FEDERAL COURT OF AUSTRALIA

Pirina, in the matter of Fund Options (Australia) Pty Ltd (in liquidation) (No 2) [2023] FCA 681

ORDERS

IN THESE ORDERS the following words bear the following meanings:

23 December 2022 orders means the orders made by the Court on 23 December 2022 relating to the payment of the plaintiffs’ reasonable costs and expenses;

AFP means the Australian Federal Police;

ASIC means the Australian Securities and Investments Commission;

CBA Account means the account with the Commonwealth Bank of Australia ending in “6266” in the name of the Company;

Company means Fund Options (Australia) Pty Limited (in liquidation);

Corporations Act means the Corporations Act 2001 (Cth);

Insolvency Practice Schedule means the Insolvency Practice Schedule (Corporations) being Sch 2 to the Corporations Act 2001 (Cth);

St George Account means the account with St George Bank Limited ending in “6551” in the name of the Company; and

Liquidators means Vincent Joseph Pirina and Steven Naidenov in their capacities as liquidators of the Company.

THE COURT ORDERS THAT:

Distributions of assets referable to the St George Account

1.    Pursuant to s 90-15 Insolvency Practice Schedule, the liquidators are justified in:

(a)    Distributing the assets referable to the St George Account to verified depositors to that account in accordance with the “$ Total” column in exhibit VJP-34;

(b)    Paying the liquidators’ remaining reasonable costs and expenses in accordance with the 23 December 2022 orders; and

(c)    After:

(i)    complying with Orders 1(a) and (b); and

(ii)    giving 30 days’ written notice to the AFP of the proposed remittance of any surplus assets referable to the St George Account to ASIC,

remitting any surplus assets referable to the St George Account to ASIC in accordance with s 544 of the Corporations Act.

Distributions of assets referable to the CBA Account

2.    Pursuant to s 90-15 Insolvency Practice Schedule, the liquidators are justified in:

(a)    Distributing the assets referable to the CBA Account to verified depositors to that account in accordance with the “$ Total Entitlement per Depositor” column in exhibit VJP-36;

(b)    Paying the liquidators’ remaining reasonable costs and expenses in accordance with the 23 December 2022 orders; and

(c)    After:

(i)    complying with Orders 2(a) and (b) above,

(ii)    giving 30 days’ written notice to the AFP of the proposed remittance of any surplus assets referable to the CBA Account to ASIC,

remitting any surplus assets referable to the CBA Account to ASIC in accordance with s 544 of the Corporations Act.

3.    Within 48 hours of these orders being made, the liquidators must cause these orders and the reasons for them to be made available on the following website: https://astoncg.com.au/creditors/fund-options-australia-pty-limited/.

4.    The liquidators have liberty to restore on 2 business days’ notice.

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

REASONS FOR JUDGMENT

FARRELL J:

1    By an interlocutory application dated 2 February 2022 and filed on 9 February 2022, Vincent Joseph Pirina and Steven Naidenov as liquidators of Fund Options (Australia) Pty Limited (in liq) (Company) sought directions under s 90-15 of the Insolvency Practice Schedule (Corporations) (being Sch 2 to the Corporations Act 2001 (Cth) (Insolvency Practice Schedule) authorising distribution of the funds held or accrued to bank accounts formerly held by the Company. They also sought orders for payment of additional remuneration over and above that which had been authorised to be paid to the Company’s previous liquidator (David Nicholas Iannuzzi) and to them on 5 December 2018 and 2 September 2020.

2    These are reasons for orders made on 23 December 2022 and 21 June 2023.

BACKGROUND

3    See also Pirina, in the matter of Fund Options (Australia) Pty Ltd (In Liquidation) [2020] FCA 1256 (Pirina (No 1)).

4    Mr Iannuzzi was appointed as the liquidator of the Company and Managed Options Pty Ltd on 15 May 2015 pursuant to a members’ voluntary winding up. I will refer to the Company and Managed Options together as the Companies. Managed Options was deregistered on 7 July 2019.

5    After investigations, it appeared to Mr Iannuzzi that the Companies had conducted an online binary options trading business although neither company held an Australian Financial Services Licence (AFSL) and such a licence was necessary to conduct that business. That business appeared to involve a number of offshore entities and individuals (referred to at [8] below). Those who sought to trade binary options were predominately foreign. The Companies’ businesses were operated in conjunction with a website published by a Hong Kong based third-party known as Banc De Options (www.bancdeoptions.com) and another website operated by a New Zealand based third-party known as Options Rider (www.optionsrider.com).

6    Shortly after his appointment Mr Iannuzzi ascertained that the Company had three bank accounts, one with the Commonwealth Bank of Australia (CBA) (CBA Account) and two accounts with St George Bank (St George Accounts).

7    In a report to creditors dated 8 August 2016, Mr Iannuzzi advised that:

    The matter was referred to him by the Company’s external accountant, Graziano De Bortoli of GDC Chartered Accountants who had previously referred insolvency matters to him;

    Before his appointment as liquidator, Mr Iannuzzi had been led to believe that the Company was an investment vehicle that a person who was leaving Australia wished to wind up and it would be a simple affair in relation to which his fees would not exceed $20,000. That proved not to be the case;

    The director and sole shareholder of the Company, Reymundo Angara, and shadow directors Slavica Krstic and Kristian Krstic (who were also directors of Managed Options and Mr Krstic was its shareholder) had been uncooperative and failed to assist in his investigations. They had provided no books and records of the Company. Law enforcement advised that they had left Australia and had not returned;

    It appeared that the Company was used as part of an ongoing phoenix operation, a continuation of their enterprises relating to a number of companies operating a scheme whereby later depositors’ funds were used to pay funds to previous depositors. It appeared that funds obtained from overseas were first channelled into accounts of Managed Options. Then, when issues arose with that company, funds were channelled into the Company’s accounts. Then, leading up to Mr Iannuzzi’s appointment, $499,000 was channelled into Sky Options Pty Ltd, a company which Mr Iannuzzi believed was controlled by Mr Angara and Ms and Mr Krstic;

    He understood that approximately 2,400 (2,000 prior to appointment, 400 post-appointment) international depositors deposited at least $4,450,000 into the Company’s bank accounts. He advised that those depositors that deposited funds prior to his appointment were classed as unsecured creditors of the Company while post-appointment deposits were likely to be classed as trust beneficiaries;

    His investigations identified a number of transactions amounting to approximately $2,728,000 which were potentially voidable transactions as there appeared to be no commercial basis for those payments. However, recovery was unlikely due to the absence of books and records and it would involve extensive costs to investigate further and initiate actions. This amount is thought to comprise:

(i)    $2,039,060 paid in five international funds transfers to a bank account of Xenia Fay Atilano. That account is thought to be in the Philippines;

(ii)    $499,100 paid in nine funds transfers to Sky Options. Approximately $130,000 was seized for Sky Options by the Australian Federal Police (AFP) as proceeds of crime;

(iii)    $100,000 paid in two electronic funds transfers to KSK Holdings Australia Pty Ltd as trustee for the Krstic Trust; and

(iv)    $89,849 paid in 10 funds transfers to Mr Angara.

8    Mr Iannuzzi formed the view that the funds deposited into the CBA Account and one of two St George Accounts (together Bank Accounts) should be returned to depositors because it was likely that the deposits had been procured by misleading or deceptive conduct or otherwise deposited under a mistaken assumption that the Companies would undertake binary trading on behalf of the depositors but did not. Mr Iannuzzi formed this view because of:

    The absence of evidence that the Companies were in fact accepting deposits for the purpose of binary trading. He had been unable to obtain books and records of the Companies or written agreements between the Companies and Banc De Options and Options Rider or the Companies and depositors;

    The failure of the directors to provide information concerning the Companies to him. The Report as to Affairs (RATA) provided was grossly inadequate;

    Each of the directors of the Companies had absconded from Australia;

    The investigations by the AFP into the Companies and the AFP obtaining an order under proceeds of crime legislation against the Company;

    Neither of the Companies holding an AFSL;

    The absence of funds being transferred to a trading platform from the CBA Account;

    The evidence of withdrawals from the CBA Account in large rounded transactions being $710,000 on 7 April 2015, $1,300,000 on 22 April 2015, $400,000 on 24 April 2015, and $210,000 on 28 April 2015;

    The lack of evidence suggesting that any of the funds deposited were returned to the depositors – if the Companies were running a binary options trading business it would be the case that some depositors would have made a profit and opted to withdraw their investment;

    The failure of Wolf Goldstein and Bob Roberts (whom Mr Iannuzzi had been advised were behind Banc De Options and Options Rider) to respond to his enquiries;

    The warnings published by the New Zealand Financial Markets Association (NZFMA) and the AFP in relation to Banc de Options and Options Rider; and

    Websites operated by Options Rider and Banc De Options being deactivated some time following Mr Iannuzzi’s appointment.

9    Mr Iannuzzi sought orders in the nature of directions under s 90-15 of the Insolvency Practice Schedule that (among other things) he would be justified in making no further tracing efforts above the limited enquiries concerning the identity of depositors beyond those described in Pirina (No 1) at [27]-[30]. He proposed to call for proofs of debt and conduct adjudications of those he received, with the expectation that any claims made would be met in full from the funds in the Bank Accounts with any surplus (after remuneration) to be paid to the Australian Securities and Investments Commission (ASIC).

