Nationwide Management Pty Ltd v Brightford Investments Pty Ltd
[2002] VSC 230
•17 June 2002
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
No. 7953 of 2000
IN THE MATTER OF: NATIONWIDE MANAGEMENT PTY LTD
| NATIONWIDE MANAGEMENT PTY LTD (ACN 002 162 549) | Applicant |
| v | |
| BRIGHTFORD INVESTMENTS PTY LTD & OTHERS | Respondents |
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JUDGE: | HABERSBERGER J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 26 NOVEMBER 2001 | |
DATE OF JUDGMENT: | 17 JUNE 2002 | |
CASE MAY BE CITED AS: | NATIONWIDE MANAGEMENT PTY LTD v BRIGHTFORD INVESTMENTS PTY LTD | |
MEDIUM NEUTRAL CITATION: | [2002] VSC 230 | |
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Corporations - Section 1073A of the Corporations Law – Notice avoiding certain contracts – Prescribed interest – Participation interest – Financial or business undertaking or scheme – Common enterprise – Investment contract – Notice declared to have had no effect.
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APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr IR Jones | Middletons Lawyers |
| For the Respondents | No appearance |
HIS HONOUR:
The Proceeding
This proceeding arises under s.1073A(1) of the Corporations Law, as it was in 1992. Section 1073A, which was introduced by an amendment effective from 18 December 1991, was contained in Division 5 of Part 7.12 of the Corporations Law under the heading "Prescribed Interests". This topic is now dealt with in a separate Act, the Managed Investments Act 1998.
By its Originating Process filed on 11 December 2000, Nationwide Management Pty Ltd ("Nationwide") made an application for declaratory relief in relation to a notice dated 20 November 2000 given on behalf of the respondents, pursuant to s.1073(2) of the Corporations Law, which purported to avoid certain contracts. The applicant sought the following orders:
"1.A declaration that the contracts (the "Contracts") referred to in a notice given on behalf of the respondent [sic] dated 20 November 2000 (the "Notice") are not prescribed interests within the meaning of the Corporations Law.
2. A declaration that the Notice has no effect.
3. Such further or other orders as the court thinks fit.
4. Costs."
On 26 April 2001, Nationwide amended its Originating Process to include an application for the following additional order:
"2A.A declaration that the Respondents are disentitled by their conduct from giving the Notice and/or have by their conduct elected to affirm the Contract [sic] and not to give such a Notice and/or have by their conduct waived any right to give such a Notice and/or by their conduct are estopped from giving such a Notice."
Section 1073(2) of the Corporations Law sets out when a contract is said to be voidable:
"Where:
a)an offer of a prescribed interest for subscription has been made; or
b)an invitation to subscribe for a prescribed interest has been issued;
in contravention of a provision of this Law, a contract entered into by any person (other than the management company) to subscribe for the prescribed interest as a result of the acceptance by the person of the offer, or the acceptance of an offer made by the person pursuant to the invitation, is voidable at the option of that person by notice in writing given to the management company."
Section 1073A(1) allows the management company, within 21 days after notice is given under s.1073(2), to apply to the Court for an order declaring the notice to have had no effect. Section 1073(3) provides that:
"The obligations of the parties to a contract are suspended:
a)during the period of 21 days after a notice is given under subsection (2) in relation to the contract; and
b)during the period beginning when an application is made under subsection 1073A(1) in relation to a notice so given and ending when the application, and each appeal (if any) arising out of it, have been finally determined or otherwise disposed of."
The Hearing
The applicant was a wholly owned subsidiary of Advance Bank Australia Limited ("ABAL"). On 1 April 1998, St George Bank Limited ("St George") became the successor in law to ABAL, pursuant to the provisions of the Bank Mergers Act 1996 (NSW) and the Bank Mergers (Advance Bank) Regulations 1998 (NSW).
In support of its application, Nationwide filed an affidavit sworn on 8 December 2000 by William Nicholas May, the head of the Loans Management Unit of St George. Pursuant to the directions of Warren J given on 15 December 2000, the respondents filed an affidavit in opposition sworn on 9 February 2001 by the fifth respondent, William Henry Areson Jnr, a resident of Hong Kong. Nationwide filed four further affidavits in reply – an affidavit sworn on 4 July 2001 by Graham Clifford Broome, who was at the relevant time the head of Group Credit for ABAL; an affidavit sworn on 6 July 2001 by Graham Gordon Parkhurst, who was at the relevant time the General Manager, Corporate, of ABAL; an affidavit sworn on 12 July 2001 by Roger Desmarchelier, who was at the relevant time Chief Manager, Corporate Banking, of ABAL; and a further affidavit by Mr May sworn on 6 July 2001.
The matter was fixed for hearing on 26 November 2001. On 23 November 2001, the last working day before the hearing, the respondents’ solicitors, Kenna Croxford & Co, applied for the leave of the Court to cease acting for the respondents. Such leave was granted. Although the applicant had served notice requiring the attendance of Mr Areson, for cross-examination, there was no appearance for any of the respondents on 26 November 2001. This has had the unfortunate result that I have not had the benefit of any argument on behalf of the respondents in respect of the difficult issues involved in this proceeding.
The Background
In April 1988, Advance Commercial Finance Limited ("ACFL"), a subsidiary of ABAL, agreed to loan the sum of $1,800,000 to Scalloway Nominees Pty Ltd ("Scalloway"), for the purpose of constructing a thirteen level building on land at 19-21 Victoria Street, Melbourne ("the Victoria Street Building"). Before it had completed construction, Scalloway defaulted under the loan agreement. ABAL, through ACFL, took possession of the Victoria Street Building as mortgagee in possession in or around March 1990. ABAL decided to complete construction of the Victoria Street Building in order to maximise recovery on the loan.
