FEDERAL COURT OF AUSTRALIA

HP Mercantile Pty Limited; in the matter of Tumut River Orchard Management Ltd (In Liquidation); in the matter of Merilbah Investments Pty Limited

(In Liquidation) v Tumut River Orchard Management Ltd

(In Liquidation), [2009] FCA 1456

CORPORATIONS – managed investment scheme (MIS) – whether circumstances of liquidator soliciting funding from contingent creditors constituted unlawful MIS – earlier MIS in which company, TROM, financed investors into that MIS by lending them money – TROM assigned the debts to other companies which, in turn, assigned them to Merilbah, which assigned them to HPM – attempts by HPM to recover the debts from numerous investor-debtors in Supreme Court and District Court – question whether assignments were valid – liquidators of TROM and Merilbah now soliciting funding from the numerous investor-debtors to enable them to challenge validity of assignments with a view to debts remaining the property of TROM or Merilbah – solicitation of funding on basis that any investor-debtor who provided funding would or might obtain a release of his or her debt from the liquidators – present application by HPM for interim injunction under s 1324(4) of Corporations Act 2001 (Cth) restraining TROM, Merilbah and their liquidators from attempting to raise further funds and from expending any of the funds already raised on basis that the obtaining of the funding in all of the circumstances constituted an MIS that was required to be registered but which was unlawful for non-registration.

Held:  modified form of injunctive relief granted on interim basis.

 Corporations Act 2001 (Cth) ss 9 (definition of “managed investment scheme”), 1324

Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605 referred to

Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 260 ALR 643 referred to

National Australia Bank Ltd v Norman [2009] FCAFC 152 referred to

in the matter of Tumut River Orchard Management Ltd (In Liquidation)

(ACN 003 501 611)

in the matter of Merilbah Investments Pty Limited (In Liquidation)

(ACN 002 979 893)

HP MERCANTILE PTY LIMITED (ACN 097 362 877) v TUMUT RIVER ORCHARD MANAGEMENT LTD (IN LIQUIDATION) (ACN 003 501 611), NICHOLAS DAVID JAMES CROUCH IN HIS CAPACITY AS LIQUIDATOR OF TUMUT RIVER ORCHARD MANAGEMENT LTD (IN LIQUIDATION) (ACN 003 501 611), MERILBAH INVESTMENTS PTY LIMITED (IN LIQUIDATION) (ACN 002 979 893), NICHOLAS DAVID JAMES CROUCH AND SHABNAM AMIRBEAGGI IN THEIR CAPACITY AS JOINT LIQUIDATORS OF MERILBAH INVESTMENTS PTY LIMITED (IN LIQUIDATION) (ACN 002 979 893), NICHOLAS DAVID JAMES CROUCH and SHABNAM AMIRBEAGGI

NSD 1267 of 2009

LINDGREN J

4 DECEMBER 2009

SYDNEY

iN THE MATTER OF TUMUT RIVER ORCHARD MANAGEMENT LTD

(IN LIQUIDATION) (acn 003 501 611)

IN THE MATTER OF MERILBAH INVESTMENTS PTY LIMITED (IN LIQUIDATION) (acn 002 979 893)

THE COURT ORDERS THAT:

1.                   Upon the plaintiff’s giving the usual undertaking as to damages, until the final hearing and determination of this proceeding or further order of the Court,

(a)        the defendants shall not solicit funds from persons who borrowed money for the purpose of investing in any managed investment scheme (investor-debtors) for the purpose of creating or increasing a fund to enable proceedings, present or future, by the plaintiff against any of the investor-debtors to be defeated on the ground of the invalidity of assignments or otherwise to establish the invalidity of assignments; and

(b)        the defendants shall not expend, use, apply or otherwise dispose of any funds already paid by investor-debtors pursuant to any such solicitation, whether by the defendants or by Horticultural Operations Ltd or any other person, except for the purpose of the conducting of public examinations under s 596A or s 596B of the Corporations Act 2001 (Cth).

2.                   The parties have liberty to apply on 24 hours’ notice.

3.                   The costs of the plaintiff’s application for interim relief be part of the parties’ costs of the proceeding.