10    I was not persuaded that such limited enquiries were justified. On 5 December 2018, I made orders to the following effect:

(a)    Mr Iannuzzi would be justified in seeking further information from CBA and St George concerning contact details of those who made deposits into the Bank Accounts; and

(b)    Fixing remuneration for the period from 15 May 2015 to 30 June 2018 in respect of the work discussed in Pirina (No 1) at [33].

11    Mr Iannuzzi initiated enquires for trace results with CBA and St George on 12 December 2018.

12    In a “Notice to Depositors” prepared by Mr Iannuzzi dated 16 January 2019 the creditors were said to be:

13    Between April and July 2019, CBA and St George provided the names and addresses of 2,210 foreign depositors. They were not able to provide contact information for Australian depositors as that information was held by remitting banks.

14    On 4 June 2019, by resolution of the Company’s creditors, Messrs Pirina and Naidenov were appointed as liquidators of the Company in lieu of Mr Iannuzzi following his resignation. Messrs Pirina and Naidenov were salaried principals of Veritas Advisory until 30 June 2019. From 1 July 2019 to 31 March 2020, they were equity partners along with Mr Iannuzzi. On 1 April 2020, Messrs Pirina and Naidenov left Veritas and founded their firm, Aston Chace Group.

15    On 18 October 2019, the liquidators sent 2,210 circulars to foreign depositors informing them that they may have a claim against the Company and seeking further details of the deposits they had made in the Bank Accounts.

16    On 18 August 2020, I made orders naming the liquidators as plaintiffs in lieu of Mr Iannuzzi. I also made orders authorising the issue of subpoenas to nine remitting banks so that the liquidators could make any final enquiries directly with Australian depositors, rather than through the remitting banks. I subsequently granted leave to the issue of a subpoena to a tenth remitting bank. The liquidators received responses with details for 44 of 48 Australian depositors.

17    The liquidators then sought and, on 2 September 2020, I made orders in a similar form to those made in favour of Mr Iannuzzi as liquidator on 5 December 2018 so that it would be clear that the liquidators would have the benefit of directions previously made under s 90-15(1) of the Insolvency Practice Schedule and orders with respect to remuneration. However, given the increased number of depositors identified in the process directed by the 5 December 2018 orders and further depositors who might be identified on further enquiry, I considered it appropriate to order that no assets should be distributed to admitted creditors until the Court was satisfied as to whether all admitted creditors would be paid in full or whether it is necessary to make a finding as to the difference (if any) in the characterisation of the claims of depositors who made deposits before and after the liquidator was appointed.

HEARING ON 22 MARCH 2022 AND RELATED EVIDENCE AND SUBMISSIONS

18    At the hearing on 22 March 2022, the liquidators relied on the following evidence and submissions:

(a)    Mr Iannuzzi’s affidavits sworn on 3 August 2018 and 28 September 2018;

(b)    Mr Pirina’s affidavits sworn on 11 August 2020, 1 February 2022 and 21 March 2022; and

(c)    Submissions prepared by Joseph Scarcella dated 16 March 2022.

19    The liquidators also relied on:

(a)    Mr Pirina’s affidavit sworn on 31 March 2022; and

(b)    Supplementary submissions prepared by Mr Scarcella dated 1 April 2022.

20    In his affidavit sworn on 1 February 2022, Mr Pirina deposed that:

(a)    As deposed to in Mr Iannuzzi’s affidavit sworn on 3 August 2018, the total quantum of funds initially available to Mr Iannuzzi (excluding interest) was approximately $1,370,805 (rounded up to the nearest dollar amount and including $16,071.63 returned to the Company by the AFP) (Initial Funds) which can be divided into the pre-liquidation period and the post-liquidation period as follows:

(i)    $708,474.04 attributable to the pre-liquidation period; and

(ii)    $662,330.79 attributable to the post-liquidation period;

(b)    As deposed to in Mr Iannuzzi’s affidavit sworn on 3 August 2018, the Initial Funds were kept in interest-bearing accounts. As at 31 December 2021 interest totalling $117,523.26 had accrued on the Initial Funds, which can be divided as follows:

(i)    $102,308 is attributable to the pre-liquidation period; and

(ii)    $15,215.26 is attributable to the post-liquidation period; and

(c)    As at 31 December 2021, refundable GST taxation credits, arising from costs paid in the liquidation totalling $81,673.15 have been received from the Australian Taxation Office which can be divided into refundable GST taxation credit as follows:

(i)    $73,611.90 is attributable to the pre-liquidation period; and

(ii)    $8,061.25 is attributable to the post-liquidation period.

21    Mr Pirina further deposed that, pursuant to a resolution passed by the creditors of the Company and orders made by this Court, the liquidators (including Mr Iannuzzi) have been permitted to draw their remuneration from the assets of the Company totalling $566,500 (GST inclusive) as follows (permitted remuneration):

(a)    On 1 June 2015, the creditors of the Company approved Mr Iannuzi’s remuneration of $20,000 plus GST ($22,000 inclusive of GST); and

(b)    Pursuant to the orders made on 5 December 2018 the Court allowed Mr Iannuzzi to:

(i)    draw remuneration of $352,000 (GST inclusive) for the period 15 May 2015 to 30 June 2018; and

(ii)    draw remuneration in the amount of $192,500 (GST inclusive) for the period from 1 July 2018 to finalisation of the winding up of the Company.

22    The liquidators said that the conduct of this liquidation has been complex. The nature of the purported business of the Company and the ongoing difficulties of obtaining depositors’ contact details from various banks and financial institutions has necessitated obtaining ongoing legal assistance which included approaching the Court for directions and the issue of subpoenas. For the period of the liquidation to 31 December 2021, legal fees in the amount of $257,096.26 (GST inclusive) have been paid from the assets of the Company. While the liquidators’ solicitors have been able to apportion some individual legal fees between the pre-and post-liquidation periods that has not been possible in all cases. Where it has not been possible, the fees have been apportioned between the two periods equally. On that basis, the legal fees could be divided as follows:

(a)    $127,859.63 (GST inclusive) for the work done in relation to the pre-liquidation period; and

(b)    $129,236.63 (GST inclusive) for the work done in relation to the post-liquidation period.

23    During the course of the liquidation, expenses such as advertising, stationery, searches, printing, photocopying, postage, GST paid and bank charges totalling $64,981.66 (GST inclusive) had been incurred and paid from the assets of the Company. Given the relatively small amount of each individual expense, the nature of these expenses and the amount of work that would be involved, the liquidators did not consider it to be feasible, cost-effective or in the interests of the creditors of the Company to seek to apportion these expenses individually to either the pre- or post-liquidation period. They did, however, consider that it would be fair and equitable to apportion these expenses according to the total percentage of admitted claims referable to each period: 90.13% to the pre-liquidation period ($58,567.89, GST inclusive) and 9.87% to the post-liquidation period ($6,413.77, GST inclusive).

24    Taking these matters into account, Mr Pirina deposed that the following chart represented the manner in which the liquidators calculated funds available for distribution as at 31 December 2021:

25    I note that the evidence reveals that:

(a)    The bank accounts appear to have been opened on 29 January 2015;

(b)    Upon identifying the Bank Accounts, Mr Iannuzzi instructed CBA and St George that no withdrawals may be made from them but they remained open for deposits;

(c)    All of the pre-liquidation funds were received into and paid out of the CBA Account;

(d)    In relation to the St George Account with account number ending 838, there were no deposits or withdrawals in the period it was open until 29 July 2015; and

(e)    In relation to the St George Account with account number ending 551, there were no deposits prior to 23 June 2015; deposits were made between 23 June and 28 August 2015; and, after deduction of bank fees and charges, there was an aggregate amount of $518,478.62.

Enquiry work

26    The liquidators undertook “enquiry work” being the work detailed above in obtaining the names and addresses of foreign depositors from CBA and St George and the names and addresses of Australian depositors from remitting banks.

27    Mr Pirina deposed that, based on the liquidators’ investigations, the total number of possible depositors to the CBA and St George Bank Accounts was 2,340. There were no addresses for 23 depositors. For 297 depositors, the address was incomplete or invalid, the depositor had requested not to be contacted again, or the depositors had marked mail sent to them as “return to sender”. The liquidators therefore obtained the names and contact details of 2,020 depositors (86% of all depositors) being 1,976 foreign depositors and 44 of 48 Australian depositors.

Communications work

28    Following on from the information held at the conclusion of the enquiry work, the liquidators undertook the following further work. In order to invite proofs of debt, on 17 December 2020, the liquidators sent circulars to 2,020 depositors which yielded 54 proofs of debt.

29    Given the paucity of responses, the liquidators sent further circulars to depositors on 17 March 2021 (other than to 71 depositors whose mail was returned to sender) setting a deadline of 31 May 2021 for the receipt of claims. By 31 May 2021, 587 claims were received. A further 19 claims were received between 1 June and 21 August 2021. Given the relatively small number of late claims and their low aggregate value, the liquidators decided to treat those claims as though they had been received by 31 May 2021. As at 1 February 2022, the liquidators had received claims from 606 depositors comprising 257 proofs of debt and 349 letters or emails.

Adjudication work

30    The liquidators undertook a streamlined process for the adjudication of the claims as described in the affidavit sworn by Mr Pirina on 1 February 2022 at [25]-[32]. It involved three review stages.

