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Lake Coogee Estate Management Pty Ltd v Australian Securities and Investments Commission [2006] FCA 1809 (21 December 2006)

Last Updated: 3 January 2007

FEDERAL COURT OF AUSTRALIA

Lake Coogee Estate Management Pty Ltd v Australian Securities and Investments Commission [2006] FCA 1809

CORPORATIONS – managed investment scheme – failure to register scheme – proposals by investors to complete scheme – land purchased and substantial number of lots sold – developers seeking to wind up scheme upon completion of development – bank finance not finalised – other adverse issues in contradicting submissions not yet addressed – application adjourned to enable finalisation of finance and response to adverse submissions

Corporations Act 2001 (Cth) ss 601E(1), 601EB, 601ED(5), 601EE, 1012A, 1012B, 1012B

Australian Securities and Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778
Australian Securities and Investments Commission v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240
Australian Securities and Investments Commission v Koala Quality Produce Limited (2002) 41 ACSR 628
Australian Securities and Investments Commission v Mount Warren Park (Nominees) Pty Ltd (2005) 56 ACSR 43
Australian Securities and Investments Commission v Young [2003] QSC 29; (2003) 173 FLR 441
Mier v FN Management Pty Ltd [2006] 1 Qd R 339

LAKE COOGEE ESTATE MANAGEMENT PTY LTD (ACN 115 352 504), ALB DEVELOPMENTS NO 1 PTY LTD (ACN 113 785 050) and CITIBOND FINANCE AND INVESTMENTS PTY LTD (ACN 114 597 912) v AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
WAD 286 OF 2006

NICHOLSON J
21 DECEMBER 2006
PERTH

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	WAD 286 OF 2006

BETWEEN:	LAKE COOGEE ESTATE MANAGEMENT PTY LTD (ACN 115 352 504) First Plaintiff ALB DEVELOPMENTS NO 1 PTY LTD (ACN 113 785 050) Second Plaintiff CITIBOND FINANCE AND INVESTMENTS PTY LTD (ACN 114 597 912) Third Plaintiff
AND:	AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Defendant

JUDGE:	NICHOLSON J
DATE OF ORDER:	21 DECEMBER 2006
WHERE MADE:	PERTH

THE COURT ORDERS THAT:

1. Within 28 days the plaintiffs file and serve a response to the adverse submissions appearing in the submissions of the defendant dated 12 December 2006 including, in particular, each of the items summarised in [188] of the submissions.
2. By 2 February 2007 the plaintiffs file and serve evidence of either the grant of bank finance or the state of negotiation for such finance.
3. The proceeding is otherwise adjourned until further directions on 5 February 2007 at 10.30 am.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	WAD 286 OF 2006

BETWEEN:	LAKE COOGEE ESTATE MANAGEMENT PTY LTD(ACN 115 352 504)First PlaintiffALB DEVELOPMENTS NO 1 PTY LTD(ACN 113 785 050)Second PlaintiffCITIBOND FINANCE AND INVESTMENTS PTY LTD(ACN 114 597 912)Third Plaintiff
AND:	AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSIONDefendant

JUDGE:	NICHOLSON J
DATE:	21 DECEMBER 2006
PLACE:	PERTH

REASONS FOR JUDGMENT

1 The plaintiffs seek orders in connection with the winding up of a scheme. The orders require consideration of the appropriate course of the winding up; that is, whether the scheme should be wound up immediately, by the appointment of liquidators or receivers with the usual functions, or whether the scheme should be wound up in a manner that permits the completion of the residential development the subject of the scheme. In addition, consideration needs to be given to the appropriate personal entity who should have carriage of the winding up and the precise terms upon which the winding up should proceed.
2 The plaintiffs’ application is supported by an affidavit sworn on 9 October 2006 of Mr Brian McNamara, a Director of the first and third plaintiffs and a person authorised by the second plaintiff to make an affidavit on its behalf. Additionally there are two affidavits of M/s Glenda Currie of the plaintiffs’ solicitors sworn on 5 and 13 December 2006 respectively. The defendant relies on the affidavit of Mr Steven Shadgett, an investigator with the Enforcement Directorate of the Australian Securities and Investments Commission (ASIC) Western Australian office sworn on 18 October 2006.

