Managed Investments Australian Limited and Australian Securities and Investments Commission
[2005] AATA 237
•18 March 2005
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2005] AATA 237
ADMINISTRATIVE APPEALS TRIBUNAL )
) No Q2003/919
GENERAL ADMINISTRATIVE DIVISION ) Re MANAGED INVESTMENTS AUSTRALIA LIMITED Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Respondent
DECISION
Tribunal Deputy President Don Muller Date18 March 2005
PlaceBrisbane
Decision The Tribunal affirms the decision made by the Australian Securities and Investments Commission on 3 October 2003, to refuse to grant to the Applicant an extension of the transition period. ................SIGNED..............................
D.W. MULLER
DEPUTY PRESIDENT
CATCHWORDS
MANAGED INVESTMENTS – Transition from prescribed interest scheme to managed investment scheme – discretion to grant extension of period within which to comply with new law – ASIC Policy Statements 51 and 135 – misleading application for extension – scheme operating outside provisions of corporations law – extension of period not granted – decision affirmed
Corporations Law (pre 1 July 1998) ss 66(2), 1065(2), 1067(2)
Managed investments act 1998
corporations act 2001: ss9, 708(10), 601ED, 601EE, 601FM, 1454(1)
REASONS FOR DECISION
Deputy President Don Muller 1. Managed Investments Australia Limited, the Applicant, is the current Manager of the Hillston Grove Vineyards Project (the Vineyards Project).
2. Since 1 July 2000, the Vineyards Project has been operating as an unregistered managed investment scheme, a situation which was apparently not known to ASIC until about September 2003. Indeed the Applicant and ASIC conducted their affairs with each other until September 2003 as if the Vineyards Project was being conducted in accordance with the Corporations Law.
3. This unfortunate state of affairs came about as the result of the following sequence of events:
(a)A change in the Corporations Law, effective from 1 July 1998, required the Vineyards Project, which was a “prescribed interest scheme” under the old law, to comply with the new law and register as a “managed investment scheme” under the new law by 30 June 2000.
(b)On 22 June 1999, the Applicant applied for an extension of the transition period to 30 June 2004. The application contained some inaccurate material about the intention of the Applicant to issue further interests in the scheme, and also about the extent of the Applicant’s day to day involvement in the management of the scheme. The application was made on a Pro Forma document which contained certain dates, the effect of which were to limit the circumstances under which an extension could be granted within ASIC’s guidelines.
(c)On 21 July 1999, ASIC purported to grant the relief sought by the Applicant.
(d)The relief instrument produced by ASIC, in consultation with the Applicant’s solicitors, contained conditions which, when combined with the fact of the issue by the Applicant of interests in the scheme in the second half of 1999, resulted in the grant of relief to the Applicant as extending only to a date in 1999 (not 30 June 2004)
(e)That is, the relief document gave no relief at all.
4. On 19 September 2003, the Applicant approached ASIC with a view to having the matter fixed. The Applicant suggested various options including retrospectively changing the date on the offending document, extending the time within which it could comply with the Corporations Law to 30 June 2004, or “take no action” for six months to allow compliance to take place.
5. On 3 October 2003, ASIC decided that it did not have the power to do any of the things sought by the Applicant.
6. The Applicant seeks review of the decision of 3 October 2003.
7. If no relief is granted, the Vineyards Project will be subject to sections 601ED and 601EE of the Corporations Act, which includes the prospect of being wound up.
8. The Vineyards Project was established by a deed dated 12 May 1998 as a scheme which offered prescribed interests. The original parties to the deed were Grapes of Australia Management Ltd (GAM), Hillston Grove Vineyards Ltd, Investments Licensing Pty Ltd and Inteq Custodians Ltd (subsequently known as Cardinal Financial Services Ltd) (Trustee).
9. On 27 June 1998, the deed was approved by ASIC pursuant to subsection 1067(2) of the Corporations Law as in force prior to 1 July 1998 (“Old Law”).
10. The approved deed was amended by:
(a)an Amending Deed dated 4 February 1999 which ASIC approved on 15 February 1999;
(b)a Deed of Retirement of Manager dated 12 October 1999 – under which GAM retired as Manager of the Project and the Applicant became the Manager – which ASIC approved on 22 October 1999;
(c)a Deed of Retirement and Appointment of Trustee dated 6 February 2001 – under which Cardinal Financial Securities Ltd retired as Trustee and Burke Bond Securities Limited became Trustee of the Project – which ASIC approved on 20 February 2001; and
(d)a Deed of Retirement and Appointment of Trustee dated 31 December 2001 – under which Burke Bond Securities Limited retired as Trustee and Custodial Limited became Trustee for the Project – which ASIC approved on 17 May 2002.
