Re McKeown Marrs Pty Ltd
[2024] VSC 102
•7 March 2024
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2023 01171
IN THE MATTER of MCKEOWN MARRS PTY LTD (ACN 142 590 958)
BETWEEN:
| MCKEOWN MARRS PTY LTD (ACN 142 590 958) | Plaintiff |
| v | |
| INTERNATIONAL ASSURANCE LIMITED PCC | Defendant |
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JUDGE: | Gardiner AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 10 August 2023 |
DATE OF JUDGMENT: | 7 March 2024 |
CASE MAY BE CITED AS: | Re McKeown Marrs Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2024] VSC 102 |
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CORPORATIONS — Application to set aside a statutory demand pursuant to s 459G of the Corporations Act 2001 (Cth) – Plaintiff alleged that agreement with Defendant had been varied so as to require Defendant to meet claims for margin calls and for an increase in management fees payable to Plaintiff – Plaintiff alleged that it had offsetting claims against the amount claimed in the demand for margin calls it had met from its own funds and for unpaid management fees – Finding that plaintiff had not satisfied onus of establishing that claims were genuine – Application dismissed.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P Fary S.C. | Blue Rock Law (Melb) Pty Ltd |
| For the Defendant | Mr T Warner | Thomson Geer |
TABLE OF CONTENTS
Introduction........................................................................................................................................ 1
Background......................................................................................................................................... 3
MM’s Evidence.............................................................................................................................. 6
IAL’s evidence............................................................................................................................. 22
MM’s evidence in reply.............................................................................................................. 36
MM’s submissions........................................................................................................................... 42
IAL’s submissions............................................................................................................................ 50
Legal principles................................................................................................................................ 56
Consideration.................................................................................................................................... 60
HIS HONOUR:
Introduction
On 1 March 2023, the Defendant, International Assurance Limited PCC (‘IAL’) served a statutory demand dated 24 February 2023 (‘demand’) pursuant to s 459E of the Corporations Act2001 (Cth) (‘the Act’) on the Plaintiff, McKeown Marrs Pty Ltd (‘MM’). The demand claimed that MM was indebted to IAL in the amount of USD 2,752,358.04 owing under a Deed of Capital Guarantee (‘Deed’) entered into by MM and IAL on 31 October 2016. The demand was accompanied by an affidavit of Bernard Emil Futter (‘Mr Futter’), a senior accounts officer of IAL.
The Schedule to the demand described the debts comprising the amount claimed in the demand as follows:
Description of the Debt Amount of the Debt (USD) A Deed of Guarantee Schedule allocated policy number FLI100100 dated 31 October 2016 calculated as set out in Annexure A 390,106.60 B Deed of Guarantee Schedule allocated policy number FLI100102 dated 30 November 2017 calculated as set out in Annexure B 130,035.53 C Deed of Guarantee Schedule allocated policy number FLI100106 dated 30 November 2017 calculated as set out in Annexure C 169,152.14 D Deed of Guarantee Schedule allocated policy number FLI100110 dated 30 November 2017 calculated as set out in Annexure D 175,386.35 E Deed of Guarantee Schedule allocated policy number FLI100114 dated 30 November 2017 calculated as set out in Annexure E 155,881.02 F Deed of Guarantee Schedule allocated policy number FLI100118 dated 30 November 2017 calculated as set out in Annexure F 155,961.83 G Deed of Guarantee Schedule allocated policy number FLI100119 dated 30 November 2017 calculated as set out in Annexure G 155,881.02 H Deed of Guarantee Schedule allocated policy number FLI100120 dated 30 November 2017 calculated as set out in Annexure H 155,885.42 I Deed of Guarantee Schedule allocated policy number FLI100121 dated 30 November 2017 calculated as set out in Annexure I 312,004.47 J Deed of Guarantee Schedule allocated policy number FLI100125 dated 20 September 2018 calculated as set out in Annexure J 952,063.66 TOTAL 2,752,358.04
The annexures A to J referred to in the schedule to the demand detail how each of the amounts claimed are calculated. The annexures respectively identify, by reference to the relevant policy number, the ‘Investment Amount’, the ‘Annual withdrawal amount’ and the ‘Guaranteed Return (8%)’. Each annexure also records the yearly ‘Investment Return Guarantee’ amount accruing on the relevant investment amount under each policy from a designated start date, based on the guaranteed rate of return of 8%.[1] The 10 debts claimed in the demand are in respect of what are described in the evidence as ‘HAWP FLI Investments’.
[1]The capitalised words in inverted commas are defined terms in the Deed.
On 24 March 2023, MM made application by originating process filed under s 459G of the Act to set aside the demand. The debts claimed in the demand were not disputed. The application claimed relief under both ss 459H and 459J of the Act, however the application ultimately relied on a contention that MM had offsetting claims in respect of the debts claimed in the demand.
The application has been made in compliance with s 459G(3) of the Act.
MM relies on affidavits of one of its (now former) directors, Simon Patrick McKeown (‘Mr McKeown’), sworn 24 March 2023 (‘March affidavit’), 12 May 2023 (‘May affidavit’) and 1 August 2023 (‘August affidavit’).
IAL relies on affidavits of Mr Futter sworn 21 June 2023 and Richard James Robinson (‘Mr Robinson’) (‘Robinson affidavit’) sworn 29 June 2023 together with affidavits of Andrew Macmillan sworn 21 June 2023 (‘Mr Macmillan’) and Mark Purslow (‘Mr Purslow’) sworn 11 July 2023.
There was a considerable volume of evidence filed in the application. The facts are of some complexity but the determination of the application ultimately came down to a consideration of whether the version of events in respect of the subject transactions given by Mr McKeown in his evidence was sufficiently plausible and cogent so as to give rise to matters which warranted further investigation.
The authorities to which reference is made below state that, while the court should not embark upon any extended enquiry or attempt to weigh the merits of the dispute, this does not prevent investigation by it of the factual basis of a claim. It is part of the court’s function to consider evidence which bears on whether or not the asserted dispute is genuine.
For the reasons which follow, I consider that on an application of the relevant standard that MM has not satisfied the onus which it bears that it has genuine offsetting claims.
Background
MM was incorporated on 15 March 2010. At the relevant times, its directors were Mr McKeown[2] and William Robert Craig (‘Mr Craig’). MM provides financial services to corporate and investment clients.
[2]Mr McKeown’s August affidavit indicates he is now a former director of MM.
IAL was incorporated in July 2009 as a ‘protected cell company’ under the laws of the Republic of Mauritius. It provides insurance and investment services to financial advisors together with corporate and individual clients. Its directors are Messrs Futter and Robinson.
Mauritian law enables a protected cell company to create other ‘cells’ to hold assets and liabilities discretely from its own. IAL established two cells, Haven Alpha Wealth Portfolio (‘FLI’) in September 2016 and Haven Alpha Wealth Portfolio 2 (‘VPB’) in April 2018.
Mr McKeown states he was introduced to IAL in October 2016 by Forbears Freedom Wealth Management Co Ltd however, in his evidence, Mr Purslow states the relationship was with Forbears Freedom Group Limited (‘Forbears’), a Thai corporation involved in financial wealth management. Mr Purslow deposes there were no dealings between MM and Forbears Freedom Wealth Management Co Ltd. Mr Macmillan also confirms this to be the case in his evidence.[3]
[3]Affidavit of Andrew Macmillan, sworn 21 June 2023, [4].
MM and IAL had no direct dealings and all communications occurred through Mr Purslow, the chairman of Forbears. Forbears brokered monies for IAL which were invested with MM. The majority of a client’s capital would be placed with secure, bank-backed fixed-interest investments under what was described as the Fixed Interest Strategy under the FLI fund. The balance was invested in the more aggressive Alpha Trading Strategy in the VPB fund, which involved the trading of call and put options.
The object of the combined investment regime was to create a balanced investment plan with high levels of security together with potential for good annual returns.
MM was appointed the portfolio manager of both the FLI and VPB funds (collectively, ‘HAWP’) in about October 2016. As part of HAWP, a management fee (‘Management Fee’) was payable to MM. MM guaranteed a return to IAL of the Investment Amount (‘Investment Amount’), together with a minimum return percentage (‘Minimum Return Percentage’) on each Investment Amount.
The Deed, which governed the terms of the dealings between MM and IAL, was entered into on 31 October 2016.[4] The terms of the Deed were negotiated by Messrs Purslow and Macmillan of Forbears on behalf of IAL and Mr McKeown on behalf of MM. IAL was not directly involved in those negotiations.
[4]Mr McKeown states in his March affidavit that the Deed was entered into ‘on or about November 2016’.
The Deed includes terms that:
(a) IAL agreed to provide the Investment Amount (as specified in Item 2 of the Schedule to the Deed (‘Schedule’)) to MM under the terms of the Deed;
(b) in consideration for MM investing the Investment Amount, IAL was to pay to MM a Management Fee of 2% of the Investment Amount;
(c) MM was entitled to deduct the Management Fee from the Investment Amount on the expiry of each period of six months until the Repayment Date specified in Item 4 of the Schedule;
(d) MM was obliged to repay the Investment Amount by the Repayment Date; and
(e) MM guaranteed payment of:
(i) the Investment Amount; plus
(ii) a Minimum Return Percentage (as specified in Item 3 of the Schedule).
The Deed appended a Schedule in respect of the original investment in the series (identified as FLI100101) which states:
Item 1: Investment
Capital Guarantee: Under a capital guarantee, the full value of the guarantee is only available at the end of your nominated term. You will always have access to your account value however; the benefit of your guarantee is available only at the end of the selected term. Your account value is the current market value of your underlying investments (including the cash account). Your account value does include the guarantee benefit and is the total minimum amount you will receive at the completion of your term.
You may choose to draw down the total interest earned on your original investment at the end of each complete year with no penalty providing the original investment amount is kept invested.
Alternatively, you may choose to invest the interest earned each year, along with the original investment amount.
Item 2: Investment Amount
Amount: 265,500 United States Dollars
Item 3: Guaranteed Investment Return
Guaranteed Investment Return: 8% per annum (Net of management Fees).
Item 4: Investment Time Frame
Term: 5 Years
Commencement: 31st October 2016
Completion: 30th October 2021
Item 4: Notice Details [the Schedule sets out contact details for IAL and MM]
MM’s Evidence
In his March affidavit, Mr McKeown contends it was the mutual understanding of the parties that documents, described as ‘Further Schedules’, would be created for each new client investment. Each such Further Schedule would, like the Schedule for FLI100101 appended to the Deed, include specific details, including the identification of the client by number, the amount of the investment and the investment’s commencement and completion dates.
Mr McKeown states that on each occasion a Further Schedule was created, discussions took place between MM and Forbears on behalf of IAL. To illustrate by way of example what typically occurred, Mr McKeown exhibits an email from Mr Macmillan of Forbears (copying in Mr Purslow of Forbears) to Mr McKeown dated 30 November 2017 together with attachments consisting of Further Schedules.[5] The Further Schedules document additional Investment Amounts together with the relevant dates as agreed. In the email, Mr Macmillan requests the execution of the Further Schedules for those investments. Mr Macmillan’s email states: ‘In going forward, we will issue a new schedule to sign for each new policy’.
[5]These additional investments have been identified as FLI100102, FLI100106, FLI100110, FLI100114, FLI100118, FLI100119, FLI100120, FLI100121, FLI100117, FLI100123, FLI100111, FLI100115, FLI100122, FLI100124 and FLI100134.
The Further Schedules subsequently generated after FLI100101 related to the two different types of investment products contemplated by the Deed. Mr McKeown states that the funds the subject of these investments were to be dealt with as follows:
(a) As to the FLI Investments:
(iii) IAL transferred the Investment Amount to MM’s custodian account (‘IB Account’) with Interactive Brokers Group Inc (‘IB’). IB is an automated and regulated electronic broker located in Connecticut in the United States;
(iv) MM had authority to invest the full Investment Amount;
(v) MM was entitled to charge a Management Fee of 2% per annum of the Investment Amount; and
(vi) the Minimum Return Percentage was 8% (which was net of the Management Fee).
