FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 1) [2012] FCA 1519

THE COURT ORDERS THAT:

1.    Service of the interlocutory process dated 9 November 2012 be dispensed with and made returnable instanter.

2.    The plaintiff have leave to join:

(a)    U.S. Realty Investments #1, LLC (L-1666059-6);

(b)    U.S. Realty Investments #2, LLC (L-1666058-5);

(c)    U.S. Realty Investments #3, LLC (L-1668734-4); and

(d)    U.S. Realty Investments #4, LLC (L-1668736-6)

("the US Realty Investments LLCs")

as defendants in these proceedings.

3.    The plaintiff have leave to file and serve upon the US Realty Investments LLCs in the United States of America pursuant rule 10.43 of the Federal Court Rules 2011 an amended originating process in the form of the draft amended originating process marked as exhibit “GJC-58” to the affidavit of Glenn John Childs sworn 8 November 2012, by serving a copy of the amended originating process to Robert P Simbro of the law offices of Simbro & Stanley, 8767 East Via De Commercio, Suite 103, Scottsdale, Arizona, USA.

4.    Pursuant to s 472(2) of the Corporations Act 2001, Damian John Templeton and Darren Michael Lewis be appointed as joint and several provisional liquidators (Provisional Liquidators) to each of the US Realty Investments LLCs.

5.    The Provisional Liquidators have the following powers:

(a)    to enter into possession and take control of all assets (including money) of the US Realty Investments LLCs, including all assets of the US Realty Investments LLCs used in or relating to their operations, together with all books, records, computers, computer disks, and any other papers or records relating thereto;

(b)    to deal with any monies held by or on behalf of the US Realty Investments LLCs or their officers, employees or agents or any of them, being monies received in relation to or employed in the US Realty Investments LLCs’ operations;

(c)    to operate and inspect any account at any bank or other financial institution being an account operated by the US Realty Investments LLCs or their officers, employees or agents or any of them and to withdraw any such monies and to pay any such monies into an account or accounts opened or maintained by or for the Provisional Liquidators;

(d)    to appoint a solicitor, accountant or other professionally qualified person either within or outside Australia to assist the Provisional Liquidators;

(e)    to delegate to their partners, employees and agents whether within or outside Australia any business or matter that the Provisional Liquidators are unable to do themselves or that can be done more conveniently by those others;

(f)    to receive any monies due to the US Realty Investments LLCs relating to their operations;

(g)    compromise any calls, liabilities to calls, debts, liabilities capable of resulting in debts and any claims (present or future, certain or contingent, ascertained or sounding only in damages) subsisting or supposed to subsist between the US Realty Investments LLCs and a contributory or other debtor or person apprehending liability to the US Realty Investments LLCs, and all questions in any way relating to or affecting the property of the US Realty Investments LLCs, on such terms as are agreed, and take any security for the discharge of, and give a complete discharge in respect of, any such call, debt, liability or claim.

(h)    for the purposes of maintaining and securing the assets of the US Realty Investments LLCs to:

(i)    pay any expense, including for the purposes of insurance;

(ii)    execute any document;

(iii)    bring or defend any proceeding;

(iv)    to carry on business;

(v)    to obtain credit; and / or

(vi)    do any other act or thing

in the name of or on behalf of the US Realty Investments LLCs, their officers, employees or agents or any of them;

(i)    to make any application to any court or regulatory agency for the purposes of exercising the powers in (a) to (h) above;

(j)    to apply for further orders, including the power to realise the assets and pay the liabilities of the US Realty Investments LLCs, and to seek directions as to the disposition of any remaining proceeds; and

(k)    to receive remuneration on a time basis within the scale of charges approved by the Court, such remuneration to be paid from the proceeds of the winding up.

6.    The Provisional Liquidators shall, by 17 December 2012, provide to the Court and to the plaintiff a report as to the provisional liquidation of the US Realty Investments LLCs, including:

(a)    the identification of the assets and liabilities of the US Realty Investments LLCs;

(b)    an opinion as to the solvency of the US Realty Investments LLCs;

(c)    the likely return to creditors;

(d)    any other information necessary to enable the financial position of the US Realty Investments LLCs to be assessed;

(e)    any suspected contravention of the Act by the directors and officers of the US Realty Investments LLCs;

7.    The plaintiff provide to the Provisional Liquidators access to the documents held by the plaintiff in relation to US Realty Investments LLC and the promotion and offering of the US Realty Memorandum.

