Koala Hydroponics Limited and Koala Quality Produce Limited [2002] AATA 41 (24 January 2002)

Last Updated: 15 February 2002

DECISION AND REASONS FOR DECISION [2002] AATA 41

ADMINISTRATIVE APPEALS TRIBUNAL )

) No N2001/296 & 297

GENERAL ADMINISTRATIVE DIVISION )

Re Koala Hydroponics Limited and Koala Quality Produce Limited

Applicants

And Australian Securities and Investments Commission

Respondent

DECISION

Tribunal Mr R P Handley, Deputy President

Date 24 January 2002

Place Sydney

Decision The Tribunal affirms the decisions under review.

..............................................

Mr R P Handley

Deputy President

CATCHWORDS

CORPORATIONS - Managed Investments Scheme - transition from prescribed interest to managed investment scheme - where two year transition period applied - where Applicant applied for extension of time - where conditional relief granted - Applicant failed to comply with conditions of relief - where director of company Applicants failed to adequately inform shareholders of the requirement to transition to managed investment scheme

Application for dealers licence - where licence application refused - whether director could perform duties in respect of licence holder "efficiently, honestly and fairly"

ASIC Policy Statement No. 135 - Managed Investments: Transitional Issues

Corporations Law - ss 601QA(1), 601QA(3), 784, 1454(2)

Managed Investments Act 1998

Story v National Companies and Securities Commission (1988) 13 NSWLR 661

Re Campbell v ASIC [2001] AATA 205

REASONS FOR DECISION

24 January 2002

1. N2001/297. This is an application lodged on 6 March 2001 by Koala Quality Produce Limited ("KQPL") for a review of a decision of the Australian Securities and Investments Commission ("ASIC") made on 19 October 2000 to refuse to vary an instrument dated 30 June 2000 that granted conditional relief to KQPL until 31 October 2000 from an obligation to convert to a managed investment scheme pursuant to s 601QA(1)(a) of the Corporations Law.

2. N2001/296. This is an application lodged on 6 March 2001 by Koala Hydroponics Limited ("KHL") for a review of a decision of ASIC made on 9 February 2001 to refuse an application for a dealers licence under s 784 of the Corporations Law.

3. At the hearing, KQPL and KHL were represented by Simon Burchett, of Counsel, and ASIC was represented by Anthony Spencer, of Counsel. The evidence before the Tribunal comprised the documents produced pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 ("the T documents"), together with the documents tendered by the parties. Warwick Young, Thakov Lal ("Tony") Morar and John Sharp gave evidence on behalf of the Applicants.

Background

4. KHL is an unlisted public company that was originally incorporated on 9 December in 1992 as Strawberry Fields Developments Limited. It changed its name to KHL on 4 June 1997. The directors of KHL are Warwick Young, John Sharp and and Alan Clague. KHL was the owner of land at Stanthorpe, New South Wales, and Yandina, Queensland, on which facilities for the hydroponic production of vegetables were developed. KQPL is also an unlisted public company, incorporated on 4 June 1997. The directors of KQPL are Warwick Young and John Sharp.

5. On 29 August 1997, KHL, KQPL and Australian Rural Group Limited ("ARG") entered into an Investment Deed by which they agreed to establish and operate a scheme known as the Koala Hydroponics Project ("the Koala Scheme"). The Koala Scheme involved the production of hydroponic vegetables on the land owned by KHL at Yandina and Stanthorpe. The Scheme sought to attract investors (referred to as "farmers") to whom blocks of shares were issued entitling them to occupy defined portions of KHL's land to carry on the business of hydroponic farming, and to appoint KQPL as the manager of that business. KHL would grant a lease of its land to ARG and ARG would sub-lease that land back to KHL, subject to the investors' rights and minimum subscriptions. The hydroponic production of vegetables on the land was to be managed by KQPL, and ARG would act as trustee and hold any property in the Scheme. The Scheme comprised a "prescribed interest" scheme under the then provisions of the Corporations Law.

6. On 11 September 1997, the Koala Scheme was approved by Australian Securities Commission, as ASIC then was, and, on 12 September 1997, KHL and KQPL lodged a prospectus with the Commission, which was subsequently approved on 23 September 1997.

7. Changes to the Corporations Law as a result of the Managed Investments Act 1998, took effect on 1 July 1998. The Managed Investments Act amendments established a new regulatory regime for managed investment schemes, which had previously been regulated as "prescribed interest" schemes. The Managed Investments Act amendments required all prescribed interest schemes to transition to the new regulatory regime within a period of two years from commencement of the amendments on 1 July 1998. However, provision was made in s 1454(2) of the Corporations Law for ASIC to extend the time for compliance beyond the two year transition period if certain criteria were met. Sub-section 1454(2) provides:

ASIC may extend that period of 2 years if the undertaking is to be wound up at a fixed time after the two years and ASIC thinks it would be unreasonable to require the undertaking to become a registered scheme before being wound up.

8. ASIC has formulated policy to guide the exercise of the discretion in relation to extension of the two year transition period under s 1454(2). In particular, Policy Statement 135 governs the transitional issues relating to managed investments. Under paragraph 135.3, transitional relief may be granted by ASIC where both the following criteria are met:

(g) the scheme is certain to terminate at a particular time after 30 June 2000 and that the approved deed does not allow the parties to the scheme to change; and

(h) it would be unreasonable for the scheme to be required to be registered.

9. By letter dated 25 May 2000 (KHL Documents, T7), Warwick Young, Chairman of KQPL, applied to ASIC for an extension of the transition period under s 1454(2). On 30 June 2000, a delegate of ASIC granted conditional relief under s 601QA(1)(a) of the Corporations Law to KQPL and ARG from the obligation to convert to a managed investment scheme until 31 October 2001. Section 601QA(1)(a) gives ASIC a discretion "to exempt a person from a provision of this Chapter" (Chapter 5C, Managed Investment Schemes), and s 601QA(3) enables ASIC to grant an exemption "subject to specified conditions" which must be complied with.

10. The conditions imposed by ASIC included the following:

1. KHL was required to obtain a letter of proposed conditions of the licence under Division 1 of Part 7.3 of the Corporations Law the grant of which would allow KHL as the proposed responsible entity, to operate the Koala Scheme

2. KQPL, ARG and KHL were required "to take all reasonable steps to cause the Scheme to be registered as a managed investment scheme as soon as practicable and in any event by 31 October 2000".

3. Until the Scheme had been registered by ASIC as a managed investment scheme, KQPL would not make any offer that would require disclosure under Chapter 6D of the Corporations Law.

4. KQPL was required to provide written progress reports every month from 30 June 2000 until registration both to members of the Scheme and ASIC in relation to transitioning the Scheme to a managed investment scheme.

11. ASIC wrote to KQPL on 26 September 2000 requesting reasons why KQPL had not complied with the conditions of the relief. By letter dated 29 September 2000, KQPL replied that an administrative oversight on its part was the reason for copies of a number of reports not being lodged with ASIC. KQPL said a further report was being prepared for mailing to members during the first week in October 2000, a copy of which would be provided to ASIC. With regard to the letter of proposed conditions, KQPL said:

we overlooked the requirement for 21 September and had diarised the 31^st October as the critical date. This was also an administrative error and not deliberate disregard to the condition.... Drafts of all relevant documents have been prepared responsible entity, to operate the Koala Scheme.