31    In the first stage, two file accountants at the liquidators’ firm would review all claims under a process where:

(a)    A consolidated spreadsheet of all of the Company’s bank transactions in the Bank Accounts was created;

(b)    A claim would be reviewed to see if it had sufficient supporting documents, for example, a transfer receipt or a copy of a claimant’s bank statement showing funds being withdrawn from the account. A formal proof of debt did not have to be received for it to be assessed;

(c)    If the required supporting documents were provided and the relevant details matched a deposit in the consolidated spreadsheet (with some allowed slight variations, especially with international deposits), the claim was admitted and categorised as Category A;

(d)    If a claim did not have sufficient supporting documents but the claimant had previously been in contact with the liquidators and provided information that specifically matched details of a transaction in the consolidated spreadsheet such that the liquidators were satisfied that the claimant definitely provided funds to the Company, the claim would be admitted for the amount in the consolidated spreadsheet and categorised as Category B;

(e)    Where the claim did not have sufficient supporting information and there had not been contact with the liquidators in which other verifying information was provided and/or the information provided showed that the claimant did not have a claim against the Company (such as, demonstrating that funds had been provided to a different entity), the claim was to be rejected and classified as Category C; and

(f)    Where any of the circulars sent on 17 December 2020 or 17 March 2021 were marked “return to sender” or no response was received from that potential depositor or the potential depositor contacted anyone at the liquidators’ firm requesting that they not be contacted again, the liquidators considered any claim that the depositor might have had to have been rejected or abandoned and it was categorised as Category D.

32    A second review would be conducted by a file manager in the employ of the liquidators’ firm. He reviewed 145 claims as part of the second review. It consisted of assessing anew any claims in Category A where the quantum exceeded $1,500, 30 claims in Category B and every claim in Category C where the claim did not exceed $1,500.

33    In the third review, the liquidators assessed any claim in Category A that exceeded $5,000, a random sample of 30 claims that fell into Category A which did not exceed $5,000 (including some claims previously assessed in the second stage), a random sample of 20 claims in Category B (including some claims previously assessed in the second stage), any claim in Category C which exceeded $1,500 and a random sample of 10% of the claims in Category C where the claim did not exceed $1,500. In all, 118 claims were assessed by the liquidators.

34    The liquidators reviewed the claims received after 31 May 2021 separately. Of those, only nine fell within Categories A or B for an aggregate amount of $9,450.28.

35    That process was designed to reduce costs of the adjudication of the claims. It was, nonetheless, time consuming. Of the 606 claims then held, 385 were approved and 221 were rejected. Mr Pirina deposed that, of the 385 admitted claims, 347 related to pre-liquidation deposits (339 foreign and 8 Australian depositors) while 38 related to post-liquidation deposits all of whom were foreign depositors.

Other communications

36    Mr Pirina deposed that, in addition to the enquiry work, depositor communications work and adjudication work, there were a significant number of other tasks, such as:

(a)    Between 17 December 2020 and 21 August 2021, the liquidators’ firm received and managed 30 telephone calls (each lasting 20 to 30 minutes) and 800 emails (some with over 100 pages of attachments) from potential depositors. Some correspondence required translation or further evaluation;

(b)    54 formal proofs of debt were received by email and post. Some of the potential depositors made contact multiple times; and

(c)    On 7 December 2021, the liquidators issued a circular by email to 382 depositors with admitted claims. The email informed them of the outcome of the formal adjudication and advised them of the liquidators’ proposed application to the Court. The circular advised of the liquidator’s intention to make an application to the Court. The notice was not sent by post to the three remaining depositors with admitted claims for whom the liquidators only had a postal address “as they would not have received the notice with the timeframe the Liquidators anticipated making the application”.

37    The 7 December 2021 circular stated:

NOTICE TO DEPOSITORS

Dear Sir/Madam,

FUND OPTIONS (AUSTRALIA) PTY LIMITED

(IN LIQUIDATION)

ACN 603 782 903

(COMPANY)

We refer to our previous communications with you regarding your claim in the Liquidation of the Company. You are receiving this notice because we have formally admitted your claim in the Liquidation for dividend distribution purposes.

Provided below is an explanation of key terms that will be used throughout this notice for ease of reference:

Depositors that paid funds into the Company's bank account before 15 May 2015.

We currently have sufficient Post-Liquidation Funds to pay Post-Liquidation Claims in full as follows:

1)    The admitted Post-Liquidation Claims total $123,401.

2)    The net Post-Liquidation Funds are estimated to be $369,032 after deducting the costs of the Liquidation referable to the Post-Liquidation work, which includes our further anticipated remuneration of $21,566 including GST (the liquidators’ further anticipated remuneration has been reduced by approximately 15% for the benefit of the Liquidation) and further anticipated legal fees of $27,500 including GST.

3)    Upon payment of all admitted Post-Liquidation Claims, there will be an estimated surplus of Post-Liquidation Funds of $245,631, subject to transaction fees (Surplus Funds).

4)    We will seek an order that the Surplus Funds may be applied towards Pre-Liquidation Claims — see details below.

5)    In the alternative to point 4 above, we will seek an order that the Surplus Funds be paid to the Australian Securities and Investments Commission (ASIC) and subsequently held by ASIC as `unclaimed money'.

We currently do not have sufficient Pre-Liquidation Funds to pay all admitted Pre-Liquidation Claims in full.

1)    The admitted Pre-Liquidation Claims total $881,673.

2)    The net Pre-Liquidation Funds are estimated to be $32,991 after deducting the costs of the Liquidation referable to the Pre-Liquidation work, which includes our further anticipated remuneration of $202,834 including GST (the liquidators' further anticipated remuneration has been reduced by approximately 15% for the benefit of the liquidation) and further anticipated legal fees of $27,500 including GST.

3)    We intend to make an application to the Federal Court of Australia in relation to seeking directions to distribute the funds of the Company in the manner described above. We also intend to seek approval of the remuneration referred to above at this time.

Our lawyers have agreed to cap their legal fees and expenses at a discounted rate, despite expecting to incur further costs, for the benefit of the Liquidation.

You are presently not required to undertake any actions or respond to this notice unless you have any objections regarding our proposed course of action.

For all previous notices to depositors and other relevant information, please refer to our website by accessing the following link: https://astoncg.com.au/creditors/fund-options-australia-pty-limited/.

If you have any queries regarding this notice, please contact fundoptions@astoncg.com.au.

Prospects of further claims

38    As at 1 February 2022, the liquidators considered it unlikely that any further claims would be received having regard to the following matters:

(a)    The length of time since Mr Iannuzzi was appointed on 15 May 2015;

(b)    News of the Company’s liquidation is likely to have spread through channels that potential depositors were likely to visit given the nature of the Company’s purported business, such as online chat rooms;

(c)    The fact that there has been a prominent link inviting claims on the liquidators’ website since the liquidators replaced Mr Iannuzzi;

(d)    Advertisements were placed in national and state newspapers; and

(e)    The communications sent to potential depositors since 15 May 2015 in evidence through affidavits sworn by Mr Iannuzzi on 3 August 2018 and 28 September 2018 and Mr Pirina on 11 August 2020, 1 February 2022, and 21 and 31 March 2022 on which Mr Pirina relied.

Notification of hearing on 22 March 2022

39    In his affidavit sworn on 21 March 2022, Mr Pirina advised that, on 25 February 2022, an email had been sent to 382 depositors with admitted claims advising them as follows:

As you know, Vincent Pirina and Steve Naidenov are the Liquidators of Fund Options (Australia) Pty Limited (In Liquidation) ACN 603 782 903 (Company).

By a Notice to Depositors dated 7 December 2021 (Notice) we foreshadowed that we would be making an application to the Federal Court of Australia (Application):

1.    for directions as to how the assets of the Company are to be distributed; and

2.    seeking approval of our further remuneration in relation to the winding up of the Company.

A copy of the Notice is attached.

We filed the Application on 2 February 2022. The Court has now scheduled the hearing of the Application to commence at 2:15 pm (Australian Eastern Daylight Time) on Tuesday, 22 March 2022.

A copy of the Court’s orders dated 24 February 2022 (Orders) is attached.

You are not required to undertake any actions or respond to this communication unless you object to the Application or wish to attend this upcoming hearing. If either of these apply, we encourage you to contact us at our below details at first instance. Alternatively, you are, of course, entitled to seek your own independent legal advice.

The Orders, the Notice, all previous notices to depositors, and other relevant information can be found on our website by accessing the following link: https://astoncg.com.au/creditors/fund-options-australia-ptv-limited/.

If you have any queries regarding this notice, please contact fundoptions@astoncg.com.au.

40    The 7 December 2021 circular attached to the email is set out at [37] above.

41    A letter to the same effect was sent to the remaining three depositors with admitted claims. The liquidators also put a notice to that effect on their website.

42    No advice concerning the time and date of the 22 March 2022 hearing appears to have been given to depositors who had not provided a claim to the liquidators.

43    I note that no one has appeared at any of the hearings at which legal representatives of Mr Iannuzzi and Mr Pirina have appeared to seek relief from the Court.

Submissions dated 16 March 2022

44    In their submissions dated 16 March 2022, the liquidators submitted that the evidence disclosed that:

(a)    They have not been able to discover the contractual basis upon which depositors provided funds to the Company. Indeed, there is insufficient evidence to determine the precise nature of the payments or deposits made to the Company. No creditor has come forward with sufficient information to permit a proper understanding of the nature of their claims. Those claims could be proprietary, a debt, or a chose in action; and

(b)    Despite extensive efforts, only 606 claims had been received of which only 385 had been admitted. That represents only approximately 16% of a total of the 2,340 depositors.

