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Federal Court of Australia - Full Court |
Last Updated: 2 November 2009
National Australia Bank Ltd v Norman [2009] FCAFC 152
BANKRUPTCY – orders for the administration of a deceased
person’s estate – vesting of the divisible property of the estate
in
the Official Trustee or registered trustee – what constitutes the
divisible property of the estate – exclusion of
property held in trust for
another person
CORPORATIONS – appeal against winding up
order in respect of unregistered managed investment scheme – whether
unregistered managed
investment scheme within meaning of s 9
Corporations Act 2001 (Cth) – whether investors contributed money
as consideration to acquire rights (interests) to benefits produced by the
scheme
– whether any of the contributions were to be pooled to produce
benefits for the people who hold interests in the scheme –
funds obtained
by accountant, now deceased, for individual investment and deposited into trust
account – monies not invested
but misappropriated by accountant – no
evidence of objective intention to make contributions to acquire benefits
produced by
a scheme – no evidence of objective intention that
contributors monies were to be pooled to produce benefits for people who
hold
interests in a scheme – monies were not "to be pooled" – not a
managed investment scheme – appeal allowed.
WORDS AND PHRASES
– para (a)(ii) under definition of managed investment scheme in
s 9 Corporations Act 2001 (Cth) – "to be pooled" –
requires proof of objective prior intention that monies contributed are to be
pooled in order
to produce financial benefits for members who hold interests in
the scheme – absent such objective intention mere deposit of
monies from
investors into trust account insufficient to meet statutory requirement that
monies are to be pooled.
Bankruptcy Act
1966 (Cth), ss 116(2)(a), 156A, 244, 247A, 248(1) and (3) and 249
Corporations Act 2001 (Cth), ss 9 and 601EA-601EE, 601FC, 601FD,
601FE, 601HA
Corporations Regulations 2001 reg 5C1.01
Federal
Court Rules Order 6 rule 15, Order 9 rule 4
Federal Court
(Corporations) Rules 2000 rule 1.3(2)
Australian Securities
& Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33
ACSR 403 referred to
Australian Securities and Investments
Commission v Enterprise Solutions 2000 Pty Ltd [2003] 1 Qd R 135
discussed
Australian Securities & Investments Commission v GDK
Financial Solutions Pty Ltd [2006] FCA 1415; (2006) 236 ALR 699 cited
Australian
Securities & Investments Commission v Hutchings
(2001) 38 ACSR 387 referred to
Australian Securities & Investments Commission v Knightsbridge
Managed Funds Ltd [2001] WASC 339 referred to
Australian Securities
& Investments Commission v Primelife Corporation Limited [2006] FCA 1072; (2006) 235 ALR
328 cited
Australian Securities & Investments Commission v Takaran
Pty Ltd [2002] NSWSC 834; (2002) 43 ACSR 46 referred to
Australian
Softwoods Pty Ltd v Attorney-General (NSW) [1981] HCA 49; (1981) 148 CLR 121
cited
Burton v Arcus [2006] WASCA 71; (2006) 32 WAR 366 discussed
Re Magarey
Farlam Lawyers Trust Accounts (No 3) (2006) 96 SASR 337 at 373 cited
Sutherland Re; French Caledonia Travel Service Pty Ltd (In Liq)
[2003] NSWSC 1008; (2003) 59 NSWLR 361 referred to
Australian Law Reform Commission Report, "Collective Investments: Other
People’s Money", (Report No 65,
1993)
NATIONAL
AUSTRALIA BANK LIMITED v TREVOR GILBERT NORMAN
and EXECUTORS AND
TRUSTEES OF THE DECEASED ESTATE OF ALLAN McFARLANE
SAD 12 of 2009
SPENDER, GRAHAM
AND GILMOUR JJ
30 OCTOBER 2009
PERTH (HEARD IN
ADELAIDE)
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IN THE FEDERAL COURT OF AUSTRALIA
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SOUTH AUSTRALIA DISTRICT REGISTRY
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GENERAL DIVISION
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SAD 12 of 2009
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ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF
AUSTRALIA
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BETWEEN:
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NATIONAL AUSTRALIA BANK LIMITED
Appellant |
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AND:
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TREVOR GILBERT NORMAN
First Respondent EXECUTORS AND TRUSTEES OF THE DECEASED ESTATE OF ALLAN McFARLANE Second Respondent |
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JUDGES:
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SPENDER, GRAHAM AND GILMOUR JJ
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DATE OF ORDER:
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30 OCTOBER 2009
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WHERE MADE:
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PERTH (HEARD IN ADELAIDE)
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THE COURT ORDERS THAT:
1. The appeal be allowed.
2. The declaration and orders of Mansfield J made on 28 November 2008 as varied on 2 June 2009, be set aside and in their place the application for a winding up order dated 8 September 2008 be dismissed.
3. The first respondent pay the appellant’s costs of the application for leave to appeal, and of the appeal, to be taxed if not agreed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal
Court Rules.
The text of entered orders can be located using eSearch on the
Court’s website.
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AND:
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DATE OF ORDER:
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WHERE MADE:
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SPENDER J:
1 I have had the benefit of reading in draft form the reasons for judgment of Graham J, and the reasons for judgment of Gilmour J.
2 Each of their Honours is of the view that the finding by the primary judge that the scheme operated by the late Allan McFarlane was a managed investment scheme can not be supported, and that the declaration and orders of the primary judge in that regard should be set aside.
3 The reasons for judgment of Justice Graham, in addition to addressing the central question of whether the scheme, the subject of the orders of the primary judge, was a managed investment scheme within s 9 of the Corporations Act 2001 (Cth) (the Act), address, without conclusively deciding, further questions that arise out of the application for a winding-up order pursuant to s 601EE of the Act. Those questions include how the Bankruptcy Act 1966 (Cth) operates in the circumstances of this case, who the proper parties are to a winding-up application under s 601EE of the Act, and whether there is a temporal requirement imposed by the use of the word "operates" in s 601EE(1) of the Act, such that the Court has no power to wind up a scheme when, at the time of the application to the Court, or at the time of the order of the Court, no person was "operating" a managed investment scheme in contravention of subs 601ED(5) of the Act.
4 I am in general agreement with the reasons of Graham J.
5 However, so that there be no doubt as to the reasons for judgment of this Full Court on the central question, I agree that the scheme, the subject of the declaration and orders of the primary judge, was not a "managed investment scheme" within s 9 of the Act, for the reasons given by Gilmour J.
6 I agree also with the orders proposed by Gilmour J.
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I certify that the preceding six (6) numbered paragraphs are a true copy of
the Reasons for Judgment herein of the Honourable Justice
Spender.
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Associate:
Dated: 30 October 2009
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ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF
AUSTRALIA
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BETWEEN:
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NATIONAL AUSTRALIA BANK LIMITED
Appellant |
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AND:
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TREVOR GILBERT NORMAN
First Respondent EXECUTORS AND TRUSTEES OF THE DECEASED ESTATE OF ALLAN McFARLANE Second Respondent |
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JUDGES:
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SPENDER, GILMOUR AND GRAHAM JJ
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DATE:
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30 OCTOBER 2009
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PLACE:
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PERTH (HEARD IN ADELAIDE)
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REASONS FOR JUDGMENT
Index to Reasons
Managed Investment Schemes under the Corporations Act |
[7]
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The late Allan McFarlane |
[9]
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The Application and the Applicant’s failure to properly identify parties |
[16]
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Relevant evidence |
[23]
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The Primary Judge’s orders under s 601EE of the Corporations Act |
[62]
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Questions arising in National Australia Bank Limited’s appeal |
[74]
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Conclusion |
[99]
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Managed Investment Schemes under the Corporations Act
7 Central to the determination of this case are a limited number of issues concerning the proper construction of certain provisions of the Corporations Act 2001 (Cth) (the ‘Corporations Act’) relating to Managed Investment Schemes. Sections 601EA-601EE of the Corporations Act relevantly provided:
‘601EA(1) To register a managed investment scheme, a person must lodge an application with ASIC.
(a) the name, and the address of the registered office, of the proposed responsible entity [the company named in ASIC’s record of the scheme’s registration as the responsible entity or temporary responsible entity of the scheme]; and (b) the name and address of a person who has consented to be the auditor of the compliance plan. ...(2) The application must state:
(4) The following must be lodged with the application:
(a) it has more than 20 members; or (b) it was promoted by a person, or an associate of a person, who was, when the scheme was promoted, in the business of promoting managed investment schemes; or (c) a determination under subsection (3) is in force in relation to the scheme and the total number of members of all of the schemes to which the determination relates exceeds 20.(a) a copy of the scheme’s constitution;...
601EB(1) ASIC must register the scheme within 14 days of lodgment of the application, unless it appears to ASIC that:
(c) the application does not comply with section 601EA; or
...
601ED(1) Subject to subsection (2), a managed investment scheme must be registered under section 601EB if:
...(2) A managed investment scheme does not have to be registered if all the issues of interests [interest in a managed investment scheme means a right to benefits produced by the scheme (whether the right is actual, prospective or contingent and whether it is enforceable or not)] in the scheme that have been made would not have required the giving of a Product Disclosure Statement under Division 2 of Part 7.9 if the scheme had been registered when the issues were made.
(a) joint holders of an interest in the scheme count as a single member; and ... (5) A person must not operate in this jurisdiction a managed investment scheme that this section requires to be registered under section 601EB unless the scheme is so registered.(4) For the purpose of this section, when working out how many members a scheme has:
(a) they are acting as an agent or employee of another person; or (b) they are taking steps to wind up the scheme or remedy a defect that led to the scheme being deregistered.(6) For the purpose of subsection (5), a person is not operating a scheme merely because:
(7) A person who would otherwise contravene subsection (5) because an interest in a scheme is held in trust for 2 or more beneficiaries (see paragraph (4)(b)) does not contravene that subsection if they prove that they did not know, and had no reason to suspect, that the interest was held in that way.
601EE(1) If a person operates a managed investment scheme in contravention of subsection 601ED(5), the following may apply to the Court to have the scheme wound up:
(a) ASIC;
(b) the person operating the scheme;
(c) a member of the scheme.
(2) The Court may make any orders it considers appropriate for the winding up of the scheme.’
8 ‘Managed investment scheme’ was defined in s 9 of the Corporations Act as follows:
‘9 Unless the contrary intention appears:...managed investment scheme means:
(i) people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not); (ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders); (iii) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or(a) a scheme that has the following features:
(b) a time sharing scheme;
(c) a partnership that has more than 20 members but does not need to be incorporated or formed under an Australian law because of regulations made for the purposes of subsection 115(2); (d) a body corporate (other than a body corporate that operates as a time sharing scheme);but does not include the following:
(e) a scheme in which all the members are bodies corporate that are related to each other and to the body corporate that promotes the scheme;
(g) a statutory fund maintained under the Life Insurance Act 1995;(f) a franchise;
(h) a regulated superannuation fund, an approved deposit fund, a pooled superannuation trust, or a public sector superannuation scheme, within the meaning of the Superannuation Industry (Supervision) Act 1993;
(ha) an FHSA trust, within the meaning of the First Home Saver Accounts Act 2008;
(i) a scheme operated by an Australian ADI in the ordinary course of its banking business;
(j) the issue of debentures or convertible notes by a body corporate; (k) a barter scheme under which each participant may obtain goods or services from another participant for consideration that is wholly or substantially in kind rather than in cash; (l) a retirement village scheme operating within or outside Australia: (i) under which the participants, or a majority of them, are provided, or are to be provided, with residential accommodation within a retirement village (whether or not the entitlement of a participant to be provided with accommodation derives from a proprietary interest held by the participant in the premises where the accommodation is, or is to be, provided); and (ii) which is not a time sharing scheme; (m) a scheme that is operated by a co-operative company registered under Part VI of the Companies (Co-operative) Act 1943 of Western Australia or under a previous law of Western Australia that corresponds to that Part;
(n) a scheme of a kind declared by the regulations not to be a managed investment scheme.’(ma) a contribution plan;
9 It would appear that a Mr Allan McFarlane (‘McFarlane’) was the ‘Founding Principal’ of ‘McFarlanes’ who carried on business as ‘Business Advisors. Chartered Accountants.’ It is common ground that McFarlane died on 16 June 2008 and that Bruce Carter, of Ferrier Hodgson, became trustee of the bankrupt estate of McFarlane upon the making of an order on 3 September 2008 that McFarlane’s estate be administered under Part XI of the Bankruptcy Act 1966 (Cth) (the ‘Bankruptcy Act’) (see inter alia ss 156A and 248(1) of the Bankruptcy Act).
10 Section 249 of the Bankruptcy Act relevantly provided in such circumstances:
(a) the divisible property of the estate, not being after-acquired property, vests forthwith in the Official Trustee or, if when the order is made, a registered trustee is trustee of the estate of the deceased person under this Act, in that registered trustee; and (b) after-acquired property of the estate vests, as soon as it is acquired by, or devolves on, the estate, in the Official Trustee or, if a registered trustee is trustee of the estate of the deceased person under this Act, in that registered trustee;‘249(1) Subject to this Act, where an order is made for the administration of the estate of a deceased person under this Part:
and is divisible amongst the creditors of the deceased person and of his or her estate in accordance with this Act.’