12. On 13 October 2000, KQPL requested an extension of the transitional relief granted on 30 June 2000 beyond 31 October 2000. On 19 October 2000, ASIC refused this application. ASIC gave the following reasons for its decision (KHL Documents, T20):

1. In ASIC's view, the reasons put forward for not lodging a licence application in order to obtain a letter of proposed conditions of licence by 21 September 2000 are inadequate;

2. the Reports [to investors] dated 23 and 24 August 2000 and 12 September 2000 make no mention of the progress of the transitioning of the Scheme to become a registered scheme. In addition, the items listed for a report you intend to issue during the first week of October does not contain any reference to the progress of the transition of the scheme to a registered managed investments scheme; and

3. In ASIC's view, the reasons put forward for not submitting reports to ASIC on the progress of the transition and registration of the Scheme are inadequate.

It is appropriate for ASIC to expect more detailed information....

13. Following discussions between Mr Young, Ron Makin of ARG, and two ASIC officers on 31 October 2000, ASIC agreed not to take "any enforcement action before the members meeting on 28 November 2000 as one final concession to see if the issue can be resolved". Amongst other matters, ASIC required that a licence application to act as Responsible Entity for the Scheme be lodged as soon as possible, but no later than 7 November 2000. On 9 November 2000, Mr Young lodged an application for a licence as a dealer for KHL to act as the Responsible Entity for the Scheme, naming Mr Morar as the person responsible for compliance in relation to the licence.

14. On 21 and 24 November 2000, ASIC sought further information from KHL in relation to the licence application. KHL provided some information by letter dated 29 November 2000 and further information by letter dated 22 December 2000. In the letter dated 29 November 2000, Mr Young said that following the meeting of investors held on 28 November 2000, KHL would seek to be licensed as Responsible Entity for the Scheme.

15. By letter dated 29 December 2000, ASIC informed KHL that it was minded to refuse KHL's licence application and invited KHL to attend a private hearing to make submissions and give evidence in relation to the application. Mr Young responded on behalf of KHL by letter dated 22 January 2001, and he and Mr Morar attended an ASIC hearing on 29 January 2001.

16. Following the hearing, on 9 February 2001, a delegate of ASIC decided to refuse KHL's licence application. ASIC notified KHL of this decision by letter dated 12 February 2001. After a discussion of the relevant issues and evidence the delegate stated (KHL Documents, T26):

85. In summary, in considering ASIC's grounds of concern in relation to Koala Hydroponics Limited licence application I have reached the conclusion that I have reason to believe that the officers of Koala Quality Produce Limited and Koala Hydroponics Limited have not acted efficiently, honestly and fairly in relation to:

a. operating the project illegally in contravention of the Corporations Law, in that

(1) the project was not transitioned prior to the expiration of the Instrument of Relief; and

(2) the officers are continuing to operate the project illegally

b. failing to adhere to the terms of relief granted to Koala Quality Produce Limited by ASIC in respect of the project, in that

(1) Koala Hydroponics Limited did not lodge a licence application prior to 21^st September 2000;

(2) The project was not registered as a managed investment scheme by 31^st October 2000; and

(3) The monthly report for August on the progress of transitioning the project was not received by ASIC.

86. I have noted in paragraph 40 above that I have no reason to believe that Mr Sheldon Young will not perform efficiently, honestly and fairly the duties of a responsible officer. However, from the information contained in the licence application regarding Mr Sheldon Young it does not appear to me that he has sufficient experience to undertake the duties and functions as the sole responsible officer to operate a managed investment scheme.

87. Overall, I am inclined to view Messrs Young's, Morar's Sharp's and Clague's past conduct in relation to Koala Hydroponics Limited and Koala Quality Produce Limited as predominantly failing to satisfy the efficiency criteria. The failure to act efficiently has resulted in the project operating illegally and this necessarily reflects upon the honesty and fairness of the officers. As noted in paragraph 30(a) above, in Story v National Companies and Securities Commission Mr Justice Young expressed the view that for a belief that a person is dishonest regard must be had to matters of efficiency and fairness, for unfair regard must be had to the mattters of efficiency and honesty and inefficient having regard to honesty and fairness.

88. I also note that by applying the conclusion reached by Mr Justice Young in Story v National Companies and Securities Commission unless a licence applicant possesses all three attributes of efficiency, honesty and fairness, ASIC shall refuse to grant an offer of a licence.

89. As noted in paragraph 38 above, ASIC is entitled to draw inferences from the past business conduct of the responsible officers in reaching a conclusion that the applicant will not perform the duties of a licensee efficiently, honestly and fairly. On the basis of my findings in this decision, summarised in paragraph 85 above in relation to the conduct of the officers of Koala Hydroponics Limited, and Koala Quality Produce Limited. I have reason to believe that the applicant will not perform efficiently, honestly and fairly the duties of a holder of a licence of the kind applied for.

Conclusion

90. Taking into account all the material before me I refuse the licence application by Koala Hydroponics Limited dated 9th November 2000 under section 784 of the Corporations Law.

17. The relevant provisions of the Corporations Law in relation to licensing are as follows:

782 (1) A person may apply to ASIC, in the prescribed form and manner, for a dealers licence or an investment advisers licence.

782 (2) ASIC may require an applicant for a licence to give ASIC such further information in relation to the application as ASIC thinks necessary.

784 (1) This section has effect where a body corporate applies for a licence.

784 (2) [Criteria for granting licence] ASIC must grant the licence if:

(a) the application was made in accordance with section 782; and

(b) the applicant is not an externally-administered body corporate; and

(c) ASIC is satisfied that the educational qualifications and experience of each responsible officer of the applicant are adequate having regard to the duties that the officer would perform in connection with the holding of the licence; and

(d) ASIC has no reason to believe that the applicant will not perform efficiently, honestly and fairly the duties of a holder of a licence of the kind applied for; and

(e) if the licence applied for is a licence to operate a managed investment scheme or schemes, the applicant meets the requirements of subsection (2A) and any additional requirements determined by ASIC under subsection (2B).

[Sub-sections (2A) and (2B) are not in issue in this matter]

784 (3) Otherwise, ASIC must refuse the application.

784 (4) In determining whether or not it has reason to believe as mentioned in paragraph (2)(d), ASIC must have regard, in relation to each responsible officer of the applicant, to:

(a) whether or not the officer is an insolvent under administration; and

(b) any conviction of the officer, during the 10 years ending on the day of the application, of serious fraud; and

(c) any reason ASIC has to believe that the officer is not of good fame and character; and

(d) any reason ASIC has to believe that the officer will not perform efficiently, honestly and fairly the duties that the officer would perform in connection with the holding of the licence.

EVIDENCE

Warwick Young

18. Mr Young made a statement dated 17 July 2001 (A3). He gave evidence at the hearing on 31 July 2001 but was unable to continue with his evidence at the resumed hearing on 5 December 2001 because of illness. He therefore provided a further written statement dated 4 December 2001 (A2) in which he answered the Respondent's contentions which would have otherwise been put to him in cross-examination.

19. Mr Young is a Management Consultant of approximately 30 years experience. He is a director of KHL and KQPL, and is also Managing Director of Prospectus and Project Management Services Pty Ltd ("PPM"), a company registered in 1990, which "for the last ten (10) years" has been involved "in providing a full range of services to prescribed interest projects". KQPL subcontracted the performance of a number of its functions to PPM. Apart from his involvement with KHL, KQPL and the Koala Scheme, Mr Young is also Chairman of the Board of Directors of two companies associated with another prescribed interest scheme, the Australian Aloe Project, which has been granted relief from transitioning to a managed investment scheme until 30 June 2004. All statutory accounting and compliance requirements of both the Australian Aloe Project and the Koala Scheme are provided by PPM staff including Mr Morar (the Company Secretary of KHL and KQPL), who is the financial controller, and Sheldon Young ("Sheldon") (Mr Young's son), who is administration manager.

