ASIC v Global Rule Pty Ltd & Ors [2010] QSC 342

SUPREME COURT OF QUEENSLAND CITATION: ASIC v Global Rule Pty Ltd & Ors [2010] QSC 342 PARTIES: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION (applicant) v GLOBAL RULE PTY LTD (IN ADMINISTRATION) (ACN 133 555 861) (first respondent) AND FREDERICK LESLIE HANSEN (second respondent) AND WILLIAM JOHN MEYWES (third respondent) FILE NO/S: BS8660 of 2010 DIVISION: Trial Division PROCEEDING: Hearing ORIGINATING COURT: Supreme Court at Brisbane DELIVERED ON: 13 September 2010 DELIVERED AT: Brisbane HEARING DATE: 9 September 2010 JUDGE: Martin J ORDER: THE APPLICANT IS TO BRING IN APPROPRIATE MINUTES OF ORDER CATCHWORDS: CORPORATIONS – RECEIVERS, CONTROLLERS AND MANAGERS – APPOINTMENT – GENERALLY – where there was evidence that arguably indicated the first respondent was running an unregistered managed investment scheme – where the first respondent was placed in voluntary administration two days before the hearing – where the second and third respondents were the directors of the first respondent – whether leave should be granted to proceed under s 440D of the Corporations Act 2001 (Cth) – whether the administration should be brought to an end with receivers and managers being appointed to the respondents -- 1 of 8 -- 2 Australian Securities and Investments Commission Act 2001 (Cth), s 13 Corporations Act 2001 (Cth), s 440D, s 447A, s 601ED(1), s 911A(1) ASIC v Burke [2000] NSWSC 694 ASIC v Hutchings [2001] NSWSC 522 ASIC v Marshall Bell Hawkins Limited [2002] FCA 1511 ASIC v Pegasus Leveraged Options Group Pty Ltd [2002] NSWSC 310 National Australia Bank Limited v Norman (2009) 74 ACSR 561 COUNSEL: M H Hindman for the applicant K E Downes SC with B Le Plastrier for the respondents SOLICITORS: Australian Securities Investment Commission for the applicant Minter Ellison for the respondents [1] This is an interlocutory application seeking a number of orders: (a) That the applicant be granted leave under s 440D(1)(b) of the Corporations Act 2001 (Cth) (“the Act”) to proceed with the interlocutory application; (b) Pursuant to s 447A of the Act, that the administration of the first respondent be immediately ended; (c) That the respondents be the subject of a freezing order; (d) That receivers and managers be appointed to the first respondent; (e) That receivers be appointed to the property of the second and third respondent; (f) Other orders in support of those set out above. Global Rule Pty Ltd [2] Global Rule Pty Ltd (“the company”) was registered on 3 October 2008. The second and third respondents are the two directors of the company. Of the 200 fully paid-up shares in the company, the first respondent holds 120 and Robyn Ann Meywes holds 80 shares. The address shown for Robyn Meywes as a shareholder is the same address shown for the third respondent as a director. [3] The company had a functioning website until about December 2009. In November 2009 information posted on that website included the following statements: (a) “Global Rule is a company that creates wealth, provides outstanding financial benefit to its partners and delivers humanitarian aid throughout Australasia.” (b) “It is a unique business model that is having tremendous impact by offering its partners the opportunity to participate in a loan program that returns 1.8% per month (21.6% per annum) in the form of interest and is available to individuals, trusts, businesses and SNSFs.” -- 2 of 8 -- 3 (c) “To date, millions of dollars worth of aid has already been provided by Global Rule to humanitarian groups, orphanages and hospitals. Global Rule is pleased to offer you the opportunity to participate in this unique business to business loan program.” Relief sought [4] In March this year ASIC commenced an investigation under s 13 of the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act”) in relation to potential breaches of ss 601ED(1) and 911A(1) by the respondents. ASIC contends that the respondents have been and are unlawfully operating an unregistered managed investment scheme (s 601ED(1)) and further that the respondents ought to hold an Australian Financial Services Licence covering the provision of financial services but do not (s 911A(1)). [5] In its originating application, ASIC seeks final relief including the appointment of receivers and managers, certain declarations, the winding up of the unregistered managed investment scheme and the winding up of the first respondent as well as associated orders. [6] This application for interlocutory relief originally came before the court on 27 August 2010. On the basis of certain undertakings, the application was adjourned. Material was exchanged between the parties. On 7 September 2010, that is, two days before the adjourned hearing of this interlocutory application, the first respondent was placed into voluntary administration by its directors. [7] The issues for determination are whether the administration should be brought to an end