SASR 387
Quatro Ltd v Agro Investments Ltd (1999) 32 ACSR 480
Queensland Mines Ltd v Hudson (1978) 18 ALR 1
Re Allan Fitzgerald Pty Ltd (In Liq) (1993) 11 ACLC 183
Re Biposo Pty Ltd (1995) 17 ACSR 730
Re Bruton Pty Ltd (1990) 2 ASCR 277
Re Corbenstoke Ltd (No 2) [1989] BCC 767
Re Eastern Capital Futures Ltd (In Liq) [1989] BCLC 371
Re Global Finance Group Pty Ltd; ex parte Read and Herbert [2002] WASC 63
Re Intercontinental Properties Pty Ltd (In Liq) (1977) 2 ACLR 488
Re KAL Assay Southern Cross Pty Ltd (In Liq) (1992) 9 ACSR 245
Re Keith Morris (1975) CLC 40-206
Re National Safety Council of Australia, Victorian Division [1990] VR 29
Re Nida Pty Ltd (1993) 10 ACSR 195
Re NRMA Ltd (2000) 33 ACSR 595
Re Stuart [1897] 2 Ch 583
Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332
United Tool & Dye Makers Pty Ltd (In Liq) v JV Marine Motors Pty Ltd (1991) 9 ACLC 314
Waldron v Auer [1977] VR 236
Waldron v MG Securities Australasia Ltd [1975] VR 508
Westpac Banking Corporation v Totterdell (1998) 20 WAR 150
Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 35 ACSR 363
(Page 5)
1 WALLWORK J: This is an appeal from an order of this Court declaring that the Knightsbridge Finance Mortgage Scheme ("the scheme") is a managed investment scheme as defined in s 9 of the Corporations Act (Cth) 2001 and that it should be wound up pursuant to s 601ND(1)(a) of the Act. The appellant contends that the learned Judge erred in his conclusion that the scheme was a managed investment scheme and that the purported registration of the scheme by the Australian Securities and Investments Commission ("ASIC") was of no effect.
Relevant Documents
2 The documents lodged with ASIC for the registration of the scheme were a Prospectus, a Custodial Agreement, and a Constitution. The Prospectus had a first part which was given to all investors when they were invited to invest moneys. The second part of the Prospectus had blank spaces to be filled in with the details of the particular property over which the advance would be secured by mortgage, with details of the borrower, the amount of the loan, the interest rate, the monthly repayments and an application form for the investor to complete.
3 The learned Judge noted that s 9 of the Act defined "managed investment scheme" as meaning:
"… a scheme that has the following features:
(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);
(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);
(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); or …"
(Page 6)
4 The prospectus revealed what was proposed in the scheme. Under the heading of "Offer" it stated:
"This prospectus offers investors the opportunity to obtain an interest in the Knightsbridge Finance Mortgage Scheme with the interest equating to a right to participate in a private mortgage loan originated and managed by Knightsbridge Finance Pty Ltd as part of the Knightsbridge Finance Mortgage Scheme. Potential investors are sent the first part and the second part of the prospectus which includes an application form. The second part of this prospectus details the features of the particular mortgage investment on offer."
5 In the same part of the Prospectus, (par 5), it is stated:
"All application money should be made payable to Knightsbridge Finance Mortgage Scheme and will be banked into the cash management account of the Knightsbridge Finance Mortgage Scheme.
Upon receipt by Knightsbridge Finance Pty Ltd, application moneys will be held in trust for the applicant in a bank account established by Knightsbridge Finance Pty Ltd to receive application funds. No money other than management fees will be released from this account without written authority from the investor or when invested into the approved investment.
Application moneys held in the designated bank account will earn interest from the date on which they are deposited until the particular authorised loan is settled.
Interest less management fees payable to Knightsbridge Finance Pty Ltd will be paid to the applicant at the rate published by Knightsbridge Finance Pty Ltd from time to time."
6 In Ch 2 of the Prospectus there is a definition as follows:
"Throughout this Prospectus, reference is made to Knightsbridge Finance Pty Ltd originating secured loans. 'Originate' refers to the finance broking services provided by Knightsbridge Finance Pty Ltd. For a fee, Knightsbridge Finance Pty Ltd manages individuals and companies looking to borrow money with investors who have money to lend."
