Re Courtenay House Capital Trading Group Pty Ltd (in liq)

Case •

[2020] NSWSC 780

•

23 June 2020

No judgment structure available for this case.

Supreme Court


New South Wales

Medium Neutral Citation: In the matter of Courtenay House Capital Trading Group Pty Limited (in liquidation) [2020] NSWSC 780
Hearing dates: 10 March 2020, last submissions received 17 June 2020
Date of orders: 23 June 2020
Decision date: 23 June 2020
Jurisdiction:Equity - Corporations List
Before: Rees J
Decision:

Directions given to liquidators: see [175].

Catchwords:

CORPORATIONS – directions to liquidators - s 90-15 Insolvency Practice Schedule – advice to trustees - section 63 Trustee Act 1925 – principles at [5]-[14] –appropriate to give directions and advice.

 

EQUITY – hotchpot – history, particularly in cross border insolvency and claims by contributors to mixed funds - see [78]-[87].

  Ponzi scheme – definition, history and features – see [15]-[24] – common misfortune – how to distribute remaining funds to investors – different approaches – ‘net investment approach’ – pari passu – ‘North American method / lowest intermediate balance rule – pari passu with hotchpot - see [89]-[108] – distribute remaining funds pari passu with hotchpot.
Legislation Cited: Corporations Act 2001 (Cth), ss 553C, 601EE(2); Schedule 2 Insolvency Practice Schedule (Corporations) ss 90-15, 90-15(3)(a), 90-20(1)(d)
Trustee Act 1925 (NSW), s 63
Cases Cited: Akers as a joint foreign representative of Saad Investments Co Limited (in official liquidation) v Deputy Commissioner of Taxation (2014) 223 FCR 8; (2014) 311 ALR 167; [2014] FCAFC 57
Australian Securities and Investments Commission v Atlantic 3 Financial (Aust) Pty Limited [2006] QSC 132
Australian Securities and Investments Commission v Idylic Solutions Limited (2009) 76 ACSR 129; [2009] NSWSC 1306
Australian Securities and Investments Commission v Letten (No 20) (2012) 92 ACSR 630; [2012] FCA 1283
Australian Securities and Investments Commission v Letten (No 7) [2010] FCA 1231; (2010) 80 ACSR 401
Australian Securities Commission v Melbourne Asset Management Pty Ltd (Receiver and Manager Appointed) (1994) 49 FCR 334
Banco de Portugal v Waddell (1880) 5 App Cas 161
Barclays Bank Limited v Quistclose Investments Limited [1970] AC 567
Barlow Clowes International Ltd (in liq) v Vaughan [1992] 4 All ER 22
Bishop Mar Meelis Zaia v David Tiglath Chibo [2005] NSWSC 917
Black v S Freedman & Co (1910) 12 CLR 105; [1910] HCA 58
Boale Wood Ltd v Whitmore 2017 BCSC 1917
Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) & Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2) [2020] NSWCA 117
Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth (2019) 368 ALR 390; [2019] HCA 20
Chapel Road Pty Ltd v ASIC [2003] AATA 660
Cherry v Boultbee [1839] EngR 1099; 41 ER 171
Cleaver v Delta American Reinsurance Co (in liq) [2001] UKPC 6; [2001] 2 AC 328
Clout (Trustee) v Anscor Pty Ltd [2003] FCA 326
Cook v Permanent Mortgages [2007] NSWCA 219
Cunningham v Brown, 265 US 1 (1924)
DD Growth Premium 2X Fund (in liquidation) v RMF Market Neutral Strategies (Master) Ltd [2017] UKPC 36
Dean-Willcocks v Soluble Solution Hydroponics Pty Limited (1997) 42 NSWLR 209 at 212; (1997) 24 ACSR 79
Donell v Kowell, 533 F.3d 762
Doyle Salewski Inc v Scott 2019 ONSC 5108
Eaton v LDC Finance Ltd (in rec) [2012] BCL 241; [2012] NZHC 1105
Edwards v Freeman (1727) 2 P Wms 435
Ex parte Wilson (1872) 7 Ch App 490
Fairfield Sentry Limited (in liquidation) v Quilvest Finance Ltd [2014] UKPC 9
Financial Conduct Authority v Anderson [2014] EWHC 3630 (Ch); [2014] CN 1983
Finnigan v R (2013) 233 A Crim R 381; [2013] NSWCCA 177
Holt v Frederick (1726) 2 P Wms 357
In Re Bernard L Madoff Inv Securities LLC 654 F 3d 229 (2d Cir 2011)
In Re Performance Investment Products Corporation Limited [2014] HKCU 658; (2014) HKCFI 481
In Re SSSL Realisations (2002) Limited [2006] Ch 610; EWCA Civ 7
In the matter of 7 Steel Distribution Pty Limited (in liquidation) (receivers and managers appointed) [2013] NSWSC 669
In the matter of Anglican Development Fund Diocese of Bathurst (receivers & managers appointed) [2015] NSWSC 440
In the matter of Bevillesta Pty Ltd (in voluntary administration) (2011) 254 FLR 324; [2011] NSWSC 417
In the matter of Courtenay House Capital Trading Group Pty Limited (in liquidation) and Courtenay House Pty Limited (in liquidation) [2019] NSWSC 1113
In the matter of Dungowan Manly Pty Limited (in liq) [2018] NSWSC 1083
In the matter of Dungowan Manly Pty Ltd (in liquidation) (2017) 124 ACSR 218; [2017] NSWSC 1771
In the matter of Hawden Property Group Pty Ltd (in liq) (ACN 003 528 345) (2018) 125 ACSR 355; [2018] NSWSC 481
In the matter of ICS Real Estate Pty Ltd (in liq); and In the matter of Independent Contractor Services (Aust) Pty Ltd (in liq) (2014) 14 ASTLR 382; [2014] NSWSC 479
In the matter of Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556
In the matter of Stanford International Bank Ltd (in liquidation) [2019] UKPC 45
In the matter of Direct Acceptance Corporation Ltd (receivers appointed) (in liquidation) (2019) 136 ACSR 245; [2019] NSWSC 395
In the matter of MF Global Australia Ltd (in liquidation) (2012) 267 FLR 27; [2012] NSWSC 994
Johnson v Smith [2010] NSWCA 306
Kadam v MiiResorts Group 1 Pty Ltd (No 5) [2018] FCA 1086; (2018) 129 ACSR 74
Karl Suleman Enterprizes v George [2003] NSWSC 544
Korda v Silkchime Pty Ltd (2010) 243 FLR 269; [2010] WASC 155
Lane (Trustee), in the matter of Lee (Bankrupt) v Deputy Commissioner of Taxation (2017) 253 FCR 46; [2017] FCA 953
Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42
Martino v Edison Worldwide Capital (In re Randy), 187 BR 425 (Bankr ND Ill 1995)
McIntosh v Fisk [2016] 2 NZLR 783; (2016) 14 TCLR 307; [2016] NZCA 74
Meadow Springs Fairway Resort Ltd (in liq) v Balance Securities Ltd [2007] FCA 1443
Merrill v Abbott (In re Independent Clearing House Co.), 77 BR 843 (Bankr. D. Utah 1987)
Millard v North George Capital Management Ltd (2006), 26 BLR (4th) 231 (Ont Sup Ct)
O’Neil v Gale [2013] EWCA Civ 1554; [2013] CN 1871
Pearson v Primeo Fund (No 1) [2017] UKPC 19
Pearson v Primeo Fund (No 2) [2020] UKPC 3
Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited (No 3) [2018] FCA 1842
Ponzi v Fessenden 258 US 254 (1922)
Prichard v Prichard [2015] WASC 170
R v Lovell [2012] QCA 43
Re Ansett Australia Ltd (2001) 39 ACSR 355; [2001] FCA 1439
Re BBY (No 2) [2018] NSWSC 346
Re BCCI (No 3) [1993] BCLC 106
Re Blume [1959] Qd R 95
Re Courtenay House Capital Trading Group Pty Ltd (in liq) and Courtenay House Pty Ltd (in liq) (2018) 125 ACSR 149; [2018] NSWSC 404
Re Daniel Efrat Consulting Services Pty Ltd (receiver appointed) (in liq) (1999) 91 FCR 154; [1999] FCA 412
Re Estate Late Chow Cho-Poon; Application for judicial advice (2013) 10 ASTLR 251; [2013] NSWSC 844
Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361; (2003) 48 ACSR 97; [2003] NSWSC 1008
Re Hobourn Aero Components Limited’s Air Raid Distress Fund; Ryan v Forrest [1946] Ch 86
Re Hobourn Aero Components Limited’s Air Raid Distress Fund; Ryan v Forrest [1946] Ch 194
Re Idylic Solutions Pty Ltd (as trustee for Super Save Superannuation Fund) (2016) 114 ACSR 230; [2016] NSWSC 907
Re International Investment Unit Trust (2004) 9 NZCLC 263,678; [2005] 1 NZLR 270
Re International Investment Unit Trust [2005] 1 NZLR 270
Re MF Global Australia Limited (in liq) [2012] NSWSC 994
Re MF Global Hong Kong Limited [2012] 2 HKLRD 1; [2012] HKCU 276
Re Oriental Inland Steam Company (1874) 9 Ch App 557
Re Plutus Payroll Australia Pty Ltd (in liq) (2019) 139 ACSR 536; [2019] NSWSC 1171
Re Printers and Transferrers Amalgamated Protection Society [1899] 2 Ch 184
Re Registered Securities Ltd (in liq) [1991] 1 NZLR 545
Re Registered Securities Ltd (in liq); National Australia Bank NZ Ltd v Tuck (1990) 5 NZCLC 66,248
Re Standard Insurance Co Limited [1968] Qd R 118
Re Tennant (1942) 65 CLR 473; [1942] HCA 3
Re Willmott Forests Ltd (No 2) (2012) 88 ACSR 18; [2012] VSC 125
Russell-Cooke Trust Co v Prentis [2002] EWHC 2227 (Ch); [2003] 2 All ER 478
Scholes v Lehmann, 56 F 3d 750 (7th Cir 1995)
Securities and Exchange Commission v Bernard Madoff and Bernard L Madoff Investment Securities LLC (S.D.N.Y. Civ. 08 CV 10791 (LLS))
Selkrig v Davies (1814) 2 Dow 230; 3 ER 848; 2 Rose 291
Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic (2006) 232 ALR 119; [2006] FCAFC 92
Titan Investments Ltd Partnership (Re) 2005 ABQB 637
United States v Madoff, 586 F.Supp 2d 240
White (Trustee), in the matter of Vlahos (Bankrupt) v Ljubicic [2017] FCA 717
Zipside Pty Ltd v Anscor Pty Ltd [2004] QSC 33
Texts Cited: Alex S Weiner ‘Net equity only comes with net equality: an exploration of an alternative remedy for victims of Ponzi schemes’ (2012) 84 Temple Law Review 423
Amy Sepinwall ‘Righting Others’ Wrongs: a critical look at clawbacks in Madoff-type Ponzi schemes and other frauds’ (2012) 78 Brooklyn Law Review 1
Caitlyn Crisp ‘Ponzi Scheme Clawbacks: are they equitable?’ (2013) 20(3) PIABA Bar Journal 317
David Partlett, ‘The Right of Subrogation in Accommodation Bills of Exchange’ (1979) 53 Australian Law Journal 694
Grant Christensen, ‘Allocating Loss in Securities Fraud: time to adopt a uniform rule for the special case of Ponzi schemes’ (2012) 3 William and Mary Business Law Review 309
Jacobs Law of Trusts in Australia (8th ed, 2016, LexisNexis)
John G Ross Martyn et al, Theobald on Wills (18th ed, 2016, Sweet & Maxwell)
Lady Arden, ‘The Judicial Committee of the Privy Council as an important source of financial services jurisprudence’ (The 9th Annual P.R.I.M.E. Finance Conference, The Hague, 3 February 2020)
Mat Campbell ‘Change of position: retreating from Barros Mattos, then rocking the boat’ (2014) 22 Restitution Law Review 105
Paul W Bonapfel et al ‘The Business Bankruptcy Panel: Ponzi Schemes – Bankruptcy Court v Federal Court Equity Receivership’ (2010) 26 Emory Bankruptcy Developments Journal 207
Spencer A Winters ‘The Law of Ponzi Payouts’ (2012) 111 Michigan Law Review 119
Category:Principal judgment
Parties:

Said Jahani and John McInerney in their capacity as joint and several liquidators of Courtenay House Pty Limited (In Liquidation) and Courtenay House Capital Trading Group Pty Limited (In Liquidation) (Plaintiffs)

  JP Melocco Pty Ltd (First Defendant)
Lifesmart Trading Pty Limited (Second Defendant)
Peter Caron & Anke Seiditz (Third Defendant)
Ralph Del Vecchio (Fourth Defendant)
Bentley Co Pty Ltd ATF Rafis Discretionary Trust (Fifth Defendant)
Robert Nahas (Sixth Defendant)
Luke Buxton (Seventh Defendant)
Representation:

Counsel:
Mr R Scruby SC / Ms L Hulmes (Plaintiffs)
No appearance (First, Second, Third, Fourth Defendants)
Mr IR Pike SC (Fifth Defendant)
Mr MA Izzo SC / Mr B Michael (Sixth Defendant)
Mr D Barlin (Seventh Defendant)
Ms N Girsa (Interested Party)

  Solicitors:
Colin Biggers Paisley (Plaintiffs)
Johnson Winter Slattery (Fifth Defendant)
Ashurst (Sixth Defendant)
Diamond Conway (Seventh Defendant)
File Number(s): 2017/269831

Judgment

  1. HER HONOUR: This case concerns how the funds which remain from a Ponzi scheme should be shared amongst those who invested in it. I have described Ponzi schemes in general at [15]-[24] and this one in particular at [25]-[47]. Here, some 780 investors paid $250 million into National Australia Bank and Westpac bank accounts used by the promoters of the Ponzi scheme. After a distribution following the judgment of Brereton J in Re Courtenay House Capital Trading Group Pty Ltd (in liq) and Courtenay House Pty Ltd (in liq) (2018) 125 ACSR 149; [2018] NSWSC 404, some $20 million remains in Westpac bank accounts to be distributed amongst the remaining investors who outlaid $80 million.

  2. Said Jahani and John McInerney, the liquidators of Courtenay House Pty Limited (in liquidation) and Courtenay House Capital Trading Group Pty Limited (in liquidation), seek directions, orders and advice pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations), Schedule 2 of the Corporations Act2001 (Cth) and section 63 of the Trustee Act 1925 (NSW) as to how these funds should be distributed following a further judgment of Black J in In the matter of Courtenay House Capital Trading Group Pty Limited (in liquidation) and Courtenay House Pty Limited (in liquidation) [2019] NSWSC 1113, from which a subset of nine investors successfully appealed: Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) & Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2) [2020] NSWCA 117. The main issue is whether principles of “hotchpot” should apply and, if so, how. I have described the equitable doctrine of hotchpot at [78] to [87] and different judicial approaches to this problem in common law jurisdictions at [89] to [109]. The liquidators also seek directions, orders and advice on how other amounts recovered during the liquidations should be distributed.

  3. In respect of distribution of the remaining $20 million, there are three possibilities or scenarios, set out at [110]. Three defendants were joined to the proceedings to represent the classes of investors who would benefit under each scenario. Bentley Co Pty Limited as trustee for the Rafis Discretionary Trust was joined as the fifth defendant to represent investors who will be financially better off under “Scenario 1” and Mr Pike SC spoke in favour of this scenario. Robert Nahas was joined as the sixth defendant to represent investors who will be financially better off under “Scenario 2” and Mr Izzo SC and Mr Michael spoke in favour of this scenario. Luke Buxton was joined as the seventh defendant to represent investors who will be financially better off under “Scenario 3” and Mr Barlin spoke in favour of this scenario. Counsel comprehensively ventilated the positive attributes of their particular scenario and the frailties of other scenarios. The liquidators’ counsel, Mr Scruby SC and Ms Hulmes, advanced the other issues on which directions were sought.

