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Supreme Court 15 May 2003

ASIC v Karl Suleman Enterprizes

[2003] NSWSC 400

Fraud & dishonesty
CORPORATIONS UNREGISTERED MANAGED INVESTMENT SCHEME BE INVESTORS STATUTORY ILLEGALITY RESTITUTION

Citation: ASIC v Karl Suleman Enterprizes [2003] NSWSC 400
Court: Supreme Court of New South Wales, Equity Division (Corporations List)
Date: 15 May 2003
Judge(s): Barrett J

Background

The first defendant operated an investment scheme, soliciting funds from members of the public under agreements styled as "Loan Agreements" that promised extraordinarily high rates of interest. The scheme was never registered as a managed investment scheme, and no disclosure document was ever lodged with ASIC as required for offers of debentures. ASIC commenced proceedings, and liquidators were appointed over the first defendant.

At the time the liquidators were appointed, a number of bank cheques from investors and would-be investors remained unpresented and had not been deposited into the first defendant's general funds. The liquidators subsequently banked those cheques into a separate, quarantined account. Two cheques remained unpresented entirely.

The liquidators applied to the Supreme Court for directions as to how those quarantined funds should be treated. In particular, they sought guidance on whether the funds were held on constructive trust for the investors, and whether returning the funds to investors was justified, including in circumstances where investment contracts had or had not been executed.

  • Whether bank cheques received by the operator of an unregistered managed investment scheme (and their quarantined proceeds) were held on constructive trust for the investors or would-be investors who provided them
  • Whether it mattered that investment contracts had been executed in some cases but not in others
  • Whether the statutory illegality of the scheme (operating an unregistered managed investment scheme; soliciting investment in debentures without a disclosure document) affected the ability of investors to recover their funds
  • Whether liquidators were justified in proceeding on the basis that the scheme involved past fraudulent misrepresentation
  • Whether liquidators, as officers of the court, could seek and act on the court's directions in equity

Decision

Barrett J held that the first defendant's activities involved two distinct contraventions. First, soliciting investment in debentures without a lodged disclosure document contravened sections 706 and 727 of the Corporations Act 2001 (Cth). Second, operating an unregistered managed investment scheme contravened section 601ED(5). Both offences carried maximum penalties of 200 penalty units or five years' imprisonment.

For would-be investors with whom no investment contract was ever executed, the funds never lawfully became the property of the first defendant. The bank cheques and their proceeds were held on constructive trust for those would-be investors. The court directed that the liquidators would be justified in treating the funds accordingly and returning them, provided the funds were not themselves sourced from the first defendant.

Where investment contracts had been executed, the court examined whether the statutory illegality or any fraudulent misrepresentation affected the investors' ability to recover. The judgment proceeded through principles of restitution and statutory illegality to conclude that the quarantined funds retained a character that justified their return to investors rather than absorption into the general pool of assets available to creditors.

The court confirmed that liquidators appointed pursuant to court orders in ASIC proceedings are officers of the court. That status entitled them to invoke the court's inherent equitable jurisdiction and seek directions, including on pure questions of law where no factual disputes needed to be resolved.

Orders Made

  • The court directed that the liquidators would be justified in treating the bank cheques received from thirteen named "would-be investors" (and the quarantined proceeds of those cheques held in a specified ANZ account) as held on constructive trust for each respective would-be investor, unless the cheque was obtained with funds sourced from the first defendant.
  • The liquidators were directed to be justified in returning the relevant bank cheque, or paying the equivalent proceeds from the quarantined account, to each would-be investor.
  • In the case of one cheque for $100,000, the liquidators were directed to pay the proceeds into court and seek interpleader relief.

Key Takeaways

  • Where investors' funds had not been commingled with an insolvent company's general assets at the time of liquidation, the Supreme Court held that those funds retained their character as constructively held for the investors rather than forming part of the general pool available to creditors.
  • Statutory illegality arising from operation of an unregistered managed investment scheme and solicitation of debenture investments without a disclosure document did not, on the court's reasoning, defeat investors' claims to restitution of unbanked or separately quarantined funds.
  • For would-be investors with whom no contract was ever formed, the absence of any contractual nexus reinforced the conclusion that the funds had never lawfully passed to the operator at all.
  • Liquidators appointed by court order in ASIC proceedings are officers of the court and may invoke the court's inherent equitable jurisdiction to seek directions on questions of law, even without an underlying factual dispute to resolve.
  • Where competing claims to particular funds exist (as with the $100,000 cheque), payment into court and interpleader relief is an appropriate protective step for liquidators acting as officers of the court.

Legislation and Cases Referenced

Legislation:
- Corporations Act 2001 (Cth), ss 9, 92(3), 446A, 601ED, 601EE, 601MB, 706, 708, 727, 1311 and Schedule 3

Cases:
- Australian Breeders Co-operative Society Ltd v Jones (1997) 26 ACSR 26
- ASIC v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240
- ASIC v Landy DFK Securities Ltd (2002) 20 ACLC 1613
- Bathurst City Council v PWC Properties Pty Ltd (1998) 195 CLR 566
- Baumgartner v Baumgartner (1987) 164 CLR 137
- Cornelius v Phillips [1918] AC 199
- Re Diplock [1948] Ch 465
- Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (1948) 76 CLR 463
- Fitzgerald v Leonhardt Pty Ltd (1997) 189 CLR 215
- Glazier Holdings Pty Ltd v Australian Men's Health Pty Ltd (unreported, NSWSC, Young J, 30 April 1998)
- Hewett v Court (1983) 149 CLR 639
- Hurst v Vestcorp Ltd (1988) 12 NSWLR 394
- Ex parte James; re Condon (1874) LR 9 Ch App 609
- Kiriri Cotton Co Ltd v Dewani [1960] AC 192
- McCarthy Bros (Milk Vendors) Pty Ltd v The Dairy Farmers Co-operative Milk Co Ltd (1945) 45 SR (NSW) 266
- Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207
- Nelson v Nelson (1995) 184 CLR 538
- Permanent Trustee Co Ltd v FAI Insurances Ltd [2003] HCA 25
- Re Tyler [1907] 1 KB 865
- Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 411