‘After-acquired property’ was defined in s 249(10) of the Bankruptcy Act as follows:
‘after-acquired property, in relation to an estate, means property that is acquired by, or devolves on, the estate of the deceased person on or after the day on which the order for the administration of the estate under this Part is made, being property that is part of the divisible property of the estate.’11 Section 248(3) of the Bankruptcy Act provided a number of definitions which are relevant to the interpretation of the provisions of the Bankruptcy Act referable to the administration of estates of deceased persons under Part XI of the Bankruptcy Act. It provided as follows:
(a) a reference to a sequestration order shall be read as a reference to an order for administration of an estate under this Part; (b) a reference to bankruptcy shall be read as a reference to administration under this Part; (c) a reference to the property of the bankrupt shall be read as a reference to the divisible property of the estate as defined by subsection 249(6); (d) a reference to the date of the bankruptcy or to the date on which a person became a bankrupt shall be read as a reference to the date on which the order for administration under this Part was made; (da) a reference to the commencement of the bankruptcy shall be read as a reference to the time at which administration of the estate under this Part is, by virtue of section 247A, to be deemed to have commenced; (e) a reference to a bankrupt shall be read as a reference to a deceased person in respect of whose estate an order for administration under this Part has been made and as including a reference to the estate of that deceased person; and (f) a reference to the trustee of the estate of a bankrupt shall be read as a reference to the trustee of the estate of a deceased person in respect of whose estate an order for administration under this Part has been made.’‘248(3) Subject to the regulations, in the application of the provisions specified in subsection (1) in relation to proceedings under this Part and the administration of estates of deceased persons under this Part:
12 Section 247A of the Bankruptcy Act made provision for relation back in respect of the date of commencement of the administration of the estate of a deceased person under Part XI.
13 Section 249(6)-(8) identified the ‘divisible property of the estate’ where the administration of the estate of a deceased person under Part XI of the Bankruptcy Act was, by virtue of s 247A, deemed to have commenced before the death of the deceased person, the ‘divisible property of the estate’ where, by virtue of s 247A the administration of the estate of the deceased person under Part XI of the Bankruptcy Act was deemed to have commenced at the time of his or her death and the ‘divisible property of the estate’ where by virtue of s 247A of the Bankruptcy Act the administration of the estate of the deceased person under Part XI was deemed to have commenced after the death of the deceased person.
Under s 249(6) of the Bankruptcy Act the divisible property of the estate comprised property that formed part of the estate upon the death of the deceased other than, inter alia, property that if the deceased had not died and a sequestration order had been made against him or her immediately before his or her death would not have been divisible amongst his or her creditors under Part VI. Similar provisions were made in s 249(7) and s 249(8) although in the latter case the divisible property of the estate comprised property that formed part of the estate at the commencement of administration of the estate under Part XI other than, inter alia, property that, if the deceased person had not died and a sequestration order had been made against him or her, would not have been divisible amongst his or her creditors under Part VI of the Bankruptcy Act.
14 Part VI of the Bankruptcy Act included s 116 which contained the normal definition of divisible property in the case of a bankrupt estate. Relevantly for present purposes, property divisible amongst the creditors of a bankrupt did not extend to ‘property held by the bankrupt in trust for another person’ (see s 116(2)(a) of the Bankruptcy Act).
15 The evidence does not reveal whether a grant of probate of any will of the late Allan McFarlane had been granted prior to 8 September 2008 nor does it reveal whether letters of administration had been issued in respect of the estate of the late Allan McFarlane. Be that as it may, a somewhat unusual application was filed in this Court on 8 September 2008.
The Application and the Applicant’s failure to properly identify parties
16 The application whereby these proceedings were instituted was filed on 8 September 2008 by Trevor Gilbert Norman, the first respondent to the present appeal, as ‘Applicant’ [plaintiff] and named as ‘Respondents’ [defendants] ‘THE EXECUTORS AND TRUSTEES OF THE DECEASED ESTATE OF ALLAN McFARLANE’. By the Application Mr Norman sought orders for the winding up of an alleged unregistered managed investment scheme under s 601EE of the Corporations Act.
17 The application contained a ‘NOTICE TO RESPONDENTS’ which commenced:
‘To: The Executors and Trusteesof the Deceased Estate ofAllan McFarlane
Andrew Scott McFarlane, Annette Kay Kellam McFarlane, Louise Jane Smith
Suite 1, 82 East Terrace Adelaide SA 5000
Bruce Carter, Ferrier Hodgson
Level 6, 81 Flinders Street Adelaide SA 5000’
18 If the names of Andrew Scott McFarlane, Annette Kay Kellam McFarlane and Louise Jane Smith were inserted into the ‘NOTICE TO RESPONDENTS’ because they were the executors of the last will and testament of the late Allan McFarlane or the administrators of his estate, one might have expected them to be so named and identified as the First Respondents, assuming that there had been an appropriate grant of probate or of letters of administration. Otherwise, one might have expected the applicant to comply with Order 6 rule 15 of the Federal Court Rules which relevantly provided:
‘15(1) Where in any proceeding it appears to the Court that a deceased person was interested, or that the estate of a deceased person is interested, in any matter in question in the proceeding and that the deceased person has no personal representative the Court may:
(a) order that the proceeding continue in the absence of a person representing the estate of the deceased person; or
(b) by order (with the consent of the person appointed) appoint a person to represent that estate for the purposes of the proceeding.
...’(2) An order under subrule (1), and any judgment or order subsequently pronounced or made in the proceeding, shall bind the estate of the deceased person to the same extent as the estate would have been bound had a personal representative of the deceased person been a party to the proceeding.
19 Presumably the ‘NOTICE TO RESPONDENTS’ was also directed to ‘Bruce Carter, Ferrier Hodgson’ on the basis that he was a registered trustee who had become the trustee of the estate of the late Allan McFarlane the administration of which had been ordered under Part XI of the Bankruptcy Act on 3 September 2008, even though the divisible property of the estate did not extend to property that had been held by the late Allan McFarlane in trust for other persons.
20 It would appear that the application filed 8 September 2008, entitled as it was, came before the primary judge for hearing on 28 November 2008 whereupon his Honour made a series of declarations and orders. His Honour’s reasons for judgment for those orders were not published until 15 January 2009.
The orders made by the primary judge are set out at [56] below.
21 At the hearing on 28 November 2008 the applicant then referred to as the plaintiff, was represented by senior and junior counsel and ‘THE EXECUTORS AND TRUSTEES OF THE DECEASED ESTATE OF ALLAN McFARLANE’, then referred to as the defendant, was represented by junior counsel instructed by Finlaysons, solicitors, although the file does not include, as one might have expected, a Notice of Appearance in accordance with Order 9 rule 4 of the Federal Court Rules, when taken with Rule 1.3(2) of the Federal Court (Corporations) Rules 2000 (the ‘Corporations Rules’).
The capacity in which junior counsel for the ‘defendant’ was appearing is uncertain: was he appearing for legal personal representatives or potential future legal personal representatives of the estate of the late Allan McFarlane and/or Mr Carter as the trustee of the estate of the late Allan McFarlane the administration of which under the Bankruptcy Act had apparently been ordered on 3 September 2008?
22 What is clear is that there was no contradictor before the Court on 28 November 2008 in respect of the orders sought by Mr Norman in his Application. Plainly, the primary judge was without assistance as to reasons why the orders sought by Mr Norman ought not to be made.
23 When asked to identify the high point of the evidence relied upon by Mr Norman to support the orders made by the primary judge on 28 November 2008, his senior counsel directed the Court’s attention to an email apparently sent by the late Mr McFarlane to a Mark Bateup at 11:41am on Friday 6 June 2008. That email was headed ‘RE: interested in interest’. It relevantly provided:
‘Minimumamount is usually $20,000 but $10,000 will be OK if that is convenient for you now. I can link you as a client with Mum. Minimumterm is 30 days. Yes the funds are available according to what deposit term you choose, but of course if you had an emergency I would always endeavour to get around that. Draws may be by cheque mailed to you or direct into your designated bank account Current rates are 30days call 12.50%pa. 45 days call 13.25%pa and 60 days call 13.95% pa. We place them on a 6 months rollover basis with one of the aforesaid call terms designated. All our funds placed through MCFARLANES Trust Account are fixed term with the 4 pillar banks, ANZ, NAB, WESTPAC and COMMONWEALTH. Therefore they are capital guaranteed. We place funds for some very large clients. Mark, we have large funds being placed today and on Tuesday next. You could bank your $10,000 direct to any NAB bank branch into the following account: I can then guarantee the above figures. NAB MCFARLANES CHARTERED ACCOUNTANTS TRUST ACCOUNT BSB NO 085 005 ACCOUNT NO 04909 7085 I would then email you confirmation and you could then advise me as to where you wanted our Certificate of Deposit mailed. We are looking forward to seeing your chirpy Mum tomorrow morning. Cheers, Allan McFarlane MCFARLANES’24 At 2:24pm on 29 April 2008 McFarlane sent an email to Marlene HUTCHINS under the heading ‘Update’ which provided as follows:
‘Dear Marlene, Thought I would update you and also ask how you fared with Mark LeCornu. Hopefully he was able and willing to meet your needs. Now a further TX [transaction] is on the table and the terms are the best yet. A 120 days (you can have 90 days also) placement attracts a record gain of 11% with record low total costs of A$1,100. This because of the US dollar being at an all-time low and the Aussie dollar being at a near-record all-time high. Additionally and unusually I have been allocated 5 business class return air tickets Adelaide/HongKong (or alternate approved route of equivalent cost) with Qantas or Cathay as rewards up to 30.06.08 for use within the next 12 months. One needs to place new funds of at least A$30,000 for one such ticket but I have been comining (sic) smaller amounts for the purpose. Let me know pronto if you are interested. Thought you may like to have this news update.’25 The reference to combining smaller amounts in this email is the closest one comes to notification to an intending investor of a possible pooling of funds.