  4. As to evidence, the liquidators relied on four affidavits by Mr Jahani, an affidavit by the liquidators’ solicitor and two reports by the liquidators to the Court. The reports were admitted into evidence without limitation and stood, effectively, as evidence of the matters described in the reports. Documents were also tendered by an investor, Nina Girsa.

ADVICE AND DIRECTIONS

  1. Section 90-15(1) of the Insolvency Practice Schedule (Corporations), being Schedule 2 to the Corporations Act 2001 (Cth), provides that the Court may make such orders as it thinks fit in relation to the external administration of a company, including determining any question arising in the external administration: section 90-15(3)(a). As liquidators, the plaintiffs have standing to bring this application as officers of the companies: section 9, Corporations Act; section 90-20(1)(d), Insolvency Practice Schedule.

  2. The principles in relation to applications for directions were summarised by Black J in In the matter of Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 at [7]–[9] and Gleeson JA in In the matter of Hawden Property Group Pty Ltd (in liq) (ACN 003 528 345) (2018) 125 ACSR 355; [2018] NSWSC 481. The Court may give directions where it will be “of advantage in the liquidation”: Dean-Willcocks v Soluble Solution Hydroponics Pty Limited (1997) 42 NSWLR 209 at 212; (1997) 24 ACSR 79 at 81 per Young J. The Court will not generally give a direction where the matter relates to the making or implementation of a business or commercial decision, when no legal issue is raised or where there is no attack on the propriety or reasonableness of the liquidator’s decision but may do so where there is the prospect of such an attack: In the matter of 7 Steel Distribution Pty Limited (in liquidation)(receivers and managers appointed) [2013] NSWSC 669 at [20] per Black J; In the matter of Dungowan Manly Pty Limited (in liq) [2018] NSWSC 1083 at [17]. A direction protects the liquidators from liability for breach of duty or unreasonable behaviour if full disclosure is made to the Court: Re Daniel Efrat Consulting Services Pty Ltd (receiver appointed) (in liq) (1999) 91 FCR 154; [1999] FCA 412 at [13]; Re Ansett Australia Ltd (2001) 39 ACSR 355; [2001] FCA 1439 at [59]–[62] per Goldberg J; In the matter of Dungowan Manly Pty Ltd (in liquidation) (2017) 124 ACSR 218; [2017] NSWSC 1771 at [3] per Black J.

  3. It is appropriate to give directions in this matter for two main reasons. First, legal issues of some complexity have arisen. Second, given the number of investors who have lost money by reason of the Ponzi scheme and the size of their losses, the prospect of an attack on the liquidators’ actions might be thought to be higher than usual. Such a prospect is enhanced by the fact that the companies did not maintain proper books and records and those which the liquidators did secure have limited reliability: see [55]. Whilst the liquidators’ assessment of the position may be sound based on the information which they have been able to obtain, there may be further material ‘out there’ which may entitle a creditor of either company to accuse them of having acted unreasonably: In the matter of Bevillesta Pty Ltd(in voluntary administration) (2011) 254 FLR 324; [2011] NSWSC 417 at [11] per Bergin CJ in Eq; Korda v Silkchime Pty Ltd (2010) 243 FLR 269; [2010] WASC 155 at [32] per Le Miere J; In the matter of MF GlobalAustralia Ltd (in liquidation) (2012) 267 FLR 27; [2012] NSWSC 994 at [7]; In the matter of Direct Acceptance Corporation Ltd (receivers appointed) (in liquidation) (2019) 136 ACSR 245; [2019] NSWSC 395 at [36] per Ward CJ in Eq. Further, whilst representative defendants have been joined to these proceedings, there are many other creditors who will not necessarily be bound by the outcome of the proceedings. In the absence of directions, the liquidators may be exposed to a complaint or claim by one or more creditors in relation to the distribution of funds. Directions will permit the liquidators to adopt a course of conduct free from the risk of personal liability for breach of duty: Re MF Global Australia Limited (in liq) [2012] NSWSC 994 at [8].

  4. Brereton J and Black J each held that funds which investors deposited with the companies are held on trust for the investors. Thus the liquidators also seek advice as trustees under section 63(1) of the Trustee Act, which provides:

A trustee may apply to the Court for an opinion advice or direction on any question respecting the management or administration of the trust property, or respecting the interpretation of the trust instrument.

  1. As Kiefel J observed in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42 at [196]:

The principal purpose of the section, and the opinion, advice or direction given under it, is the protection of the interests of the trust. Another purpose is the protection of a Trustee who is acting in that regard and upon advice. Securing the latter purpose may ensure the attainment of the principal purpose, by removing the concern of a Trustee about exposure beyond their usual indemnity.

  1. Ordinarily, the Court would be provided with a comprehensive opinion by the trustees’ counsel who, out of court, has studied the problem to be solved, examined the factual context critically, analysed competing contentions in a comprehensive legal context and worked out a solution that commends itself to his or her professional judgement, being a judgement upon which the Court can responsibly be invited to rely: Re Estate Late Chow Cho-Poon; Application for judicial advice (2013) 10 ASTLR 251; [2013] NSWSC 844 at [113] per Lindsay J. Here, whilst the liquidators initially expressed views on how the funds should be distributed – before representative defendants were joined – the liquidators’ counsel left the matter to the representative defendants’ counsel at the hearing, consistent with the approach described by Finkelstein J in Sons of Gwalia Ltd (subject to deed of company arrangement) v Margaretic (2006) 232 ALR 119; [2006] FCAFC 92 at [6]: (citations omitted)

When a “trust dispute” has come about because there is a dispute between two beneficiaries … the duty of the trustee as the trustee for all beneficiaries is to treat the beneficiaries impartially and remain neutral. Thus, unless the trust instrument itself provides otherwise, the trustees should bring the dispute into court for resolution but in the proceeding they are not entitled to favour one party over another by advocating a party’s cause. To do otherwise would be a breach of the trustees’ duty to deal impartially with all beneficiaries and to protect their interests. Of course, if the case is not properly presented by the beneficiaries the trustees may, indeed probably should, provide the court with their views.

  1. The liquidators were not entirely neutral. As to whether Ms Girsa and Zoja Gromova should be included in any distribution, the liquidators acknowledged that the directions sought involved an adversarial element but submitted it was appropriate to give judicial advice nonetheless: Macedonian Orthodox Community Church at St Petka at [59]-[60]; Re Plutus Payroll Australia Pty Ltd (in liq) (2019) 139 ACSR 536; [2019] NSWSC 1171 per Black J at [5]-[7].

  2. As Gleeson JA explained in Hawden Property Group, section 90-15 of the Insolvency Practice Schedule accommodates the determination of substantive rights although the Court would not do so without affording potentially affected parties an opportunity to be heard: at [8] citing Meadow Springs Fairway Resort Ltd (in liq) v Balance Securities Ltd [2007] FCA 1443, at [49]-[51] (French J, referring to Australian Securities Commission v Melbourne Asset Management Pty Ltd (Receiver and Manager Appointed) (1994) 49 FCR 334 at 352 (Northrop J)); Re Willmott Forests Ltd (No 2) (2012) 88 ACSR 18; [2012] VSC 125 at [45]-[46] (Davies J); In the matter of ICS Real Estate Pty Ltd (in liq); and In the matter of Independent Contractor Services (Aust) Pty Ltd (in liq) (2014) 14 ASTLR 382; [2014] NSWSC 479 at [25] (Brereton J). Here, Ms Girsa appeared in person on behalf of herself and Ms Gromova. Ms Girsa tendered documents and made submissions. Thus, those affected by the direction sought have been afforded an opportunity to be heard. Thus, I consider it appropriate to give directions in respect of Ms Girsa and Ms Gromova’s proofs of debt so that the liquidators can complete the distribution of funds to all investors.

