Australian Securities Investment Commission v Atlantic 3 Financial (Aust) Pty Ltd (No 4) [2003] QSC 398

SUPREME COURT OF QUEENSLAND CITATION: ASIC v Atlantic 3 Financial (Aust) Pty Ltd (No 4) [2003] QSC 398 PARTIES: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION (applicant) v ATLANTIC 3 FINANCIAL (AUST) PTY LTD ACN 056 262 723 (first respondent) FREDRIC MICHAEL ACKER (second respondent) GERILYN MARIE POLANSKI (third respondent) FILE NO/S: S4426 of 2003 DIVISION: Trial Division PROCEEDING: Applications DELIVERED ON: 27 November 2003 DELIVERED AT: Brisbane HEARING DATE: 27-30 October 2003 JUDGE: Mullins J ORDER: It is directed that Gregory Michael Moloney and Peter Ivan Felix Geroff are justified in refusing to sign the deeds which are respectively in the forms contained in: (a) exhibit “GMM-MLC-16” to the affidavit of G M Moloney filed on 16 September 2003 (doc 109); (b) exhibit “GMM-36” to the affidavit of G M Moloney filed on 16 September 2003 (doc 105); (c) exhibit “GMM-38A” to the affidavit of G M Moloney filed on 16 September 2003 (doc 105); (d) exhibit “GMM-8A” to the affidavit of G M Moloney filed on 16 September 2003 (doc 107); and (e) exhibit “NJA-2” to the affidavit of N J Abercrombie filed on 7 October 2003 (doc 144). CATCHWORDS: CORPORATIONS LAW – UNREGISTERED MANAGED INVESTMENT SCHEME – winding up by the court – where directions sought by court appointed liquidators of unregistered managed investment schemes – where investor proposals providing for the transfer of the assets in the -- 1 of 17 -- 2 schemes to each investor – whether proposed transfers in the interests of investors – whether proposals adequately protect liquidators’ entitlement to remuneration - whether proposed transfers in the public interest generally – directions given Corporations Act 2001 (Cth) Property Law Act 1974 Nelson v Nelson (1995) 184 CLR 538 Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 COUNSEL: P H Morrison QC and S E Brown for the applicant R A Perry for the first respondent and Messrs Hewitt, Pegg and Moxon D J S Jackson QC for the liquidators SOLICITORS: Australian Securities and Investments Commission for the applicant Lynch & Company for the first respondent and Messrs Hewitt, Pegg and Moxon Gadens Lawyers for the liquidators [1] MULLINS J: On 17 July 2003 Fryberg J ordered that 15 unregistered managed investments schemes that were being conducted by the first respondent be wound up pursuant to s 601EE of the Corporations Act 2001 (Cth) (“the Act”). On 19 August 2003 I ordered that Gregory Michael Moloney and Peter Ivan Felix Geroff jointly and severally (“the liquidators”) be appointed liquidators to wind up five of the schemes identified in paragraph 2 of that order. Between 27 and 30 October 2003 I heard together five applications made by the liquidators seeking directions in respect of each of these five schemes. I dealt with the application relating to the Sentry Alliance Pty Ltd scheme in my reasons published on 31 October 2003: ASIC v Atlantic 3 Finance (Aust) Pty Ltd (No 2) [2003] QSC 366. I will deal with the other four applications together in these reasons. [2] The reasons for the appointment of the liquidators to wind up the four schemes to which these applications for directions relate are set out in the judgment which I gave in this proceeding on 19 August 2003: ASIC v Atlantic 3 Financial (Aust) Pty Ltd [2003] QSC 265; (2003) 47 ACSR 52 (“ASIC v Atlantic 3 (No 1)”). [3] The four schemes were identified in the order made on 19 August 2003 as: (a) Mackay Leagues Club Ltd (“Mackay scheme”); (b) Numinko Pty Ltd (“Numinko scheme”); (d) Plymouth Greens Pty Ltd, Atlantic 3 Maryborough Mortgage Pty Ltd Advance (“Plymouth Greens/Maryborough scheme”); (e) Clearview Properties Pty Ltd (“Clearview scheme”). [4] Mr Perry of Counsel who was instructed by Lynch & Company to appear on behalf of the first respondent in respect of the four applications was also instructed by that same firm of solicitors to appear on behalf of three investors, Messrs Hewitt, Pegg and Moxon (“the three investors”). -- 2 of 17 -- 3 [5] In respect of each of the four schemes, a proposal was put to the liquidators by the investors in that scheme which, in general terms, provided for a transfer of the assets of the scheme to each investor, according to that investor’s beneficial interest in the assets of the scheme. The rationale for that proposal was that such a transfer to the investor would eliminate the investor’s investment in an unregistered scheme and if all investors of the scheme sought such a transfer that would result in the winding up of the scheme. By the time of the hearing, there was 100% support for the proposal for each scheme from the investors in that scheme, according to the first respondent’s listing of investors for each scheme. [6] The proposal was put forward by each of the investors in a scheme signing a copy of the deed proposed for that scheme which the first respondent and the three investors now seek the liquidators to sign. [7] The signature of an investor on a proposed deed was obtained, as a result of the three investors sending a letter dated 27 August 2003 to each of the investors in the four schemes which referred to the order made on 19 August 2003 appointing the liquidators to wind up the four schemes and proposed that each of the schemes be wound up by the transfer of the scheme’s securities from the liquidators to each investor in each scheme. It was argued in that letter that the alternative method of winding up by the sale by the liquidators of the underlying assets and the distribution of the proceeds of sale to the investors would in the opinion of the three investors lead to significant losses to investors, because of the costs involved. Apart from enclosing with the letter the proposed form of deeds concerning the schemes in which the investor had invested, the following details were provided to the investor of the proposal: “We believe that a much more attractive method of winding-up for investors and one that will save them many hundreds of thousands of dollars is as follows: 1. That Liquidators transfer each mortgage (and other security) to each investor who wants to take a transfer in the proportion that is the same as their interest in the mortgage i.e. if you have contributed 50% of the invested funds you would have a 50% share of the mortgage. 