Westeq Ltd and Australian Securities and Investment Commission
[2006] AATA 34
•17 January 2006
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2006] AATA 34
ADMINISTRATIVE APPEALS TRIBUNAL )
) No W2004/228
GENERAL ADMINISTRATIVE DIVISION ) Re WESTEQ LTD Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION
Respondent
DECISION
Tribunal Associate Professor G A Barton, Member Date17 January 2006
PlacePerth
Decision The Tribunal affirms the decision under review. .............(sgd G Barton)...................
Member
CATCHWORDS
CORPORATIONS LAW- responsible entity- registered forestry managed investment schemes- Australian financial services licence-professional indemnity and fraud insurance- relief- relevant considerations- factors external to a particular licensee- relevant investors otherwise protected- practical effect- consideration of matters peculiar to a particular licensee and associated investors or growers postponed to any hearing to suspend or cancel the licence pursuant to section 915C of the Act- decision affirmed.
Old Corporations Act; s784
Corporations Act 2001; s912A (1) (b); s913B; s914A (1) (a) and (b); s915C (1)(a); s915C(4); s1433.
Administrative Appeals Tribunal Act 1975; s37.
Story v NCSC (1988) 13 NSWLR 661; 13 ACLR 225; 6 ACLC 560.
Australian Securities and Investment Commission Policy Statement 131 Managed Investments: Financial Requirements; PS 131.3(c); PS 131.16-19.
Australian Securities and Investment Commission Policy Statement 167 Licensing: Discretionary Powers and Transition; PS 167.40; PS 167.55.
REASONS FOR DECISION
17 January 2006 Associate Professor G A Barton, Member 1. The applicant, Westeq Ltd (‘Westeq’), conducts a managed investment scheme agribusiness growing paulownia trees for harvest and sale (T3). On 21 April 1999 the respondent granted Westeq, then named Plantation Equity Services Ltd., a dealers licence pursuant to section 784 of the old Corporations Act, as defined in section 1410 of the Corporations Act 2001 (‘the Act’), authorising it to operate Paulownia West Coast Project No 3 (‘PWC 3’) and Paulownia West Coast Project No 4 (‘PWC 4’), registered forestry managed investment schemes, and to carry on a securities business of dealing in its capacity as responsible entity of PWC 3 and PWC 4 (T14). The dealers licence included the condition relating to professional indemnity (PI) and fraud insurance set out in para 3 of these reasons. Westeq held the dealers licence until 5 March 2004.
2. On 5 March 2004 the respondent granted Westeq an Australian financial services licence (‘the AFS licence’), which authorises Westeq to carry on a financial services business to operate registered managed investment schemes (including the holding of any incidental property) like West Coast Hardwood Project No 3 (‘WCH 3’) and West Coast Hardwood Project No 4 (‘WCH 4’) in its capacity as responsible entity (T2; T15). PWC 3 and WCH 3 have the same Australian registered scheme number, as do PWC 4 and WCH 4. Westeq is also the manager for West Coast Hardwood Project No 1 (‘WCH1’ ) and West Coast Hardwood Project No 2 (‘WCH 2’) which are prescribed interest schemes. The AFS licence, which replaced the dealers licence, was granted under section 913B of the Act, in accordance with the streamlined licensing procedure for certain regulated principals provided for in section 1433 of the Act which is a transitional provision relating to the Financial Services Reform Act 2001 (‘FSR Act’) (T2). The AFS licence came into effect on 4 March 2004 (T15).
3. Condition 10 of the dealers licence required Westeq, at all times, to maintain an insurance policy covering PI and fraud by officers that:
“(a)is adequate having regard to the nature of the activities carried out by the licensee under the licence; and
(b)covers claims amounting in aggregate to whichever is the lesser of:
(i)$5,000 or
(ii)the sum of the value of all scheme property of registered schemes for which it is the responsible entity” (T14).
4. Condition 17 of the AFS licence requires Weste q to maintain an insurance policy covering PI and fraud by officers that:
“(a)is adequate having regard to the nature of the activities carried out by the licensee under the licence; and
(b)covers claims amounting in aggregate to whichever is the lesser of:
(i)$5 million; or
(ii)the sum of the value of all IDPS property of all IDPSs for which it is the operator and all scheme property of all registered schemes for which it is the responsible entity” (T15).