  3. The particular task undertaken by the Court when giving directions was well described by Brereton J in Re BBY Limited (receivers and managers appointed) (in liq) (No 2) [2018] NSWSC 346; (2018) 363 ALR 492 at [40]:

… in a liquidator’s application for directions, courts often have to do “rough justice” by reason of the limitations of the available evidence, in the light of what is reasonably practical and economical, and judgments may be made on evidence much inferior to that which would be required to sustain a beneficiary’s claim in adversarial proceedings.

Further, “liquidators and Courts supervising them have to act on such evidence as is available, and the reasonably available inferences, without insisting on the proofs that would be required in a beneficiary’s claim”: at [67]. Thus, “[w]hile the Court’s powers to give directions … do not generally permit orders that depart from proprietary rights, this principle yields in cases where it is not pragmatic to ascertain proprietary rights with precision”: at [83].

  1. Similarly, in Australian Securities and Investments Commission v Idylic Solutions Limited (2009) 76 ACSR 129; [2009] NSWSC 1306, albeit in the context of section 601EE(2) of the Corporations Act where the Court may make “any orders it considers appropriate” for the winding up of an unregistered managed investment scheme, Barrett J described the liquidator’s role as identifying the rights and obligations of persons who had invested in the scheme by reference to available documents and the application of legal principles and, “If something more is then needed in order to effect the winding up (by way of clarification or refinement of the legal rights and obligations or by way of procedural facilitation), the Court is empowered … to supply that element”: at [5]. Barrett J noted an overriding principle that such orders should not sanction the release of funds to persons who have no legal entitlement to them: at [6].

PONZI SCHEMES

  1. A Ponzi scheme was described by Chesterman JA in R v Lovell [2012] QCA 43 at [30]:

… a Ponzi scheme [is] a fraudulent investment operation that pays returns to investors from their own money or money paid into the scheme by subsequent investors rather than from any actual profit earned from money invested. The scheme entices new investors by offering returns legitimate investments cannot, returns that were both abnormally high and consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever increasing flow of money from subsequent investors to keep the scheme going.

  1. This description was embraced by Campbell J, with whom Macfarlan JA and Barr AJ agreed, in Finnigan v R (2013) 233 A Crim R 381; [2013] NSWCCA 177 at [2], where Campbell J further explained at [3]:

In one sense, … a Ponzi scheme consists of "robbing Peter to pay Paul". But there must be an endless, serial recruitment of Peters, each of whom, if he or she knew the truth, could hope for no better than to take a turn as Paul because the "entitlements" of previous investors must be paid out with the receipts obtained from the new. There is no investment.

Similar definitions are used in the United States and Canada: Cunningham v Brown, 265 US 1 (1924); Titan Investments Ltd Partnership (Re) 2005 ABQB 637 per Hawco J at [8], followed in Boale Wood Ltd v Whitmore 2017 BCSC 1917 at [46]; Doyle Salewski Inc v Scott 2019 ONSC 5108 at [100]-[101]. See also Millard v North George Capital Management Ltd (2006), 26 BLR (4th) 231 (Ont Sup Ct) at [11] per Cumming J. In the United States and Canada, an intention to defraud creditors is inferred from the fact that the Ponzi scheme is being operated at all, as no other reasonable inference is possible: Merrill v Abbott (In re Independent Clearing House Co.), 77 BR 843 (Bankr. D. Utah 1987) at 860-861.

  1. Ponzi schemes were named after American fraudster Charles Ponzi, an Italian immigrant living in Boston who went from obscure salesman with $150 in capital to a multimillionaire in less than six months by claiming to trade in international postal coupons and promising returns of 100%: Ponzi v Fessenden 258 US 254 (1922); Grant Christensen, ‘Allocating Loss in Securities Fraud: time to adopt a uniform rule for the special case of Ponzi schemes’ (2012) 3 William and Mary Business Law Review 309 at 311.

  2. In Australian Securities and Investments Commission v Atlantic 3 Financial (Aust) Pty Limited [2006] QSC 132, Atkinson J noted that such schemes continue to attract and dupe innocent members of the public: at [30], citing Zipside Pty Ltd v Anscor Pty Ltd [2004] QSC 33; Clout (Trustee) v Anscor Pty Ltd [2003] FCA 326; Chapel Road Pty Ltd v ASIC [2003] AATA 660; Bishop Mar Meelis Zaia v David Tiglath Chibo [2005] NSWSC 917; Karl Suleman Enterprizes v George [2003] NSWSC 544. To these examples may be added, more recently, Cook v Permanent Mortgages [2007] NSWCA 219; Idylic; White (Trustee), in the matter of Vlahos (Bankrupt) v Ljubicic [2017] FCA 717; Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited (No 3) [2018] FCA 1842; and Kadam v MiiResorts Group 1 Pty Ltd (No 5) [2018] FCA 1086; (2018) 129 ACSR 74.

  3. A Ponzi scheme which has generated much recent judicial and academic consideration is that operated by Bernard Madoff, who held himself out as an investment advisor on the stock market. From at least the 1990s, Mr Madoff did not buy a single share on behalf of his clients but sent them regular statements that reported market transactions and indicated an average growth of 12% said to be achieved by his unique trading strategy. Client redemptions were funded by money that other clients deposited with him. The US Securities and Exchange Commission investigated Mr Madoff but did not detect the Ponzi scheme. When the stock market crashed in 2008, an unexpected number of clients sought to redeem their investments and the scheme went bust. Mr Madoff’s sons called the police. At the time of his arrest, Mr Madoff had 4,800 customers who had invested $20 billion and accumulated fictional investments of $65 billion. Mr Madoff was sentenced to 150 years in prison: United States v Madoff, 586 F.Supp 2d 240; Securities and Exchange Commission v Bernard Madoff and Bernard L Madoff Investment Securities LLC (S.D.N.Y. Civ. 08 CV 10791 (LLS)); Amy Sepinwall ‘Righting Others’ Wrongs: a critical look at clawbacks in Madoff-type Ponzi schemes and other frauds’ (2012) 78 Brooklyn Law Review 1 at 10-12.

  4. Law suits were brought by Mr Madoff’s trustee in bankruptcy to ‘claw back’ money from investors who made money from the scheme. These ‘claw back’ suits prompted an outpouring of academic literature on how best to allocate what remains at the end of a Ponzi scheme amongst those affected, including: Caitlyn Crisp ‘Ponzi Scheme Clawbacks: are they equitable?’ (2013) 20(3) PIABA Bar Journal 317; Spencer A Winters ‘The Law of Ponzi Payouts’ (2012) 111 Michigan Law Review 119; Alex S Weiner ‘Net equity only comes with net equality: an exploration of an alternative remedy for victims of Ponzi schemes’ (2012) 84 Temple Law Review 423 at 424; and Paul W Bonapfel et al ‘The Business Bankruptcy Panel: Ponzi Schemes – Bankruptcy Court v Federal Court Equity Receivership’ (2010) 26 Emory Bankruptcy Developments Journal 207. A useful summary of the American and Canadian approach to ‘claw back’ claims can be found in McIntosh v Fisk [2016] 2 NZLR 783; (2016) 14 TCLR 307; [2016] NZCA 74 at [54]-[56]. An English example of ‘claw back’ litigation is O’Neil v Gale [2013] EWCA Civ 1554; [2013] CN 1871, discussed in Mat Campbell ‘Change of position: retreating from Barros Mattos, then rocking the boat’ (2014) 22 Restitution Law Review 105. The collapse of the Madoff Ponzi scheme also gave rise to several judgments by the Judicial Committee of the Privy Council as “feeder funds” for the Madoff scheme were located in the British Virgin Islands and Cayman Islands: Fairfield Sentry Limited (in liquidation) v Quilvest Finance Ltd [2014] UKPC 9; Pearson v Primeo Fund (No 1) [2017] UKPC 19; DD Growth Premium 2X Fund (in liquidation) v RMF Market Neutral Strategies (Master) Ltd [2017] UKPC 36; In the matter of Stanford International Bank Limited (in liquidation) [2019] UKPC 45; Pearson v Primeo Fund (No 2) [2020] UKPC 3.