2. In exchange for the transfer each investor releases the Liquidators from any obligation to pay the investor any monies from the winding-up of the scheme. 3. The mortgages are then transferred into each participating investors name and the scheme is returned to the control of the investors. 4. The investors can, if they wish, appoint Atlantic 3 Funds Management Ltd, a registered managed investment company to undertake the management of the scheme. 5. Atlantic 3 has agreed to release the Liquidators from having to make any payment to it from the winding-up of the scheme. -- 3 of 17 -- 4 6. The Liquidators are also entitled to take their fees incurred to date from the winding-up of the scheme but to avoid this difficulty and permit the transfer, Atlantic 3 has agreed to pay their costs so far as concerns any transferring investor. 7. The investors recognise that Atlantic 3 has a right to receive any expenses incurred by it from the scheme but so as to permit the transfer of the mortgage, each investor acknowledges the right of indemnity and charges his mortgage interest accordingly.” [8] By the time the liquidators convened meetings of investors in each of these four schemes on 5 September 2003, some of the investors had already signed the proposed deeds. At each of the meetings of investors held on 5 September 2003 resolutions were passed by those present that the deeds be executed by the liquidators. An application by the liquidators seeking directions about the signing of the deeds was filed in respect of the Mackay, Plymouth Greens/Maryborough and Clearview schemes on 16 September 2003 and in respect of the Numinko scheme on 17 September 2003. A committee of investors for each scheme was also formed at each meeting of investors held on 5 September 2003. [9] In order to deal with the issues raised on the hearing of the applications, it is helpful to set out the substance of one of the deeds which is typical of the others. I will use the form of deed for the Plymouth Greens/Maryborough scheme. The recitals of the form of deed for the Plymouth Greens/Maryborough scheme provide: “A Prior to 17 July 3003 Atlantic, as trustee on behalf of the Investor, conducted a mortgage scheme known as Maryborough (‘the scheme’). B. In its capacity as trustee Atlantic was the holder of a legal interest as mortgagee, over the properties known as Lots 2, 3, 4, and 5 Horsburgh Place on BUP 10786, County of March, Parish of Maryborough and Lot 4 on RP 108304 and Lot 2 on RP 3719, County of March, Parish of Maryborough (‘the mortgage’). C. In such capacity as trustee Atlantic has the benefit of collateral securities securing the obligations of the borrower under the scheme (‘the collateral securities’). D. The Investor has invested the amount specified in the schedule in the scheme (‘the investment amount’). E. The Investor holds a beneficial interest in the mortgage and the collateral securities in the percentage specified in the Schedule (‘the percentage beneficial interest’). F. On 17 July 2003 the scheme was ordered to be wound-up by order of the Supreme Court of Queensland. -- 4 of 17 -- 5 G. On 19 August 2003 the Liquidators were appointed jointly and severely (sic) to wind-up the scheme by order of the Supreme Court of Queensland. H. On 19 August 2003 the legal interest in the mortgage and collateral securities was vested in the Liquidators as new trustees for the scheme by order of the Supreme Court of Queensland. I. The Investor now wishes to purchase the legal interest in the mortgage and the collateral securities from the Liquidators on the terms and conditions of this deed.” [10] The operative parts of the deed for this scheme are in the following terms: “1. ASSIGNMENT OF LEGAL INTEREST IN SECURITIES The Liquidators assign all their right, title and interest in the mortgage and collateral securities to the extent of the percentage beneficial interest, to the Investor. 2. RELINQUISHMENT OF BENEFICIAL INTEREST BY INVESTOR The Investor shall accept the assignment referred to in clause 1 in full and final satisfaction of the Investor’s entitlement to repayment of principal and interest from the scheme and of the Investors right to participate in the winding up of the scheme to the extent of the percentage of beneficial interest. 3. TRANSFER OF MORTGAGE The Investor shall prepare and deliver a transfer of the mortgage to the Liquidators and the Liquidators shall sign such transfer and cause it to be delivered to the Investor’s Solicitors. 4. STAMP DUTY Any stamp duty payable upon this deed and the transfer referred to in clause 3 shall be paid by Atlantic. 5. LEGAL COSTS Atlantic shall pay the Investor’s costs of the preparation, drawing and engrossing of this deed and any transfer and shall pay all registration fees payable on such transfer pursuant to the Land Titles Regulations 1994. 6. GOVERNING LAW -- 5 of 17 -- 6 The agreement shall be governed by and construed according to the law in force in the State of Queensland and the parties submit to the non-exclusive jurisdiction of the courts in the State of Queensland. 7. ENTIRE AGREEMENT This agreement constitutes the entire agreement made between the parties to this deed concerning the transfer of the mortgage referred to in clause 3 and supersedes all prior arrangements, agreements, representations or undertakings. 8. PAYMENT OF LIQUIDATORS REMUNERATION AND EXPENSES Without derogating from the provisions of orders 6 and 7 made by Mullins J, on 19 August 2003 in Claim No. S4426/2003 Atlantic shall pay the Liquidator’s remuneration costs, charges and expenses incurred by them as Liquidators of the scheme from the date of their appointment to a date seven days after the tender of this Deed to them, to the extent of the percentage beneficial interest. 