8.    Liberty be granted to any party to apply to the Court on the giving of reasonable notice.

9.    The costs of the proceeding to date be reserved.

10.    The hearing of the amended originating process be otherwise adjourned to a date to be fixed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 (Cth)

REASONS FOR JUDGMENT

introduction

1    On 14 November 2012, I made the orders set out above, for the reasons that follow.

2    By an interlocutory application dated 9 November 2012, the applicant, the Australian Securities and Investments Commission (“ASIC”), sought:

1.    leave to join the following four entities registered in the United States as defendants to the proceeding:

(a)    U.S. Realty Investments #1, LLC (L-1666059-6);

(b)    U.S. Realty Investments #2, LLC (IL-1666058-5);

(c)    U.S. Realty Investments #3, LLC (L-1668734-4); and

(d)    U.S. Realty Investments #4, LLC (L-1668736-6)

(“LLCs”);

2.    leave to file and serve on the LLCs in the United States under r 10.43 of the Federal Court Rules 2011 (Cth) (“Federal Court Rules”) an amended originating process by specified means; and

3.    the appointment of a provisional liquidator to the LLCs with specified powers, to report to the Court and ASIC, including in relation to specified matters.

3    The application was supported by:

1.    The affidavits of Glenn Childs sworn on 27 June 2012, 9 July 2012 and 8 November 2012.

2.    The affidavit of Tony Tsiavis sworn on 9 November 2012.

3.    The affidavit of Mike Tauschek affirmed 12 November 2012.

4.    The affidavit of Tony Tsiavis sworn on 13 November 2012.

5.    Brief written submissions dated 12 November 2012.

6.    An extended form of the above written submissions, dated 14 November 2012.

4    The consents of Damian John Templeton and Darren Michael Lewis dated 12 November 2012 to appointment as joint and several provisional liquidators of the four LLCs were filed.

FACTS AND EVIDENCE

5    The third defendant, Mr Burrows, is and was the controller of the first defendant, ActiveSuper Pty Ltd (“ActiveSuper”). The fourth defendant, Mr Gibson, is and was, the controller of the second defendant.

6    ASIC commenced a proceeding against the defendants by an originating process dated 27 June 2012 filed under ss 726, 727, 911A, 911B, 992A, 1101B, 1041H, 1323 and 1324 of the Corporations Act 2001 (Cth) (“the Act”) and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act”). In summary, ASIC alleges that all the defendants (ActiveSuper, ACN 143 832 053 Pty Ltd, Jason Burrows and Justin Gibson) contrary to relevant provisions, made offers of securities and carried on a financial services business. ASIC alleges that the individual defendants provided financial product advice, dealt with financial products in relation to superannuation interests without a licence and engaged in hawking financial products and misleading or deceptive conduct.

7    In June 2012, ASIC applied for asset preservation orders against the defendants.

8    In his affidavit sworn on 27 June 2012 in support of the application for asset preservation orders, Mr Childs, who is employed by ASIC as a senior investigator in Financial Services – Enforcement, deposed that ASIC had reason to believe that the defendants had been involved in conduct whereby:

(a)    Australian investors with relatively small amounts of superannuation had been induced by conduct in apparent contravention of the Act [and the ASIC Act] to:

(i)    convert their superannuation arrangements into [self-managed superannuation funds] SMSFs to be held in cash,

(ii)    pay that cash into a bank account;

(iii)    authorise Burrows to make withdrawals from that bank account, and to transfer funds to the USA (US) for the purposes of being used by a US company to acquire "distressed" real estate in that country, the investors being promised shares in that US company;

(b)    Approximately 199 SMSF clients had contributed approximately AUD$3.7m in response to the above scheme promoted by Burrows and others;

(c)    of that AUD$3.7m, approximately AUD$1.4m was sent by Burrows to various accounts in the US;

(d)    of that AUD$ 1.4m, it appeared that approximately US$455,000 had been used to purchase 14 properties in Arizona (US Properties);

(e)    the US Properties were held in the name of one of four entities: US Realty Investments #1 LLC, US Realty Investments #2 LLC, US Realty Investments #3 LLC or US Realty Investments #4 LLC (the LLCs);

(f)    contrary to representations made to the Australian investors, shares in the LLCs were not issued to the investors. Instead Australian SMSF investors were issued with shares in a BVI entity now known as Syndicated Property Group Ltd (SPG Ltd), previously called Syndicated Property Group Arizona Ltd;

(g)    according to corporate records lodged with the Arizona Corporations Commission (AZCC):

(i)    management of the LLCs was vested in a manager (as opposed to the members);

(ii)    Burrows was the manager of the LLCs; and

(iii)    SPG Ltd was a member who held an interest of 20% or more in the capital or profits of the LLCs:

(h)    SPG Ltd was incorporated in the BVI on 2 November 2011.