  5. Three features of Ponzi schemes should be noted at the outset. First, “profits” or “returns” paid by the promoters are, in truth, other investors’ capital. The nature of such “profits” or “returns” was described by Barrett J in ASIC vIdylic at [49]:

… “returns” were paid to certain investors … These were not distributions of profits. … Rather, “returns” entailed receipt by early investors of capital contributed by themselves and perhaps some later investors, in order to satisfy expectations of periodic returns generated by the promotional literature …

See likewise Donell v Kowell, 533 F.3d 762 at 777-779; followed in Canada in Boale Wood Ltd v Whitmore at [60].

  1. Second, Ponzi schemes have zero chance of success. Indeed, in the United States and Canada, Ponzi schemes are assumed to be insolvent from the moment that the first investment contract is entered into: Re Titan Investments at [16] citing Merrill v Abbott (In re Independent Clearing House Co); Martino v Edison Worldwide Capital (In re Randy), 187 BR 425 (Bankr ND Ill 1995) at 441; Scholes v Lehmann, 56 F 3d 750 (7th Cir 1995) and followed in Boale Wood Ltd v Whitmore at [49] and Doyle Salewski Inc v Scott at [104].

  2. Third, the fact that some investors withdraw their principal in time or receive “returns” is due to “dumb luck” and the whims of the schemer: Crisp (2013) at 333-4. As Lord Sumption noted in Fairfield Sentry Limited v Quilvest at [3]:

It is inherent in a Ponzi scheme that those who withdraw their funds before the scheme collapses escape without loss, and quite possibly with substantial fictitious profits. The loss falls entirely on those investors whose funds are still invested when the money runs out and the scheme fails.

  1. The task for the Court in a case such as this is to determine how millions of dollars of lost value is to be allocated among creditors who are entitled to it and equally innocent. Should all investors bear the costs of fraud equally or, because Ponzi schemes rely on a constant influx of funds to keep the fraud going, should those who were induced to invest first be compensated differently from later investors: Crisp (2013) at 317. I have described different judicial approaches to this problem in common law jurisdictions at [89] to [109].

COURTENAY HOUSE PONZI SCHEME

  1. Courtenay House was incorporated in 2008. Courtenay House Capital Trading Group was incorporated in 2011. Tony Iervasi was the director of both companies and treated the two companies as if they were one: external documents generated by the companies referred to the companies interchangeably.

  2. Mr Iervasi’s background was in property development. Mr Iervasi had little or likely no knowledge of the foreign exchange (FX) market. Mr Iervasi told the liquidators that he established the companies to pursue an interest in FX markets and taught himself how to trade by attending various seminars and conventions. Mr Iervasi said he began trading for himself and, over time, started to trade for friends and family at their request. The liquidators’ forensic analysis of the companies’ bank statements does not support Mr Iervasi’s version of events but indicates that the companies were operating a Ponzi scheme from the beginning. There does not appear to be any funds transferred for FX trading after the receipt of investor capital but, instead, new investor capital appears to have been used to pay trading and personal expenses of Mr Iervasi.

  3. Mr Iervasi knew David Sipina through property development. In 2013, Mr Sipina joined the companies as Business Development Manager or FX Trader, although it does not appear that Mr Sipina undertook any FX trading. Rather, Mr Sipina’s role was to bring new investors into the companies. He received a base salary supplemented by commissions on any new funds which he brought into the companies. In 2015, Mr Sipina became a director of Courtenay House Capital Trading Group. In 2015, Anshul Gupta also joined the companies as a quasi-Chief Financial Officer and was responsible for keeping the companies’ records and preparing investor statement positions.

What investors were told

  1. Initially, investors were introduced to the companies through friends and acquaintances of Mr Iervasi, who met with clients and provided an overview of what the companies did, his purported success to date and answered any questions they had. These investors were not provided with any documentation.

  2. From 2013, investors could meet with Mr Iervasi, Mr Sipina or Athan Papoulias, Senior Business Analyst, in the boardroom at the companies’ Bondi Junction office. During such meetings, clients were given a 30 minute presentation. The presentation incorporated technical language and graphs which an unsophisticated investor would have had difficulty understanding. The aim was to portray that the companies had some form of insight or competitive advantage that allowed them to generate a stable and consistent monthly return. The companies went to considerable lengths to present an image of legitimacy regarding the nature of their investment activities. During these meetings, clients were sometimes given an “Investor Pack” or “Client Information Booklet”. Sometimes investors preferred to skip straight to making the investment based on feedback or recommendations received from others; such investors typically were not provided with any formal documentation. Only about half of the investors had a formal meeting or received a presentation or any formal documentation. Thus, the companies did not issue consistent documentation to every investor and it is unclear which investors received what documentation.

  3. During client meetings, investors were advised that there was a “slush fund” whereby, in months where the companies generated returns of 5%, only a return of 4% was paid with the remaining 1% put aside so that, in months where the companies only achieved a 3% return, the “slush fund” was used to top up returns to the advertised 4% per month. There was, in fact, no “slush fund”. This was a marketing ploy to provide a rationale as to how the companies could pay stable and consistent returns each month.

  4. Investors were also told that the companies’ funds were pooled together and that there were no separate trading accounts for each individual. Investors were advised that this was done in order to reduce costs and allow the companies better opportunities for trading the funds. The notion of all clients’ funds being “pooled” was heavily advertised to investors, including in emails located by the liquidators and the Client Information Booklet. The Investor Pack stated:

Rather than dealing with individual accounts (which is fiddly and time-consuming) we pool the funds together. So when we make a trade on your account, we are doing the same for others.

… Throughout the year we have little losses each month and then instead of taking these from investor’s accounts, we pool the losses and every 6 months or twice a year in February and October we send out email advising investors that the losses will be paid out of the trust account, to clear this amount and then start with a clean slate.

There were no details within the Investor Pack which advised investors how their funds would be held in the companies’ bank accounts.

  1. Investor Application Forms included terms and conditions which remained broadly similar over time and did not refer to how funds were held nor that funds were pooled. Later versions of Investor Application Forms did however, refer to the funds deposited by investors being held in the companies’ “trading account held in trust”; these forms were used for the “Brexit Special”, described at [35] and the subject of Brereton J’s judgment.

The products

  1. Until late 2016, the companies offered three different types of trading strategies to investors (referred to as Standard Products) being:

  1. Swing Trading, with an estimated return of 1.5% per month (or 18% per annum) and potential capital risk advertised at 5% of funds invested;

  2. Forex Extreme Trading, with an estimated return of 4% per month (or 48% per annum) and potential capital risk advertised at 10% of funds invested; and

  3. Forex Live/Elite Trading, with an estimated return of 7.5% per month (or 90% per annum) and potential capital risk advertised at 15% of the funds invested.

  1. There was a minimum investment of $25,000 in Standard Products, later increased to $50,000 due to the suggested need to reduce the administrative burden of smaller investments. In fact, the companies undertook little FX trading and that undertaken fared poorly: of $4 million paid by the companies into FX trading accounts, $1.2 million was lost. Rather, the Standard Products were a marketing ploy to deceive investors into believing that the companies were operating a legitimate FX trading business which generated profits sufficient to pay the advertised returns to investors.

  2. In late 2016, the companies began to market “Special Products” to existing investors based upon current affairs around the world. The companies sought to rely on external geopolitical events to create the perception that there would be, for a very limited period of time, an opportunity to make a super return from FX trading due to increased volatility in FX markets. Three Special Products were offered by the companies in connection with:

  1. the US Election in November 2016 (US Election Special);

  2. the US Inauguration in January 2017 (Inauguration Day Special); and

  3. Brexit in May 2017 (Brexit Special).

  1. The companies marketed Special Products as one-off, short term investments of four to six weeks. The Special Products were advertised as available only to the first 100 investors. Investors were encouraged to return the form and the funds early before the offer closed, either on a set date or when there were 100 subscriptions. In reality, the companies never had a maximum amount of subscriptions and, indeed, there were 163 investors in the Brexit Special. The Special Products were a marketing strategy employed by the companies with a sense of urgency and exclusivity to deceive investors into “doubling down” on their existing investment.