5. ‘IDPS’ in condition 17(b)(ii) of the AFS licence is a reference to investor directed portfolio services. Condition 17 is a standard AFS licence condition (T13).
6. By sections 914A(1)(a) and (b) of the Act, the respondent could impose and may, at any time, by giving written notice to Westeq, vary or revoke condition 17 of the AFS licence.
7. Westeq maintained PI and fraud insurance until 11 December 2003 when its insurer declined to renew the policy because the insurer had withdrawn from the market (T2; T6). On 9 January 2004 Westeq applied to the respondent to revoke condition 10 of the dealers licence (T3) and on 31 March 2004 it requested that its application be treated as an application to revoke condition 17 of the AFS licence (T9).
8. On 28 May 2004 the respondent refused to vary or revoke condition 17 of the AFS licence under section 914A(1)(b) of the Act (T2) and Westeq applied for review of this decision on 23 June 2004 on the ground that it is unable to reasonably obtain PI and fraud insurance cover (T1).
9. As Westeq is in breach of condition 17 of the AFS licence, it is in breach of section 912A(1)(b) of the Act. In these circumstances, by sections 915C(1)(a) and (4) of the Act, the respondent has a discretionary power to suspend or cancel the AFS licence after giving Westeq, or its representative, an opportunity to appear, and to make any submissions on the matter, at a private hearing before the respondent. The power to suspend or cancel the AFS licence is not punitive and the aim of the hearing would be to establish the facts necessary for the respondent to decide whether the AFS licence ought to be cancelled to protect the public; Story v NCSC (1988) 13 NSWLR 661; 13 ACLR 225; 6 ACLC 560.
10. Mr N Pakes of lawyers Murcia Pestell Hilliard, who appeared for Westeq, tendered documentary exhibits A1 to A11. Mr P Bevilacqua of Counsel appeared for the respondent. Documents T1 to T17 in relation to the decision under review were before the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975. Both parties lodged statements of facts and contentions and made written submissions.
11. The respondent’s pre- FSR Policy Statement 131 Managed Investments: Financial Requirements (‘PS 131’) provides guidance on the financial requirements that a responsible entity must satisfy to have a licence authorising it to operate a managed investment scheme. Relevantly PS 131.3(c) states that in order to obtain such a licence, the applicant must “maintain appropriate professional indemnity insurance and insurance against fraud of your officers. This should cover claims up to, and in aggregate, $ 5 million, or the value of scheme assets, whichever is less (unless you can demonstrate to us that such insurance is not reasonably obtainable); ....” (T12).
12. The insurance requirements of PS 131.3(c) are explained in PS 131.16 to PS 131.19 as follows:
“[PS131.16] In any business there is a risk of funds or assets being misappropriated by employees, owners and other parties. When an entity is managing another person’s money or assets, the risk and impact of fraud may increase. Therefore, we will require as a licence condition, that a responsible entity must have and maintain adequate insurance protection against loss arising from negligent administration or fraud by its officers.
[PS 131.17] The insurance requirements set out in this policy statement take into account:
(a)mandatory professional indemnity insurance requirements under the SIS regime and in other jurisdictions such as the United states and Canada (which have mandatory broker bond and/or insurance requirements); and
(b)professional indemnity requirements in Australia (eg Australian Stock Exchange Ltd).
[PS 131.18] We have not prescribed standard insurance policy requirements, but we have set the lesser of $5 million or the value of scheme assets as the minimum cover. In other respects, it is up to the directors of the responsible entity, and the auditor of the responsible entity, to assess whether the terms of the cover are adequate. Maintaining the required insurance is also a licence condition.
[PS 131.19] You will not be required to obtain this insurance if you can demonstrate to us, at the time of your licence application, that it is not reasonably obtainable.” (AFST 9).”
13. The respondent’s Policy Statement 167 Licensing: Discretionary Powers and Transition (PS 167) explains how its pre- FSR Act policies will apply after the commencement of the FSR Act on 11 March 2002 (T16). It is stated at PS 167.40 that the requirement for responsible entities to maintain appropriate PI insurance as required by PS 131 will be continued during the 2 year transitional period from 11 March 2002 to 10 March 2004; Key terms PS 167.55 (T16). The respondent has continued to apply PS 131 in respect of P I cover since 10 March 2004 and states in its report “Overview of decisions on relief applications from financial service providers” of December 2004 (T17) that it “will only dispense with this requirement where the insurance is not generally available on an industry - wide basis and the responsible entity has adequate alternative arrangements in place to ensure that investors are compensated for any loss or damage arising from negligence by the responsible entity or fraud by its officers” (T17 section 2.15).