4.                   The proceeding be stood over to a date to be advised for the making of directions with a view to progressing the matter to a final hearing.

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.

iN THE MATTER OF TUMUT RIVER ORCHARD MANAGEMENT LTD (IN LIQUIDATION) (acn 003 501 611)

IN THE MATTER OF MERILBAH INVESTMENTS PTY LIMITED (IN LIQUIDATION) (acn 002 979 893)

REASONS FOR JUDGMENT

introduction

1                     The plaintiff, HP Mercantile Pty Limited (HPM), claims to be the assignee of debts that came into existence when investors were financed into certain managed investment schemes (MISs or projects).  I will refer to those investors as “investor-debtors”.

2                     The first defendant, Tumut River Orchard Management Ltd (TROM), lent the money to the investor-debtors.  The second defendant, Nicholas David James Crouch, is the liquidator of TROM (TROM’s Liquidator).  TROM assigned the debts to assignee companies which in turn assigned them to the third defendant, Merilbah Investments Pty Limited (Merilbah), of which Mr Crouch and Shabnam Amirbeaggi (Merilbah’s Liquidators) are the liquidators.  Merilbah assigned the debts to HPM.  On 9 November 2009 I gave HPM leave to commence and proceed with this proceeding against TROM under s 500 of the Corporations Act 2001 (Cth) (the Act) and against Merilbah under s 471B of the Act.

3                     HPM has issued many proceedings and will issue many more against the investor-debtors to recover the debts.

4                     HPM alleges that TROM, TROM’s Liquidator, Merilbah and Merilbah’s Liquidators have sought funding from the investor-debtors to enable a challenge to be made to the validity of the assignments and therefore to HPM’s title to sue on them.  If the assignments are invalid, title to the debts remains in TROM or Merilbah, depending on whether all or only the last of the assignments is invalid.

5                     In this proceeding HPM complains that by seeking and obtaining the funding from the investor-debtors and taking steps to challenge the validity of the assignments, TROM, TROM’s Liquidator, Merilbah and Merilbah’s Liquidators have established and operated a managed investment scheme (MIS) within the meaning of s 9 of the Act which, not being registered under the Act, is unlawful, with the consequence that steps taken and proposed to be taken by those parties in raising the funds and using the funds raised are unlawful.  For example, HPM seeks to prevent public examinations under ss 596A and 596B of the Act from taking place as being aspects of the implementation of the unlawful MIS.  The public examinations are to take place later this month.

6                     By its further amended originating process filed in court on 19 November 2009, HPM seeks a declaration that TROM, TROM’s Liquidator, Merilbah and Merilbah’s Liquidators have established an MIS as defined in s 9 of the Act which is illegal for not being registered under s 601EB of the Act and for not complying with Chapter 5C of the Act.  It seeks a declaration that those defendants are operating the scheme in contravention of s 601ED of the Act, injunctive relief, an order for return of the funds collected to the investor-debtors who contributed them, and an order that the fifth defendant (Mr Crouch) and the sixth defendant (Mr Amirbeaggi) make up any shortfall resulting from the fact that part of the fund has been expended.

7                     These reasons for judgment relate to HPM’s claim for interim relief restraining the defendants until further order of the Court from disposing of any of the funds collected and from attempting to raise further funds.

Legislation

8                     Section 1324(1) of the Act provides that where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute a contravention of the Act, the Court may, on the application of a person whose interests have been, are or would be affected by the conduct, grant an injunction restraining the person from engaging in the conduct and, if the Court thinks it desirable to do so, requiring that person to do any act or thing.  Section 1324(4) of the Act, the provision under which the present application for interim relief is made, provides:

Where in the opinion of the Court it is desirable to do so, the Court may grant an interim injunction pending determination of an application under subsection 1.

9                     Section 601ED of the Act provides in subs (1) that, subject to an exception not presently relevant, an MIS must be registered under s 601EB if, relevantly, it has more than 20 members.  Each of the present projects has more than 20 members.