20. Mr Young said the properties at Stanthorpe and Yandina had initially been used by Strawberry Fields Developments Ltd for the hydroponic growing of strawberries and other vegetables, for example, lettuce. When the growing of strawberries proved not to be viable, other vegetables were experimented with and, ultimately, tomatoes were thought to be a good prospect. KHL issued a prospectus to attract investment and, with the proceeds, purchased the operation and growing system of Strawberry Fields Development Ltd.

21. Mr Young said under the terms of the Investment Deed dated 28 August 1997, investors have a right to occupy their designated portion of land and elect to have KQPL manage it for them. Since the Koala Scheme commenced on 1 January 1998, there have been various plantings and harvests but, because of changing weather patterns, losses resulted. Mr Young acknowledged that KHL had never operated at a profit on an annualised basis.

22. Mr Young said that prior to 1 July 1998, when the Managed Investments Act 1998 took effect, he had a broad idea of what it was about, having attended an ASC seminar and been visited by ASC officers. Soon after 1 July 1998, he became aware of the two year transition period. In the latter part of 1998, he engaged Freehill Hollingdale and Page, Solicitors, to provide general advice on the transitioning of the Koala Scheme to a managed investment scheme before the deadline of 30 June 2000. He anticipated that the work involved in transitioning would be done during the course of 1999.

23. Mr Young said in April 1999 he underwent major surgery for cancer and, for a period until November 1999, intense chemotherapy. As a result, his administration manager, Sheldon, who was responsible for getting together the required material for the application for a dealers licence, had to do so without Mr Young's direct supervision. Applications were made for police searches, and compliance plans and a draft constitution were prepared. Mr Young denied that his illness was a reason for delays in transitioning the Koala Scheme.

24. Mr Young acknowledged being aware that an application was made by Deacons Graham and James, Solicitors, to ASIC for an extension to the transition period for the Australian Aloe Project in June 1999. However, he said he had never previously seen the application itself, although he knew an extension was granted to 30 June 2004. Mr Young said the difference between the Australian Aloe Project and the Koala Scheme was that the former was financially sound at the time its application for an extension was made. However, this was not the case with the Koala Scheme where it had become clear that the Scheme was not viable without greenhousing which would require a further capital injection from investors.

25. Mr Young said that changing weather patterns during 1999, in particular, had brought devastating rains in South East Queensland with the result of either wiping out entire crops of tomatoes or reducing the quality to second or third grade. Expert advice was sought, which was to the effect that greenhousing was the only viable option, at an estimated cost of $3 million. It was determined to seek voluntary contributions from the investors to raise these funds should this option be approved, and to suspend work on transitioning the Scheme in the meanwhile. A further complication was that by early 2000 the Australian Taxation Office was issuing amended assessments to "tens of thousands of tax payers who had invested in agricultural schemes" similar to that of the Koala Scheme and who had previously received "assessments based on claims for deductible expenditure incurred in the course of their agricultural business".

26. Mr Young acknowledged that Gary Hunter, the farm Manager of the Yandina and Stanthorpe properties from November 1993 to May 1999, had eventually been dismissed for inefficiency and replaced by his former assistant, Leon Percival. Mr Sharp effectively acted as unpaid general manager of the farms from May 1999, and formally took on the position of general manager in December 1999. Mr Sharp's report dated 14 April 2000 (KQPL document T19) highlighting the problems facing the Koala Scheme, was sent to investors with the notice of the General Meeting to be held on 5 May 2000. At that meeting, resolutions were proposed to sell the farm at Stanthorpe, with investors relinquishing their rights in respect of that operation, and to seek a voluntary contribution of $2,500 from each investor to fund the construction of undercover growing systems for the farm at Yandina. Mr Young said the meeting was adjourned so that more detailed information could be provided to investors.

27. Mr Young said he could not remember whether, at the meeting of 5 May 2000, any mention was made of the impending deadline for transition of 30 June 2000. He acknowledged that although he was aware of the deadline from 1998, he did not raise the question of an exemption with investors prior to his letter to ASIC dated 25 May 2000 (KHL Documents, T8) and did not take any steps to inform investors of having applied for an exemption between 25 May 2000 and 27 June 2000. However, the Notice of General Meeting for the Scheme attached to the KHL letter of 2 June 2000 (A3, WRY7) refers in item 4 of Special Business to an application by KHL "to transition the Project into a Scheme under the provisions of the Managed Investments Act whereby it will assume the role of Responsible Entity".

28. Mr Young said about 100 people attended the General Meeting in Perth, not all of whom were investors. He agreed that of the approximately 500 investors in the Koala Scheme, at least 400 investors were not, therefore, at the meeting. In answer to a question, he said he did not think it important to inform those investors of a requirement to comply with a statutory change by 30 June 2000 -it was not a matter of priority.

29. With regard to the meeting on 27 June 2000, Mr Young acknowledged that he did not tell the meeting that if the exemption was not granted, the Koala Scheme would have to comply with the law by 30 June 2000. However, this was because he told them that, as a result of his conversations with ASIC, he expected an exemption would be granted. He acknowledged that he took no steps to inform the investors who did not attend the meeting of this, and that in his report to investors dated 21 July 2000 (A3, WRY11, attachment) there is no mention of the application for an exemption or of the 30 June 2000 deadline. Mr Young said he did not see informing investors of the deadline as being a priority.

30. Mr Young acknowledged that ASIC's response dated 29 June 2000 to his application for an exemption, referred to the draft Instrument of Relief being subject to conditions. He said he read the Instrument and its Schedules carefully. He thought the written monthly progress reports were the key, and overlooked the requirement for KHL to obtain a letter of proposed conditions of licence by 21 September 2000 (KHL Documents, T10). He made a note that 31 October 2000 was the material day and probably also misled the other directors with whom he discussed the matters and who, he agreed, relied on him, as to this.

31. Mr Young acknowledged that after the exemption was granted on 30 June 2000, he took no steps to report to ASIC on transitioning until they brought his failure to do so to his attention. Nothing was sent to ASIC between 30 June 2000 and 26 September 2000. However, he said the application was progressed. He guessed that he personally spent about six to eight hours on the matter, reviewing the compliance plan and police reports.

32. Mr Young was referred to ASIC's letter to him dated 26 September 2000 (KHL Documents, T13). He acknowledged that ASIC had expressed the view that KQPL was operating the Scheme illegally. He said that between 26 September 2000 and 13 October 2000, he gave instructions to his staff to review the documents for the dealers' licence application. The only reason the application was not lodged earlier was because of his mistake in not progressing it.

33. Mr Young agreed that having not provided the information required to investors in the period after 30 June 2000, an investor in the Koala Scheme at 29 September 2000 would have had no idea that an exemption had been granted. Investors not present at the 29 June 2000 meeting would also not have known that an exemption had been applied for. He acknowledged that he had failed to keep investors informed about these matters.

34. Mr Young was referred to his letter to investors dated 10 October 2000 (KHL Documents, T16). He acknowledged that he omitted to inform investors that the Koala Scheme was currently operating illegally, and that those investors not present at the 29 June 2000 meeting would not have had any understanding of the ramifications of transitioning to the Scheme. Mr Young believed the matter was in hand and that as a result of his dealings with ASIC, "commercial reality would be applied" and that common sense would prevail.