(Page 7)
7 In the next paragraph but one it is stated:
"An investor obtains a direct interest in a particular secured loan originated and managed by Knightsbridge Finance Pty Ltd under the Knightsbridge Finance Mortgage Scheme and therefore obtains the benefit of the income generated in relation to the loan."
8 In the same chapter of the Prospectus (par 15), it is stated:
"Subject to the borrower not being in default under the loan, or unless as specified to the contrary in the second part of this Prospectus, investors are entitled to the income (ie interest paid on the particular secured loan made by them) less charges incurred by Knightsbridge Finance Pty Ltd and the fee to which Knightsbridge Finance Pty Ltd is entitled as well as a return of capital (ie principal) actually recovered by Knightsbridge Finance Pty Ltd on behalf of the investors."
9 In par 19 of the same chapter it is stated:
"Control of the loans rests with the investors who instruct Knightsbridge Finance Pty Ltd to act on their behalf. Knightsbridge Finance Pty Ltd will at all times act in the interests of investors and will keep investors informed on the conduct of the loan which relates to the investors' investment. In relation to major decisions concerning a loan (including where enforcement action may involve a significant cost), Knightsbridge Finance Pty Ltd may consult with investors."
10 In Ch 6 it is stated:
"Securities issued as part of Knightsbridge Finance Mortgage Scheme relate to participation in private mortgage loans originated and managed as part of the Knightsbridge Finance Mortgage Scheme."
11 In par 5 of Ch 7, which chapter is headed "Main Terms of the Offer", it is stated:
"All application moneys should be made payable to Knightsbridge Finance Mortgage Scheme and will be banked into the cash management account of the Knightsbridge Finance Mortgage Scheme.
(Page 8)
- Upon receipt by Knightsbridge Finance Pty Ltd application moneys will be held in trust for the applicant in a bank account established by Knightsbridge Finance Pty Ltd to receive application funds. No money other than management fees will be released from this account without written authority from the investor or when invested into the approved investment.
Application moneys held in the designated bank account will earn interest from the date on which they are deposited until the particular authorised loan is settled.
Interest less management fees payable to Knightsbridge Finance Pty Ltd will be paid to the applicant at the rate published by Knightsbridge Finance Pty Ltd from time to time."
12 In my view, the finance broking services and the management services provided for in the documents at a charge to the investors are of significance when considering the questions raised by this appeal.
The Decision Appealed From
13 The learned Judge held:
"All that the word 'scheme' requires is that there should be some 'programme or plan of action': see Australian Softwood Forests Pty Ltd v Attorney General (New South Wales)(1981) 148 CLR 121 at 129…"
14 In Australian Softwood Forests Pty Ltd v Attorney General (NSW) (Ex rel Corporate Affairs Commission) (1981) 148 CLR 121, Mason J (as he then was) said at 129:
"Nor again does it matter that the subscriber by accepting the offer constitutes himself as one who executes some elements of the scheme and derives from doing so a financial advantage which is not earned by other participants whose activities relate to other elements in the scheme. It is not an objection to an enterprise qualifying as an undertaking or scheme that it consists of a number of parts or elements, the participation of individual parties being limited to one of these parts or elements, their profit or remuneration being derived from the particular activities in which they engage. There is nothing in the notion of an undertaking or scheme that requires or implies that there is joint participation in everything comprised in the
(Page 9)
- plan or that there must be a share or pooling of profits or receipts."