11. On 1 July 1998, the Managed Investments Act 1998 came into effect. The new legislation changed the Corporations Law, now the Corporations Act 2001, (“New Law”) by replacing the prescribed interest schemes regime of the Old Law, with a managed investment scheme regime. The new legislation required that a single responsible entity be responsible for the operations of a managed investment scheme, such as the Vineyards Project, and to perform the roles previously carried out by the Trustee and the Manager. Section 601FA of the Corporations Act requires the “responsible entity” of a registered scheme to be a public company that holds an Australian Financial Services Licence which authorises it to operate a managed investment scheme.
12. The rationale behind the New Law was said to enhance investor protection and consumer confidence in relation to collective schemes.
13. It is common ground that the Vineyards Project falls within the definition of a managed investment scheme as set out in section 9 of the Corporations Act and these legislative changes are consequently relevant to it and to the Applicant.
14. Transitional provisions were enacted in the Corporations Law to provide for the changes made by the Managed Investments Act 1998 and to enable prescribed interest schemes to make the transition from their regulation as prescribed interest schemes to regulation as managed investment schemes. Essentially, the transitional provisions provide relief for qualifying managed investment schemes from complying with the Managed Investments Act 1998 for a certain period of time.
15. Subsection 1454(1) of the New Law provided that the Old Law continued to apply to a prescribed interests scheme for a period of two years starting on the commencement of the New Law unless, before the two year period ended, it became a registered managed investment scheme.
16. The Managed Investments Act 1998 required that all prescribed interest schemes make the transition to managed investment schemes within two years of the commencement of the Act on 1 July 1998. That is, by 30 June 2000.
17. Subsection 1454(2) of the New Law provided that ASIC had a discretion to extend the period of two years if the prescribed interest scheme was to be wound up at a fixed time and ASIC thought it would be unreasonable to require the prescribed interest scheme to become a registered managed investment scheme before being wound up.
18. ASIC produced Policy Statement 135 (PS135) which sets out the circumstances under which ASIC will exercise the discretion to extend the transition period of two years. Those parts relevant to this review are:
“Extending the transitional period
[PS 135.3] We will give you relief so that the transitional period is extended under s 1454(2). Relief will be on a case by case basis following Pro Forma 174 [PF 174]. We will give relief when both the following criteria are satisfied:
(a)the scheme is certain to terminate at a particular time after 30 June 2000 that the approved deed does not allow the parties to the scheme to change; and
(b)it would be unreasonable for the scheme to be required to be registered.
[PS 135.4] It will not be unreasonable for a scheme to be registered unless the scheme is closed. By this we mean that the interests in the scheme could only be issued after the Managed Investments Act 1998 commenced:
(a)under a prospectus which was lodged before the Managed Investments Act commenced; and
(b)by excluded issues.
[PS135.5] If a scheme is closed, it is unreasonable for that scheme to be required to be registered when:
(a)the scheme operator will have limited active management duties after 30 June 2000; or
(b)the scheme will be wound up soon after 30 June 2000.
Extending the transitional period
[PS 135.9] New investments in schemes should not be deprived of the protection of the managed investment provisions of the Law for longer than the two year standard transitional period unless this would unreasonably disadvantage a promoter who has incurred significant costs.
[PS 135.10] Schemes will only be given extensions of the transitional period when it is clear that the cost of registering is disproportionate to the benefits to prescribed interest holders. When deciding whether or not to give relief, we will also consider the future difficulties of continuing to administer the Law as it existed before 1 July 1998.
Closed
[PS135.12] By the time a prospectus is lodged, the promoter of a scheme will have incurred significant costs. Promoters should not be denied an extension that they could otherwise get because they continue to use a prospectus current at the commencement of the Managed Investments Act for its normal life, so long as the scheme is closed to other non excluded applicants.
Fixed term
[PS 135.13] If the scheme is to be wound up at a fixed time after 30 June 2000 (‘a fixed term scheme’) we can extend the two year transitional period for registering schemes: s1454(2).