14. The Tribunal finds that the evidence in this matter establishes the relevant facts set out in paras 15 to 22 of these reasons.
15. The officers of Westeq are Mr Robert Brodie Dewar, director; Mr Trevor Graham Crouch, director; and Mr Rick Gavin Hopkins, director and secretary.
16. WCH 1 to 4 are fully subscribed and constitute a plantation of approximately 95 000 trees on 288 hectares, divided into 742 woodlots, leased by 220 growers, who pay Westeq annual management fees to maintain their woodlots in accordance with a lease and management agreement. Westeq is responsible for establishing and cultivating the trees and for harvesting, processing and selling the timber. It is expected that the trees will be harvested between 2008 and 2011 (A1). The annual fee for WCH 1 to 3 is $1 672 and that for WCH 4 is $1 214. Westeq employs 3 full time staff to manage and run the day to day activities of the farm and up to 25 part time or contract workers to perform seasonal and other specific tasks on the plantation such as pruning, weed control, pest control and maintenance of the irrigation system (A1). The plantation is on land owned by Farmtech Management Pty Ltd (A1). All entry funds paid by growers to Westeq have been expended to establish and operate the plantation (A1). Annual management fees which amount to approximately $960 000 are generally received by Westeq in advance of the work being done and Westeq will not hold substantial growers' funds before the harvest to commence in 2008 (A1).
17. Westeq was under voluntary administration from 28 December 2001 until 20 September 2002. It maintained PI and fraud insurance from September 2002 until it expired on 11 December 2003 when Mr Rick Hopkins informed the respondent that, over a period of 8 weeks prior to expiry, Westeq had used 4 insurance brokers to approach over 35 underwriters for PI and fraud insurance cover without success save that one broker had advised that cover was available from Lloyds of London at an approximate premium of $210 000 (T3). The fact that Westeq was under voluntary administration is a principal reason for its difficulty in obtaining PI and fraud insurance.
18. All of Westeq’s plant and equipment is comprehensively insured for loss and theft. As at 30 June 2004 the written down book value of Westeq's office equipment was $2 730 and that for its plant and equipment was $108 426 (A1).
19. Westeq has strict operating procedures to reduce the risk of PI or fraud insurance claims. All its executive staff are contracted from Precision Finance and Insurance Services Pty Ltd. ('PFI') and they are required to comply with Westeq's procedures and code of practice. PFI provides services ranging from executive management to accounting and administration and it has PI insurance cover to indemnify Westeq for any acts of negligence of its employees who do not have access to Westeq bank accounts or funds. Access to Westeq funds requires the signature, or password in the case of electronic transactions, of at least one director and one other person (A1).
20. Westeq has a comprehensive operations manual that conforms to occupational health and safety standards (A1).
21. Since 2002 directors of Westeq have provided over $700 000 to finance various works on the plantation and they, members of their families, and their friends are participants in WCH1, 3 and 4 (A1).
22. Westeq is wholly owned by Planteq Pty Ltd ('Planteq') as trustee for entities associated with Westeq's directors. On 20 May 2003 Planteq offered Westeq a revolving loan facility limited to $1 000 000 or any other amount as may be agreed between the parties (T6). Mr Robert Dewar and Mr Graham Crouch are the directors of Planteq (A1) and the offer of a revolving loan facility with a limit of $1 000 000 remains open for acceptance by Westeq (A11).
23. The respondent’s delegate made the decision under review because he was not satisfied that the level of PI and fraud insurance cover that Westeq requires is not available, on an industry-wide basis, generally to responsible entities of managed investment schemes or specifically to responsible entities of forestry schemes, and that Westeq has adequate alternative arrangements in place to ensure that its investors are compensated for any loss or damage arising from any negligence or fraud of its officers. He was also satisfied that Westeq's circumstances do not justify a departure from the respondent's policy in relation to relief from the AFS licence requirement to maintain PI and fraud insurance (T2).
24. Westeq submitted, on a number of grounds, that the Tribunal vary its AFS licence by the revocation of condition 17 pursuant to section 914(1)(b) of the Act.