15 In ASIC v Chase Capital (2001) 36 ACSR 778 at 789 Owen J said "The term 'scheme' is not defined in the Law." His Honour referred to the words of Mason J quoted above and went on to say:
"It seems to me that each investment is itself a separate part of the scheme but, nonetheless, it is a part of the overall scheme. I acknowledge that each is comprised of different participants or groups of participants. The method of organisation, while substantially similar, had subtle differences. The 'manager' was different in the sense that on some occasions the application form mentioned that CCML would be the manager while, on others, it would act through an agent. The target or object of the various investments were different. For example, in some of them the money was put in by way of subscription for shares or units in unit trusts. On another there was a purchase of a piece of machinery and the lease of the equipment to the target. Other investments, such as BBF, TCF and TIF were quite different again. But many, if not most, investment schemes will have a spread of investments. In the end, though, what ties the various investments together is the concept of 'the club'. It is the same overall structure, using the same method of operation and designed towards the same end. It seems to me, therefore, that it is appropriate to speak of 'the Chase Scheme' and the 'Leadenhall Scheme". But that does not mean that the individuality of a particular investment is ignored. It would be unrealistic to ignore the subtle differences between the individual components that go, in combination, to make up the scheme. In the end, on the finalisation of the scheme (whether that be by a simple realisation of the assets or a formal winding up and, in the latter event, subject to the costs of the winding up generally) each individual investment will have to be accounted for separately. If the schemes are looked at in this broad sense, it is clear that they are comprised of more than 20 members."
16 In my opinion, significant words in that passage, which should be regarded as correctly reflecting the relevant principle are "It is the same overall structure, using the same method of operation and designed towards the same end."
(Page 10)
17 In the present case the learned Judge asked the question whether the plan of action, ie the 'scheme', had the three features listed in the definition of the phrase 'management investment scheme'.
18 His Honour came to the conclusion that the investors had contributed money and that the money was paid as a consideration to acquire rights, namely the right to earn interest from a borrower under a loan arrangement which would be secured by a mortgage in favour of the investors. His Honour said:
"In addition, the money was paid knowing that fees would be deducted from it by Knightsbridge Finance. On that basis, the money was also paid as consideration to acquire rights, namely the right to secure the services of Knightsbridge Managed Funds as responsible entity, and Knightsbridge Finance as the entity responsible for managing the scheme."
19 His Honour came to the conclusion that the contributions were pooled as specified in the first part of (ii) of the definition, because when investors were invited to advance moneys to a borrower, the plan, as revealed by the prospectus, was that moneys were to be placed in the BankWest cash management account until those moneys were ready for payment to the borrower at settlement, in exchange for the mortgage security documents. When the "funds were sitting waiting for payment out, the total of the moneys in the account would earn interest. This interest was then shared among all investors pro rata. Pooled moneys therefore produced "financial benefits" in a strict sense."
20 His Honour also said that the pooled moneys produced financial benefits in the sense that after they had been pooled they would then be paid out to borrowers who would pay interest on those borrowed funds. The contributions were therefore also used in a "common enterprise" with the meaning of those words in the alternative part of (ii) of the definition. In this regard his Honour referred to the following words of Mason J in the Australian Softwood Forests Pty Ltd case:
"An enterprise may be described as common if it consists of two or more closely connected operations on the footing that one part is to be carried out by A and the other by B, each deriving a separate profit from what he does, even though there is no pooling or sharing of receipts of profits. It will be enough that the two operations constituting the enterprise contribute to the overall purpose that unites them. There is then an enterprise
(Page 11)
- common to both participants and, accordingly, a common enterprise."
21 With respect to par (iii) of the definition, his Honour said:
"The third feature of a managed investment scheme is that the members do not have day to day control over the operation of the scheme. I find that this element of the definition is satisfied. In fact, no party suggested otherwise."
22 His Honour held therefore that the KFM Scheme was a "managed investment scheme".
23 His Honour also found that each loan was a managed investment scheme but that the effect of "Class Orders - SCO 99/1639 and CO00/203" was that because the KMF Scheme was registered, the individual loans within it did not have to be registered as separate schemes.
24 His Honour held that notwithstanding it was not in issue, it was still necessary for him to make the finding which he did, that each of the 29 unregistered schemes listed in the schedule to the originating process satisfied the definition of "managed investment scheme". He found that in each case people had contributed money or money's worth as consideration to acquire rights to benefits produced by the scheme; the contributions were pooled and used in a common enterprise to produce financial benefits; and the members did not have day to day control over the operation of the scheme.
25 His Honour then considered whether there were grounds to wind up the scheme and the 29 unregistered schemes and, if so, who should be appointed to take responsibility for ensuring that the schemes were wound up.