[PS 135.14] Our power applies only to fixed term schemes because it was not intended that we would have the power to extend the two year period indefinitely. We consider that a fixed term scheme is one which is certain to terminate:
(a) on a particular calendar date; or
(b)by reference to some event certain to happen, that can be determined by reference to an existing agreement between the parties.
Non-mining primary production schemes, film schemes and similar schemes.
[PS 135.18] We will consider extending the transitional period for non-mining primary production schemes, film schemes and similar schemes. This is because for most of their operation, they are ‘passively’ operated in that the only role of the operator is maintenance and receiving income. We will initially give an extension for up to four years after the standard two year transitional period ends.
[PS135.19] To be eligible for relief such schemes need not be wound up by 30 June 2010 or any other particular date. However:
(a) the scheme must be a fixed term scheme; and
(b)the approved deed for the scheme must provide for the scheme to be wound up at a time reflecting the underlying cycle of the business.
If the business venture, when applying for relief, has not entered a phase where only limited management functions are needed, we will not give relief. For example, in the case of a film scheme, the film must be complete and, in the case of a forestry scheme, the trees must have been planted and the plantation set up complete.
Schemes to be wound up shortly after transition
[PS 135.20] We will extend the transitional period when a scheme is to be wound up within one year after the standard two year transitional period ends. If we did not give this extension, the cost of registering would be unreasonable due to the short period when the managed investments provisions of the Law would give protection.”
19. Of crucial importance in this case is the fact that although interests in the Vineyards Project were first issued under a prospectus dated 28 May 1998, that is before the Managed Investments Act 1998 commenced, another prospectus was lodged with ASIC on 22 January 1999 and further interests were issued pursuant to that second prospectus. That is, interests in the Scheme issued under a prospectus which had been lodged with ASIC after 1 July 1998. It was not a closed scheme within the meaning of that term in PS135.4 and 135.5.
20. The section 37 document also shows that further interests in the scheme were issued, other than under a prospectus lodged with ASIC prior to 1 July 1998, and other than the second prospectus lodged on 22 January 1999. The particular references are:
(a)See folios 32, 33 where offers of units in the Vineyards Project were made to existing holders in or about September 2001.
(b)See folios 34, 39 and 40 where offers of units in the Vineyards Project were made to new investors, which were taken up in December 2001 through to April 2002.
(c)See for example folios 44, 45, 48 and 50 where offers of units in the Vineyards Project (No. 3) were taken up in June and July 2002.
21. It should also be noted that the Vineyards Project involves the ongoing tending of grape vines. That is, the enterprise has to be managed on a day to day basis. The vines have to be pruned, weeded and watered. The grapes have to be picked and marketed. It would be impossible for the enterprise to succeed if it was “passively” operated. The scheme was clearly not passively operated within the meaning of that term in PS 135.18, nor within the meaning of “limited active management duties” in PS 135.5.
22. It is clear that the Vineyards Project did not satisfy the crucial elements of PS 135. It was not closed. It was not anticipated that it would be wound up anytime soon after 30 June 2000, although it was said to be for a fixed term, terminating on 30 June 2020. It was not passively operated. It was not an undertaking which would have automatically gained an extension of time.
23. On or about 22 June 1999, Deacons Graham James, solicitors for Cardinal, on behalf of the Project, applied for relief by ASIC from the requirement for the Vineyards Project to convert to a managed investment scheme until 30 June 2004. The application contained the following:
“We are instructed by each of the Trustee and Manager to apply for an extension of time within which the Project must comply with the transitional provisions applicable to managed investment schemes, being until 30 June 2004.
The application is made under the provision of section 1454(2) of the Corporations Law applicable to managed investment schemes, being until 30 June 2004.
The application is made under the provision of section 1454(2) of the Corporations Law applicable to each jurisdiction, ASIC Policy Statement 135 and ASIC Pro Forma 174.
Nature of Project
The Project is a non-mining primary production project, in respect of which participants (‘Growers’) have the right to use certain land for the purpose of carrying on the business of commercially growing, cultivating and harvesting grapes in order to process and sell grapes and grape juice. The Growers have entered into a Management Agreement with the Manger for the provision by the manager of cultivation, maintenance and marketing of the grapes and grape juice services to the Growers.
Issue of Interests
The interests of Growers were issued pursuant to a Prospectus in May 1998 and a Supplementary Prospectus dated 22 January 1999 which were lodged with and registered by the Australian Securities Commission and the Australian Securities and Investments Commission. We understand that there will be no further issue of interests in the Project.