9    On 10 July 2012, Marshall J made asset preservation injunctions and other orders against the defendants, including Mr Burrows. The defendants were restrained from, inter alia, dealing with the property and funds of the LLCs (and another company in the USA, Syndicated Arizona Property Solutions LLC) which ASIC contended derived from funds which Australian investors had contributed as a result of conduct by Mr Burrows and others in contravention of the Act. Mr Burrows was also restrained from dealing with any property acquired with the funds.

10    It was not disputed that Mr Burrows had complied with the asset preservation orders and was co-operating with ASIC.

11    In his third affidavit dated 8 November 2012, sworn in support of the present application, Mr Childs deposed that Mr Burrows had apparently lost control of the LLCs and their shareholder, SPG Ltd (“SPG”), and had inexplicably been replaced by one Mr George, who was not subject to asset preservation orders. Mr Childs deposed that in late October 2012, ASIC was informed that the LLCs’ properties in the United States had been offered for sale and an offer to purchase had been received in relation to at least one property. Mr Burrows had attempted to prevent the completion of the sale. Mr Childs deposed that in those circumstances, ASIC was concerned that if the US properties were sold, the proceeds of sale may be dissipated and not returned to the Australian SMSF investors whose funds were used to purchase the properties.

12    Mr Childs also deposed that in September 2012, Mr Burrows’ solicitors, Atanaskovic Hartnell, advised ASIC that Mr George had sought advice from a British Virgin Islands’ (“BVI”) law firm, Forbes Hare Lawyers, on whether the United States properties could be sold without Mr Burrows’ approval. Atanaskovic Hartnell asked Forbes Hare Lawyers to advise whether Mr Burrows was still a director of SPG (which was the sole shareholder of, and thus effectively entitled to control, the LLCs).

13    Mr Childs deposed that a search of the relevant Arizona Corporation Commission database revealed that on 4 September 2012, the LLCs had lodged documents signed by Jeffrey George, indicating that the sole management of the LLCs had moved to their shareholder, SPG, and that Mr George, rather than Mr Burrows, now claimed to be the director of SPG. The attempts of ASIC and Atanaskovic Hartnell to clarify Mr Burrows’ status had proved unsuccessful.

14    Mr Childs deposed that on 25 September 2012, the Arizona Corporation Commission database informed ASIC that, based on all known information, management of the LLCs had shifted to SPG. Further, SPG’s Register of Directors and Officers and Register of Members-Management Shares (apparently certified on 22 August 2012 by a solicitor of Forbes Hare) recorded that Mr Burrows had ceased to be a director of SPG on 17 August 2012. As at 22 August 2012, Mr George was SPG’s sole director although Mr Burrows was shown as the sole member.

15    While ASIC continued its attempts to clarify the situation, Mr Burrows had attempted to assert his control of SPG by sending its statutory agent (Forbes Hare Corporate Services Ltd) a member’s resolution to remove Mr George and re-establish himself, if necessary, as director of SPG.

16    On 31 October 2012, ASIC informed Mr Burrows that it was concerned about his removal as director of SPG and the manager of the LLCs and the consequent risk that Mr George (whether because directed by third parties or otherwise) might sell the US properties. Mr Burrows’ solicitors advised that he would not oppose the present application, but could not accept service for the LLCs, which must be on the member of the LLCs, namely, SPG.

17    On 31 October 2012, Mr Burrows’ solicitors (in Mr Burrows’ capacity as the sole member of SPG) instructed the LLCs’ statutory agent, Robert Simbro (a lawyer based in Arizona) not to take any steps to dispose of the US properties without SPG’s approval.

18    Mr Simbro responded that he represented SPG and was seeking instructions from Forbes Hare Corporate Services Ltd as to who, under BVI law, was the director of SPG. He advised that if the position were unclear, he would resign as legal counsel for the LLCs and SPG.

19    Mr Burrows’ solicitors subsequently informed ASIC that Forbes Hare Corporate Services Ltd, had advised that Mr Burrows was not the sole member of SPG and had refused to give effect to his member’s resolution to restore him as director.

20    Mr Childs deposed that ASIC and Mr Burrows’ solicitors asked Forbes Hare Corporate Services Ltd, whether SPG had issued further shares since 9 November 2011, when Mr Burrows was recorded as the sole member. The inquiries were, at the date of swearing his third affidavit, unanswered.

21    Mr Childs deposed that on 24 October 2012, Mr Burrows’ solicitors advised ASIC that Mr Burrows had learnt that Mr Palmer (a person involved in the transfer of the investor funds to the USA) had received offers to purchase the LLCs’ real estate in Arizona. Mr Palmer had no apparent authority to sell the US properties. Mr Burrows attempted to instruct Mr Palmer not to proceed with a particular firm offer to buy a property for $50,150 and it was unknown whether the sale had been completed. As at 24 October 2012, Mr Burrows had no knowledge of whether any other US property was for sale. On 25 October 2012, Mr Palmer indicated that he was passing on the offer, and the buyer advised ASIC that he would not proceed with the purchase.