(b) As to the VPB Investments:
(i) IAL deposited the total Investment Amount into its segregated custodian account with VP Bank Ltd (‘VP Bank’), of which 15.25% was then transferred to MM’s custodian account with IB (‘Advanced Funds’). The balance of 84.75% remained in IAL’s segregated custodian account with VP Bank (‘Retained Funds’);
(ii) the Advanced Funds were to be invested by MM using MM’s Alpha Trading Strategy;
(iii) the Retained Funds were to be made available to MM for margin purposes when required by MM due to market volatility (‘Margin Funds’), but otherwise remained in the control of IAL;
(iv) a Management Fee of 4% per annum of the Investment Amount was chargeable by MM;
(v) the Minimum Return Percentage was 7% (net of the Management Fee); and
(vi) the Guarantee was contingent upon the Margin Funds being advanced when requested by MM.
It will be seen that IAL disputes that terms (vii), (viii) and (x), which are the bases of MM’s alleged offsetting claims, formed part of the agreement with MM in respect of the VPB investments.
Mr McKeown states the original discussions in relation to the VPB investments took place in or about 2019. The concept was proposed by Forbears on behalf of IAL to MM.
Mr McKeown, adopting FLI100123 as a typical example, refers to Article 2 of the Schedule for that investment which he contends provides:
The total Investment Amount will be deposited into IAL’s segregated custodian account with [VP Bank]. 15.25% of the total Investment Amount will then be transferred from IAL’s account with [VP Bank] to MM’s custodian account with IB and 84.75% will be retained in IAL’s segregated custodian account with [VP Bank]. These funds will be available to MM for margin purposes when required.
(emphasis added)
A central controversy in this application involves the question of whether it is arguable that the italicised words in Article 2 were included in the terms of the investments the subject of the Further Schedules between MM and IAL as MM contends, or as IAL contends, such provision was not a term of any of the Further Schedules agreed to. In addition, MM contends that each of the Further Schedules provided for a Management Fee of 4%, whereas cl 2.2(a)(i) of the Deed provided for a 2% Management Fee. IAL says that there was never any agreement to vary this.
Mr McKeown states the requirement for IAL to advance the Margin Funds would thereby enable MM to manage risks associated with options trading. For each Investment Amount transferred from IAL to MM’s IB Account, a separate IB sub-account was set up in MM’s primary IB Account. IAL was provided with daily statements for each IB sub-account by MM.
Mr McKeown states all discussions in relation to these investments, including ordinary business, took place between Forbears and MM. He exhibits, by way of example:
(a) an email chain between Mr Macmillan of Forbears and himself dated 28 November 2017 in relation to dates and investment values; and
(b) an email from Mr Macmillan to Mr McKeown dated 18 January 2019 relating to returns under the FLI Investments which included queries made on behalf of IAL.
Mr McKeown states that he has 5000 emails between MM and Forbears relating to communications in respect of the investments and that there was also a large volume of WhatsApp messages which he asserts he no longer has access to as Mr Purslow has deleted them.
Mr McKeown states that in early 2020, the stock market became very volatile as a result of the economic uncertainty arising from the pandemic. MM’s Alpha Trading Strategy was particularly sensitive to market volatility, given the returns were highly dependent on the prices of call and put options, which were subject to change and significantly dependant on interest rate levels. Further, there was a sudden increase in margin requirements at the beginning of the pandemic, correlating with the withdrawal of global liquidity providers.
Mr McKeown states that in early to mid-2020, he communicated with Mr Purslow via WhatsApp to discuss IAL’s current investments, given the market volatility and associated risks.
Mr McKeown states that on 28 July 2020 (’28 July email’), he sent an email to Messrs Macmillan and Purslow observing that, given the market had taken a significant downturn, ‘one of two things could happen’:
(a) the VPB positions would be closed down (i.e. sold or allowed to expire) at a loss; or
(b) in accordance with the terms of the Further Schedules, IAL would need to provide a further 20% of the Retained Funds to MM as Margin Funds to cover the margin position to keep the positions open.
Mr McKeown states in or about July 2020, he was advised by Mr Purslow in a WhatsApp message that MM was not to ‘close down’ the positions and that Margin Funds would be advanced to MM to cover the margin requirements.
Mr McKeown states that based on Forbears’ promise to advance the Margin Funds, MM kept the VPB positions open (that is, they were not to be sold and if due to expire, were instead rolled over into the next quarter). While awaiting receipt of the Margin Funds, MM utilised its own funds in the IB Account to cover the margin requirements. He states that after this time, and given market conditions, he repeatedly requested Mr Purslow provide the Margin Funds as agreed, otherwise MM would have no alternative but to close down the positions. Mr Purslow, via WhatsApp, told him this could not occur, and that Margin Funds would be immediately provided.
Mr McKeown states that, despite Forbears’ continued assurances that the Margin Funds would be transferred, the funds were never received by MM. The market continued to decline and the margin requirements continued to increase. Accordingly, MM was forced to increasingly rely upon its own funds to support the margin requirements. Eventually, MM could no longer carry the risk of the VPB investments by using funds not part of FLI or VPB to cover the margin requirements. MM consequently closed out all of the positions at a significant loss in or about March 2021.
Mr McKeown states that had IAL complied with its obligations to advance the Margin Funds, MM would have been able to cover the increased margin requirements for the period of the stock market volatility, the positions could have been kept open until the market ultimately settled and the investments would have been profitable.
Mr McKeown’s March affidavit then moves to the subject of the IB sub-accounts. Mr McKeown states the IB sub-accounts which held the FLI and VPB monies are, and have always been, in the name of MM.
At or around the time the sub-accounts were established, MM provided IAL with paperwork to enable an ‘adviser login’. IAL failed to complete the necessary requirements, but as a courtesy, MM granted IAL direct access to those accounts by way of a ‘master login’. However, once issues arose regarding IAL’s failure to advance the Margin Funds, MM took steps to have IAL’s access retracted.
Mr McKeown’s March affidavit then addresses the issue of the offsetting claims against IAL’s demand. He states MM has offsetting claims against IAL which significantly exceed the amount of the debt claimed in the demand.
Mr McKeown states that as a result of IAL’s failure to advance the Margin Funds, and given MM was required to utilise its own funds to support the margin requirements, the IAL investments in the IB sub-accounts had a negative balance of USD5,273,899.05 (‘June 2020 Negative Balance’) as at 30 June 2020. He states an invoice for the June 2020 Negative Balance was rendered to IAL in February 2022. Mr Fary, Senior Counsel for MM acknowledged that this was not a contemporaneously generated document but offered no explanation for the delay of over 18 months between the accrual of the negative balance for such a substantial sum and the issuing of the invoice.[6] I observe that it could be reasonably supposed that if MM considered itself contractually entitled to look to IAL for reimbursement for a sum of that order, which it had apparently paid from its own funds, that it would press for payment promptly upon the accrual of that liability and proceed to enforce its legal rights if payment was not forthcoming.
[6]Transcript of Proceedings, Re McKeown Marrs Pty Ltd (Supreme Court of Victoria, S ECI 2023 01171, Gardiner AsJ, 10 August 2023) 40.
Referring to the June 2020 Negative Balance, displayed in an IB Activity Statement exhibited to his affidavit (’30 June 2020 Statement’), Mr McKeown states that the 30 June 2020 Statement displays the net asset value (‘NAV’) of each of the sub-accounts as at 30 June 2020 and is a typical example of a statement provided daily by MM to IAL. Mr McKeown contends the 30 June 2020 Statement confirms the NAV of the sub-accounts totalled the June 2020 Negative Balance of USD5,273,899.05 as at 30 June 2020. He states these losses continued to accrue until MM was eventually required to close out the accounts in or about March 2021. The negative balance of the IB sub-accounts as at March 2021 was of the order of USD12,213,909.90, which MM contends is the amount of its offsetting claims in respect of the Margin Funds to which it says MM is entitled.
Mr McKeown states MM suffered further losses as a direct result of the negative balance displayed in the IB sub-accounts because it became apparent to other brokers that MM was facing significant pressure. This affected MM’s earnings and profitability relating to the accounts of other clients. MM has not quantified these amounts but Mr McKeown asserts that they can be substantiated. Despite this assertion, such a claim was not subsequently substantiated or quantified.
In addition, Mr McKeown states that as the positions had to be closed out prior to the market’s recovery, MM did not have access to funds to receive payment of its Management Fee of USD2,681,444.20 (‘Management Fee Loss’). He states the Management Fee Loss is calculated at 4% per annum over five years on 100% of the Investment Amounts under the VPB Further Schedules (being USD 13,407,221.00), calculated as follows:
Schedule Investment Amount (USD) 100111 1,592,890.00 100115 176,931.00 100117 1,592,890.00 100122 1,991,140.00 100123 1,769,890.00 100124 1,592,980.00 100134 4,690,500.00 TOTAL 13,407,221.00 4.00% of $13,407,221.00 536,288.84 Total Management Fee Loss over five years 2,681,444.20
Mr McKeown states that on 13 May 2022 and 1 June 2022, he sent emails to IAL and Forbears attaching invoices in respect of the losses and requesting payment. Again, it is not explained why this claim, which is for substantial sums and was accruing every six months for each investment, was not made earlier. Clause 2.2(b) of the Deed provided that MM was entitled to deduct all Management Fees from the Investment Amount on the expiry of each period of six months until the Repayment Date for the investment.
It will be seen that IAL’s evidence is that the Management Fees were in fact paid (albeit at a rate of 2%, not 4%).[7]
[7]See para 141 below.
The first of those two emails was sent from what was identified as the ‘Accounts Department’ at the address [email protected] to Smita Appadoo, Mr McKeown’s co–director Mr Craig, Mr McKeown’s brother David McKeown and Adam Bold (‘Mr Bold’), and stated:
Please update on payment. Please note under no circumstances will any payments will be made until these invoices are honored (sic).
The second email was sent on 1 June 2022 from the Accounts Department to Mr Futter, David McKeown, Mr Robinson, Tabrez Kureemun, Douglas Riach and Nigel Ball, and states:
Please note the following are outstanding and in default. If payment is not received within five business days of the date of this email we reserve the right to take further action to recover the money without further notice to yourselves.
Mr McKeown states that although the Further Schedules allowed for fees to be taken at intervals of six months,[8] MM did not draw its Management Fees until the end of the investment period, and has therefore received no Management Fees for the VPB investments. It contends that it therefore has a specifically quantified offsetting claim for Management Fees owing for USD2,681,444.20 in respect of the VPB investments. I note that there is no claim made in the March affidavit in respect of Management Fees for FLI investments.
[8]As noted in para 45 above, this entitlement is found in cl 2.2 of the Deed. It is not mentioned in the Further Schedules.
Mr McKeown states MM also has a counterclaim against IAL as a result of its failure to provide Margin Funds under which it is entitled to set-off against any claim IAL may have against MM pursuant to the Deed. Mr McKeown contends this claim would sound in damages of at least USD7,955,343.25 (which, as at the date of his March affidavit, was AUD11,889,021.83).
Mr McKeown concludes his affidavit by contending MM has offsetting claims exceeding the amount of the debt claimed in the demand, MM is solvent and the issuing of the demand constitutes an abuse of process.
In his May affidavit, Mr McKeown reiterates his contention that the parties and Forbears had a mutual understanding that Further Schedules would be created for each new client investment and would contain specific details that included the Investment Amount, the commencement and completion dates and the client number. Mr McKeown stated these Further Schedules would be created for both FLI and VPB. Mr McKeown describes the basis upon which he contends the terms in respect of the requirement for IAL to provide Margin Funds were agreed to and the raising of the Management Fee to 4% came to form part of the agreement between MM and IAL.