with receivers and managers being appointed to the respondents or should the administration be permitted to continue on the basis of the second and third respondents giving certain undertakings. Stay of proceedings [8] Section 440D of the Act provides that, during the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with except where the administrator gives written consent or with the leave of the court. [9] In circumstances where the administration of the company commenced only two days before the resumption of the adjourned hearing and where, while the administrators have taken some steps, there have not been substantial changes made to the company and where there are allegations about the nature of the business of the company sufficient, at least, to raise substantial suspicions, it is appropriate for leave to be granted to proceed and I grant that leave. Managed Investment Scheme? [10] The interlocutory orders sought do not require that I make a final determination as to whether or not the first respondent was conducting an unregistered managed investment scheme. Whether or not receivers and managers should be appointed, though, does raise the question as to the strength of the applicant’s case as one of the considerations which should be taken into account. A “managed investment scheme” is defined in s 9 of the Act as meaning, among other things, the following: -- 3 of 8 -- 4 “(a) a scheme that has the following features: (i) people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not); (ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders); (iii) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); …” [11] The applicant says that the key elements of the program being conducted by the company demonstrate, at least on a prima facie basis, that the respondents were conducting a managed investment scheme. The elements relied upon by the applicant are: (a) The promotion of the scheme on the company’s website which I have set out above, together with some limited evidence of advertising by way of flyers in which similar statements are made; (b) The company operates by lenders entering into an agreement with it entitled “Revolving Loan Agreement”. The agreement confirms the amount of the loan made by the lenders to the company, the rate of interest payable and the terms for payment of interest and repayment of the principal. It does not state for what purpose the loaned funds are provided. A lender acquires rights to benefits produced by the scheme, the most obvious of which is the interest rate of 21.6 per cent per annum. The applicant relies upon ASIC v Pegasus Leveraged Options Group Pty Ltd [2002] NSWSC 310 and says that it should have been obvious to lenders that the rate of interest offered was not a normal rate of interest and that it would be achievable only by the carrying out of a scheme in which moneys were pooled. I note here that in many of the cases involving managed investment schemes the rate of interest offered is usually extraordinarily high. While a rate of 21.6 per cent per annum is substantially higher than might ordinarily be achieved, it is not in the stratospheric category of some offered rates. On the other hand, it was a rate which was to be achieved at the same time as the company was making donations of a charitable nature to the extent of millions of dollars. The applicant says that the court should be satisfied that the lenders participated in the scheme understanding, or that they ought to have understood, that their funds, at least to some extent, would be pooled. (c) There is evidence to suggest that there are 136 lenders with a total loan balance of $15,000,000. (d) Loan funds had been used to: (i) purchase real estate; -- 4 of 8 -- 5 (ii) be traded by the second respondent on US financial markets; (iii) obtain interests in other companies; (iv) purchase a sailing boat; and (v) purchase real property in the names of the second and third respondents together with other people. (e) There is no evidence that the lenders had any input into the control of the moneys. Indeed, the loan agreement gave them no control rights. (f) The assets of the scheme were not kept separate and in an oral examination of the second respondent it became clear that numerous assets alleged to be those of the scheme were placed in the name of other persons. [12] The loans are unsecured and are specifically not for a fixed lending period. It has some similarities with the scheme considered in ASIC v Hutchings [2001] NSWSC 522. [13] The respondents argued that the evidence to support a finding that what was being conducted was a managed investment scheme is either slim or non-existent. In particular, they point to that part of the definition of “managed investment scheme” that requires as one of its features that “any of the contributions are to be pooled”. While there is no doubt that there has been a pooling of funds to generate the benefits which have been provided, the respondents