9. ACKNOWLEDGEMENT OF RIGHT OF INDEMNITY The Investor acknowledges that Atlantic is entitled to be indemnified from the assets of the scheme for all expenses reasonably incurred by Atlantic in or about the execution of the scheme notwithstanding the transfer of the legal interest in the mortgage from the Liquidators to the Investor and the Investor charges the legal interest in the mortgage that it will acquire pursuant to this deed with the payment to Atlantic of such expenses. 10. RELEASE BY ATLANTIC Atlantic releases and discharges the Liquidators from any obligation to pay Atlantic for any costs, charges, expenses, remuneration or interest payment or any other entitlements pursuant to section 72 of the Trust Act 1973 (QLD) which Atlantic may have concerning the scheme or of any obligation to make a distribution to Atlantic from the winding-up of the scheme.” [11] It was common ground amongst the parties that the court has the power to give the directions sought by the liquidators, as to whether they should enter into the deeds put forward in respect of each of these schemes. [12] At the time these applications were heard, ASIC’s application to wind up the first respondent on the just and equitable ground remained to be heard and determined. It was also common ground amongst the parties that these applications could proceed and be dealt with, notwithstanding that the winding up application was outstanding. [13] Because of the potential effect of the winding up of the first respondent on these applications, during the hearing of the applications the first respondent proposed -- 6 of 17 -- 7 that it assign its rights under all the proposed deeds and the joint venture agreement for the Clearview equity scheme to Echocast Pty Ltd, a company which was incorporated on 24 October 2003 and controlled by the second and the third respondents. The proposed deed of assignment between the first respondent and Echocast Pty Ltd was Ex 13. This proposed deed could operate only as an assignment of the rights of the first respondent, without Echocast Pty Ltd being able to undertake the obligations of the first respondent under the deeds which are the subject of these applications. Issues [14] There are a number of issues in common to each of the applications. These are: (a) what weight should be given to the support of the investors for the proposed deed; (b) whether the practical consequence of transferring the scheme asset (namely the mortgage and any collateral securities) to the investors in that scheme would be unmanageable; (c) the need to ensure that the liquidators’ rights in respect of their remuneration and expenses for the work undertaken in winding up each scheme were preserved; (d) what would the public interest require; (e) whether consideration should be given to whether there are creditors of the first respondent arising out of the conduct of any of these schemes. Apart from the general issues, there are also specific issues for particular schemes. I will therefore deal with the general issues, as they apply to all or most of the schemes, and then deal with the specific issues that arise for each scheme. Support of the investors [15] A clear purpose of the regulation of managed investment schemes under the Act is the protection of potential investors in such a scheme. The interests of the investors in each of these schemes was one of the factors taken into account in determining that each of these schemes should be wound up by the liquidators, rather than the first respondent: ASIC v Atlantic 3 (No1). The interests of the investors in each scheme remains a relevant consideration on each of these applications, as the proposed transfer of assets in each scheme to the individual investors necessarily has direct consequences for each investor in bringing to an end the liquidators’ involvement and in how the investment will be held and managed. [16] Support of the investors for the proposal does not necessarily equate to the interests of the investors. The support of the investors reflects the subjective interests of those investors. What each investor subjectively sees as his, her or its interest is not necessarily the same as an objective view of that investor’s interest. [17] At the outset, the attraction for each of the investors in putting funds in each of these schemes was the prospective returns the investor anticipated obtaining from that investment. It can be inferred that the investors’ interests are now directed at ensuring that the return of their funds from the schemes is maximised, by bringing to an end the costs involved in the liquidators’ conducting the winding up of the schemes. That this was the common imperative of the investors was acknowledged by Mr Perry in his submissions: para 30 of Ex 38. -- 7 of 17 -- 8 [18] It is the interests of the investors viewed objectively in the context of other relevant considerations which must be taken into account in considering these applications. I therefore reject the submission made on behalf of the first respondent and the three investors that the 100% support by all investors in all schemes “is the most compelling consideration” in these applications. [19] The calculation that there is 100% support of all investors in respect of the schemes which are the subject of these applications is based on the first respondent’s listing of investors. The liquidators have complaints about the records provided to them by the first respondent in respect of each of these schemes. In the course of giving evidence on these applications, Mr Moloney expressed concern about notification to him from the first respondent of substitutions of investors. Mr Moloney foreshadowed that it may be necessary to call for proofs of debt from each of the investors to ensure that the first respondent’s listing of investors for each scheme was accurate. Any justifiable concern about the identification of investors for each of the schemes could be addressed by the calling of formal proofs of debt from the investors and resolving any issues about the list of investors for each scheme, before the deeds were