Fixed Term
The life of the Project is for a fixed term, expiring on 30 June 2020. There is no provision in the Project Deed that enables the term of the Project to be extended.
We enclose a copy of page 1 of the Project Deed and pages 5 and 6. Clause 3.5 provides that the Project will terminate on 30 June 2020 or at such earlier date as is provided in the Project Deed or the law.
Stage of Operations
We are advised that the land has been prepared for planting of the Growers’ plots, which has commenced. Planting is expected to be completed in October 1999. Thereafter, the Project will, for all intents and purposes, enter into the ‘passive’ phase in that the only role of the Manager will be maintenance and the receiving of income from future grape harvests.”
24. ASIC sent Pro Forma 174 to Deacons. The Pro Forma contained the following:
“SCHEDULE A: WHEN SUBSECTION 1454(2) EXTENSION ENDS
(a) [insert calendar date]; or
(b)the date upon which an interest in the Scheme, if any, is issued after 30 June 1998, other than:
(i)under a prospectus which was lodged before 1 July 1998; or
(ii)by an excluded issue; or
(c)the date upon which there is a change, if any, to the time by which the scheme is to be wound up, whichever is the earliest.”
25. Correspondence went back and forth between Deacons and ASIC concerning the fine tuning of certain areas of the “relief instrument” but the date inserted by Deacons in paragraph (a) of Schedule A remained in the final form of the instrument, namely, 30th June 2004, and the dates in paragraph (b) of Schedule A, which were part of the Pro Forma, also remained, namely, 30 June 1998, and 1 July 1998.
26. Thus the so-called “relief instrument” dated 21 July 1999 extended the application of the transition period in subsection 1454(2) of the New Law in relation to the Vineyards Project until:
“ (a) 30 June 2004; or
(b)the date upon which an interest in the Scheme, if any, is issued after 30 June 1998, other than:
(i)under a prospectus which is lodged before 1 July 1998; or
(ii)by an excluded issue; or
(c)the date upon which there is a change, if any, to the time by which the scheme is to be wound up, whichever is the earliest.”
27. The ASIC instrument gave no relief at all because of the dates contained in paragraph (b), namely 30 June 1998 and 1 July 1998, because of the prospectus that was lodged with ASIC on 22 January 1999 (after 1 July 1998) and because of the interests issued pursuant to it during 1999. That is, the instrument gave an extension until some time in 1999. This was of no effective benefit because the legislation relating to the transition period gave an extension until 30 June 2000.
28. It is the contention of the representatives of the Applicant that the relief instrument was never meant to be of no effect, and that the dates in paragraph (b) above were meant to be 30 June 1999 and 1 July 1999 (not 1998).
29. Thereafter the Applicant and ASIC continued their affairs and arrangements with each other, as though the “relief instrument” had granted the Vineyards Project relief until 30 June 2004.
30. However, after 30 June 2000 the Vineyards Project had actually become an unregistered managed investment scheme.
31. The oversight was not properly focussed upon by ASIC until August 2003, when action was taken by the Applicant to remove the Trustee, Custodial Ltd. This action caused ASIC to look more carefully at the Vineyards Project. ASIC came to the conclusion that the Applicant was operating an unregistered managed investment scheme in breach of the Corporations Law.
32. On 19 September 2003, the Applicant took the following steps:
(a)Delivered to ASIC all books and records required by ASIC;
(b)Contended that ASIC, by lodging documents in relation to the Vineyards Project in 1999 and 2001, had given implied consent to the relief instrument of 21 July 1999;
(c)Applied for a change to the dates in the instrument granting relief such that it could grant an extension until:
(i)30 June 2004; or
(ii)The date upon which an interest in the scheme, if any, is issued after 30 June 1999; other than under a prospectus which was lodged before 1 July 1999; or alternatively;
(d)Requested that ASIC take a “no action” position for a period of six months in relation to the Project to allow Hillston Grove Vineyards Ltd time to obtain an Australian Financial Services Licence and for the scheme to convert.
THE DECISION UNDER REVIEW
33. On 3 October 2003 ASIC wrote to the applicant refusing the applications in the following terms:
“I advise that the grounds for refusing your client’s application for approval dated 14 August 2003 are as follows:
1.the extension of the transition period under section 1454 of the Corporations Law, in force prior to 1 July 1998 (‘the Law’) has ceased, as conceded in your letter dated 19 September 2003; and
2.as such, ASIC does not have any power to approve the Deed to continue under subsection 1065(2) of the Law.