10                  Section 601ED(5) provides that a person must not operate an MIS that s 601ED requires to be registered under s 601EB unless the scheme is registered. 

11                  Critical to the present case is the definition of an MIS in s 9 of the Act which is, relevantly, as follows:

(a)        a scheme that has the 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);

            (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); …

Facts

Statement of Claim

12                  It seems that, generally speaking, the facts as pleaded in the statement of claim (SOC) will not be in dispute.  The validity of the assignments, however, will be.  The following account is of the allegations made in the SOC.

13                  During the period 1991 to June 1998 TROM promoted, established, managed and operated eight horticultural projects directed to tax minimisation.  Each project involved several documents executed by TROM and investor-debtors.  One of these was an “Investor Loan Agreement”.  Each investor had the option of entering into such an agreement with TROM under which TROM would lend to the investor the amount required to subscribe for his, her or its interest in the project.  The amount lent was repayable on terms.

14                  For the eight projects there were 2,345 investors of whom 2,332 entered into the Investor Loan Agreements with TROM.  These 2,332 persons are the investor-debtors.

15                  During the period 1996 to 1998 TROM assigned the debts, at law or equity, to various of Core Finance Pty Ltd (Core), Symsung Pty Ltd (Symsung) and Treetop Projects Limited (Treetop). 

16                  At some time between 15 March and 31 October 2000, Core, Symsung and Treetop assigned the debts to Merilbah.

17                  On or about 31 August 2001 Merilbah assigned the debts to HPM.

18                  Since 2002, HPM has obtained at least nine final monetary judgments against investor-debtors and is seeking to recover in a further 22 actions that are pending in the District and Supreme Courts of New South Wales.

19                  The principal issue in dispute between HPM and the investor-debtors has been or is the validity and efficacy of the assignments from TROM, via Core, Symsung, Treetop and Merilbah, to HPM.

20                  HPM intends to seek to recover the remaining (some 1,500) debts said to be due to it by investor-debtors.

21                  HPM alleges (para 22) that TROM, TROM’s Liquidator, Merilbah and Merilbah’s Liquidators have a program and plan of action which comprises at least the following:

i.          TROM’s Liquidator and Merilbah’s Liquidators are to raise funds from investors of the [eight] projects ...;

ii.         TROM’s Liquidator is to conduct public examinations under sections 596A and 596B of the Corporations Act 2001 (Cth) of, inter alia, the directors, officers, employees and associates of each [of] HP Mercantile, TROM, Core, Symsung, Treetop and Merilbah for the purpose of gathering evidence to determine whether the assignment of loan debts of investors from TROM, Core, Symsung, Treetop and Merilbah, is valid and effective to give HP Mercantile right, title and interest in the loan debts.

            Particulars

            (a)        Examinations of Mr Andrew Purcell were conducted in December 2008 and April 2009.

            (b)        A Summons for Examination has been served on each of Gregory Roy William McDonald and John Campbell Myers.

            (c)        A Summons for Examination has been issued for, but not yet served on, each of Ross Chapman, Brenton Ralph Arnott-Smith, Garth Raymond Doolan and Peter William Forsyth.

iii.         TROM’s Liquidator and Merilbah’s Liquidators are to carry out and conduct enquiries and investigations into HP Mercantile’s right, title and interest to the loan debts for the [eight] projects ...

iv.        TROM, TROM’s Liquidator, Merilbah and Merilbah’s Liquidators is [sic – are] to fund and participate, as a party and otherwise, in litigation to challenge HP Mercantile’s right, title and interest to the loan debts the subject of recovery proceedings.

            Particulars

            TROM has been joined as a defendant to the proceedings nos. 2742/04, 2743/04, 2748/04 and 3117/06 in the District Court of New South Wales.

v.         TROM and/or Merilbah is to acquire all right, title and interest in the loan debts due under Investor Loan Agreements if HP Mercantile’s right, title and interest is successfully invalidated or set aside.

22                  HPM alleges that TROM’s Liquidator and Merilbah’s Liquidators have been soliciting and continue to solicit funds from investor-debtors for the purposes mentioned and that investor-debtors have contributed money to them for at least those purposes.  It is pleaded that at least 200 investor-debtors have done so to date and that their contributions are contributions of money within subpara (a)(i) of the definition of “managed investment scheme” in s 9 of the Act (set out at [11] above).

23                  According to para 26 of the SOC:

Each of the investors who has contributed money to TROM’s Liquidator or Merilbah’s Liquidators has or will acquire a right to at least the following benefits:

i.          The provision of information and/or evidence with which to challenge HP Mercantile’s right, title and interest to the loan debt due under the Investor Loan Agreement.

ii.         Reduced litigation costs in challenging HP Mercantile’s right, title and interest to the loan debt due under the Investor Loan Agreement.

iii.         Protection from adverse costs orders.

iv.        Reduced stress and anxiety by virtue of TROM’s Liquidator or Merilbah’s Liquidators challenging HP Mercantile’s right, title and interest to the loan debt due under the Investor Loan Agreement.

v.         The prospect of eliminating and destroying HP Mercantile’s right, title and interest to the loan debt due under the Investor Loan Agreement.

vi.        The promise of recommending to the Court the release and discharge of his/her/its loan debt due under the Investor Loan Agreement if TROM’s Liquidator or Merilbah’s Liquidators are successful and the prospect of the Court sanctioning the same.

vii.        A greater understanding of his/her/its project.

24                  Accordingly, so it is pleaded (para 27 of the SOC), each of the funding investor-debtors has acquired a right to a benefit within subpara (a)(i) of the MIS definition.  It is said that the monetary contributions have been “pooled” for the purposes of subpara (a)(ii) of the definition, that each investor-debtor will acquire the financial benefits and/or rights or interest in property pleaded in para 26 of the SOC; and that the investor-debtors do not have the day to day control of the scheme within subpara (a)(iii) of the definition.

25                  Finally, it is alleged that the scheme pleaded is required to be registered under s 601EB of the Act but is not registered, and accordingly that each of TROM, TROM’s Liquidator, Merilbah and Merilbah’s Liquidators is operating an unregistered MIS in contravention of s 601ED of the Act, which will continue to affect HPM’s interests in the following ways (para 34 of the SOC):

i.          Invalidate and/or obstruct HP Mercantile’s right, title and interest in the loan debts due under the Investor Loan Agreements.

ii.         Hinder and obstruct the recovery of loan debts due to it under the Investor Loan Agreements.

iii.         Increase the costs of recovering the loan debts due to it under the Investor Loan Agreements, including in the proceedings particularised under paragraph 22(c) [perhaps a reference to para 22(ii)(c) – see [21] above].

iv.        Create uncertainty and delay in HP Mercantile’s dealings and interactions with each of TROM, TROM’s Liquidator, Merilbah and Merilbah’s Liquidators, including in the proceedings particularised under paragraph 22(c) [perhaps a reference to para 22(ii)(c) – see [21] above].

26                  Accordingly, so it is said (para 35 of the SOC), HPM is a person whose interests are or would be affected within s 1324 of the Act by the continued operation of the scheme.

Further Facts

27                  Consequent upon a creditors’ voluntary winding up on or about 28 April 1999, Maxwell William Prentice and Vince Christopher Barilla of Prentice Parbery & Barilla were appointed joint liquidators of TROM.  TROM was deregistered on 7 January 2006. 

28                  On 7 July 2008 the Supreme Court of New South Wales ordered that the registration of TROM be reinstated and it appointed TROM’s Liquidator.

29                  On 7 February 2008 the Supreme Court of Western Australia ordered that Merilbah be wound up and it appointed Merilbah’s Liquidators.

30                  Funds were sought from the investor-debtors to constitute a “Fighting Fund” to enable the validity of the assignments to be tested.  The money raised was paid into a bank account in the name of Merilbah.  It seems that a company named Horticultural Operations Ltd (HOL) has played a leading role in the soliciting of the funds, but there is evidence that Mr Crouch has sought funds from the investor-debtors too.  A firm of solicitors named Galic & Co Lawyers and a chartered accountant named Barry Coates have also been involved.

31                  In its circular to investor-debtors, HOL has misleadingly asserted that if the assignments are held to be invalid so that title to the debts remains with TROM or Merilbah, the debt of a funding investor-debtor will be discharged.  For example, in its circular dated 19 May 2009 HOL stated:  “Growers contributing to the HOL Legal Fund will obtain a discharge of loan obligations from the Liquidator”.  By contrast, in his circular to investor-debtors Mr Crouch has pointed out that while he will seek approval from the Court for such a favourable treatment of a funding investor-creditor, the matter is within the discretion of the Court (and see para 26(vi) of the statement of claim set out at [23] above).

32                  There is in evidence a statement of receipts and payments of Merilbah’s Liquidators in relation to Merilbah.  This shows an opening balance as at 7 February 2008 of $63,445.81 followed by numerous receipts extending from 16 September 2009 to 2 November 2009 credited to a “TROM Fighting Fund” totalling $97,350.  As well, the statement shows payments of “Legal Fees” of $9,570 to counsel and $47,586.28 to solicitors, totalling $57,156.28.  If one deducts this amount from the total amount of $160,795.81 (being $63,445.81 + 97,350), one arrives at a balance of $103,639.53.  However, the evidence is that the amount in fact held by Merilbah’s Liquidators (as at 2 November 2009) was $103,642.49 (I was told that there had been minor adjustments that explain the discrepancy, the nature of which does not matter). 

33                  By its interlocutory application, HPM seeks to restrain Merilbah’s Liquidators from expending any part of this sum as well as from raising any further funds from “any member of the public”.

34                  In his circulars to investor-debtors soliciting funding, Mr Crouch signed both as liquidator of TROM and as liquidator for Merilbah.  I do not know how it comes about that the money subscribed by investor-debtors was deposited into an account in the name of Merilbah alone.

Consideration

35                  The present application is one for an interim injunction under s 1324(4) of the Act.  I am not determining the substantive application and make no final findings of fact or express any final conclusions of law.

36                  Subsequent to the hearing I raised with the parties the possibility of converting the nature of the hearing and therefore of my decision into final ones.  While counsel for the defendants agreed to that course, counsel for HPM indicated that his client had always anticipated adducing further evidence on the final hearing.  In these circumstances, the hearing, like my present decision, remain interlocutory only.

37                  In the present context the word “interlocutory” must be used with caution.  Palmer J pointed out in Australian Securities and Investments Commission v Mauer-Swisse Securities Ltd (2002) 42 ACSR 605 that when granting an injunction under s 1324(1) or (4) of the Act the Court is not exercising the traditional equitable jurisdiction to grant final or interlocutory injunctions.  While considerations that are customarily relevant to the exercise of that jurisdiction may be also relevant to the exercise of the discretion under s 1324(1) or (4), the dominant consideration in cases under the section is the purpose of the provision of the Act that is said to have been contravened.

38                  Unfortunately, to a large extent the parties have not joined issue in their submissions.  HPM emphasises that the purpose of Pt 5C of the Act is to establish a régime to protect those who contemplate acquiring or have acquired interests in MISs.  Counsel for HPM submits that the arrangement established and implemented by the defendants was the very kind of arrangement that the legislature intended should be registered and regulated by Pt 5C.  This submission, however, assumes what is to be decided – that there was an MIS in the first place.

39                  Counsel for the defendants, on the other hand, places heavy reliance on s 564 of the Act.  That section expressly contemplates the possibility that a creditor or creditors will indemnify a liquidator and so enable the liquidator to recover property which would not otherwise have been recovered.  The section empowers the Court to make such orders as it deems just with respect to the distribution of the property recovered with a view to giving the funding creditor or creditors an advantage over others in consideration of the risk assumed.  Counsel correctly points out that the notion of “creditors” for this purpose includes contingent creditors.  It seems not to be disputed by HPM that the various investor-borrowers are contingent creditors of TROM or Merilbah or of both of them.

40                  Again, however, counsel’s submission does not carry the day.  As counsel for HPM points out, a conclusion that there was an unlawful MIS in the present case and that the funds raised may therefore not be lawfully used for their intended purpose would not be inconsistent with s 564: a liquidator would be at liberty to take an indemnity for costs of litigation from creditors but not by means of an unlawful MIS.

41                  The parties made submissions for and against the proposition that the arrangement established by the defendants constituted an unlawful MIS.  HPM’s submissions were founded upon the decision of the Full Court of this Court in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 260 ALR 643.  More precisely, HPM’s submissions were founded on the majority judgment of Sundberg and Dowsett JJ in that case – Jacobson J dissented.  Over all, two Judges of this Court, the majority in the Full Court, considered that the litigation funding arrangement in that case constituted an MIS as defined in s 9 of the Act, while the primary Judge Finkelstein J, and Jacobson J in dissent in the Full Court, considered that it did not. 

42                  I referred the parties to the more recent decision of the Full Court in National Australia Bank Ltd v Norman [2009] FCAFC 152 delivered on 30 October 2009, on which the parties also made submissions. 

43                  I do not propose to embark upon a detailed consideration of the various elements of an MIS as defined in s 9 of the Act.  It suffices to say that I do not think that either of the authorities named above or others to which I was referred demonstrate conclusively that the arrangement in the present case was or was not an MIS.  Both possibilities are arguable.

44                  It seems to me that for the purpose of this application for urgent interim relief, I should proceed on the assumptions that arguably funds have been and are to be raised under an unlawful MIS and that arguably the assignments are invalid and HPM lacks title to them.

45                  In his submissions, counsel for HPM has stated in a different connection that neither TROM nor Merilbah has any assets from which to pay damages and that TROM’s Liquidator and Merilbah’s Liquidators are not a source of recovery.  I infer that unless the funds already raised from investor-debtors are made available, the question of the validity of the assignments will not be able to tested.  TROM’s Liquidator and Merilbah’s Liquidators are officers of the Court.  So far as the evidence reveals, no investor-debtor who has provided funding or been asked to provide it is complaining.  I appreciate that it can be said that the investor-debtors would not be aware of circumstances giving them a right to complain.  For example, apparently they would not know that HOL has misrepresented to them that if the assignments are held to be invalid, they will definitely obtain a discharge of their debts.  The Australian Securities and Investments Commission is aware of the present dispute but has not sought an injunction restraining the defendants from approaching the investor-debtors.

46                  Several questions of concern are raised by the present application for interim relief.  Who are the creditors (including, but not limited to, contingent creditors) of TROM and Merilbah who will benefit from a determination that the assignments are invalid?  What is the ground of their status as creditors or contingent creditors?  What is the fund that it is hoped will provide the basis of a distribution to creditors?  Have TROM’s Liquidator and Merilbah’s Liquidators been encouraging investor-debtors to make claims and thereby to become contingent creditors?  How can TROM’s Liquidator and Merilbah’s Liquidators support a result that all investor-debtors be released from their debts?  Has there been an abuse by TROM’s Liquidator and Merilbah’s Liquidators of their powers in seeking to create challenges to the validity of the assignments in circumstances in which, if it be the case, the only persons who will benefit in terms of payment of money will be themselves?

47                  These questions may be answered on the final hearing.

48                  Notwithstanding some doubts in the light of these questions, I consider that I should give weight to the position taken by TROM’s Liquidator and Merilbah’s Liquidators as officers of the Court that they need to conduct the public examinations which, as noted earlier, are fixed to take place this month.

49                  What should occur is that, subject to the views of the parties, the proceeding should be given an early final hearing.  In the meanwhile, TROM’s Liquidator and Merilbah’s Liquidators (or whichever of them is appropriate) should have access to the funds already raised but only to enable them to pursue the public examinations under ss 596A and 596B of the Act that are about to take place.  Pending the final hearing no further solicitation of funds should take place.  The costs of the plaintiff’s application for interim relief should be the parties’ costs of the proceeding.

Conclusion

50                  Upon the plaintiff’s proffering to the Court the usual undertaking as to damages, there should be a modified injunction of the form just described.

Associate:

Dated:         11 December 2009