entered into by the liquidators. Management of each scheme if transfer of interest in mortgage to each investor were implemented [20] I will deal with this issue in respect of each of the Mackay, Numinko and Plymouth Greens/Maryborough schemes, as, strictly speaking, there is no legal mortgage in respect of which any transfer of interest can be made to what have been described as the Clearview debt investors. [21] According to the affidavit of Mr N J Abercrombie, an employee of Lynch & Company, filed on 27 October 2003 there are currently 56 investors in the Mackay scheme, 33 investors in the Numinko scheme and 50 investors in that part of the Plymouth Greens/Maryborough scheme which relates to the investment in the mortgage held in the name of Atlantic 3 Maryborough Mortgage Pty Ltd (“A3MM”). [22] The quantum of each investment ranges from less than $10,000 to greater than $100,000, with most investments being for amounts between $10,000 and $100,000. [23] None of the deeds proposed for each of these schemes specifies how the investors, if they each take a transfer of an interest in the relevant mortgage corresponding to the quantum to that investor’s investment, would manage the mortgage. The position would be that after the transfer there would be multiple mortgagees in respect of each of the mortgages who would need to act in conjunction in undertaking any action as mortgagees. As owners in common of the mortgage, the investors would need to act unanimously in making any decision as mortgagees, other than in respect of a dealing limited to an investor’s interest under the mortgage. [24] Mr Perry submitted that the investors in a particular scheme having made the decision to enter into the deeds and take a transfer of the mortgage, it would be for them to work out how they would manage their investments. Mr Perry conceded that “in some schemes it might, in a functional sense, be difficult, but not unachievable”. That concession was properly made in view of the numbers of investors in each of these schemes and the difficulty in coordinating the actions and -- 8 of 17 -- 9 responses of those investors. It was therefore submitted on behalf of the first respondent and the three investors that potential problems in managing the mortgage transferred to the investors should not preclude the liquidators entering into the deeds for that transfer, as the liquidators should act on the basis that each of those investors was prepared to sign the proposed deed without firm arrangements being made as to the future management of that investment. [25] In view of the fact that the arrangement which is proposed by the investors for the transfer of the mortgage to themselves in each scheme brings about the termination of the winding up of that scheme, it is a matter for the liquidators to be concerned about, as to whether the investors will be left in a position where they can, in practical terms, collectively manage their investments. [26] It is also relevant that the lack of investor concern about being left with an investment that will be difficult to manage has arisen after each investor received a letter from the three investors which makes the suggestion about the future management of the investment that is unlikely to be implemented. I am referring to numbered paragraph 4 of the letter dated 27 August 2003 which suggests that investors could appoint Atlantic 3 Funds Management Ltd (“A3FM”) which is a registered managed investment company to undertake the management of “the scheme”. It is difficult to see how that could resolve the potential problem, if not all investors were prepared to appoint A3FM for the purpose. The advice is also incorrect in referring to the mortgage as a “scheme” after the transfer of a beneficial interest in the mortgage to each investor. All that would exist after such transfers were implemented is the holding of the mortgage by the investors in common. If A3FM proposed to administer the mortgage held by the investors in common in such a way that it became a managed investment scheme as defined in s 9 of the Act, that could happen only after all relevant steps were taken by A3FM to enable such a managed investment scheme to be conducted lawfully. [27] The fact that the proposed deeds would leave the investors in each of these schemes in a parlous situation, as far as being able to look after their respective investments in the relevant mortgage is concerned is a consideration that must weigh against the liquidators entering into the deeds, even though the investors themselves have not articulated this concern. Protection for liquidators’ remuneration and expenses [28] Orders 6 and 7 of the order made on 19 August 2003 which cover the remuneration in respect of the four schemes the subject of these applications in addition to the Sentry Alliance Pty Ltd scheme provide: “6. Subject to the following order, the Liquidators may from time to time receive fair and reasonable remuneration in relation to each Scheme on the basis of their Time Charges plus GST and all reasonable out of pocket expenses deducted from the proceeds of that Scheme, or from the proceeds of sale of any property held as security for that Scheme or the proceeds of any other security or claim against a third party in respect of that Scheme, provided that all expenses that are not referable to a specific Scheme should be apportioned among all the Schemes on a pro-rata basis according to the total amount of principal and interest owing under each Scheme. -- 9 of 17 -- 10 7. The Liquidators shall not be entitled to payment of such remuneration unless the Liquidators:- (a) receive approval from two-thirds in value of the investors in the Scheme; or; (b) if a Committee of Inspection has been appointed in respect of that Scheme, obtain approval from the Committee of Inspection; or (c) obtain approval of the Court; for the payment of such remuneration [29] Although clause 8 in each of the proposed deeds purports to be made without derogating from these orders in respect of the payment of the liquidators’ remuneration expenses, the