45    They said there is therefore an unresolved (and likely unresolvable) legal question as to the correct characterisation of the deposits that cannot be determined:

(a)    Deposits might correctly be categorised as being held in trust subject to the principles in Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (Quistclose); that is, as money advanced for the specific purpose of trading binary options but that purpose failed; or

(b)    Deposits may be imbued with a trust in the nature of that in Black v S Freedman & Co (1910) 12 CLR 105 (Black v S Freedman & Co), as those deposits may have been procured by fraud; and/or

(c)    The Company operated a Ponzi scheme and thus distributions may be governed by the principle set out in In the matter of Courtenay House Capital Trading Group Pty Ltd (in liq) [2020] NSWSC 780 (Rees J) (Courtenay House).

46    The liquidators submitted that there was a clear benefit to the liquidation of the Company in the Court making the directions sought because it enables them to distribute realised assets to admitted creditors and then take steps to conclude the winding up. They submitted that, having regard to matters listed in s 90-15(4) of the Insolvency Practice Schedule:

(a)    The liquidators have faithfully performed their duties in that they have exhausted all sensible investigations to reach this point, and they have done so under the supervision of the Court and pursuant to orders and directions made to assist them;

(b)    There is no evidence of failure to comply with the Corporations Act, the Insolvency Practice Schedule or orders made by the Court; and

(c)    Depending on the ultimate distribution method adopted, it is conceivable that actual or potential creditors could suffer loss but that is a function of the direction rather than the conduct of the liquidators.

Further remuneration

47    The liquidators sought orders with respect to the payment of further remuneration. Mr Pirina deposed that:

(a)    The liquidators’ costs of the liquidation of the Company have exceeded the permitted remuneration, with the last of the permitted remuneration being drawn down on 30 November 2020. It can be divided as follows:

(i)    $434,684.03 (GST inclusive) on account of work done relating to the pre-liquidation period: and

(ii)    $131,815.95 (GST inclusive) on account of work done relating to the post-liquidation period;

(b)    The Court’s 2 September 2020 orders did not allow the liquidators to draw funds from the Company to pay their remuneration in excess of the permitted remuneration and they have not done so. However, the liquidators have done significant work since that time. Accordingly, for the period between 1 September 2020 and 31 December 2021, the liquidators’ unbilled and unpaid work in progress (WIP) was $209,467.50 (GST inclusive); and

(c)    Although the liquidators’ remuneration was last drawn on 30 November 2020, the work that supported its invoice was done prior to 1 September 2020. Accordingly, the liquidators had not been paid any remuneration for work done from 1 September 2020 onwards.

48    Together with WIP (which I take to be as at 1 February 2022) the liquidators considered that they could reasonably claim a further $244,425 plus GST for their work to the end of the winding up of the Company (inclusive of likely remuneration of $54,000 plus GST). However, the liquidators were aware of the costs that have already been incurred to date. As at 1 February 2022, the liquidators were prepared to reduce their anticipated costs by 10% and therefore claim anticipated remuneration at $242,467.50 (GST inclusive) which could be divided as follows:

(a)    $218,535.64 (GST inclusive) attributable to the pre-liquidation period; and

(b)    $23,931.86 (GST inclusive) attributable to the post-liquidation period.

49    The liquidators’ solicitors anticipate that their future legal costs in assisting to the conclusion of the liquidation will be $60,000 plus GST (inclusive of current unbilled WIP). However, the liquidators were informed that their solicitors are prepared to reduce their future anticipated costs by approximately 17% and to cap their future legal costs at $55,000 (GST inclusive). Consistent with the suggested previous treatment of legal costs, anticipated legal fees can be divided equally between the pre- and post-liquidation periods.

50    The liquidators noted these things:

(a)    If the cost to complete the liquidation of the Company is less than anticipated, the liquidators will only draw down those fees that are actually earned;

(b)    If the Court makes the orders sought, the total remuneration paid to the liquidators (including Mr Iannuzzi for the period in which he was the liquidator of the Company) would comprise approximately 50% of the total funds available for distribution; and

(c)    Despite the substantial work undertaken by the liquidators since they replaced Mr Iannuzzi on 4 June 2019, by that time $424,000 (almost 54% of the overall total anticipated liquidators’ remuneration of $808,967.50) had already been drawn down from the assets of the Company. The liquidators provided a summary of all invoiced and anticipated remuneration in Mr Pirina’s affidavit sworn on 1 February 2020 at [80].

Amount available for distribution

51    On the basis that the Court made the orders sought by the liquidators as at 1 February 2022, the liquidators anticipated that there would be approximately $383,955.83 available for distribution calculated as follows:

Proposed methods of distribution as at March 2022

52    The liquidators initially proposed that the distribution be effected by one of two methods and noted a third method.

53    By the first method (method 1), depositors who deposited funds in the post-liquidation period would be paid out of the pool of funds received in respect of that period. Should there be any surplus funds left in the post-liquidation pool after all creditors who contributed to it have been entirely paid out, those surplus funds would be added to the pool of funds received by the Company in the pre-liquidation period and pre-liquidation depositors would receive a dividend of approximately $0.295 in the dollar claimed. The liquidators noted that under this method:

(a)    The return to pre-liquidation creditors is increased without altering the return to post-liquidation depositors;

(b)    The prospect of a post-liquidation creditor now emerging to make a claim is remote for the reasons given at [38] above; and

(c)    It avoids a situation where, due to bank fees, 264 admitted pre-liquidation creditors do not receive a return; see [58] below.

54    By the second method (method 2), depositors with admitted claims would only be paid from the pool of funds into which they made deposits on a pari passu basis and any surplus from a pool would be paid to ASIC in accordance with s 544 of the Corporations Act. The liquidators noted that under this method:

(a)    Post-liquidation depositors with admitted claims would be paid in full and pre-liquidation depositors with admitted claims would receive $0.195 cents in the dollar;

(b)    While the precise character of the deposits remains unknown, the post-liquidation deposits could be subject to some trust or equivalent relationship which would mean that it is inappropriate to use the surplus to enhance the return to pre-liquidation depositors; and

(c)    While the chance of a new claim being made is remote, payment to ASIC of any surplus will permit any post-liquidation creditors who have yet to make themselves known to the liquidators to make a claim. That avoids the need for the liquidation to remain open for an indefinite period of time.

55    By the third method (which only appears in a footnote in the liquidators’ submissions of 16 March 2022) (method 3), all admitted claims would participate pro rata in the assets of the Company resulting in a dividend of $0.38 for each admitted creditor. There is simplicity in this method and it treats all claims equally, but it adversely impacts known post-liquidation creditors.

56    The liquidators submitted that this is not a case where the Court is likely to be assisted by contradictors as to the appropriate distribution model. They referred to the decision of the Court of Appeal of New South Wales in Caron and Seidlitz v Jahani and McInerney in their capacity as liquidators of Courtenay House Pty Ltd (in liq) & Courtenay House Capital Trading Group Pty Ltd (in liq) (No 2) [2020] NSWCA 117; (2020) 102 NSWLR 537 (Caron v Jahani (No 2)).

57    The liquidators noted that:

(a)    The admitted claims are small. The average claim is $2,613.62. The average pre-liquidation creditor has a claim of $2,543.93 while the average post-liquidation creditor has a claim of $3,250.08. Out of the admitted 339 foreign depositors with a pre-liquidation claim, only 75 have an admitted claim exceeding $2,150;

(b)    The creditors’ claims are so small that the cost of contradicting would be prohibitive;

(c)    If the costs of any contradictors were to be paid out of the assets of the Company, it would significantly erode the remaining funds of the Company;

(d)    If a contradictor was appropriate, the most likely appropriate contradictor would be Australian, but there are only eight of them and they all provided deposits pre-liquidation;

(e)    A post-liquidation depositor might be an appropriate contradictor were method 3 to be adopted. If that model was thought to be appropriate, distribution could be delayed until such time as the liquidators notify the post-liquidation creditors and give them a time limited opportunity to apply to the Court to discharge or vary that order. That would not be an onerous task as there are only 38 admitted post-liquidation creditors;

(f)    There is no logical party that could contest method 1 as there is no identified party with a sufficient interest in the remaining funds nor is it likely that such a creditor will come forward having regard to the matters set out at [38] above;

(g)    ASIC would not be an appropriate contradictor since neither s 544 nor Part 9.7 of the Corporations Act confers sufficient interest on it;

(h)    Given the difficulty in contacting depositors and seeking their engagement thus far, the Court may infer that creditors would be unlikely to be willing to contradict the application; and

(i)    No one gave notice of their intention to appear at the court hearing on 22 March 2022 and none did appear. The Court may therefore infer that the creditors are “ambivalent” about the distribution model.