Mr McKeown states there were thousands of emails, telephone calls and electronic messages exchanged between MM and Forbears on IAL’s behalf. He states he found it difficult to liaise with Forbears and that the resolution of each issue seemed to involve some level of disagreement.
Mr McKeown refers to an email sent to him by Mr Macmillan dated 9 July 2019 (‘9 July email’). That email concerns VPBs FLI100123 and FLI100122, and states:
Hi Simon,
As per emails last month, see attached – last of the 5 ‘in-force’ VP Bank policies requiring amended Schedule of G’tees requiring signing ie. [sic] Article 5 has been amended (for all 5 current VPB policies).
Grateful if you could print, sign, scan & return via email when you get a chance please – not urgent, any time this week is OK.
Let me know if you have any questions.
Mr McKeown states he had been engaged in discussions with Mr Macmillan regarding amending the terms of the ‘in force’ VPB investments and, in particular, Article 5 of those investments. He refers to an example of Article 5 is that contained in Further Schedule FLI100117, which states:
Article 5: Income Distribution
IAL will withdraw the Investment Return Guarantee of 7% earned in the MM Sub-Account at the end of each complete year with no penalty, providing the original MM sub-account investment amount remains invested in the MM sub-account. In this case the Investment Return Guarantee will be paid, annually in arrears, to IAL for the benefit of the Policyholder.
Mr McKeown states Article 2 of the draft Further Schedules attached to the 9 July email did not contain the term requiring IAL to provide Margin Funds in the terms of the italicised words appearing in para 26 above. Mr McKeown says that as a result, he was in discussions with Forbears (whose representatives are not identified) between 9 July 2019 and 15 July 2019 ‘to the effect that it was agreed that the term would be inserted’.
Mr McKeown states he has been unable to locate any further emails or messages relating to the provision of or entry into each of the other Further Schedules because each Further Schedule was executed and collected from MM’s office in Melbourne. Mr McKeown states that the final Further Schedules for FLI100117, FLI100123, FLI100111 and FLI100115 dated 15 July 2019 were executed and collected from that office. He reiterates that he no longer has access to the relevant WhatsApp messages as he believes they have since been deleted by Mr Purslow.
Mr McKeown then refers to a series of communications between himself and Mr Macmillan in the period 28 August to 9 September 2019. The first is an email from Mr Macmillan to Mr McKeown dated 28 August 2019. Attached to it is a document titled ‘Deed of Guarantee Schedule 1 – HAWP 2 (VP Bank)’, which concerns investment FLI100134, with a word processing identifier ‘(v070619)’ at the foot of each page of the document. I note that Article 2 of that document contains no provision in respect of an obligation to provide funds to MM in respect of margin calls nor is there any amendment to Article 4 which increases the Management Fee to 4% from 2% by the insertion of the words ‘at 4% of 100% and ...’. The email states:
Evening Simon,
Could you print, sign, scan and return (via email) the attached when you get time please.
Let me know if you have any questions.
Thanks
andrew (sic)
Mr McKeown states that between 28 August 2019 and 9 September 2019 numerous telephone conversations took place between him and Mr Purslow in relation to the investment and the terms of the Further Schedule for VPB investment FLI100134. He then refers to several emails, all sent on 9 September 2019 (‘9 September 2019 emails’). The first is a follow-up email sent by Mr Macmillan to Mr McKeown at 3:47pm enquiring if he had ‘had a chance to print & sign the schedule for MM100134’.
Mr McKeown states that ‘on or about 9 September’[9] when he replied to that email he inadvertently attached the signed version of the ‘Deed of Guarantee Schedule 1 – HAWP 2 (VP Bank)’ in the form that Mr Macmillan had sent on 28 August 2019. Mr McKeown states that the terms included in that draft Further Schedule were not the terms MM required and to which MM agreed.
[9]The time of that email is not specified in the affidavit.
Mr McKeown deposes that he had a telephone conversation with Mr Purslow, on a date that he does not recall, during which Mr McKeown indicated MM could not agree to that Further Schedule until a term requiring the provision by IAL of funds for margin purposes if required was included.
Mr McKeown deposes that MM amended the draft Further Schedule to reflect that conversation and requirement, identified by a word processing identifier ‘v100919’ and the handwritten words ‘final copy/version’. He does not recall why the document was dated 10 September 2019 but deposes that it was attached to the email he sent at 4:15pm on 9 September 2019. Mr McKeown deposes that the document that he sent to Mr Macmillan at 4:15pm contained the additional sentence at the end of Article 2: ‘These funds will be available to MM for margin purposes when required’ and the modification of Article 4 providing for an increase of the Management Fee to 4% from the 2% provided for in cl 2.2(a)i of the Deed, unlike the Further Schedule FLI100134 document sent by Mr Macmillan on 28 August 2019. However, in the Robinson affidavit, Mr Robinson adduces evidence of the native form of the email sent by Mr McKeown at 4:15pm on 9 September which indicates that the Further Schedule attached to the email from Mr McKeown was an executed form of the FLI100134 Further Schedule in identical terms to that which had been sent by Mr Macmillan on 28 August 2019.
Mr Macmillan replied to that email at 4:34pm that same day stating: ‘Perfect. Thanks Simon’. It now seems clear having regard to the Robinson affidavit that Mr Macmillan was responding to Mr McKeown’s 4:15pm email attaching the Further Schedule for FLI100134 executed by Mr McKeown in identical form to that which Mr Macmillan had sent him on 28 August.
Mr McKeown then refers to an email dated 13 September 2019 sent to Mr Macmillan and others at 6:52am, in which Mr McKeown states ‘Think this is everything now’. Mr Macmillan replied on that same day at 10:18am, in an email stating:
Thanks Simon. You already sent the signed DoG schedule for MM100134.
However, I still need the Deed of Guarantee signed for the Instanza fund – as per my email last Friday.
Grateful if you could print, sign & return the attached ASAP please.
Thanks
andrew [sic]
PS: we received funds for 100124 yesterday – A VP Bank policy, $243k to be invested with MM for an Investable Amount of $1.77m. Funds should be in IB by next Friday-ish.
Mr McKeown states that Mr Macmillan acknowledged receipt of the ‘executed schedule’ in that email sent at 10:18am on 13 September 2019. However, that email has the subject heading ‘RE: Deed of G’tee Schedule for 100134’ and attaches a document described as ‘IHAWP MM Deed of Guarantee 190906 (released)’. Mr Macmillan refers to receipt of FLI100134; there is no reference by Mr Macmillan to v100919. It is probable from the context that the executed Further Schedule that Mr Macmillan was referring to was the Further Schedule Mr McKeown sent at 4:15pm on 9 September 2019.
As to the requests for Margin Funds, Mr McKeown deposes MM made a number of requests to Forbears that IAL provide 20% of the Retained Funds as Margin Funds to keep the positions open in circumstances where Forbears had indicated IAL refused to close down the positions at a loss. These requests are not specified or particularised and there is no reference to any record in electronic form of them.
Mr McKeown states both he and his staff contacted Mr Purslow about the Margin Funds in the face of the stock market’s deterioration. Mr McKeown states he made verbal requests between 18 and 24 February 2020 via telephone to Mr Purslow as a result of the decline in the market. Mr McKeown deposes that Mr Purslow’s response was:
Keep the positions open. Do not close under any circumstances. We will provide margin coverage.
Mr McKeown states that his staff also contacted Mr Purslow to confirm this as the market deterioration was of great concern. He has not been able to obtain telephone records from MM’s telephone provider to substantiate this. The staff involved in those communications are not identified.
The balance of the IB sub-accounts (these being the MM accounts holding the IAL HAWP accounts) as at 1 February 2020 was USD5,532,569.13. By 29 February 2020, the balance of the accounts had fallen to USD1,709,462.84.
Mr McKeown states MM kept open many VPB positions and ‘rolled’ them into the March – June quarter, based on what Mr McKeown describes as ‘repeated promises’ by Forbears to advance the Margin Funds, by utilising its own funds. Mr McKeown describes this practice as ‘moving from one call or put on a particular stock to a different call or put on that same stock’ so as to avoid the stocks expiring with no value, or resulting in a long or short position in the underlying stock.
Despite this rolling of options in the March 2020 quarter, the market conditions nonetheless rendered the stocks worthless as there were no buyers. Mr McKeown states MM did not wish to incur further losses by rolling the positions into the June quarter with its own funds, as it had lost faith in the promise that Margin Funds would be advanced. In June 2020, the MM board made the decision to stop rolling the positions into the September quarter. As a result, the bulk of the remaining options expired in or around June 2020, with some longer options expiring in the quarters leading up to and including March 2021.
As to the June 2020 Negative Balance, Mr McKeown deposes that, in the face of the market conditions, the options had moved so far from each of the ‘strike prices’ so as to have become effectively worthless as prospective purchasers would instead purchase the underlying investment at a lower cost. Mr McKeown further notes that it was not until the options expired that the loss was realised and the true value of each option was displayed in the MM books and statements. Until that time, the value reflected was the purchase price. These entries are referred to by Mr McKeown as ‘zombie’ positions.
While Mr McKeown acknowledges the market volatility as impacted by the pandemic was unprecedented, he states it is a fact that market volatility can always occur and this was the reason MM sought the inclusion of IAL’s obligation to advance Margin Funds as required in the Further Schedules. Mr McKeown indicates the alternative of MM having only a small portion of the Investment Amount available to it to conduct the investment while guaranteeing the Minimum Return Percentage was an unviable situation.
Mr McKeown refers to further correspondence between himself, Mr Purslow, Douglas Riach of Forbears and Mr Craig of MM, which took place between 19 January 2021 and 22 January 2021. The first email in that chain is from Mr Riach, and queries ‘Can we agree that when MM makes payments, they notify us of dates due, so that we can make sure IAL sends on to our clients. This to me is a very important part for our clients on the Income option. Late payments make for annoyed clients haha’ [sic].
On 22 January 2021, Mr McKeown sent two emails in reply. The first reads:
Note Douglas all income payments have stopped and will only resume upon funding of the VP accounts. Mark Purslow is aware of this.
The second email from Mr McKeown provides an indication that ‘the amount to be remitted is 13,079,900.00 USD’ alongside a request to ‘[p]lease let me know when to expect’.
Mr McKeown then refers to an email sent by him on 11 September 2021 to Galen Choi, whose role is described as the Introducing Financial Advisor, which states:
Hi Galen,
There seems to be confusion around the VP accounts at Mckeown Marrs.
As have has [sic] previously explained to Forebears;[10]
1.Our legal and compliance advice is that these accounts need to be recapitalized. We also have this advice from previous Forebears staff. We alerted Forebears to this situation last February.
2.We will not pay further income payments until the above is resolved. Again this has been stated to Forebears staff on numerous occasions.
3.We have tried to work around this issue but now complaints made to our compliance officer and ASIC require us to resolve this issue as soon as possible.
4.We have made offers to Forebears however at this point we need to either recapitalize the accounts or the balance of the accounts can be remitted minus Mckeown Marrs fees.
As Mark has made very clear there is no facility to recapitalize these accounts we will be returning the investment minus our fees.
[10]Throughout his evidence, Mr McKeown has referred to Forbears as ‘Forebears’.
Mr McKeown then refers to an email dated 15 January 2022, sent by him to Mr Choi, asking whether Mr Choi is ‘the IFA[11] in regards to the VP accounts’ as MM was ‘not able to get hold of Mark Purslow at this time and want[s] to resolve this issue as soon as possible’.
[11]This acronym is not defined, but appears to refer once again to ‘Introducing Financial Officer’.
On 17 January 2022, Mr Choi replied and stated that he may be able to assist with the VP issue. Mr McKeown sent a reply email on 20 January 2022 stating:
Hi Galen, the issue is that we have waited for over a year for Mark to re-capitalize the VP accounts. As you are aware we have received only approx 11% of these funds and due to the market pullback due to Covid we alerted Forebears that we need to either close the positions or add extra margin. Forebears requested the positions be kept open and they subsequently created a loss for MM. We are still awaiting the resolution of these issues.