During 1991, when construction of the Victoria Street Building was being completed, ABAL engaged two real estate agents to prepare reports on the prospects of its sale as one building. An examination of those reports and the general market trend at the time indicated that selling the building as a whole could be difficult and that the greatest prospect of recovery for ABAL in relation to the non-performing Scalloway loan would be to strata title the Victoria Street Building and sell it as thirteen separate floors, each with its own strata title. Tenders (expressions of interest) to market the building either as a whole or on an individual or multiple strata basis were sought. The proposal by Gray Winter Properties Pty Ltd ("GWP") was accepted.
GWP initially agreed to purchase the residential floors, being floors eleven, twelve and thirteen, of the Victoria Street Building. GWP also agreed to find purchasers for the commercial floors, being floors one to ten. By 20 December 1991, purchasers had made offers, subject to finance, for seven commercial floors and GWP had itself entered into contracts as principal for the remaining three commercial floors. It had until 4 February 1992 to find substitute purchasers for each of these floors or it would remain legally bound as purchaser. The ten commercial floors were eventually sold, principally to investors in the Hong Kong region. GWP did not receive any commission or payment from ABAL for its efforts in seeking to sell the Victoria Street Building floors as separate strata title sales.
In order to assist the sale of the thirteen floors of the Victoria Street building, ABAL indicated that it would be prepared to consider applications for finance from any purchasers, subject to its normal credit criteria, and that ABAL and its related entities would consider entering into agreements to lease the commercial floors from the purchasers. In fact, Barclays Bank Ltd leased floors one to four with a substantial rent free period and ABAL agreed to pay to the purchasers the rent in respect of these floors during the rent free period.
The first respondent, Brightford Investments Limited ("Brightford"), is and was a company owned and controlled by interests associated with Mr Areson. According to the affidavit of Mr Areson, he was part of "a syndicate" of ten or so Hong Kong investors. Mr Areson deposed that in January 1992, he was contacted by Mr Michael Winter, then a Melbourne solicitor and a director of GWP. Mr Winter introduced an investment proposal to the members of "the syndicate", allegedly representing that they would be purchasing the Victoria Street Building for less than half of what it would cost to build and that they could not lose on this investment since ABAL would rent back the floors from the investors at an amount which would service the outstanding loan which ABAL would advance to enable them to purchase the premises.
In his affidavit, Mr Areson asserted that:
"At all times the Bank treated myself and the other investors as a syndicate for the purchase of the building from it as mortgagee in possession. Although each of the investors entered into individual finance agreements for their respective floors of the building, the 'deal' provided for an advance of $9 million from the Bank to the syndicate to purchase the ten floors."
He then referred to the following correspondence as support for his claim that the investors were treated as a syndicate:
(a)Letter from ABAL to GWP dated 19 March 1992 which commenced with the heading "21 Victoria Street Syndicate."
(b)Letter from ABAL to GWP dated 9 June 1992 which referred to "the rollover of the $9 million funding for the Victoria Street Syndicate."
(c)Letter from ABAL to GWP dated 9 July 1992 which commenced with the heading "Rate Fixing 21 Victoria Street Syndicate" and in the body of the letter confirmed "having secured fixed rate funding of $9,000,000.00."
(d)Letter from St George to Mr Areson of Brightford dated 14 September 1998 which referred to "[a] full review of the total '21 Victoria Street project' … being undertaken" and continued "[a]s the overall facilities are of a complex nature, any individual request needs to be considered with the interests of all parties, including the Bank’s, taken into consideration."
A letter of offer dated 20 November 1991 from GWP to ABAL referred to a loan by ABAL of $9 million in respect of the commercial floors. However, the letter also stated that the $9 million would be "divided into ten separate loans as listed on the attached schedule". Each of the ten loans was to be secured against one of the commercial floors. The attached schedule varied the amount of the loan according to the proposed sale price of the floor, which in turn was calculated according to the size of that floor. According to an internal memorandum of ABAL dated 20 December 1991, the $9 million to be advanced in respect of the commercial floors represented 91.23% of their value. Each of the potential borrowers was to be individually approved.
Brightford's Contracts
By a contract of sale dated 24 January 1992, Brightford purchased from ACFL the tenth floor of the Victoria Street Building (being Lot 10 on Plan of Subdivision No. 308073G and being the whole of the land contained in Certificate of Title Volume 10041 Folio 944) ("the property") for the sum of $987,125. Settlement of the contract of sale was subject to execution of a lease of the property by ABAL for a period of seven years from 4 March 1992 to 3 March 1999, with a five year option, at an initial rental of $87,209.80 per annum or $7,267.48 per calendar month, with three rent reviews. The lease between Brightford and ABAL was executed on 23 February 1992.
On 27 January 1992, Brightford applied for a loan of $905,000, which was approved by ABAL on 14 February 1992. The loan of $905,000 was fully advanced at the settlement of Brightford's purchase of the property, which took place on 4 March 1992. On the same date, ABAL entered into a five year Loan Facility Agreement with Brightford for the sum of $905,000.
Also on 4 March 1992, Nationwide entered into a Support Guarantee Facility Agreement with Brightford and with the second, third, fourth and fifth respondents as guarantors of Brightford’s obligations under that agreement. This agreement was secured by a mortgage over the property in favour of Nationwide dated 23 March 1992.
All rental payments were deposited into a security or treasury account with ABAL in the name of Brightford, which used the monies in the account to meet its interest-only repayments on its loan facility. Over time the small monthly surplus remaining in the account increased. It was subsequently used to reduce the principal of the loan.
ABAL sub-let the property to Meridan Corporate Services Pty Ltd ("Meridan") for a term of five years from 15 November 1992 at an initial rental of $3,141.33 per calendar month from 15 May 1993 to 14 November 1995 (the first six months being rent free) and then a rental of $3,546.67 per calender month to the end of the sub-lease.
On or about 18 December 1996, the respondents executed an extension and variation of the existing Loan Facility Agreement with ABAL. This continued the financial accommodation, now in the sum of $845,000, for a further term of five years.