I advise that the grounds for refusing your client’s application to extend the transition period dated 19 September 2003 are as follows:
1.the extension of the transition period under section 1454 of the Corporations Law, in force prior to 1 July 1998 (‘the Law’) has ceased;
2.as such, ASIC does not have any power to extend the transition period under subsection 1065(2) of the Law;
3.ASIC is not satisfied that modifying the instrument dated 21 July 1999 is within the scope of its policy in Policy Statement 51: Applications for relief – see paragraphs PS51.63 and PS 51.64; and
4.the application demonstrated no special circumstances that would justify a departure from policy.”
34. The Applicant seeks a review of the decision dated 3 October 2003.
35. At the hearing the Applicant was represented by Ms. C. Conway of Counsel, instructed by McCullough Robertson and the Respondent was represented by Ms. M. Brennan of Counsel.
36. The Tribunal had the following evidence before it:
· The section 37 documents;
· Two affidavits plus oral evidence from Rodney Harold Jellyman, Director of the Applicant company and day to day manager of the Vineyards Project.
· Oral evidence from Wayne Roderick Lyons, Registered Company Auditor who has been the company Auditor of Hillston Grove Vineyards Limited, Managed Investments Australia Limited and the Hillston Grove Vineyards Project since June 1999.
· The historical company extract of Hillston Grove Vineyards Limited.
· An affidavit and oral evidence from Philippa Bell, who is attached to the Financial Services Regulation Directorate of ASIC.
37. Mr. Jellyman gave evidence to the following effect:
·In the first half of 1999 he had discussions with a Mr. Russell, a director of the Trustee of the Vineyards Project, Cardinal Financial Securities Limited, about the need for an application to be lodged with ASIC seeking an extension of the transition period.
·He stressed to Mr. Russell the need for ASIC to be reminded of the existence of the January 1999 prospectus when executing an instrument granting the relief.
·He gave formal instructions to Cardinal to obtain an extension of the transition period until 30 June 2004.
·On or about 12 April 2000, he received a copy of a letter signed by Pauline Vamos, National Compliance Adviser Managed Investments (ASIC), to Managed Investments Ltd. The letter contained the following:
“Registration of Managed Investment Schemes – 30 June 2000 Deadline
ASIC’s records show that you are, or were previously, the manager of investment schemes constituted by an approved deed under the prescribed interests provisions of the Corporations Law (the Law).
As you know, ASIC has previously written to you requesting information about whether you intend to apply for registration of the investment schemes or whether steps have been taken to wind up the schemes. All prescribed interest funds, unless they have been, or will be, wound up before 1 July 2000, have obtained or qualify for ASIC approved relief or do not otherwise satisfy the statutory definition of managed investment scheme, are required to complete transition before 30 June 2000. This is a statutory deadline and as such ASIC has limited powers to extend that date generally. You should not assume that you will be able to gain any extension (or other relief) outside that referred to in ASIC Policy Statement 135.
If you have not obtained registration of your funds as a managed investment scheme by 30 June 2000, you will be prohibited from operating or managing the fund (scheme) until you have been granted a variation of your dealers licence to operate managed investment schemes and ASIC has registered your fund(s) as a managed investment scheme.
ASIC, as part of its legislative mandate, is required to facilitate and monitor the transition of existing funds to the managed investment requirements of the Law. To ensure that all reasonable and practicable steps are taken to complete transition by 30 June 2000, ASIC requires you to produce written information and statements set out in the enclosed Notice of Direction (issued under section 788(1) of the Law) in relation to prescribed interests schemes which, according to ASIC’s records, you are, or were previously, the manager. You should read the notice carefully. You will see that it requires you to produce the information set out in the notice:
on Friday 14 2000
at 5pm”
·On 14 April 2000, he spoke to Mr. Russell who advised him that the relief had been granted and that Mr. Russell would send him a copy of the relief document.
·A short time later the same day he spoke to Mr. Michael Wall of ASIC to advise Mr. Wall that relief had been granted.
·About a quarter of an hour later he again spoke to Mr. Russell and was informed by Mr. Russell that the relief instrument had not taken account of the second prospectus. He asked Mr. Russell to send him a copy of the relief instrument and advised Mr. Russell that he would have to apply for a variation of the instrument to cover the second prospectus and that he would discuss the matter with ASIC.