  2. The minimum investment for a Special Product was $50,000. Funds deposited by investors into Special Products had to be new capital; investors were not allowed to transfer funds they had in Standard Products into Special Products. The aim appeared to be to encourage an injection of funds into the companies with the potential that, at the end of the 30 day investment window, a number of investors would be willing to rollover their capital and thus continue to fund the Ponzi scheme. It had the desired effect: a large proportion of investors rolled their principal into a Standard Product or another Special Product. Due to these rollovers, the companies did not have to repay a large amount of capital invested in these products.

  3. Funds invested in Special Products were never traded by the companies despite the companies paying returns of 22.87% on the US Election Special (or an annualised rate of return of 274.4%) and 13% on the Inauguration Day Special (or an annualised rate of return of 156%). The returns were paid from existing investor capital in Special Products. For the last-offered Special Product, the Brexit Special, investors funds remained intact when the Ponzi scheme was brought to an end.

The payments

  1. From about 2014 on, the companies also paid existing investors who referred new investors a trail commission of 0.5% per month, later reduced to 0.25% per month. The companies did not maintain any commission payment summaries, but liquidators estimate that $1,552,871 was paid to investors as commissions.

  2. Overall, of some $249.2 million deposited into the companies’ bank accounts over the life of the Ponzi scheme, two-thirds was paid back as ‘returns’ to investors. More specifically, and putting Brexit Special investors to one side for the moment:

  1. Some 17% of investors received more than the capital outlaid in the form of ‘returns’ or commissions. Indeed, overall this group of investors received 50% more than they outlaid. If the liquidators were minded to pursue ‘claw back’ actions against these 106 investors, then such claims would seek to pursue some $20 million or, on average, $190,000 per investor.

  2. A further 75% of investors received some, but not all, of their capital back by ‘returns’ and commissions.

  3. Some 8% of investors received no return at all.

Consistent with the nature of Ponzi schemes, earlier investors received a much higher proportion of their initial capital back as they enjoyed the benefit of a stream of regular returns funded by subsequent investors. Later investors suffered larger losses.

  1. In addition, $7.49 million was withdrawn from the companies’ bank accounts by key individuals including Mr Iervasi, Mr Sipina and Mr Papoulias. After taking into account deposits made by these individuals, net withdrawals of $6,209,080 were made.

The bank accounts

  1. The companies had six bank accounts: three with Westpac and three with National Australia Bank. By and large, investor deposits for Standard Products, and payments by the companies to investors for such products, were made through the Westpac bank accounts. More precisely, in May 2008, Courtenay House opened a bank account at Westpac (the Westpac 1 account). This account was the primary bank account used to receive deposits from investors until another account (the Westpac 2 account) was opened by Courtenay House Capital Trading Group in July 2011. After the Westpac 2 account opened, the Westpac 1 account received fewer deposits from investors and instead received funds from the Westpac 2 account. The companies had a third Westpac account (the Westpac 3 account) which had little deposit or withdrawal activity whilst the companies were operating.

  2. From August 2012 on, the Westpac 2 account was the primary bank account used to receive capital deposits from investors for Standard Products. The majority of the funds deposited into the Westpac 2 account were transferred to the Westpac 1 account. Investors’ funds were mixed within the Westpac accounts with newer deposits being used to pay capital returns to earlier investors as well as commissions and general operating expenses of the companies.  Of the monies actually used for FX trading, $3.8 million came from the Westpac 1 account and $200,000 from the Westpac 2 account.

  3. Turning to the National Australia Bank, the companies made it clear to investors that funds invested in Special Products had to be paid into the companies’ National Australia Bank accounts and not into the companies’ Westpac accounts and, by and large, that is what happened. More precisely, in September 2016, Courtenay House opened an account with the National Australia Bank for the US Election Special Product (US Election NAB account) and a National Australia Bank business cash maximiser account (NAB business account). In November 2016, Courtenay House opened an account to receive investor funds for the Inauguration Day Special and the Brexit Special (the Brexit NAB account). 

  4. The US Election Special was marketed to existing investors by email in September 2016 and, by 31 October 2016, investors had deposited $20.87 million into the US Election NAB account. Of this, $4.38 million was paid in returns to investors and $12.6 million was transferred to the Brexit NAB account for investors who “rolled over” their investment into the Brexit Special. Funds were also received in the US Election NAB account from the Brexit NAB account and used to pay returns on investment and capital to US Election Special investors.  Between 14 and 17 February 2017, the NAB business account received $25 million from the Brexit NAB account and transferred it to the US Election NAB account.

  5. There was also mixing of the companies’ funds between the National Australia Bank accounts and Westpac accounts:

  1. From the Westpac 1 account, $1.3 million was transferred to the Brexit NAB account and $1.2 million was transferred to the US Election NAB account.

  2. From the US Election NAB account, $5 million was transferred to the Westpac 2 account after the US Election Special Product finished.

It is not clear whether these transfers were because investors gave specific instructions or whether those promoting the Ponzi scheme just did it. The relevance of mixing funds between the National Australia Bank accounts and Westpac accounts will become clear in relation to application of the principle of hotchpot: at [128].

  1. The companies did not segregate investors’ funds into separate client accounts. Beyond holding funds in relation to Standard Products in Westpac accounts and funds in relation to Special Products in National Australia Bank accounts, there was no evidence that the companies treated or sought to treat the funds as client trust monies.

The game is up

  1. In 2017, the Australian Securities and Investments Commission (ASIC) began investigations into the companies’ affairs following reports that the companies were conducting an unregistered managed investment scheme. On 21 April 2017 at 3.11pm, ASIC obtained freezing orders over the companies’ assets and assets of related parties including Mr Iervasi and Mr Sipina. Orders were made prohibiting Mr Iervasi from leaving the country and restraining the companies from carrying on business.

  2. Nine investors deposited funds into the Westpac 2 account on or after the day that the freezing orders were made (Post 21 April Investors).  The Court of Appeal’s judgment (Caron v Jahani) is concerned with these investors. Their funds totalled $775,000. Four of these investors made deposits on 21 April 2017, following which $60,000 was withdrawn from the Westpac 2 account notwithstanding the freezing order. The $60,000 was transferred to the Westpac 1 account, from which it was withdrawn. The remaining five Post 21 Investors then deposited a further $300,000 into the Westpac 2 account and their funds are specifically identifiable by the liquidators.

  3. On 16 May 2017, on the application of ASIC, the Court appointed Mr Jahani and Mr McInerney as joint and several liquidators of the companies.  On the liquidators’ appointment:

  1. The Westpac 1 and Westpac 3 accounts each had a nil balance.

  2. The Westpac 2 account had a balance of some $21 million. Black J held that these funds are held on trust for the investors who deposited them and it is the distribution of those monies with which this judgment is primarily concerned. 

  3. The US Election NAB account had a nil balance.

  4. The Brexit NAB account held $28,949,978. The liquidators were able to trace substantially all the funds deposited for the Brexit Special to the 163 investors who deposited them.  The funds in this account were the subject of Brereton J’s judgment.

  5. The NAB business account had a balance of $14,006.33. The liquidators seek orders as to how they should distribute these monies, which I have considered at [144].

  1. In addition to the bank accounts, the liquidators also accessed FX trading accounts in the names of the companies or Mr Iervasi and recovered some $2 million. The liquidators seek directions as to how to distribute these funds, which I have considered at [162].