effect of transferring the mortgage to the investors is that there would no longer be any proceeds of the scheme or property of the scheme from which to satisfy the liquidators’ entitlement to remuneration and reimbursement of expenses. As the liquidators were appointed by the court as independent persons to wind up each of these unregistered managed investment schemes in order to protect the investors of the scheme, the court must take into account the effect of each proposed deed on the likelihood of the liquidators recovering their remuneration and expenses. That is a matter of public interest, in addition to being a matter of interest to the liquidators. It is a relevant consideration against the liquidators entering into each of the deeds that their right to payment of remuneration and expenses from the existing assets of the scheme would be replaced, in effect, by a mere covenant by the first respondent to pay the liquidators’ remuneration and expenses without any supporting security. [30] There is another difficulty with clause 8 of the proposed deed in that it stipulates that the remuneration and expenses of the liquidators will be paid by Atlantic 3 “from the date of their appointment to a date seven days after the tender of this deed to them”. That period has long since passed and the liquidators have undertaken additional work in relation to the subject schemes since that time. Public interest [31] The submission is made on behalf of ASIC that clause 9 of the proposed deed provides for a covenant on the part of each investor to benefit the first respondent which amounts to an acknowledgment by the investor that the first respondent is entitled to an indemnity from the assets of the scheme for expenses incurred by the first respondent in respect of the scheme which would never be enforceable. This is on the basis that the expenses were incurred by the first respondent in undertaking the unlawful operation of an unregistered scheme and it is submitted that the first respondent could not profit from engaging in those illegal activities: Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410, 413, 416-417, 423, 425, 427-428, 432. [32] It is submitted on behalf of the first respondent and the three investors that there was no express or implied prohibition in the Act against the recovery by the first respondent of any expenses which it had incurred in operating the unlawful schemes and that, as a matter of public policy, the court would not refuse to enforce the provisions in the deeds which were directed at the recovery by the first respondent -- 10 of 17 -- 11 from the investors of the expenses which the first respondent had actually incurred in connection with the schemes. [33] The prohibition in s 601ED(5) of the Act against the operation of an unregistered managed investment scheme does not expressly or impliedly deal with the enforceability of an arrangement between the operator of the scheme against an investor for the recovery of expenses incurred in operating the scheme. [34] It is not appropriate to express a view about the enforceability of clause 9 of the proposed deeds relating to the mortgages or clause 8 of the Clearview equity deed in the absence of detail of the expenses sought to be recovered by the first respondent and any prior arrangements which may have existed between the first respondent and these investors for the payment of those expenses. Whether, as a matter of public policy, the court would allow recovery by the first respondent of its expenses pursuant to clause 9 would depend on how that covenant would be characterised in the case of a particular investor, taking into account the different categories of case where the court would not refuse to enforce rights associated with an unlawful purpose, as described by McHugh J in Nelson v Nelson (1995) 184 CLR 538, 612- 613. [35] It is also not necessary to consider the argument that clause 9 would not be enforced as a matter of public policy, because there is another vice identifiable in clause 9 which would justify the liquidators refusing to enter into the deeds which contain a clause in those terms. Notwithstanding that the liquidators were appointed to wind up the schemes for the protection of the investors after the schemes were being operated unlawfully by the first respondent, the proposed deeds seek to confer on the first respondent a charge over each investor’s interest in the mortgage after the transfer pursuant to the deed, but to deny the liquidators the opportunity to be reimbursed from the scheme assets for their remuneration and expenses. The public interest does not support an arrangement that disadvantages the liquidators appointed by the court to wind up the scheme in these circumstances at the same time as the arrangement endeavours to advantage the operator of the unlawful scheme. [36] Another aspect of the public interest is that the decision was made to appoint independent liquidators to wind up these schemes, notwithstanding that the first respondent claimed to be able to conduct the winding up of these schemes on a more cost effective basis. Some consideration must be given to the benefit of continuing the involvement of the liquidators as independent persons in the process of winding up each of these schemes. Interests of creditors [37] It is a usual step in the winding up of a company, before the distribution of the assets of the winding up for proofs of debt to have been called for and lodged by the creditors of the company. It would be expected that the liquidators in the normal course before finalising the winding up of each of these schemes would have advertised and sought proofs of debt from the investors and/or any creditors of the scheme assets. It is likely that debts incurred by the first respondent in operating the schemes unlawfully would have been debts provable against the first respondent, rather than the scheme assets. One of the considerations for whether the liquidators should enter into the proposed deeds is that, by transferring the mortgage to the -- 11 of 17 -- 12 