22    On 2 November 2012, Mr Simbro advised Mr Burrows’ solicitors that Forbes Hare Lawyers would address ASIC’s queries about the management and control of SPG.

23    Mr Childs exhibited spreadsheets of the debits and credits of the LLCs between March and December 2011 identifying the deposit of the SMSF funds to its bank accounts. All entries (save $29,000 credited to one company) matched up with the ActiveSuper account.

Service

24    Mr Childs exhibited the proposed amended originating process. He deposed that ASIC intended to serve by email:

(a)    Robert Simbro – rsimbro@simbroandstandley.com;

(b)    Mr J Santos, Forbes Hare - jose.santos@forbeshare.com;

(c)    FH Corporate Services Ltd - info@forbeshare.com and mail@forbeshare.com

25    Mr Childs deposed that Mr Simbro had advised that he was retained to represent SPG through Forbes Hare Corporate Services Ltd, its registered agent in BVI. Mr Childs noted that Forbes Hare Lawyers sought to distinguish itself from the registered agent of the LLCs, although they shared the same address and email.

26    Tony Tsiavis of ASIC deposed that the requirements of r 10.43 of the Federal Court Rules (which provides for service of an originating process on a person in a foreign country) had been satisfied by delivering a copy to a general or authorised agent (in accordance with the law of Arizona on service of a limited liability company).

27    Mr Tsiavis deposed that as records disclosed that Mr Simbro was the statutory agent of the LLCs, ASIC proposed to serve the amended originating process on Mr Simbro personally in that capacity.

28    Mike Tauschek of Atanaskovic Hartnell, Mr Burrows’ solicitors, deposed that as Mr Burrows was assisting ASIC, he had communicated with Forbes Hare Corporate Services Ltd, the registered agent of SPG in BVI.

29    Mr Tauschek deposed that throughout September and October 2012, he had asked Forbes Hare Corporate Services Ltd and Forbes Hare Lawyers whether Mr Burrows was a director and/or member of SPG and (after ASIC advised of Mr Burrows’ apparent removal as a director of SPG) sent documentation to restore him, if necessary.

30    Mr Tauschek deposed that Mr Simbro informed him that he would seek instructions from Forbes Hare Corporate Services Ltd as to who was the true director of SPG.

31    Mr Tauschek deposed that he was, at the date of affirming his affidavit, awaiting Forbes Hare’s response. On 2 November 2012, Forbes Hare Corporate Services Ltd advised that (contrary to the register ASIC had provided) Mr Burrows was no longer the sole member of SPG and thus Forbes Hare Corporate Services Ltd could not give effect to his instructions. On 2 November 2012, Mr Tauschek requested Forbes Hare Corporate Services Ltd to advise whether there had been a further issue of shares in SPG since 9 November 2012 (when Mr Burrows was recorded as sole member) but had received no response at the date of affirming the affidavit.

Discussion

Notice of application

32    The application was made against the LLCs ex parte. The defendants including Mr Burrows, had notice of and did not oppose it.

33    There was evidence to suggest that Mr Burrows was the LLCs’ manager and the director and sole shareholder of their sole corporate shareholder, SPG. If that were so, the LLCs had notice of and did not oppose the application.

34    If, however, Mr Burrows had been removed by unexplained but lawful means as the manager of the LLCs and as the director and sole shareholder of SPG, and replaced by Mr George or his interests, ASIC had, as Mr Tsiavis deposed, given the LLCs notice of the application by forwarding it, together with relevant materials, to Forbes Hare Lawyers, and to Mr Simbro, the statutory agent of the LLCs in Arizona.

35    Although neither Mr Simbro nor Forbes Hare Corporate Services had acknowledged receipt of the documents, I was satisfied that ASIC had taken all reasonable steps to give the LLCs notice of the application.

Jurisdiction to make orders – whether companies carrying on business in Australia

36    A preliminary issue in the application was whether the Court had jurisdiction to make an order winding up the LLCs, and hence, jurisdiction to appoint provisional liquidators.