26 At 3:51pm on 2 June 2008 McFarlane sent an email to Peter & Carol Denton under the heading ‘been thinking’. That email included:
‘Hi Pete, Been thinking since I saw you both this morning. Are you operating your line of credit at its maximum? Are you in a position to increase it? Much wealth is to be made right now while rates are up for fixed deposits, short term deals and foreing (sic) exchange. The Reserve seems to be not anxious to raise rates again and have signalled a fall in rates much later in the year. Now seems the "appointed time" to make hay while the sun shines. Are family and friends alert to these opportunities? Just thinking macro! ...’27 On 9 February 2005 McFarlane appears to have sent a facsimile to Vaughan & Karin Sage under the heading ‘RE FINANCIAL POSITION’. The facsimile included:
‘Thank you for the copies of the financials for 2002, 2003 and 2004 for Sage Engineering. I will review them over the next few days. Meanwhile it is opportune that the approximate figure of $77,000 has matured as a term deposit at the Commonwealth Bank. We can immediately arrange placement through our Trust Account at around 8% pa on a six month rollover basis, withdrawals by 7 days notice. I recall that you have around $30,000 maturing some time in March 2005. You are welcome to place any surplus cheque [account] funds with us if you wish on the same basis. When I have completed my overall review you may wish to meet with me again and we can talk [about] a range of financial options available to you.’28 Apart from the above pre-investment communications from McFarlane, the only other relevant evidence appears to take the form of certain acknowledgements of indebtedness by MCFARLANES and letters attributed to a Mark Bateup and his mother dated 18 November 2008 to which reference will be made shortly. The acknowledgements of indebtedness included a document on the letterhead of MCFARLANES, apparently signed by McFarlane, dated 18 October 2001 in the following terms:
‘BATCH NO 801 CERTIFICATE NO 74328/BANKS/1/RO This is to certify that MRS DORIS ETHEL DENTON of 34 SNEAD CRESCENT, FAIRVIEW PARK, SOUTH AUSTRALIA 5126 has this day placed the sum of NINETY-SIX THOUSAND, SIX HUNDRED AND SEVENTY-SIX DOLLARS AND NINETY-SIX CENTS ($96,676.96) on bank funds deposit for a period of SIX MONTHS ON A ROLLOVER BASIS at an interest rate of 8.75 PER CENTUM PER ANNUM MCFARLANES CHARTERED ACCOUNTANTS TRUST ACCOUNT BANK FUNDS 18 October 2001’29 Another acknowledgment of indebtedness on the letterhead of MCFARLANES apparently signed by McFarlane was dated 10 October 2003 and was in the following terms:
‘BATCH NO 1564 CERTIFICATE NO TX 990361/2/PAC This is to certify that WENDY ANNE LYTTLE of 7/33 SIXTH AVENUE, MAROOCHYDORE, QUEENSLAND 4558 has this day placed the sum of AUD ONE HUNDRED AND TEN THOUSAND DOLLARS ONLY (AUD $110,000.00) on foreign exchange placement (PACIFIC) for a period of 120 DAYS AT 10% GAIN maturing on 10 MARCH 2004 costs being $250.00 MCFARLANES CHARTERED ACCOUNTANTS TRUST ACCOUNT BANK FUNDS 10 October 2003 Approval 4569’30 Another acknowledgment of indebtedness on the letterhead of MCFARLANES apparently signed by Mr McFarlane was dated 14 February 2005 and was in the following terms:
‘BATCH NO 2001 CERTIFICATE NO 198482/BANKS/2 This is to certify that VAUGHAN WILLIAM SAGE AND KARIN SAGE both of SAGE ENGINEERING, 17 PLEASANT GROVE, HOLDEN HILL, SOUTH AUSTRALIA 5088 have this day placed the sum of ONE HUNDRED THOUSAND DOLLARS ONLY ($100,000.00) on bank funds deposit for a period of SIX MONTHS ON A ROLLOVER BASIS at an interest rate of 8.00 PER CENTUM PER ANNUM Withdrawals by 7 days notice MCFARLANES CHARTERED ACCOUNTANTS TRUST ACCOUNT BANK FUNDS 14 February 2005 Approval 4569’31 Another acknowledgment of indebtedness on the letterhead of MCFARLANES apparently signed by Mr McFarlane was dated 18 April 2005 and was in the following terms:
‘BATCH NO 5811 CERTIFICATE NO 1134561/PACIFIC/M This is to certify that CRONULLA BAPTIST CHURCH – STAFF VEHICLES has this day placed on Pacific foreign exchange the sum of AUD TEN THOUSAND DOLLARS ONLY (AUD $10,000.00) for a period of ONE HUNDRED AND TWENTY DAYS at a gain of 10 PER CENTUM maturing on 16 AUGUST 2005 costs being AUD $150.00. MCFARLANES CHARTERED ACCOUNTANTS BANK FUNDS 18 April 2005 Bank of America Approval 4569’32 Another acknowledgment of indebtedness on the letterhead of MCFARLANES apparently signed by Mr McFarlane was dated 10 April 2007 and was in the following terms:
‘BATCH NO 7118 CERTIFICATE NO TX788592/PACIFIC/2 This is to certify that IAN NORMAN AND CHRISTINE ANNE NORMAN of 5 TURTUR PLACE, GOLDEN GROVE, SOUTH AUSTRALIA 5125 have this day placed the sum of AUD FIVE HUNDRED AND FIFTY THOUSAND DOLLARS ONLY (AUD$550,000.00) on foreign exchange placement for a period of 120 DAYS AT 10.00% GAIN with Bank of America costs of AUD$2,000.00 and placement fee of AUD$850.00 maturing on 18 AUGUST 2007. MCFARLANES TRUST ACCOUNT BANK FUNDS Bank of America Approval 9488 10 April 2007’33 Another acknowledgment of indebtedness on the letterhead of MCFARLANES apparently signed by Mr McFarlane was dated 9 August 2007 and was in the following terms:
‘BATCH NO 7749 CERTIFICATE NO TX733498/PACIFIC/2 This is to certify that WILLEM HESSEL BAARTSE AND HENDRIKA WILHEMINA BAARTSE of 32 WARRAMUNDA CRESCENT, BANKSIA PARK, SOUTH AUSTRALIA 5091 have this day placed the sum of AUD FIVE HUNDRED AND SIXTY-SEVEN THOUSAND, FIVE HUNDRED DOLLARS ONLY (AUD$567,500.00) on foreign exchange placement for a period of 120 DAYS AT 10.00% GAIN with Bank of America costs of AUD$4,500.00 and MCFARLANES placement fee of AUD$750.00 maturing on 07 DECEMBER 2007. MCFARLANES TRUST ACCOUNT BANK FUNDS Bank of America Approval 9488 09 August 2007’34 Another acknowledgment of indebtedness on the letterhead of MCFARLANES apparently signed by Mr McFarlane was dated 2 January 2008 and was in the following terms:
‘BATCH NO 8134 CERTIFICATE NO TX001021/PACIFIC/2 This is to certify that ALEXANDER STEVENSON AND GILLIAN MARGARET STEVENSON of 7 ST MATTHEWS PLACE, BRIDGEWATER, SOUTH AUSTRALIA 5155 have this day placed the sum of AUD FOUR HUNDRED THOUSAND DOLLARS ONLY (AUD$400,000.00) on foreign exchange placement for a period of 120 DAYS AT 10.00% GAIN with Bank of America costs of AUD$2,500.00 and MCFARLANES placement fee of AUD$750.00 maturing on 02 MAY 2008. MCFARLANES TRUST ACCOUNT BANK FUNDS Bank of America (Australian bank funds) Approval 10455 02 JANUARY 2008’35 Another acknowledgment of indebtedness on the letterhead of MCFARLANES apparently signed by Mr McFarlane was dated 10 January 2008 and was in the following terms:
‘BATCH NO 8572 CERTIFICATE NO TX006944/PACIFIC/1 This is to certify that BETHANY JANE DENTON of 34 KING STREET, NORWOOD, SOUTH AUSTRALIA 5067 has this day placed the sum of AUD FIFTY THOUSAND DOLLARS ONLY (AUD$50,000.00) on foreign exchange placement for a period of 120 DAYS AT 10.00% GAIN with Bank of America costs of AUD$500.00 and MCFARLANES placement fee of AUD$250.00 maturing on 18 MAY 2008. MCFARLANES TRUST ACCOUNT BANK FUNDS Bank of America (Australian bank funds) Approval 10455 10 JANUARY 2008’36 Another acknowledgment of indebtedness on the letterhead of MCFARLANES apparently signed by Mr McFarlane was dated 27 February 2008 and was in the following terms:
‘BATCH NO 7894 CERTIFICATE NO 1285655/BANKS/RO/1 This is to certify that LOUISE HENRIETTE VAN HERPEN of C/- 4 PARATOO ROAD, STIRLING, SOUTH AUSTRALIA 5152 has this day placed the sum of FOUR HUNDRED AND TWENTY-NINE THOUSAND, TWO HUNDRED AND TWENTY-FIVE DOLLARS ONLY ($429,225.00) on bank funds deposit for a period of SIX MONTHS ON A ROLLOVER BASIS at an interest rates of 13.50% PER ANNUM AT 45 DAYS CALL ON $370,000.00 10.05% PER ANNUM AT 7 DAYS CALL OR 12.50% PER ANNUM AT 30 DAYS CALL ON $59,225.00. MCFARLANES CHARTERED ACCOUNTANTS TRUST ACCOUNT AUSTRALIAN BANK FUNDS (CAPITAL GUARANTEED) Approval 7255 27 February 2008’37 Another acknowledgment of indebtedness on the letterhead of MCFARLANES apparently signed by Mr McFarlane was dated 1 May 2008 and was in the following terms:
‘BATCH NO 8552 CERTIFICATE NO TX006899/PACIFIC/1 This is to certify that MARLENE JOY HUTCHINS of 9 COLORADO DRIVE, GLENALTA, SOUTH AUSTRALIA 5052 has this day placed the sum of AUD TWO HUNDRED AND FORTY THOUSAND, SIX HUNDRED AND SEVENTY-TWO DOLLARS AND SEVENTY-ONE CENTS (AUD$240,672.71) on foreign exchange placement for a period of 120 DAYS AT 11.00% GAIN With Bank of America costs of AUD$750.00 and MCFARLANES placement fee of $200.00 maturing on 29 AUGUST 2008. MCFARLANES TRUST ACCOUNT BANK FUNDS Bank of America (Australian bank funds) Approval 14925 Rewards – 2 Air tickets business class return Adelaide/Hong Kong or equivalent 01 May 2008’38 Another acknowledgment of indebtedness on the letterhead of MCFARLANES apparently signed by Mr McFarlane was dated 23 May 2008 and was in the following terms:
‘BATCH NO 8251 CERTIFICATE NO 1289782/BANKS/RO/1 This is to certify that FAY MARION BATEUP of PO BOX 493, STIRLING, SOUTH AUSTRALIA 5152 has this day placed the sum of THREE HUNDRED AND EIGHTY-FIVE THOUSAND, ONE HUNDRED AND FORTY-EIGHT DOLLARS AND FIFTY-EIGHT CENTS ($385,148.58) on bank funds deposit for a period of TWELVE MONTHS ON A ROLLOVER BASIS at an interest rate of 14.05 PER CENTUM PER ANNUM WITHDRAWALS BY 90 DAYS CALL and a further sum of TWENTY THOUSAND DOLLARS ONLY ($20,000.00) ON 30 DAYS CALL AT AN INTEREST RATE OF 12.50 PER CENTUM PER ANNUM. MCFARLANES CHARTERED ACCOUNTANTS TRUST ACCOUNT AUSTRALIAN BANK FUNDS (CAPITAL GUARANTEED) Approval 14955 23 May 2008’39 The evidence also includes an unsigned document on the letterhead of MCFARLANES headed:
‘IAN &CHRISTINE NORMAN STATEMENT OF FUNDS PLACED THROUGH MCFARLANES TRUST ACCOUNT AS AT 11 JANUARY 2008’40 Under the further heading ‘THE NORMAN FAMILY TRUST’ it was disclosed that there was a balance as at 11 December 2006 ‘as previously advised’ of $173,910.35 which after payments to the CPS Credit Union and the addition of interest left a balance as at 11 January 2008 of $108,698.73.
41 The second page of the unsigned statement on the letterhead of MCFARLANES included similar figures referable to ‘THE BODYGUARD & MISTY SUPERANNUATION FUND’. This was followed by a statement in respect of ‘IAN & CHRISTINE NORMAN’.
42 A similar document referable to
‘PG & CA DENTON (TOTAL) DEPOSIT FUNDS PLACED THROUGH MCFARLANES TRUST ACCOUNT AS AT 31 JANUARY 2008’provided similar information in respect of those apparent clients of MCFARLANES.
43 The Bateup letters of 18 November 2008 which give the appearance of having been prepared for the Bateups to send to the solicitors for Mr Norman, perhaps by those solicitors, include the rather odd words in the top right hand corner of the first page of each letter:
‘Investor Letter Mark Bateup’and
‘Investor Letter Fay Bateup’respectively. The Mark Bateup ‘Investor Letter’ gives an address at Kenmore in Queensland and the Fay Bateup ‘Investor Letter’ gives and address at Stirling in South Australia.
Each ‘Investor Letter’ is headed:
‘Federal Court Action No. SAD 135 of 2008’It would seem somewhat unlikely that a genuine communication authored by Mark Bateup of Kenmore Queensland and Fay Bateup of Stirling South Australia would be so entitled if written by them to the solicitors for Mr Norman of their own volition. Be that as it may, there is very little difference between the two investor letters. The Mark Bateup investor letter includes a sentence as follows:
‘I invested $10,335.41 in the Alan (sic) McFarlane Chartered Accountant Trust Account (this amount is the principal investment of $10,000 plus interest accrued at time of declared bankruptcy on 3rd September 2008)’The comparable sentence in the Fay Bateup Investor Letter read:
‘I invested $421,080.76 in the Alan (sic) McFarlane Chartered Accountant Trust Account (this amount is the principal investment of $405,148.58 plus interest accrued at time of declared bankruptcy on 3rd September 2008)’44 It seems likely that McFarlane was a fraudster who misappropriated vast sums of money invested by various individuals with MCFARLANES.
45 In an affidavit sworn on 19 November 2008 by Mr Carter, presumably as trustee of the estate of the late Allan McFarlane the administration of which under Part XI of the Bankruptcy Act was apparently ordered on 3 September 2008, he deposed to convening a meeting of creditors of McFarlane on 19 September 2008, which was apparently attended by 70 creditors. To his affidavit he attached a list of creditors, whom he identified as ‘Investor’ Creditors, claimed to be owed a total of $16,961,448.52. The list was headed ‘Creditors Present at First Meeting of Creditors of the Administration of the Deceased Estate of Allan McFarlane In Person or by Proxy’.
46 The list of ‘Investor’ Creditors included the ‘Applicant’, Trevor G Norman, who was said to be owed $275,976.00.
47 In an affidavit bearing the typed date 4 September 2008 but apparently sworn on 8 September 2008 Michael Allan Fabbro of Ezra Legal, the solicitors for the applicant, stated under the heading "Purpose of Affidavit’:
‘2. I swear this affidavit for the purpose of supporting the application made by the Applicant Creditor (sic) for the appointment of Nicholas David Cooper and Andre Janis Strazdins ... as joint and several liquidators of the unregistered managed investment scheme ("the Scheme") of Mr Allan McFarlane ("McFarlane").
48 The description of Mr Norman as ‘the Applicant Creditor’ does not fit comfortably with his desire to have liquidators appointed to ‘the unregistered managed investment scheme’ of McFarlane. Managed investment schemes have ‘members’ with ‘interests’.
49 Under the heading ‘Background Facts’ Mr Fabbro’s affidavit continued as follows:
‘3. McFarlane corresponded with various clients and associates and invited those clients and associates to invest funds in the Scheme which funds were generally deposited into the McFarlanes Accountants Trust Account ("Trust Account"), under the care and control of McFarlane. ...’
It will be appreciated that Mr Fabbro’s affidavit presupposes the existence of a scheme which answers the description of a managed investment scheme as defined in s 9 of the Corporations Act.