Aspects of the Scheme
26 It is significant that the purpose of the relevant legislation is to regulate schemes where the public are involved in contributing finance for investment. In this case the responsible entity acquired a dealer's licence, issued prospectus documents and registered the scheme.
27 The respondents contended that the alternative requirement in (ii) of the definition of a scheme that the contributions be used in a common enterprise to produce financial benefits was met by each of the investors
(Page 12)
- accessing skilled finance broking and management services provided by the responsible entity, Knightsbridge Managed Funds Ltd, through its agent Knightsbridge Finance Pty Ltd, for a fee which those investors paid. In my view, that proposition is correct.
28 The plan was that investors would obtain the expertise of finance broking and management services in return for fees paid. There was management of investments under a common set of rules and procedures. People were invited to invest money in this scheme on the terms presented in the documents. It is a significant feature that members did not have day to day control over the operation of the scheme (whether or not they had the right to be consulted or to give directions) - see (iii) of the definition.
29 Although the individual mortgagees, whether comprised of one investor or a number, did not share in the profits from other mortgages, there was a system developed for investing the investors' money in a rational manner, subject to the investors paying the relevant fees.
30 Pursuant to Ch 10 of the prospectus there was a compliance plan setting out the measures which Knightsbridge Managed Funds Ltd would apply in operating the scheme to ensure compliance with the Corporations Law and the Constitution. The compliance plan was to ensure that the scheme was audited as required by s 601HG of the Law; also to ensure that property taken as security for loans was valued prior to the loans being made and that adequate records of the operation of the scheme were kept.
31 A compliance committee was set up. The majority of the members of that committee were independent of Knightsbridge Managed Funds Ltd and Knightsbridge Finance Pty Ltd. The functions of the committee included reporting to ASIC if the committee considered that Knightsbridge Managed Funds Ltd had not taken or did not propose to take appropriate action in relation to any breach of the Corporations Law or the Constitution.
The Appeal
32 It was submitted for the appellant that the expenses were not "paid across the board" and that all expenses were allocated to an individual mortgage. That is not strictly correct because the individual investors were charged fees at a rate which would cover the expenses and generally provide for the running of the companies concerned.
(Page 13)
33 The appellant contended that the investors' entitlement to interest was entirely dependent upon the particular borrower and that there was no pooling of interest payments under the scheme, in the sense that individual mortgagees would not be entitled to profits from other mortgages; further that the mortgages were in parallel rather than the interests being cumulative, as it was suggested the interests had been in the Australian Softwood Forests' case; that in this case there was no sharing of income between the various mortgagees and no sharing of entitlement to return of capital.
34 The appellant contended that there was also no sharing of losses. Each mortgage was an entirely separate transaction. It was admitted that the parallel separate mortgages were managed by the one broker. The question was whether that gave rise to an overall scheme.
35 It was further submitted for the appellant that if it was found that the separate mortgage interests were part of the scheme, they would be scheme property within s 9 of the Act, being property acquired with the contributions. It was said to follow from that, that all of the mortgage interests would be held on trust for all of the members. This was contrary to what the prospectus said, which was that each investor had an investment in a particular mortgage and rights under that particular mortgage. The prospectus itself recognised that there was no umbrella scheme because in each case Part 2 was different for each loan and related to a particular transaction.
36 It was conceded that for a fee, the scheme matched individuals and companies looking to borrow money from investors who had money to lend. However, it was submitted that each investor obtained a direct interest in a particular secured loan originated and managed by Knightsbridge Finance (605D); that beneficial ownership of a secured loan was with the investor or investors who made the loan. That was not consistent with s 601FC(2) of the Act which provided for a trust over all scheme property and that all mortgages were scheme property - Barrett J in Re Investa Properties Ltd 187 ALR 462 at [12] - [14].
37 The point was made for the appellant that the prospectus provides that the investor will be the lender (top 607) and the investor's name will be on the security documents except where some mortgages are held "on trust for the lenders". The lenders were to have a specific beneficial interest in the relevant mortgage. Fees were allocated to each individual loan. They were not allocated across the board. The risk in each
(Page 14)
- transaction remained with the investor. The timing of payments to investors corresponded to the payments by the borrowers.