37    Part 5.7 of the Act establishes a regime for winding up foreign companies. Section 9 of the Act defines a foreign company as a body corporate incorporated outside Australia. The application of Part 5.7 is limited to Part 5.7 bodies. A Part 5.7 body is defined in s 9 of the Act to mean:

(a)    …

(b)    a registrable body that is a foreign company and:

(i)    is registered under Division 2 of Part 5B.2; or

(ii)    is not registered under that Division but carries on business in Australia; or

(c)    …

38    Section 583 relevantly provides:

Winding up Part 5.7 bodies

Subject to this Part, a Part 5.7 body may be wound up under this Chapter and this Chapter applies accordingly to a Part 5.7 body with such adaptations as are necessary, including the following adaptations:

(a)    the principal place of business of a Part 5.7 body in this jurisdiction is taken, for all the purposes of the winding up, to be the registered office of the Part 5.7 body;

(b)    a Part 5.7 body is not to be wound up voluntarily under this Chapter;

(c)    the circumstances in which a Part 5.7 body may be wound up are as follows:

(i)    if the Part 5.7 body ... has ceased to carry on business in this jurisdiction …;

(ii)    if the Court is of opinion that it is just and equitable that the Part 5.7 body should be wound up;

(iii)    …

(d)    if the Part 5.7 body is a registrable Australian body-the winding up must deal only with the affairs of the body outside its place of origin.

39    As the LLCs were foreign companies, the Court’s jurisdiction depended on whether the LLCs had carried on business in Australia, albeit such business activities may have ceased. In Australian Securities and Investments Commission v Edwards [2004] QSC 344 (“Edwards”) at [41], PD McMurdo J stated:

Once a registrable body that is a foreign company becomes registered under Div 2 of Pt 5B.2 or carries on business in Australia, it becomes a Pt 5.7 body which is thereafter susceptible to an order for winding up, regardless of whether it subsequently becomes deregistered or ceases to carry on business in Australia. Once it becomes a Pt 5.7 body it has effectively submitted to the jurisdiction conferred by the Act for its winding up. Such an interpretation of the definition of a Pt 5.7 body is clearly beneficial to the operation of Pt 5.7. The contrary interpretation would enable a foreign company, which carried on business here illegally by being unregistered, to avoid an order for winding up in Australia by ceasing its business here just ahead of a winding up application. Especially where an expressed circumstance for winding up is the cessation of business in Australia, it is difficult to see that such a limitation upon the operation of Pt 5.7 was intended.

40    In Gebo Investments (Labuan) Ltd v Signatory Investments Pty Ltd [2005] NSWSC 544 (“Gebo Investments”), Barrett J stated at [24]:

It cannot be accepted that a foreign company that has carried on business in Australia, with all the consequences that that entails (including, in most cases, incurring debts payable to Australian residents) is put beyond the reach of Australian winding up simply by retreating to its homeland. If, in reality it has left no legacy requiring administration in Australia (assuming grounds for winding up are shown), any application for a winding up order is likely to be refused on discretionary grounds. But if matters cognizable in an Australian winding up have been left behind, the jurisdiction to wind up is, in my view ongoing: cf Banque des Marchands de Moscou (Koupetschesky) v Kindersley [1950] 2 All ER 105. I respectfully adopt and endorse, in particular, the statements in [41] of McMurdo J's judgment in ASIC v Edwards.

41    While Mr Burrows (who on one view was the lawful controller of the LLCs) did not oppose the orders sought, as ASIC acknowledged, such consent could not ameliorate a want of jurisdiction.

42    Section 21 of the Act provides:

Carrying on business in Australia or a State or Territory

(1)    A body corporate that has a place of business in Australia, or in a State or Territory, carries on business in Australia, or in that State or Territory, as the case may be.

(2)    A reference to a body corporate carrying on business in Australia, or in a State or Territory, includes a reference to the body:

(a)    establishing or using a share transfer office or share registration office in Australia, or in the State or Territory, as the case may be; or

(b)    administering, managing, or otherwise dealing with, property situated in Australia, or in the State or Territory, as the case may be, as an agent, legal personal representative or trustee, whether by employees or agents or otherwise.

(3)    Despite subsection (2), a body corporate does not carry on business in Australia, or in a State or Territory, merely because, in Australia, or in the State or Territory, as the case may be, the body:

(a)    is or becomes a party to a proceeding or effects settlement of a proceeding or of a claim or dispute; or

(b)    holds meetings of its directors or shareholders or carries on other activities concerning its internal affairs; or

(c)    maintains a bank account; or

(d)    effects a sale through an independent contractor; or

(e)    solicits or procures an order that becomes a binding contract only if the order is accepted outside Australia, or the State or Territory, as the case may be; or

(f)    creates evidence of a debt, or creates a security interest in property, including PPSA retention of title property of the body; or

(g)    secures or collects any of its debts or enforces its rights in regard to any securities relating to such debts; or

(h)    conducts an isolated transaction that is completed within a period of 31 days, not being one of a number of similar transactions repeated from time to time; or

(j)    invests any of its funds or holds any property.