PLAINTIFFS’ EVIDENCE

3 The relevant circumstances appear from the affidavit of Mr McNamara. The first plaintiff is a trustee of the Lake Coogee Estate Development Trust (the Unit Trust). The Unit Trust issued an information memorandum inviting investments by way of the purchase of units in the Trust. The memorandum set out information concerning the purchase, subdivision and sale of approximately 56 residential lots at the Lake Coogee Estate. This invitation for investments through the Unit Trust and the management of the development with a view to securing returns for unit holders is collectively described as ‘the scheme’.
4 On 28 September 2006 ASIC wrote to the plaintiffs’ solicitors threatening an application to wind up the scheme. The foundation for this contention was that the various activities involved in the development, constituting the scheme, resulted in it being a management investment scheme under ch 5C of the Corporations Act 2001 (Cth) (the Act).
5 The orders which the plaintiffs seek are that the scheme not be wound up immediately but be wound up after opportunity has been given for completion of the development. The form of orders which they seek would be made up as follows. There would be a definitional section in which the foregoing events would be defined. The first order would be undertakings by the plaintiffs not to take any further steps in offering interests and related matters. The second order envisages undertakings from the second and third plaintiffs that they will use their best endeavours to assist the first plaintiff in the winding up of the scheme. Thirdly, it would be declared that the scheme constitutes a Management Investment Scheme under ch 5C of the Act operated by the plaintiffs, which was required to be registered under s 601EB of the Act and which was not so registered in contravention of s 601ED(5) of the Act. Fourthly, it would be ordered that the scheme be wound up pursuant to s 601E(1) of the Act and the first plaintiff appointed to wind up the scheme in accordance with the compliance plan and subject to the supervision and direction of the supervisor, namely, Mr Shaun Fraser of McGrath Nichol. It is proposed that the winding up is to involve ‘Scheme Completion’ which is defined to mean the completion of sales of all proposed lots comprising the subdivided real property, the final distribution of net proceeds to investors, and the proper completion and discharge of all other aspects of the scheme. The orders make provision that the plaintiffs are to provide the supervisor with unrestricted access to the scheme, books and records. Further, the first plaintiff is to provide monthly reports to the supervisor detailing all receipts and expenditure incurred and reporting on the progress of the winding up of the scheme; and quarterly reports to investors on the progress of the scheme. Further, the supervisor is to be ordered to provide quarterly reports to the Court and to the defendant detailing the progress made up to the date of each report to achieve Scheme Completion in accordance with the compliance plan and other relevant financial details. Finally, it is also to be ordered that the first plaintiff must, within 21 days of completing the winding up of the scheme, provide to the Court and the parties (verified on oath) a report of the actions taken by the plaintiffs in the winding up and all receipts and payments made in the winding up and in complying with the proposed orders.
6 The reason these orders are sought is set out in Mr McNamara’s affidavit. He states that the development was set up, using the Unit Trust, as a vehicle for investors to derive financial gain in the manner set out in the information memorandum. The involvement of the various plaintiffs in the development to date has been as follows. The second plaintiff acquired the land, using in part loan funds advanced to it by the first plaintiff. A facility deed was entered into and a deed of charge secured this loan. The first plaintiff entered into a written agreement with the second plaintiff to manage the development of the scheme (the Management and Service Agreement). The third plaintiff provides project management, consulting and other services to the first plaintiff in its performance of the Management and Service Agreement.
7 The first plaintiff has entered into contracts to sell 42 of the 63 lots comprising the development. It has received deposits totalling $633 000 from the purchasers of the 42 lots. Mr McNamara anticipates that in the normal course of the scheme the remaining 21 lots will be sold within three to six months. He anticipates that construction will begin around March 2007 and be completed around September 2007. He envisages the scheme will then be wound up and capital and profit shares distributed to investors by December 2007. Projections have been prepared by the first plaintiff in respect of the probable net profit and returns to unit holders. The projections show that the projected net profit is likely to be sufficient to enable the ‘A’ class unit holders to receive 100 per cent of the first $1.575 million; the ‘B’ class unit holders to receive a 100 per cent of the further net income, that is, in a range $1.575 million - $2.575 million; and for a further return to be made to A and B class unit holders as envisaged in the information memorandum. Mr McNamara’s evidence is that based on the current projections, A class unit holders should receive a final return of 79 per cent on their capital invested.
8 Mr McNamara’s evidence is that it is not in the best interests of the unit holders that the scheme be wound up. He deposes however that if the scheme is to be wound up, that it should take place after completion of the development under the terms specified in the proposed orders so that unit holders returns are not prejudiced.

FINANCING PROPOSAL

9 ASIC earlier stated to the Court that it was not prepared to agree to the proposed orders in the absence of evidence concerning the availability of finance to enable the scheme to be completed. Consequently, on 11 December 2006 the solicitors for the plaintiffs wrote to the Manager of BankWest, Balcatta Branch asking whether the Bank would, in writing, advise whether it was prepared to provide the further funding, either unconditionally or on conditions that orders in terms of the minute of proposed orders are made in the Federal Court. By letter dated 12 December 2006 the Area Manager of BankWest responded to the first plaintiff that ‘based on our discussions and the information which you have provided to date (including detailed information with regard to the orders you are seeking from the Supreme Court to allow this project to proceed), BankWest is pleased to provide the attached Financing Proposal incorporating our Indicative Terms for your consideration’. The letter stated that the financing proposal was not an offer of finance, it was predicated on orders being made by the Court allowing a proposal to proceed on the basis submitted with the compliance plan being adhered to and the supervisor performing his functions as required. The letter envisaged that upon receipt of further information, the Bank would be able commence due diligence activities (which would include commissioning a valuation report and quantity engineers report) and seek formal accrediting approval. Upon completion of those steps the Bank would then be in a position to make a formal offer of finance, not necessarily in the same terms as the financial proposal. In that financial proposal as attached to the letter, there was a credit limit of $9 250 000 referred to with an unexplained additional reference in parentheses to +5 500 000. A term of 1.5 years is envisaged for the loan.