  2. On 25 May 2017, Mr Iervasi’s girlfriend, Ms Girsa, lodged a proof of debt for $150,000 for monies invested in the Ponzi scheme. Her mother, Ms Gromova, lodged a proof of debt for $100,000. Annexed to the proofs of debt were a collection of documents obtained from the companies, which were incomplete and unclear (given the state of the companies’ documentation, this may not be the investors’ fault). The liquidators’ efforts to obtain further information in respect of these proofs of debt are described at [63] to [65], [68], [69], [74] to [75]. The liquidators seek directions as to whether to exclude Ms Girsa and Ms Gromova from any distribution, which I have considered at [165].

  3. In September 2017, the liquidators commenced these proceedings seeking orders and directions as to how to distribute funds held in the companies’ bank accounts to investors, with the issue being determined initially in respect of funds in the Brexit NAB account. On 18 September 2017, the Court made orders that the liquidators provide a report detailing the status of their investigations. 

Liquidators’ first report

  1. In October 2017, the liquidators provided their report, in particular, in respect of funds invested in the Brexit Special.  The liquidators’ investigations in relation to the funds deposited in Westpac bank accounts for Standard Products was then ongoing.  The liquidators described the forensic investigation being undertaken, the purpose of which was twofold: to understand from whom the companies received funds and how those funds were used or spent; and, to substantiate the position of each investor to enable the liquidators to form an opinion as to the amount owed to each investor for the purposes of calculating any dividend. Mr Jahani explained:

28   The forensic investigation has been large and complex. It has required me to collate, analyse and understand:

a.   14,000 lines of bank statements …

b.   44,000 additional lines of data relating to batch payments, where a single entry appeared on the bank statements …

c.   16,000 lines of investor accounts information prepared by the Companies spread across separate documents for each investor for each month over a 4 year period;

d.   Over 800 investments included in Proof of Debt forms; and

e.   Other books and records of the Companies including those saved onto the Companies’ computers, hard drives and emails.

29   The primary difficulty I have faced in undertaking the above tasks is the lack of reliable books and records of the Companies.

  1. Mr Jahani noted that, on his appointment as liquidator with Mr McInerney, their staff attended at the companies’ offices in Bondi Junction and secured all available books and records, which comprised 18 boxes of books and records, two laptops used by Mr Iervasi and a hard drive used by Mr Gupta. All IT equipment was forensically imaged. A review of the books and records revealed:

  1. Signed Investor Application Forms were only available for 50% to 60% of investors.

  2. There were no investor statements from 2011 to 2013, as none were created. Mr Gupta’s hard drive contained Statements of Capital and Monthly Income for individual investors for 2014 to 2017. Mr Jahani used these statements to create a spreadsheet of investor accounts. The spreadsheet has approximately 24,500 lines of data.

  3. The laptops and hard drive contained Excel spreadsheets with details of some 1,500 batch payments made to investors from January 2014 to April 2017. Mr Jahani combined the data from these spreadsheets into one spreadsheet containing 44,000 rows of data.

  4. There were no bank reconciliations, profit and loss statements or balance sheets, as none had ever been prepared.

  5. Commission schedules and statements were never created. The liquidators had only been able to locate two spreadsheets detailing commission payments made to investors in two months.

Whilst Mr Iervasi advised that there were spreadsheets on his computer which detailed payments and deposits from 2011 to 2014, the liquidators were unable to locate any spreadsheets notwithstanding a thorough review of the laptops, hard drive and forensic backup. Of the available material, Mr Jahani observed, “there are significant errors and issues with the companies’ documentation which limits the reliance which can be placed upon them”.

  1. The liquidators sought documents from all known accountants and solicitors for the companies, but all advised they held no books and records. Efforts to obtain the companies’ emails from Google US were unsuccessful. Bank statements were obtained from Westpac and National Australia Bank. Statements of account were obtained from three FX brokers. Hard copy bank statements were scanned and converted into spreadsheets by a third party, as it was the most cost effective and time efficient method of doing so. There were 13,800 entries in the bank statements. The spreadsheet was checked for accuracy by sample-checking transactions and checking the input balance against a running balance formula utilising the input debit and credit amounts. In order to undertake a full reconciliation of the Westpac 1 and Westpac 2 accounts, a significant amount of bank trace documents were needed: liquidators were charged $36 per trace request with each request taking up to eight weeks. The liquidators had already requested over 500 key transactions to be traced by Westpac. At the time of the first report, the liquidators had insufficient information to determine who had deposited, or received, funds in respect of 3,147 transactions totalling approximately $69 million.

  2. Mr Jahani’s evidence brings to mind Bell P’s observations in Caron v Jahani at [121]:

... Fraudsters are not renowned for their commitment to orderly and immaculate record keeping, and even if capable of it, the creation and maintenance of an accurate and meaningful paper trail is not generally part of their modus operandi.

Brereton J’s judgment

  1. In March 2018, Brereton J heard a separate question as to what should be done with the funds in the Brexit NAB account. If those funds were treated as the beneficial property of those who invested in the Brexit Special, then those investors would receive their money back in full whilst other investors would receive a dividend of some 13 cents in the dollar. If all funds were “pooled”, then all investors would receive a dividend of some 26 cents in the dollar: Courtenay House [2018] NSWSC 404 per Brereton J at [14]. His Honour held that the Brexit investors were the beneficial owners of the funds in the Brexit NAB account and the liquidators were justified in distributing those funds to the Brexit investors only and not to any other creditors of the companies: at [42]. In so concluding, Brereton J had regard to the Client Information Booklet and Investor Pack, which specifically represented that monies invested in the Brexit Special would be held on trust for the investor. His Honour was satisfied that the companies’ formal documents in respect of the Brexit Special contained unambiguous and explicit words indicating that the monies were held on trust: at [24]. The fact that the monies were to be pooled with those of other investors to trade in FX was not inconsistent with an intention to create a trust, nor that the bank account received funds from multiple beneficiaries: at [26]. His Honour was also satisfied that, even if an express trust had not been established, the funds were held on a Quistclose trust as recognised in Barclays Bank Limited v Quistclose Investments Limited [1970] AC 567 or held on trust under the principles in Black v S Freedman & Co (1910) 12 CLR 105; [1910] HCA 58 as having been procured by fraud.

  2. Important for current purposes, the investors who had deposited funds for non-Brexit products submitted that, if the Court were to conclude that the funds invested in the Brexit Special were held on trust for those investors, then likewise the funds invested by non-Brexit investors were also held on trust and the funds should be “pooled”. Brereton J considered at [32]:

The first limb of this proposition is in my judgment correct. The documentation for the other special products was relevantly indistinguishable from that used for the Brexit Special, and the documentation for standard products in more recent times was to similar effect. Although it is conceivable that Courtenay House still held some funds which had been invested under the earlier documentation which did not contain the explicit reference to being “held in trust”, it is likely that the overwhelming proportion of the funds held as at the appointment date had been subscribed under documentation which did contain those words. Accordingly, I accept that Courtenay House held the funds subscribed by non-Brexit investors on trust for the clients who invested them.

  1. However, Brereton J did not accept that it followed that the Brexit Special funds should be “pooled” with non-Brexit funds. Unlike Re BBY (No 2) [2018] NSWSC 346, there had been no mixing of Brexit Special trust funds with other trust funds; the Brexit Special trust fund was sufficient to meet the claims of all who had contributed to it; and, thus “the capital deposited by each investor was held on trust for that investor”: at [33]-[36]. At [38]:

Where there is no difficulty in identifying the beneficial entitlements to the Brexit funds, no deficiency in them, and they have not been mixed with any other money, there is no warrant for pooling, which would amount to no more than disregarding clear property interests in particular property on account of some notion of common misfortune.

