Norman, in the matter of The Executors and Trustees of the Deceased Estate of McFarlane v McFarlane [2009] FCA 14 (15 January 2009)

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Norman, in the matter of The Executors and Trustees of the Deceased Estate of McFarlane v McFarlane [2009] FCA 14 (15 January 2009)

Last Updated: 19 January 2009

FEDERAL COURT OF AUSTRALIA

Norman, in the matter of The Executors and Trustees of the Deceased Estate of McFarlane v McFarlane [2009] FCA 14

Corporations Act 2001 (Cth) ss 9, 601ED, 601EE
Bankruptcy Act 1966 (Cth) s 244



Australian Securities and Investments Commission v Commercial Nominees of Australia Ltd [2002] NSWSC 576; (2002) 42 ACSR 240 referred to
Re Stacks Managed Investments Ltd (as responsible entity of Premium Mortgage Income Fund) [2005] NSWSC 753; (2005) 219 ALR 532 referred to
Australian Softwood Forests Pty Ltd v Attorney-General (NSW) [1981] HCA 49; (1981) 148 CLR 121 referred to
Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (2000) 35 ACSR 620 cited
Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339 referred to
Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd [2002] NSWSC 310; (2002) 41 ACSR 561 referred to




IN THE MATTER OF THE UNREGISTERED MANAGED INVESTMENT SCHEME OF ALLAN MCFARLANE (DEC’D)

TREVOR GILBERT NORMAN v THE EXECUTORS AND TRUSTEES OF THE DECEASED ESTATE OF ALLAN MCFARLANE


SAD 135 of 2008



MANSFIELD J
15 JANUARY 2009
ADELAIDE

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SAD 135 of 2008

IN THE MATTER OF THE UNREGISTERED MANAGED INVESTMENT SCHEME OF ALLAN MCFARLANE (DEC’D)

BETWEEN:	TREVOR GILBERT NORMAN Plaintiff
AND:	THE EXECUTORS AND TRUSTEES OF THE DECEASED ESTATE OF ALLAN MCFARLANE Defendant

JUDGE:	MANSFIELD J
DATE:	15 JANUARY 2009
PLACE:	ADELAIDE

REASONS FOR JUDGMENT

INTRODUCTION

1 On 28 November 2008, I declared that a Scheme operated by Allan McFarlane (deceased) (McFarlane) was a managed investment scheme as defined in s 9 of the Corporations Act 2001 (Cth) (the Act) which was required to be registered pursuant to s 601ED(1) of the Act, but was not so registered, so that McFarlane was operating the scheme in contravention of s 601ED(5) of the Act.

2 Pursuant to s 601EE of the Act, I ordered that the Scheme be wound up. I also appointed Nicholas Cooper and Andrew Strazdins as joint and several liquidators of the Scheme (the Liquidators).

3 The scheme was defined in the order in the following terms:

For the purposes of this Order "the Scheme" means the managed investment scheme operated by Allan McFarlane (deceased) ("McFarlane") whereby:

(a) members of the public (the "scheme investors"), at the request of McFarlane, invested moneys with McFarlane to be held on trust for them, by way of payments into a National Australia Bank Account, BSB 085005 account number 049097085 in the name of "McFarlanes Chartered Accountants Trust Account" ("the Account");

(b) the investors’ moneys were pooled in the Account;

(c) the purpose of the investment and of the pooling was for McFarlane to invest the pooled moneys in other investments to achieve further financial benefits for scheme investors;

(d) McFarlane had day to day control over the moneys obtained from investors;

(e) McFarlane misappropriated the moneys of scheme investors.

4 I further ordered pursuant to s 601EE(2) of the Act that the Scheme should be wound up as if it were a company, and that the Liquidators should have all the powers and responsibilities of a liquidator under the Act as if the Scheme were a company.