ASIC’S POSITION

10 The position of ASIC is that it cannot permanently permit the undertakings envisaged in the orders to replace an application in accordance with the Act for appropriate remedies. Therefore it does not have powers to authorise the scheme. The Act provides that such schemes are to be wound up and ASIC agrees with that course. However ASIC does not consent to the proposed method of winding up or to the orders sought. It submits that the appropriate relief is to wind up the scheme now. It makes submissions in order to inform the exercise by the Court of what ASIC accepts is its discretion on the plaintiffs’ proposed form of winding up.

PRIOR AUTHORITIES

11 In seeking these orders the plaintiffs rely on the reasoning of White J in Australian Securities and Investments Commission v Mount Warren Park (Nominees) Pty Ltd (2005) 56 ACSR 43 (Mount Warren Park 56 ACSR). There the Supreme Court of Queensland considered applications by ASIC for the winding up of four unregistered managed investment schemes. Orders were made for each of them to be completed within various periods ranging from 12 to 24 months. The orders incorporated extensive reporting requirements to investors, ASIC and the supervisor appointed to each of the schemes. At [31] White J said:

‘In Tasman Investments Barrett J reviewed a great many of the authorities relating to section 601EE including a number of cases in this jurisdiction. He concluded:

‘Several threads run through these cases. I would respectively adopt the observations of Mullens J in the Atlantic Three case [ASIC v Atlantic Three Financial (Aus) Pty Ltd (2003) 47 ACSR 52] that there can be a tension between what is required, as a matter of public interest, for the protection of the body of investors and what is perceived as a matter of private interest, to be in the interests of investors individually; and that is ultimately a matter of balancing all factors relevant to the particular case in determining who should be entrusted with the task of winding up the scheme and on what terms. At the same time, I remain of the general view (expressed in ASIC v Takaran (No 2)) that the public interest dimension would cause winding up by the existing and contravening operator not to be favoured except in exceptional circumstances.’’

12 ASIC, in reviewing the provisions of the legislation, states it is not the case that winding up is only appropriate where the scheme is insolvent; rather winding up is the remedy for dismantling of an illegal scheme and it operates to protect as far as possible the investors recognising that their money is at risk in forms that do not comply with the requirements of the Act.
13 The submissions for ASIC refer to the reasons of Barrett J in Australian Securities and Investments Commission v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240 at 243-244, at [12]-[13]. There his Honour, in reference to the winding up power provided in s 601EE(2) of the Act, accepted that the powers conferred upon the Court were very broad and that ‘it must be accepted that the court has jurisdiction to settle or prescribe any aspect or element of the basis for winding up or the winding up process which it is necessary to supply because that element cannot be obtained from any other source’. Further, that the statute itself does not attempt to lay down the basis for or method of winding up, so that the Court should be able to realise the assets of the scheme, discharge the liabilities and distribute any surplus among beneficiaries or members in an appropriate way as his Honour outlined. Reference is also made to the reasoning of Keane JA (with whom McMurdo P and Douglas J agreed) in Mier v FN Management Pty Ltd [2006] 1 Qd R 339 where he expressed agreement with these observations of Barrett J adding at [18] as a caveat that a court should be guided by analogies with the law relating to the winding up of companies, partnerships and trusts when deciding on the appropriate procedure for the winding up of a scheme.
14 ASIC also draws attention to the reasoning of Owen J in Australian Securities and Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778. There, his Honour rejected an order allowing persons associated with the schemes to realise assets and distribute them among the investors. His reasons were as follows. Firstly, a receiver’s report showed that some of the investors were in a questionable state and it would be better if an independent person were in control of the recovery processes. Secondly, because of intra-group transactions, it was conceivable there could be disputes concerning true ownership of some assets and the true purport of certain transactions. Thirdly, it was possible in those circumstances that investors could take different views concerning the appropriate method of finalisation. Fourthly, there was evidence of dividends having been paid to investors in returns for certain investments that were in excess of receipts in relation to those investments, so that accounting between various interests was inevitable. Fifthly, the placement of the scheme under the control of an independent external controller would remove conceptual difficulties arising if finalisation were to be effected with further breaches (albeit technical) of the law.
15 On the question of whether the circumstances under which winding up can be carried out by the operators, ASIC draws attention to the reasons of Muir J in Australian Securities and Investments Commission v Young [2003] QSC 29; (2003) 173 FLR 441 at [67], citing from Australian Securities and Investments Commission v Koala Quality Produce Limited (2002) 41 ACSR 628 at 629. There Barrett J stated that:

‘without registration and the regime it entails, necessary controls are lacking, with the result that investors are exposed to a situation in which their funds are not protected in the way the legislation intends them to be protected. This gives rise to serious public interest considerations which justify measures to put an end to the scheme.’