  1. Further, Brereton J held that there was no proper basis to set-off the returns derived by Brexit investors from their investments in non-Brexit products against their entitlement to recover their Brexit investments: at [41]. At [40]:

… It might have been otherwise if Brexit funds had been used to repay earlier investments, but they were not. Moreover, a beneficiary’s entitlement to recover its property from one fund is not affected by what the same beneficiary has received from another fund. Insofar as the argument is analogous to the rule in Cherry v Boultbee [1839] EngR 1099; 41 ER 171, that rule concerns set-off of claims and liabilities in respect of a single fund. And while, in the context of a deficient mixed fund, it may be appropriate that returns received by some beneficial owners be taken into account in order to do equity in distribution of what remains in the fund, [citing ASIC v Idylic Solutions Ltd (2009) 76 ACSR 129; [2009] NSWSC 1306 at [77]] the Brexit Investment fund is, as has been explained above, neither deficient, nor mixed with non-Brexit funds.

  1. A further $10,000 was invested on 14 June 2016. Ms Girsa has provided a cash deposit slip in support of this deposit but the source of the funds is not clear from the any of the material provided by Ms Girsa. The liquidators do not propose to admit this amount. I agree, for the reasons set out at [168].

  2. Finally, a further $40,000 was said to be deposited on 1 November 2016. The companies’ records indicate that $38,540.11 was received into the companies’ bank account on or about that date. This investment was made using funds provided by Ms Girsa’s brother. Ms Girsa has provided an Advice of Payment dated 26 October 2016 from the Bank of Ireland. The customer name is “Vitaljis Gromovs” and one of the companies is named as the beneficiary for €28,300. The liquidators propose to admit $38,540.11 only.

  1. Having considered the documentation supplied by Ms Girsa in support of her and Ms Gromova’s claim, and a further affidavit of Mr Jahani reviewing this material, I agree that the liquidators are justified in admitting $81,814.86 of Ms Gromova’s claim only.

Whether liquidators justified in retaining $300,000 for future legal and investigation expenses

  1. In April 2019, the committees of inspection of the companies unanimously resolved that the liquidators were authorised to pay up to $300,000 from the assets of the companies for additional legal costs and disbursements to conduct further investigations and pursue potential recovery actions. The liquidators seek directions as to whether they are justified in withholding this sum from distribution to the investors.

  2. The liquidators’ investigations into the affairs of the companies are continuing. They intend to conduct further public examinations of persons associated with the companies to determine whether additional recoveries may be pursued. The investigations and recovery actions conducted by the companies thus far have proved worthwhile: the liquidators have recovered more than $5 million from the promoters of the Ponzi scheme.

  3. In circumstances where this Ponzi scheme has affected so many investors who, notwithstanding the distributions made and to be made by the liquidators, will have sustained substantial losses, continuation of the liquidators’ investigations seems worthwhile so that viable means of recovering the companies’ assets or pursuing other remedies under the Corporation Act losses may be identified. The representatives of those affected by this scheme, being the committees of inspection, have supported this course. I consider that the liquidators are justified in withholding $300,000 from distribution to investors for future legal and investigation expenses.

  4. For these reasons, I make the following orders using the defined terms described in the annexure to the orders:

Method of distributing funds in the Westpac Accounts

(1) Pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) to the Corporations Act 2001 (Cth) and section 63 of the Trustee Act 1925 (NSW), direct and advise that Said Jahani and John McInerney (the liquidators), in their capacity as joint and several liquidators of Courtenay House Trading Group Pty Limited (in liquidation) and Courtenay House Pty Limited (in liquidation) (the companies), would be justified in calculating the distribution payable to the Beneficial Owners from the funds in the Westpac Accounts:

(a)   in accordance with Scenario 2 as described in the liquidators’ report to the Court dated 1 November 2018 at [5.2];

(b)   classifying deposits made by Beneficial Owners into the NAB Accounts (or any of them) for the purpose of investing in the US Election Special Product or the Inauguration Day Special Product as capital for the purpose of calculating the distribution payable pursuant to Scenario 2; and

(c)   classifying the following payments to Beneficial Owners as returns for the purpose of calculating the distribution payable pursuant to Scenario 2:

(i)   returns paid to Beneficial Owners which were attributable to their investment in the US Election special product and the Inauguration Day special product: and

(ii)   referral commissions paid to Beneficial Owners.

Funds to be included in the distribution to Beneficial Owners

(2) Pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) to the Corporations Act 2001 (Cth) and section 63 of the Trustee Act 1925 (NSW), direct and advise that the Liquidators would be justified in including the following funds in those to be distributed to the Beneficial Owners in accordance with the method described in Order 1:

FX trading accounts

(a)   amounts recovered by the companies from foreign exchange trading accounts as described in the liquidators’ report to the Court dated 1 November 2018 at [3.34];

Mistaken Investors

(b)   the $300,000 described in the liquidators’ report to the Court dated 1 November 2018 at [4.45]-[4.53];

Remaining funds in NAB business account

(c)   the funds held in the National Australia Bank account BSB 082 973 Account 87-508-5764 in the name of Courtenay House Pty Ltd;

Recoveries from promoters

(d)   amounts recovered by the Companies pursuant to the lervasi Settlement, Sipina Settlement and Papoulias Settlement;

Investments by related parties

(e)   the remaining $388,884.64 of funds deposited by Vanessa and Bozo Relja in the NAB Brexit Account; and

(f)   the sum of $50,000 deposited by Nina Girsa in the NAB Brexit Account.

(3) Pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) to the Corporations Act 2001 (Cth) and section 63 of the Trustee Act 1925 (NSW), direct and advise that the liquidators are justified in:

(a)   excluding Nina Girsa from any distribution of funds to the Beneficial Owners in accordance with Order 1;

(b)   admitting Zoja Gromovo’s proof of debt in the amount of $81,814.86 and rejecting the balance of the proof of debt.

Costs of liquidators’ further investigations

(4) Pursuant to section 90-15 of the Insolvency Practice Schedule (Corporations) to the Corporations Act 2001 (Cth) and section 63 of the Trustee Act 1925 (NSW), direct and advise that the liquidators are justified in withholding the sum of $300,000 from distribution to the Beneficial Owners, for future legal and investigation expenses.

(5)   Grant liberty to the parties within 28 days to notify any amendment sought to these orders to correct any errors or omissions.

ANNEXURE

Beneficial Owners means the investors who deposited funds into the Westpac Accounts to participate in investment opportunities excluding:

  1. the Post 21 April 2017 Investors as defined in Categories E and F of the liquidators’ report to the Court of 1 November 2018;

  2. David Sipina and related entities;

  3. Athan Papoulias and related entities;

  4. Vanessa and Bozo Relja; and

  5. Nina Girsa.

lervasi Settlement means the settlement reached between the Companies, the Liquidators, Tony lervasi and entities related to Tony lervasi and documented in a deed of settlement and release dated 26 July 2018.

NAB Accounts means, together, the following bank accounts:

BSB

Account Number

Name of Account

082 973

87-501-9054

Courtenay House Pty Limited

082 973

80-565-6250

Courtenay House Pty Limited

NAB Brexit Account means the National Australia Bank account BSB 082-793 Number 80-565-6250 in the name of Courtenay House Pty Ltd.

Papoulias Settlement means the settlement reached between the Companies, the Liquidators, Athan Papoulias and an entity related to Athan Papoulias and documented in a deed of settlement and release dated 12 April 2019.

Sipina Settlement means the settlement reached between the Companies, the Liquidators, David Sipina, Vanessa and Bozo Relja and entities related to David Sipina and documented in a deed of settlement and release dated 29 March 2019.

Westpac Accounts means, together, the following bank accounts:

Bank

Account Number

Name of Account

Westpac

490253

Courtenay House Capital Trading Group Pty Limited (in liquidation) ATF Courtenay House Capital Trading and Investment Group Trust

Westpac

265692

Courtenay House Pty Limited (in liquidation) ATF lervasi Capital Trust

Westpac

819577

Courtenay House Capital Trading Group Pty Limited (in liquidation) ATF Courtenay House Capital Trading and Investment Group Trust

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Decision last updated: 23 June 2020

Most Recent Citation
Cases Citing This Decision

14

Estate of Tanner [2025] NSWSC 1078
Re Petsamo No 14 Pty Ltd [2025] NSWSC 899
Re Petsamo No 14 Pty Ltd [2025] NSWSC 899