38 It was submitted that other investors were not entitled to money paid under a particular loan and the moneys would be held on trust for the investor who made that loan. That was completely inconsistent with 601FC(2) of the Law because there were separate trusts in connection with each mortgage and its proceeds. Reference was made to Ch 2, par 20 of the prospectus (609A) where it was provided if a borrower defaulted, an investor would not be able to recover any shortfall from Knightsbridge Managed Funds Ltd or Knightsbridge Finance Pty Ltd.
39 As opposed to these propositions, it is noted that Knightsbridge Finance acts in the interests of the investors, checks insurance and manages the loans in accordance with the Constitution. Investors' records are maintained by administration staff trained in their particular areas of responsibilities - Ch 3, par 7 and par 8 (613A).
40 The appellant relied on the provisions in Ch 4 (614B) that there was a level of investment risk which was different for each authorised investment and that it was the responsibility of each investor to satisfy himself or herself that the proposed investment was suitable for his or her specific needs. It was submitted that where there was more than one client there was a scheme, but it was a separate scheme and had nothing to do with the other investors. Part 2 of the prospectus in each case identified a particular proposal for that particular investor. Financial information was given concerning the borrower. There was a valuation of the property. When the money was sent in by the investor it was held on trust by the broker to apply it only for the purpose of the particular investment. Interest was paid on the money. The brokers were offering services to various people and arranging for separate individual pooled loans.
41 With respect to the definition of "scheme property", reliance was placed on the reasons of Barrett J in paragraphs 12 - 14 of Re Investa (supra). It was submitted that scheme property included all the proceeds of the scheme and if money had been pooled it had been pooled in one overall scheme. If there was an umbrella scheme all of the mortgage interests were part of the scheme and scheme property. That was inconsistent with the prospectus concerning particular loans for each investor. Therefore there was not an overall scheme within the terms of the legislation.
(Page 15)
42 It is significant that pursuant to the prospectus, where there is a default, the management is entitled to deduct the expenses for the recovery of the loan and the enforcement of securities as a first priority from moneys received from the particular borrower - Ch 4 par 2 [615]. Knightsbridge Finance is entitled to charge a fee for the time spent by its employees looking after the investors' interests in a loan upon the occurrence of a breach (616A to B).
43 It was submitted for the appellant that there was nothing in that provision which went to the scheme as a whole. It applied to each individual account separately and was based on insolvency practitioners' hourly rates. It was said that there was nothing to be found anywhere in the prospectus concerning any fee to be charged to "what is called the umbrella scheme". Each fee is charged to an individual account.
44 It was stressed that an investor did not have a right of return from an entire portfolio. The investment was in a particular transaction. There was no ability to call for repayment from an overall fund or to redeem units as some other schemes had provided. There was no right of transfer. Each investor had a particular entitlement with respect to a particular loan. It was submitted that everything in the documents was consistent with a specific transaction. There was no common plan of action. There was no common enterprise between the people in mortgage A and those in mortgage B.
45 I note that there is the provision which provides for the payment of interest on moneys which have not been invested at a rate published from time to time. That rate would be the same for all moneys in the trust account.
46 From the point of view of the respondents, the scheme gave to investors the expertise of finance broking and management services paid from interest payments. It was said that the overall scheme was detailed in great complexity in the documents including the prospectus. The overall purpose was the power of acquiring borrowers and earning interest on the funds which were generated in accordance with the scheme. All of the participants obtained benefit from the organisation from the beginning to the end. The scheme was dependent on the expertise of the mortgage broker which brought all of the investments into one pool.
47 The point was made that (iii) of the definition of a scheme requires "that 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
(Page 16)
- directions)…". This is a difference between an overall scheme and a broker arranging mortgages for private clients. It was submitted that the Legislature has provided protection for members who do not have day to day control over the operation of the scheme. Even in a single lender, single borrower situation under the scheme there was the ensuring that the mortgage document had all the terms it should have and that it was executed properly. There was the administration and the collection of the loan. Those matters were attended to by the companies. The responsible entity had acquired a dealer's licence. It had a custodial agreement and a constitution. The scheme was registered. There was a compliance committee which would not ordinarily be present where there is a mortgage broker.