58    Mr Pirina deposed that he had made enquiries with various Australian and international banks regarding the cost of international transfers and:

(a)    The cost quoted by the National Australia Bank is typical based on his enquiries and he has been advised that it charges a $20 transaction fee for international money transfers where the source of those funds is in Australian dollars;

(b)    The cost quoted by the Bank of America is typical based on his enquiries and he has been advised that it charges a fee of USD16 (approximately AUD22 based on foreign exchange rates as at 18 January 2022) for inbound money transfers;

(c)    Accordingly, a depositor based in the United States of America would need to be entitled to receive a dividend of more than $42 in order for that dividend not to be entirely consumed by bank fees;

(d)    Under method 2 (return of $0.195 in the dollar of pre-liquidation admitted claims), the admitted claim would need to be at least $2,150;

(e)    There are 339 foreign depositors with an admitted pre-liquidation claim and out of these only 75 have an admitted claim exceeding $2,150. Accordingly, if method 2 were adopted, the vast majority of foreign depositors with an admitted pre-liquidation claim will not receive any dividends after bank fees. $241,633.98 would be eaten up in bank fees;

(f)    If method 1 were adopted, there would be no depositors (Australian or foreign) with an admitted claim that would receive no dividend. Method 1 would result in the pre-liquidation depositors receiving over 15 times more in dividends than they would receive if method 2 were adopted while in both cases the admitted claims of post-liquidation depositors would be paid in full; and

(g)    While method 2 (where any surplus of post-liquidation deposits are paid to ASIC) may seem more attractive in circumstances where there is some real chance that future depositors who have so far not made themselves known to the liquidators might later present themselves to ASIC and convince ASIC that they have an admissible claim, it is the liquidators’ view that it is unlikely that that will occur given the steps taken to date.

59    As at 1 February 2022, it was Mr Pirina’s view that method 1 was the most equitable in circumstances where not all admitted creditors were capable of having their admitted claims paid out.

60    At the hearing on 22 March 2022, the liquidators’ legal representative, Mr Scarcella, submitted that it was not easy to decide which was the appropriate method having regard to the state of the evidence and the consequences that flow from the characterisation of the funds received. However, he conceded that, having regard to relevant authorities, if I formed the view that the Company’s business was a scam, it is difficult to resist the conclusion that the funds in the Bank Accounts are trust funds and therefore it is necessary to maintain the segregation of the accounts on a pre- and post-liquidation basis so that method 2 would be the appropriate method of distribution.

61    Mr Scarcella accepted that it would be open to the Court to order that foreign pre-liquidation depositors who would receive no dividend after the deduction of bank fees should be excluded from receiving a distribution in method 2. That would thereby enhance the return to other foreign pre-liquidation depositors and be in the best interests of that class as a whole.

62    The liquidators sought and were granted leave to file further evidence and submissions. Submissions and a further affidavit sworn by Mr Pirina on 31 March 2022 were filed on that date.

63    In his affidavit sworn on 31 March 2022, Mr Pirina deposed that:

(a)    Of the admitted claims, only 20 exceed $10,000 when converted to Australian dollars. The three largest pre-liquidation claims were all made by foreign depositors for $124,324.26, $37,299.52 and $26,892.95. If method 2 were adopted they would receive $2,424.32, $727.34 and $524.41 respectively if all admitted pre-liquidation depositors participate in the distribution. I note that Mr Pirina deposed that if not all pre-liquidation foreign depositors participate in the distribution on the basis set out in [65] below, those three claims would receive $4,500.54, $1,350.24 and $524.11 respectively (the last amount of which perhaps should be $973.52), rounded to the nearest cent, before bank fees;

(b)    Bank statements for the CBA Account indicate that withdrawals fell into three categories: lump sum transfers to other bank accounts, bank fees and charges, and transfers to variously named individuals who the liquidator infers are people who had previously deposited funds with the Company for the purpose of binary options trading; and

(c)    None of the depositors with admitted claims appear to have received money out of the CBA Account. The only withdrawals from the St George Accounts were bank fees and charges.

64    Mr Pirina submitted that, if method 2 is applied and foreign pre-liquidation depositors with claims of less than $2,150 are excluded, the liquidators identified that there would be fewer depositors that would need to be contacted in the future, and fewer individual transfers of funds would be required. They therefore reassessed their position with respect to future remuneration which will permit a greater dividend to be paid to the pre-liquidation depositors. They would reduce the claim for future remuneration by a further 20% to $26,400 inclusive of GST. This would result in a change to the chart at [51] above as follows:

65    If the Court ordered that distributions not be made to 264 foreign pre-liquidation depositors who have claims of less than $2,150 and applied method 2, the funds available for distributions to the 75 remaining foreign depositors would increase so that the available funds and return to those foreign depositors would change applying method 2 as follows:

66    The liquidators sought the following remuneration approval:

67    The liquidators properly accepted that a remuneration determination can specify the amount of the remuneration or the method of working out that remuneration: s 60-10(3) of the Insolvency Practice Schedule. They also properly accepted that any determination based on a time-cost basis must have a cap: s 60-10(4) of the Insolvency Practice Schedule. They relied on the matters that a Court should take into account set out at s 60-12 of the Insolvency Practice Schedule. They submitted that the present application seeks remuneration for a specific amount (informed by a time-cost basis). The claims for remuneration and legal fees are discounted and capped (see the chart at [64] above). They submitted, and I accept, that the following relevant principles emerge from the case law:

(a)    The liquidators bear the onus to establish that the claimed remuneration is reasonable: Sanderson as Liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr [2017] NSWCA 38; (2017) 93 NSWLR 459 (Sakr Nominees) at [54];

(b)    The mere fact that the work conducted does not lead to an augmentation of the funds available for creditors does not mean the liquidators are not entitled to be remunerated for it: Sakr Nominees at [57]; and

(c)    Fixing remuneration involves the Court’s consideration of the work done by the liquidators and whether it was reasonable to carry it out and the appropriateness of the amounts charged for it: Sakr Nominees at [59]. This includes a consideration of the quality and complexity of the work.

JULY 2022 MEMORANDUM

68    On 5 July 2022, I caused a memorandum (July 2022 Memorandum) to be sent to Mr Scarcella to which was attached a Schedule which I had caused to be prepared having regard to the content of statements for the CBA Account which Mr Pirina had put in evidence. The Schedule noted deductions from the CBA Account, deposits to it (primarily focussed on amounts over $10,000) and account balances after transactions. The July 2022 Memorandum addressed the following matters.

69    The liquidators were advised that I accepted Mr Iannuzzi’s view that the Company’s operations were part of a scam and on that basis, deposits to the Bank Accounts should be treated as having been held on trust having regard to the principles derived from Black v S Freedman & Co with the consequence that depositors to the Bank Accounts were not simply creditors and the Company held those funds as trustee for the depositors. I accepted that the Company’s operations were part of a scam for essentially the reasons set out at [8] above. Accordingly, the liquidators were advised that I had formed the view that the depositors were relevantly in the same position as investors in litigation in the Supreme Court of New South Wales in relation to the Ponzi scheme operated by Courtenay House Capital Trading Group Pty Ltd.

70    I noted that submissions filed on the liquidators’ behalf had relied on the decision of Rees J in Courtenay House at [5]-[14] in relation to principles relevant to the Court giving directions under s 90-15 of the Insolvency Practice Schedule, including the usual practice of the Court being provided with an opinion of a trustee’s counsel. They had also relied on the Court of Appeal’s decision in Caron v Jahani (No 2) in relation to the proposition that this is not a case where the Court is likely to be assisted by contradictors as to the appropriate distribution model. However, the submissions in support of the liquidators’ application filed to that date did not address the following findings made in Caron v Jahani (No 2) which were noted in the July 2022 Memorandum at [1]:

(a)    Where evidence of particular investors’ interests in a co-mingled fund is available, the lowest intermediate balance rule provides the fairest, most equitable and principled outcome for the allocation of limited funds between investors. This is because application of the lowest intermediate balance rule permits the tracing of surviving proprietary interests where that is possible: Caron v Jahani (No 2) [145]–[146], [164];

(b)    The date of the freezing order did not provide a principled basis for differentiating between investors on either side of that line: Caron v Jahani (No 2) [166]-[168]; and

(c)    Distribution in accordance with the lowest intermediate balance rule may be of such complexity in a particular case that a liquidator would be justified and entitled to distribute on a pari passu basis: Caron v Jahani (No 2) [5], [153]-[154], [172]-[174].

71    In relation to the St George Account, the July 2022 Memorandum noted (at [2]-[3]) that:

(a)    All of the funds deposited into it were deposited after the liquidator was appointed and there were no withdrawals from that account other than a bank fee and for liquidators’ remuneration; and

(b)    Accordingly, the funds standing to the credit of the St George Account are available only for payment to the depositors to that Account and for payment of the liquidators’ remuneration and expenses attributable to that Account.

72    In relation to the CBA Account, the July 2022 Memorandum noted that:

(a)    The Schedule summarised material deposits and withdrawals from the CBA Account between 29 January and September 2015; and

(b)    There appears to have been a pattern of allowing the build-up of deposits from named accounts which may generally be thought to have been made by people induced to acquire binary options. The exceptions to that are some large, round number deposits made shortly before a withdrawal which might be thought to be connected to people likely involved in the scam identified at the last dot point of [7] above. There were then substantial withdrawals leaving a relatively small account balance; those lowest balances were identified in the Schedule.

73    I note that the bank statements for the CBA Account relevantly show the following, although this table was not included in the Schedule. I have bolded information of particular relevance:

74    The July 2022 Memorandum further noted:

(a)    The information set out at [27] above;

(b)    Other than a bank account fee of $10.00 that was withdrawn on 1 May 2015, the last withdrawal from the CBA Account before 15 May 2015 (the date Mr Iannuzzi was appointed as liquidator) was $50,000 on 30 April 2015 (30 April withdrawal), leaving an account balance of $36,154.47 (the 30 April balance); and

(c)    By the end of 14 May 2015, there was $708,474.04 in the CBA Account. There was therefore $672,319.57 contributed by depositors after the 30 April withdrawal of $50,000 up until the end of 14 May 2015 (the early May depositors).