Relevant case law

43    Whether a company is “carrying on business” in Australia is a question of fact (Luckins v Highway Motel (Carnarvon) Pty Ltd (1975) 133 CLR 164 at 186), the typically important indicia of which may vary in different contexts. (See On Call Interpreters & Translators Agency Pty Ltd v Commissioner of Taxation (No 3) [2011] FCA 366, where Bromberg J at [217] and [218] non-exhaustively summarised the principles governing the indicia of a business and the identification of the party for whose business economic activity is performed).

44    Whether a party is carrying on a business will be determined in all of the circumstances of the case, the context of the relevant statute and with reference to the particular nature of the enterprise conducted by the company (Edwards at [62]; Eltran at [8]).

45    In Hope v Council of the City of Bathurst (1980) 144 CLR 1 at [8], Mason J stated that “business” denoted “activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis”.

46    Despite the potential ambiguity of the terms, (Town Investments Ltd v Department of the Environment [1978] AC 359 at 383 per Lord Diplock); (City Finance Co Ltd v Matthew Harvey & Co Ltd (1915) 21 CLR 55 at 66 per Isaacs J), some authorities suggest that “carrying on a business” requires the following three elements:

(a)    a series of acts;

(b)    undertaken as part of a commercial enterprise;

(c)    for the purpose of profit.

47    Provided that there are acts within Australia which are part of the company's business, the company will be doing business in Australia (see Gebo Investments at [41], citing Actiesselskabet Dampskib “Hercules” v Grand Trunk Pacific Railway Co [1912] 1 KB 222) although the bulk of its business is conducted elsewhere (see Edwards at [39]) and it maintains no office in Australia (Bray v F Hoffman-La Roche Ltd (2002) 118 FCR 1 at [63]).

48    Capital raising per se, or conducting business through, rather than by, an agent, in Australia, may not amount to “carrying on business in Australia”.

49    In Tycoon Holdings Ltd v Trencor Jetco Inc (1992) 34 FCR 31, an American company placed magazine advertisements inviting readers to contact it in the USA. The company employees visited Australia on occasion, but their visits were not repetitive and lacked continuity. The company’s agent in Australia was conducting its own business, only one aspect of which was to act as the company's agent. Wilcox J held that, although it was a question of degree, the foreign company did business “through” the agent, not “by” the agent, and was not carrying on business in Australia (at 40).

50    In Davidson v Global Investments International Ltd (1995) 19 ACSR 89, a company registered in the BVI was engaged in the business of joint venture property development in Sumatra. Its fundraising for the project through the issue of shares to Australian residents did not constitute carrying on business in Australia.

51    In Australian Securities and Investments Commission v Cycclone Magnetic Engines Inc (2009) 224 FLR 50, Martin J held that a foreign company’s “one off” promotion (including by recommendations, statements of opinions, reports, newsletters and a website) of a share issue in Australia over a limited period in order to raise capital for its business was not carrying on a financial services business in Australia.

52    On the other hand, capital raising which is part of a company’s ongoing business, or activities to locate Australian investors (even if the funds are invested outside Australia) may constitute carrying on business in Australia (ASIC v Risqy Ltd [2008] QSC 107).

53    In Edwards, PD McMurdo J held that three foreign companies were carrying on business in Australia on various bases.

54    The first foreign entity operated a scheme under which members could borrow the retail price of a car, pay a discounted price and invest the remainder. A representative in Australia provided documents to potential investors, corresponded with and admitted investors to the scheme and made payment through his business on the company’s behalf. PD McMurdo J held that the company had carried on business in Australia through the individual (at [33]-[34] and [38]).

55    The second foreign company appointed Australians as “fund gatherers”, who canvassed investors in investment meetings and seminars in Australia. The company also canvassed investors through loan agreements and sought to make a return on funds deposited with it. Although the pooling of funds occurred outside Australia, PD McMurdo J held that the foreign company’s extensive marketing of the scheme and procurement of funds amounted to operating within the jurisdiction (at [51]–[57]).

56    The third foreign company offered shares in itself by providing offer, documents and documents in its name to investors in Australia. The documents recorded that the foreign company would "act as the client's private consultant" and negotiate and facilitate the placement of funds into the private portfolios, while investors would receive profit from a "privately placed portfolio". PD McMurdo J held that although there was usually a distinction between raising capital by a share issue and applying the capital in the business (at [61]), in this case, the procurement of funds was a step in the conduct of the company’s business rather than a mere capital raising (at [63]–[67]).