Conclusions
48 In my opinion, each separate investment was part of an overall scheme in the sense explained by Owen J in the Chase Capital decision (supra). There were different participants and the target or object of the various investments was usually different. However, there was the same overall supervisory structure using the same method of operation and designed towards the same end. Before stating this conclusion, it is unnecessary to analyse in detail the decision of Holmes J in Lawloan Mortgage Pty Ltd [2002] QSC 302, since Holmes J expressly held (at par 79) that the matter before him was distinguishable from the present case as first instance.
49 The contentions in grounds 3.4 and 3.5 that the ongoing operations involved widespread and serious breaches of trust were not established in fact. Neither were the contentions in ground 4 that his Honour erred in holding that there was a programme or plan of action of and for all mortgagees in separate secured loans and that his Honour should have held that there was no common enterprise for all the mortgages and therefore no managed investment scheme.
50 For the above reasons I would not uphold grounds 1 - 4 of the appeal which in essence contend that his Honour erred in holding that there was a managed investment scheme which should be wound up.
Whether Mr Carrello Should be Appointed
51 The second issue which counsel for the appellant submitted should be answered differently to the way in which it was answered by the
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- learned Judge, was whether Mr Carrello should have been appointed as the person responsible for ensuring the winding up of the schemes.
52 Mr Carrello was the voluntary administrator of Knightsbridge Managed Funds Ltd and the liquidator of Knightsbridge Finance Pty Ltd. The appellant was concerned, amongst other things, with events which had occurred before Mr Carrello was appointed as administrator of the two Knightsbridge companies. There was a litany of complaints advanced by counsel for the appellant (pages 13 - 15 of the transcript) concerning how the funds had been managed by Cliftons. It was submitted that Mr Carrello had not been told by ASIC about the problems concerning the management of the moneys; further that although Mr Carrello had been the liquidator and administrator he had done nothing to investigate the alleged problems.
53 It was submitted that the relevant maladministrations had been known to ASIC since about March 2000. However, Mr Carrello had first known about the problems a couple of weeks before November 2001.
54 His Honour found that Mr Carrello could not be criticised for not learning of the ASIC investigations and conclusions before he did as they had not been drawn to his attention.
55 He said that the evidence suggested that the bulk of the alleged irregularities had occurred before the Knightsbridge Finance Group had acquired the two companies. He also found that an audit, concerning a period after that time, conducted by Mr Cooke, had revealed few irregularities.
56 His Honour said that there were matters which might require further investigation. In any event, if there were serious irregularities the individual investors would have the right to take whatever action and make whatever claims, they considered appropriate against any persons responsible.
57 His Honour said that the orders proposed were directed to the orderly winding up of the schemes. They would not authorise Mr Carrello to take over and conduct causes of action or suits on behalf of investors in relation to the claims without seeking directions from the Court. If a conflict arose, that would be the time to address the problem.
58 In his Honour's opinion the two relevant BankWest accounts were never overdrawn and nothing in Conlan v Registrar of Titles (2001) 24 WAR 299 affected the decision concerning whether or not Mr Carrello
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- should be appointed to ensure the winding up of the schemes; that it must be shown that there is a real conflict - some realistic prospect of embarrassment - before a liquidator will be removed - Advance Housing Pty Ltd (In Liq) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230 at 232 - 234.
59 His Honour found that Mr Carrello was well acquainted with the schemes and that it would be to the financial disadvantage of investors if he were not appointed. A new person would have to spend a considerable amount of time and money coming to grips with the problems associated with each loan.
60 His Honour also found that the appellant had not discharged the onus of establishing that there was a real prospect of conflict and that there was no evidence of real conflict which would lead to the conclusion that Mr Carrello should not be appointed.
61 Mr Carrello was the administrator of the responsible entity and the liquidator of the third respondent. He had been undertaking the work required to administer the scheme. He was cross-examined at length. The learned Judge was unable to discern any basis upon which it could be cogently argued that there was a problem in his carrying out of the practical and logical extension of the duties he had already been performing. His appointment did not deprive the investors of any of their rights. There were registered mortgages for every loan. The named mortgagees had preserved, indefeasible rights to the payment of the funds. Mr Carrello was familiar with the operations of the second and third respondents and the loans forming part of the scheme.