75    The liquidators were asked to address the following issues:

(a)    Given that the CBA Account is a pooled fund in relation to which there were both deposits and withdrawals, whether there is a principled basis for treating deposits made by the early May depositors differently from the amounts contributed on or after 15 May 2015 in light of the Court of Appeal’s decision in Caron v Jahani (No 2) and what was said at [166]-[168]. President Bell there accepted that the date on which ASIC obtained a freezing order did not provide a principled basis for differentiating the position of investors in the Ponzi scheme on either side of that line;

(b)    The principles espoused by Bell P in Caron v Jahani (No 2) did not suggest that it was necessary to go back all of the way in time in the calculation of investors’ interests on the lowest intermediate balance rule if to do so would make that task too complex or expensive: see Caron v Jahani (No 2) at [172]-[175]. The liquidators were asked whether they had a view on how far back it would be practical to go in tracing the interests of persons who contributed to the CBA Account before 30 April 2015 through the lowest intermediate balance method; and

(c)    Without seeking to suggest an answer to the question asked above, the July 2022 Memorandum noted that the lowest intermediate balance preceding the withdrawal of $50,000 on 30 April 2015 resulted from the withdrawal of $144,000 on 29 April 2015 (last 29 April withdrawal) leaving an account balance of $9,386.82 (last 29 April withdrawal balance). An amount of $76,767.65 was deposited by 50 contributors after the $144,000 withdrawal and before the 30 April withdrawal.

76    The liquidators were asked to state their position in relation to:

(a)    Any required adjustment of proposed distributions out of the CBA Account in light of the decision in Caron v Jahani (No 2);

(b)    Whether there was a need to adjust the liquidators’ already paid remuneration and expenses (eg, legal costs) as between the CBA Account and the St George Account and the manner in which any further remuneration and costs would be allocated as between the St George Account and the CBA Account;

(c)    The continued utility of a benchmark of $2,150 for an admitted claim in determining to whom a payment should be made after international transfer fees are taken into account;

(d)    Whether large round number deposits to the CBA Account (eg, $300,000 and $600,000 which might be thought to have been made by persons associated with the scam) should participate in distributions by the liquidators out of the CBA Account;

(e)    The fact that on 25 February 2022, a circular advising of the application for directions had been sent only to 385 depositors whose proofs of debt had been accepted (verified depositors) and the circular had suggested that distributions would be differentiated by whether a verified depositor made the deposit before liquidation on 15 May 2015 or post-liquidation creditors;

(f)    The relevance of the fact that only depositors with admitted claims were given notice of the hearing on 22 March 2022 in light of the significance placed by the Court of Appeal in Caron v Jahani (No 2) on the willingness of some depositors to act as contradictors. The liquidators were asked whether all possible depositors for whom the liquidators have addresses had received notice of the 22 March 2022 hearing and of the proposed basis of distribution so as to be in a position to act as contradictors should they wish to do so;

(g)    The Court’s view that, as the Company held the funds in the CBA Account and the St George Account as trustee and that the depositors had a beneficial interest in the funds, they were not simply creditors;

(h)    Whether funds should be returned to all possible depositors for whom the liquidators have email or postal addresses, rather than just to those in respect of whom they have admitted claims; and

(i)    As the moneys paid out of the CBA Account did not appear to have been paid to anyone who had deposited money into it, there was no role for the application of hotchpot principles.

SEPTEMBER 2022 LETTER

77    The liquidators provided a letter dated 5 September 2022 in response to the July 2022 Memorandum (September 2022 Letter). Mr Scarcella also appeared at a hearing on 26 October 2022.

78    The liquidators advised that, since the liquidators received the July 2022 Memorandum, one further depositor had contacted them and they had verified that depositor’s claim in an amount of $4,973.27. Exhibit VJP-21 would indicate that this deposit was made to the St George Account in July 2015.

Nature of funds held

79    The liquidators advised that:

(a)    They accept that the evidence uncovered in Mr Iannuzzi’s investigations and their investigations support a finding that the Company’s operations were a scam and that the deposits to the Bank Accounts are held by them as trustees. While Mr Iannuzzi did not consider that he had sufficient evidence to make that determination so that he treated pre-liquidation depositors as creditors and post-liquidation deposits as being held on trust, there is now no principled basis on which that view can be supported;

(b)    The liquidators agree that the CBA Account and the St George Account should be treated as separate pools; and

(c)    Since there were no withdrawals from the St George Account other than bank fees, the “lowest intermediate balance” rule will have no application to the St George Account.

Proposed application of the “lowest intermediate balance” approach to the CBA Account

80    The liquidators considered that the most appropriate approach to the “lowest intermediate balance” with respect to the CBA Account would be to use the following three points:

(a)    Immediately following the withdrawal of a transfer fee on 19 March 2015 which left a balance in the CBA Account of $380.96 (19 March withdrawal);

(b)    Immediately following the last 29 April withdrawal of $144,000 which left the last 29 April withdrawal balance of $9,386.82 in the CBA Account; and

(c)    Immediately following the 30 April withdrawal of $50,000 which left the 30 April withdrawal balance of $36,154.47 in the CBA Account.

81    It was their view that:

(a)    The remaining balance after the 19 March 2015 withdrawal was so low that only one verified depositor prior to that date (Ms SK) would be able to receive a distribution larger than the international transfer fee and no Australian verified depositor deposited funds before that date. Ms SK’s deposit comprised 84% of all verified deposits (from 20 verified depositors) before the 19 March withdrawal. The next largest verified deposit was $4,141.03 or 2.79% of the total deposits occurring before the 19 March withdrawal such that that foreign depositor cannot receive more than $10.62. On that basis, all but one of the pre-19 March depositors could be disregarded;

(b)    They should distribute $9,005.86 (being the last 29 April withdrawal balance of $9,386.82 less the 19 March withdrawal balance of $380.96) to all verified depositors who made their deposits between those dates. There were 311 verified deposits totalling $592,360.48. It was submitted that the last 29 April withdrawal point was appropriate because of the low balance at that date and it leads to the result that any verified depositor whose deposit occurred prior to that date will necessarily receive a small return. Recalculating every time a withdrawal was made up to that date would be costly and would not be justified given the small returns those verified depositors would likely receive;

(c)    They should distribute $26,767.65 (being the 30 April withdrawal balance of $36,154.74 less the last 29 April withdrawal balance of $9,386.82) to all verified depositors who deposited funds into the CBA Account between the last 29 April withdrawal and the 30 April withdrawal, being nine verified deposits totalling $10,797.43; and

(d)    They should distribute the remaining funds pari passu to all verified depositors that deposited funds into the CBA Account after the 30 April withdrawal, being 97 verified deposits totalling $174,031.88.

Attribution of remuneration

82    The liquidators noted that, as Mr Iannuzzi had deposed in his affidavit sworn on 3 August 2018, the liquidators attributed work done and their subsequent remuneration for that work on the basis of whether the work related to deposits made before Mr Iannuzzi was appointed as liquidator or after that date, being 15 May 2015. The liquidators accepted that that delineation is not now appropriate having regard to the Court’s view that the Company’s operations were a scam. Instead, the delineation should be by reference to whether work was done in relation to deposits to the CBA Account or the St George Account. The way past and future remuneration is allocated therefore requires some adjustment. However, in the liquidators’ view, that is now probably not possible, or at least not cost-effective, since time recordings were not made with that delineation in mind.

83    The liquidators submitted that the total of the approved and drawn down remuneration and expenses together with estimated costs was $1,179,445.41. This was split between pre-liquidation ($861,198.63) and post-liquidation ($318,246.78).

84    The liquidators suggested two possible other bases of allocating liability for remuneration and costs between the Bank Accounts, being:

(a)    By reference to verified deposits (verified deposits method). The total amount of verified deposits is $1,012,447.80, split between the St George Account ($87,243.51 or 8.62% of verified deposits) and the CBA Account ($925,204.29 or 91.38% of verified deposits); or

(b)    By reference to the funds in each of the Bank Accounts as at 28 August 2015 (original funds method). The aggregate amount was $1,370,804.83, with $852,361.21 (or 62.18%) standing to the credit of the CBA Account and $518,443.62 (or 37.82%) standing to the credit of the St George Account.

Utility of $2,150 yardstick

85    The liquidators agreed that use of the “lowest intermediate balance” method renders the yardstick of $2,150 for an admitted claim of a foreign depositor inutile for determining which foreign depositors’ verified deposits should be disregarded.