35. Mr Young was asked about the meeting with Darren McShane and Catherine Bennett of ASIC on 31 October 2000. Mr Young did not recall Mr McShane saying that the Koala Scheme had been operating illegally since 1 July 2000, although Mr Young acknowledged that Mr McShane could have said this. Mr Young also had no recollection of Mr McShane saying that ASIC would not give a "no action letter". Mr Young believed ASIC had accepted his explanation and did not consider the Scheme had been operating illegally. Mr Young was referred to Mr McShane's letter dated 2 November 2000 (KHL Documents, T20) and agreed that Mr McShane had said "ASIC would not take any enforcement action before the members meeting on 28 November 2000 as one final concession to see if the issue can be resolved". The conditions set included lodging KHL's licence application no later than 7 November 2000 and sending an attached ASIC notice to investors which included the statement "in ASIC's view, the Scheme is currently being operated in contravention of the Corporations Law". Mr Young agreed that, as at 2 November 2000, he understood the Scheme was operating illegally.

36. In his further written statement dated 4 December 2001 (A2), in response to issues raised by the Respondent in cross-examination, Mr Young said:

No new solicitation of funds occurred after the grant of the temporary exemption; requests had already been made to the members for the voluntary contribution to the green housing and expenses of the project and the express purpose of the application and grant of the temporary extension was to permit those requests to be pursued...

In my opinion at the time and now the requests did not require disclosure under the law as provided for by Schedule D of the exemption...

37. Mr Young stated there was no necessary unfairness to members created in the procedure for voluntary contributions. He hoped that approval might be obtained from ASIC to divide the Koala Scheme into two pools, one for those who had made a voluntary contribution and one for those who had not. The new constitution required for transition could incorporate this division.

38. Mr Young stated the Koala Scheme continues to comply with the old law applicable to prescribed interest schemes. No members claim to have been misled or deceived by what has occurred. Indeed, members have recently again indicated their desire for the Scheme to continue. It is clearly not in members' interests for the Scheme to cease, despite the difficulties. In particular, there could be detrimental tax consequences for members.

39. Mr Young referred to members' desire to explore alternative crops. Should such exploration yield a viable product, a further investment by members would be required. The reason for the transition to a managed investment scheme not being completed by the required date, was the need to consider the viability of the Koala Scheme.

John Sharp (A6)

40. Mr Sharp said he became a director of KQPL on 17 April 1999. He is the General Manager of his family company, Pitline Pty Ltd, other shareholders being family members. He has worked for over 30 years in utility management but, prior to his involvement in the Koala Scheme, had no direct experience of hydroponic farming.

41. On 1, 4 and 5 January 1999, Mr Sharp had discussions with Gary Hunter, the previous manager of the farms at Yardina and Stanthorpe, over the use of electricity on site and the risks associated with power cuts as a result of problems with electricity supply in Queensland. Mr Sharp was concerned about power availability to run the pumps circulating the nutrient solutions flowing through the hydroponic channels feeding the tomatoes, and the effect that a blackout would have. Mr Sharp became concerned that Mr Hunter was not being honest with the Board and was failing to co-operate in trying to resolve the electricity supply problem. Mr Sharp was also concerned that Mr Hunter was selling first grade tomatoes as second grade. Mr Sharp reported to the Board on these matters in March 1999, as a result of which Mr Hunter was dismissed sometime in May 1999.

42. On 23 November 1999, Pitline Pty Ltd entered into a contract with KQPL to act as general manager for the farms, a role which Mr Sharp undertook on behalf of Pitline until 30 June 2000. On 29 March 2000, Mr Sharp prepared a report for Mr Young on the Koala Scheme (KQPL Document, T19, attachment). Mr Sharp related how Mr Hunter's management had adversely affected the profitability of the Scheme. He stated the land at Yandina was not suitable for growing tomatoes in the open because of excessive rainfall, and the land at Stanthorpe was prone to high winds, hail and significant temperature fluctuations which made use of the land for growing tomatoes "inappropriate". Moreover, travelling costs between the two farms were too high. Water quality was a significant problem at Yandina, and the hydroponic growing channels were too small for the particular tomatoes being cultivated because their root systems were too large and clogged up the channels. The growing channels had previously been used to grow strawberries which have smaller roots. Mr Sharp said that, notwithstanding these problems, he could see a complete turnaround for the Koala Scheme if the recommendations were accepted.

43. Mr Sharp said he became aware of the need for the Koala Scheme to transition to a managed investment scheme during the course of Board meeting discussions in the first part of 2000. He was aware of a time frame but not of the significance of 30 June 2000. He attended the general meetings in Perth on 5 May 2000 and 27 June 2000 and so would have been aware of the need for transition at least by 5 May 2000, because it was discussed at a Board meeting with Mr Young and Mr Morar. Mr Sharp said Mr Young was looking after the arrangements for transition and Mr Sharp was content to rely on Mr Young and did not concern himself with it. The transitioning of the Koala Scheme was outside his area of responsibility as a director.

44. Mr Sharp said that at the General Meeting on 5 May 2000 it was mentioned that transitioning had to be addressed. He became aware that there was a deadline and that Mr Young was in constant contact with ASIC. Mr Sharp did not see the documents for the 27 June 2000 General Meeting before they were sent to investors. He received a copy as an investor (Pitline Pty Ltd had ten farm shareholdings).

45. Mr Sharp acknowledged that there was no mention of transitioning in the letter to KHL investors dated 2 June 2000 (KQPL Documents, T21) although there is reference to transitioning in the notice of General Meeting of the Koala Scheme, albeit without mention of the 30 June 2000 deadline. Mr Sharp said he considered the disclosure to investors about transitioning was adequate, although, in hindsight, investors should have been informed of the 30 June 2000 deadline - this was an important fact of which investors, who were considering the appointment of a proxy, should have been aware.

46. Mr Sharp said he is not aware now of any specific non-compliance with the exemption granted by ASIC. His understanding was that Mr McShane at ASIC had told Mr Young that provided ASIC was kept informed, the exemption would be "OK". However, Mr Sharp was aware that the application for a dealers licence, lodged in early November 2000, was lodged a few days late. This is the only information about non-compliance that Mr Young had passed on. Mr Sharp could not recall Mr Young passing on any other information about non-compliance, for example about a failure to report to investors.

47. Mr Sharp acknowledged that he had not seen the exemption. He reiterated that he had and still has complete confidence in Mr Young who was handling the matter. Mr Sharp said he would not be taking steps to inform himself independently. He was not aware of, nor had he previously seen, the ASIC letter of 26 September 2000 expressing concerns to Mr Young, nor was he aware of the requirement to obtain a letter of proposed conditions of licence by 21 September 2000. Mr Sharp said he was surprised Mr Young had not drawn the letter of 26 September 2000 to his attention.

48. Mr Sharp did not recall seeing a copy of the ASIC notice about the legality of the Koala Scheme (KHL Documents, T20) although he said he might have received it.

Thakov Lal (Tony) Morar

49. Mr Morar confirmed that his statement dated 17 July 2001 (A5) was true and correct. He said he has been the company secretary of KHL since September 1994 and of KQPL since March 1997. He is a shareholder in KHL and an investor in the Koala Scheme. Mr Morar has also been the Financial Controller of PPM since March 1994, a company in which he is not a shareholder and of which he is not a director. However, PPM pays his salary.

50. Mr Morar said he signed the application for a dealers licence on behalf of KHL. He acknowledged that he was the person described as responsible for compliance but said this was only in relation to accounting and financial matters. Mr Young was responsible for compliance in relation to other matters. Mr Morar first became aware of the transition requirements for prescribed interest schemes on about 1 July 1998 when the changes in the Corporations Law took effect. He realised they would affect the Koala Scheme.

51. Mr Morar said he familiarised himself with the transition requirements for the new regulatory regime around March 1999. He was aware of the concept of a Responsible Entity and the need to make an application to ASIC, although he did not go into the requirements in any great depth. He left it to Mr Young to deal with transitioning and to take the necessary steps. Mr Morar could not recall discussion of the need to transition taking place at board meetings of KHL or KQPL, at this time although it was discussed at joint board meetings of those companies around February or March 2000 prior to the General Meeting of 5 May 2000. Mr Young had told the joint board meeting of the requirement to transition to a managed investment scheme, and that application forms had to be processed and police checks organised. Sheldon Young was preparing compliance plans.

52. Mr Morar was asked about the application for a dealers licence which he signed (KHL Documents, T22). He said of the 80 hours estimated as the time taken to complete the application form, probably 40 hours was spent by Sheldon Young preparing the compliance plan. The time spent on the application for an exemption was not included. Mr Morar said he probably signed the application for a dealers licence because Mr Young was not present at the time. However, Mr Morar said that throughout 1999 and 2000, Mr Young was regularly available for meetings and discussions although he continued to receive therapy following his surgery.

53. Mr Morar said he left Mr Young to attend to non-financial compliance matters in relation to the transition. The possibility of an extension of the transition period was probably raised about June 2000 and Mr Morar became aware that Mr Young was handling this with ASIC. Mr Morar was not aware of and could not recall having seen the letter dated 25 May 2000 to ASIC (KHL Documents, T7) requesting an extension of the transition period. He had no recollection of this request for an extension being discussed at board level.

54. Mr Morar said he neither saw ASIC's letter of 29 June 2000 nor the enclosed draft instrument relief (KHL Documents, T8). However, he said he would have seen the letter dated 25 May 2000 (KHL Documents, T7) before or at the time he made his Statutory Declaration dated 30 June 2000 (KHL Documents, T9). When warranting that KHL would take the required steps towards transition (paragraph 3.1 (e)), he was relying on Mr Young. Mr Morar could not recall whether he had seen the Instrument of Relief and did not have a copy of the signed instrument. He could not recall knowing at the time that the exemption was conditional. He first became aware of the conditions attached around December 2000, after he signed the application for a dealers licence. He had not read the exemption when he signed the application: he relied on Mr Young who had not told him that the exemption was subject to conditions.

55. Mr Morar confirmed he had attended board meetings between 30 June 2000 and 9 November 2000, when he signed the application, and he could not recall any mention of conditions being attached to the exemption nor could he recall Mr Young having mentioned any breach of conditions. Mr Morar was referred to ASIC's letter to Mr Young dated 2 November 2000 (KHL Documents, T20) regarding the breach of conditions, which Mr Morar denied having ever seen. However, as an investor, he had received a copy of the ASIC notice enclosed with that letter, although not before signing the application for the dealers licence.

56. Mr Morar was referred to Mr Young's letter to ASIC dated 22 December 2000 (KHL Documents, T26) enclosing a cashflow statement for KHL. Mr Morar said the property at Stanthorpe was sold for $285,000, contracts being exchanged on 6 January 2001, with settlement having taken place in early November 2001. He said PPM had not yet been paid the $30,000 administration fee detailed. The loss for the period December 2000 to 30 June 2001 was $129,000.

57. Mr Morar was asked about the Annual General Meeting of KHL held on 21 November 2001 between 3:00pm and 5.00pm at the offices of PPM for which he had prepared draft Minutes (A1). Mr Young had been present at PPM's offices between about 10:00am and 6:00pm on that day, and had attended the meeting. At the meeting, it had been resolved to continue with the Koala Scheme. The meeting had also resolved that KHL should pay $125,000 (including a fee of $35,000 for accounting services) to PPM from the proceeds of sale of the Stanthorpe property. No invoice for the $125,000 was provided at the meeting although Mr Young had said this would be forthcoming. Mr Morar said at the date of his giving evidence (23 November 2001), this payment had not yet been made.

58. In his Chairman's address to the meeting on 21 November 2001, Mr Young mentioned KHL's application for a dealers licence. Mr Morar said this would have been the first General Meeting of KHL since the application was lodged. Mr Young had also mentioned ASIC's Supreme Court application to wind up the Koala Scheme and that undertakings had been given to seek the approval of the trustees before any payments are made. No such approval had yet been sought. Because the response to the request for voluntary contributions for proposed greenhousing at the Yandina property had not reached the required level, repayment of the voluntary contributions received was being made and would be completed in the next few days.

Submissions

Applicant

59. Mr Burchett, for the Applicant, said that during the first six months of 2000 when the need for an extension of the transition period was in issue, other serious matters concerning the viability of the Koala Scheme were also under consideration. It was reasonable to assume that the necessary steps towards transition could be completed within a period of four months.

60. Mr Burchett submitted that it was not surprising that the condition in the Instrument of Relief dated 30 June 2000 (KHL Documents, T10) requiring that, by 21 September 2000, KHL obtain "a letter of proposed conditions of licence", was overlooked by Mr Young. This oversight accords with the confusing layout of the Instrument in which Schedule C, which in paragraph 5 refers to 21 September 2000, mainly comprises recitals, whereas Schedule D contains the conditions, including, in paragraph 1, taking all reasonable steps towards transition by 31 October 2000. However, Mr Burchett acknowledged the Applicant's omission, in August 2000, of not referring to progress towards transition in the letter to investors.

61. Mr Burchett noted the Respondent had not called Mr McShane to give evidence as to what had occurred at ASIC's meeting with Mr Young on 31 October 2000 and to confirm the ASIC file note of that date (KHL Documents, T19). Mr Young's evidence as to this meeting had been tested in cross-examination and he said he did not recall Mr McShane having advised that the Scheme had been operating illegally since 1 July 2000 given the failure to meet the terms of relief. Mr Young believed ASIC had accepted his explanation as to the conditions of relief and did not consider the Scheme to have been operating illegally. Mr Young believed his understanding to have been reinforced by Mr McShane's letter of 2 November 2000 (KHL Documents, T20).

62. Mr Burchett noted that although the original KQPL application for an extension of the period of transition referred to s 1454(2), that application was dealt with as an application under s 601QA, which provides ASIC with a wide discretion in making exemptions and enables the grant of an exemption subject to specified conditions. Mr Burchett noted that the power to grant exemptions under s 601QA is not subject to any express guidance under the Act. However, ASIC's policy with regard to relief under s 1454(2) favours relief in similar circumstances.

63. Mr Burchett contended that the Respondent had implicitly admitted that the reasons given originally for the decision of 19 October 2000 were entirely inadequate. The Respondent has since sought to "create reasons after the fact to justify the decision". In particular, Mr Burchett again pointed to the confusing layout of the Instrument of Relief.

64. With regard to the decision dated 9 February 2001, to refuse KHL's application for a dealers licence, Mr Burchett emphasised that the officers of a company are distinct from the company itself, and that consideration must be given to the duties of the officers and how any belief as to the officer's performance of his/her duties would affect any belief in respect of the company as a whole. Mr Burchett contended there were no grounds for any concern that the officers of KHL would not act honestly or fairly. Their efficiency has, in the past, been limited by their obligations to protect the interests and comply with the wishes of the members. Isolated minor incidents in extraordinary circumstances, unlikely to be repeated, seen in the context of long and distinguished careers, do not justify the inference that the officers might not carry out their functions efficiently, honestly and fairly.

65. Mr Burchett acknowledged that Mr Young had made some "slip ups", but these do not necessarily reflect on his future conduct. Moreover, clearly the investors want the Koala Scheme to continue.

Respondent

66. Mr Spencer, for the Respondent, said there are three directors of KHL - Mr Young, Mr Sharp and Mr Clague, with Mr Morar being Company Secretary (KHL Documents, T3). Mr Sharp's evidence was that in the past, he relied on Mr Young in relation to regulatory issues and that he will do so again in the future. Mr Morar relied on Mr Young entirely in relation to regulatory issues and gave evidence that there was no discussion of the exemption at board meetings between 30 June 2000 and 9 November 2000. Mr Young's evidence was that non-compliance was his responsibility alone. The Respondent submits that the Tribunal should not be confident of any change in the future.

67. Mr Spencer said the objective of the relevant part of the Corporations Law is investor protection. He noted that the terms of the Koala Scheme set out in the original prospectus (KHL Documents, T6, pp21-22) reveal that for an investment of $5,538, the investor has the benefit of tax deductibility of $10,669. However, neither the Koala Scheme nor its predecessor, Strawberry Fields, have ever yielded a profit from hydroponic activities.

68. From early 1999, Mr Sharp reported to the Board on various problems with the Koala Scheme and, in his report of 29 March 2000, he indicated that the problem was not just changing weather conditions. The problem also included: the conduct of the previous farm manager, the fallacy of any synergistic use of the two properties, that Stanthorpe was a high wind area prone to hail, high travelling costs between the two properties, water quality problems, and that the growing channels, previously used to grow strawberries, were too small for successfully growing tomatoes. Mr Spencer said these problems should have been apparent to anyone having a long association with the properties, such as Mr Young. The Scheme set out in the prospectus was never a realistic proposition. Mr Sharp's report highlighted that without a further contribution of $2,500 per holding, the Scheme was not and never would be viable.

69. With regard to the requirement in Schedule C of the Instrument of Relief that a letter of proposed conditions of licence be obtained by 21 September 2000 (KHL Documents, T10), Mr Spencer noted this requirement had also been set out in the draft Instrument enclosed with ASIC's letter of 29 June 2000 (KHL Documents, T8). This Instrument referred to relief being granted subject to KQPL "adhering to and complying with the conditions and requirements" contained in the Instrument.

70. Mr Spencer noted Mr Morar's evidence that he was not aware of Mr Young's letter to ASIC dated 25 May 2000 (KHL Documents, T7) seeking an extension of the transition period, at the time it was sent out. However, Mr Morar believed he had seen this letter at the time he made his Statutory Declaration on 30 June 2000 (KHL Documents, T9). Although he had not seen the draft Instrument of Relief, Mr Spencer submitted that Mr Morar never took steps to check KQPL's compliance with ASIC's requirements.

71. With regard to the Instrument of Relief (KHL Documents, T10), Mr Spencer said paragraph 5 of Schedule C contained a clearly stated requirement to obtain a letter of proposed conditions of licence. This was overlooked by Mr Young. The other requirements were set out in Schedule D and, despite Mr Young and Mr Morar warranting KQPL'S compliance, KQPL breached paragraphs 1 to 4. In his written submission, Mr Spencer summarised the breaches as follows:

It became apparent by about 26 September 2000 that KQPL had breached the conditions of the relief granted on 30 June in the following ways:

(i) it had not lodged a licence application on or before 21 September 2000 (indeed, it did not do so until 10 November and even then, it did not provide all of the documents required until 22 December 2000);

(ii) it had failed to provide monthly written progress reports for August to ASIC;

(iii) it had not provided written progress reports every month in relation to the transition of the Scheme to registration as a Managed Investment Scheme;

(iv) it had failed to take all or any reasonable steps to cause the Scheme to be registered as a Managed Investment Scheme as soon as practicable.

By 26 September 2000, KQPL had not provided a single communication to ASIC, let alone written progress reports to ASIC about transitioning. Further, KHL had not lodged a licence application.

By 19 October 2000, ASIC had received the letter of 29 September 2000 enclosing reports to members dated 17 July 2000, 21 July 2000, 24 August 2000 and 12 September 2000 and the explanation that "an administrative oversight had meant that they were not copied to you as required".

Other than the letter of 21 July 2000 which recorded the passing at the meeting of 27 June 2000 of a resolution that KHL become the Responsible Entity, none of the letters which had been forwarded mentioned anything in relation to the transitioning of the Scheme.

The letter of 10 October 2000 advised the Growers that an extension of time had been granted for transitioning until 31 October 2000. There was no suggestion that any progress had been made towards transitioning or of any intention to apply for an extension of time after that date.

It is submitted that there was no information put to Growers that would permit them to even understnd what was required to transition or to what extent that work could be accomplished or, indeed, the apparent intention three days after the 10 October letter to apply for a further extension.

By late October 2000, it was clear that of the five letters that KQPL had sent to Growers during the period July to October 2000, only two (21 July and 10 October 2000) had made any mention of transitioning the Project to a Managed Investment Scheme notwithstanding the terms of the exemption of 30 June 2000.

72. Mr Spencer said there had been an almost complete failure to inform investors in the Koala Scheme about transitioning. Even if mentioned at the General Meeting in Perth on 29 June 2000, only 20% of investors were present and 80% would have remained unaware. This was either a gross dereliction of duty or an incapacity to understand the implications of transparency.

73. Mr Spencer noted that Mr Young in his affidavit dated 17 July 2001 ((A3), paragraph 13) stated that at no stage prior to 29 December 2000 "was any question of operating a scheme illegally raised by ASIC". Mr Spencer submitted this is clearly wrong. For example, in ASIC's letter of 26 September 2000 (KHL Documents, T13), it stated its view that KQPL was presently operating the Koala Scheme illegally.

74. Mr Spencer referred to the ASIC file note dated 31 October 2000 of the meeting between Mr Young, Mr Makin of ARG and Mr McShane and Ms Bennett of ASIC (KHL Documents, T19). In evidence, Mr Young said Mr McShane could have mentioned that the Koala Scheme was operating illegally. This was at odds with Mr Young's affidavit of 17 July 2001. However, it is clear from ASIC's letter of 2 November 2000, that it was not satisfied with Mr Young's explanation. While stating that no enforcement action would be taken before the Members Meeting of 28 November 2000, it does not say that previous irregularities will be overlooked. Moreover, the enclosed ASIC notice to be distributed to members, specifically stated that "in ASIC's view, the Scheme is currently being operated in contravention of the Corporations Law".

75. With regard to the requests to investors for voluntary contributions of $2,500 to provide the required capital for greenhousing at the Yandina property, Mr Spencer said such requests were offers to the public soliciting money requiring the issue of a prospectus. Furthermore, it was not clear that investors who did contribute would be treated more favourably than those who did not. Thus, there was potential unfairness, and breach of paragraphs 2 and 3 of Schedule D of the Instrument of Relief.

76. Mr Spencer, responding to the Applicant's submissions, submitted that the Koala Scheme is currently not a viable project, and is being run neither in accordance with the investors' wishes nor in compliance with the law. Moreover, the Koala Scheme has never been viable since established in 1998. In the year since the exemption was granted, no progress has been made. Mr Spencer suggested that the investors are "inert" because they have been told that if the Scheme is wound up, this could affect their tax situations with the possibility that their 1998 tax deductions could be revisited.

77. Mr Spencer submitted that since the conditions of the exemption have not been complied with in the past, there is no indication that they will be in the future. Furthermore, with regard to the licence application, there is ample evidence to show a failure to operate the Koala Scheme honestly, efficiently and fairly: there has been a failure to be transparent; two directors have failed to comprehend their obligations; there has been a failure to reveal the shortcomings of the Koala Scheme; and a failure to act efficiently - conditions have not been complied with, documents not read, and there have been delays in progressing the Scheme. In his written submission, Mr Spencer summarised the evidence relating to the failure to act efficiently, that comprised:

(i) Notwithstanding a period of two years and a situation in relation to weather that had prevailed throughout that period, KQPL had made no substantial progress to transition the Scheme;

(ii) Notwithstanding the availability of exemptions and indeed a clear indication that at least as early as a year prior to the date by which transitioning should have been accomplished that an exemption could be obtained, KQPL did not apply for an exemption until a little more than a month prior to 30 June 2000;

By it own admission, KQPL failed by "administrative oversight" to provide copies of a number of the reports which had been circulated to Growers from the periods 27 June 2000 and 29 September 2000;

By its own admission, KQPL had "overlooked" the requirement in the exemption that KHL obtain a letter of proposed conditions of licence prior to 21 September 2000 (ergo, lodge an application for that licence prior to that time). The delegate, Mr Young, was unable to say whether that occurred because he did not read the exemption closely enough or whether, having read it, he did not diarise to do it (H429, p.41.25);

As set out above, none of the material which was forwarded to Growers at any stage prior to 29 January 2000 complied with the requirement to inform Growers about the progress of transitioning the Scheme (with the possible exception of the letter dated 6 November 2000 which (atQ28, p.3) informed the Growers, incorrectly, that the major reason for an exemption not being granted was ASIC's lack of authority to do so);

Mr Young told the delegate that he began completing the application Form 701 well before June 2000, yet when it was finally lodged on 10 November 2000 it still did not contain the requisite background material in relation to Mr Percival (possibly due to oversight), references for Mr Sharp, or cash flow projections required to be provided.

Consideration of Law and Findings

78. This matter involves a review of two decisions: first, a decision of 19 October 2000 to refuse an extension of the conditional relief granted to KQPL on 30 June 2000, and second, a decision of 9 February 2001 to refuse an application by KHL for a dealers licence. The Tribunal's findings of fact and the evidence upon which those findings are based are relevant to both decisions.

79. The Koala Scheme was established in August/September 1997 as a successor to the Strawberry Fields project with which Mr Young had been associated. Neither the Strawberry Fields project, nor the Koala Scheme, has ever operated at a profit on an annual basis. A report prepared by Mr Sharp on the Koala Scheme dated 29 March 2000 (KQPL Documents T19) highlights a range of basic problems which suggest that the Scheme was unlikely ever to be viable.

80. The pivotal person in relation to the establishment and operation of the Koala Scheme is Mr Young. He is the Chairman of both KHL and KQPL and his private company, PPM, performs a number of KQPL's functions under contract. Mr Young's evidence is that he became ill in late 1998 and underwent surgery for cancer in April 1999. This was followed by a period of intense chemotherapy until November 1999. After the first day of the hearing, on 31 July 2001, Mr Young suffered a relapse and underwent further surgery in September 2001. This was the reason for his not completing his oral evidence. However, Mr Morar's evidence on 23 November 2001 indicates that Mr Young was performing his usual role at a meeting of the Koala Scheme investors on 21 November 2001.

81. Mr Young's evidence was that his illness did not delay the transitioning of the Koala Scheme although he acknowledged that he delegated some of the preparatory work to his Administration Manager, Sheldon Young.

82. In giving evidence, Mr Young accepted responsibility for the "mistakes" made by him in failing to comply with the conditions contained in the Instrument of Relief dated 30 June 1990. It is clear from his evidence and that of Mr Sharp and Mr Morar, that Mr Young undertook the process of transitioning on behalf of KQPL. Both Mr Sharp, a fellow director, and Mr Morar, the Company Secretary, relied entirely on Mr Young taking the necessary steps and trusted his judgment in doing so.

83. In the Tribunal's view, while none of the evidence suggests any dishonesty on Mr Young's part, there is ample evidence to support a finding that he failed to act diligently in progressing the transitioning of the Koala Scheme to a managed investment scheme. Although the Managed Investments Act amendments to the Corporations Law provided for a two year transition period between 1 July 1998 and 30 June 2000, by early 2000, little had been done to progress the process of transitioning the Koala Scheme.

84. While the Tribunal accepts that a principal reason for this delay may have been the fundamental questions raised about the viability of the Koala Scheme, nevertheless, the failure to take any significant steps towards transitioning or, at least, towards seeking an extension of the two year period, suggests a lack of appreciation by Mr Young of the significance of the regulatory requirements and the steps which needed to be taken towards transition. Mr Young wrote to ASIC seeking an extension of the transition period on 25 May 2000 (KHL Documents, T7). He said in evidence that prior to this letter, he had not raised the question of an extension with the investors. In answer to a question in cross-examination, he said he did not think it important to inform the investors as a whole of the requirement to comply with the new regulatory regime by 30 June 2000, having included mention of the need to transition in an agenda item for the General Meeting on 27 June 2000, circulated with a KHL letter dated 2 June 2000 (A3,WRY7).

85. Having secured a four month extension to the transition period on 30 June 2000, Mr Young then largely failed to comply with the conditions contained in the Instrument of Relief. His evidence was that this was "an administrative oversight" by him. The Tribunal adopts Mr Spencer's summary of the breach of conditions apparent to ASIC by 26 September 2000, stated in paragraph 70 above. Of particular concern, is Mr Young's ongoing failure to inform investors of the extension granted and conditions to which it was subject, and that the Koala Scheme was operating illegally pending compliance.

86. In his affidavit dated 17 July 2001 (A3), Mr Young stated (at paragraph 13) that "at no stage prior to it [ASIC's letter of 29 December 2001] was any question of operating a scheme illegally raised by the ASIC". Mr Young apparently failed to take note of a clear statement by ASIC to this effect in its letter of 26 September 2000 (KHL Documents, T13). He also failed to take note of a statement at a meeting between ASIC officers and Mr Young on 31 October 2000 (recorded in an ASIC file note of that date (KHL Documents, T19), which the Tribunal accepts is sufficiently reliable given Mr Young's evidence that the ASIC officer "could have said" the Scheme was operating illegally), and to the ASIC notice required to be distributed to investors, accompanying ASIC's letter to Mr Young dated 2 November 2000 (KHL Documents, T20).

87. The evidence of Mr Sharp and Mr Morar suggests that from about March/April 2000, they were aware in general terms, through attending board meetings, of the requirement for transitioning. While, as stated above, they relied on Mr Young taking the necessary steps and trusted his judgment, Mr Young appears to have provided them with very little information about what was required and about his dealings with ASIC. Mr Sharp said he had not seen the Instrument of Relief dated 30 June 2000 (KHL Documents, T10), nor ASIC's letter of 26 September 2000 (KHL Documents, T13) drawing attention to ASIC's concerns and their view that the Scheme was operating illegally. Clearly, he knew nothing of the conditions contained in the Instrument of Relief.

88. Mr Morar's evidence was in a similar vein. He could not recall seeing the Instrument of Relief and said he did not become aware of this being subject to conditions until December 2000. This is notwithstanding that he signed a statutory declaration dated 30 June 2000 (KHL Documents, T9) warranting compliance with the Instrument of Relief and was the signatory to KHL's application for a dealers licence dated 10 November 2000 (KHL Documents, T22). Mr Morar confirmed that he attended board meetings between 30 June 2000 and 9 November 2000 and could not recall any mention that the exemption was of a conditional nature nor of any conditions being breached.

89. The Tribunal notes that steps to raise additional "voluntary contributions" from investors were initiated prior to 30 June 2000, by resolution at the general meeting of investors on 27 June 2000. Requests to investors for a commitment to a further financial contribution were made in letters dated 17 July 2000, 21 July 2000, 24 August 2000 and 12 September 2000 (KHL Documents, T15, enclosures). The Tribunal is satisfied that ASIC clearly had reasonable grounds for a concern that KQPL's actions in seeking further voluntary contributions were in breach of either paragraphs 2 or 3 of Schedule D of the Instrument of Relief.

90. Turning specifically to the first of the decisions under review, that of 19 October 2000 refusing an extension of the conditional relief granted on 30 June 2000, the Tribunal notes the broad discretion available to ASIC under s 601QA (1)(a) and (3). Mr Young first wrote to ASIC seeking an extension of the transition period with respect to the Koala Scheme on 25 May 2000. A general meeting of investors in the Scheme held on 27 June 2000 decided to proceed with transitioning the Scheme into a managed investment scheme. ASIC faxed Mr Young a draft Instrument of Relief on 29 June 2000 which he returned to ASIC on 30 June 2000 with handwritten suggested amendments. These suggested amendments related to the identification of the correct parties and do not appear to have been in relation to the substance of the conditions themselves (KHL Documents, T9). The Tribunal finds that Mr Young, having closely examined the draft Instrument and made suggested amendments, must have been aware of its contents and, therefore, of the conditions which were subsequently set out in the Instrument of Relief and to which the relief granted was subject.

91. The discussion of the evidence above leads the Tribunal to conclude that KQPL failed to comply with a number of conditions set out in the Instrument of Relief dated 30 June 2000, specifically:

* paragraph 5 of Schedule C - a letter of proposed conditions was not obtained by 21 September 2000.

* paragraph 1 of Schedule D - the Tribunal finds that KQPL, the Trustee (ARG) and KHL had not taken all reasonable steps towards registration - Mr Young failed to progress the transition as might reasonably have been expected.

* paragraphs 2 and 3 of Schedule D - ASIC clearly had reasonable grounds for concern that KQPL was in breach of these paragraphs by seeking further voluntary contributions from investors.

* paragraph 4 of Schedule D - KQPL failed to provide monthly written progress reports to investors and ASIC. Mr Young seems not to have comprehended the importance of keeping investors properly informed.

92. In the Tribunal's view, ASIC had good reason for refusing to grant further relief to KQPL based on KQPL's failure to comply with conditions to which the original relief granted was subject. The Tribunal therefore affirms the decision of 19 October 2000.

93. The second decision under review is that of 9 February 2001 to refuse KHL's application for a dealer's licence under s 784 of the Corporations Law. Sub-section 784(2) requires ASIC to grant a licence if the specified criteria are met including, relevantly subparagraph (d) which requires that "ASIC has no reason to believe that the applicant will not perform efficiently, honestly and fairly the duties of a holder of a licence of the kind applied for". If the criteria are not met, s 784(3) states "ASIC must refuse the application".

94. Sub-section 784(4) states that in making a determination as to s 784(2)(a):

ASIC must have regard, in relation to each responsible officer of the applicant to:

(a) whether or not the officer is an insolvent under administration; and

(b) any conviction of the officer, during the 10 years ending on the day of the application, of serious fraud, and

(c) any reason ASIC has to believe that the officer is not of good fame and character; and

(d) any reason ASIC has to believe that the officer will not perform efficiently, honestly and fairly the duties that the officer would perform in connection with the holding of the licence.

95. With regard to paragraph (d) and the meaning of the words "efficiently, honestly and fairly", the Tribunal had regard to the decision of Young J in Story v National Companies and Securities Commission (1988) 13 NSLWR 661. Justice Young's interpretation of the meaning of those words has been followed in a number of court and tribunal decisions including, for example, in a recent decision of the Tribunal in Re Campbell and ASIC [2001] AATA 205. In Story at 672, His Honour said:

Thus I turn to the phrase "efficiently, honestly and fairly". In one sense it is impossible to carry out all three tasks concurrently. To illustrate, a police officer may very well be most efficient in control of crime if he just shot every suspected criminal on sight. It would save a lot of time in arresting, preparing for trial, trying and convicting the offender. However, that would hardly be fair. Likewise a judge could get through his list most efficiently by finding for the plaintiff or the defendant as a matter of course, or declining to listen to counsel, but again that would hardly be the most fair way to proceed. Considerations of this nature incline my mind to think that the group of words "efficiently, honestly and fairly" must be read as a compendious indication meaning a person who goes about their duties efficiently having regard to the dictates of honesty and fairness, honestly having regard to the dictates of efficiency and fairness, and fairly having regard to the dictates of efficiency and honesty...

So far as "efficient" is concerned, someone is an efficient person or performs his duties efficiently if he is adequate in performance, produces the desired effect, is capable, competent and adequate: see, eg, Spotts v Baltimore & Ohio Railroad Co 102 F (2d) 160 at 162 (1939). Although that definition comes from a case dealing with handbrakes on railways cars, it seems to me that it can be applied to the word used in the current statute.

96. Later in Story, Young J explains the test of efficiency (at 679), as follows:

does the relevant conduct show that the performance by the plaintiff of his functions falls short of the reasonable standard of performance by a dealer that the public is entitled to expect: cf Boyd v Carah Coaches Pty Ltd (at 99)?

97. The reasons for ASIC's decision of 9 February 2001 are set out in paragraph 12 above. The Tribunal has found that the pivotal person in relation to the Koala Scheme and the operation of both KHL and KQPL is Mr Young. Mr Sharp, a fellow director of both KHL and KQPL, and Mr Morar, the Company Secretary, rely on Mr Young in relation to matters of compliance, and Sheldon Young, described by Mr Young as PPM's administration manager, acts under his direction. There is no evidence before the Tribunal as to the third director of KHL, Alan Clague.

98. As stated above, in the Tribunal's view, none of the evidence suggests any dishonesty by Mr Young. However, there is substantial evidence discussed above to support a finding that he failed to act efficiently in relation to the performance of his duties in transitioning the Koala Scheme. As a result, KQPL failed to comply with the conditions set out in the Instrument of Relief, and the Koala Scheme operated in contravention of the provisions of the Corporations Law. Of particular concern is Mr Young's failure to keep investors properly informed and his lack of appreciation of the relevant regulatory requirements.

99. In the Tribunal's view, Mr Young's conduct fell short of the reasonable standard that could be expected of a person in his position: he failed to act efficiently. Despite Mr Young's evidence that the investors have not been misled, the Tribunal considers that his failure to inform investors about transition to a managed investment scheme demonstrates a lack of efficiency that could have been potentially detrimental to the interests of investors who may have had inadequate information on which to make decisions about their investments. To this extent, Mr Young could be said not to have acted fairly in relation to their interests. In relation to s 784(2), the Tribunal concludes that ASIC did have a reason to believe that KHL would not perform efficiently, honestly and fairly the duties of a holder of a licence of the kind applied for, and, therefore, acted correctly in refusing the grant of a dealers licence to KHL. Thus, the Tribunal also affirms the decision of 9 February 2001.

I certify that the 99 preceding paragraphs are a true copy of the reasons for the decision herein of Mr R P Handley, Deputy President.

Signed:

.................................................................

Associate

Date of Hearings: 31 July, 23 November and 5 December 2001

Date of Decision: 24 January 2002

Solicitor for the Applicant: Mr J Whitfield, Whitfields Solicitors

Counsel for the Applicant: Mr S Burchett

Solicitor for the Respondent: Ms A Haines, ASIC

Counsel for the Respondent: Mr A Spencer