25. Westeq contended that, for the purpose of PS 131.19, it had demonstrated to the respondent at the time it applied for the AFS licence that P I and fraud insurance was not reasonably obtainable by it. PS131.19 speaks only in terms of the availability of insurance to the individual licensee and says nothing of adequate alternative arrangements to compensate investors for loss or damage arising from any negligence of the responsible entity or fraud of its officers. In any event, Westeq contended, the requirement that the insurance is not available on an industry-wide basis is vague and uncertain because the risks of a managed investment scheme agribusiness differ from scheme to scheme depending on the particular business activity and its location. It was further submitted by Westeq that in determining an application such as that under review, the respondent is required to take the individual circumstances of the licensee into account something which it is effectively prevented from doing if relief is only to be granted when the insurance is unavailable on an industry-wide basis.
26. Alternatively Westeq submitted that the requisite insurance was not available on an industry-wide basis, the industry being Western Australian hardwood tree plantation managed investment schemes not associated with a listed company, and that satisfactory arrangements are in place for the protection of growers. This submission was based on advice to Westeq from its insurance brokers that PI insurance is exceptionally difficult to obtain for any agricultural style managed investment scheme that is not associated with a listed company, and Westeq's proposal that the documentation relating to the revolving loan facility referred to in para 22 of these reasons be amended to make an amount of $1 000 000 available to Westeq to meet PI and fraud type claims.
27. Westeq submitted that the Tribunal should have regard to the types of risks generally covered by PI and fraud insurance and the limited exposure of Westeq growers to them.
28. Section 914A of the Act confers an unrestricted discretionary power on the respondent to impose conditions, or additional conditions, on the AFS licence, or to vary or revoke them, either on its own initiative or in response to an application from Westeq and, by section 915C, the respondent has a discretion to suspend or cancel the AFS licence if Westeq does not comply with the conditions on it.
29. Condition 17 of the AFS licence is a standard condition imposed by the respondent to protect Westeq's growers against any loss that may arise from its negligent administration or fraud by its officers. It was not disputed, and the Tribunal finds, that condition 17 was imposed for a proper purpose.
30. The respondent’s decision not to revoke condition 17 of the AFS licence was taken because its delegate was not satisfied that the insurance Westeq required when it applied for the AFS licence was not available industry-wide and that Westeq had adequate alternative arrangements in place to ensure that its investors are compensated for any loss or damage arising from any negligence or fraud of its officers. The Tribunal finds that these are relevant considerations in exercising a discretionary power to vary or revoke condition 17 given its undisputed purpose. They reflect a policy of dispensing with the condition for PI and fraud insurance on the basis of factors external to a particular licensee and only in circumstances where relevant investors are otherwise adequately protected, an approach which, in the Tribunal's view, is appropriate for a standard licence condition to protect those investors. The practical effect of this approach is that a consideration of matters peculiar to a particular licensee and associated investors or growers is postponed to any hearing to suspend or cancel the licence pursuant to section 915C of the Act. The Tribunal finds that the fact that this result is not clearly encapsulated in the respondent's policy guideline PS131.19 does not have the legal effect that the respondent was obliged to make the decision under review on the basis of Westeq's individual circumstances.
31. The Tribunal finds that the evidence does not establish that PI and fraud insurance was not available to Westeq on an industry-wide basis when it applied for the AFS licence even assuming that 'industry', for this purpose, is limited to agricultural style managed investment schemes not associated with a listed company. Westeq was uninsurable when it applied for the AFS licence for reasons related to its voluntary administration. In any event the offer of a revolving loan facility referred to in para 22 of these reasons is not an adequate alternative arrangement to ensure that Westeq growers are compensated for any loss occasioned by Westeq's negligence or by the fraud of its officers. This fact is not changed by the proposal to amend the offer documentation to make the funds available to Westeq to meet PI and fraud type claims.
32. So the Tribunal finds there are no grounds for it to set aside the decision under review and to exercise the discretion conferred by section 914A(1)(b) of the Act to revoke condition 17 of the AFS licence.
33. The Tribunal affirms the decision under review.
I certify that the 33 preceding paragraphs are a true copy of the reasons for the decision herein of Associate Professor G A Barton, Member
Signed: .........(sgd D Brodie)....................
AssociateDate/s of Hearing 23 February 2005
Date of Decision 17 January 2006
Counsel for the Applicant
Solicitor for the Applicant Mr N Pakes of Murcia Pestell Hilliard
Counsel for the Respondent Mr P Bevilacqua
Solicitor for the Respondent
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