Utility of contradictors

86    In relation to the issue of whether there is utility in seeking out contradictors, the liquidator submitted that:

(a)    The only likely, and most appropriate, contradictors would be Australian verified depositors having regard to the difficulty and likely expense that would “inevitably” be involved in contacting and arranging for a foreign verified depositor to act as a contradictor. While the liquidators had suggested that the eight Australian verified depositors would not be appropriate because they provided their deposits before 15 May 2015, that position has been overtaken by the Court’s view that liquidation is not a distinguishing characteristic as all moneys held to the credit of the Bank Accounts are trust funds;

(b)    There were 48 Australian depositors identified by the liquidators. Of them, four had insufficient contact details or requested not to be contacted again. Of the remaining 44, there were three “return to sender” responses to the liquidators’ circular dated 17 December 2020. Of the remaining 41, only eight contacted the liquidators and they were informed of the hearing scheduled for 22 March 2022. (I note that no creditor appeared at the hearing). If the Court considered it appropriate, the cost of contacting them would not be prohibitive. However awaiting their response may further delay the resolution of the liquidation. Further, of the eight Australian verified depositors, seven made deposits before 29 April 2015 with the result that any distribution to them would be negligible so that it is unlikely that any of them would be prepared to act as contradictor. The remaining Australian verified depositor made a deposit of $4,000 on 5 May 2015, and he is likely to receive a larger distribution, but it is unlikely to be substantial enough to compel him to act as a contradictor; and

(c)    Given the difficulty in contacting depositors and seeking their engagement thus far, the Court may infer that depositors would be unlikely to be willing to contradict the application.

Verified depositors

87    The liquidators submitted that:

(a)    They have confirmed contact details for only 386 verified depositors. Of these, 385 were notified of the hearing scheduled for 22 March 2022 and the basis of the proposed distributions. The other verified depositor contacted the liquidator in July 2022;

(b)    They initially identified that there were 2,340 potential depositors that may have deposited funds into either the CBA Account or the St George Account. After conducting further investigations (including issuing subpoenas), by December 2020, the liquidators had names and contact details of 2,020 potential depositors to whom the liquidators sent circulars inviting them to provide details of any claim they might have on the assets of the Company;

(c)    The 17 December 2020 circular was sent to those 2,020 potential depositors. Seventy-one “return to sender” responses were received, meaning that the liquidators could theoretically send a further communication to only 1,949 potential depositors;

(d)    The March 2021 circular was sent to those 1,949 potential depositors;

(e)    The world at large was made aware that there was a hearing scheduled in this matter for 22 March 2022, as the relevant orders made by the Court were posted on the liquidators’ website;

(f)    As at 1 February 2022, only 606 potential depositors had made any claim to the assets of the Company. Of the 606 potential depositors who submitted a claim to the liquidators, 385 were admitted, and 221 were rejected. Taking into account the depositor who notified the liquidators in July 2022, there are 386 verified depositors;

(g)    The reason for rejecting 221 claims was that the information provided did not establish that the claimants deposited funds into either of the Bank Accounts;

(h)    Of the 607 who made a claim:

(i)    All provided their names and an address, either residential or email;

(ii)    Most, but not all, provided a figure for how much they claimed to have deposited (in various currencies);

(iii)    Most did not provide a date on which they claimed to have made a deposit;

(iv)    Most did not provide the account their transfers were claimed to have gone into;

(v)    Most did not provide the bank from which their transfers were claimed to have been made; and

(vi)    Ultimately, if the name of the claimant matched the name of a depositor as noted in the bank statements for the CBA Account or the St George Account, then the liquidators admitted that claim for the amount as noted on the relevant bank statement. With respect to the rejected 221 potential depositors, not even the names they gave matched with a deposit as stated in the relevant bank statements;

(i)    Based on previous circulars, they estimate that the costs of sending a standard circular to all 1,949 potential depositors would range from $8,000 to $12,000; and

(j)    They have found no evidence that any verified depositor had any money returned to them. Accordingly, the liquidators agree that there is no scope to apply hotchpot principles to the distribution of funds in this matter.

Lowest intermediate balance methodology and oral submissions made on 26 October 2022

88    The September 2022 Letter set out a number of matters on which the liquidators sought guidance as to the Court’s attitude. As a consequence, a further hearing was listed for 26 October 2022 at which Mr Scarcella again appeared.

89    The main issue addressed at that hearing was the fact that the proposed method of distribution of the CBA Account set out in the September 2022 Letter did not accord with the “lowest intermediate balance” methodology contemplated in Caron v Jahani (No 2), but rather, a variant of it. The methodology in Caron v Jahani (No 2) is designed to trace interests in the ultimate balance of the fund, not at the rests suggested by the liquidators.

90    By way of example, by applying the “lowest intermediate balance” methodology considered in Caron v Jahani (No 2) to the balances in the CBA Account, it is apparent that Ms SK had no relevant traceable interest in that account by 19 March 2015 for the following reasons:

(a)    The balance of the CBA Account after Ms SK deposited $122,276.90 (after international transaction fees) on 26 February 2015 was $123,074.08. There were no further deposits to that account until 2 March 2015;

(b)    Immediately after Ms SK’s deposit, $73,000 was withdrawn, comprising electronic funds transfers of lump sums of $53,000 and $20,000 leaving a balance of $50,074.08 on 26 February 2015. There was then a series of what appear to be payments to purported option holders and transfer fees, together with an electronic funds transfer of $50 leaving a balance in the CBA Account of $5,402.11 on 1 March 2015. Ms SK’s traceable interest was then $5,367.12 (rounded to nearest cent);

(c)    On 2 March 2015, there was a series of deposits (and no withdrawals) with a resulting balance of $13,341.14. On 3 March 2015, there was a series of withdrawals leaving a balance of $1,115.20. Ms SK’s interest in the balance of balance of $1,115.20 was $448.64;

(d)    After the balance of $1,115.20 on 3 March and up to 5 March 2015, there was a series of deposits leading to a high of $17,216.81. On 5 March 2015, there was a payment out of the CBA Account which appears to have been made to a purported option holder, and a transfer fee leaving a balance of $9,689.86. Ms SK’s interest in that balance was $252.49 (rounded down to the nearest cent). There were then some further deposits on 5 March leading to a high of $11,607.65 and an electronic transfer of $11,000 leaving a balance of $607.65. Ms SK’s interest in that sum was $13.22 (rounded to the nearest cent);

(e)    Between 6 and 9 March 2015, there was a series of deposits (and no withdrawals) leaving a balance of $12,232.36. There was then a payment out and transfer fee on 10 March 2015 leaving a balance of $7,133.46. Ms SK’s traceable interest in that amount was $7.71 (rounded to the nearest cent);

(f)    On 10 March 2015, there was a series of deposits leaving a balance of $16,071.67. On 11 March 2015, there were then two payments and a transfer fee leaving a balance of $1,100.86. Ms SK’s traceable interest in that amount was $0.53 (rounded to the nearest cent);

(g)    After the balance of $1,100.86 on 11 March 2015, there were a series of deposits leaving a balance of $15,624.72 on that day. The first two transactions on 12 March 2015 were electronic funds transfers of $1,000 and $14,000 leaving a balance of $624.72. Ms SK’s traceable interest in that balance was $0.02 (rounded to the nearest cent); and

(h)    After the balance of $624.72 on 12 March 2015, there were a series of deposits leaving a balance of $38,698.42 on 13 March 2015, before $38,000 and a transfer fee of $22 were withdrawn leaving a balance of $676.42. Ms SK’s traceable interest in that balance was $0.00035.

91    At that case management hearing, the liquidators were asked to provide evidence concerning the traced interests of verified depositors and the likely return to verified depositors whose interests could not be traced if surplus (after payment of remuneration, traced interests and related international transaction fees) were to be paid to the remaining verified depositors on a pari passu basis.

MR PIRINA’S AFFIDAVIT SWORN ON 29 NOVEMBER 2022 AND DRAFT ORDERS

92    On 30 November 2022, the liquidators’ solicitors provided to my chambers a further affidavit sworn by Mr Pirina on 29 November 2022 and proposed orders for approval of remuneration and distribution of the deposits in the Bank Accounts.

93    Mr Pirina deposed that:

(a)    Once anticipated GST receipts are received by the liquidators, there will be $1,603,443.74 available for distribution in the liquidation (Total Receipts);

(b)    Since Mr Pirina swore his affidavit dated 31 March 2022, substantial further work has been undertaken by the liquidators and their solicitors. The liquidators have agreed to cap their further remuneration at $44,000 and Johnson Winter Slattery have agreed to cap their further fees at $33,000. If the liquidators’ claimed remuneration is approved, the total expenses of the liquidation will be $1,256,445.41 (Total Expenses); and

(c)    While acknowledging the Court’s discretion with respect to approving the liquidators’ remuneration, further calculations had been done on the basis that it is approved.

94    Mr Pirina summarised the sources of Total Receipts as follows. “Original Funds” in the CBA Account include $16,071.63 received into the CBA Account from the AFP:

95    Mr Pirina confirmed that the liquidators held the opinions referred to at [82] above. He also confirmed that the liquidators considered that there were two methods of allocating the Total Expenses, being the original funds method and the verified deposits method.

Allocation of Total Expenses to the Bank Accounts applying the original funds method

96    Mr Pirina deposed that the outcome of the allocation of the Total Expenses to the St George Account and the CBA Account using the original funds method produced the following result:

97    Mr Pirina noted that if the original funds method (see [84] above) is adopted and disregarding any international transaction fees:

(a)    All of the verified deposits to the St George Account will be available for distribution to the depositors who made them;

(b)    26.68% of the verified deposits to the CBA Account will be available for distribution to the depositors who made them; and

(c)    There would be an overall surplus of $12,949.55 in the St George Account.