50 None of the items of correspondence to which Mr Fabbro referred mentioned any ‘Scheme’ nor did they invite clients and associates of McFarlane to invest funds in a Scheme.
51 Whether McFarlane solicited the provision of funds by gullible clients and associates under the pretext that they would be deposited in a bank account styled a ‘trust account’ in his name is a matter of irrelevance for present purposes.
52 National Australia Bank Limited, which appears to have had McFarlane or MCFARLANES as a customer, was not, as a result, a trustee of monies standing to the credit of an account which McFarlane may have styled as a ‘Trust Account’. The Bank was simply a debtor of the relevant account holder for the whole of the amount standing to the credit of the account from time to time (see per Campbell J in Sutherland Re; French Caledonia Travel Service Pty Ltd (In Liq) [2003] NSWSC 1008; (2003) 59 NSWLR 361 (the ‘Travel Service case’ at [61]).
53 A credit in a bank account is not a chose in possession. Rather it is an inchoate chose in action (inchoate because of the need to make demand before there is a cause of action that can be sued on). A debt owed by a banker to a customer is a single thing – an obligation to pay $X – and the client’s paying more money into a bank account results in the creation of a different thing – an obligation to pay some larger amount than $X (see per Campbell J in the Travel Service case at [61]).
54 The presumption that a trustee has intended to act honestly is one which arises between trustee and beneficiary. There is no reason why a banker ought be presumed to know of or be in any way affected by such a presumption of honest intention as between trustee and beneficiary (per Campbell J in Travel Service case at [65]).
55 Mr Fabbro’s affidavit of 8 September 2008 continued:
‘4. A number of clients and associates ("Members") of McFarlane accepted the offer to invest funds with McFarlane. ...’
56 Mr Fabbro’s affidavit, by using the word ‘Members’ to describe clients and associates of McFarlane, again presumes, inaccurately and without any foundation, that a client or associate of McFarlane who invests money with McFarlane is ‘a Member’ of a ‘managed investment scheme’ within the meaning of the Corporations Act.
57 Later in his affidavit Mr Fabbro said:
‘9. Upon examination of the documents presently available it would appear that:
9.1 the funds of each of the Members [Mr Fabbro’s definition of "clients and associates of McFarlane"] were pooled together into the Trust Account [A bank account or bank accounts apparently maintained by McFarlane and variously styled, according to MCFARLANES’ acknowledgements of indebtedness, ‘MCFARLANES CHARTERED ACCOUNTANTS TRUST ACCOUNT BANK FUNDS’, ‘MCFARLANES TRUST ACCOUNT BANK FUNDS Bank of America’, ‘MCFARLANES CHARTERED ACCOUNTANTS BANK FUNDS (with a reference thereafter to Bank of America)’, ‘MCFARLANES TRUST ACCOUNT BANK FUNDS Bank of America (Australian bank funds)’, ‘MCFARLANES CHARTERED ACCOUNTANTS TRUST ACCOUNT AUSTRALIAN BANK FUNDS (CAPITAL GUARANTEED)] and invested on their behalf by McFarlane;
9.2 The Scheme [Mr Fabbro’s definition of an unregistered managed investment scheme of McFarlane of which Mr Norman was said to be an "Applicant Creditor"] has more than twenty members [there was no evidence of any clients and associates of McFarlane being Members of an unregistered management investment scheme]; and
9.3 McFarlane was in the business of promoting the Scheme [there is no doubt that McFarlane was involved in the solicitation of funds for investment by him on behalf of clients and associates which he may well have misappropriated but no evidence that the solicitation was referable to the acquisition of interests in a managed investment scheme].’
58 Notwithstanding that property held by McFarlane in trust for his firm’s clients and associates did not form divisible property of his bankrupt estate that vested in Mr Carter as trustee for the purpose of the administration thereof under Part XI of the Bankruptcy Act, Mr Carter appears to have taken an interest in the circumstances in which monies had been invested by various persons with McFarlane. In an affidavit sworn by him on 12 September 2008 Mr Carter referred to a report obtained from Edwards Marshall which apparently set out some conclusions about an investigation into a particular bank account conducted by McFarlane which report had been commissioned by Mr Andrew McFarlane a son of McFarlane. The report apparently concluded that there was ‘no evidence that any of the money owing to the investor creditors has actually been invested’. Mr Carter observed that Edwards Marshall’s report only related to one bank account conducted by McFarlane and that the period under consideration was 29 June 2007 to 30 June 2008. Mr Carter’s affidavit stated in paragraph 10:
‘10. ... The evidence in my possession indicates that the deceased had received moneys from investor creditors since the early part of this decade and further investigations and analysis of the bank account is likely to be required in order to investigate what has happened to the investors’ funds.’
59 In a later affidavit sworn by Mr Carter on 19 November 2008 he deposed under the heading ‘The National Australia Bank Limited’:
‘17. The deceased banked with the National Australia Bank Limited (NAB) for some years prior to his death. He conducted accounts, which were secured by mortgages over the house [a reference to 65 Milan Terrace, Stirling] with a fluctuating account limit so that in essence a line of credit was available to the maximum amount which the Bank had agreed to advance against the house.
18. The deceased also conducted for many years prior to his death, another bank account with the NAB which was entitled "McFarlanes Chartered Accountants Trust Account" (the Trust Account). My investigations have revealed that the deceased had not been practising as a Chartered Accountant for a number of years prior to his death although the account continued to be titled in this manner.
19. The operations of the Trust Account during the financial year 1 July 2007 until the death of the deceased in June 2008 are the subject of a confidential report commissioned by the McFarlane family from Edwards Marshall & Co. ...
...
22. I have concluded at this stage that:
22.1 there was a mingling of personal funds and investor funds in the Trust Account;
22.2 there is no evidence of any funds having been received into the Trust Account from the redemption of investments made on behalf of investors in the period from 1 July 2007. There is no record of deposits referable to investments being redeemed. Funds paid out to investors from the Trust Account in this period came from firstly, a transfer of moneys from the mortgage account that the deceased conducted with the NAB and secondly, from other investors funds which the deceased received and would then pay out;
...’
60 Later, at paragraph 37 of his affidavit Mr Carter said:
‘37. ... At this stage, the only identified property would appear to be whatever claims might be made against the NAB. I expect that such claims will be vigorously contested and will take some years to be finally litigated unless compromised at an earlier time.’
61 Whilst Mr Fabbro and Mr Carter’s evidence may suggest that they believed that during his lifetime McFarlane conducted a ‘Ponzi scheme’ (a type of scheme named after Charles Ponzi, a fraudster from the United States) there is nothing, in my view, in the evidence to support a finding that Mr McFarlane operated an unregistered managed investment scheme within the meaning of the Corporations Act.
The evidence tends to suggest that he committed numerous acts of defalcation, robbing Peter to pay Paul.
The Primary Judge’s orders under s 601EE of the Corporations Act
62 In the foregoing context Mr Norman’s application came before the primary judge for hearing on 28 November 2008. As previously observed there was, in reality, no contradictor. The orders made by the primary judge on that day were as follows:
‘For the purposes of this Order "the Scheme" means the managed investment scheme operated by Allan McFarlane (deceased) ("McFarlane") whereby:THE COURT DECLARES THAT:(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.
2. The Scheme was not registered as required by s 601ED(1) of the Act.1. The Scheme 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.
THE COURT ORDERS THAT:3. McFarlane was operating the Scheme in contravention of s 601ED(5) of the Act.
4. The Scheme be wound up forthwith pursuant to s 601EE of the Corporations Act.
5. Nicholas David Cooper and Andre Janis Strazdins, Official Liquidators, of BRI Ferrier, Level 4, 12 Pirie Street, Adelaide SA 5000 be appointed to act as the joint and several liquidators of the Scheme ("the Liquidators").
6. Pursuant to s 601EE(2) of the Act, the winding up of the Scheme shall be conducted as if the Scheme were for the purposes of the Act a "company" and in acting as liquidators and administering the affairs of the Scheme the Liquidators shall have all the powers and responsibilities that a liquidator would have pursuant to the Corporations Act as if the Scheme were a company, with such modifications as are necessary.
7. Subject to the proviso expressed at the end of this Order, the scheme property of the Scheme ("the Scheme property") shall consist of:
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:
7.5.2 contributions made to the Scheme or the Account by the scheme investors.7.5.1 the Account, or
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).
8. The Liquidators shall not commence any proceeding relying on a cause of action of the kind referred to in Order 7.4 hereof without the leave of the Court.
9. The Liquidators shall be paid remuneration on a time basis at a reasonable fee according to the hours for which the Liquidators, or any partner in or employee of the firm to which the liquidators are attached, are engaged in work necessary for and relevant to the purpose of the winding up, such remuneration to be calculated at the rates of that firm from time to time for work of that nature, together with all reasonable out of pocket expenses.
10. The remuneration and expenses of the Liquidators incurred in relation to their winding up of the Scheme be paid from the Scheme Property.
11. The parties and the Liquidators have liberty to apply on short notice, including but not limited in relation to the powers of the Liquidators and the definition of Scheme Property.
12. The Plaintiff be paid his costs of this application as a first priority from the Scheme Property.’
63 The definition of ‘the Scheme’ at the commencement of the primary judge’s orders is somewhat curious given that Mr Norman was urging that there was a scheme within the meaning of paragraph (a) of the definition of managed investment scheme under s 9 of the Corporations Act. Paragraph (a) of the definition required, firstly, that there be ‘a scheme’ and, secondly, that such scheme have three identifiable features. The first feature was that people should contribute money or money’s worth as consideration to acquire ‘rights (interests) to benefits produced by the scheme...’.
64 It would be an oddity for a scheme operated by McFarlane, if there was one, to be a scheme whereby he ‘misappropriated the moneys of scheme investors’ and yet be one which had the requisite feature covered by subparagraph (i) of paragraph (a) of the definition.
65 A further oddity would be to have a scheme, if there was one, operated by McFarlane whereby members of the public, at the request of McFarlane, invested moneys with McFarlane ‘to be held on trust for them’ if their contributions were made ‘as consideration to acquire rights to benefits produced by the scheme’ and some or all of the contributions were to be pooled, or used in a common enterprise, to produce benefits ‘for the people who hold interests in the scheme’.
66 It will be readily apparent from the terms of the orders made by the primary judge on 28 November 2008 that National Australia Bank Limited has concerns in respect of the definition of scheme property as including:
‘7.2 any and all moneys in the Account [referring to McFarlane’s account with National Australia Bank Limited BSB 085 005 No. 049097085 in the name of ‘McFarlanes Chartered Accountants Trust 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,...’
67 Notwithstanding the apparent character of the orders made by the primary judge on 28 November 2008 as final orders, an application would appear to have been made by the plaintiff to the Court for further relief under the liberty to apply referred to in order 11. That application came before the primary judge on 2 June 2009 when:
• Mr Norman was represented by the senior counsel who had previously appeared for him,
• there was no appearance for ‘THE EXECUTORS AND TRUSTEES OF THE DECEASED ESTATE OF ALLAN McFARLANE’,
• the liquidators appointed by the Court on 28 November 2008 appeared by counsel, and
• counsel appeared for National Australia Bank Limited instructed by Johnson Winter & Slattery, Solicitors.
68 The primary judge ordered the deletion from his orders of 28 November 2008 of paragraph 7.3.
69 In his reasons for judgment of 2 June 2009 the primary judge said:
‘1 The Orders made in this matter on 28 November 2008 were made with some urgency and with a limited opportunity to fully consider the issues. Reasons for those Orders were subsequently published: Norman, in the matter of The Executors and Trustees of the Deceased Estate of McFarlane v McFarlane [2009] FCA 14. At the time of making those Orders there was some discussion between counsel and the Court as to how to properly define the "Scheme property" and certain alterations to the proposed orders were made as a result of that discussion. In addition the parties and the liquidators were given liberty to apply on short notice, including specifically in relation to the definition of "Scheme property". ... 3 Matters have moved on. It was understood at the time those Orders were made that one, if not the principal, investigation which the liquidators would pursue on behalf of the Scheme investors would be to determine whether the National Australia Bank Limited (the Bank) in its conduct of an account entitled "McFarlanes Chartered Accountants Trust Account" had in some way acted improperly. Following the making of those Orders, the liquidators secured from the Court Orders for the examination of two officers of the Bank and for the production of certain of its records. The Bank unsuccessfully applied for a stay of those Orders because in the meantime it had sought leave to appeal from the making of the Orders made on 28 November 2008. Its application for a stay was unsuccessful both at first instance and on appeal: National Australia Bank Limited v Norman [2009] FCAFC 13. The practical situation is that it has produced the papers which it was required to produce for inspection pursuant to the examination/production Orders, but the examination of its officers has not taken place. I understand that the examination of its officers is not intended to proceed pending the hearing of its application for leave to appeal and, if leave is granted, the appeal, from the making of those Orders.’70 By an Application for Leave to Appeal filed on 19 January 2009, four days after delivery of the primary judge’s reasons for judgment of 15 January 2009, National Australia Bank Limited sought leave to appeal from the judgment of the primary judge given on 28 November 2008. That application was superseded by an Amended Application for Leave to Appeal filed 9 July 2009 in which National Australia Bank Limited was named as Applicant, Trevor Gilbert Norman was named as First Respondent and ‘EXECUTORS AND TRUSTEES OF THE DECEASED ESTATE OF ALLAN MCFARLANE’ was named as Second Respondent. The primary order sought was in the following terms:
‘1. National Australia Bank Limited (the applicant), a non-party, applies for leave to appeal from the judgment of Justice Mansfield given on 28 November 2008 in Adelaide, both in its original form and as varied by Justice Mansfield on 2 June 2009.’