62 His Honour said that Mr Carrello, in his capacity as liquidator of Knightsbridge Finance and as administrator of Knightsbridge Funds Management, was winding up the schemes. Once the orders proposed were made, Mr Carrello would continue to perform his role as liquidator of Knightsbridge Finance and administrator of Knightsbridge Funds Management. He would have the additional role as the Court appointed person responsible for ensuring the winding up of the schemes under s 601NF and s 601EE of the Corporations Act. There would be proper funding and a committee of inspection for each non-performing loan.
63 Counsel for the appellant submitted there were very substantial problems with the trust account which required investigation. However, Mr Carrello can undertake that investigation and apply to the Court if there are any problems arising from it.
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64 Mr Carrello's appointment does not prevent individual investors making claims against either of the Knightsbridge entities. His role is one of getting in the property. He will make sure the moneys are collected under the mortgages and pay them to the people who are entitled. If a dispute arises as to who is entitled, the money can be paid into Court.
65 In my view, there was nothing before his Honour or in the appeal papers which indicated that there was any real or sensible possibility of a conflict. If there has been any negligent management or inappropriate activity by management the individual investors can pursue whoever was responsible.
66 Under the present orders Mr Carrello is the person responsible to wind up the scheme. He will make decisions concerning calling up particular loans if they are in default and make sure payments are made if there is not default. The investors retain their rights under the mortgages. There is no reason to suggest that Mr Carrello will not act appropriately and come back before the Court if necessary.
67 I would not uphold the appellant's contentions in this regard.
Costs
68 The final ground of appeal is that his Honour erred in not awarding costs to the appellant, basically on the ground that by her appearance, the appellant performed a public service which was required in order to elicit important facts. It was submitted that if costs are not awarded in these circumstances the Court is unlikely to have the benefit of contradictors in future cases.
69 The learned Judge said that the appellant was entirely unsuccessful in the arguments which were advanced before the Court but it was true that the Court was assisted in having a contradictor. His Honour was of the view that some of the submissions were over developed in some areas and perhaps the Court had spent more time hearing the case than would otherwise have been necessary. His Honour referred to previous authorities cited which were all cases involving a scheme of arrangement in which proposals were objected to by persons who wished to oppose them.
70 His Honour thought that if an award of costs was made in the appellant's favour the cost could fall on other investors and creditors and that would be unfair to the other investors and creditors. His Honour
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- therefore thought that it was not appropriate to make an order for costs in the appellant's favour. He also did not think it appropriate to make an order for costs in favour of the companies because the appellant could not be blamed for attending the Court as a contradictor. He dismissed both applications for costs.
71 It was submitted on behalf of ASIC that it is a regulatory authority charged with the regulation of this type of case and that where it is entirely successful it should not have to meet the costs of either objectors to, or supporters of its case. It was submitted that the authorities relied on by the appellant had no application to this case and that there was no basis for ordering that costs should be paid where an objector was completely unsuccessful and her conduct had led to more time hearing the case than was necessary.
72 It was submitted on behalf of the second and third respondents that the appellant had taken a position before the trial Judge which went beyond merely being a contradictor coming before the Court in essence to make submissions. Further, that the appellant had sought discovery and joinder of parties and had become an active party in the litigation. The learned Judge had commented that the appellant's action had perhaps lengthened the proceedings. The appellant had also attacked Mr Carrello's position and had lost "all along the line". The second and third respondents submitted that there was no reason for the ordinary rule to be departed from and that an order should be made that the appellant should meet the costs of the second and third respondents.
73 In my view, the order as to costs made below should not be disturbed and the appeal should therefore be dismissed with costs.
74 MURRAY J: I respectfully agree with Wallwork J that this appeal should be dismissed with costs. I have nothing to add to the reasons for decision published by his Honour.
75 BURCHETT AUJ: I agree with the reasons and conclusions of Wallwork J.
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