He concluded by stating that he could not ‘think of circumstances in which the court might think it appropriate to decline to order winding up of an unregistered scheme under s 601EE, except perhaps where satisfactory remedial measures of some kind were virtually complete’.

PLAINTIFFS’ CONTENTIONS

16 In their submissions the plaintiffs contend that what makes it appropriate for the orders to be made in their case is that, given the volume of sales already made there will be an avoidance of a fire sale. Further, there will be a saving in costs and also there is a profit to be made upon completion of the scheme.
17 The plaintiffs also rely upon the circumstances of the meeting of investors as detailed in the first affidavit of M/s Currie. Orders proposed to have been made on 24 October 2006 provided, among other things, for the plaintiffs to arrange for a meeting of A class unit holders in the trust to consider a resolution by which the management investment scheme was to be wound up on the basis that the residential subdivision project was completed by the plaintiffs. There are 72 unit holders. A notice of meeting was dispatched to them dated 15 November 2006 together with an explanatory memorandum, a copy of legal advice, an investigative accountant’s report, the minute of proposed orders and the compliance plan, being the attachment to them, a proxy form and a corporate representative form where appropriate. The meeting was called for and held on 1 December 2006. The plaintiffs received 50 valid proxy forms before the meeting and four late proxy forms. In summary, 2 570 000 valid proxy votes were received; 220 000 proxy votes were received late and 255 000 votes taken at the meeting all of which were in favour of the resolution. The total votes received represented 89.6 per cent of the total votes available. Votes were received from 61 of the 72 A class unit holders. There is, consequently, an extremely high level of support among the investors for the orders now sought.
18 ASIC submits that the views of investors are one factor to consider and do not bind the Court. It submits that the Court should take into account both those who voted for the resolution and the interests of those who did not vote. I consider this is the correct approach, although the very high level of those who did vote results in consideration of the factor being a significant one supporting the existence of exceptional circumstances in favour of the course urged by the plaintiffs.

ASIC’S SUBMISSIONS

19 ASIC has given detailed consideration to the circumstances, the scheme and the proposed orders and draws attention to the following matters.

Corporate entities and directors

20 The first plaintiff is owned by Mr McNamara, having two Directors, Mr McNamara and Mr Priestly (‘Management’). The second plaintiff, known as ‘Landbank’ is owned by Property Pty Limited and Carnegie Capital Pty Limited (Carnegie Capital) having a single Director, Mr Priestly. Both of the owner companies are owned by Mr McNamara. Carnegie Capital is an underwriter to the scheme. The third plaintiff (Citibond) is also owned by Mr McNamara.

Information memorandum

21 The information memorandum was distributed in about September 2005 by Citibond, Landbank and Management. It invited offers to subscribe for units in the Unit Trust to develop five properties in the Munster area by subdivision and then sale for residential use. Landbank was identified as the project developer. Management was identified as the trustee. Citibond was identified as the manager and project manager. The memorandum sought to raise $3 500 000 for A class units of $1 each in the Unit Trust. The purpose of the fundraising was to enable the purchase, subdivision and sale of the 56 residential lots. Anticipated returns of 45 – 50 per cent over an estimated two year development period were offered. B class units were held by Citibond and Landbank who at their discretion could transfer some of their entitlements to any profits from the development. The information memorandum identified five properties said to be the subject of signed contracts which would be developed.
22 ASIC submits the scale of the scheme in terms of investors and money raised is relevant when considering the voracity of the plaintiffs’ assertions as to their knowledge of the impropriety of their actions.

Disclosure requirements

23 The information memorandum did not refer to the Management and Service Agreement or the managerial control given to Management or the fees and commissions Management may claim under that agreement. It also did not disclose the fees routed to Mr Priestly and Mr McNamara and the default mechanisms protecting Landbank and Citibond.

The Unit Trust deed

24 ASIC submits that if the vote which was taken from unit holders at the meeting on 1 December 2006 had been to vary by termination the Unit Trust or to vary the rights of the unit holders, it would have required unanimous consent to be affective.

Management and Service Agreement

25 ASIC submits that the issues raised by the investigating accountant in relation to ambiguous wording of some of the fees while being raised with management was not apparently resolved. Therefore, it is said, there is scope for some conflict between the interests of investors and the interests of management in the payment of fees arising from the development. Under the plaintiffs’ proposal the future payment of expenses in the form of fees would be reported and supervised in the form proposed by them.

Finance securities

26 Landbank and Management entered into a finance facility whereby Landbank borrows the money raised by Management and provides to Management a charge on its property and the land to be redeveloped. The investigating accountant has drawn attention to a lack of clarity in the accounting of this arrangement. ASIC submits the security of Management as against Landbank is a factor to be considered in the exercise of the Court’s discretion on the plaintiffs’ application.