71 On 12 August 2009 the Court as presently constituted ordered that National Australia Bank Limited be added as a respondent and granted leave to it to appeal the orders of the primary judge of 28 November 2008 and the orders of the primary judge of 2 June 2009, being the orders which varied the orders of 28 November 2008.
72 The reasons for judgment of the primary judge of 15 January 2009 were brief. As his Honour said at [7] of those reasons:
‘7. I indicated that I would in due course publish brief reasons for the making of those orders [referring to the orders of 28 November 2008]. These are my reasons for doing so.’73 Under the heading ‘FINDINGS’ his Honour said at [14]-[16]:
‘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).’Questions arising in National Australia Bank Limited’s appeal
74 Three questions relevantly arise for consideration in this appeal:
(a) Did the evidence that a significant number of persons invested monies with or through McFarlane in interest bearing accounts render them members of a managed investment scheme within the meaning of the Corporations Act?;
(b) Does the Court have power to order that an unregistered managed investment scheme be wound up if a person has operated but no longer operates such a managed investment scheme in contravention of subsection 601ED(5) of the Corporations Act?; and
(c) In the event that the Court orders that an unregistered managed investment scheme be wound up, should it treat the scheme as if it were a corporation and appoint liquidators to it or should it treat it as in effect a partnership and appoint receivers and managers to wind up its affairs?
75 In light of the view which I have taken in relation to the first question it is unnecessary to consider the second and third questions in any detail. However, the use of the present tense ‘operates’ in s 601EE(1) of the Corporations Act when taken with the array of possible applicants to have a scheme wound up, which include ‘(b) the person operating the scheme’ (emphasis added), provides strong support for the view that the Court’s power to order the winding up of a scheme cannot be invoked where, at the time the order is made, no person is operating a managed investment scheme in contravention of subsection 601ED(5) of the Act. Given that McFarlane died on 16 June 2008 and that no person appears to have succeeded him as the operator of any scheme that may have existed, the Court would appear to be without any power to wind up an unregistered managed investment scheme some five months later.
76 In relation to the third question the tentative view to which I have come is that the appropriate mechanism for implementing a winding up of an unregistered managed investment scheme that is operated by a person is to do so by the appointment of receivers and managers treating the scheme as if it were a partnership and treating assets that would have fallen within the definition of ‘scheme property’ in s 9 of the Corporations Act had the scheme been registered, as scheme property.
77 Given the conclusion which I have reached in relation to the first question, it is unnecessary for me to express any final conclusions on the second and third questions.
78 In my opinion the lack of any evidence to prove that a scheme operated by McFarlane had the feature required by subparagraph (i) of paragraph (a) of the definition of managed investment scheme contained in s 9 of the Corporations Act precludes a finding that Mr McFarlane was, up until his death, operating a managed investment scheme to which ss 601ED(5) and 601EE of the Corporations Act applied..
79 In my opinion a finding could not be made that people contributed money or money’s worth ‘as consideration to acquire rights to benefits produced by’ a scheme unless they were seized of the nature of the scheme, the benefits that may be produced by the scheme and the nature of the rights to those benefits which they were acquiring.
80 Furthermore, I do not consider that the evidence supports the finding of a scheme that had the feature required by subparagraph (ii) of paragraph (a) of the definition.
81 If the scheme was one under which some or all of the contributions were ‘to be pooled, or used in a common enterprise, to produce ... benefits ... for the people [holding] interests in the scheme’ it was essential that at the time of making the contributions the contributors knew that some or all of the contributions were to be pooled or used in a common enterprise. The words ‘to be’ cannot be overlooked.
82 The decision of Buss JA in Burton v Arcus [2006] WASCA 71; (2006) 32 WAR 366 with which Steytler P and McLure JA agreed, to the contrary, is, in my opinion, plainly wrong and should not be followed.
83 In relation to subparagraph (i) of paragraph (a) of the definition of managed investment scheme Buss JA said at [55]-[56]:
‘55 The first element in para (a) of the definition requires that: (a) "people contribute money or money’s worth"; and56 This element was described in para 19.6 of the explanatory memorandum to the Managed Investments Bill 1997 as "incorporating a purposive element in the definition". In other words, the money or money’s worth must be contributed for the purpose of acquiring the relevant rights to benefits.’ (Emphasis added)(b) the money or money’s worth be contributed "as consideration to acquire rights ... to benefits produced by the scheme ..."
With the above observations I am in complete agreement. The relevant purpose which must be found is a common purpose of the contributors that they should as consideration for their contributions acquire rights to benefits produced by the scheme. Ignorance as to how the scheme was intended to produce benefits is inconsistent with a finding that the relevant feature existed in relation to a particular scheme.
84 Having identified subparagraph (i) of paragraph (a) of the definition as one ‘incorporating a purposive element’, his Honour then appears to have disregarded that requirement.
85 In addressing subparagraph (ii) of paragraph (a) of the definition of managed investment scheme Buss JA dismissed the importance of the words ‘to be’ relying upon what one might call a ‘throwaway line’ and, certainly, obiter dicta of the Court of Appeal in Queensland in Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2003] 1 Qd.R. 135 (‘Enterprise Solutions’).
86 In Enterprise Solutions the Queensland Court of Appeal referred to Oxford Dictionary and Encyclopaedia Britannica definitions of ‘pool’, ‘parimutuel’ and ‘investment trust’. Their Honours then said at [9]:
‘... In these instances, "pool" and "pooled" are used with reference to a fund made up of numerous payments from participants and used for a purpose they contemplate.’ (Emphasis added)87 At [13] the Queensland Court of Appeal then concluded its reasoning in respect of pooling by saying at the end of [13]:
‘... The words "to be pooled ... to produce" in para. (ii) quoted above imply that the intention must be to pool the contributions and, by use of the pool, produce benefits; they do not imply that the benefits must be of such a kind as to be unobtainable without pooling. As for the words "to be", it was contended that there was no evidence that the contributors appreciate that the contributions are to be pooled. That contributions would be dealt with in that way is obvious; but in any event, under the scheme pooling occurs and that is enough.’ (Emphasis and underlining added)88 The need for evidence of intention is apparent from the passages quoted above. In Enterprise Solutions there was apparently no direct evidence as to what the contributors appreciated, however the objective evidence would appear to have made it ‘obvious’. By way of contrast there was no evidence in this case to support a finding that the individual contributors intended or contemplated a pooling of their funds with those of other contributors, and it certainly wasn’t ‘obvious’.
89 The objective evidence from the MCFARLANES’ acknowledgements of indebtedness noted above are quite inconsistent with any contemplated pooling as the summary below demonstrates:
|
Date
|
Investor
|
Principal
|
Term
|
Interest
Rate
|
Nature of Investment
|
|
18.10.01
|
Denton
|
$97,676.96
|
6 months
|
8.75%
|
|
|
10.10.03
|
Lyttle
|
$110,000.00
|
120 days
|
10% gain
|
‘Foreign Exchange placement (Pacific)’
|
|
14.2.05
|
Sage
|
$100,000.00
|
6 months
|
8%
|
|
|
18.4.05
|
Cronulla Baptist Church
|
$10,000
|
120 days
|
10%
|
‘Pacific Foreign Exchange’
|
|
10.4.07
|
I & C.A. Norman
|
$550,000
|
120 days
|
10% gain
|
‘Foreign Exchange placement ... with Bank of America’
|
|
9.8.07
|
Baartse
|
$567,500
|
120 days
|
10% gain
|
‘Foreign Exchange placement ... with Bank of America’
|
|
2.1.08
|
Stevenson
|
$400,000
|
120 days
|
10% gain
|
‘Foreign Exchange placement ... with Bank of America’
|
|
10.1.08
|
Denton
|
$50,000
|
120 days
|
10% gain
|
‘Foreign Exchange placement ... with Bank of America’
|
|
27.2.08
|
Van Herpen
|
$370,000
$59,225
|
45 days call
7 days call
|
13.5%
12.5%
|
|
|
1.5.08
|
Hutchins
|
$240,672.71
|
120 days
|
11% gain
|
‘Foreign Exchange placement ... with Bank of America’
|
|
23.5.08
|
Bateup
|
$385,148.58
$20,000
|
12 months
30 days call
|
14.05%
12.50%
|
|
The disparity of dates, terms, rates and nature of investment are totally inconsistent with any concept or intention of pooling.
90 The problem which has arisen with the interpretation of the definition of managed investment scheme in the Corporations Act derives from the aside of the Queensland Court of Appeal in Enterprise Solutions at [13]:
‘but in any event, under the scheme[involving, in that case, the collection of moneys from the public and their use in betting on horse races] pooling occurs and that is enough.’91 In my opinion, the Queensland Full Court did not intend by its use of the throwaway line at the end of the last sentence to depart from its finding that there ‘must be an intention to pool contributions and, by use of the pool, produce benefits’ to come within the expression ‘to be pooled ... to produce ... benefits’.
92 In my opinion Buss JA was in error in saying as he did in Burton v Arcus at [64]:
‘64 The Court of Appeal ... rejected another argument ... to the effect that the words "to be" in para (a)(ii) of the definition require that the scheme investors appreciate that their contributions are to be pooled. ...’93 His Honour proceeded to refer to some single judge decisions predicated upon the correctness of the last 12 words of para [13] of the Queensland Court of Appeal’s judgment in Enterprise Solutions, when taken out of context.
94 The conclusions of Buss JA, with which I respectfully disagree, were recorded at [68]-[70] of his Honour’s reasons for judgment in Burton v Arcus as follows:
‘68 In my opinion where:the feature in the second element in para (a), that the moneys (or contributions) "are to be pooled", will be satisfied. 69 If the promoter or operator of a scheme in fact pools money contributed by people, and the pooling occurs without their agreement, approval or knowledge, the promoter or operator will have formed the intention, prior to the pooling, that the pooling should be or become a characteristic of the scheme. When this intention is formed, it may properly be said that the contributions of the people "are to be pooled" within the second element in para (a) of the definition. 70 In my opinion, the concepts and language in para (a) of the definition do not expressly or impliedly require that any pooling occur with the agreement, approval or knowledge of the people who have paid or supplied the money or money’s worth. A scheme will not avoid characterisation as a "managed investment scheme", within para (a) of the definition, where the promoter or operator intends to pool, or does in fact pool, money or money’s worth, without the agreement, approval or knowledge of the people who have contributed it.’(a) people have paid money to or as directed by the promoter or operator of a scheme (as contemplated by the first element in para (a) of the definition);
(b) the promoter or operator intends to pool, or does in fact pool, the money; and
(c) the pooling occurs without the agreement, approval or knowledge of the people who paid the money,
95 In my opinion the rejection by Buss JA of a requirement that pooling occur with the express or implied approval or knowledge of the contributors is unsustainable and should not be followed.
96 The evidence of the communications from McFarlane to investors and the acknowledgements of indebtedness referred to in MCFARLANES’ certificates are inconsistent with any finding that contributors expressly or impliedly knew or approved of any contributions being pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people who made contributions and might be said to have held interests in the putative scheme.
The high point for a contrary conclusion would be in the one sentence of McFarlane’s email of 29 April 2008 to Marlene Hutchins which said:
‘One needs to place new funds of at least A$30,000 for one such ticket [a Qantas or Cathay reward] but I have been [combining] smaller amounts for the purpose.’97 In my opinion the sentence mentioned does not support a finding that 20 or more contributors made contributions as consideration to acquire rights to benefits produced by a putative managed investment scheme under which contributions ‘were to be pooled, or used in a common enterprise, to produce financial benefits or benefits consisting of rights or interests in property for the contributors’.
98 The several certificates which have been placed in evidence demonstrate a principal and agent relationship between investors and McFarlane with each individual investment of funds made separately and apart from the investments made by others. In my opinion the evidence does not allow the finding of any managed investment scheme.
Conclusion
99 It follows that there was nothing in relation to which a winding up order could be made in accordance with s 601EE(1) of the Act on 28 November 2008. Accordingly, the appeal should be allowed. The orders of the primary judge of 28 November 2008 should be set aside. In lieu thereof an order should be made dismissing the application filed 8 September 2008.
In the circumstances it is unnecessary to make any orders in respect of the first order made by the primary judge on 2 June 2009 which proceeded on the assumption that the orders made on 28 November 2008 had been within power.
In my opinion it is unnecessary to make any order dealing with the other procedural orders made by the primary judge on 2 June 2009.
Mr Norman, the first respondent, should be ordered to pay National Australia
Bank Limited’s costs of its application for leave
to appeal and of the
appeal.