As far as we are aware there are no late payments due to IAL for any other accounts. Since Andrew MacMillan [sic] left we have had major problems dealing with Forebears. We cannot deal with Nigel Ball and we have had problems contacting Mark. We take this matter seriously to the point we have employed Andrew Macmillian [sic] to help from this end.
Mr McKeown deposes that MM never received Margin Funds despite repeated assurances from Forbears. As a result, MM had no alternative but to close down positions in March 2021, incurring a loss of USD12,213,909.90, an amount which reflected the true value of all the options that had expired at that time. Mr McKeown’s contention is that had IAL made the Margin Funds available, MM would have used those funds to keep the positions open by rolling the options until the market recovered, thereby avoiding the substantial losses suffered by the IAL account options. Similarly, Mr McKeown states that had Mr Purslow not made representations in February 2020 that the Margin Funds would be advanced, MM would have immediately closed down the VPB positions either by selling the options for any price obtainable, or by letting them expire. He does not explain why, if he regarded IAL to be contractually obliged to make Margin Funds available, MM did not move to enforce such obligation, which had accrued to a very significant sum.
Mr McKeown states that, as the positions had been closed out prior to the recovery of the market, MM did not have access to funds to receive payment of its Management Fees regarding the VPB investments of USD2,681,444.20.
Mr McKeown refers to a series of IB statements regarding VPB from 2019 to 2021, and states that if MM had received Management Fees for this period, they would have been recorded as ‘Advisor Fees’ in these statements.
Mr McKeown deposes MM was not paid any Management Fees with respect to the FLI investments, despite the Deed providing that a Management Fee of 2% per annum of the Investment Amount was chargeable.
Mr McKeown deposes that the FLI Management Fee Loss calculated at 2% per annum over five years of 100% of the Investment Amounts under the FLI Investment Further Schedules (being USD3,628,830) is USD362,883, which is calculated as:
Schedule Investment Amount (USD) 100119 120,000.00 100120 120,000.00 100121 240,000.00 100125 860,000.00 100126 10,000.00 100127 10,000.00 100128 20,000.00 100129 20,000.00 100130 895,181.00 100131 100,000.00 100132 10,000.00 100133 130,061.00 100136 14,030.00 100141 10,000.00 200200 33,600.00 200201 100,100.00 TOTAL 3,628,830.00[12] 2.00% of $3,628,830 72,576.60 Total FLI Management Fee Loss over five years 362,883.00 [12]From the context, this appears to be the total of the investments over the 5 year period.
As I have observed, while the March affidavit (the only affidavit filed within the 21 days after service of the demand) made a very specific claim for Management Fees in respect of the VPB investments, it made no claim for Management Fees for the FLI investments and in my opinion, as a matter of jurisdiction, such a claim is not available to be raised subsequently.[13]
[13]Malec Holdings Pty Ltd v Scotts Agencies Pty Ltd (in liq) [2015] VSCA 330 [52]-[65],[93] (Kyrou, Ferguson and Kayne JJA); Sceam Construction Pty Ltd v Clyne (2021) 64 VR 404, [39] – [43] (Ferguson CJ, Sifris JA and Walker JA).
IAL’s evidence
In his affidavit sworn 21 June 2023, Mr Futter states that IAL entered into an exclusive promoter’s agreement with Forbears whereby Forbears would refer and introduce independent financial advisers to IAL who would then promote and market products to potential customers. He states that most of the communications relating to investments by IAL policyholders with MM occurred by way of Forbears corresponding with MM, who would then pass on any communications to IAL. He states that Forbears never had authority to agree to terms or otherwise bind IAL without its express approval.
Mr Futter describes a series of acrimonious exchanges between MM and the solicitors for IAL following service of the demand. Included amongst these communications were a series of emails provided to Mr Futter by IAL’s solicitors emanating from the email address [email protected] in March 2023. These emails sought to involve Adrian Tembel, the chief executive partner of Thomson Geer, IAL’s solicitors. I will not detail these communications here, as they do not appear to immediately relevant in the resolution of this application.
Mr Futter describes the background which resulted in the agreement between IAL and MM. He states Mr Purslow introduced Mr McKeown to IAL in or around 2016. The purpose of that introduction was that Forbears had designed an investment which utilised the Alpha Trading Strategy developed by MM to guarantee investors their initial investment after a five year term, plus guaranteed annual growth. Mr Futter states that in July 2016 he received a copy of a proposal from MM that had been prepared for Forbears in this regard.
Mr Futter states that IAL agreed to all of Forbears’ clients using an IAL linked investment policy to invest in MM’s Alpha Trading Strategy product. On 31 October 2016, Mr Robinson, a director of IAL, signed the Deed with MM.
Mr Futter states that after each new investment was received by IAL from Forbears’ clients, it was then invested with MM. This occurred by sending the investment amount to MM’s accounts held with IB. Upon receipt of the investment, MM would sign a Further Schedule which was intended to be annexed as a Further Schedule to the Deed, recording the terms of the particular investment identified by reference to the relevant policy number. Mr Futter states that the terms of the Further Schedule for each investment did not overwrite or vary the terms of the Deed. He states that the Deed appended a sample of a Further Schedule.[14]
[14]That Further Schedule is set out in para 20 above.
Mr Futter states that in or around May 2019, he had concerns as to how MM could guarantee a return each year if their investments did not produce the necessary gains, with the risk that MM would run out of money if withdrawals were made every year. He states that after some discussion, MM agreed to sign a letter to assure him that MM had sufficient funds to continue to trade the investments as necessary and that MM had sufficient capital to fund the income if required.
In this regard, on 25 June 2019 (’25 June letter’), Mr McKeown wrote to Mr Futter, responding to Mr Futter’s enquiries. Mr McKeown’s letter after setting out IAL’s concerns, responded to each in turn as follows:
i.How would MM deal with this scenario where the balance went to zero for ongoing investment purposes?
[MM response] MM has sufficient funds in IB to continue to trade the investments as necessary.
ii.How would MM pay the annual income, in that same scenario, where the balance went to zero?
[MM response] As above, MM has sufficient capital to and will fund the income if required.
Mr McKeown refers to this letter in his August affidavit[15] and states that these assurances were only given on the basis that IAL agreed to provide the Margin Funds upon request. I note that the letter made no reference to such an agreement.
[15]See para 157 below.
Mr Futter sets out the investments that IAL had with MM. He differentiates between FLI Investments and VPB Investments. Mr Futter states there were 36 further investments made, with 29 of them relating to FLI and 7 relating to VPB, making a total of USD17,800,989.52 invested with MM.
He states that prior to August 2017, there was only one type of investment product offered by MM which was the FLI product. Mr Futter states that the investments the subject of the demand are all FLI investments, the terms of which are not disputed.
Mr Futter states that in about August 2017, Forbears approached IAL with a second product that would enable investments from clients of a bank located in Hong Kong, VP Bank Hong Kong, the VPB investments the subject of MM’s cross claim. Mr Futter denies that the terms of those investments are as stated by Mr McKeown in his March affidavit.[16]
[16]Outlined at para 23 above.
Mr Futter describes the VPB investments as involving VP Bank lending money to policyholders with a condition that 75% of the monies loaned be retained by VP Bank as security for investment in corporate bonds for five years. The balance of 25% was paid to IAL, which deducted its fees and Forbears’ fees (making a total of 11.5%) with the balance of 13.5% being paid to MM.
Mr Futter, using investment FLI100111 as being a typical example, describes how that investment was documented.
Mr Futter’s affidavit then moves to the Further Schedules which are at the centre of MM’s contention that it has genuine offsetting claims against IAL. He exhibits copies of what he describes as the first versions signed by Mr McKeown of Further Schedules FLI100111, FLI100117 and FLI100123 on 20 September 2018, FLI100115 on 29 September 2018, and FLI100122 on 29 April 2019. These first versions included the phrase in Article 5 which was later agreed to be deleted.
Mr Futter exhibits an email chain concerning this amendment to Article 5, which culminated in Mr McKeown signing reissued versions of the relevant Further Schedules as follows:
(a) FLI100115 on 11 June 2019;
(b) FLI100111 and FLI100117 on 24 June 2019; and
(c) FLI100122 and FLI100123 on 10 July 2019.
The Further Schedules relating to investments FLI100134 and FLI100124 were not required to be reissued as the investments commenced at a later date, being signed on 9 September and 30 September 2019 respectively. The VPB Further Schedules which were amended included a word processing footer ‘(v070619)’. Mr Futter states that this was the latest version of the Further Schedules for the VPB investments.
Mr Futter states that contrary to Mr McKeown’s evidence, there has been no further version of the VPB Further Schedules agreed to by MM and IAL. As to Mr McKeown’s evidence in that regard, he states that:
(a) as to Mr McKeown’s March affidavit in which he deposes the Further Schedule for FLI100124 was purportedly signed on 10 September 2019, the way in which any new investment was received and Further Schedules signed is described in para 90 above. A Further Schedule was unable to be signed prior to the commencement of the investment which is why all of the Further Schedules postdate the investment commencement dates as provided in Article 9 of the Further Schedules. Article 9 of the version of FLI100124 referred to in Mr McKeown’s March affidavit states that it commenced on 26 September 2019 and therefore it could not have been signed on 10 September 2019; and
(b) as to Mr McKeown’s May affidavit, Mr Futter states he believes that the 9 July email sent by Mr Macmillan to Mr McKeown related to Mr Futter’s request to have the sentence removed from Article 5 by reason that this is expressly stated in Mr Macmillan’s email. That is to say the email cannot be the source of support for Mr McKeown’s contention that it is a reference to the amendment of the terms of Article 2.
Mr Futter states that he never agreed to the terms said to be included in the VPB Further Schedules by Mr McKeown which provided:
(a) that the Retained Funds would be made available to MM when requested, for margin payments or otherwise; and
(b) that there was a 4% Management Fee payable.
Mr Futter states he would never have agreed nor instructed Forbears to agree to those terms by reason that the Retained Funds from which they were supposed to be sourced could never be provided to MM; VP Bank held those funds as security for its loans to the investors and the funds were invested in bonds.
Mr Futter states that prior to reviewing Mr McKeown’s March affidavit, he had never seen the versions of the VPB Further Schedules annexed to Mr McKeown’s March affidavit which contain the terms described in para 103 above.
As to Mr McKeown’s evidence in respect of his expectation that some of the Further Schedules were collected from MM’s office in Melbourne, Mr Futter states at no stage during IAL’s dealings with MM or Forbears in respect of its investments with MM did IAL receive or deliver physical copies of any agreements, nor arrange or instruct Forbears to collect physical copies of documents from MM’s office.
Mr Futter then describes impediments which IAL has had to accessing MM’s account with IB, despite IAL requesting that MM reinstate its access to view MM’s IB accounts.
In respect of Management Fees, Mr Futter makes particular reference to FLI100115 stating that it is the only investment for which MM has paid out to date. He states that on 27 August 2021, the policyholder for that account requested a full surrender of their investment. Mr Futter deposes MM fulfilled the terms of both the Deed and the Further Schedule for FLI100115, and paid IAL USD213,546.17, a return in slight excess of the guaranteed 8% per annum. Mr Futter states that MM never indicated it had not been paid the associated Management Fees.
Mr Futter states the Further Schedules for the seven VPB investments have not been altered any further, and none of the terms of any Further Schedule overwrote or varied the original terms contained in the Deed. He contends the agreed terms relating to the VPB Further Schedules were:
(a) an amount of 15.25% of the total Investment Amount would be transferred to MM’s custodian account with IB;
(b) the balance of the Investment Amount would remain with IAL’s custodian account with VP Bank; and
(c) the Minimum Guaranteed Return Percentage was 7% (net of the Management Fee).