investors according to the quantum of each investor’s investment, there is no opportunity for creditors who may claim to have a charge against the scheme assets to pursue that claim. That would not prevent the liquidators from entering into the proposed deeds, if the liquidators advertised publicly seeking details of any claims of creditors against the scheme assets and resolved those claims, before entering into the proposed deeds. Mackay scheme [38] The background to the Mackay scheme can be found in paras [52] to [55] of ASIC v Atlantic 3 (No 1). The mortgage in which investors’ funds were invested is held over a hotel property in Mackay in respect of which the liquidators have obtained a valuation and advice that a better return to investors is likely to be obtained from marketing the property as a redevelopment site, rather than incurring expenses in putting the property into a tenantable condition, leasing it and then selling it. Based on the advice obtained by the liquidators, they are of the opinion that there is likely to be a significant shortfall to investors upon the sale of the property for redevelopment. The second respondent stated in evidence that he considered that the building (which is described by the liquidators’ valuer as being “in a derelict state”) needed to be tenanted with repair work being undertaken in conjunction with prospective tenants and that after the building had been leased and time allowed to pass for the value of the building to rise, the property should then be sold. [39] The first respondent has been the mortgagee in possession of the property for some time. There are arrears of rates and land tax and no income being generated from the property to meet these outgoings. [40] Despite the support of investors for the proposed deed, it would be unworkable for 56 separate investors to take over the existing mortgage of this non-income producing property. It would also be against the public interest to terminate the winding up on the terms contained in clauses 8 and 9 of the proposed deed. Numinko scheme [41] The background to the Numinko scheme can be seen from paras [60] to [61] of ASIC v Atlantic 3 (No 1). One of the complications with this mortgage is that the first respondent is tenant in common with 15 investors from a mortgage scheme conducted by Delaneys Lawyers who have been referred to as the Delaneys investors. It is a fair observation that the complication of the Delaneys investors remains whether the proposed deed proceeds or not. [42] The mortgage in which investors’ funds were invested is held over a property known as “Downsview Lodge” which is conducted as student accommodation in Toowoomba. The mortgagees, including the first respondent, have been in possession of the property operating the accommodation business conducted from the property for some time. [43] The liquidators have obtained a building condition report that indicates that there are a number of major areas of the building that will require structural repair. The liquidators have also received a notice requiring work to be undertaken pursuant to the Fire and Rescue Services Act 1990. The liquidators are of the opinion that significant further sums are required in order to bring the property to a condition where the best price can be obtained on sale and also to satisfy statutory obligations. -- 12 of 17 -- 13 It is not practical to contemplate that 33 investors who invested in the Numinko scheme through the first respondent could undertake the task of raising the funds to implement the steps required to achieve a sale of this property. The support of the investors for the proposed deed does not outweigh the considerations which fall under the umbrella of public interest which would not justify the liquidators entering into the proposed deed for this scheme. Plymouth Greens/Maryborough scheme [44] Consistent with the order that I made on 19 August 2003, this scheme has been identified as Plymouth Greens/Maryborough scheme, although it is common ground that it is an amalgam of two investment schemes. The background to this scheme, on the material that was available in this proceeding at that time, can be seen from paras [90] to [96] of ASIC v Atlantic 3 (No 1). [45] The proposed deed put for this scheme has been put forward only by the investors in the mortgage held by A3MM. It is a defect in the proposed deed that the first respondent and not A3MM is named as conducting the mortgage scheme and being the holder of the mortgage over the properties identified in that deed. That is sufficient to justify the liquidators’ refusing to enter into the deed proposed for this scheme. [46] Even if that defect were rectified, it would not be appropriate for the liquidators knowing of the interest of the Plymouth Greens investors in the purchase of the Maryborough properties to assign the mortgage over those properties held by A3MM to the Maryborough investors who would have no obligation to consider the interests of the Plymouth Greens investors, when exercising the rights as mortgagees of the Maryborough properties. The support of the Maryborough investors for the proposed deed is of little weight when the proposal completely ignores any rights of the Plymouth Greens investors. [47] It would be unworkable for the mortgage held by A3MM to be transferred to 50 investors. The other public interest considerations are also against the transaction put forward by these investors. Clearview scheme [48] Some background to the Clearview scheme, on the material that was available in this proceeding at that time, can be gathered from paras [98] to [102] of ASIC v Atlantic 3 (No 1). [49] After the order was made on 19 August 2003, there was a dispute amongst ASIC, the liquidators and the first respondent as to the extent of the Clearview scheme. That dispute was resolved and I made orders on 17 September 2003 in the following terms: “1. It is declared that the land described as Lot 6 on Survey Plan 100057 County of Canning Parish of Mooloolah, Title Reference 50222449 (“the Clearview land”) is an asset of the Scheme