By letter dated 20 July 1998, in anticipation of the end of the seven year lease with its above market rental, Mr Areson raised with St George the possibility of renegotiating the Loan Facility Agreement. He suggested that "the loan period could be stretched out for a long term with an adjusted interest rate" in order that the anticipated reduced rent would cover the repayments of the loan. He stated that he did not want to put further money into the investment.
On 14 September 1998, St George responded to Mr Areson's letter in the terms set out in paragraph 14 above. On 7 December 1998, St George wrote to Brightford noting that the original lease on the property was due to expire on 4 March 1999 and enquiring what Brightford’s intentions were in respect of the loan.
The Default by Brightford
By letter dated 7 April 1999, St George expressed its concern about Brightford’s loan account being in arrears. The last payment received by St George had been on 12 February 1999. Payments due on 4 March and 4 April 1999 had not been received.
On 13 April 1999, Brightford wrote to St George advising that it was "not in a position to put any more money into this property." Brightford sought some arrangement concerning the repayment of the loan facility based on the amount of the rental income generated by the property.
In or about August 1999, Brightford issued a Notice of Availment to Nationwide, the support guarantor, pursuant to clause 3 of the Support Guarantee Facility Agreement. The effect of this was to notify Nationwide that Brightford wished to avail itself of the facility under the Support Guarantee Facility Agreement. As requested, Nationwide gave the Support Guarantee in favour of St George.
On or about 23 September 1999, St George demanded of Nationwide payment under the Support Guarantee and Nationwide served on Brightford a Notice to Pay under the mortgage and a Notice of Demand to Pay pursuant to the Support Guarantee Facility Agreement. These demands required payment, within 7 days of 23 September 1999, of the sum of $767,871.76, being the total amount owing by Brightford to Nationwide under the Support Guarantee Facility Agreement. No monies having been received from Brightford, Nationwide took possession of the property on 3 October 1999. On 24 November 1999, Nationwide sold the property for $467,500. No communications disputing Nationwide’s rights to take possession and to sell the property as mortgagee in possession were received by Nationwide or ABAL from or on behalf of Brightford in the period from the service of the Notices to settlement of the mortgagee's sale on 24 January 2000.
On 25 February 2000, Nationwide sent a further Notice of Demand to Pay Monies to Brightford seeking payment of the balance of the debt in the sum of $317,444.52. No monies were received by Nationwide.
On 21 March 2000, Nationwide commenced proceedings in this Court against Brightford and the four guarantors, in proceeding number 4743 of 2000, claiming the sum of $317,444.52 together with interest and costs. A Defence dated 6 June 2000 was filed by the defendants in that proceeding.
The s.1073(2) Notice
On 20 November 2000, the respondents’ solicitors served a Notice pursuant to s.1073(2), which purported to avoid the contract of sale with ACFL dated 24 January 1992, the lease with ABAL dated 23 February 1992, the Loan Facility Agreement with ABAL dated 4 March 1992, the Support Guarantee Facility Agreement with Nationwide dated 4 March 1992, the mortgage to Nationwide dated 23 March 1992, and the sub-lease agreement between ABAL and Meridan dated 15 November 1992. The Notice stated:
"We hereby, on behalf of Brightford Investments Ltd, give notice that:
1.The abovenamed contracts constituted contracts entered into by Brightford Investments Ltd to subscribe for prescribed interests as defined in the Corporations Law.
2.Each of the Management Companies to the abovenamed contracts with Brightford Investments Ltd referred to above failed to comply with the then applicable provisions of the Corporations Law relating to prescribed interests, in particular sections 1018 and 1064.
3.Pursuant to section 1073(2) of the Corporations Law and as a consequence of the contraventions the contracts are voidable at the option of Brightford Investments Ltd.
4.The abovenamed contracts are hereby avoided pursuant to section 1073(2) of the Corporations Law."
In his affidavit Mr Areson deposed:
"10.Until November 2000 I and the other Respondents were not aware that prior to the scheme being marketed to our syndicate it was necessary for the Applicant, Greywinter Properties Pty. Ltd. [sic] and the Bank to register and provide us with a prospectus and to have in place an approved deed within the meaning of section 1065, 1066 of the Corporations Law. Nor was I aware of any circumstances which would have given me or any of the other Respondents any reason to believe that I and the other Respondents could terminate or avoid any of the agreements which I and they had entered into in respect to the purchase and financing of the property.
11. In particular, I was not aware prior to November 2000 that:
(a) there were prescribed interest provisions of the Law;
(b)the prescribed interest provisions applied to the sale and financing of the property;
(c)the prescribed interest provisions had not been complied with in that no prospectus had been issued and no approved deed had been obtained;
(d)there was any obligation to register a prospectus and to obtain an approved deed;
(e)the Respondents had rights to avoid the transactions pursuant to the prescribed interest provision of the Law."
Mr Areson deposed that the failure of the applicant to obtain an approved deed had prejudiced the respondents. He referred to the buy-back covenant and conditions for the maintenance of an adequate buy-back arrangement required to be in an approved deed: s.1069(1)(c) and (d). Mr Areson stated that he would have exercised his rights under the deed to force a buy-back.
The applicant submitted, and there was no evidence to the contrary, that the receipt of the Notice on 20 November 2000 was the first indication or communication from the respondents that the validity of the contracts referred to in the Notice was being called into question.
The Questions for Determination
Mr Jones of counsel, who appeared for the applicant, submitted that there were two questions to be determined in this proceeding:
(1)whether the transaction involving the contract of sale of the property or any of the other associated contracts involved a prescribed interest; and, if so,
(2)whether the respondents had by their conduct elected to affirm the contracts or waived any right to give the s.1073(2) Notice or become estopped from giving such a notice.
The Relevant Legislation
The sections of the Corporations Law mentioned in the s.1073(2) Notice and Mr Areson's affidavit included ss.1018, 1064 and 1065. They relevantly provided as follows:
"1018(1)A person shall not offer for subscription or purchase, or issue invitations to subscribe for or buy, securities of a corporation unless:
(a)a prospectus in relation to the securities has been lodged;
(b)the prospectus complies with the requirements of this Division; and
(c)if the prospectus is a registrable prospectus – the prospectus has been registered by the Commission under section 1020A.
…
1064(1)A person, other than a public corporation, must not make available, offer for subscription or purchase, or issue an invitation to subscribe for or buy, any prescribed interest.
…
1065(1)A person shall not issue, offer for subscription or purchase, or issue invitations to subscribe for or buy, any prescribed interest, unless, at the time of the issue, offer or invitation, there is in force, in relation to the interest, a deed that is an approved deed for the purposes of this Division [Div. 5] or a corresponding law."
The applicant accepted that if the transaction involving the contract of sale of the property or any of the other associated contracts constituted an offer for subscription or purchase of, or an invitation to subscribe for or buy, or the issue or making available of, a prescribed interest, then one or more of ss.1018(1), 1064(1) and 1065(1) would have been contravened. First, according to its definition in s.92, the meaning of the word "securities" in s.1018(1) included "prescribed interests", and as there was no prospectus for the sale of prescribed interests, s.1018(1) would have been breached. Secondly, both Nationwide and ACFL, the vendor of the property, were at all material times subsidiaries of ABAL and as such, neither was a public corporation, and s.1064(1) would therefore have been breached. Finally, there was no approved deed in relation to the offer of the thirteen floors of the Victoria Street building, and thus s.1065(1) would have been breached.
What then is a "prescribed interest"? Section 9 of the Corporations Law defines "prescribed interest" as meaning:
"(a) a participation interest; or
(b)a right, whether enforceable or not, whether actual, prospective or contingent and whether or not evidenced by a formal document, to participate in a time-sharing scheme;
but does not include:
(c)a right or interest, or a right or interest included in a class or kind of rights or interests, declared by the regulations to be an exempt right or interest, or a class or kind of exempt rights or interests, for the purposes of Chapter 7; or
(d)an exempt prescribed interest in relation to this jurisdiction (as defined by section 68A);"
For the purposes of this proceeding, there is no suggestion that paragraphs (b) to (d) apply. The critical limb is, therefore, paragraph (a) "a participation interest".
In s.9 "participation interest" is defined as meaning:
"any right to participate, or any interest:
(a)in any profits, assets or realisation of any financial or business undertaking or scheme whether in Australia or elsewhere;
(b)in any common enterprise, whether in Australia or elsewhere, in relation to which the holder of the right or interest is led to expect profits, rent or interest from the efforts of the promoter of the enterprise or a third party; or
(c) in any investment contract;
whether or not the right or interest is enforceable, whether the right or interest is actual, prospective or contingent, whether or not the right or interest is evidenced by a formal document and whether or not the right or interest relates to a physical asset, but does not include:
(d) such a right that is a right to participate in a time-sharing scheme;
(e) any share in, unit of a share in, or debenture of, a body corporate;
(f) any interest in, or arising out of, a policy of life insurance."
In his submissions on behalf of the applicant, Mr Jones asserted that, for the purposes of establishing a "participation interest", the critical issue is whether, after the acquisition of the right or interest, a continuing relationship between the parties exists, so that the parties either derive, or expect to derive, a return in the form of either rent or capital by their investment being used in common with the investment of other persons. He submitted that none of the three limbs of the definition of "participation interest" applied and it is to that issue that I now turn.
Paragraph (a) of the definition of "Participation Interest"
In order to fall within paragraph (a) of the definition of "participation interest", there must be a right to participate, or an interest, "in any profits, assets or realisation of any financial or business undertaking or scheme." In Australian Softwood Forests Pty Ltd v Attorney General (NSW); Ex Relatione Corporate Affairs Commission[1] ("Australian Softwood"), which is a leading authority in this area and has been frequently referred to and applied, Mason J, as he then was, with whom Gibbs CJ and Stephen J agreed, said that the words "financial or business undertaking or scheme" were "of very wide import"[2]. His Honour further noted that the term "scheme" required that there should be "some programme, or plan of action …"[3] In his analysis of paragraph (a) of the definition of "interest" in s.76(1) of the Companies Act 1961 (NSW), a predecessor of the definition of "participation interest", his Honour refused to read down the words in paragraph (a). His Honour continued:
"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 plan or that there must be a share or pooling of profits or receipts."[4]
[1](1981) 148 CLR 121
[2](1981) 148 CLR 121 at 129
[3]Clowes v Federal Commissioner of Taxation (1954) 91 CLR 209 at 225 per Kitto J
[4](1981) 148 CLR 121 at 129
No doubt the reference in Mr Areson's affidavit to a "syndicate" of investors was intended to suggest that the sale of the Victoria Street Building to the "syndicate" was a "financial or business undertaking or scheme." Counsel for the applicant submitted, however, that for paragraph (a) to be applicable there must be an acquisition of an interest in a "financial or business undertaking or scheme" and that it is not sufficient for there to be an acquisition from a "financial or business undertaking or scheme".[5] In support of this proposition, Mr Jones directed the Court to a group of authorities falling within the umbrella of "the residential unit cases"[6].
[5]See Maunder-Hartigan v Hamilton (1984) 8 ACLR 937 at 946; (1984) 2 ACLC 438 at 446 per Brinsden J
[6]See Amadio Pty Ltd v Henderson (1998) 81 FCR 149 at 182 per Northrop, Ryan and Merkel JJ
In Brisbane Unit Development Corporation Pty Ltd v Deming No 456 Pty Ltd (No 2)[7] ("Brisbane Unit Development"), the question was whether the sale of home units in a building on the Brisbane River fell within the definition of "interest" in s.76 of the Companies Act 1961 (Qld). Connolly J, with whom Douglas J and Sheahan J agreed, held that it was:
"not … open to question that the promotion of a home unit building involving as it must the acquisition of the land, the design and construction of the building, the financing of the enterprise, the sale of the projected home units (usually in anticipation of their construction), the registration of the Building Units Plan and the final step by the promoter of divesting itself of the building and its component units answers the description 'a financial or business undertaking or scheme'. The question however is whether the invitation to the public to purchase the projected units is an invitation to purchase an interest in the assets of the financial or business undertaking or scheme.
Those who conduct such undertakings and schemes commonly hold property both real and personal. It is equally common for them to dispose of such assets from time to time. When a motor car or a parcel of land surplus to the requirements of a trading corporation is sold the purchaser does not in my judgment acquire an interest in an asset of the trading corporation. On the contrary he acquires something which has ceased to be an asset of that corporation."[8]
[7][1983] 2 Qd R 92
[8][1983] 2 Qd R 92 at 101-2
Connolly J accordingly held that the mere purchase of a home unit did not amount to the then statutory equivalent of paragraph (a). His Honour concluded:
"Giving the phrase the wide import which is called for there is, in my opinion, nothing about the ownership of a unit and a share in common property which answers the description financial or business undertaking or scheme. True it is that the unitholders through their elected body corporate must take appropriate steps for the management and maintenance of the building but this does not amount to the conduct of a financial or business undertaking or scheme."[9]
[9][1983] 2 Qd R 92 at 102
In Munna Beach Apartments Pty Ltd v Kennedy[10] ("Munna Beach"), which was also concerned with the same statutory provision, McPherson J stated that the argument in that case was confined to paragraph (c), "investment contract". His Honour continued:
"No doubt the reason for this is because, once the building units plan is registered, the assets, including the common property which then comes into existence, ipso facto cease to be part of 'any financial or business undertaking or scheme' within para. (a), and become simply part of the assets of the proprietors of the building unit lots who do not engage in any such undertaking or scheme …"[11]
[10][1983] 1 Qd R 151
[11][1983] 1 Qd R 151 at 156-157
In Jones v Acfold Investments Pty Ltd[12] ("Acfold Investments"), the appellants agreed to purchase "off the plan" a strata title unit in a proposed multi-storey building near the beach at Maroochydore. The Full Court of the Federal Court of Australia (Sheppard, Morling and Spender JJ) held that there was no "interest" in terms of s.76 of the Companies Act 1961 (Qld). The Court rejected the appellants' argument that the provisions of a management agreement and an agency agreement brought the transaction within the scope of s.76. Their Honours stated:
"The provisions of the agreements should not be considered in isolation from the context which gave rise to them. Each purchaser of a home unit no doubt found it expedient that an arrangement should be made that proper care be taken of the common property. Since the building was erected in a holiday area it was likely that a unit owner might wish to let his unit. The management agreement made provision for the care of the common property. The substantial effect of the agency agreement was to give the owner of a unit the right (using that word in a loose sense) to use the services of a nominated agent who would use his best endeavours to let the owner's unit.
Construing the agreements in the context in which they were made, we do not think that they gave rise to any 'interest' in terms of par (a) of the definition of that term in s 76. The agreements do not give to a unit holder an interest in the agent's profit, nor his assets. Nor does he have any interest in the 'realisation' of any financial or business undertaking or scheme of the agent, assuming the word 'realisation' to refer (as we think it does) to the proceeds which would accrue to the agent if his business were wound up. We agree with the conclusion of the learned trial judge that the ownership of a unit and a share in common property together with the possibility of associated services for management and maintenance of the building and the letting of units do not answer the description of the phrase 'financial or business undertaking or scheme', notwithstanding its wide import."[13]
[12](1985) 6 FCR 512
[13](1985) 6 FCR 512 at 519-20
The case of Maunder-Hartigan v Hamilton[14] ("Maunder-Hartigan") concerned the sale of twenty-four apartments in a three storey block of residential units in Scarborough, Western Australia. Each contract of sale was subject to a condition that the purchaser acknowledged that he was aware that the vendor had leased the building to South Pacific Promotions Pty Ltd, which would then sub-lease the various units to holiday makers. Each contract of sale also required that the purchaser enter into a management agreement with Leisure Holdings Pty Ltd. The same company was specified in all contracts. The manager collected each owner's guaranteed proportion of the rent and distributed it to the owner after deducting a commission. By majority, it was held that the sales of the residential units and a share in common property in the holiday complex did not breach the prescribed interest provisions.