In his affidavit sworn 21 June 2023, Mr Macmillan, former Head of Operations of Forbears, states he assisted IAL with sourcing and checking new business documentation which included all policy application forms, supporting what he describes as ‘DD documentation’, a reference which is not explained, and investment related documentation. He reported to Mr Purslow. He is no longer employed or otherwise involved with Forbears.
Mr Macmillan states that at all times his understanding was that Forbears could not make decisions or enter into any binding agreements on behalf of IAL or MM without express authority.
Mr Macmillan confirms the position in relation to both HAWP investments, the Deed and the first Further Schedule appended to it. He also confirms the process by which the Further Schedules were prepared, that being by manually preparing a Further Schedule for each new investment by inputting investment specific information such as policy number, investment amount, start date and end date into an IAL approved template. As to VP Bank related policies, Mr Macmillan deposes he prepared the Further Schedules for each new investment using a template form of Schedule 1 to the Deed (‘VPB Schedule 1 template’) that had been approved by IAL. Mr Macmillan states each new investment required a new VPB Schedule 1 template to be prepared. Mr Macmillan further states that as each new Further Schedule was intended to form part of the Deed, the wording of the VPB Schedule 1 template needed to be approved by IAL prior to its use.
Mr Macmillan states MM was required to sign all VPB Schedule 1 template documents to acknowledge the terms of each individual investment. IAL required and was provided with copies of all Further Schedule documents for filing. Mr Macmillan deposes that upon receipt of those documents as signed by MM, he emailed them to IAL.
Mr Macmillan states only two versions of the VPB Schedule 1 template were ever used, and that both had been approved by IAL. The original version was released on 18 September 2018, and had the filename ‘v180918’. The second version, referred to by the filename ‘v070619’, was released on 7 June 2019, and deleted the phrase ‘…providing the original MM sub-account investment amount remains invested in the MM sub-account’ from Article 5 at IAL’s request.
Mr Macmillan deposes he only ever sent MM these two versions of the Further Schedules and he never generated nor was he instructed to generate, a version of the VPB Schedule 1 template that provided for the Margin Funds to be made available to MM or for a 4% Management Fee to be payable.
In particular, Mr Macmillan states the 9 September emails sent to him by Mr McKeown did not attach the Further Schedule purporting to relate to FLI100134. He knows this because that document includes a word processing footer version number of ‘v100919’. He states that he has never produced or generated Further Schedules for VPB investments with that version number. Prior to reviewing those affidavits, he had never seen a version of the Further Schedules bearing the footers ‘v090619’ or ‘v100919’, or which included terms relating to availability of Margin Funds or providing for Management Fees of 4%.
Mr Macmillan states that he sent each of the Further Schedules to MM by email. MM would send them back to him in signed form and they would be forwarded on to IAL by email. Mr Macmillan states that he never collected any Further Schedules from MM’s office.
He states that he does not ever recall discussing with Mr McKeown the insertion of a clause into the VPB Schedule 1 template whereby IAL would agree to provide funds for margin purposes. He states that he knew he would not have made assurances or promises to that effect had Mr McKeown raised it with him, because he had not been authorised to do so by Forbears and IAL and because he knew VP Bank held the majority of the funds as security. In short, no additional funds were available or accessible.
In his affidavit sworn 11 July 2023, Mr Purslow confirms in detail Mr Futter’s evidence in respect of the background to the investment by IAL under the terms of the Deed with MM, including the VPB investments the subject of the Further Schedules. He disagrees with Mr McKeown’s evidence[17] and states IAL and Forbears never agreed to:
[17]See para 23(b)(iii),(iv) and (vi) above.
(a) the provision of the Retained Funds to MM for margin purposes when required;
(b) the exacting of a 4% Management Fee; and
(c) the Deed being contingent upon the advancement of the Margin Funds.
He states the Management Fee was 2% not 4% and refers to a term of the investments provided in Article 6 of the Further Schedules which required that if, in any complete year the investment delivered a return above the guaranteed amount of 7%, any excess return would be paid to IAL for the benefit of the investor in accordance with the distribution rules.
Mr Purslow refers to Articles 7 and 8 of the Further Schedules, which provide that the proceeds will be paid to IAL at maturity and the client will always have access to the MM NAV of the underlying investments. Mr Purslow states it is likely MM owes IAL policyholders an amount far exceeding what has been claimed in the demand.
Mr Purslow states that while he did communicate with Mr McKeown through WhatsApp, he did not delete any messages forming part of that conversation. He still retains historical WhatsApp messages exchanged with Mr McKeown and does not know whether it is possible, and if so how, to delete WhatsApp messages from someone else’s account.
Mr Purslow supports and confirms the evidence of Mr Macmillan that Forbears did not agree to the provision of Margin Funds from VPB nor to the increase of the Management Fee from 2% to 4%. He further states he never saw any Further Schedule containing either of those terms prior to the issuing of the demand. Mr Purslow states this is because Forbears could not enter into or vary any agreement without authority from IAL. He also deposes he knew VP Bank was holding the funds retained from VPB as security for its loans, and that those funds had been invested in bonds.
Furthermore, Mr Purslow states that while he does not recall if he was ever asked by MM about closing down the positions, he knew he did not have authority to make that decision. He states that had he been asked, his response would have been that MM would need to discuss it with IAL.
Mr Purslow states that in June 2019, IAL became concerned as to how MM would fund the guaranteed annual payments if there was insufficient cash in the sub-account, and queried whether these payments would be funded by MM from a contingency fund. IAL required MM to make written assurances guaranteeing the annual payments. Mr Purslow refers to an email chain dating from 21 to 25 June 2019 between Messrs McKeown and Macmillan, into which Mr Purslow was copied. The first of those emails, dated 21 June 2019, was sent by Mr Macmillan to Mr McKeown, and states:
Morning Simon,
Further to earlier discussions, IAL still need a response re the ‘what-if’ scenario whereby a VP Bank related MM subaccount runs out of funds ie. their key concern is how will the annual payments be funded if there’s insufficient cash in the subaccount. I assume that they would be paid by MM, from a contingency fund or similar?
…
To be clear, please be assured that we have total confidence in you and MM but we just need to have answers to these “what if” scenario questions to ensure that we cover our own risk management and compliance.
Happy to call and discuss if you have any questions. Otherwise, grateful of a response to each of the specific questions please – there’s some urgency around finalising this given that a policyholder payment is dependent upon a resolution.
The questions referred to by Mr Macmillan appear to be included as an extract from a previous email, and state:
2.If the market conditions result in performance consistently below guaranteed annual targets and the income is withdrawn annually, there is concern as to what would happen under the worst-case scenario whereby the MM subaccount balance is Nil when an annual income payment is due. Using MM100111 as an example:
Initial investment (14 Jun 2018):
$242,890
End of Year1 value (13 Jun 2019):
$212,700
Year1 income withdrawal (late Jun 2019):
$91,800
Approx Year2 subaccount opening balance:
$120,900
If this trend continued, the MM subaccount would run out of money within a few years or have insufficient cash to meet the next annual income payment of $91,800. Therefore:
i.How would MM deal with this scenario where the balance went to zero for ongoing investment purposes?
ii.How would MM pay the annual income, in that same scenario, where the balance went to zero?
On 24 June 2019, Mr McKeown responded to these questions by way of reply email:
MM has sufficient funds in IB to continue to trade the investments as necessary.
As above MM has sufficient capital to fund the income.
On that same day, Mr Macmillan replied and indicated Mr McKeown’s response had been incorporated ‘into the proposed revised letter text’, to be sent to IAL ‘for an OK before incorporating into the final letter’.
Mr Purslow denies that he ever said in July 2019 or at any other time, and in any other message, correspondence or verbal discussion, that IAL would provide any of the funds retained in the VP Bank accounts. He states that he would never have made a statement of that kind, as he knew such a statement would be in direct contradiction to the terms of the agreement between IAL and VP Bank whereby the majority of the funds invested were to be retained by VP Bank for the full duration of the five year investment. He also states that he had no authority to make such a statement.
Mr Purslow exhibits an email that he sent to Mr McKeown on 7 February 2022, forwarding an email he had received from David McKeown of MM on 11 September 2021, where David McKeown confirms it is ‘clear that there is no top up option on the VP accounts’. He states that he does not recall if MM ever asked him about closing down the positions, but he knew he did not have authority to make a decision of that kind so, if they had asked, he would have said it would need to be discussed with IAL, the investor party under the Deed.
Mr Purslow refers to the June 2020 Negative Balance, and to an email dated 4 August 2020 from Mr Macmillan to Mr Robinson into which Mr Purslow was copied. That email states:
Thanks Richard. See attached as discussed – a copy of the IB report for the IAL Main Contingency Fund, as provided by Simon.
Attached to that email was a copy of the activity statement in respect of Account U7919030 which shows that, as at 30 June 2020, the ‘ending value’ was USD8,990,294.33 (‘4 August NAV’).
Mr Purslow states that in August 2019, a meeting was convened between Messrs McKeown, Craig, and Robinson, Mr Bold and himself. At that meeting, he states Mr McKeown agreed to appoint Mr Bold, described as the Director of Compliance & Risk Services Pty Ltd, to provide an independent verification of the performance of all HAWP investments.
Mr Bold was to provide an independent sign off on a quarterly basis (known as the ‘fair values’ sign off) of the values of each HAWP investment on the IB platform at that point in time compared to the current guaranteed minimum value required for each account at that same point in time. The purpose of this was to determine whether there was a shortfall (in that the values in the HAWP accounts were insufficient to meet the guaranteed values) or a surplus (meaning that there was an excess of the amount required to support the relevant minimum guarantees). It was stated to be a regulatory requirement to identify this shortfall.
Mr Bold compared the guaranteed minimum values for each investment, as provided to him by Forbears, with the current values of all HAWP accounts derived from IB statements provided by MM. In the Fair Value Quarterly Sign Off dated 11 November 2020 (‘July Fair Value Quarterly Sign Off’), Mr Bold found that, as at 30 June 2020, the total surplus of the HAWP portfolio was USD2,394,057. In the Fair Value Quarterly Sign Off dated 11 November 2020 (‘November Fair Value Quarterly Sign Off’) (together, ‘Sign Offs’), he also found that the total surplus of the HAWP portfolio was USD3,329,392 as at 30 September 2020.
Mr Purslow states the value of the IAL Portfolio of investments for both HAWP investments was substantially positive and should have been reinvested by MM together with additional surplus returns.
As to the Management Fees, Mr Purslow refers to email correspondence dated 16 July 2019 (’16 July correspondence’). Mr Macmillan copied Mr Purslow into the last email in that chain. Mr Purslow deposes that a document headed ‘MM fees taken 15 July 2019’[18] shows that the same and correct Management Fee percentage, i.e. 2% as stated in cl 2.2(a)(i) of the Deed, was taken by MM in respect of the HAWP accounts. In that correspondence, Mr McKeown stated:
Hi Andrew, just a heads up. Charlotte took out management fees for all accounts that had passed their anniversary dates. Figures are in the transaction history. Note she used the figures from you [sic] spreadsheet for year starting figure.
[18]The table is extracted in para 143 below.
He also indicated Mr Robinson did not need to approve the withdrawal of the Management Fees ‘as it was done through the master account as mgt fees’.
Mr McKeown, on that same date, in the first email in that chain, indicated the following:
Hi Andrew,
We submitted all the contracts to IB showing what we can take as mgt fees on each account. When Charlotte does this is sends [sic] to Adam who signs off on the fees and then we forward to IB. IB take a day or so to approve the fees and then we can release. Note these fees are normally charged automatically on a daily basis for most clients, except yourself and most of the into clients. [19] We can only take out what is shown on account contracts.[20]
[19]It is not explained what ‘into clients’ is a reference to.
[20]Emphasis in the original.