·About a half an hour later he rang Mr. Wall, but he was not available. He then asked to speak to Ms. Vamos and was put through to her. He had a discussion with Ms. Vamos about the notice and the need for a variation. Ms. Vamos advised him that the variation would be granted to include the second prospectus and that the Trustee was to apply for the variation. Ms. Vamos told him to fax the relief as granted to Mr. Wall with a cc to her. He did as Ms. Vamos requested.
·Later the same day he spoke to Mr. Russell and Mr. Russell agreed to apply for a further variation to cover the second prospectus.
·Apparently no action was taken in respect of the relief instrument. However, ASIC continued to conduct its relationship with the Vineyards Project as if relief had been granted.
·On 4 August 2003, at a meeting of investors, it was proposed to remove Custodial as Trustee and that the Applicant assume the Trustee’s obligations and powers for a period of six months (subject to ASIC’s approval), which would allow sufficient time for Hillston Grove Vineyards Ltd to obtain an Australian Financial Services License authorising it to act as a responsible entity and for the Vineyards Project to convert to a registered managed investment scheme.
·On or about 14 August 2003, he, as a director of the Applicant and day to day manager of the Vineyards Project, applied to ASIC under s.1065(2) of the Corporation Law for a direction that the Deed be permitted to continue as an approved deed without a trustee.
·It was after the application made on or about 14 August 2003 that it appeared to him that ASIC took the view that the Applicant was suspected of breaching the Corporations Law.
·On or about 19 September 2003, he delivered to ASIC all books and records of the Project.
·On or about 19 September 2003, he made an application on behalf of the Applicant for a further application for an extension of the transition period under s.1454(2) of the Corporations Law. This application was rejected.
·On 23 April 2004 the Investors in the Hillston Grove Vineyard Project voted to convert the Project to a Managed Investment Scheme with their company Hillston Grove Vineyards Limited as the Responsible Entity.
·The issued share capital of Hillston Grove Vineyards Limited consists of:
(a)880,500 Ordinary ‘A’ Class shares, representing 73.67% of the issued capital of Hillston Grove Vineyards Limited which is held by 578 individual investors; and
(b)314,600 Ordinary Shares representing 26.32% of the issued capital of Hillston Grove Vineyards Limited held by Managed Investment Limited.
·The 2004 annual accounts of Hillston Grove Vineyards Limited shows the shareholding and contains an unqualified audit report.
·The last valuation of the property owned by Hillston Grove Vineyards Limited was completed on 20 June 2003 and valued it at $18,302.566.
·In early 2003 Hillston Grove Vineyards Limited signed a 16 year contract (terminating 30 June 2020) for the sale and purchase of wine grapes with Casella Wines Pty Ltd (manufacturer of Yellow Tail Wines) commencing on 1 July 2003. This contract was negotiated by the Applicant on behalf of the Investors and other shareholders of Hillston Grove Vineyards Limited. This contract means that every crop produced from current and future plantings by Hillston Grove Vineyards Limited is sold to Casella Wines Pty. Ltd.
·Subject to the price of wine grapes it is expected that the Investors under Prospectus 1 and 2 will receive a positive income from the sale of grapes. In the year ended 30 June 2003 their income equalled their expenses.
·The Project is closed with Investors being advised in a Newsflash on or about 16 September 2003.
·There has not been any increase in the business activity of the Scheme other than the excluded issues which are exempted under the instrument of relief dated 21 July 1999 and excluded under section 1063 of the Corporations Law. There were 1458 interests issued under the first prospectus, 700 interests issued under the second prospectus and 2681 interests issued under the excluded offers the majority of which were bonus units.
·The Manager has at all times adhered to Clause 13.2 of the Deed and in particular 13.3(ii)(A) in that they have always acted in the best interests of the Investors.
·The Scheme is not passively managed. A vineyard requires day to day hands on management. Passively managed schemes usually fail.
38. Mr. Lyons gave evidence to the following effect:
·He is a Registered Company Auditor who has been the company auditor of Hillston Grove Vineyards Limited, Managed Investments Australia Limited and the Hillston Grove Vineyards Project since June 1999.
·His appointment was approved by ASIC on 31 October 2000.
·He has never written a qualified audit report in respect of the Hillston Grove Vineyards Project.
·All payments due to investors in the Project have been made in accordance with the Deed.
·The Project is “absolutely solvent”.