Associate:
Dated: 30
October 2009
|
IN THE FEDERAL COURT OF AUSTRALIA
|
|
|
SOUTH AUSTRALIA DISTRICT REGISTRY
|
|
|
GENERAL DIVISION
|
SAD 12 of 2009
|
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF
AUSTRALIA
|
BETWEEN:
|
NATIONAL AUSTRALIA BANK LIMITED
Appellant |
|
AND:
|
TREVOR GILBERT NORMAN
First Respondent EXECUTORS AND TRUSTEES OF THE DECEASED ESTATE OF ALLAN McFARLANE Second Respondent |
|
JUDGES:
|
SPENDER, GRAHAM AND GILMOUR JJ
|
|
DATE:
|
30 OCTOBER 2009
|
|
PLACE:
|
PERTH (HEARD IN ADELAIDE)
|
REASONS FOR JUDGMENT
GILMOUR J:
100 The appellant, National Australia Bank (NAB), appeals pursuant to leave granted against the declaration and orders of Mansfield J (the primary judge) made on 28 November 2008.
The declaration and orders of the primary judge
101 The primary judge 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; that it was not so registered; and that it was operated by McFarlane. A winding up order was made pursuant to s 601EE of the Act. Mr Nicholas Cooper and Mr Andre Strazdins were appointed joint and several liquidators of the scheme.
102 The winding up orders provide:
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 [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.
103 NAB was not a party to the original application. It was not served with, nor heard on, the application for the winding up orders in relation to the managed investment scheme as declared by the primary judge (‘the Scheme’). Nonetheless the application by NAB for leave to appeal was granted, following argument, immediately prior to the hearing of the appeal. The Court concluded that NAB had demonstrated the necessary interest and ordered that it be joined as a party to the original application.
104 For the reasons which follow, in my judgment, the scheme operated by McFarlane was not a "managed investment scheme" as defined in s 9 of the Act. The declaration and orders made by the primary judge on 28 November 2008 as varied by the primary judge’s orders of 2 June 2009 should be set aside, and in their place, it should be ordered that the application filed 8 September 2008 be dismissed.
Background
105 The late Mr Allan McFarlane was the founding member of "McFarlanes" and carried on business as a business adviser and chartered accountant. He died in a motor vehicle accident in June 2008. On 3 September 2008, Mr Bruce Carter was appointed the trustee of the estate of McFarlane under s 244 of the Bankruptcy Act 1966 (Cth).
106 The estate has unsecured creditors in excess of $21 million and relatively little in uncharged assets to meet those liabilities. The trustee ascertained that the vast majority of creditors of the estate with debts owed to them in excess of $20 million are persons who deposited funds with McFarlane for investment by him. The first respondent, Mr Norman, is one of those investors.
107 McFarlane conducted several bank accounts with NAB, one of which was styled as the "McFarlanes Chartered Accountants Trust Account" (‘the Account’).
108 The funds received by McFarlane from investors were deposited by him into the Account. Each investor had given McFarlane instructions as to how the funds in each case were to be invested. Most were to be placed on term deposits with various banks in Australia and overseas.
109 McFarlane never gave effect to those instructions but misappropriated them in part to his own use and in part to meet interest payments due to the investors. This was a type of what has become known as a Ponzi scheme.
110 The liquidators of the scheme sought to have the winding up orders amended, by deleting former clause 7.3, which defined the "Scheme property" to include "any or all documents concerning the Account or its operation, or the making of payments by scheme investors". NAB appeared on the application to amend, and opposed the making of the orders on various grounds, including that it was inappropriate to do so having regard to the fact that the liquidators had already taken the benefit of the wider orders by obtaining and executing summonses for the production by NAB of a very wide range of documents relating to the Account.
111 Amending orders to this effect were made by the primary judge on 2 June 2009.
The findings of the primary judge
112 The term "managed investment scheme" is defined in s 9 of the Act as follows:
9. Unless the contrary intention appears: . . . managed investment scheme means:(a) a scheme that has following features:
(i) people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not);
(ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders);
(b) a time sharing scheme; but does not include the following: . . . None of the exclusions has application in the present factual circumstances.(iii) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or
113 There was little consideration of the statutory features of the then alleged managed investment scheme by the primary judge. His Honour said at [14]-[15] that "[o]n 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 investment of those funds" and that there was "evidence that McFarlane approached friends, clients and associated persons to invest monies with or through him in interest bearing accounts". The nature of the ‘rights’ or interests of the investors in the ‘scheme’ for the purposes of para (a)(i) was not explained. No ‘pooling’ of contributions was expressly identified for the purposes of para (a)(ii)).
114 The submissions before the primary judge it appears were mainly directed to the appropriateness of a liquidator being appointed, amongst other things, to investigate possible causes of action on behalf of investors, as distinct from leaving this to the trustee of McFarlane’s bankrupt estate. However, there was no contradictor on the issue of whether there was a scheme or not and the primary judge was without assistance in this respect. As his Honour said at [24]-[25]:
... [t]here 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 ..., and ... 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 on way or the other to the application of the plaintiff.115 The following paragraphs from the reasons of the primary judge disclose the relevant findings of fact:
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.Grounds of appeal
116 The primary ground of appeal is that the evidence did not warrant the declaration made by the primary judge that there was a managed investment scheme, nor the making of winding up orders. This ground in turn rests principally on the subsidiary ground that the primary judge erred, when he found that ‘pooling’ in the sense contemplated within the definition of "managed investment scheme" under s 9 had occurred.
117 These grounds necessarily involve consideration of the proper construction of the relevant provision of s 9 of the Act where it sets out the meaning of "managed investment scheme".
Regulation of managed investment schemes
118 The regulation of managed investment schemes is dealt with in Ch 5C of the Act. The history of the law leading to the present statutory regime is set out at length in Australian Securities & Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339 at [38]- [44].
119 Registration of a managed investment scheme with ASIC is regulated under ss 601EA to 601EE of the Act. The circumstances in which registration of a managed investment scheme is required are set out in s 601ED. One such circumstance is where the scheme has more than 20 members.
120 To register a managed investment scheme, a person must lodge an application with the Australian Securities and Investments Commission and amongst other things must lodge with the application a copy of the scheme’s constitution and a copy of the scheme's compliance plan. Regulation 5C.1.01 provides that an application to register a managed investment scheme must be in the approved form. Under para 1 of the approved Form 5100 an applicant for registration requires to set out the scheme name and the proposed scheme details. The form contains, under this part, 20 generic descriptions of schemes and the applicant is required to indicate which is the relevant generic scheme proposed. Examples of these are:
• Mortgages• Listed Property Trusts
• Film Schemes
• Primary Production – Forestry
• Derivatives
• Time Share Schemes
121 The constitution of a registered scheme must include adequate provision for the consideration that is to be paid to acquire an interest in the scheme; and the powers of the responsible entity in relation to making investments of, or otherwise dealing with, scheme property.
122 The compliance plan of a registered scheme must set out adequate measures that the responsible entity is to apply in operating the scheme to ensure compliance with the Act and the scheme’s constitution, including amongst other things the arrangements for ensuring that all scheme property is clearly identified as scheme property and held separately from property of the responsible entity and property of any other scheme: s 601HA(1).
123 Section 601ED(5) provides that a person must not operate in this jurisdiction a managed investment scheme that this section requires to be registered under s 601EB, unless the scheme is so registered.
124 Sections 601EB(1)(d) and 601FA of the Act require that a registered managed investment scheme must have a "responsible entity". Section 601FA provides that the responsible entity must be a public company holding an Australian financial services licence authorising it to operate a managed investment scheme. The duties of a responsible entity are outlined in s 601FC of the Act. The duties of the officers of the responsible entity are prescribed by s 601FD. The duties of employees of the responsible entity are outlined in s 601FE.
125 All that the word "scheme" requires is that there should be some "programme or plan of action": Australian Softwoods Pty Ltd v Attorney-General (NSW) [1981] HCA 49; (1981) 148 CLR 121 at 129 per Mason J, Gibbs CJ and Stephen J concurring.
126 This has been applied in numerous cases including Australian Securities & Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403; Knightsbridge Managed Funds [2001] WASC 339 at [45].
127 Barrett J in Australian Securities & Investments Commission v Takaran Pty Ltd [2002] NSWSC 834; (2002) 43 ACSR 46 at [15] applied the following gloss:
The essence of a "scheme" is a coherent and defined purpose, in the form of a "programme" or "plan of action", coupled with a series of steps or course of conduct to effectuate the purpose and pursue the programme or plan. In some cases, the scope of the scheme will readily be gathered from some constitutive document in the nature of a blueprint setting out all relevant matters.128 Finkelstein J in Australian Securities & Investments Commission v GDK Financial Solutions Pty Ltd [2006] FCA 1415; (2006) 236 ALR 699 at [2], citing Takaran 43 ACSR at [16] observed that a "scheme ... is the combination of these things necessarily connected by design", while "[t]he scheme may also include those things or attributes that ‘contribute to the coherence and completeness’ of the three essential elements". Goldberg J in Australian Securities & Investments Commission v Primelife Corporation Limited [2006] FCA 1072; (2006) 235 ALR 328 at [33] described a scheme as "a network of contractual rights and contractual obligations".
129 Further, as is explicit in the definition, a "managed investment scheme" contemplates a pooling of contributors’ funds or of a ‘common enterprise’ as between the contributors. In this case it was the former limb which was relied upon.
Pooling or common enterprise: section 9 – "managed investment scheme" para (a)(ii)
130 The features set out under para (a)(i) and that part of para (a)(ii) in the definition of managed investment scheme in s 9 which concerns pooling of contributions, are the features of primary relevance to this appeal. Also involved is the proper interpretation of the definition of "managed investment scheme" in s 9 as a whole, particularly having regard to the requirement in para (a)(i) that the contributions are made as "consideration to acquire rights (interests) to benefits produced by the scheme ...".
131 It is convenient to begin with a consideration of the issue of pooling in para (a)(ii). Three components relevantly are involved:
(a) any of the contributions "are to be pooled ...";
(b) the purpose of the pooling is "to produce financial benefits, or benefits consisting of rights or interest in property"; and
(c) those benefits must be produced "for the people ... who hold interests in the scheme", whether as contributors or as people who have acquired interests.
132 The matter of pooling was the subject of observations by the Western Australia Court of Appeal in Burton v Arcus [2006] WASCA 71; (2006) 32 WAR 366. Buss JA, with whom Steytler P and McLure JA agreed, was of the opinion at [68] that where:
(a) people have paid money to or as directed by the promoter or operator of a scheme (as contemplated by the first element in para (a) of the definition);
(b) the promoter or operator intends to pool, or does in fact pool, the money; and
(c) if pooling occurs without the agreement, approval or knowledge of the people who paid the money, the feature in the second element in para (a), that the moneys (or contributions) "are to be pooled", will be satisfied.
133 His Honour continued:
[69] If the promoter or operator of a scheme in fact pools money contributed by people, and the pooling occurs without their agreement, approval or knowledge, the promoter or operator will have formed the intention, prior to the pooling, that the pooling should be or become a characteristic of the scheme. When this intention is formed, it may properly be said that the contributions of the people "are to be pooled" within the second element in para (a) of the definition.
[70] ... A scheme will not avoid characterisation as a "managed investment scheme", within para (a) of the definition, where the promoter or operator intends to pool, or does in fact pool, money or money’s worth, without the agreement, approval or knowledge of the people who have contributed it.
134 Buss JA considered a number of authorities including Enterprise Solutions 33 ACSR 403 and on appeal to the Queensland Court of Appeal Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2003] 1 Qd R 135.
135 As to the words "to be pooled ... to produce" the Queensland Court of Appeal said the following at [13]:
The words "to be pooled ... to produce" in para (ii) quoted above imply that the intention must be to pool the contributions and, by use of the pool, produce benefits ... As for the words "to be" it was contended that there was no evidence that the contributors appreciate that the contributions are to be pooled. That contributions would be dealt with in that way is obvious; but in any event under the scheme pooling occurs and that is enough. (Emphasis added)136 From the passage which I have emphasised Buss JA concluded at [64] that the Queensland Court of Appeal had rejected the argument that the words "to be" in para (a)(ii) of the definition require that the scheme investors appreciate that their contributions are to be pooled.
137 In Enterprise Solutions 33 ACSR 403 investors provided money to the controllers of the scheme under the terms of betting-agency agreements to bet on their behalf on horse races. There were hundreds of investors. The money they contributed was deposited into two bank accounts. The moneys in the accounts were used to pay management fees payable under the agreements; to place bets; to maintain credit balances with betting agencies; and to pay moneys due to investors. Whilst each bet was placed by and in the name of a particular individual it was placed on behalf of all of the investors covered by the relevant agreement subject to the possibility that an investor may request exclusion from a day’s betting or some other variation.
138 The Court of Appeal said that the rights which the investors acquired when they paid money in were the rights to have the scheme operated in accordance with the agreements that they had made.