5 The Scheme property was described in Order 7 of the orders in the following terms:

7.1 the property and rights of each of the scheme investors in the Scheme; 7.2 any and all moneys in the Account;

7.3 any or all documents concerning the Account or its operation, or the making of payments by scheme investors;

7.4 any and all causes of action (or other rights) in relation to: 7.4.1 the Account, 7.4.2 the Scheme, 7.4.3 any payment made to or from the Account, or 7.4.4 scheme investors’ participation in the Scheme;

which are held by any one or more of the scheme investors as at the date of this order, whether jointly or severally;

7.5 any and all traceable proceeds or assets from: 7.5.1 the Account, or

7.5.2 contributions made to the Scheme or the Account by the scheme investors.

For the avoidance of doubt this paragraph of the Order shall be construed widely, and shall include but not be limited to any causes of action held by one or more of the scheme investors, arising partly or wholly because of the Scheme, against third parties provided that nothing in this Order shall apply to any divisible property of McFarlane within the meaning of the Bankruptcy Act 1966 (Cth).

6

There were complementary orders to which I do not presently need to refer.

7 I indicated that I would in due course publish brief reasons for the making of those orders. These are my reasons for doing so.

BACKGROUND

8 For many years McFarlane practised as a business advisor and chartered accountant under the name "McFarlanes" in South Australia. He died in a motor vehicle accident on 16 June 2008. It quickly emerged that there were significant creditors in his estate, and that it was unlikely that there would be assets in his estate sufficient to meet those creditors’ claims. On 3 September 2008 Bruce Carter (the Trustee) was appointed the trustee of the bankrupt estate of McFarlane pursuant to s 244 of the Bankruptcy Act 1966 (Cth). He has since been involved in identifying and realising the assets of McFarlane’s estate, including two properties at Stirling and Kapunda. He has confirmed, following a creditors’ meeting of 18 September 2008, that the estate has unsecured creditors in excess of $21m and relatively little in the way of uncharged assets available to meet those liabilities. The Trustee also has ascertained that the vast majority of the creditors of the estate, whose debts are in excess of $20m, are persons who had deposited funds with McFarlane for investment by him, as distinct from trade and other unsecured creditors of the estate.

9 The plaintiff is one of those investors. Between January 2001 and February 2008, he, either directly or through trusts and entities controlled by him, had deposited nearly $1m with McFarlane for investment by him.

10 On 8 September 2008, the plaintiff applied for orders, including a declaration that McFarlane operated a managed investment scheme which required registration, but was not registered under the Act contrary to s 601ED(5) of the Act, and for an order pursuant to s 601EE that the Scheme be wound up. That application was initially stood over pending the first creditors’ meeting to be conducted by the Trustee. It was then listed for hearing on 28 November 2008 when I made the orders referred to above.

11

The principal residence of McFarlane was, to his death, jointly owned by himself and his wife. It was mortgaged to the National Australia Bank, securing indebtedness of some $3.15m. It has since been sold for $3.1m, so the net proceeds of sale available to the estate from that property will not be sufficient to fully discharge the mortgage to the National Australia Bank. Obviously whilst that debt remains outstanding it will continue to accrue significant interest liability.

THE APPLICABLE LAW

12 The Court has clear power under s 601EE to order winding up of a managed investment scheme which has not been registered in contravention of s 601ED(5). The range of orders which may be made is unrestricted: s 601EE(2), and see the observation of Barrett J in Australian Securities and Investments Commission v Commercial Nominees of Australia Ltd [2002] NSWSC 576; (2002) 42 ACSR 240 at [13] and of White J in Re Stacks Managed Investments Ltd (as responsible entity of Premium Mortgage Income Fund) [2005] NSWSC 753; (2005) 219 ALR 532 at [32].

13 A management investment scheme is defined in s 9 of the Act. In essence, it requires a "program or plan of action": see Australian Softwood Forests Pty Ltd v Attorney-General (NSW) [1981] HCA 49; (1981) 148 CLR 121 at 129, which involves the pooling of funds of a number of persons: see Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (2000) 35 ACSR 620. There must be consideration for the pooling of funds in the grant of rights or interests to benefits to be generated from the use of those funds: Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339 at [46]. The scheme must therefore contemplate the generation of benefits under a common enterprise – that is, financial benefits or benefits which are rights or interests in property – from the funds contributed. And, the contributors should not have the day to day control of the operations of the scheme, ie they should not engage in the acts which constitute its management or the carrying out of its activities: see Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd [2002] NSWSC 310; (2002) 41 ACSR 561 at [55].