39. Ms. Bell gave evidence to the following effect:
· In producing a document such as the relief instrument in this case, ASIC would usually show a draft to the parties to make sure it is correct.
· ASIC would not knowingly produce an instrument which had no effect. Such a result would be a mistake or an oversight.
· The Applicant in this case did apply for an extension of the transition period before 25 June 2004.
· The Applicant has complied with all things asked of it by ASIC.
· On Wednesday 5 March 2003 ASIC published an Information Release outlining the circumstances in which it would consider further extending the transition period until 30 June 2010 for prescribed interest schemes which had been given an extension on or before 30 June 2000.
· On 26 May 2004 ASIC published a Media Release outlining the circumstances in which it would consider further extending the transition period until 30 June 2010 for prescribed interest schemes for which the extension expired on 30 June 2004.
· Most applications for extension fitted within Pro Forma 174 which complied with PS 135. Applications which did not fit the Pro Forma, or did not satisfy PS 135 would have been dealt with on a case by case basis.
· If ASIC had known about interests being issued after 30 June 1998, pursuant to a prospectus lodged after 1 July 1998, and if ASIC had known that the Vineyards Project was not passively operated, ASIC would have made a more detailed examination of the application for relief.
40. In relation to Mr. Jellyman’s evidence about his conversation with Ms. Vamos, the Tribunal was informed by Ms. Brennan that Ms. Vamos was unavailable to give evidence. Consequently, ASIC can neither confirm nor deny the conversation as alleged took place.
41. The representatives of the Applicant have proposed since September 2003, and again at this hearing, that the insertion of the dates 30 June 1998 and 1 July 1998 in the application Pro Forma and in ASIC’s relief instrument were mistakes as the result of human error. The Applicant’s submission has been that the dates were meant by the parties to be 1999, not 1998. The Tribunal was urged to apply “the slip rule” to retrospectively change the dates to 1999, in accordance with the intentions of both ASIC and the Applicant in July 1999.
42. There are at least the following problems associated with the Applicant’s suggested course of action:
(a)I am not satisfied that ASIC made a mistake in putting the date 1998 on the Pro Forma. That date accorded with PS 135.
(b)If ASIC had known that further interests were to be issued in the Vineyards Scheme in late 1999 and thereafter, ASIC may not have granted relief at all.
(c)If ASIC had known that the Vineyards Scheme was not to be passively managed, ASIC may not have granted relief.
(d)Further interests were issued in 2001 and 2002 (not under either of the two prospectus of 1998 or 1999) which would have meant that even if the date on the relief instrument was changed to 1999, the extension would still not have extended beyond 2001.
43. It has been the contention of Mr. Jellyman that the interests issued in 2001 and 2002 were “excluded issues” within the meaning of paragraph (b)(ii) of Schedule A of the relief document (see paragraph 24 above). Mr. Jellyman claims to have taken advice on the matter from a Mr. Staib of ASIC, who in turn had taken advice from a Senior Counsel. Mr. Staib is now deceased.
44. However, Mr. Jellyman concentrated on the definition of “excluded issues” in section 708(10) of the Corporations Act 2001.
45. I take the view that the term “excluded issues” in PS 135 and in the relief document produced in July 1999 referred to “excluded issues” as defined at the time of the issuing of PS 135.4, namely 3 August 1998, and at the time of issuing the relief document on 22 July 1999. The definition of “excluded issues” at the time was contained in s.66(2) of the Old Law and referred to new prescribed interests made to existing holders of prescribed interests in satisfaction of amounts payable to the existing holders, or in exchange for existing interests of a different class from the new interests. The new interests issued in the Vineyards Project in 2001 and 2002 did not fit the definition in s.66(2) of the Old Law. I conclude that for the purposes of this review they were not excluded issues.
46. At any event I am not satisfied that ASIC made a mistake in the dates when it issued the relief instrument. ASIC acted on the information supplied to it at the time. I do not accept that it would be appropriate to retrospectively change the dates on the relief instrument from 1998 to 1999.
47. Consequently, the debate about whether the new interests issued in 2001 and 2002 were excluded issues or not, is irrelevant.
48. The misinformation given to ASIC allowed the Vineyards Project to slip under ASIC’s radar. It caused ASIC to treat the Vineyards Project as if it was complying with the law.