139 In my opinion, on the question of pooling, it is necessary to consider the definition of "managed investment scheme" in s 9 as a whole. Relevantly, any consideration of what is meant by "any of the contributions are to be pooled" in para (a)(ii) requires consideration of that part of the definition under para (a)(i) under which the contributions are made as "consideration to acquire rights (interests) to benefits produced by the scheme ...". This presumes that prior to any contributions being made the programme or plan of action must have been articulated including the means by which benefits are to be produced; what those benefits are and what is the consideration to be paid to obtain interests in those benefits. The subsequent making of contributions, to adopt the language of Barrett J in Takaran [2002] NSWSC 834; 43 ACSR 46, are but the steps or course of conduct to effectuate the purpose and pursue the programme or plan.
140 As Windeyer J observed in Australian Securities and Investments Commission v Hutchings (2001) 38 ACSR 387 at [13]:
The question then is whether the "lenders" contributed money as consideration to acquire rights to benefits produced by the scheme. It seems to me that this is determined by the decisions in Waldron v Auer [1977] VR 236 and Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2000] QCA 452; (2000) 35 ACSR 620. In the latter case it was held that the term "interest" included "a right to have a scheme operate in accordance with the agreements they have made and to be paid moneys due". (Emphasis added)141 Consistent with this approach Buss JA adopted with apparent approval what Barrett J said in Takaran [2002] NSWSC 834; 43 ACSR 46 when his Honour in that case emphasised at [12] that the ‘scheme’ must be capable of identification within certain boundaries and that such identification is necessary to decide whether it has the characteristics which bring it within the statutory definition. What it is may be, in whole or in part, discerned from documents such as the agreements entered into by individual investors in Enterprise Solutions [2003] 1 Qd R 135 or the prospectus, amongst other documents, in Knightsbridge Managed Funds [2001] WASC 339. There may be a programme or plan of action which is evidenced orally or which arises by implication from conduct or a combination of all or some of these. A scheme involves "members" who attach themselves to the programme or plan, which, in my opinion, must be capable of being objectively discerned. However unlikely in practical terms, it is conceivable that persons may become members of a scheme by making contributions to obtain interests without full or indeed any appreciation of the particular programme or plan. They may know no more than that they are joining as investors with a number of other persons who they may or may not know. Normally the programme or plan would be contained in some promotional document or would have been the subject of discussions between the promoter and individual members but it may be that some members have not read the document nor been a party to the discussions but have contributed perhaps on the basis of a recommendation from a friend or simply because they knew and trusted the promoter and were not interested in the details. They may not, I accept, appreciate that the funds contributed are to be pooled with those of other contributors. I would not regard that as fatal to a conclusion that there was a managed investment scheme in a particular case so long as the features set out in s 9 are demonstrated. Absent fraud or material misrepresentations the contribution of funds in such circumstances would amount to implicit approval or agreement on the part of the contributor to the terms of the Scheme.
142 In Burton v Arcus [2006] WASCA 71; 32 WAR 366 the statutory features of a managed investment scheme were evident: a company invited a number of investors to lend money to another company and to participate in a "joint first mortgage investment"; the contributors’ funds were to be combined and loaned to a single borrower upon a first mortgage security in relation to the acquisition and pre-development work for a large site in East Perth; the term of the loan was 12 months; interest was to be paid monthly. Forty investors participated. Investors were sent letters by the promoting company inviting them to participate as lenders in the proposed loan upon terms set out in the letter. Each investor signed an endorsement on the letter of invitation accepting the proposed investment and appointing the promoting company as agent to administer all matters relating to the mortgage. Investors were unaware of the number or identity of the other investors until they paid amounts to the company promoting the scheme. Although this was so, and for reasons I have already given, such a circumstance is no barrier to the conclusion that a scheme existed as defined in s 9. The necessary features set out in s 9 were evident. There was a plan for investment. Funds were to be contributed to acquire interests to benefits produced by the scheme. The funds were to be pooled and provided by way of a single loan to the borrower and benefits by way of interest on the loan were to accrue for those investors as a whole according to their respective interests.
143 There was no issue, either at first instance or on appeal in Burton v Arcus, as to whether the funds contributed were to be pooled. Rather the primary issue at trial and on appeal was whether or not the third feature of ‘day-to-day control’ under s 9 had been established. The trial judge held that the ‘scheme’ called for money to be pooled and lent (emphasis added): Arcus v Burton 51 ACSR at [28]. This finding of fact was not challenged on appeal.
144 Consistently Buss JA at [107] described the scheme as one with a number of characteristics including that investors contributed funds which were paid to the company promoting the scheme "... for investment in a pooled loan to be made to (the borrower) ...". (Emphasis added).
145 This characteristic, amongst others, his Honour said at [108] was apparent from the terms of the letters of invitation sent to investors.
146 Buss JA, relevantly concluded at [115] that:
(t)he programme or plan of action ... also had the feature referred to in para (a)(ii) of the definition of "managed investment scheme", in that: (a) the money contributed by the investors was "to be pooled ...".147 If, when Buss JA in obiter in Burton v Arcus 32 WAR at [68] and again at [70] employed the phrase "... does in fact pool the money ..." his Honour intended to say that if funds are unilaterally pooled by the recipient of the funds at some time after contribution of those funds was made to acquire rights to benefits produced by a scheme which did not contemplate that funds were to be pooled is, nonetheless, sufficient to meet the test under para (a)(ii) of the definition of managed investment scheme in s 9, then I would respectfully disagree with him and the other members of the Court.
148 In my opinion, the words "contributions are to be pooled" in para (a)(ii) require an intention, objectively discerned, forming part of the "scheme" and formed prior to the making of contributions, that the contributions are to be pooled. That intention may be discerned objectively and variously from documents, discussions or conduct. The subjective evidence of members as to what, and by what means, they understood was the scheme prior to making their contributions would be relevant but not necessarily determinative of this question.
149 In Enterprise Solutions [2003] 1 Qd R 135 it was self-evident that the moneys were to be pooled. I do not apprehend that when the Court of Appeal there observed in dicta at [13] "... but in any event under the scheme pooling occurs and that is enough", that their Honours meant that pooling could occur without the relevant prior intention. The pooling their Honours were describing was "under the scheme". This necessarily drives the meaning back to the very question of what is the scheme. The observation, in that sense, is a circular one.
150 Furthermore what is required is an intention objectively discerned that contributions are to be pooled, relevantly, "... to produce financial benefits ... for the people (the members) who hold interests in the scheme ...". Accordingly, contributions are not merely to be pooled. Rather they are to be pooled for a purpose, namely, the production of financial benefits for the members as a whole proportional to the interest they acquired by making contributions. The primary judge in this case at [13] acknowledged this when he said:
The scheme must therefore contemplate the generation of benefits under a common enterprise ... from the funds contributed.151 That contributions are in fact pooled, in the sense that they are collected in the same bank account, after contributions have been made but without the requisite prior intention does not, in my opinion, meet the requirement under para (a)(ii) that contributions are "to be pooled". To conclude otherwise would be to ignore the prospective and purposive words "to be" in para (a)(ii). It is also inconsistent with the need for a scheme, in the sense of the programme or plan, to be in existence before contributions are made.
152 Accordingly, absent proof of such intention that they are to be pooled, I do not think that the mere fact that moneys are thereafter collected into one bank account meets the definition of a "scheme", for the purposes of s 9.
153 I do not regard the mere fact that moneys are placed into one bank account by a person with the intention that they be used according to the individual arrangements reached with each person who provided the moneys as constituting evidence of the relevant intention under para (a)(ii). That, in my opinion, is what occurred in this case. I will consider the facts open on the evidence in this respect below.
154 The Court of Appeal in Enterprise Solutions [2003] 1 Qd R 135 at [9] said that the words "pool" and "pooled" may be used with reference to "a fund made up of numerous payments from participants and used for a purpose they contemplate" (emphasis added). It is a single and corporate purpose which is there described. By contrast, a fund made up of numerous payments from a number of individuals and used for a number of purposes pursuant to a particular arrangement made with each individual is different from a fund constituted by monies which were to be pooled to produce benefits for people who hold interests in the scheme.
155 Buss JA referred to this passage at [61]. His Honour said:
The Court of Appeal also noted (at [8]), that pooling will occur where moneys paid or supplied by people are collected in a bank account.156 What in fact the Court of Appeal said at [8] was:
There is, however, certainly pooling at least in the sense that the monies paid in are collected in one of two accounts controlled by one or more of the appellants.157 I do not understand their Honours there to be saying that by this fact alone "pooling" occurred in the sense used in para (a)(ii). As the Court said at [13] the words "to be pooled ... to produce" in para (ii) imply that the intention must be to pool the contributions and, by use of the pool, produce benefits.
158 This construction is consistent with the genesis of the legislation in an Australian Law Reform Commission Report, "Collective Investments: Other People’s Money", (Report No 65, 1993), which led to the introduction of the managed investment scheme provisions in the Act and referred to "collective investment schemes" as allowing "individuals and groups with relatively small savings to get better returns by pooling their money, giving them more investment opportunities". This was adverted to by Pullin J in his historical analysis in Knightsbridge Managed Funds [2001] WASC 339 to which I referred above.
159 In any event, in my opinion, for reasons which I will later explain, the first feature described in para (a)(i) was not established on the facts and for this reason alone did not warrant the conclusion that there was a managed investment scheme.
The evidence before the primary judge
160 In my opinion, there was no evidence that investors contributed money as consideration to acquire interests produced by a scheme (para (a)(i)) or that investors’ funds were to be pooled, and by use of the pool produce benefits for the investors, or "members" (para (a)(ii)). Rather, the evidence as a whole supported the opposite conclusion.
161 The principal affidavit before the primary judge was sworn by a solicitor, Michael Fabbro, on 4 September 2008. I accept the submission by NAB that Mr Fabbro’s evidence does not explain the nature, or elucidate the existence, of any ‘scheme’ but rather, seems merely to assume it. His evidence is assertive and conclusionary in character. It asserts that various clients and associates of McFarlane were invited by him to "invest funds in the Scheme" with such funds "generally [being] deposited into the ... Account". Mr Fabbro produced a bundle of correspondence between McFarlane and investors as supposed evidence of these propositions.
162 None of McFarlane’s correspondence with clients or actual or potential investors makes any mention of any intention for investors’ funds to be pooled in the relevant sense. Rather, in my view, the evidence discloses that McFarlane received clients’ funds and invested them on their behalf in various types of investments as individuals. An example is McFarlane’s email dated 6 June 2008 to Mr Mark Bateup which senior counsel for Mr Norman characterised as the high point of the evidence below and supportive of the orders made by the primary judge. It was in the following terms:
Minimum amount is usually $20,000 but $10,000 will be OK if that is convenient for you now. I can link you as a client with Mum. Minimum term is 30 days. Yes the funds are available according to what deposit term you choose, but of course if you had an emergency I would always endeavour to get around that. Draws may be by cheque mailed to you or direct into your designated bank account Current rates are 30 days call 12.50% pa. 45 days call 13.25% pa and 60 days call 13.95% pa. We place them on a 6 months rollover basis with one of the aforesaid call terms designated. All our funds placed through MCFARLANES Trust Account are fixed term with the 4 pillar banks, ANZ, NAB, WESTPAC and COMMONWEALTH. Therefore they are capital guaranteed. We place funds for some very large clients. Mark, we have large funds being placed today and on Tuesday next. You could bank your $10,000 direct to any NAB bank branch into the following account: I can then guarantee the above figures. NAB MCFARLANES CHARTERED ACCOUNTANTS TRUST ACCOUNT BSB NO 085 005 ACCOUNT NO 04909 7085 I would then email you confirmation and you could then advise me as to where you wanted our Certificate of Deposit mailed. We are looking forward to seeing your chirpy Mum tomorrow morning. Cheers, Allan McFarlane MCFARLANES163 The other kind of documents said to bear on the question were the so-called "Certificates". These were provided by McFarlane to his clients purporting to certify the investment supposedly made by him on their behalf. They were all in similar terms although the identity of the relevant bank and the terms varied across the several certificates.