Allocation of Total Expenses to the Bank Accounts applying the verified deposits method

98    Mr Pirina deposed that the outcome applying the verified deposits method (see [84] above) would be as follows:

(a)    All of the verified deposits to the St George Account will be available for distribution to the depositors who made them;

(b)    No money will be available for distribution to the verified depositors to the CBA Account (as the allocation of the relevant proportion of the Total Expenses to that Account would exceed the Total Receipts related to that Account by $120,118.18); and

(c)    There would be an overall surplus remaining in the St George Account of $379,873.

Liquidators’ preference

99    Both methods result in the verified depositors to the St George Account being paid in full. However, the liquidators consider that the original funds method of allocating the Total Expenses is the most appropriate because it will leave some money available for distribution to verified depositors to the CBA Account and numerically more verified depositors will receive some return on funds. Since depositors to the St George Account cannot receive more money than they deposited, the original funds method avoids “wastage” – which would result from the payment of $379,873 to ASIC as unclaimed moneys. I note that it also results in the liquidators being paid a greater percentage of their remuneration and expenses since there would be a deficit of $120,118.18 available for payment of the allocated share of the Total Expenses from the CBA Account. Mr Pirina’s evidence then proceeded on the basis that the original funds method would be the one adopted. I accept that the original funds method is the appropriate method of allocating the Total Expenses for the reasons given by the liquidators.

Impact of international transaction fees in relation to the St George Account

100    In his 29 November 2022 affidavit, Mr Pirina deposed that there are 21 verified depositors to the St George Account, all of whom are foreign.

101    The liquidators proposed that they pay international transfer fees from the surplus of the St George Account being $12,949.55. There was one verified depositor to the St George Account who made multiple deposits to that account and those deposits would be paid in one transaction so that only one fee would be paid in relation to it. There was another verified depositor who made deposits to both the St George Account and the CBA Account. His distributions would be made in one transaction and the fee would be drawn from his entitlement referable to the St George Account, and not his entitlement referable to the CBA Account. In my view, there is no reason why that approach should not be adopted for the St George Account.

102    As previously deposed, the liquidators consider that each transfer of funds to a foreign depositor will incur an estimated $42 international transaction fee which would result in aggregate fees of $882. This would leave an estimated net surplus in the St George Account of $12,067.55. Exhibit VJP-21 is a spreadsheet setting out the distributions that the liquidators anticipated making to each verified depositor to the St George Account which takes into account these matters.

CBA Account – pari passu method of distribution to verified depositors

103    Mr Pirina deposed to what would happen if, after applying the original funds method to account for the Total Expenses, the $246,805.27 available for distribution to the 360 verified depositors to the CBA Account were to be paid pari passu. An estimated amount of $14,742 would be deducted from the amount available for distribution on account of international transaction fees.

104    The eight Australian verified depositors to the CBA Account would each receive 26.68% of their deposits.

105    Of the 352 foreign verified depositors to the CBA Account, 56 made multiple verified deposits. The same approach as for the St George Account distributions would generally be adopted, including making distributions relating to multiple deposits by a depositor in a single transaction so as to minimise transaction costs. However, there is no surplus in the CBA Account from which to pay international transaction fees so that those foreign verified depositors would have the transaction fee deducted from what they would otherwise receive. All distributions would exceed $42 so each verified depositor to the CBA Account would receive at least some distribution. Exhibit VJP-22 is a spreadsheet setting out the distributions that the liquidators would anticipate making under that method.

CBA Account – lowest intermediate balance method

106    Mr Pirina then deposed to what he says would happen if the lowest intermediate balance method were adopted.

107    Mr Pirina deposed that the last 29 April withdrawal balance of $9,386.82 and the 30 April withdrawal balance of $36,154.47 are the possible relevant starting points. He said that, on balance, the liquidators consider that the 30 April withdrawal balance is the most appropriate point to use because:

(a)    It is a more principled approach than pari passu distribution;

(b)    It results in verified depositors receiving more funds than using the last 29 April withdrawal balance as the starting point;

(c)    There were no withdrawals after the 30 April withdrawal;

(d)    In the context of the quantum available for distribution, going further back would make the task (which I take to mean the task of tracing interests) too complex and expensive;

(e)    The 30 April balance is a low balance in the context of the deposits that were made before that point which indicates that essentially all of the previous deposits had, by that time, been depleted. The liquidators acknowledged that the last 29 April withdrawal balance is lower, however, they say the difference between that balance and 30 April withdrawal balance is quite minor; and

(f)    The liquidators consider it appropriate to use a single reference point rather than multiple reference points, and in their view it should be the 30 April balance.

30 April withdrawal point

108    Mr Pirina deposed that there were 437 verified deposits, 340 of which occurred prior to the 30 April withdrawal (pre-30 April withdrawal verified deposits) and 97 which occurred after the 30 April withdrawal (post-30 April withdrawal verified deposits). He provided the following chart:

109    Mr Pirina deposed that:

(a)    If the depositors of the pre-30 April withdrawal verified deposits receive a distribution only from the 30 April withdrawal balance of $36,154.47, those verified depositors will only receive a 4.81% return: see exhibit VJP-23;

(b)    There would be a remaining amount of $210,650.80 from which to pay a return to the post-30 April withdrawal verified depositors for which the aggregate amount of verified deposits is $174,031.88. Accordingly, those verified depositors would be repaid in full (excluding transaction fees). That would result in a surplus of $36,618.92: see exhibit VJP-23;

(c)    The aggregate amount of international transaction fees payable in respect of 352 foreign verified depositors to the CBA Account would be approximately $14,742. Given the likely surplus of $36,618.92, the liquidators proposed to pay these international transaction fees from the CBA Account surplus;

(d)    The liquidators calculated the total amount that a verified depositor who had made multiple verified deposits would be entitled to receive by way of distribution (including both pre-30 April withdrawal verified deposits and post-30 April withdrawal verified deposits). They were able to determine which verified depositors would be entitled to a distribution of less than $42. There were 56 instances where a particular foreign verified depositor made multiple deposits and where individual returns would not have exceeded $42 but where the aggregated deposits would result in a return exceeding $42: see exhibit VJP-24; and

(e)    After conducting those calculations, there were 118 foreign verified depositors to the CBA Account who would be entitled to receive less than $42, which means that any distribution to them would be wholly eaten up in the international transaction fees; with the effect that the liquidators would be expending funds without any benefit to any depositor. Accordingly, the liquidators intend to exclude those 118 foreign verified depositors from participating in any distributions (excluded depositors). The excluded depositors would all be pre-30 April verified depositors and their verified deposits would total $75,784.02: exhibit VJP-25 sets out the details of the 118 excluded depositors, including the total of their verified deposits to the CBA Account and the amounts they stood to receive on the basis of these calculations. This treatment would result in both the number and value of the pre-30 April withdrawal verified deposits decreasing as demonstrated in exhibit VJP-26 which sets out the details of the participating depositors and the remaining 319 verified deposits (participating deposits).

110    The information in [109(d)] and [109(e)] above may be represented as follows:

111    After excluding the excluded depositors, the calculations that Mr Pirina deposed to at [51] to [55] of his affidavit sworn on 29 November 2022 (see [108] and [109(a)] and [109(b)] above) must be recalculated. After those recalculations:

(a)    Participating depositors who made a pre-30 April withdrawal verified deposit would now receive a 5.35% return, up from 4.81%. Of course, there would be no change to the return received by verified depositors who made the post-30 April withdrawal verified deposits;

(b)    Where individual participating depositors made multiple participating deposits (including both pre- and post-30 April withdrawal deposits), the liquidators added together all of those participating deposits to arrive at a dollar amount to which each participating depositor would be entitled; and

(c)    For foreign participating depositors, the liquidators subtracted $42 to arrive at the amount those participating depositors would likely actually receive once international transaction fees are accounted for.

This is shown in exhibit VJP-27. It can be represented in the following table:

112    Mr Pirina deposed that a comparison of the amounts depositors would receive if international transaction fees were funded from the estimated surplus of $36,618.92 in the CBA Account and if they are deducted from distributions may be represented as follows:

113    The liquidators submitted that, if international transaction fees are paid from the expected surplus from the CBA Account:

(a)    There would be no excluded depositors;

(b)    More depositors receive a return;

(c)    There will be more total funds cumulatively received by the participating depositors; and

(d)    There would remain a surplus in the CBA Account.

Last 29 April withdrawal point

114    Mr Pirina deposed that the liquidators conducted the same exercise in relation to the last 29 April withdrawal point. He said that, consistent with the procedure set out above:

(a)    The pre-last 29 April withdrawal verified deposits ($740,374.98) can only receive a distribution from the last 29 April withdrawal balance ($9,386.82). The last 29 April withdrawal balance comprised 1.27% of the pre-last 29 April verified deposits. Accordingly, each pre-last 29 April withdrawal verified deposit will only receive a 1.27% return; and

(b)    The post-last 29 April verified deposits would be “funded” from the remainder of the monies available for distribution from the CBA Account ($246,805.27) after deducting the last 29 April withdrawal balance, leaving the amount of $237,418.45. As this amount exceeds the total of the post-last 29 April withdrawal verified deposits (being $184,829.31), all post-last 29 April verified deposits would be entirely repaid (excluding international transaction fees). Further, there would be a surplus of $52,589.14.

115    Mr Pirina deposed that the distribution of the remaining funds in the CBA Account, on the basis that the lowest intermediate balance method is adopted, and that the point used is the last 29 April withdrawal, can be represented in the following table: