Norfolk Ridge Vineyards Ltd and Australian Securities and Investment Commission

[2005] AATA 1234

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2005] AATA 1234

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No W2004/241 & W2003/442        

GENERAL ADMINISTRATIVE DIVISION		)
Re		NORFOLK RIDGE VINEYARDS LTD

Applicant

And AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION

Respondent

DECISION

Tribunal Associate Professor G A Barton, Member

Date14 December 2005

PlacePerth

Decision The Tribunal affirms the decisions under review.

...........(sgd G A Barton).............................

Member

CATCHWORDS

CORPORATIONS LAW – responsible entity – registered viticultural managed investment schemes – dealers licence – Australian financial services licence – professional indemnity and fraud insurance – relief – not reasonably obtainable – decisions under review affirmed.

Old Corporations Act

s. 784

s. 786(1)(b) and (7)

Corporations Act 2001

s. 1410

s. 913B

s. 1433

s. 914A(1)(a) and (b)

s. 912A(1)(b)

s. 915C(1)(a) and (4)

Story v NCSC (1988) 13 NSWLR 661; 13 ACLR 225; 6 ACLC 560

Australian Securities and Investment Commission Policy Statements

PS 131 Managed Investments : Financial requirements

PS 131.3 (c)

PS 131.16 to 19

PS 167 Licensing : Discretionary powers and transition

PS 167.40

PS 167.55

REASONS FOR DECISION

14 December 2005 Associate Professor G A Barton, Member         

1. On 12 May 1998 the respondent granted the applicant, Norfolk Ridge Vineyards Ltd. (‘NRVL’), a dealers licence pursuant to section 784 of the old Corporations Act as defined in section 1410 of the Corporations Act  2001 (‘the Act’), authorising it to operate Norfolk Ridge Vineyards (‘NRV’) and Magpie Ridge Vineyards Project (‘MRV’), registered viticultural managed investment schemes, and to carry on a securities business in its capacity as a responsible entity of NRV and MRV (DLT 2). The dealers licence as varied by the respondent on 4 December 2001(AFST 11) included the condition relating to professional indemnity (P I) and fraud insurance set out in para. 3 of these reasons. NRVL held the dealers licence until 9 March 2004.

2. On 9 March 2004 the respondent granted NRVL an Australian financial services licence (‘the AFS licence’), which authorises NRVL to carry on a financial services business to operate NRV in its capacity as responsible entity (AFST 12). The AFS licence, which replaced the dealers licence, was granted under section 913B of the Act in accordance with the streamlined licensing procedure for certain regulated principals provided for in section 1433 of the Act which is a transitional provision relating to the Financial Services Reform Act  2001(‘FSR Act’) (AFST 2). The AFS licence came into effect on 10 March 2004.

3.      Condition 11 of the dealers licence required NRVL, at all times, to maintain an insurance policy covering P I and fraud by officers that:

“(a) is adequate having regard to the nature of the activities carried out by the licensee under the licence; and

(b)       covers claims amounting in aggregate to whichever is the lesser of:

(i)        $5 000 000; or

(ii)the sum of the value of all scheme property of registered schemes for which it is the responsible entity” (AFST 11)

4.      Condition 15 of the AFS licence requires NRVL to maintain an insurance policy covering P I and fraud by officers that:

“(a)is adequate having regard to the nature of the activities carried out by the licensee under the licence; and

(b)       covers claims amounting in aggregate to whichever is the lesser of:

(i)        $5 million; or

(ii)the sum of the value of all IDPS property of all IDPSs for which it is the  operator and all scheme property of all registered schemes for which it is the responsible entity” (AFST 12).

5.      The AFS licence does not authorise NRVL to operate IDSP (investor directed portfolio services) and so the requirement in condition 15(b) (ii) in relation to IDSP is not relevant to the determination of these applications.

6. It was common cause between the parties that, by sections 786(1)(b) and (7) of the old Corporations Act and sections 914A(1)(a) and (b) of the Act, the respondent could impose, and may, at any time, revoke or vary, condition 11 of the dealers licence and condition 15 of the AFS licence respectively.

7.      On 14 April 2003 NRVL’s insurance policy covering P I and fraud expired. On 16 April 2003 it notified the respondent that it was in breach of condition 11 of the dealers licence and sought relief from the condition that it maintain P I cover (AFST 7). NRVL obtained fraud insurance cover in June 2003 (AFST 3) and it has crop insurance.

8.      On 11 March 2004 NRVL notified the respondent it was in breach of condition 15 of the AFS licence in relation to P I cover (AFST 4) and it applied to the respondent for relief from the condition that it maintain P I cover on 12 March 2004 (AFST 3).

9.      On 20 October 2003 the respondent refused to revoke condition 11 of the dealers licence (DLT 2) and on 24 June 2004 the respondent refused to vary or revoke condition 15 of the AFS licence (AFST 2). NRVL applied for review of these decisions on 13 November 2003 and 30 June 2004 respectively (DLT 1; AFST 1). Both applications were made on the ground that PI insurance cover is not reasonably obtainable.

10. If NRVL is in breach of condition 15 of the AFS licence, it will be in breach of section 912A (1) (b) of the Act. In these circumstances, by sections 915C(1)(a) and (4) of the Act, the respondent has a discretionary power to suspend or cancel the AFS licence after giving NRVL, or its representative, an opportunity to appear, and to make any submissions on the matter, at a private hearing before the respondent. The power to suspend or cancel the AFS licence is not punitive and the aim of the hearing would be to establish the facts necessary for the respondent to decide whether the AFS licence ought to be cancelled to protect the public;  Story v NCSC (1988) 13 NSWLR 661; 13 ACLR 225; 6 ACLC 560.

11. Mr A A Treadgold, the managing director of NRVL, appeared for NRVL and gave evidence. He called Mr Glen Hahn, an executive account manager with EBM Insurance and Mr R Garton - Smith, managing director of Primary Securities Ltd. He tendered documentary exhibits A1 to A5. Mr P Bevilacqua of Counsel appeared for the respondent. For convenience, documents T1 to T9 (lodged with the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975) in relation to the respondent’s decision concerning condition 11 of the dealers licence, are cited in these reasons as ‘DLT’ and those concerning the respondent’s decision in relation to condition 15 of the AFS licence (T1 to T13) as ‘AFST’. Supplementary documents T 14 and T15 were lodged in respect of both applications.

12. The respondent’s pre - FSR Act Policy Statement 131 Managed investments: Financial requirements (‘PS131’) provides guidance on the financial requirements that a responsible entity must satisfy to have a licence authorising it to operate a managed investment scheme. Relevantly PS 131.3(c) states that in order to obtain such a licence, the applicant must “maintain appropriate professional indemnity insurance and insurance against fraud of your officers. This should cover claims up to, and in aggregate, $ 5 million, or the value of scheme assets, whichever is less (unless you can demonstrate to us that such insurance is not reasonably obtainable); ....” (AFST 9).

13.     The insurance requirements of PS 131.3(c) are explained in PS 131.16 to PS 131.19 as follows:

[PS131.16]  In any business there is a risk of funds or assets being misappropriated by employees, owners and other parties.  When an entity is managing another person’s money or assets, the risk and impact of fraud may increase.  Therefore, we will require as a licence condition, that a responsible entity must have and maintain adequate insurance protection against loss arising from negligent administration or fraud by its officers.

[PS 131.17]  The insurance requirements set out in this policy statement take into account:

(a)mandatory professional indemnity insurance requirements under the SIS regime and in other jurisdictions such as the United states and Canada (which have mandatory broker bond and/or insurance requirements); and

(b)professional indemnity requirements in Australia (eg Australian Stock Exchange Ltd).

[PS 131.18]We have not prescribed standard insurance policy requirements, but we have set the lesser of $5 million or the value of scheme assets as the minimum cover.  In other respects, it is up to the directors of the responsible entity, and the auditor of the responsible entity, to assess whether the terms of the cover are adequate.  Maintaining the required insurance is also a licence condition.

[PS 131.19]You will not be required to obtain this insurance if you can demonstrate to us, at the time of your licence application, that it is not reasonably obtainable.” (AFST 9).

14. The respondent’s Policy Statement 167 Licensing: Discretionary powers and transition (PS 167) explains how its pre - FSR Act policies will apply after the commencement of the FSR Act on 11 March 2002(T 14). It is stated at PS 167.40 that the requirement for responsible entities to maintain appropriate P I insurance as required by PS 131 will be continued during the 2 year transitional period from 11 March 2002 to 10 March 2004; Key terms PS 167.55 (T14). The respondent has continued to apply PS 131 in respect of P I cover since 10 March 2004 and states in its report “Overview of decisions on relief applications from financial service providers” of December 2004 (T15) that it “ will only dispense with this requirement where the insurance is not generally available on an industry - wide basis and the responsible entity has adequate alternative arrangements in place to ensure that investors are compensated for any loss or damage arising from negligence by the responsible entity or fraud by its officers” (T15 section 2.15).

15.     The Tribunal finds that the evidence in these matters establishes the facts set out in paras 16 to 20 of these reasons.

16.     When NRVL’s insurance policy covering P I expired in April 2003 the insurer declined to reinsure because it had decided to withdraw from that segment of the market. Mr Treadgold then approached NRVL’s insurance brokers, EBM Insurance (‘EBM’), to obtain P I cover. EBM specialises in all classes of insurance.

17.     On 9 May 2005 Mr Glen Hahn of EBM sent the following e-mail message to Mr Treadgold: “Tony as per your query today there are still no new markets for Professional Indemnity Insurance, and the existing insurer for this type of business is AIG, and they are not taking on any new business. You will recall that we have previously asked AIG to quote on your behalf and they have in any event declined to quote. Regards, Glen Hahn” (A1)

18.     “AIG “in Mr Hahn’s message, stands for American International Group. EBM directs a great amount of business to AIG. In Mr Hahn’s experience AIG currently decline to provide new P I cover for agricultural, horticultural and viticultural managed investment schemes. In the case of NRVL, AIG informed him verbally that they were not providing P I cover in the viticultural area and in any event they would not provide it to NRVL because it had not achieved the forecast projections made in the prospectus for NRV. AIG has declined other proposals for new P I cover in the viticultural, horticultural and agricultural fields referred to it by EBM.  At no stage did Mr Hahn contact the responsible entities of other viticultural managed investment schemes to establish who their P I insurers are and so, in cross - examination by the respondent, he confirmed that he was unable to say that no insurer would provide P I cover to NRVL.

19.     Mr Treadgold discussed the matter of NRVL’s P I insurance cover with Mr Garton - Smith of Primary Securities Ltd. (‘Primary’) an AFS licensee that does business as the contract responsible entity for managed investment schemes by taking responsibility for a scheme but subcontracting the active operations of the scheme to a manager. Primary has P I insurance cover for its operations and it has contracted for 10 agricultural investment schemes over the last 5 to 6 years. Primary declined to contract as responsible entity for NRV and place it on its global P I insurance policy with AIG for the same reason that AIG declined to insure NRVL directly. Mr Garton - Smith testified that P I insurance was available to NRVL but at a very high premium (A3). Primary did contract for My Wine Club Ltd. at a cost in excess of $100, 000 (A2).

20.     Mr Treadgold did not approach other insurance brokers but he was contacted by Miller and Associates, insurance brokers in Sydney, who offered to arrange P I and crime insurance up to $5 million for NRVL through Lloyds of London at a quoted premium of $108,000 per annum including stamp duty (A4). Mr Treadgold declined the offer because the approximate fee income of NRVL is $800, 000 and he formed the view that NRVL was justified in seeking relief from the respondent in respect of its licence requirement for P I insurance cover because P I cover was no longer reasonably obtainable by NRVL. NRVL had previously obtained P I cover for amounts from $5 million to $1 million at annual premiums from $ 2000 to $ 5000.

21.     Mr Treadgold tendered in evidence the Australian Government’s position paper of 2003 on compensation for loss in the financial services sector (A5).

22.     Mr Treadgold submitted on behalf of NRVL that P I insurance cover is not available to it or, alternatively, if it is available, it is not reasonably available on the basis of the quoted premium in the offer from Miller and Associates (A4). He made the further submission that NRVL had not been in breach of condition 11 of the dealers licence and was not in breach of condition 15 of the AFS licence because the sum of the value of all NRV assets was zero for the purpose of condition 11(b) (ii) of the dealers licence and condition 15(b) (ii) of the AFS licence. He explained that NRV is a closed scheme and that NRVL is not providing financial advice but growing and selling grapes on behalf of the participating growers. It sells grapes at the farm gate and receives the proceeds, activities for which it has crop insurance and fraud insurance.

23.     The respondent’s principal submissions are set out at paras.15 to17 of its statement of facts and contentions. In relation to NRVL’s submission that it is not in breach of the insurance conditions in dispute because the value of all NRV assets is zero, the respondent submitted at the hearing that in that event the minimum amount of cover is $5 million. The Tribunal finds that this latter submission is misconceived as it is irreconcilable with the terms of condition 11 of the dealers licence and condition 15 of the AFS licence. This finding, however, does not assist NRVL for the reasons set out below.

24. The Tribunal finds that it is arguable that NRVL was not in breach of condition 11 of the dealers licence, and is not in breach of condition 15 of the AFS licence, by failing to maintain P I insurance cover in circumstances where the sum of the value of all NRV property is zero. There were no financial statements before the Tribunal to establish the value of NRV property. However, even if it were established that the sum of the value of all NRV and MRV property has been zero since NRVL’s P I insurance expired and that NRVL has not been in breach of condition 11 of the dealers licence and condition 15 of the AFS licence, those matters relate to whether NRVL has complied with the condition that it maintain adequate P I insurance and they are not grounds for varying or revoking it. The condition for P I insurance is there to protect NRV growers when the circumstances it prescribes arise and it is always open to NRVL, at any hearing pursuant to section 915C of the Act, to submit to the respondent that those circumstances have not arisen. The respondent’s discretionary power to suspend or cancel the AFS licence is referred to in para 10 of these reasons.

25.     NRVL’s submission that the cost to it of P I and fraud insurance, relative to its income, has reached a level where it can no longer obtain such cover reasonably is based on the quotation from Miller and Associates for an aggregate limit of liability of $5,000,000 (A4).  This limit of liability is not based on any reasonable calculation of the amount of P I and fraud cover NRVL is required to maintain by condition 15 of the AFS licence and so is not a true measure of the cost of P I and fraud insurance cover to NRVL.  This finding is based on the requirement in condition 115(b) of the AFS licence and on the evidence of Mr Treadgold for NRVL on the value of NRV property.  There is no reason to doubt his testimony that the value of NRV property is considerably less than $5,000,000.

26.     The evidence adduced by NRVL does not establish that P I insurance cover is generally not available to it on an industry-wide basis, nor does it establish that such cover is otherwise not reasonably obtainable, and so the Tribunal finds that there are no grounds for it to exercise the statutory discretions referred to in para 6 of these reasons to relieve NRVL wholly or partially from condition 11 of the dealers licence and condition 15 of the AFS licence.

27.     The Tribunal affirms the decisions under review.

I certify that the 27 preceding paragraphs are a true copy of the reasons for the decision herein of Professor G A Barton, Member

Signed:         .........(sgd D Brodie)....................................
  Associate

Date of Hearing  11 May 2005
Date of Decision  14 December 2005
Appearing for the Applicant      Mr Treadgold
Counsel for the Respondent     Mr Bevilacqua