referred to in Order 2 of the Order of this Court in this matter of 19 August 2003 by the name “Clearview Properties Pty Ltd”; -- 13 of 17 -- 14 2. It is declared that the Clearview land vested in the liquidators of the Scheme by force of Order 3 of the Order of this Court of 19 August 2003; 3. It is declared that the participants of the Scheme referred to in Order 2 of the Order of this Court of 19 August 2003 by the name “Clearview Properties Pty Ltd” include the persons in the categories referred to in paragraph 5 of the five page affidavit of Doctor Fredric Michael Acker filed on 2 September 2003;” [50] The Clearview land is owned by the first respondent which it purchased from the mortgagee exercising power of sale under the first registered mortgage, after the first respondent had been registered as holding the second mortgage over the land. The transfer of the fee simple estate of the Clearview land to the first respondent was free of this second mortgage, as a result of s 86 of the Property Law Act 1974. The land is in the process of being developed for subdivision and sale. Although there is no existing mortgage over the land, there are investors who invested in respect of this scheme, believing that their investment would be protected by a mortgage held in the name of the first respondent. In the affidavit of the second respondent filed on 2 September 2003 relating to the Clearview land (doc 84), the investors who had invested in the existing second mortgage over the land before it was purchased by the first respondent are described as the first investors and the investors who intended to invest in a mortgage to be registered over the land after it was purchased by the first respondent are described as the second investors. The first investors and the second investors have been referred to collectively as the Clearview debt investors. The deed for the Clearview mortgage scheme (which is in similar terms to the other deeds) which proposes the transfer of the mortgage and the collateral securities to the investors in that scheme has been put forward by the Clearview debt investors. Without an existing mortgage in respect of which the proposed transfers under the deed for the Clearview mortgage scheme can take effect, there is no basis, whatsoever, for the liquidators contemplating entering into the proposed deed for the Clearview mortgage scheme. [51] After the order was made on 17 September 2003, the first respondent made a proposal to those investors whom the second respondent had described as investing “in equity” in the Clearview project and as not being part of the Clearview mortgage scheme that each of the Clearview equity investors enter into a deed with the liquidators and the first respondent to wind up the Clearview equity scheme by the liquidators transferring to each equity investor an interest in the fee simple of the Clearview land corresponding to the extent of the beneficial interest of the equity investor in the Clearview equity scheme. The first respondent also proposed to enter into a joint venture agreement with each Clearview equity investor to complete the development, marketing and sale of the Clearview land for the benefit of all investors (both debt and equity) in the Clearview scheme. In practical terms, the development of the Clearview land which was underway when the liquidators were appointed to wind up the Clearview scheme needs to be completed to enable the Clearview debt investors to be repaid and for the Clearview equity investors to realise their investments. [52] Stage 2 of the development of the Clearview land has been partially completed. There is approximately $70,000 owed to the builder. Mr Moloney has made -- 14 of 17 -- 15 enquiries of the builder and consultants involved in the development of stage 1 and ascertained that development costs of approximately $466,000 are required to complete the development of 6 housing lots in stage 2 which would then result in each of the lots being sold for a price that could exceed $300,000. Mr Moloney’s investigations to date have revealed that the lots proposed in stages 3A and 3B may be inferior to those produced in stage 2 and that further investigations would need to be undertaken in order to determine the most appropriate timing and means of realising the property comprising stages 3A and 3B. [53] By the time of the hearing of these applications, there was 100% support of the Clearview equity investors for the proposed deed relating to the Clearview equity scheme and the proposed joint venture agreement. The liquidators therefore on 28 October 2003 filed an amended application in respect of the Clearview scheme seeking directions as to the signing of the deeds relating to the Clearview equity scheme in addition to the deeds relating to the Clearview mortgage scheme. [54] The proposed deed relating to the Clearview equity scheme is in similar terms to the proposed form of deed for the transfer to investors of the mortgage comprising the scheme, except that the proposed deed for the Clearview equity scheme does not contain a clause requiring the transfer of the mortgage to be signed by the liquidators, but includes as clause 10: “10. JOINT VENTURE AGREEMENT The execution by the Equity Investor of a Joint Venture Agreement with Atlantic in the form specified in the Schedule is a condition precedent to the operation of this deed.” [55] The proposed deed for the Clearview equity scheme therefore suffers the same vices as the other proposed deeds by including a clause which is merely a covenant by the first respondent to pay the liquidators’ remuneration and expenses in lieu of the liquidators being able to enforce their entitlement against the assets of the scheme and by including an acknowledgement (supported by a charge) on the part of the equity investor that the first respondent is entitled to be indemnified from the assets of the Clearview equity scheme for expenses reasonably incurred by the first respondent in respect of the equity scheme. There is also no acknowledgement by each Clearview equity investor