Mr Purslow refers to the 16 July email correspondence from Mr Macmillan to Mr McKeown which appends the following table:
Mr Purslow states this table, headed ‘MM Fees Taken 15 July 2019’, demonstrates that the 2% Management Fee, as provided for by cl 2.2(a) of the Deed, was withdrawn by MM in respect of both HAWP investments. This contention would appear to be based on the 2 columns respectively headed ‘Mgt Fee’ and ‘Transfer Amount’ and the notation at the foot of the spreadsheet ‘Amount transferred by MM (AUD$157k @US70c)’. The spreadsheet makes reference to the date of the transfer and the IB sub-account from which the fees were paid.
MM’s evidence in reply
In his August affidavit, Mr McKeown confirms his earlier evidence that:
(a) Investment FLI100111 is a VPB investment;
(b) funds were transferred to MM on or about 15 June 2018;
(c) the Investment Amount was USD1,592,890;
(d) the commencement date was 15 June 2018 and the relevant Further Schedule was signed by MM on or about 15 July 2019;
(e) the amount of USD242,890 represents the 15.25% proportion invested with MM, being the Advanced Funds;
(f) the balance of the Advanced Funds held by MM may deteriorate for various reasons, including as a result of the state of the market;
(g) in or about June 2019 and due to market volatility, Mr Macmillan requested that Mr McKeown provide a letter on the MM letterhead assuring IAL that MM had funds available to ensure the Advanced Funds and Minimum Return Percentage would be advanced, irrespective of whether the investment experienced a gain or loss; and
(h) MM only agreed to provide such assurance on the basis that IAL agreed to provide the Margin Funds in the event margin calls were made.
In relation to Investment FLI100111, Mr McKeown deposes that MM was asked in June 2019 to provide a letter on the MM letterhead assuring IAL it had the funds available to ensure that both the Advanced Funds and Minimum Return Percentage would be paid to IAL irrespective of any gain or loss. Mr McKeown deposes this was only done on the basis that IAL agreed to provide the Margin Funds upon request.
MM states initial versions of the following Further Schedules were prepared by Forbears in September 2018 and April 2019:
(a) FLI100111;
(b) FLI100115;
(c) FLI100117;
(d) FLI100123; and
(e) FLI100122.
Article 5 of these initial versions stated:
IAL will withdraw the Investment Return Guarantee of 7% earned in the MM Sub-Account at the end of each complete year with no penalty, providing the original MM sub-account investment amount remains invested in the MM sub-account.[21] In this case the Investment Return Guarantee will be paid, annually in arrears, to IAL for the benefit of the Policyholder.
[21]Emphasis in original.
In May 2019, MM agreed for the underlined phrase in Article 5 to be removed and re-signed each of those above-listed Further Schedules. Further Schedules FLI100115, FLI100117, FLI100123 and FLI100122 were reissued by Forbears and signed by Mr McKeown on behalf of MM. These documents contained no reference to the margin calls or to the increase in the Management Fee to 4%.
As to the Further Schedules, Mr McKeown states:
(a) the first versions of the Further Schedules for VPB Investments FLI100111, FLI 100115, FLI100117, FLI100122 and FLI100123 were prepared by Forbears in or about September 2018 and April 2019;
(b) the first versions of those Further Schedules contained the statement that:
‘IAL will withdraw the Investment Return Guarantee of 7% earned in the MM Sub-Account at the end of each complete year with no penalty, providing the original MM sub-account investment amount remains invested in the MM sub-account. In this case the Investment Return Guarantee will be paid, annually in arrears, to IAL for the benefit of the Policyholder’;
(c) despite not having a copy of the first versions of those Further Schedules in his possession, the signatures on Further Schedules FLI100111, FLI100115, FLI100117, FLI100122 and FLI100123 appear to be his;
(d) in or about May 2019, Mr Purslow proposed that the underlined phrase in Article 5 be removed and that each of those Further Schedules be re-signed. Mr McKeown states he agreed to this course of action;
(e) Article 5 of the Further Schedules relating to VPB Investments FLI100115, FLI100117, FLI100122 and FLI100123 was amended. The Further Schedules were then reissued by Forbears and Mr McKeown states that the signature on those documents appears to be his. He further states he does not have any record or recollection of being provided with a reissued copy of FLI100111;
(f) between 9 and 15 July 2019, it was agreed between Mr Purslow and Mr McKeown that the term relating to the Margin Requirement would be inserted into Further Schedules FLI100117, FLI100123, FLI100111 and FLI100115;
(g) Mr McKeown amended those Further Schedules pursuant to that agreement, and printed, signed and scanned those versions for his records. He states the original versions of those signed Further Schedules were collected from the MM Melbourne offices, but he cannot recall who collected them on behalf of Forbears; and
(h) the first versions of Further Schedules FLI100134 and FLI100124 were prepared by Forbears between August and September 2019, and were later amended by Mr McKeown to include the relevant clause regarding the Margin Fund requirement. Mr McKeown states these were either collected from the MM offices or emailed to Forbears. Mr McKeown is unable to recall who collected the physical copies of the Further Schedules.
Mr McKeown confirms his evidence in his earlier affidavits that he was not advised by Mr Purslow or anyone on behalf of IAL that the changes made to the revised Further Schedules collected from the MM offices were rejected. Mr McKeown deposes that despite numerous telephone discussions with Mr Purslow regarding the Margin Fund requirement, the Further Schedules prepared by Forbears did not reflect what was discussed and consequently, amendments had to be made.
As to the Management Fees, Mr McKeown states that following telephone conversations in 2018 and 2019, it was agreed between himself and Mr Purslow that a 4% Management Fee would be payable on the VPB investments, and this was reflected in the amendments made to the final executed versions of the Further Schedules.
As to Mr Futter’s evidence that the Retained Funds were not available to pay the margin calls and the 4% Management Fee, Mr McKeown deposes that MM ‘was not privy to the specific arrangements in place between VP Bank and IAL’.
Mr McKeown states the 4 August NAV of the IAL investments in the IB sub–accounts is not accurate as it related only to Account U7919030 and did not include the sub-accounts bearing the losses. Mr McKeown states the 30 June Negative Balance displays the NAV of each of the sub-accounts, which was USD5,273,899.05 as at 30 June 2020.
Mr McKeown refers to a series of emails exchanged between himself, Mr Choi of VP Bank, Mr Purslow and others between 8 April and 9 May 2022. Mr McKeown states that Mr Choi was seeking to separate his VPB clients from the FLI clients, and that Mr McKeown agreed to make income payments for the VPB accounts on the specific basis that those amounts were paid to the VPB clients directly, as opposed to through IAL. Mr McKeown deposes that IAL did not allow this.
Mr McKeown states Mr Choi discussed separating the accounts with him as a result of Mr McKeown’s concerns regarding IAL’s failure to provide MM with the Margin Funds.
Mr McKeown refers to an email sent by him to Mr Futter on 12 April 2022, in which Mr McKeown states that payment would be made on the basis that ‘[a]ny outstanding legal action is placed on hold whilst we continue to resolve the outstanding issues’. Mr McKeown states that as IAL did not agree to that proposal, MM did not make the income payments to preserve its position.
Mr McKeown states that the ‘Haven Alpha Wealth Portfolio (2) – Supplemental Scheme Particulars’, as mentioned by Mr Macmillan in his 21 June affidavit, relates to matters between IAL and VP Bank. Mr McKeown states that MM was not privy to any arrangements between IAL and VP Bank, and had not been shown that document prior to the commencement of the proceeding.
Mr McKeown states the changes made to Further Schedule FLI100134 to include both the Margin Fund requirement and the 4% Management Fee were a reflection of the telephone conversations between Messrs McKeown and Purslow. He deposes that Mr Purslow was the primary point of contact at Forbears in relation to each investment, and that Mr Macmillan reported to Mr Purslow. He further states the discussions regarding each investment largely took place between himself and Mr Purslow over WhatsApp or via telephone.
Mr McKeown concedes that, having reviewed a native version of the 9 September emails, it appears that the final executed Further Schedule relating to FLI100134 dated 10 September 2019 was not attached. He further states he has been unable to locate that version of the email in his own records.
Mr McKeown makes reference to an email chain between himself, Mr Purslow, David McKeown, Mr Macmillan and Mr Craig between 3 March and 24 April 2017. As to that series of exchanges he states:
(a) Mr Purslow’s statement that ‘85% of funds left with [VP Bank] will be credited to the HAWP product to support the guarantees’ was ‘effectively meaningless’ to MM. What became critical when the VPB investments were discussed in 2019, he states, was that the funds be made available to MM for margin purposes when required; and
(b) Mr McKeown’s response to Mr Purslow’s query as to whether there was ‘any maximum volume that [MM] can take using the HAWP structure’ was a reference to where, in circumstances where approximately 15% of the funds were being transferred to MM’s custodian account with IB, MM would only be left with access to 7% of the funds after payment of the 4% Management Fee and Forbears’ fee of 4%.
Further, IAL observes that cl 2.2 of the Deed provides that MM is only entitled to Management Fees upon the expiry of each six month interval until the relevant Repayment Date. IAL contends the majority of the investments have not yet expired, with some expiring only in 2026, and MM is not entitled to claim Management Fees for future periods. IAL submitted that if the Court accepts the existence of an offsetting claim for Management Fees, the demand would need to be varied under s 459H(4) of the Act.
IAL argues the following amended Further Schedules differ significantly from their original form:
Further Schedule Number Investment Amount FLI100117 1,592,890 FLI100123 1,769,890 FLI100111 1,592,890 FLI100115 176,931 FLI100122 1,991,140 FLI100124 1,592,890 FLI100134 4,690,390
MM’s only concrete attempt to establish the amended Further Schedules to a date prior to 10 March 2023 was the evidence of a conversation with Mr Purslow concerning FLI100134 and MM’s subsequent amendment of that Further Schedule. In this regard, MM states the incorrect version of the FLI100134 Further Schedule was inadvertently sent to Mr Macmillan on 9 September 2019. IAL states MM has not addressed any of the other inconsistencies relating to the other amended Further Schedules, and MM ultimately accepted the ‘true’ Further Schedules had been in the same form sent to Mr McKeown by Mr Macmillan on 28 August 2019 without the amended text contained in Articles 2 and 4.
IAL contends that the version of Further Schedule FLI100134 contained in the 9 September 2019 email sent by Mr McKeown and exhibited to the Robinson Affidavit is indicative that the amended Further Schedules had not been agreed to. IAL contends Mr McKeown has not been able to otherwise establish such an agreement in respect of any of the amended Further Schedules. IAL submits that the Robinson affidavit provides definitive proof of the native form of the 9 September email. IAL contends this establishes that the Further Schedule for FLI100134 attached to that email sent by Mr McKeown was executed in identical terms to what which had been sent to him by Mr Macmillan on 28 August 2019. IAL contends this is consistent with IAL’s version of events.
As to Mr McKeown’s evidence in regard to the collection of physical documents from the Melbourne MM offices, IAL contends there is no evidence to support this. IAL equally submits there is no explanation as to why Mr McKeown would sign and return the Amended Further Schedule FLI100134 by email on 9 September 2019, and then on 10 September 2019, sign the amended Further Schedules and arrange for their physical collection. IAL contends this submission is refuted by both the return of the Further Schedules by way of email and the international locations of IAL and Forbears.
IAL further submits there was no contemporaneous communication in which the amended Further Schedules were referred to prior to March 2023. Equally, IAL contends the alleged provision obliging the remission of Margin Funds to MM is inconsistent with a number of emails:
(a) Mr McKeown’s email dated 28 July 2020, in which he asks ‘if there is any possibility to send a further percentage of the invested funds’ and then states ‘I understand there is no appetite for the above two issues but we need to ask the questions purely as a compliance matter’; and
(b) David McKeown’s email dated 11 September 2020 to Mr Purslow stating ‘I have just spoken with [Mr McKeown] and we are now clear there is no top up option on the VP accounts’.
(c) Mr Macmillan’s email dated 21 June 2019, in which he inquires, in a scenario where the MM subaccount would exhaust its funds, ‘[h]ow would MM deal with this scenario where the balance went to zero for ongoing investment purposes?’ and ‘[h]ow would MM pay the annual income, in that same scenario, where the balance went to zero?’