FINDINGS

14 On the evidence, I was satisfied as to the existence of a managed investment scheme operated by McFarlane, which involved him inviting the investors to deposit funds into an account operated by him for the purpose of the investors participating in the financial benefits earned from the investment of those funds.

15 There is evidence that McFarlane approached friends, clients and associated persons to invest monies with or through him in interest bearing accounts. There is clearly evidence that a significant number of persons did so, well in excess of the 20 persons (the minimum number of investors required to impose upon McFarlane the obligation of registration of the Scheme). As noted above, it appears that investors had deposited funds in excess of $20m with McFarlane by the time of his death. Those funds were apparently then received by McFarlane into a trust account which he sometimes described as the "McFarlanes Trust Account". It is also clear that the Scheme was required to be, and was not, registered contrary to s 601ED(5) of the Act.

16 As I have indicated, I am also satisfied that the plaintiff was one of the investors or members of the Scheme. He is, therefore, entitled to apply for its winding up (s 601EE(1) of the Act).

DISCRETION

17 The Court has discretion as to whether to order the winding up of the Scheme in the circumstances. The issue which senior counsel for the plaintiff, and in a neutral way counsel for the Trustee, addressed was principally whether there was utility in making the orders which I made where the Court had already appointed the Trustee as trustee of the bankrupt estate of McFarlane. There is no suggestion that the Trustee has not acted expeditiously and competently in the administration of the bankrupt estate. Nor is there any suggestion that he will not continue to do so.

18 However, there are several factors which influenced me to make the orders which I made notwithstanding those circumstances.

19 The first, and principal, factor derives from the fact that the principal potential source of funds either to the investors in the Scheme, and possibly more generally to the creditors of the estate, is a cause of action or causes of action against McFarlane’s bankers, or others involved in the administration of the funds received. It is common ground that such a cause of action, if available, is likely to be the principal avenue of further funds becoming available either to the investors in the Scheme or to the estate. That is because it now appears that, at least to a very significant degree, McFarlane did not invest funds deposited with him but applied them to his own purposes, so that either they have been dissipated or are no longer traceable.

20 From the point of view of the Scheme investors, presumably the potential cause of action involves exploring whether McFarlane’s bank which conducted the trust account, or some other entity, was or had reason to be aware of the general nature of the Scheme, in particular the source of funds deposited by McFarlane, and somehow acted so as to permit those funds to be applied by McFarlane in ways other than those contemplated by the investors and to his own benefit, in circumstances where that bank, or those others, were delictual and so may be accountable for the investors’ losses or some of them. That is obviously a very general expression of a potential line of investigation of a possible cause of action. It is not intended to indicate that such a cause of action may or may not exist.

21 The Trustee of the estate must attend to the interests not simply of the investors in the Scheme, but to other creditors of the estate. He has sought legal advice as to whether the estate itself might have a cause of action against the relevant bank or against others. Whether such a claim might be based upon similar grounds possibly available to the Scheme investors, or different grounds, is unclear.

22 However, in my view, the Liquidators of the Scheme would have a more refined and clearer focus in investigating such a potential cause of action than the Trustee, whose duty is not simply to the investors in the Scheme but to the creditors of the estate generally. Moreover, I perceive a possible difficulty confronting the Trustee that any general cause of action available to the estate on behalf of all its creditors would be on behalf of the estate, so that the Trustee would be faced with bringing such a claim as if he were standing in the shoes of McFarlane. There is clearly a significant potential obstacle to such a claim which would probably not be faced by the Liquidators on behalf of the investors in the Scheme. The latter point was only briefly adverted to in the course of submissions. I mention it without placing too much weight upon it. In my view, the investors in the Scheme have a different and somewhat more refined basis for exploring a claim against the bank or others than does the Trustee, as the Trustee is more widely accountable to all creditors of the estate.