submit that when read as a whole, the words “to be” direct attention to the objective intention of investors, formed prior to making the contributions. [14] I was referred to a number of authorities which consider the words “to be” and whether they import a particular test of intention. The respondents relied heavily on a decision of the Full Court of the Federal Court in National Australia Bank Limited v Norman (2009) 74 ACSR 561 where Gilmour J, with whom Spender J agreed, observed generally: “[148] In my opinion, the words ‘contributions are to be pooled’ in para (a)(ii) require an intention, objectively discerned, forming part of the “scheme” and formed prior to the making of contributions, that the contributions are to be pooled. That intention may be discerned objectively and variously from documents, discussions or conduct. The subjective evidence of members as to what, and by what means, they understood was the scheme prior to making their contributions would be relevant but not necessarily determinative of this question. … [151] That contributions are in fact pooled, in the sense that they are collected in the same bank account, after contributions have been made but without the requisite prior intention does not, in my opinion, meet the requirement under para (a)(ii) that contributions are ‘to be pooled’. To conclude otherwise would be to ignore the prospective and purposive words ‘to be’ in para (a)(ii). It is also inconsistent with the need for a scheme, in the sense of the programme or plan, to be in existence before contributions are made. -- 5 of 8 -- 6 [152] Accordingly, absent proof of such intention that they are to be pooled, I do not think that the mere fact that moneys are thereafter collected into one bank account meets the definition of a “scheme”, for the purposes of s 9. [153] I do not regard the mere fact that moneys are placed into one bank account by a person with the intention that they be used according to the individual arrangements reached with each person who provided the moneys as constituting evidence of the relevant intention under para (a)(ii). That, in my opinion, is what occurred in this case. I will consider the facts open on the evidence in this respect below.” [15] The reasoning of Gilmour J seems, with respect, to be unexceptional but it is not a matter which is required to be decided now. Of course, whether such an intention existed is a question to be considered in the light of all the evidence including evidence which gives rise to an inference that such an intention was in place. It may well be that on the final hearing of this matter, it is decided that a managed investment scheme was not being conducted. But, on the material before me, I think there is a case which is at least arguable that such a scheme was being promoted and conducted. Appointment of receivers and managers [16] Until Tuesday, 7 September, 2010 the directors of the first respondent maintained that it was solvent. On that day, as I have noted above, they appointed the administrators. Each of the second and third respondents says that the appointment was made on the basis of advice from accountants and legal advice as to the consequences of the accountant’s views. The advice from the accountants was in these terms: “I note the following as a result of my preliminary review: • The accounts are not satisfactorily prepared to enable a full and proper understanding of the position of the company and the trust for which it acts as trustee; and • There appears to be a deficiency of assets to liabilities that is material. My preliminary view is that I have not yet been able to verify that the company is solvent and hold concerns that the company may not be solvent or may not be solvent at some future time.” [17] The applicant submits that there are liabilities in the order of $22,000,000 as against assets in the order of at least $5.7 million. Part of the difficulty in identifying the assets is that property is, for example, held in the name of the second respondent or the second respondent and his wife and the values of some of those properties are not known. [18] The power to appoint receivers and managers to the first respondent arises in the circumstances of this case where an investigation is being carried out under the ASIC Act or the Act of the type currently being conducted by the applicant, and where the court considers that such relief is necessary or desirable for the purpose of -- 6 of 8 -- 7 protecting the interests of a person to whom the respondents are liable, or may become liable, to pay money by way of debt or damages. Receivers and managers of the company [19] The appointment of a receiver is not a step which is lightly taken. There is a need to balance the effect which such an appointment will have with the overriding concern to protect the assets of the company for the benefit of those entitled to them. See ASIC v Burke [2000] NSWSC 694. The appointment of a receiver and