In the latter case, IAL submits that if it had been contemplated IAL would fund margin calls in circumstances where the reserve funds had been depleted, Mr Macmillan would not have put these questions. Equally, IAL contends it is unconvincing that this conversation concerned a hypothetical situation where the funds were temporarily zero, as this is not reflected in the plain wording of the emails.
IAL contends the June 2020 Negative Balance runs counter to the 4 August NAV and argues MM has provided no explanation as to this discrepancy, nor made any attempt to support this account by reference to contemporaneous documents. It has not been able to produce any other statements of this type.
IAL submits the Sign Offs both indicate a surplus in the IAL portfolio, and thus contradict Mr McKeown’s evidence that it held a negative balance.
IAL contends the 16 July correspondence referred to at para 139 above is demonstrative of both the value of the Management Fee as 2% and the fact that MM has withdrawn its Management Fees previously.
IAL submits it is inherently implausible MM did not charge any of its Management Fees, especially in light of FLI100115, an investment which has matured and which has been paid out in full by MM.
IAL submitted that, while it may not be for the Court to determine the merits of the dispute, it is for the Court to consider and determine whether the:
…dispute or off setting claim [has] a sufficient objective existence and prima facie plausibility to distinguish it from a merely spurious claim, bluster or assertion, and sufficient factual particularity to exclude the merely fanciful or futile.[42]
[42]TR Administration Pty Ltd v Frank Marchetti & Sons Pty Ltd (2008) 66 ACSR 67, [71] (Neave, Kellam and Dodds-Streeton JJA).
IAL referred to the observation of the Court in First Equilibrium Pty Ltd v Bluestone Property Services Pty Ltd (In Liq), that:
Mere assertion of a claim or counterclaim is not sufficient. The claim or counterclaim must raise a bona fide or genuine dispute on substantial grounds as to the whole of the judgment debt.[43]
[43](2013) 95 ACSR 654, [21] (Gordon, Griffiths and Farrell JJ).
IAL cited the reasoning of Palmer J in Macleay Nominees Pty Ltd v Belle Property East Pty Ltd, where it was emphasised that a genuine offsetting claim is a claim on a cause of action advanced in ‘good faith’.[44] This was said to mean the claim was ‘arguable on the basis of facts asserted with sufficient particularity to enable the Court to determine that the claim is not fanciful’.[45]
[44]2001] NSWSC 743, [18] (Palmer J).
[45]Ibid.
IAL made reference to my decision in Alpine Valley Flour Mill Pty Ltd v Grainlink (NSW) Pty Ltd, in which I found that an offsetting claim was not genuine, that:
Where an applicant to set aside a statutory demand contends for the existence of an offsetting claim it bears the onus of establishing that it is genuine in the sense of being authentic or bona fide, and real, not spurious, and not frivolous or vexatious. While the threshold for establishing a genuine offsetting claim has been said to be relatively low, an applicant must establish matters beyond mere assertion and that its claim is authentic.[46]
[46][2020] VSC 85, [14] (Gardiner AsJ) (‘Alpine v Grainlink’).
IAL contended it is no bar to rejection of an application under s 459H that the Court needs to form a view as to the authenticity, veracity, or otherwise, of conflicting documentary evidence and the accompanying sworn evidence, without making a final determination. Emphasis was placed on Silcocks in which Moshinky J classified the evidence in favour of the applicant’s document as being very weak, and was prepared to draw conclusions based on inferences from file-notes, emails and other like documents when deciding upon the terms of the operative document.[47]
[47]Silcocks (n 24) [48]–[51] (Moshinky J).
IAL submitted MM’s alleged claim is an example of a non-genuine offsetting claim which is not bona fide or authentic discussed in the authorities. In particular, IAL pointed to:
(a) the timing of the alleged representations;
(b) the alleged amended VPB Further Schedules, (both as to the margin calls and the increases in Management Fees) which were originally sought to be grounded at the necessary point in time by what IAL contends as a serious error or deliberate contrivance and which now rest on the implausible evidence of physical collection;
(c) the proposition that IAL was to provide funds to cover margin calls is contrary to contemporaneous correspondence which suggests that Mr McKeown was keenly aware that VP Bank funds were not available to meet margin calls;
(d) the purported 30 June 2020 statement expressing a negative balance of approximately USD5 million does not accord with other statements for Account U7919030; and
(e) the increase to the Management Fees and the simultaneous failure to deduct them
all appear to have been manufactured or ‘got up’[48] in an attempt to defeat the demand.
[48]Alpine v Grainlink (n 46) [144] and [148], quoting JJMMR Pty Ltd v LG International Corp [2023] QCA 519, [18] (McPherson JA).
IAL contended it follows that the offsetting claim was not raised in ‘good faith’, and that Mr McKeown’s evidence is implausible as:
(a) the Alleged Representations (made orally or via WhatsApp) were never subsequently referred to in any written correspondence despite their purported significance;
(b) neither Mr Purslow nor Forbears were agents of IAL and there is a dearth of evidence suggesting MM operated under the misapprehension that Mr Purslow had the authority to legally bind IAL; and
(c) due to the arrangements IAL had with VP Bank, IAL did not have access to the relevant funds and could not provide them to MM, even if it wished to do so. Mr Purslow and Forbears were both aware of this, and therefore would not have made the Alleged Representations.
IAL referred to Silcocks which demonstrates that to the extent it is necessary, the Court can make a valid finding that it prefers IAL’s documents and narrative to those of MM in the course of evaluating whether the offsetting claims are genuine.
Mr Warner, counsel for IAL, contended MM’s submission that the agreement would have been ‘commercially difficult to rationalise’ or ‘unviable’ without the inclusion of the added words in the Further Schedules has no merit. That was the agreement that MM entered into originally.
Legal principles
I consider that it is necessary because of various features in its evidence, to consider whether MM, which bears the onus, has ‘cleared the hurdle’ of what is often described as a low threshold. For this reason a close analysis and characterisation of that threshold in the case law is necessary.
In his work ‘Assaf’s Winding Up in Insolvency’ the author provides a detailed discussion concerning the approach of the Courts to determining whether a genuine dispute exists (or if the circumstances are such, there is a genuine offsetting claim).[49] After observing that the threshold is a low one and by no means a difficult or demanding one to satisfy, the author, with reference to observations made in settled case law, observes that the Court’s state of mind concerning the existence of a genuine dispute or claim may range from ‘a clear conviction that the debt does not exist’ to ‘an opinion that the genuine dispute hurdle has only just been cleared’.
[49]Farid Assaf, Assaf’s Winding Up in Insolvency (LexisNexis, 3rd ed, 2021) 6.182 – 6.23 (‘Assaf’).
The approach in some authorities is likened to that of a Court considering an application for summary judgment. Reference was made to the observations of the Queensland Court of Appeal in JJMMR Pty Ltd v LG International Corporation[50] where it was observed that the task of the Court in a genuine dispute case is to decide whether there is a dispute ‘such as would warrant subsequent adjudication’. Put in another way, the Court attempts to ascertain whether the alleged dispute or claim raises a ‘triable issue’ in relation to the demand.
[50][2003] QCA 519, [4] (de Jersey CJ).
Assaf makes reference in this context to the decision of Lindgren J in Rohalo Pharmaceutical Pty Ltd v RP Scherer SpA & Pharmagel SpA where it was observed that a creditor will not be entitled to summary judgment if the defendant raised a defence or cross-claim deserving of trial and concomitantly, a defence or cross-claim would not be struck out or dismissed if it raised an issue deserving a trial.[51] An application to set aside a demand involving the extra-curial ‘remedy’ of ‘presumption of insolvency’ under s 459C of the Act is no less draconian than the summary curial remedy of judgment for debt. For this reason, the author observes that the standard of satisfaction which a court requires in being satisfied of the existence of a genuine dispute is not a particularly high one.[52] Mr Assaf states that the task of an applicant to set aside a statutory demand is no more onerous than that which would confront it if it were seeking to meet an application from the creditor for summary judgment.[53]
[51]Assaf (n 49) 6.18, citing Rohalo Pharmaceutical Pty Ltd v RP Scherer SpA & Pharmagel SpA (1994) 15 ACSR 347(Lindgren J).
[52]Assaf (n 49) 6.18, citing Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37, 39 (Lockhart J).
[53]Assaf (n 549) 6.18.
The author draws attention to other principles which come into play in the exercise. First, the Court should not embark upon any extended inquiry and will not attempt to weigh or assess the merits of the dispute. In the present context, as Mr Fary contends, the Court should not engage in an inquiry as to the credit of the deponent of the affidavit filed in support of the application except in extreme cases.[54] Nor should the Court decide or resolve contested issues of fact and law which have a significant or substantial basis. The jurisdiction of s 459H obliges the Court to conclude whether there is a genuine dispute or claim; the Court should not express a view as to the issue of the existence of the debt.[55] The Court’s jurisdiction is restricted to determining whether there is plausible evidence to establish the existence of a genuine dispute or claim, not whether the evidence was disputed or even likely to be accepted at a final hearing of any such claim at a conventional inter partes proceeding.
[54]Assaf (n 49) 6.19, citing Britten-Norman Pty Ltd v Analysis and Technology Australia Pty Ltd (2013) 85 NSWLR 601, [46] (Beazley P, Magher & Gleeson JJA).
[55]Spa Corp Australia Pty Ltd v Myer Stores Ltd [2001] VSCA 89 [1]–[5] (Brooking and Charles JJA) (‘Spa Corp’)
Assaf made reference to the observations of Barrett J in Panel Tech Industries Aust Pty Ltd v Australian Skyreach Equipment Pty Ltd (No 2) where it was observed:
Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow. The court does not engage in any form of balancing exercise between the strengths of competing contentions. If it sees any factor that, on rational grounds, indicates an arguable case on the part of the company, it must find that a genuine dispute exists, even where any case apparently available to be advanced against the company seems stronger.[56] (emphasis added)
[56][2003] NSWSC 896, [18](Barrett J) (emphasis added).
In a similar vein, the Victorian Court of Appeal observed in Spa Corp:
The only question for us is whether the judge erred in determining that there was no genuine dispute. One can of course differ from the judge without deciding that the debt did not exist. A great range of states of mind on what we might call the ultimate question – the existence of the debt – may accompany the view that there is a genuine dispute, ranging from a clear conviction that the debt does not exist to the opinion that the genuine dispute hurdle has only just been cleared.
We think, if we may say so, that, except in a case in which it is as plain as a pikestaff that there is no debt (where bluntness may be in the interests of both sides), judges should, in general at all events, in dealing, whether at first instance or on appeal, with the question of genuine dispute, be at pains to perform the admittedly delicate task of disposing of that question without expressing a view on what we have called the ultimate question. For otherwise, on an application which resembles if it is not in law an interlocutory one, things may be said which embarrass the judge before whom the ultimate question comes.[57]
[57]Spa Corp (n 55) [3]–[4].
Reference was made to the decision of Heerey J in Madagascar Australia Trading Pty Ltd v Ramsay,[58] where there were starkly conflicting versions of evidence; Heerey J held that in such circumstances one should be cautious before seizing on one piece of evidence favourable to the creditor and concluding that there was no genuine dispute.
[58](1998) 28 ACSR 423.
As Assaf observes however, the principle that questions of disputed fact will not be decided in these types of applications does not prevent the Court from investigating the factual basis of a claim. In this context, as observed by McLelland CJ in Eyota, the Court is not ‘required to accept uncritically every piece of evidence put forward by a company attempting to establish that there is a genuine dispute’.[59] The New South Wales Court of Appeal observed in Britten-Norman that inconsistent contemporaneous documents are not necessarily sufficient to displace the existence of a genuine dispute or offsetting claim, notwithstanding that they may pose difficulties for the ultimate proof of the claim. In this regard, the existence of evidence that casts doubt, even significant doubt, on an applicant’s contention that there is a disputed debt or offsetting claim, is not the basis for the rejection of a claim under s 459H.[60]
[59]Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, 785 (McLelland CJ).