23 I appreciate that the Trustee may continue to explore what assets are available to the estate of McFarlane (including possible causes of action) and could apply to the Court for directions if he discerned at any point that he did have a possible conflict of interest between attending to the interests of the creditors in the estate generally, and to the group of creditors in the estate who represent investors in the Scheme. However, it is important if such potential causes of action are to be investigated, that the avenues of investigation be explored as promptly as practicable. In my view, it is preferable that the Trustee not be put in the position by the Court where he is taking action which may focus on a cause of action available only to some creditors of the estate.

24 Secondly, I have taken into account that there was no direct opposition to the winding up of the Scheme and to the appointment of the Liquidators. Although the Trustee did not formally acknowledge the existence of the Scheme, he did not contend that there was no such scheme or that there was not, or may not have been, at least two classes of creditors of the estate: investors in the Scheme on the one hand, and McFarlane’s personal creditors, including his trade creditors, on the other. If that is the case, he accepts that at some point there is potential for the interests of those two groups of creditors to conflict. Quite properly, he raised for the Court’s consideration whether at present that potential conflict was such as to warrant the incurring of the additional expense which must necessarily flow from the winding up of the Scheme and the appointment of the Liquidators. However, the fact that it would have been unwise, if not unfair to the Trustee, to have appointed the Trustee also as the liquidator of the Scheme once the decision had been made to wind it up, provides sufficient reason to indicate why it is appropriate to have made the orders at the time they were made.

25 I note that ASIC, having been served with the application, has adopted a neutral position on the application, albeit because it was itself insufficiently informed as to the nature of the Scheme to adopt a positive attitude one way or the other to the application of the plaintiff.

26 Thirdly, I have taken into account that, although not all members or potential members of the Scheme have been identified, a significant number of them have positively expressed support for the orders made, and a significant percentage of them in terms of value (in excess of 50 per cent) have done so. The remainder have not been fully identified, or have chosen to express no view in support of or in opposition to the proposed orders.

27 I do not consider that the relative powers of the Trustee or of the Liquidators are so different as to have influenced the exercise of the discretion. There was some debate about that topic, but on reflection the different statutory sources of their respective potential investigative powers did not operate as an indication or counter-indication as to whether the discretion should be exercised as it was.

28 Finally, I note that, notwithstanding the risk of the duplication of costs, the Court will expect the Trustee (as he has indicated he will) and the Liquidators (who had not had an opportunity to formally express such a view to the Court) to cooperate in their respective roles so as to minimise the degree of duplication in the performance of their respective tasks. Obviously, the Liquidators’ focus will be upon exploring the availability of the potential cause of action referred to. To the extent to which it would not be inconsistent with the interests of the investors in the Scheme, the Liquidators will no doubt keep the Trustee informed of those investigations. In the event that either the Trustee or the Liquidators become concerned about inappropriate or unnecessary duplication of costs, they may seek directions from the Court.

29 I note the difficulty which the orders made sought to address regarding the possible inter-mingling of investors’ funds and personal funds of McFarlane. That concern was properly raised by counsel on behalf of the Trustee. If, as is possibly the case, the McFarlanes Trust Account was used for purposes beyond the deposit of funds received by him from investors in the Scheme, there may well be difficulties in identifying the separately sourced funds or their application. I endeavoured to accommodate that circumstance by the concluding part of Order 7 defining the Scheme property. It may have to be further considered. However, even if the McFarlanes Trust Account (or the bank account into which investors’ funds were deposited) was used for the deposit of funds from other sources or if it was used for the legitimate application of funds within it, I did not consider that was a reason why either I should not determine that there had been a pooling of investors’ funds or should not exercise my discretion upon my findings to wind up the Scheme and to make the orders which were made.

I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.

Associate:

Dated: 15 January 2009

Counsel for the Plaintiff:	Mr M Livesey QC with Mr P Britten-Jones
Solicitor for the Plaintiff:	Ezra Legal
Counsel for the Defendant:	Mr M Barrett
Solicitor for the Defendant:	Finlaysons

Date of Hearing:	28 November 2008
Date of Judgment:	15 January 2009