49. However, Mr. Jellyman knew that the prospectus lodged on 22 January 1999 was going to cause problems. He referred to it in early 1999 when he was giving instructions to Cardinal to apply for relief. He knew in April 2000 that relief had not been granted beyond 30 June 2000, when he received the letter from Ms. Vamos. He either knew, or should have known by mid 2000, that the relief document had not been altered, and that no relief had been granted. He must have at least had a deep suspicion that by late 2000 he was operating an unregistered managed investment scheme. However, he continued his dealings with ASIC as if an extension of time had been granted to 30 June 2004.
50. I reject any notion that ASIC, by its dealings with the Vineyards Project, somehow negligently lulled Mr. Jellyman into a false sense of security about the extension of time. ASIC was acting at all times on the information that the representatives of the Vineyards Project had provided.
51. I find that ASIC did not at any stage represent to Mr. Jellyman either directly or impliedly that it intended to depart from its policy in exercising its statutory discretion. There was no implied consent to an extension of the transitional period.
52. The Applicant is no longer pursuing the proposal that ASIC take “no action” for six months.
53. It is common ground between the parties that ASIC still had the power on 3 October 2003 to extend the transition period under s.1454 even though the transition period had ended. (See s.70 of the Corporations Act 2001). Thus, the Tribunal is in the same position.
54. It is also common ground that PS 51.63 and PS 51.64 apply to the relief now sought. Those policy statements are:
“[PS 51.63] In general, the ASIC cannot give relief concerning breaches of provisions of the Law which have already taken place. In other words, the ASC generally does not have power to grant retrospective relief. (The chief exceptions are in s 70 and s714).
[PS 51.64] To the extent that the ASC can give relief which is not clearly retrospective but may take away the future consequences of past conduct, its general policy is not to do so. However, the ASC may give relief in those circumstances where:
(a) no mischief has yet occurred; and
(b)the regulatory detriment of the breach is minimal and clearly outweighed by the commercial benefit which would result from the ASC giving the proposed relief.
The ASC’s paramount consideration in exercising its powers in these circumstances is whether anyone has already been adversely affected by the previous breach.”
55. I am concerned that the Vineyards Project has now been operating as an unregistered managed investment scheme for over six years and in contravention of the Corporations Law and/or Corporations Act 2001 for over four years. In that time the Vineyards Project has attracted new investors and the business has been actively managed and expanded. It is way past the time when the manager should have taken steps to comply with the New Law. The “mischief” has well and truly occurred. The regulatory detriment of the breach has not been minimal. I also take the view that the breach has not been accidental nor completely innocent.
56. It was urged on the Tribunal by Ms. Conway for the Applicant that the Vineyards Project has been well managed, has substantial assets, will inevitably provide a good return for investors and has the continuing support of the investors. She submitted that it would not be in the best interests of the investors for the Vineyards Project to be put at risk of being wound up.
57. I accept that the Vineyards Project is a large undertaking which seems to be viable but I do not accept that the entities managing the investors’ funds have had a harmonious relationship. Mr. Jellyman’s affidavit contains the following paragraph:
“Hillston Grove Vineyards Limited and Managed Investments Limited have commenced legal action in the Supreme Court of Queensland against Custodial Limited for false and misleading statements made in the Trustees Report to Investors in the Hillston Grove Vineyards Project for the years ending 30 June 2001 and 30 June 2002.”
58. I do not have sufficient material before me to embark on the exercise of attempting to determine whether the Vineyards Project has been well managed or not, or whether the representatives of the Applicant or Custodial are correct in their allegations. I am more than happy to leave that to the Queensland Supreme Court. Nevertheless, it is clear that there has been a good deal of friction among the entities who have been in charge of the investors’ funds.
59. However, no matter how well an investment project has been managed, any circumvention of the legislation relating to the safeguarding of investors’ funds cannot be condoned and certainly cannot be rewarded.
60. I believe that the breaches of the legislation are serious and outweigh the commercial benefit, if any, which would result from giving the relief sought by the Applicant.
61. It is not appropriate in this case to grant a further extension of time within which to comply with the New Law.
62. The decision under review is affirmed.
I certify that the 62 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President Don Muller
Signed: .....................................................................................
R. Link, AssociateDate/s of Hearing 17 September 2004
Date of Decision 18 March 2005
Counsel for the Applicant Ms. C. Conway
Solicitor for the Applicant McCullough Robertson
Counsel for the Respondent Ms. M. Brennan
Solicitor for the Respondent Ms. P. Bell, solicitor for ASIC
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