[60]Britten-Norman Pty Ltd v Analysis & Technology Australia Pty Ltd (2023) 85 NSWLR 601, [60]–[62] (Beazley P, Meagher and Gleeson JJA).
Dodds-Streeton J in Viarc described the approach to be taken in this way:
While it is not a very exacting standard, on the other hand mere assertion of a dispute or off-setting claim, mere bluster or advancing grounds which are illusory or spurious or insufficiently particularised will not suffice. The Court must not enter into the merits of the dispute, but it is not crossing the line in relation to its legitimate role in these applications to consider evidence which “bears on whether or not the asserted dispute or off-setting claim is genuine”. Indeed, that is its necessary function.
The dispute or off-setting claim should, as has been recognised, have some objective existence, and the plaintiff bears the onus of establishing the genuineness of the dispute or off-setting claim. The plaintiff has not discharged that onus in the present application. In my opinion, the plaintiff’s position conflates the conflicting assertions about the terms of the retainer with a genuine dispute about existence of the debt or a genuine off-setting claim on the basis of facts sufficiently particularised. (emphasis added).[61]
[61]Powerhouse Australasia Pty Ltd v Viarc Pty Ltd [2006] VSC 508 (Dodds-Streeton J)
In Re Wollongong Coal Limited, Black J observed:
I proceed, following Britten-Norman, on the basis that it is not necessary for a party seeking to set aside a demand to lead admissible evidence to establish a “genuine dispute” and that the absence of contemporaneous documentation to support the existence of the dispute, or the existence of contemporaneous documentation inconsistent with a dispute, will not necessarily deprive it of a genuine character. Having said that, it seems to me that there must be a point at which the Court can conclude that a dispute is in fact not “genuine” – or, in the language of the earlier case law, that it amounts to a spurious claim, mere bluster or assertion and does not raise a plausible contention requiring investigation – by reason of a combination of those matters. Otherwise it is difficult to see any circumstance in which any dispute asserted to exist would not be treated as a genuine dispute, and a creditor’s statutory demand would not be set aside, as long as a deponent of an affidavit in support of an application to set aside a demand was prepared to assert and verify its existence.[62]
[62](2015) 110 ACSR 134, 141 [22].
Mr Assaf concludes his review of the relevant principles with the observation that another aspect of assessing genuineness requires that the serious question or plausible contention not be something merely created or constructed in response to the pressure represented by the service of the statutory demand.[63]
[63]Assaf (n 49), citing Creata Aust Pty Ltd v Faull (2017) 125 ACSR 212 [47] (Barrett AJA).
Consideration
The starting point in this matter is that, under the terms of the Deed, there was no mention or provision in respect of an obligation by IAL to provide MM with funds to meet margin calls arising by reason of a falling market. In addition, the Management Fee payable to MM was fixed at 2% under the Deed.
As such, MM’s claims in respect of the Margin Funds and the Management Fees at a rate of 4% both stand or fall on MM being able to plausibly contend that the terms of the Deed were varied or modified by agreement with IAL in the way that Mr McKeown describes.
There are a number of features of MM’s evidence which, when considered collectively, lead me to the conclusion that its claims are not arguable and genuine and do not warrant further investigation in a conventional inter partes setting.
I first turn to Mr McKeown’s evidence in respect of how it is contended the Further Schedules came to be amended to reflect the alleged agreement with IAL to reimburse it for margin calls and increase the Management Fee to 4%.
Mr McKeown’s evidence in his May affidavit was that he was in discussions with unidentified representatives of Forbears[64] between 9 July and 15 July 2019 which he asserts resulted in an agreement that IAL would provide Margin Funds. He does not elaborate on the particulars or details of those discussions in his affidavits other than an assertion as to their outcome. Mr McKeown presents no record of contemporaneous electronic communications regarding this significant matter despite its considerable financial significance to the parties and his evidence that he had 5,000 emails in respect of communications passing between MM and Forbears on behalf of IAL.
[64]In his August affidavit he states that such discussions were with Mr Purslow.
Mr McKeown’s description as to how the final versions of the Further Schedules embodying such amendments were executed and collected from MM’s office is in my view vague and unconvincing. It is striking that Mr McKeown has no record of who was said to have collected those documents and when. IAL’s observations in this regard have much force. They point to the absence of documentary evidence in the form of a log book or recipient signature for the collection of the documents, and the absence of any particulars of with whom or whereabouts the amended Further Schedules were made available for collection. Despite the apparently voluminous contemporaneous email correspondence between Messrs McKeown, Purslow and Macmillan, MM does not adduce any communications referring to the alleged amended Further Schedules being either ready for collection or successfully being picked up and acknowledged. Further, IAL points to the absence of an explanation by Mr McKeown as to why he would sign and return the Further Schedule for FLI100134 by email on 9 September 2019, yet the following day sign the amended Further Schedule and arrange for it to be physically collected. Mr McKeown’s evidence in this regard is successfully confronted by Mr Macmillan’s evidence, which is that all executed Further Schedules were emailed back to him and that he never physically collected any Further Schedules from MM’s offices. This evidence was not answered by Mr McKeown. IAL’s evidence is that Forbears is based in Thailand and IAL in Mauritius, i.e. they do not have a physical presence in Melbourne.
Mr McKeown stated he was not advised by Mr Purslow or anyone on behalf of IAL that the changes made to the revised Further Schedules collected from the MM offices were rejected but there is no evidence of any subsequent communication from MM with IAL or Forbears confirming they were aware of such changes, or any requests by MM of IAL for copies of the Further Schedules which had been executed by IAL. Messrs Futter, Purslow and Macmillan’s evidence is that they never saw a version of the Further Schedules containing such changes until after the issue of the demand.
Mr McKeown’s evidence in respect of the period 28 August 2019 to 9 September 2019 is detailed at paras 58 to 65 above. The thrust of Mr McKeown’s evidence as to the communications taking place in this period is that in a telephone conversation with Mr Purslow on an unspecified date, Mr McKeown stated to Mr Purslow that MM could not agree to the Further Schedule in the form sent by Mr Purslow on 28 August 2019 until a term requiring the provision of Margin Funds was included. There is no written record of that conversation, or of any agreement by Mr Purslow to the inclusion of that provision.
I do not regard Mr McKeown’s evidence to be in support of the position that IAL, through Forbears, agreed to the modification of the Further Schedules in the way he describes as being cogent and convincing. As I have said, Mr McKeown scarcely refers to the issue of the increase in the Management Fee in his evidence.
In his March affidavit, Mr McKeown states that in or about July 2020, he was advised by Mr Purslow via WhatsApp that MM was not to close down the positions and that in accordance with the agreement (presumably a reference to the one he states was reached in July 2019 referred to in the previous para) that Margin Funds would be advanced to MM to cover margin requirements. IAL points to Mr McKeown’s May affidavit where he deposes that those representations were made some six months earlier in February 2020. I agree with IAL’s submission that this evidence in inconsistent with, in particular, Mr McKeown’s email to Mr Purslow of 28 July 2020. In that email, Mr McKeown enquires as to whether there is any possibility to send a further percentage of the invested funds to meet margin calls, with the apparent acknowledgement that Mr McKeown already knew IAL would decline this request and that he was asking this question purely as a formality. I accept IAL’s submission that the enquiries in that email implicitly accept IAL had no obligation to meet a request by MM for Margin Funds, while at the same time Mr McKeown contended that IAL made representations it would meet margin calls.
I also agree with IAL’s submission that the representations allegedly made by IAL in February 2020 rather than July 2020 are not supported by any contemporaneous documentary evidence.
It is to be observed that despite Mr McKeown stating he has 5,000 emails between MM and Forbears relating to the investments, he has not put into evidence any communications at all in respect of negotiations concerning the alleged agreement in respect of margin calls or for the doubling of the Management Fee. Similarly, he states there was a large volume of WhatsApp messages concerning the investments but does not explain how Mr Purslow has deleted messages from Mr McKeown’s devices or account. Mr Purslow has denied any WhatsApp messages were deleted.
It was said on behalf of MM that the inability to access funds to meet margin calls was ‘untenable’ and ‘commercially difficult to rationalise’ but as IAL points out, that is the agreement struck under the terms of the Deed. The Deed was struck before the onset of the pandemic and no provision was made for recourse to IAL for margin calls.
I cannot accept as being plausible a contention made on behalf of MM that there was no reference to or discussion in the numerous communications passing between the parties by email and WhatsApp about matters which gave rise to very significant financial implications, in particular, the variation in IAL’s obligations in respect of the provision of Margin Funds or the increase to the Management Fee.
Another feature of the evidence is the time period between the alleged accrual of MM’s right to have recourse to IAL in respect to the margin calls and there being a documented demand for them. For example, as at 30 June 2020, IAL’s investments in the IB sub-accounts had a negative balance of USD5,273,899.00, referred to in the evidence as the ‘June 2020 negative balance’. It was not until February 2022 that an invoice was rendered in respect of this. I find it quite implausible that a commercial organisation which regarded itself as having the contractual ability to seek reimbursement for very significant sums would not be exercising the right to demand such monies as and when they accrued, rather than waiting some 20 months to render an invoice to them. No explanation was available for the delay in this regard.
IAL suggests the explanation for this might be that MM did not consider that it had the right to seek such recourse for reimbursement from IAL when the margin call position was deteriorating. When the accounts were eventually closed out in March 2021, the negative balance of the accounts was of the order of USD12,213,909.00, which is the amount of MM’s alleged offsetting claim in respect of the Margin Funds reimbursement.
The same observations apply in respect of the claim for Management Fees over a period of five years at a rate of 4%. The terms of the Deed entitled MM to deduct its Management Fee from the investment amount upon the expiry of each six month period of the investment. The notion that a commercial organisation would voluntarily delay being paid such significant sums for such a long period of time as contended by MM is remarkable.
IAL’s position in respect of the Management Fees is that they have been paid and points to communications between Messrs McKeown and Macmillan, into which Mr Purslow was copied, setting out the Management Fee payments in spreadsheet form. There is no substantive response to IAL’s evidence that the Management Fees have in fact been paid and at a rate of 2%. Other than in his affidavit in reply, Mr McKeown responds to that evidence with the simple assertion and no more that such table setting out the alleged payments recorded a ‘mere accounting exercise’. I do not accept Mr Fary’s submission that this response is not so unconvincing that it is capable of being summarily determined that it does not give rise to a genuine offsetting claim.
Another striking feature of the claim for Management Fees at a rate of 4% is that Mr McKeown has scarcely referred to how an agreement came to be reached with IAL in that regard. The only reference to it is in Mr McKeown’s August affidavit where it is said that following telephone conversations in 2018 and 2019, he agreed with Mr Purslow that a 4% Management Fee would be payable.
MM’s evidence is that prior to the issue of the demand, despite it being contended that it had had a claim for nearly AUD12,000,000.00 since 24 March 2023, it did not put a process in train to recover such a significant amount if it regarded IAL as having an obligation to reimbursement for this amount.
The outcome of this application involved a determination of whether Mr McKeown’s evidence in respect of the alleged agreement to vary the Deed in the way described is of sufficient cogency and plausibility to justify a finding that MM’s claim is genuine and arguable. As the case law indicates, in that exercise the court is not to accept the evidence of an applicant uncritically and it is part of the court’s function to consider evidence as to whether the alleged claim is genuine. On the basis of the foregoing analysis of the evidence, I do not consider that MM has satisfied the onus of establishing that its offsetting claims are plausible and arguable.
I will order that MM’s application be dismissed with costs including any reserve costs.
SCHEDULE OF PARTIES
| S ECI 2023 01171 | |
| BETWEEN: | |
| MCKEOWN MARRS PTY LTD (ACN 142 590 958) | Plaintiff |
| - v - | |
| INTERNATIONAL ASSURANCE LIMITED PCC | Defendant |
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