of the equity interest being subject to any claims by the Clearview debt investors. [56] The joint venture agreement is predicated on an offer by the first respondent to manage and undertake the development, marketing and sale of the Clearview land on behalf of the equity investor and that the equity investor appoints the first respondent as development manager for that purpose. The duties of the development manager are set out in clause 2 of the agreement: “. authorise, approve and commission contractors to complete the work necessary to prepare stages 2 and 3 for sale. . authorise, approve and commission real estate agents to market and sell the land. . engage and commission any necessary town planning, surveying engineering and specialty consultants such as electricity and telecommunications consultants as it considers necessary to complete the development of the land. -- 15 of 17 -- 16 . to prepare and issue tenders for civil works contractors. . engage and contract with consultants. . supervise and liase (sic) with contractors on civil construction works. . make any necessary applications to the local authority concerning the land. . instruct Solicitors to settle the contracts of sale. . distribute proceeds of sale in accordance with this agreement. . pay interest to the first debt investors and the second debt investors until the completion of the development, marketing and sale of the land.” There is no obligation on the first respondent to consult with the equity investor in relation to the performance of any of these duties. [57] It is proposed in the agreement that from the sale proceeds of lots comprising stage 2, the first respondent will distribute those proceeds in payment of the costs of sale, then reimbursement of the first respondent’s expenses incurred “in its capacity as trustee of the Clearview schemes” (which presumably refers to when the first respondent was unlawfully conducting the scheme) and in its capacity as development manager together with any interest payments made by the first respondent to the first or second debt investors. After allowing for the anticipated development costs of stage 3, clause 5 of the joint venture agreement requires the balance of the proceeds from the sale of stage 2 to be paid by the first respondent to the first debt investors in respect of all principal and interest owing to them, then to the second debt investors until they are paid all principal and interests owning to them, and then to the equity investors until they are paid the amount of their equity contribution and interest (calculated at 15% per annum from the date of their contribution). Clause 6 of the joint venture agreement provides for the distribution of the proceeds from the sale of lots comprising stage 3 and sets up the same priorities provided for in respect of the distribution of the proceeds from stage 2, but provides that after the equity investors have been paid their equity contribution and interest, 70% of the remaining balance of the proceeds of sale will go to the equity investors and 30% of the remaining balance to the first respondent which will represent its management fee for undertaking the duties of development manager. [58] There is no suggestion that the Clearview debt investors have either consented to or have any knowledge of the provisions of the joint venture agreement or the Clearview equity deed which affect their interests. [59] It is submitted by ASIC that the proposal in the joint venture agreement will constitute another managed investment scheme that is unregistered. If the proposed Clearview equity deed were entered into by the liquidators with each equity investor, upon the transfer of the respective equity interests to the equity investors, the joint venture agreement, in effect, provides for the pooling of those interests, so that they are managed by the first respondent, without any restriction on the exercise of the powers given by the equity investors to the first respondent as development manager. The hallmarks of a managed investment scheme as defined in s 9 of the Act are therefore present in the proposal contained in the joint venture agreement. -- 16 of 17 -- 17 [60] As the entry by an equity investor into the joint venture agreement is a condition precedent to the operation of the Clearview equity deed entered into by that equity investor, the liquidators could not enter into any Clearview equity deed which contemplates that the equity investor will have entered into the joint venture agreement which provides for the operation of an unregistered managed investment scheme. Even if that were not the case, the vices identified above in relation to the clauses in the Clearview equity deed dealing with remuneration and expenses of the liquidators and the charge in favour of the first respondent for its expenses incurred in connection with the equity scheme and the failure of the Clearview equity deed to deal with the rights inter se between the Clearview equity investors and the Clearview debt investors are sufficient to justify refusal of the liquidators to enter into the Clearview equity deed. Order [61] As the analysis of each proposal has revealed, there are weighty considerations against the liquidators entering into each of the proposed deeds. In those circumstances, the directions sought by the liquidators will be as follows: It is directed that Gregory Michael Moloney and Peter Ivan Felix Geroff are justified in refusing to sign the deeds which are respectively in the forms contained in: (a) exhibit “GMM-MLC-16” to the affidavit of G M Moloney filed on 16 September 2003 (doc 109); (b) exhibit “GMM-36” to the affidavit of G M Moloney filed on 16 September 2003 (doc 105); (c) exhibit “GMM-38A” to the affidavit of G M Moloney filed on 16 September 2003 (doc 105); (d) exhibit “GMM-8A” to the affidavit of G M Moloney filed on 16 September 2003 (doc 107); and (e) exhibit “NJA-2” to the affidavit of N J Abercrombie filed on 7 October 2003 (doc 144). [62] I will hear submissions on the question of the costs of the applications. -- 17 of 17 --