[14][1984] 8 ACLR 937; (1984) 2 ACLC 438
Brinsden J held that paragraph (a) did not apply. He stated that:
"To characterise … [the management] agreement as a business undertaking or scheme, despite being words of wide import, is going too far. In any event, … [w]hat … the [purchasers] enjoy is not profit from the Management Agreement considered as a business undertaking or scheme, but rent by reason of their entitlement as reversioners to the benefit of the lease with South Pacific. I am also of the view that the [purchasers] did not share in the assets or realisation of any financial or business undertaking or scheme …"[15]
[15](1984) 8 ACLR 937 at 947; (1984) 2 ACLC 438 at 447
The other member of the majority, Pidgeon J, held that there was a "financial or business undertaking or scheme":
"The nature of the scheme is that the purchaser or owner, as he becomes, makes his land available so that it can be used in conjunction with other land to enable the tenant South Pacific Promotions Pty. Ltd. to make the land available for a holiday resort."[16]
However, his Honour also found that the owner did not acquire "a right to participate" or "any interest" in any "profits" or "assets" or "realisation":
"The owner has no right to participate or interest in the profits of the scheme. The owner receives a fixed rent which is determined from time to time by the lease. I do not consider the term 'rent' can include profits in this context and this is supported by the fact that in definition (b) the word 'rent' is used in addition to the word 'profits'. Clearly there is no interest in any 'realisation' of the scheme. When the lease comes to an end the owner acquires the reversion. This cannot be 'realised' other than by the owner himself and would not be a realisation of the undertaking or scheme. It becomes necessary to see if there is a 'right to participate' or 'interest' in any 'asset' of the scheme. It can be asked 'what has the owner acquired?' and is it an asset in the scheme? He has acquired an estate in fee simple to the whole of a title. That is his interest in the actual land. The estate in fee simple is not an asset in the scheme. If the term of years reserved by the contract of sale and granted by the previous owner could be regarded as an asset in the scheme then the current owner would have no interest, actual prospective or contingent in it. This was vested in the tenant. The owner is entitled to the reversion expectant on the termination of the lease but this is not an asset in the scheme. I do not consider it can be said that by leasing land to such a scheme that the lessor has the right to participate or any interest in an asset of the scheme."[17]
[16](1984) 8 ACLR 937 at 953; (1984) 2 ACLC 438 at 452
[17](1984) 8 ACLR 937 at 954; (1984) 2 ACLC 438 at 453
In Co-operative Building Society of South Australia Ltd v Australian Securities Commission[18] ("Co-operative Building Society") a similar but more complicated scheme was found by Jenkinson J to constitute a prescribed interest. His Honour distinguished Maunder-Hartigan on the basis of the different contractual provisions and concluded:
"In my opinion the foregoing provisions point to the existence of a 'business undertaking or scheme' and 'a common enterprise' in which the applicant, Westend and those who purchase strata units establish a serviced apartments complex and carry it on for profits in which the applicant, as a unitholder in the unit trust, and the purchasers share. The purchaser's right to participate in those profits is not a right or an interest which derives merely from his interest in the trust. The right in my opinion derives from the terms of the contract of sale of the strata unit. It is an essential element of the scheme or enterprise that for at least 10 years there will be at the place where the proposed business is to be carried on a substantial number of apartments available for letting. The business can only be carried on profitably if such a number of what the business is engaged in selling – residential accommodation – is available. In my opinion it is an implied term of each contract of sale of a strata unit that the vendor warrants that each unit previously sold has been sold under a contract the express terms of which are the same as those of that contract and that the vendor promises that all the other units not yet sold will be sold under contracts in the same terms. It is that implied term which confers, on the purchaser his right to participate in the profits of the scheme: without that term the scheme and the common enterprise as I have described them would not exist."[19]
[18](1993) 10 ACSR 89
[19](1993) 10 ACSR 89 at 99
In the present case, in my opinion, there was no "financial or business undertaking or scheme." Each of the ten strata title commercial floors of the Victoria Street building was purchased separately. Brightford's contract of sale related only to the tenth floor – "Lot 10 on Plan of Subdivision No. 308073G and being the whole of the land contained in Certificate of Title Volume 10041 Folio 944". Unlike the factual situation in Maunder-Hartigan[20] and Co-operative Building Society[21], each floor was separately leased. There was no connection between the individual owners in terms of any sharing of the return obtained by them from the purchase and lease back of a floor in the Victoria Street Building.
[20](1984) 8 ACLR 937; (1984) 2 ACLC 438
[21](1993) 10 ACSR 89
As previously stated, Mr Areson asserted in his affidavit that ABAL treated "myself and the other investors as a syndicate for the purchase of the building from it as mortgagee in possession." The "syndicate" was said to be a group of investors from Hong Kong. In fact, not all of the commercial floors were purchased by investors from Hong Kong. In any event, the only suggestion by Mr Areson that the investors had anything in common was that on occasions ABAL referred to funding of $9 million in respect of the ten commercial floors. I do not consider that this description of the funding can alter the conclusion that each purchaser was acting independently. Mr Areson acknowledged that "each of the investors entered into individual finance agreements for their respective floors of the building." Not only were there ten separate loans but, as one would expect, each potential borrower was assessed individually by ABAL.
There is, therefore, nothing to suggest that Brightford's transaction was anything other than one involving the purchase by an investor of its own asset to be held by it for its own purposes without regard to the position of the purchasers of the other floors.
The only continuing connection between the individual purchasers was that they were all members of the body corporate with a right to share in the common property. I agree with Connolly J that that fact alone is not sufficient. Therefore, in my opinion, there was no relevant "financial or business undertaking or scheme."
Accordingly, it is not necessary to consider in detail whether, in any event, the payment of rent to Brightford could be categorised as a right to participate, or an interest, in "any profits, assets or realisation of any financial or business undertaking or scheme." Suffice it to say that I respectfully agree with the analysis of this point by Pidgeon J in Maunder-Hartigan[22].
[22](1984) 8 ACLR 937; (1984) 2 ACLC 438
Paragraph (b) of the definition of "Participation Interest"
In order to fall within paragraph (b) of the definition of "participation interest", there must be a right to participate, or an interest, "in any common enterprise … in relation to which the holder of the right or interest is led to expect profits, rent or interest from the efforts of the promoter of the enterprise or a third party." Counsel for the applicant submitted that, in the circumstances of this case, there was no "common enterprise" and no expectation that Brightford would receive any "profits, rent or interest from the efforts of the promoter of the enterprise or a third party."
In Australian Softwood, Mason J did not agree with the submission that "in order to constitute a 'common enterprise' there must be a joint participation in all the elements and activities that constitute the enterprise."[23] His Honour went on:
"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 common to both participants and, accordingly, a common enterprise."[24]
[23](1981) 148 CLR 121 at 133
[24](1981) 148 CLR 121 at 133
The first question is whether there was a "common enterprise". A possible argument is that it was constituted by the relationship between Brightford and the other investors. But that relationship, such as it was, did not continue beyond the initial dealings with GWP. Despite ABAL's use of the word "syndicate" in connection with the $9 million loan, I do not consider that these investors were a syndicate. Each contract of sale and lease was separately entered into and each loan was separately assessed and advanced. There was no linking of the funding to each investor. There was no sharing of the rent or profits.[25] Each investor had its own separate asset and associated liability and its own separate income and associated expenses. There was no commonality between the investors.