57    In Eltran, a foreign company conducted a trading business in various money markets using funds lent by investors. The company was incorporated in the USA, had no place of business in Australia and had never traded in Australian markets. Its business nevertheless included the receipt, retention and redemption of money invested by Australian investors and regular reporting to investors. The company’s dealings in Australia included procuring investments and entering into loan agreements. It communicated by telephone, mail and email within Australia, and in some correspondence gave an Australian address. The company also deposited investment funds into a bank account in Australia. Applegarth J held that, in such circumstances, the foreign company was carrying on business in Australia (at [17]–[21]).

58    In Eltran, Applegarth J stated at [8]:

I adopt, with respect, the observations of McMurdo J in ASIC v Edwards (2004) 22 ACLC 1469 at 1479 [38] and 1483 [62]. The relevant inquiry is whether Starport’s conduct in Australia, either directly or through its agents, involved “a succession of acts designed to advance some enterprise of the company pursued with a view to pecuniary gain” (at 1479 [38], quoting Luckins v Highway Motel (Carnarvon) Pty Ltd (1975) 133 CLR 164 at 178). The factual question is addressed not only by reference to the context of the particular statute but also with an understanding of the particular nature of the enterprise which constituted the company’s business (at 1483 [62]).

59    In Gebo Investments, Barrett J held that a foreign company’s solicitation of investments on an internet website, together with its entry into a consulting contract with an Australian person, amounted to carrying on business in Australia. Although the associated documents rarely identified which corporate entity was intended, a number of individuals who usually resided in Australia conducted meetings and telephone conversations to further the business in Australia.

Activities of the LLCs

60    The evidence relevant to whether the LLCs carried on business is set out below.

61    Mr Childs deposed:

LLCs carrying on business in Australia

51.    ASIC believes that the LLCs are, or at least have been, carrying on business in Australia for the purposes of the definition of "Part 5.7 body" in the Act, and in particular s 583 of that Act ("Winding up Part 5.7 bodies").

52.    ASIC's belief is based on the following facts:

Solicitation of investment funds by targeting Australian investors

53.    The matters referred to in the First Childs Affidavit and this affidavit disclose that Burrows was instrumental in arranging for the investment of Australian SMSF investor funds in the LLCs, by promoting to Australian investors the idea of investing in a US company to purchase US real estate.

54.    All of the activities undertaken by Burrows in this respect were undertaken in Australia. In particular, in the First Childs Affidavit I referred to the following facts:

(a)    $3.7m was debited from Australian SMSF cash management accounts and credited to ActiveSuper's bank account (paragraph 114);

(b)    Of the $3.7m, approximately $1.4m was transferred between 1 February 2011 and 18 October 2011 from ActiveSuper's account to one of five USA Bank of Arizona accounts in the name of one of the following.

(i)    Syndicated Arizona Property Solutions LLC

(ii)    US Realty Investments LLC1

(iii)    US Realty Investments LLC2

(iv)    US Realty Investments LLC3

(v)    US Realty Investments LLC4 (paragraphs 119 to 125)

(c)    Burrows was the sole director and shareholder of ActiveSuper (paragraph 9) from 20 May 2011 onwards. Previously, the only other director of ActiveSuper was Joanne Burrows, who I believe is related to Jason Burrows (paragraph 17);

55.    Of the amount of $1.4m referred to in (b) above:

(a)    the entire amount was paid to and received by the LLCs; and

(b)    those amounts were transferred after the time on which the relevant LLC were incorporated - namely, 14 March 2011 (LLCs # 1 and #2) and 18 March 2011 (LLCs #3 and #4)

Acquisition of US properties by LLCs

56.    As noted above, at least between the incorporation of the LLCs in March 2011 and 4 September 2012, management of the LLCs was vested in Burrows alone.

57.    From a review of the books and records produced to ASIC by Royale Capital, I have identified a number of email communications between Burrows, Gibson, Palmer and various other individuals (namely, escrow and lending agents in the US) concerning the acquisition of the US Properties by the LLCs. In particular, the emails appear to require Burrows to review the escrow (buyer's) packages sent to him, and authorise the purchase by signing and completing the enclosed forms on behalf of the LLCs.

58.    Exhibit "GJC-52" annexed to this affidavit is a true copy of the bundle of emails regarding the acquisition of the US Properties by the LLCs.

59.    Burrows appears to have provided instructions to the Bank of Arizona, generally via email, authorising the transfer of funds from the bank accounts of the LLCs. Exhibit "GJC-53" annexed to this affidavit is a true copy of emails between Burrows and Orlando Ulibarri, Senior Personal Banker, National Bank of Arizona, relating to the establishment of the LLC bank accounts and requesting that funds be transferred from the LLCs bank accounts.