Money raised

27 The evidence from Mr Shadgett is that between 1 August and 14 October 2005 there were 62 offers from investors received by the plaintiffs for units in the Unit Trust. In all $2 929 000 was raised. According to the plaintiffs there are 72 investors having raised $3 399 000: see M/s Currie’s first affidavit.
28 ASIC submits that the accumulation of more than 20 investors and the pooling of more that $2 million requires recommendations for the purchase of units in the Unit Trust to be accompanied by a product disclosure document in accordance with ss 1012A and 1012B of the Act and the exemption for managed investment schemes involving less than 20 investors or the accumulation of less than $2 million provided by s 1012D of the Act does not apply. ASIC submits the number of investors compared to the number required for the scheme to be registered and the amount raised compared to the amount that would require a product disclosure document is relevant in assessing the past conduct of the plaintiffs when considering their application.

Investors’ unit trust certificates

29 The Unit Trust balance sheet does not identify Citibond, Landbank or Management as owners of any equity. Citibond’s financial statements do not record an investment in the Unit Trust. This ambiguity in the accounting information and the difficulty with the accounting records being reconciled against scheme documents is, submits ASIC, a relevant factor in considering the exercise of the discretion.

Operation of the scheme

30 Again ASIC submits that the ambiguity in the scheme documents and accounting information (particularly the balance sheet, profit and loss statement and the trial balance) is a factor to be considered. Although, it accepts that the proposed orders provide for the payment of fees in the future to be reported and supervised.

Scheme property acquired

31 Three of the contracts entered into by Landbank at the time of the information memorandum to acquire the scheme property required the excision of a portion of the land for retention by the vendors. The excision is identified in the information memorandum and the scheme progress was updated for investors.

Progress

32 ASIC’s enquiries of the City of Cockburn, where the development is located, indicate that there have been applications to subdivide and develop the scheme property in the manner proposed by the information memorandum. Physically, little has been done to the land by way of development.
33 The extent of completion is a relevant factor for consideration. ASIC submits it is apparent from cases where an operator was permitted to complete a scheme that the scheme was already finished or sufficiently near to completion that the policy concerns behind the operation of the Act were already met or redundant.

Pre-sales of developed lots

34 Landbank has agreed for pre-sales in respect of 42 of the 63 lots. Some pre-sale contracts were arranged by the business Perth Landbrokers as the real estate agents and some sales were made by the parties associated with that agent. Perth Landbrokers is associated with Mr Priestly. His interest in the sale was disclosed to investors who attended the meeting of 1 December 2006. However, his interest in the real estate agent (he is registered as being the person carrying on the business), Perth Landbrokers and the interest of that firm in the settlement of three development sales was not disclosed. ASIC accepts, however, that the plaintiffs proposed that in the future the progress of sales will be supervised and reported to ASIC and investors in the manner outlined in the proposed winding up orders.

Valuation

35 The valuation of the property arranged by the plaintiffs was based on the assumption that the land was to be subdivided into 69 lots for residential use. However, there will now be 63 lots. This changed circumstance was not expressly pointed out to the investors.

Finance

36 BankWest has provided finance and taken registered security over the scheme property. The investigating accountant has pointed out that the primary risk to the development is obtaining further funding in the amount of $5 million from BankWest.
37 ASIC submits that for the plaintiffs to be permitted by the Court to complete the development, they should establish that the finance is available and that they can complete the development in accordance with the orders which they seek. It contends that in Mount Warren Park 56 ACSR at 49 the operators organised the finance before the orders were made. ASIC has been unable to locate any case where the Court has permitted orders as sought by the plaintiffs where the funding was not in place. It submits that if the funding was not raised there would be an immediate concern for liquidity of the scheme which would be reported in accordance with the mechanisms in the proposals before the Court.

Investor correspondence

38 Documents produced by Management under notice to ASIC reveal that at least one investor was paid out his investment upon request without Management observing the terms of the Unit Trust.
39 Management has sent to investors four letters updating them on the progress of the scheme. However, it is said that they were not told of the total pre-sales, the changes to the anticipated costs of the development, the nature of the legal difficulties raised with ASIC or the absence of ASIC’s assent to the proposal to restructure the scheme. It is nevertheless accepted that the proposed orders provide for more regular updates on progress costs and expenses. Nevertheless, ASIC submits the lack of frankness with which the plaintiffs have communicated with investors in the past is a matter the Court should take into account.

Absence of ASIC licences or registration

40 Reference is made by ASIC to the absence of any licence to deal with financial products or the registration of the activities of the plaintiffs or the information memorandum as a managed investment scheme. However, ASIC accepts that possibly no licence will be needed as it appears the plaintiffs do not intend to issue or trade the financial products already issued.

Investor protection

41 ASIC points to the existing non-compliances with the statutory requirements but accepts that the plaintiffs seek to ameliorate the position with the reporting and supervision function proposed.

Meeting of investors

42 ASIC says that it consented to the interim arrangements which facilitated the meeting on 1 December 2006 but it was not fully provided with notice or copies of documents to be considered at the meeting. ASIC submits it does not consider it appropriate to include late or informal proxies in calculating the level of the consent. If those proxies are omitted there is 83 per cent consent from investors.