[25]See Acfold Investments (1985) 6 FCR 512 at 520 per Sheppard, Morling and Spender JJ
Although the links between the investors were greater in Maunder-Hartigan[26], Brinsden J held that even in that case the requirements of paragraph (b) were not satisfied.
"It is … necessary to see what it is that constitutes the common enterprise. The enterprise most strongly pressed, was said to arise among the Contos and the other unit holders. The mere fact that they are all unit holders under the same strata plan does not, by itself, amount to them all being part of a common enterprise, there was no contractual relationship between the owners of the units inter se, there was no sharing of rent or profits. Upon registration, each unit owner acquired the title of that unit subject to a lease of that unit. The rent payable by South Pacific for that unit was payable to the unit owner or at his direction."[27]
[26](1984) 8 ACLR 937; (1984) 2 ACLC 438
[27](1984) 8 ACLR 937 at 947; (1984) 2 ACLC 438 at 447
Another possible argument was that there was a "common enterprise" between Brightford and ABAL by virtue of the lease. Assuming that this relationship, which was a continuing one[28], could be regarded as a "common enterprise" within the meaning of paragraph (b), there was still no expectation of "profits, rent or interest from the efforts of the promoter of the enterprise or a third party." Brightford was entitled to receive rent from ABAL, but this was as a result of the lease[29]. There were no other "profits, rent or interest" which Brightford could expect from "the efforts" of ABAL or any other party. This is to be contrasted with the facts in Hamilton (Commissioner for Corporate Affairs) v Casnot Pty Ltd[30] where the promoter of the scheme bore a continuing obligation to "expend substantial sums of money in advertising and employ staff to locate customers."[31] It was held that the continuing substantial activity required of the promoter was directly related to the making of profits by the investor.
[28]See Streeter v Pacific-Seven Pty Ltd. (1985) 3 ACLC 430 at 434 per de Jersey J
[29]See Maunder-Hartigan (1984) 8 ACLR 937 at 954; (1984) 2 ACLC 438 at 453 per Pidgeon J
[30](1981) 5 ACLR 279; (1981) ACLC 33,122
[31](1981) 5 ACLR 279 at 280; (1981) ACLC 33,122 at 33,123
It follows that I accept the applicant's submission that paragraph (b) was also not applicable to Brightford's situation.
Paragraph (c) of the definition of "participation interest"
In order to fall within paragraph (c) of the definition of "participation interest", there must be a right to participate, or an interest, "in any investment contract." An "investment contract" is defined in s.9 as meaning:
"… any contract, scheme or arrangement that, in substance and irrespective of its form, involves the investment of money in or under such circumstances that the investor acquires or may acquire an interest in, or right in respect of, property, whether in this jurisdiction or elsewhere, that, under, or in accordance with, the terms of investment will, or may at the option of the investor, be used or employed in common with any other interest in, or right in respect of, property, whether in this jurisdiction or elsewhere, acquired in or under like circumstances."
The first point to be considered is whether, in this case, there was an "investment of money." In Brisbane Unit Development, Connolly J stated:
"In my view the payment of the purchase price for real estate is not aptly described as the investment of money in circumstances in which the investor acquires an interest in property."[32]
McPherson J in Munna Beach was of the same view. His Honour referred to and adopted[33] the distinction accepted by Jenkins J in Re Power:
"… between purchasing freehold property for the sake of the income one is going to get from it and purchasing freehold property for the sake of occupying it or permitting somebody else to occupy it. In the former case, the purchase is, in common parlance, and I think also in legal parlance, accurately described as an investment. In the latter case it is not necessarily an investment, for it is a purchase for some other purpose than a receipt of income."[34]
In both Brisbane Unit Development and Munna Beach, it was not clear what was proposed as the use of the apartments. It seems that they were to be used principally for residential purposes. It was this factual basis which led McPherson J in Munna Beach to draw the distinction between "laying out" money as an "investment" and the "payment" of money for the purchase of a residence. He continued:
"In my opinion, the contract of sale in the present case did not and does not contemplate any return to the purchasers of their money, and so is not one 'which involves the investment of money'."[35]
[32][1983] 2 Qd R 92 at 102
[33](1983) 1 Qd R 151 at 155
[34](1947) Ch 572 at 575
[35][1983] 1 Qd R 151 at 156
In Maunder-Hartigan, without deciding the point, Brinsden J stated that:
"what the appellant here did would ordinarily be described as the purchase of real estate though, admittedly, by way of investment."[36]
It was clear in that case that the apartments were not going to be used as private residences. In the similar but more complicated factual situation in Co-operative Building Society, Jenkinson J held:
"I am further of the opinion that what was being offered by the applicant to prospective purchasers of units was a right to participate in an 'investment contract', within the defined meaning of that term. The 'contract' being offered in substance involves the investment of money. The purchase price buys no right to enjoyment of possession for the first 30 years of fee simple ownership of the land purchased. That land being a stratum parcel in a building, 30 years is a not insubstantial part of the period during which possession might be enjoyed. The payment of the purchase price in those circumstances suggests that an investment of that money is being made."[37]
[36](1984) 8 ACLR 937 at 949; (1984) 2 ACLC 438 at 449
[37](1993) 10 ACSR 89 at 100
In my opinion, what Brightford did in this case is properly described as an "investment of money" because the property purchased was one of ten commercial floors, already subject to a seven year lease. There was no suggestion that it was anything other than an "investment" by Brightford, hopefully to produce income and capital gain for that company. The payment of the purchase price was an "investment of money" by Brightford.