manager has been described as being of a “drastic nature” (ASIC v Marshall Bell Hawkins Limited [2002] FCA 1511), and that it should only be made in exceptional circumstances after careful scrutiny. Further, as the court may not require ASIC to provide an undertaking as to damages, special attention must be paid to any submission concerning the detriment which might arise with respect to the making of such an order so far as the respondents and third parties might be concerned. [20] The act of appointing a receiver can be justified, even where there are Mareva orders in place, where the various circumstances do give rise to the necessary concern. [21] In this case, the following matters are relevant: (a) The uncertainty as to the existence and location of assets including investments; (b) The number and identity of claimants and the nature of their claims; (c) The circumstances which give rise to an apprehension that there has been incompetence in the handling of the company’s affairs (particularly where directors were unaware of the solvency or otherwise of the company); (d) Where there must be a serious doubt about the company’s solvency and where the appropriateness of leaving the company in charge of the assets is in doubt. [22] The matters which arise in this case which create concern include: (a) Assets have been purchased in the name of persons other than the company and no security has been provided. (b) There is uncertainty about the number of lenders and the total amount lent. (c) It appears that unsecured loans have been made to the second respondent and his wife which do not appear to be supported by documents and the terms of which are unknown. The loans appear to be in the order of at least $1,000,000. (d) It also appears that significant losses have been suffered by the scheme. I have referred to that above. [23] Of course, the fact that administrators have been appointed must also be taken into account. In these circumstances, though, that, if anything, eases the path towards an order for the appointment of receivers as the control of the company has already been taken out of the hands of the directors. [24] The respondents argued that the appropriate order was to leave the administrators in place. Particular weight was put on the requirements that the Act impose upon the -- 7 of 8 -- 8 directors to cooperate with administrators but, without listing all the differences and similarities between administrators and receivers there does not, in my view, appear to be such a preponderance in favour of retaining administrators that receivers should not be appointed. As became obvious during argument, the appointment of the administrators constituted an event which would allow for demands to be made by lenders for their funds so that the appointment of a receiver does not add to the concern raised about that particular circumstance. [25] I am satisfied that there is property which is in jeopardy in that it is in the names of persons other than the first respondent, or it is overseas, or it is yet to be identified and that it is more appropriate that a court appointed receiver take control of the company to deal with those matters. Receivers of the property of the second and third respondents [26] The applicant seeks an order that receivers of the property of the second and third respondents be appointed. That is sought on the basis that, so far as Hansen is concerned, there is evidence that assets of the scheme are held in his name and, so far as Meywes is concerned, there are grounds to suspect that he has gained an inappropriate financial advantage from moneys put into the scheme and that his assets should be protected by the appointment of receivers. [27] The appointment of receivers to an individual is an extraordinary remedy and one which is not lightly granted. It is, in my opinion, not appropriate in this case having regard to the conduct of the second and third respondents since these proceedings have commenced and, prior to that, when they were the subject of investigation and oral examination by ASIC. Both the second and third respondents offer substantive undertakings and are already the subject of freezing orders. Those factors, together with the absence of any undertaking as to damages by ASIC and the order which I will make to appoint receivers and managers to the company, are sufficient to satisfy me that I should not appoint receivers to the property of the second and third respondents. [28] The draft order proffered by ASIC contained an order for the second and third respondents to provide specified information to any receivers and managers. That order, together with the freezing order, is sufficient in the circumstances. [29] Of course, if during the investigations by the receivers and managers matters arise which provide a basis for making such an order then an application can be made. Orders [30] I require the applicant to bring in appropriate minutes of order. -- 8 of 8 --