164 The following is an example of such a certificate dated 18 October 2001 on the letterhead of MCFARLANES, apparently signed by McFarlane:
BATCH NO 801 CERTIFICATE NO 74328/BANKS/1/RO This is to certify that MRS DORIS ETHEL DENTON of 34 SNEAD CRESCENT, FAIRVIEW PARK, SOUTH AUSTRALIA 5126 has this day placed the sum of NINETY-SIX THOUSAND, SIX HUNDRED AND SEVENTY-SIX DOLLARS AND NINETY-SIX CENTS ($96,676.96) on bank funds deposit for a period of SIX MONTHS ON A ROLLOVER BASIS at an interest rate of 8.75 PER CENTUM PER ANNUM MCFARLANES CHARTERED ACCOUNTANTS TRUST ACCOUNT BANK FUNDS 18 October 2001165 I accept the submissions made on behalf of NAB that the certificates provided to investors by McFarlane are reflective of investments of funds on different dates, in different amounts, in different investment products and on different terms for the sole benefit of the individual owners of those funds. Specifically, those documents purport to "certify" the following:
(a) an investment on 14 February 2005 of $100,000 by Vaughan and Karin Sage on bank funds deposit for a period of six months on a rollover basis at an interest rate of 8.00% per annum, with withdrawals on 7 day’s notice;
(b) an investment on 10 October 2003 of $110,000 by Wendy Lyttle on (Pacific) foreign exchange placement for a period of 120 days at a 10.00% gain, maturing on 10 March 2004, with costs of $250.00;
(c) an investment on 9 August 2007 of $567,500 by Willem and Hendrika Baartse on foreign exchange placement for a period of 120 days at a 10.00% gain, maturing on 7 December 2007 with Bank of America costs of $500.00 and McFarlane’s placement fee of $750.00;
(d) an investment on 10 April 2007 of $550,000 by Ian and Christine Norman on foreign exchange placement for a period of 120 days at a 10.00% gain, maturing on 18 August 2007;
(e) an investment on 18 October 2001 of $96,676.96 by Doris Denton on bank funds deposit for a period of six months on a rollover basis at an interest rate of 8.75% per annum;
(f) an investment on 18 April 2005 of $10,000 by the Cronulla Baptist Church on Pacific foreign exchange for a period of 120 days at a 10.00% gain, maturing on 16 August 2005, with costs of $150.00;
(g) an investment on 2 January 2008 of $400,000 by Alexander and Gillian Stevenson on foreign exchange placement for a period of 120 days at a 10.00% gain, maturing on 2 May 2008, with Bank of America costs of $2,500.00 and McFarlane’s placement fee of $750.00;
(h) an investment on 10 January 2008 of $50,000 by Bethany Denton on foreign exchange placement for a period of 120 days at a 10.00% gain, maturing on 18 May 2008, with Bank of America costs of $500.00 and McFarlane’s placement fee of $250.00;
(i) an investment on 27 February 2008 of $429,225.00 by Louise van Herpen on bank funds deposit for a period of six months on a rollover basis at an interest rate of 13.50% per annum at 45 days call on $370,000 and 10.05% per annum at 7 days call or 12.50% per annum at 30 days call on $59,225.00;
(j) an investment on 1 May 2008 of $240,672.71 by Marlene Hutchins on foreign exchange placement for a period of 120 days at a 11.00% gain, maturing on 29 August 2008, with Bank of America costs of $750.00 and McFarlane’s placement fee of $200.00 together with "rewards" of 2 business class return air tickets;
(k) an investment on 23 May 2008 of $385,148.58 by Fay Bateup on bank funds deposit for a period of twelve months on a rollover basis at an interest rate of 14.05% per annum with withdrawals on 90 days call and on further sum of $20,000 at 12.50% per annum on 30 days call.
166 Some email correspondence suggests that McFarlane made weekly or twice-weekly "placements" of investors’ funds, for example, the email exchange with Mark Bateup in June 2008 and the email to Marlene Hutchins of 29 April 2008. The evidence does not support, in any way whatsoever, the investing of composite funds across the "pool" of funds held in any combination of contributors. In other words there is no evidence of investors’ funds being pooled or commingled for some common purpose of obtaining some shared or mutual financial benefit. The reference in one email to McFarlane ‘com[b]ining’ small amounts of investors’ funds was for the purpose of accessing ‘rewards’ of five business class airfares – rewards which were referred to in the certificate apparently issued to Ms Hutchins on 1 May 2008 and referred to above. Such a limited combination, of less than 20 members does not qualify as a managed investment ‘scheme’ requiring to be registered under the Act.
167 The individual nature of the investments is further evidenced by a series of other documents, for example a document entitled "Ian and Christine Norman Statement of Funds placed through McFarlane’s Trust Account as at 11 January 2008". That statement shows a running account, with various debits and credits, only some of which relate to the Normans personally. The entries on the statement include:
(a) for the Norman Family Trust:
(i) an opening balance as at 11 December 2006 of $173,910.35;
(ii) periodic debits of $5,000, $8,000 or $15,000 constituting "payments to CPS Credit Union";
(iii) a credit described as "interest";
(iv) a closing balance as at 11 January 2008 of $108,698.73;
(b) for the Bodyguard & Misty Superannuation Fund:
(i) an opening balance as at 11 December 2006 of $7,713.99;
(ii) three debits constituting payments to the Australian Taxation Office;
(iii) a credit described as "interest";
(iv) a closing balance as at 11 January 2008 of $4,804.51;
(c) for Ian and Christine Norman:
(i) an opening balance as at 11 December 2006 of $535,218.55;
(ii) a payment of $52,840.00 to Wirr-away Motor Homes;
(iii) two credits described as "TX net gain";
(iv) a credit described as "interest";
(v) a closing balance as at 11 January 2008 of $568,988.79;
(d) total funds of $682,492.03 as at 11 January 2008, of which $500,000 was supposedly on "TX placement" and $182,492.03 was in the Account.
168 A further document is entitled "PG & CA Denton (Total) Deposit Funds placed through McFarlanes Trust Account as at 31 January 2008":
(a) commences with an opening balance as at 20 August 2007 of $789, 845.28;
(b) contains a credit entry "Add TX Net Gains" of $64,150.00;
(c) then sets out a series of debit entries under the heading "Less Payments", including:
(d) contains a further credit entry "Add Interest" of $4,661.82;(i) six payments to the NAB Visa account;(ii) six payments entitled "Adelaide Bank Loan";
(iii) one payment to the Australian Taxation Office for the P&C Denton Super Fund;
(iv) two further payments entitled "NAB Account - PG Denton";
(e) concludes with a closing balance of $790,295.10 as at 31 January 2008.
169 There are several further statements of funds passing through the Account, evidencing similar kinds of transactions and which are obviously personal to the individual investors
170 Other evidence disclosed that some of the moneys passing through the Account belonged to McFarlane himself. For example, correspondence passing between solicitors for Mr Norman and solicitors for the trustee of McFarlane’s estate prior to the hearing before the primary judge refers to a confidential investigative report conducted by Messrs Edwards Marshall into transactions on the Account in the 2007 and 2008 financial year, which showed that almost $500,000 was drawn from equity in McFarlane’s house and paid into the Account in that year. The trustee, Mr Carter, deposed that he had concluded, apparently on the basis of the Edwards Marshall report, that there was a mingling of personal and investors’ funds in the Account.
171 There were a number of ‘form’ letters signed by persons who said they had invested funds with McFarlane. Each include the following statements:
I am an investor who has lost a significant amount of money by reason of placing my funds with the late Mr Allan McFarlane. ... I understood that the funds deposited with Mr McFarlane on trust for me were to be invested by Mr McFarlane in accordance with my instructions. I understood that, at all times, I continued to be the beneficial owner of those funds because they were deposited in a trust account. Mr McFarlane said to me that my trust funds would be invested on my behalf in different types of investments, most commonly foreign exchange investments with the Bank of America. It now appears that he fraudulently used those funds for his own personal gain. ... I understand that dozens of other investors placed their trust funds in the Allan McFarlane Chartered Accountant Trust Account with the National Australia Bank, under materially similar circumstances to me. ...172 The investors had no appreciation whatsoever that their funds were going to be pooled or combined with those of other investors in order to produce some benefit for all. Rather, the letters speak of the investors’ funds being invested on "my" behalf and "in accordance with my instructions" in various kinds of investments. And, while the letter refers to the signatory now being aware that other investors placed their funds with McFarlane under similar circumstances, there is no indication that he or she understood at any stage that such funds were to be combined with his or her own as part of an investment scheme.
173 The statements in the letters are consistent with the proposition that McFarlane acted as the signatory’s finance broker or investment adviser for the purpose of investing funds placed with him in various kinds of investments for the benefit of the individual investor.
174 Section 601ED(6) provides relevantly that a person is not operating a managed investment scheme merely because they are acting as an agent for another person.
175 There is no evidence that investors contributed their funds as consideration for the acquisition of rights or interests in some identifiable scheme. There is no evidence that funds were to be pooled and, by use of the pool, produce benefits for the members of the alleged scheme. Rather, investors placed funds with McFarlane for individual investment and for the benefit of that investor alone. There is no programme or plan under which investors would share in any financial benefits produced. In my opinion, their funds whilst paid into the Account were not funds which, objectively, were to be pooled for a common purpose and were not in fact pooled for a common purpose. Their funds were commingled with the funds of other investors and, apparently, those of McFarlane himself, but such commingling does not of itself amount to ‘pooling’ any more than the deposit by various clients of funds into a solicitor’s trust account does: Re Magarey Farlam Lawyers Trust Accounts (No 3) (2006) 96 SASR 337 at 373 [123], 379-380 [144]-[146].
176 In my opinion the evidence did not disclose the first two statutory features of a "managed investment scheme" within the meaning of paras (a)(i) and (ii) in s 9 of the Act. It is unnecessary to consider the third feature. The appeal ought be allowed.
177 In fact the evidence, as a whole, supports an inference that, objectively, there was never an intention that investors’ funds were to acquire interests in a scheme, a feature of which was that funds were to be pooled to obtain benefits for them. Rather it discloses that, at all times, McFarlane’s plan was to misappropriate investors’ funds by fraudulent misrepresentations made to investors. Senior counsel for the first respondent submits that if contributors intend to acquire benefits from part of the scheme as defined, then that is sufficient; and that here, part of the Scheme, which was not disclosed to the Scheme investors, was to misappropriate the contributions of the investors.
178 He submits that the subjective intention of contributors to acquire benefits produced by the scheme was met in that they contributed their moneys into a single bank account with the intention of acquiring financial benefits, namely, high interest returns, which McFarlane promoted and promised. That McFarlane had a wider and fraudulent scheme than that contemplated by the investors does not mean, so the argument goes, the contributors were not hoping to acquire benefits by the scheme. The promise of interest was part of the scheme.
179 Mr Norman submits that the relevant plan of action was that McFarlane regularly procured deposits of money from his clients into the Account, which his clients believed were being provided for the purpose of investments of various kinds although they were in fact fictitious and which he did not invest but misappropriated to his own use.
180 In other words, the Scheme, according to the respondents, was the way in which McFarlane defrauded his clients, not the way in which the investment fund was supposed to be operated.
181 That McFarlane had a programme or plan of action, and that he undertook a course of conduct to effectuate that programme or plan of action, is evidenced, they submit, by the following:
(a) McFarlane accepted deposits of his clients’ money in the NAB Trust Account;
(b) his clients knew that their funds were being deposited in the trust account, and thought that the moneys were going to be invested by him; and
(c) he misappropriated those moneys from that trust account.
182 The submission then is, putting it slightly differently, that on what the investors knew and had been promised there were benefits available but never received because of the subsequent fraud and misappropriation of the moneys by McFarlane. The Scheme therefore had several characteristics which included those known to investors and those not known namely, the fraudulent activity. Viewed in this way, the inclusion of the fraudulent activity in the definition of the Scheme was necessary to define the way in which the Scheme was operated, in part, by McFarlane. Senior counsel for the first respondent submits that there is no prohibition in the Act from so doing. Indeed the primary judge defined the scheme to include the conduct of McFarlane in misappropriating the moneys of scheme investors.
183 I do not accept these submissions. As I have already explained, s 601EE allows managed investment schemes to be wound up where a person operates a scheme in contravention of s 601ED(5). Section 601ED(5) prohibits a person from operating a managed investment scheme that is required to be registered, unless the scheme is so registered. Section 601ED(5), accordingly, envisages that the unregistered managed investment scheme is of a kind which ought to have been, and could in fact have been, registered. In my opinion, a scheme involving, even in part, misappropriation as one of its features, is not a scheme of a kind which is capable of registration by the Australian Securities and Investments Commission under s 601EB of the Act.
184 Whilst in the colloquial sense it may be regarded as a scheme, it is not a statutory scheme within the meaning of s 9 of the Act and, it follows, cannot be subject to a winding up order of the Court under s 601EE or otherwise.
185 Any scheme involving a programme or plan for the misappropriation of investors’ funds could not involve contributions being pooled or used in a common enterprise to produce financial benefits "for the people ... who hold interests in the scheme", as required by the second limb of the definition of "managed investment scheme".
186 As senior counsel for NAB put it, investors in a supposed scheme could not be taken to have intended to contribute money as consideration to acquire rights to benefits produced by a scheme in which they would be defrauded.
187 The appellant in the event that its primary ground of appeal was unsuccessful also challenged the form of orders made by the primary judge. It is unnecessary, given my conclusion that there was no managed investment scheme to deal with this subsidiary ground.
188 The appeal should be allowed. The declaration and orders of Mansfield J of 28 November 2008 as varied by his Honour on 2 June 2009 should be set aside and in their place the application for a winding up order dated 8 September 2008 be dismissed.
189 The first respondent should pay the costs of National Australia Bank
Limited of the application for leave to appeal, and of the
appeal, to be taxed
if not agreed.
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I certify that the preceding ninety (90) numbered paragraphs are a true
copy of the Reasons for Judgment herein of the Honourable
Justice Gilmour
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Associate:
Dated: 30 October 2009
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Solicitor for the Appellant:
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Johnson Winter & Slattery
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Counsel for the First Respondent:
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M Livesey QC and D Blight
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Solicitor for the First Respondent:
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Ezra Legal
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The ‘Second Respondent’ did not appear.
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URL: http://www.austlii.edu.au/au/cases/cth/FCAFC/2009/152.html