The second requirement of an "investment contract" is that the interest in, or right in respect of, property "be used or employed in common." In Brisbane Unit Development, Connolly J held that:
"… there is no evidence in this case from which it could be inferred that the property comprised in the home units the subject of the contracts together with the shares of common property are to be used or employed in common with other interests in property in accordance with terms of investment or at all."[38]
A similar conclusion was stated by McPherson J in Munna Beach:
"It is, of course, true that two or more of the tenants in common might elect or even agree to go upon the land simultaneously; but if they then proceeded to do so, it does not seem to me that they would be using their respective rights 'in common'. On the contrary, each of them would then be severally exercising his individual right, even though he might be doing so contemporaneously with and even by pre-arrangement with the other or others. To express it in another way, it is not enough for the purposes of the definition that a proprietor, who holds a right in common with others, should exercise that right. In order to attract the definition, the right must be exercised 'in common with' others, and that is not done simply by exercising the common right contemporaneously, or in pursuit of a pre-concert with others."[39]
In Maunder-Hartigan, both Brinsden J and Pidgeon J agreed with the approach of McPherson J on this point.
[38][1983] 2 Qd R 92 at 102-103
[39][1983] 1 Qd R 151 at 154-155
Jenkinson J reached the contrary view in Co-operative Building Society:
"That such an investment is made is confirmed by the circumstance that profit during the ensuing 10 years, at least, is expected to be derived from the carrying out of what the contract contemplates. And the circumstances under which that payment occurs are such that the purchaser acquires a right in respect of his property, the unit, namely the right to have the unit used in the apartment complex business, a right that under the terms of investment will be used in common with each of the other unitholders' rights in respect of their units, which are acquired in like circumstances."[40]
[40](1993) 10 ACSR 89 at 100
In the present case, in my opinion, there is nothing to suggest that Brightford's interest in the property was to "be used or employed in common." It purchased the tenth floor separately and leased it to ABAL separately. Any subsequent lease would also have been a separate matter. There was no linking the use of that floor with the use of other floors. Merely sharing an interest in, or simultaneously using, the common property is not sufficient.
Finally, there is the further requirement that the common use of the right must be one which takes place "under, or in accordance with, the terms of investment." McPherson J in Munna Beach held that in order for there to be a finding of an "investment contract", the interest in, or right in respect of, property that will or may be used in common with any other such interest or right:
"would not be satisfied from any ad hoc arrangement made after the contract of sale was entered into…the common use of the right must be one which takes place 'under or in accordance with the terms of the investment'."[41]
His Honour held that in that case there was:
"nothing in the contract of sale, viewed as the terms of the investment, which either requires or contemplates that the proprietors or any of them will on any occasion or occasions combine to go upon the common property; and even if they in fact do so, it cannot fairly be described as a use of that property which is undertaken 'under or in accordance with the terms of the investment'."[42]
This conclusion is equally apposite to the facts of this case.
[41][1983] 1 Qd R 151 at 155
[42][1983] 1 Qd R 151 at 155
The situation in the present case can be contrasted with that in Amadio Pty Ltd v Henderson ("Amadio Building").[43] This case involved a declaration that the contract of sale of 258 Queensberry Street, Carlton was in contravention of ss.169 to 171 of the Companies (Victoria) Code. A number of investors, consisting predominantly of farmers, small business people and doctors, formed a partnership to buy the building. The parties were inextricably linked to each other in terms of their expectation of some return, in the form of rent or capital gain, from their investment. The interest offered involved use by the partnership of the co-owned property interests in common for profit and also to obtain and secure the principal sum for which the partners were jointly and severally liable with rights of contribution as between all of the parties. No partner was free to deal with his, her or its interest because it was encumbered by that partner's obligations as a partner and the inter-related rights of contribution.
[43](1998) 81 FCR 149
The Full Federal Court in Amadio Building observed that:
"In cases such as Munna Beach or Brisbane Unit Development Corporation, the owners of interests held the title to a specific apartment, as well as to a share in the common property. Thus, where separate interests in an investment are to be held by individuals and there are to be separate benefits and obligations on the part of the holder of each interest the separate and discrete interest offered to the participants may not be a prescribed interest.
However, where investors hold title to an asset with no separate or discrete interest which they could use or employ for their own benefit and will be obliged to use and mortgage their interest in common with the other investors if they wish to make a profit from it, the interest held is more likely to have the requisite interaction of rights, benefits and obligations and therefore constitute a prescribed interest under pars (a) and (c)."[44]
[44](1998) 81 FCR 149 at 183 per Northrop, Ryan and Merkel JJ
The Amadio Building case fell into the latter category, whereas, in my opinion, the present case is in the former category. There was no "investment contract" within the meaning of paragraph (c) of the definition of "participation interest" because Brightford's purchase was separate from the purchase of other floors in the Victoria Street Building and there was no mingling of income or sharing of profits between the various purchasers. Brightford's investment was separate to that of the other investors.
Conclusion
I, therefore, conclude that the transaction involving the contract of sale of the property and the other associated contracts did not involve a prescribed interest. Thus, there was no contravention of any provision of the Corporations Law and the purported avoidance of those contracts by the s.1073(2) Notice dated 20 November 2000 was of no effect.
In light of that finding, it is unnecessary for me to consider the second question argued by the applicant. If, subsequently, it turns out that the issue of election, waiver and estoppel needs to be considered, all of the relevant factual material is contained in the affidavits, in respect of which there was no cross-examination.
Orders
The orders I would propose making are as follows:
1.Declare that none of the contracts referred to in the Notice dated 20 November 2000 given on behalf of the respondents ("the Notice") constituted a prescribed interest within the meaning of the Corporations Law.
2.Pursuant to s.1073A(1) of the Corporations Law, declare the Notice to have had no effect.
3.Order that the respondents pay the applicant’s costs of and incidental to this proceeding, including reserved costs.
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