Summary of relevant factors

43 ASIC points to the following relevant factors to the exercise of the discretion to grant the orders sought:

(a) The size of the funds invested and the number of investors affected.
(b) The rights of investors under scheme documents and how those rights will be affected under the proposed orders.
(c) The fact that unanimous approval was not obtained.
(d) The discrepancies and vagaries in the scheme documents to be administered by the plaintiffs in completion of the scheme as raised by McGrath McNichol and as yet unresolved by the plaintiffs.
(e) The unresolved position of the senior finance provider BankWest in terms of its security being breached by this application and in terms of it providing a further $5 million senior debt to the scheme to enable it to be completed.
(f) The progress that is required to complete the scheme and the time frame for that to happen.
(g) The frankness with which the plaintiffs have dealt with the investors to date.
(h) The complexity caused by having to terminate the scheme completion for what ever reason.
(i) The protective mechanisms offered to investors in the proposal.
(j) The seriousness of the identified contraventions.
(k) The benefits of the plaintiffs completing the scheme compared to an independent administrator bringing it to an end.
(l) The existence of real or possible disputes between investors and the plaintiffs in the course of the winding up which in turn depends on the reliability of the scheme documents and accounting records already in existence and to be created.
(m) The depressing effect of the appointment of an external controller to the scheme including the likely expenses of such a controller.
(n) The amount at stake.
(o) The views of those concerned having made a financial investment.

REASONING

44 There are two reasons why no final decision can be made at this time despite these extensive submissions from both parties. The first is that the submissions made by ASIC have not in terms been answered by the plaintiffs. It is necessary that they should have the opportunity to address each of the issues which ASIC suggests is adverse to the exercise of the discretion in favour of making the orders the plaintiffs seek.
45 The second is that I agree with the submission for ASIC that whether or not the plaintiffs can succeed in obtaining the orders depends quite fundamentally on whether there is finance in place which will demonstrably enable the completion of the development. In my view it is patent that that is not the present position. The letter from BankWest dated 12 December 2006 makes quite clear that the financing proposal is not an offer of finance and that steps must be taken before a formal offer of finance is made.
46 It follows that provided the issue is dealt with promptly, the Court should hold over for final consideration the application for the orders pending the final advice from BankWest and compliance by the plaintiffs with directions giving to them the opportunity of responding to adverse information supplied by ASIC.
47 The BankWest response envisaged the finalisation of Court orders should precede finalisation of finance. However, I consider that the reverse is the necessary position. I see no reason why the Bank’s final position of finance cannot be determined subject to the Court making the orders, including the provisions for reporting and supervision, by the plaintiffs.
48 It was accepted on the hearing of the application that the orders should be modified to provide that no later than 9 February 2007, the applicant file and serve evidence of a grant of bank finance or the state of such financing with liberty to either party to apply. However, considering the criticality of the issue of bank finance and the fact that other adverse items have been put in the ASIC submissions (delivered on the eve of the hearing), I do not consider it would be appropriate to exercise the discretion in favour of making the orders until the outstanding matters are before the Court.
49 The plaintiffs should be constantly aware that they are now in breach of the law and that unless the circumstances are established where the Court’s discretion can be exercised in favour of the orders proposed, particularly by certainty in relation to the bank finance, the Court will not countenance the continuation of the application indefinitely.
50 Accordingly the application is adjourned to enable the above matters to be attended to and appropriate directions made.

I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Nicholson.

Associate:

Dated: 21 December 2006

Counsel for the Plaintiffs:	T Coyle

Solicitor for the Plaintiffs	Lavan Legal

Counsel for the Defendant:	C Slater

Solicitor for the Defendant:	Australian Securities Investment Commission

Date of Hearing:	15 December 2006

Date of Judgment:	21 December 2006

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3	The relevant circumstances appear from the affidavit of Mr McNamara. The first plaintiff is a trustee of the Lake Coogee Estate Development Trust (the Unit Trust). The Unit Trust issued an information memorandum inviting investments by way of the purchase of units in the Trust. The memorandum set out information concerning the purchase, subdivision and sale of approximately 56 residential lots at the Lake Coogee Estate. This invitation for investments through the Unit Trust and the management of the development with a view to securing returns for unit holders is collectively described as ‘the scheme’.
4	On 28 September 2006 ASIC wrote to the plaintiffs’ solicitors threatening an application to wind up the scheme. The foundation for this contention was that the various activities involved in the development, constituting the scheme, resulted in it being a management investment scheme under ch 5C of the Corporations Act 2001 (Cth) (the Act).
5	The orders which the plaintiffs seek are that the scheme not be wound up immediately but be wound up after opportunity has been given for completion of the development. The form of orders which they seek would be made up as follows. There would be a definitional section in which the foregoing events would be defined. The first order would be undertakings by the plaintiffs not to take any further steps in offering interests and related matters. The second order envisages undertakings from the second and third plaintiffs that they will use their best endeavours to assist the first plaintiff in the winding up of the scheme. Thirdly, it would be declared that the scheme constitutes a Management Investment Scheme under ch 5C of the Act operated by the plaintiffs, which was required to be registered under s 601EB of the Act and which was not so registered in contravention of s 601ED(5) of the Act. Fourthly, it would be ordered that the scheme be wound up pursuant to s 601E(1) of the Act and the first plaintiff appointed to wind up the scheme in accordance with the compliance plan and subject to the supervision and direction of the supervisor, namely, Mr Shaun Fraser of McGrath Nichol. It is proposed that the winding up is to involve ‘Scheme Completion’ which is defined to mean the completion of sales of all proposed lots comprising the subdivided real property, the final distribution of net proceeds to investors, and the proper completion and discharge of all other aspects of the scheme. The orders make provision that the plaintiffs are to provide the supervisor with unrestricted access to the scheme, books and records. Further, the first plaintiff is to provide monthly reports to the supervisor detailing all receipts and expenditure incurred and reporting on the progress of the winding up of the scheme; and quarterly reports to investors on the progress of the scheme. Further, the supervisor is to be ordered to provide quarterly reports to the Court and to the defendant detailing the progress made up to the date of each report to achieve Scheme Completion in accordance with the compliance plan and other relevant financial details. Finally, it is also to be ordered that the first plaintiff must, within 21 days of completing the winding up of the scheme, provide to the Court and the parties (verified on oath) a report of the actions taken by the plaintiffs in the winding up and all receipts and payments made in the winding up and in complying with the proposed orders.
6	The reason these orders are sought is set out in Mr McNamara’s affidavit. He states that the development was set up, using the Unit Trust, as a vehicle for investors to derive financial gain in the manner set out in the information memorandum. The involvement of the various plaintiffs in the development to date has been as follows. The second plaintiff acquired the land, using in part loan funds advanced to it by the first plaintiff. A facility deed was entered into and a deed of charge secured this loan. The first plaintiff entered into a written agreement with the second plaintiff to manage the development of the scheme (the Management and Service Agreement). The third plaintiff provides project management, consulting and other services to the first plaintiff in its performance of the Management and Service Agreement.
7	The first plaintiff has entered into contracts to sell 42 of the 63 lots comprising the development. It has received deposits totalling $633 000 from the purchasers of the 42 lots. Mr McNamara anticipates that in the normal course of the scheme the remaining 21 lots will be sold within three to six months. He anticipates that construction will begin around March 2007 and be completed around September 2007. He envisages the scheme will then be wound up and capital and profit shares distributed to investors by December 2007. Projections have been prepared by the first plaintiff in respect of the probable net profit and returns to unit holders. The projections show that the projected net profit is likely to be sufficient to enable the ‘A’ class unit holders to receive 100 per cent of the first $1.575 million; the ‘B’ class unit holders to receive a 100 per cent of the further net income, that is, in a range $1.575 million - $2.575 million; and for a further return to be made to A and B class unit holders as envisaged in the information memorandum. Mr McNamara’s evidence is that based on the current projections, A class unit holders should receive a final return of 79 per cent on their capital invested.
8	Mr McNamara’s evidence is that it is not in the best interests of the unit holders that the scheme be wound up. He deposes however that if the scheme is to be wound up, that it should take place after completion of the development under the terms specified in the proposed orders so that unit holders returns are not prejudiced.

12	ASIC, in reviewing the provisions of the legislation, states it is not the case that winding up is only appropriate where the scheme is insolvent; rather winding up is the remedy for dismantling of an illegal scheme and it operates to protect as far as possible the investors recognising that their money is at risk in forms that do not comply with the requirements of the Act.
13	The submissions for ASIC refer to the reasons of Barrett J in Australian Securities and Investments Commission v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240 at 243-244, at [12]-[13]. There his Honour, in reference to the winding up power provided in s 601EE(2) of the Act, accepted that the powers conferred upon the Court were very broad and that ‘it must be accepted that the court has jurisdiction to settle or prescribe any aspect or element of the basis for winding up or the winding up process which it is necessary to supply because that element cannot be obtained from any other source’. Further, that the statute itself does not attempt to lay down the basis for or method of winding up, so that the Court should be able to realise the assets of the scheme, discharge the liabilities and distribute any surplus among beneficiaries or members in an appropriate way as his Honour outlined. Reference is also made to the reasoning of Keane JA (with whom McMurdo P and Douglas J agreed) in Mier v FN Management Pty Ltd [2006] 1 Qd R 339 where he expressed agreement with these observations of Barrett J adding at [18] as a caveat that a court should be guided by analogies with the law relating to the winding up of companies, partnerships and trusts when deciding on the appropriate procedure for the winding up of a scheme.
14	ASIC also draws attention to the reasoning of Owen J in Australian Securities and Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778. There, his Honour rejected an order allowing persons associated with the schemes to realise assets and distribute them among the investors. His reasons were as follows. Firstly, a receiver’s report showed that some of the investors were in a questionable state and it would be better if an independent person were in control of the recovery processes. Secondly, because of intra-group transactions, it was conceivable there could be disputes concerning true ownership of some assets and the true purport of certain transactions. Thirdly, it was possible in those circumstances that investors could take different views concerning the appropriate method of finalisation. Fourthly, there was evidence of dividends having been paid to investors in returns for certain investments that were in excess of receipts in relation to those investments, so that accounting between various interests was inevitable. Fifthly, the placement of the scheme under the control of an independent external controller would remove conceptual difficulties arising if finalisation were to be effected with further breaches (albeit technical) of the law.
15	On the question of whether the circumstances under which winding up can be carried out by the operators, ASIC draws attention to the reasons of Muir J in Australian Securities and Investments Commission v Young [2003] QSC 29; (2003) 173 FLR 441 at [67], citing from Australian Securities and Investments Commission v Koala Quality Produce Limited (2002) 41 ACSR 628 at 629. There Barrett J stated that:

16	In their submissions the plaintiffs contend that what makes it appropriate for the orders to be made in their case is that, given the volume of sales already made there will be an avoidance of a fire sale. Further, there will be a saving in costs and also there is a profit to be made upon completion of the scheme.
17	The plaintiffs also rely upon the circumstances of the meeting of investors as detailed in the first affidavit of M/s Currie. Orders proposed to have been made on 24 October 2006 provided, among other things, for the plaintiffs to arrange for a meeting of A class unit holders in the trust to consider a resolution by which the management investment scheme was to be wound up on the basis that the residential subdivision project was completed by the plaintiffs. There are 72 unit holders. A notice of meeting was dispatched to them dated 15 November 2006 together with an explanatory memorandum, a copy of legal advice, an investigative accountant’s report, the minute of proposed orders and the compliance plan, being the attachment to them, a proxy form and a corporate representative form where appropriate. The meeting was called for and held on 1 December 2006. The plaintiffs received 50 valid proxy forms before the meeting and four late proxy forms. In summary, 2 570 000 valid proxy votes were received; 220 000 proxy votes were received late and 255 000 votes taken at the meeting all of which were in favour of the resolution. The total votes received represented 89.6 per cent of the total votes available. Votes were received from 61 of the 72 A class unit holders. There is, consequently, an extremely high level of support among the investors for the orders now sought.
18	ASIC submits that the views of investors are one factor to consider and do not bind the Court. It submits that the Court should take into account both those who voted for the resolution and the interests of those who did not vote. I consider this is the correct approach, although the very high level of those who did vote results in consideration of the factor being a significant one supporting the existence of exceptional circumstances in favour of the course urged by the plaintiffs.

32	ASIC’s enquiries of the City of Cockburn, where the development is located, indicate that there have been applications to subdivide and develop the scheme property in the manner proposed by the information memorandum. Physically, little has been done to the land by way of development.
33	The extent of completion is a relevant factor for consideration. ASIC submits it is apparent from cases where an operator was permitted to complete a scheme that the scheme was already finished or sufficiently near to completion that the policy concerns behind the operation of the Act were already met or redundant.

44	There are two reasons why no final decision can be made at this time despite these extensive submissions from both parties. The first is that the submissions made by ASIC have not in terms been answered by the plaintiffs. It is necessary that they should have the opportunity to address each of the issues which ASIC suggests is adverse to the exercise of the discretion in favour of making the orders the plaintiffs seek.
45	The second is that I agree with the submission for ASIC that whether or not the plaintiffs can succeed in obtaining the orders depends quite fundamentally on whether there is finance in place which will demonstrably enable the completion of the development. In my view it is patent that that is not the present position. The letter from BankWest dated 12 December 2006 makes quite clear that the financing proposal is not an offer of finance and that steps must be taken before a formal offer of finance is made.
46	It follows that provided the issue is dealt with promptly, the Court should hold over for final consideration the application for the orders pending the final advice from BankWest and compliance by the plaintiffs with directions giving to them the opportunity of responding to adverse information supplied by ASIC.
47	The BankWest response envisaged the finalisation of Court orders should precede finalisation of finance. However, I consider that the reverse is the necessary position. I see no reason why the Bank’s final position of finance cannot be determined subject to the Court making the orders, including the provisions for reporting and supervision, by the plaintiffs.
48	It was accepted on the hearing of the application that the orders should be modified to provide that no later than 9 February 2007, the applicant file and serve evidence of a grant of bank finance or the state of such financing with liberty to either party to apply. However, considering the criticality of the issue of bank finance and the fact that other adverse items have been put in the ASIC submissions (delivered on the eve of the hearing), I do not consider it would be appropriate to exercise the discretion in favour of making the orders until the outstanding matters are before the Court.
49	The plaintiffs should be constantly aware that they are now in breach of the law and that unless the circumstances are established where the Court’s discretion can be exercised in favour of the orders proposed, particularly by certainty in relation to the bank finance, the Court will not countenance the continuation of the application indefinitely.
50	Accordingly the application is adjourned to enable the above matters to be attended to and appropriate directions made.