62    Mr Childs also deposed that the LLCs entered a loan agreement with an Australian company, MOGS Pty Ltd (“MOGS”), signed by Mr Burrows as director of the LLCs, apparently in Queensland and under Queensland law. The agreement provided for a loan of AUD $1 million to MOGS, which was guaranteed and secured by a mortgage over a Victorian property. The loan facility was increased to $1.47 million in November 2011, and MOGS’ officers instructed Mr Burrows on at least three occasions to make payments on the facility to the benefit of MOGS.

63    Mr Childs deposed:

No other apparent activities

71.    As far as I am aware, the only activities of the LLCs are those associated with the investment of the funds of Australian SMSFs.

72.    As far as I am aware, the LLCs are not otherwise trading.

64    In accordance with its obligations in the context of an ex parte application and as a model litigant, ASIC, while submitting that the LLCs carried on business in Australia, also put the contrary case.

65    ASIC submitted:

63.    Cases on which the LLCs might rely to suggest that they have not been carrying on business in Australia include Tycoon Holdings Ltd v Trencor Jetco Inc (1992) 34 FCR 31; Davidson v Global Investments International Ltd (1995) 19 ACSR 89, and ASIC v Cycclone Magnetic Engines Inc (2009) 224 FLR 50.

66    In contrast to Eltran (where the activities of the foreign company were conducted in its name in Australia and there was correspondence containing representations to Australian investors in its name) in this case, the names of the LLCs were not disclosed to the Australian investors. The LLCs were not named in the investment memorandum and were not yet incorporated when the second and fourth defendants began to promote the investment by “cold-calling”. The investment memorandum merely referred to a US company and described ActiveSuper as the party that would undertake the investments. As ASIC acknowledged, it was therefore arguable that Mr Burrows undertook the activities in Australia in his capacity as controller of ActiveSuper and not as the controller of the LLCs.

67    On the better view, however, Mr Burrows’ activities in Australia were also attributable to, and amounted to more than a “one off” fundraising by, the LLCs. Mr Burrows was the controller of both ActiveSuper and the LLCs while arranging to debit relevant superannuation accounts of Australian customers and transferring the funds to the United States between February and October 2011 through accounts he controlled.

68    The business of debiting, transmitting and soliciting the targeted Australian customers’ funds in US real estate was carried out by both ActiveSuper and the LLCs. Although ActiveSuper was the entity disclosed to investors in Australia, the LLCs’ activities were integral to, and in one sense inseparable from, those of ActiveSuper in Australia.

69    Moreover, the LLCs’ activities were not confined to investment in distressed real estate in the United States. Although the investment memorandum did not refer to loan making, the LLCs’ controller, expressly on behalf of the LLCs, entered into a loan agreement under Australian law with an Australian entity, secured by a mortgage over Australian real estate. Between October 2011 and 14 March 2012, at least $1.9 million was loaned to MOGS and another borrowing entity under the agreement. A significant amount of the funds transmitted to the LLCs was repatriated to Australia or applied at the direction of the LLCs in several tranches.

70    In my opinion, the LLCs carried on business in Australia both by their loan activities in Australia and their controller’s debiting and transferring of Australian funds in Australia.

Whether provisional liquidators required

71    The assumption of control by overseas parties purporting to oust Mr Burrows from control of the LLCs and SPG remained unexplained, despite the repeated attempts to elicit information from the agents of SPG and the LLCs in the BVI and the United States, to which Messrs Childs and Tauschek deposed.

72    In the circumstances, there was a reasonable prospect that a justifiable lack of confidence in the conduct and management of the LLCs’ affairs (see Loch v John Blackwood Ltd [1924] AC 783) and a case for winding up on the just and equitable ground would be made out at trial.

73    On the material before the Court, the lawful basis for the removal of Mr Burrows (who was subject to, and complying with, the asset preservation orders) was not apparent. If Mr Burrows remained the lawful controller of the LLCs, the appointment of provisional liquidators would, on one view, be an unnecessary drastic intrusion into the affairs of the LLCs. Nevertheless, the balance of convenience favoured the appointment of provisional liquidators in order to secure the LLCs’ assets and to prevent their dissipation, given:

(a)    the opacity of the developments leading to the asserted change in control;

(b)    the impact of different legal systems;

(c)    problems of communications;

(d)    the lack of assured de facto control even if Mr Burrows remained in de jure control;

(e)    the evidence of an attempted sale of one United States property and Mr George’s inquiries about whether he could sell the properties without Mr Burrows’ concurrence; and

(f)    the relative urgency of the situation.

74    There was no evidence that the LLCs had any independent activities or stakeholders whose legitimate interests would be likely to be prejudiced.

75    Accordingly, I considered that provisional liquidators with the specified powers should be appointed.

Associate:

Dated:    13 February 2013