[2006] WASCA 71

[2006] WASCA 71

Document Name: WASCA\FUL\71 (JC)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT : THE COURT OF APPEAL (WA)

CITATION : BURTON & ORS -v- ARCUS & ANOR [2006] WASCA 71

CORAM : STEYTLER P

MCLURE JA BUSS JA

HEARD : 15 FEBRUARY 2006

DELIVERED : 5 MAY 2006

FILE NO/S : FUL 179 of 2004

BETWEEN : JOYCE MIRIAM BURTON PHILIPPA MARGARET WALSH

RICHARD DOUGLAS BLYTHE SYLVIA JOAN BLYTHE

DONALD ROBERT BONNY JOYCE EVELYN BONNY

ALFRED ERNEST RYDER FINTEIN PTY LTD (ACN 009 387 553) JOHN KENNETH WALSH

MARGARET JOSEPHINE WALSH ROSS EDWARD YEATS

LORNA MAY YEATS JOHN HERBERT MONCRIEFF FISHER

JENNIFER BLAKE FISHER DONALD GEORGE BELL

PATRICIA LORRAIN BELL GARY ALLAN HOWIE

PHILIP JAMES HOWIE COLIN EASTWOOD KNIGHT

NOLA CARMA KNIGHT CHARLES LOUIS BLADEN

JEAN BLADEN KEITH HAROLD LARKE SHIRLEY ALEXANDRIA LARKE

http://www.austlii.edu.au/cgi-bin/sign.cgi/au/cases/wa/WASCA/2006/71

[2006] WASCA 71


VERNON WILLIAM DEAGUE

KAY MARIE DEAGUE ENKLEMAN PTY LTD (ACN 071 458 430)

OCEAN GARDENS INC JOSHRICH PTY LTD (ACN 008 755 477)

NANCY MICHELLE VERNALEO SHANKLAND NOMINEES PTY LTD

(ACN 009 221 278) BERNARD ARTHUR McFALL

DOLORES JOAN McFALL LANCE BRIAN PRESCOTT McDONALD

JENNIFER DAWN ATHERTON KENNETH CHARLES COLLINS IRENE ENID COLLINS

KENNETH NEIL SELBY MARY ELIZABETH SELBY

DONALD CARL SLATER ELAINE LILY SLATER

Appellants

AND

ALBERT LAWRENCE ARCUS VIVIENNE CONSTANCE ARCUS

First Respondents

ON APPEAL FROM:

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Coram : JOHNSON J

Citation : BURTON AND THE PERSONS NAMED IN

SCHEDULE 1 TO THE ORIGINATING PROCESS OF THE PLAINTIFFS DATED 17 APRIL 2003 -v-

ARCUS & ORS [2004] WASC 244

File No : COR 138 of 2003


[2006] WASCA 71


Catchwords:

Corporations - Managed investment scheme - Unregistered scheme - Contributory mortgage investment - Characteristics of the scheme - Meaning of

"to be pooled" - Whether members of a scheme must agree to, approve of or know of the pooling - Meaning of "day-to-day control" - Whether managerial

activities of the promoter or operator of a scheme are to be imputed to the members for the purpose of determining whether the members have day-to-day

control of the scheme - Winding up

Mortgages and securities - Torrens system - Indefeasibility - Rights of a co-mortgagee as a tenant in common - Whether the Court has power to order

winding up under s 601EE of the Corporations Act 2001 (Cth) notwithstanding the rights of a co-mortgagee under the mortgage and the Transfer of Land Act 1893 (WA) - Whether the Court should, in its discretion, order winding up

Legislation:

Corporations Act 2001 (Cth), s 9, s 424(1), s 479(3), s 601EB, s 601ED,

s 601EE, s 1371, s 1399, s 1400 Corporations Law, s 9, s 424(1), s 479(3), s 601EB, s 601ED, s 601EE

Finance Brokers Control Act 1975 (WA), s 48 Managed Investments Act 1998 (Cth)

Transfer of Land Act 1893 (WA), s 52, s 63, s 67, s 68, s 76, s 134, s 188(ii), s 199, s 202, s 222, s 231

Result:

Appeal allowed

Unregistered managed investment scheme ordered to be wound up

Category: A


[2006] WASCA 71


Representation:

Counsel:

Appellants : Mr C L Zelestis QC & Mr J C Giles

First Respondents : Mr K J de Kerloy

Solicitors:

Appellants : Solomon Brothers First Respondents : Freehills

Case(s) referred to in judgment(s):

Australian Securities and Investments Commission v Chase Capital

Management Pty Ltd (2001) 36 ACSR 778

Australian Securities and Investments Commission v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240

Australian Securities and Investments Commission v Drury Management Pty Ltd [2004] QSC 068

Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403

Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd [2003] 1 Qd R 135

Australian Securities and Investments Commission v IP Product Management Group Pty Ltd (2002) 42 ACSR 343

Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561

Australian Securities and Investments Commission v Takaran Pty Ltd (2002)

170 FLR 388 Australian Securities and Investments Commission v Takaran Pty Ltd (No 2)

(2002) 43 ACSR 334 Australian Securities and Investments Commission v Tasman Investment

Management Ltd [2005] NSWSC 1332 Australian Securities and Investments Commission v Young (2003) 173 FLR

441 Bermuda Cablevision Ltd v Colica Trust Co Ltd [1998] AC 198

Canwest Global Communications Corporation v Australian Broadcasting Authority (1998) 82 FCR 46

Crocombe v Pine Forests of Australia Pty Ltd (2005) 219 ALR 692


[2006] WASCA 71


D.K.L.R. Holding Co (No 2) Pty Ltd v The Commissioner of Stamp Duties

(New South Wales) (1982) 149 CLR 431 Drake v Templeton (1913) 16 CLR 153

Hillpalm Pty Ltd v Heaven's Door Pty Ltd (2004) 220 CLR 472 Interstate Mortgage & Investments Pty Ltd v Australian Securities &

Investments Commission, unreported; SCt of NSW (Austin J); 22 July 2002

Kay v Australian Securities and Investments Commission (2002) 172 FLR 273 Leros Pty Ltd v Terara Pty Ltd (1992) 174 CLR 407

Mier v FN Management Pty Ltd (2005) 56 ACSR 93 Miller v Minister of Mines [1963] AC 484

Owen v Carrington Confirmers Pty Ltd (in liq), unreported; Fed C of A; 28 April 1995

Pratten v Warringah Shire Council [1969] 2 NSWR 161

Quach v Marrickville Municipal Council [Nos 1 & 2] (1990) 22 NSWLR 55 Re Global Finance Group Pty Ltd (In Liq) (Supervisor Appointed) and Global

Mortgage Investments Pty Ltd (In Liq) & Ors (2002) 26 WAR 385

Case(s) also cited:

Australian Securities and Investments Commission v Atlantic 3 Financial (Aust)

Pty Ltd (2003) 47 ACSR 52 Australian Securities and Investments Commission v Emu Brewery Mezzanine

Ltd (2004) 52 ACSR 168 Collie v Merlaw Nominees Pty Ltd (No 2) [2001] VSC 60 Conlan v Registrar of Titles (2001) 24 WAR 299

Consolidated Trust Co Ltd v Naylor (1936) 55 CLR 423 Figgins Holdings Pty Ltd v SEAA Enterprises Pty Ltd (1999) 196 CLR 245

Karl Suleman Enterprizes Pty Ltd (in liq) v Babanour (2004) 49 ACSR 612 Mann v Hulme (1961) 106 CLR 136

Muschinski v Dodds (1985) 160 CLR 583 Re Stacks Managed Investments Ltd (2005) 54 ACSR 466

Webb Distributors (Aust) Pty Ltd v The State of Victoria (1993) 179 CLR 15 Webb v Jonas (1888) 39 Ch D 660


[2006] WASCA 71 STEYTLER P

McLURE JA


1 STEYTLER P: I have had the advantage of reading the judgment of

Buss JA. I agree with it and with his conclusion that the appeal should be allowed. I agree, also, with the additional comments of McLure JA. I

would hear further from the parties as regards the orders which should now be made.

2 MCLURE JA: I have had the advantage of reading the judgment of Buss JA. I agree that the appeal should be upheld for the reasons he

gives. I propose to make some additional observations on the third limb of the definition of managed investment scheme, namely whether the

members had day-to-day control over the operation of the scheme. This limb of the definition links with the prohibition in s 601ED(5) and the

relief (winding up) in s 601EE of the Corporations Act 2001 (Cth). Under s 601ED(5), a person must not operate a managed investment scheme unless it is registered. If a person operates an unregistered managed

investment scheme, that scheme can be wound up under s 601EE. The word "operate" in the context of s 601ED(5) and s 601EE is to be given its

ordinary meaning. The term is not used to refer to ownership or proprietorship but rather to acts that constitute the management of or the

carrying out of the activities comprising the managed investment scheme: see Australian Securities and Investments Commission v Pegasus

Leveraged Options Group Pty Ltd (2002) 41 ACSR 561 at 574.

3 The appellants contended that Global Finance Group Pty Ltd

("Global") operated the private contributory mortgage investment scheme to which the appellants and respondents were parties ("the Newrose

scheme") and that it was a managed investment scheme as defined. If the investors collectively had the day-to-day control of the operation of the Newrose scheme, it could not be said that Global operated the scheme

(see s 601ED(6) which provides that a person does not operate a scheme merely because he is acting as an agent or employee for another).

4 A managed investment scheme must be registered prior to commencement of the operation of the scheme. The phrase "day-to-day

control over the operation of the scheme" in the definition of managed investment scheme connotes that decisions will have to be made and

directions given in the course of its operation. That is, the nature and extent of the activities involved in implementing the scheme must be such

as to require day-to-day control. As stated by Buss JA, "day-to-day" means routine, ordinary, everyday and in the context of the definition of

managed investment scheme, means making routine, ordinary, everyday management or operational decisions. I am of the view that the term


[2006] WASCA 71 McLURE JA


"control" in the definition means authority to decide and direct and not

merely to participate in decision-making.

5 The respondents rely on two related submissions on the issue of

day-to-day control. First, they contend the investors had control of all relevant matters which they identify as the nature, terms and conditions of

the investment, whether to extend the term of the investment and matters relating to enforcement on default. Secondly, they contend that Global's

role in the operation of the scheme was purely administrative and involved no decision-making in its implementation or operation. They

identify Global's role in the operation of the scheme as confined to acting as a mere conduit for the payment of interest and the return of capital at

the end of the term of the investment.

6 It was not in dispute that the investors made the decisions about entry into the investment on the stated terms and conditions and whether to

extend the term of the investment. The parties disagreed as to whether the investors or Global controlled matters relating to enforcement of the

mortgage. All the investors individually authorised Global "to administer all matters relating to the mortgage". Clause 5(5) of the mortgage entitles

the mortgagees to act by an agent. It provides:

"All acts which the Mortgagee is required or empowered to do

under this deed may be done by the Mortgagee or the solicitor agent contractor or employee of the Mortgagee."

7 The appellants contended that Global's authority to administer the mortgage extended to enforcement upon breach. That would encompass

decisions about whether and if so when to issue a notice of demand or default notice, whether to enter into possession of the mortgaged property or sell it or whether to commence proceedings. Without Global having

such authority, the mortgagees could only take action under the mortgage if they all agreed to the proposed course of action.

8 The need for unanimity is a very significant practical impediment to acting in relation to, or under, the mortgage. I accept that is the

commercial reason for the investors' express delegation to Global of authority to administer all matters relating to the mortgage. It would be

impractical for all the investors to control the implementation of what had been agreed between each investor and Global and what was agreed in the

mortgage. On the other hand, I have reservations as to whether Global's authority should be construed to extend beyond the preliminary steps

necessary to enliven the mortgagees' enforcement powers. However, it is unnecessary to determine the scope of Global's authority in relation to the




enforcement of the mortgagees' rights on default because it does not

determine the outcome.

9 First it is necessary to identify the plan or scheme in question.

Global carried on the business of promoting and arranging private contributory mortgage investments. In this case, the relevant scheme is

the particular contributory mortgage investment involving the loan to Newrose Holdings Pty Ltd, guaranteed by Mr Sadek, for the acquisition

and holding of six adjoining lots in East Perth. That being so, the scheme comes into existence once the investors have decided to invest and in the

absence of default (and subject to the investors' rights to early termination), the scheme ends when the term of the loan expires upon

repayment of the principal 12 months after the commencement date. On that view, the decision to invest and any decision to extend are outside the scheme. However, even if the Newrose scheme began earlier and covered

any extension, the investors' control of the decisions to invest or extend or take enforcement procedures does not individually or collectively require

a finding that the investors had day-to-day control over the Newrose scheme: see Australian Securities and Investments Commission v Chase

Capital Management Pty Ltd (2001) 36 ACSR 778 (where the investors had agreed to invest in specified investments) and Australian Securities

and Investments Commission v Takaran Pty Ltd (2002) 170 FLR 388 and Kay v Australian Securities and Investments Commission (2002)

172 FLR 273 (both of which involve contributory mortgage schemes). The decisions are not determinative either because they are not properly

characterised as day-to-day management decisions or because they do not displace a finding that another party is in day-to-day control.

10 That brings me to the issue of Global's role in the Newrose scheme.

It is apparent from the affidavit evidence on which the appellants relied that the question whether Global was in day-to-day control of the

operation of the scheme was not understood to be a live issue. The evidence is scanty and incidental. Much depends on inference. What is

clear is that Global initiated and promoted the Newrose scheme to a wide range of potential investors numbering more than 20. The promotion of

the investment involved the provision of positive information and opinions as to the prudence of the investment. All contact relating to the

Newrose scheme was between the individual investor(s) and Global. The investors did not know or deal with each other before the commencement

of the operation of the scheme. During the term of the Newrose scheme, the identity of investors changed (by assignment of a share in the

mortgage) without reference to the other investors. The change was organised and facilitated by Global.




11 Further, it can be inferred from the evidence that after acceptance of

Global's offer and the payment of their investment contribution, the investors had no involvement in the management of the investment until

after Global went into administration in February 1999. Thereafter it went into liquidation. It is the case that at some stage after Global went

into administration the investors who were mortgagees at that time assumed day-to-day control over the Newrose scheme. However, that

does not affect the position as at the inception of the Newrose scheme until February 1999 or whether the mortgage is scheme property.

12 From the time of receipt of investors' funds, Global acted in a variety of ways without reference to or direction from the investors. It deposited

the investment funds into its bank trust account pending settlement of the loan. Section 48 of the Finance Brokers Control Act 1975 (WA) required Global to deposit funds into a bank trust account. Global had one trust

account into which all monies were deposited. Global maintained a trust ledger for, inter alia, what it described as project accounts and money

market accounts. The Newrose scheme was project account 1378. Whether money was recorded in the project account or the money market

account was indicated on the receipt provided by Global to investors. Interest from the money market account was periodically credited to the

project account. The terms on which Global deposited the investors' funds with its bank pending settlement was left to Global's discretion. So

too the terms on which the amount retained to cover interest payments was to be invested.

13 Global's purpose was to solicit investors ready and able to invest the total amount of the loan ($3.75M) by the commencement date of the loan. As is apparent from the investment contracts, the amount individual

investors agreed to pay sometimes differed from the amount initially proposed by Global. Significant investor coordination would be required

and Global would also have to address issues arising from over subscription. This loan was under subscribed at the time of settlement of

the purchase of the security property. We were not addressed on the question whether Global had authority to proceed if the investment was

undersubscribed at the commencement date. Further, it is unclear whether the nominated commencement date of the loan is a contractual matter that

could not be altered without the investors' consent. The offers to investors identified the commencement date of the Newrose loan as 14 August 1998

but added that funds received after that date would still be eligible to participate. However, I will proceed on the assumption that Global did

not have authority to lend less than the nominated amount or change the commencement date of the loan.




14 Global also retained and instructed solicitors to prepare the mortgage

which was in standard terms. The instructions must have included the names of the investors, their share in the security, how it was to be held

(tenants in common or joint tenants), the commencement and repayment dates (stated to be 14 August 1998 and 14 August 1999 respectively), the

principal sum advanced (stated to be $3.75M), details about the guarantor and various other matters. The investors received a copy of the mortgage

after settlement of the loan.

15 Global also had control over matters relating to the settlement of the

loan. It is apparent from the evidence of Global's joint liquidator that settlement of the loan is when the entitlement to the funds in the project

ledger moved from the investors to the borrower. The liquidator identifies the settlement date of the Newrose loan as 1 September 1998, being the date when $3.325M was advanced by the investors to Newrose. At

settlement of the loan, Global was required to calculate and retain on behalf of the investors the equivalent of 12 months' interest payable under

the mortgage. Further, on the same date, Newrose's purchase of the security property settled and Global paid out approximately $2.432M at

settlement. For that settlement, Global had to determine the amount required to fund the purchase, pay the funds to or at the direction of the

borrower and obtain a duly executed registrable mortgage and guarantee. Thereafter, Global was required to ensure that the balance of the loan to

Newrose was paid out to the borrower for the agreed purpose. Global did make further payments out of the project account, some of which were for

the purposes identified in the investment contract (purchase and holding costs of the security property) and some of which were not. Other relevant Global activities include securing registration of the mortgage

and investing the retained interest for payment to the investors at the time when it was due under the mortgage.

16 It is apparent from the above that the investors had delegated significant management functions to Global. Although there were few

discretionary decisions, other decisions involved evaluative judgments bearing a similarity to discretionary decisions. Still other decisions were

supervisory in nature but fell short of being purely pro forma in nature. Indeed, the nature and extent of Global's day-to-day control in operating

the Newrose scheme and other similar contributory mortgage investment schemes resulted in widespread breaches of its express and implied duties to investors (see Re Global Finance Group Pty Ltd (In Liq) (Supervisor Appointed) and Global Mortgage Investments Pty Ltd (In Liq) & Ors

(2002) 26 WAR 385). I do not rely on Global's misconduct as establishing day-to-day control. Rather it demonstrates that its day-to-day



BUSS JA


control of management provided it with the opportunity to engage in

systematic misconduct. I am satisfied that Global had day-to-day control over the operation of the Newrose scheme.

17 BUSS JA: In about late July 1998 Global Finance Group Pty Ltd ("Global"), a licensed finance broker, sought to raise a loan of $3,750,000

for its client, Newrose Holdings Pty Ltd ("Newrose").

18 Between about 30 July 1998 and about 30 September 1998 Global

sent letters to numerous private investors inviting them to participate as lenders in the proposed loan to Newrose.

19 Each letter was, relevantly, in these terms:

(a) The recipient of the letter was invited to consider "the …

joint first mortgage investment" described in the letter.

(b) The security for the loan comprised:

(i) a registered first mortgage of land, namely six

contiguous lots with a total area of 3,970 square metres situated in East Perth ("the East Perth

land"); and

(ii) a guarantee from Nabil Michel Sadek, who was

stated to have a net worth of $12,400,000.

(c) The term of the loan was 12 months, commencing on

14 August 1998, but the recipient could contribute funds towards the loan after that date.

(d) It was represented that:

"Borrower intends to develop the site in readiness for a

multi-residential building and preliminary application has been made to the City of Perth. The proposal is extremely viable and profitable and will be done in

stages. This proposal offered to you is for the acquisition and holding period pending further proposal

evaluations, demolition of existing buildings, fencing and council approvals and extensive marketing

programme.

The site is then to be on sold and this loan paid out."

(e) It was also represented that:


[2006] WASCA 71 BUSS JA


"A sworn valuation dated 22 July 1998, and held on file,

values the properties collectively at $6,000,000. En globo land value this loan represents 62.5% of this

figure. The completed project value is $36,000,000 at a cost of $18,000,000 would show a 100% profit to a

developer. As previously stated Mr Sadek does not plan to develop the land but on sell the project to his Eastern

States contacts."

(f) Global promised the recipient that:

"Notwithstanding the above, sufficient funds will be held in trust by Global Finance Group Pty Ltd to make

timely interest payments to investors on this deal for the term of the loan. Interest payments are therefore considered undoubted."

20 Global's promise in the letters of invitation to retain funds in trust on account of interest payments required the retention of $388,125 (being

interest at 10.35% per annum on a loan of $3,750,000 for a term of 12 months).

21 The letters of invitation did not specify the purchase price paid or payable by Newrose for the East Perth land. Indeed, the letters referred

merely to a "joint first mortgage investment", and did not state that the loan was required to enable Newrose to complete the purchase of the

property.

22 Global's invitation to participate in the making of the proposed loan

was accepted by the appellants and the first respondents. There are 40 appellants and two first respondents. It is convenient to refer to the appellants and the first respondents as "the investors".

23 Each investor signed an endorsement on the letter of invitation which he or she received from Global, as follows:

"I/We hereby accept the above named investment and appoint Global Finance Group Pty Ltd as our Agent to administer all

matters relating to the mortgage and confirm funds will be forwarded to your office."

24 Each investor agreed to participate in the proposed loan in a specified amount. The contributions were not equal. The first

respondents, Dr Albert Arcus and Vivienne Arcus, jointly advanced




$1,400,000. The contributions by the appellants were within the range

$10,000 to $500,000.

25 The first respondents received from Global a document entitled

"Interest Disposal Authority". The document provided, relevantly, as follows:

"I/We hereby acknowledge that any funds held by Global Finance Group Pty Ltd on our behalf pending placement into

investment will be paid interest at the current ANZ Indicator money market rates of interest as declared from time to time for

amounts of $50,000 to $99,999. I/We also consent to any surplus interest received above this rate by Global Finance

Group Pty Ltd as a result of incentives provided to it by the bank for bulk investments will be retained by Global Finance Group Pty Ltd to cover government charges and administration

costs on investing these funds."

The first respondents completed and signed the document, and returned it

to Global. There was no direct evidence that any of the other investors received an interest disposal authority.

26 When each investor agreed to participate in the making of the proposed loan:

(a) Global had not informed the investor of the identity of any of the other investors;

(b) the investor was unknown to the other investors; and

(c) the investor was unaware of the number of other

investors.

Each investor did not ascertain the identity and number of the other investors until after payment to Global of the investor's share of the loan.

27 Shortly prior to 27 August 1998, Global instructed Hyland & Watts, a firm of solicitors, to prepare the mortgage. The mortgage provided,

relevantly, as follows:

(a) Those investors who had agreed, by on or about

27 August 1998, to participate in the proposed loan were named as the mortgagees as tenants in common in

specified shares, and were described as "all care of Global Finance Group Pty Ltd" at its address.




(b) By cl 2, the mortgagor, Newrose, was obliged to pay or

cause to be paid to the mortgagees, on the terms set out in cl 2, at the address of Global, the principal sum, interest

and all other moneys secured by the mortgage.

(c) By cl 5(5):

"All acts and things which the Mortgagee is required or empowered to do under this deed may be done by the

Mortgagee or the solicitor agent contractor or employee of the Mortgagee."

(d) The principal sum which the investors had agreed to advance was $3,750,000.

(e) The repayment date for the principal sum was 14 August 1999, and interest would be payable by twelve consecutive monthly instalments in arrears commencing

on 14 September 1998.

The mortgage was dated 27 August 1998 and executed by Newrose, as

mortgagor, and Mr Sadek, as guarantor. On 2 September 1998 Hyland & Watts lodged the mortgage for registration under the Transfer of Land Act

1893 (WA).

28 Although the letters inviting the investors to participate, and the

mortgage, specified that the amount of the loan was $3,750,000, the total amount actually contributed by the investors was $3,705,000. The

amounts totalling $3,705,000 were contributed between about 3 August 1998 and about 6 October 1998. By 1 September 1998, $3,325,000 had

been paid to Global.

29 Global held the investors' funds, together with other funds paid to it in connection with its finance broking business, in a trust account which it

operated and controlled. Global maintained ledgers in respect of the trust account, but the ledgers were often deficient or inaccurate.

30 On 1 September 1998, Newrose completed the purchase of the East Perth land. Global disbursed $2,431,867.31 of the funds contributed by

the investors, to enable completion to occur. Also, on 1 September 1998, Global deducted from the funds contributed by the investors, $77,460 to

pay its brokerage and costs, and other amounts totalling $308,680 for various purposes. Subsequently, Global disbursed further moneys from

the funds contributed by the investors.




31 By letters dated 2 September 1998, Global wrote to at least some of

the investors, relevantly:

(a) confirming that the loan had been advanced to Newrose;

(b) noting that interest was due and payable on the 14th day of each month; and

(c) enclosing a document entitled "Notice to Lender and Borrower".

The "Notice to Lender and Borrower" summarised the salient provisions of the mortgage.

32 Global's trust account ledger card in respect of the loan to Newrose reveals that Global invested in the "money market" the funds contributed

from time to time by the investors (or the balance of those funds which Global had not disbursed), and that the investment in the "money market" earned interest, as follows:

(a) 31 August 1998 - $301.37;

(b) 30 September 1998 - $3,404.18;

(c) 15 October 1998 - $1,077.41;

(d) 30 November 1998 - $967.27;

(e) 31 December 1998 - $472.18; and

(f) 31 January 1999 - $279.89.

33 Global sent interest payments to the investors regularly until in or about February 1999. Since in or about February 1999, no interest

payments have been made. None of the principal has been repaid. By 19 February 1999, the balance of the investors' funds retained by Global

was $102,445.46. This balance was insufficient to satisfy the remaining interest payments which were payable by Newrose during the 12-month term.

34 On 19 February 1999 administrators were appointed in respect of Global, and on 20 April 1999 it went into liquidation.

35 Although Newrose has been in default under the mortgage since in or about February 1999, the investors have not exercised their power of sale.




The appellants have been in dispute with the first respondents in relation

to its exercise.

36 In March 2000 a committee representing the investors appointed

Knight Frank, real estate agents, to market and attempt to sell the East Perth land. Knight Frank marketed the property and sought tenders for its

purchase. No tenders were received, but some people expressed an interest in purchasing the property for $2,000,000 to $2,500,000.

Between about July 2000 and about November 2001, Knight Frank, on behalf of the investors, offered the property for sale at a price of

$4,000,000. No offers to purchase were received. The committee representing the investors did not have power to bind the investors.

37 By November 2001, all of the investors except the first respondents were willing to offer the East Perth land for sale at a price within the range $2,300,000 and $2,600,000. The first respondents refused to agree

to a sale at less than $4,000,000.

38 Since November 2001, the first respondents have continued to refuse

to sell the East Perth land for less than $4,000,000, and the property has not been sold.

39 The appellants tendered at trial an affidavit of Francis Morley Newton. Mr Newton is a licensed real estate agent. The affidavit

annexed a document dated 8 October 2003, described as a "marketing appraisal", which Mr Newton prepared for one of the appellants in respect

of the East Perth land. The document stated, relevantly:

(a) "I believe that [the East Perth land] will sell for

$37,000 - $40,000 per strata lot."

(b) "Being zoned for 63 apartments this equates to $2,331,000 to $2,520,000."

The document emphasised that Mr Newton was not a licensed valuer, and he was providing a "market appraisal" only.

40 An affidavit of Dr Arcus, sworn 18 September 2003, and tendered at trial, annexed a letter dated 8 August 2003 from Kingsley Lewis, a

licensed real estate agent, to Dr Arcus. In this letter Mr Lewis stated, relevantly:

"The latest sale price to be achieved is for the former ARCUS Site at the corner of Aberdeen Street and Palmerston Street and

with this site showing approximately $600/sqm for a land area




of 4,502 square metres of $37,500 per unit of land content for

the residential component.

Your site has always been zoned for office purposes and it is

only with the influence of the East Perth Redevelopment authority that this office purpose has changed to reflect a heavy

concentration of residential and with his [sic] development related to the superb aspect from the site.

Assuming a residential use and a density of R160 (63 units), we estimate the sale price of your property to be in the order of

$5-5.25 million, however, the timing is presently not opportune for you to obtain this sale price by way of a formal marketing

campaign.

It would be best for the Syndicate to wait a period of time and we are only suggesting possibly twelve months, to allow

competing developments to be completed and sold. As East Perth values stabilise and hopefully improve as a result of

declining supply as take up occurs, this will have a positive influence upon your property and sale price will benefit."

The letter did not explain the basis for Mr Lewis' opinion that a sale price within the range $5,000,000 to $5,250,000 may be obtained. The only

sales evidence referred to by him suggests a value of approximately $2,400,000; that is, $37,500 x 63 units. Mr Lewis did not state, however,

that the land at the corner of Aberdeen Street and Palmerston Street was comparable to the East Perth land. There was no evidence that Mr Lewis

had any qualifications as a valuer.

41 There was some other evidence at trial, of a hearsay nature, that a sale of the East Perth land may be possible for a price greater than the

range which the appellants were willing to accept ($2,300,000 and $2,600,000) and less than the price which the first respondents insisted

upon (not less than $4,000,000).

42 In June or July 2001 the City of Perth, being the local government

with jurisdiction in respect of the East Perth land, issued a demolition order which required the demolition of various buildings on the property.

The buildings the subject of the demolition order have been demolished. One building on the property, at 33 Bronte Street, East Perth, remains, and

is leased. The rental paid under the lease is the only revenue derived from the property, and is significantly less than the holding and other costs

which the investors are incurring.




The proceedings

43 On 5 May 2003 the appellants commenced proceedings in the Supreme Court.

44 The appellants alleged, relevantly for the purposes of this appeal, that:

(a) the arrangements relating to the procuring and making of the loan constituted a "managed investment scheme", as

defined in s 9 of the Corporations Act 2001 (Cth);

(b) the scheme was not registered; and

(c) in the circumstances, the scheme should be wound up.

45 The first respondents contended, relevantly for the purposes of this

appeal, that:

(a) the arrangements relating to the procuring and making of the loan did not constitute a managed investment scheme;

and

(b) even if those arrangements did constitute a managed

investment scheme, the Court should not, in the circumstances, order the scheme to be wound up.

46 The proceedings were tried before Johnson J. The evidence was adduced by affidavit. None of the deponents was cross-examined. The

learned Judge decided that the arrangements relating to the procuring and making of the loan did not constitute a managed investment scheme.

Her Honour also decided that even if the arrangements did constitute a managed investment scheme, there was no basis for making the orders

sought. The appellants' application was therefore dismissed.

Managed investment schemes – legislative framework – Corporations Law

47 The Managed Investments Act 1998 (Cth) was enacted and

commenced on 1 July 1998. It introduced a new Ch 5C into the Corporations Law. Chapter 5C replaced Div 5 and 5A of Pt 7.12 of the

Law, which had regulated prescribed interest schemes. The relevant provisions of the Corporations Law, as amended by the Managed

Investments Act, are these:

(a) In s 9, "managed investment scheme" was defined to

mean, relevantly:




"(a) a scheme that has the following features:

(i) people contribute money or money's worth as consideration to acquire rights (interests) to benefits produced by the

scheme (whether the rights are actual,

prospective or contingent and whether they are enforceable or not);

(ii) any of the contributions are to be pooled, or used in a common enterprise, to produce

financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in

the scheme (whether as contributors to the scheme or as people who have acquired

interests from holders);

(iii) the members do not have day-to-day

control over the operation of the scheme (whether or not they have the right to be

consulted or to give directions); or

…"

(b) In s 9, "interest" in a managed investment scheme was defined in terms which corresponded to those in par (a)(i)

of the definition of "managed investment scheme". In particular, "interest" was defined to mean "a right to

benefits produced by the scheme (whether the right is actual, prospective or contingent and whether it is enforceable or not)".

(c) In s 9, "member", in relation to a managed investment scheme, was defined to mean "a person who holds an

interest in the scheme".

(d) The words "scheme", "control" and "operation" in the

definition of "managed investment scheme" were not defined in the Law.

(e) Section 601ED(1)(a) provided that (subject to s 601ED(2), which is not relevant for present purposes) a




managed investment scheme must be registered under

s 601EB if it had more than 20 members.

(f) Section 601ED(5) prohibited a person from operating a

managed investment scheme that s 601ED required to be registered under s 601EB unless the scheme was so

registered. The word "operate" in s 601ED(5) was not defined in the Law.

(g) Section 601ED(6)(a) provided that, for the purpose of s 601ED(5), a person was not operating a scheme merely

because they were acting as an agent or employee of another person.

(h) Section 601EE(1) provided that if a person operated a managed investment scheme in contravention of s 601ED(5), the Australian Securities and Investments

Commission, the person operating the scheme or a member of the scheme was entitled to apply to the Court

to have the scheme wound up. By s 601EE(2), the Court was empowered to make any orders it considered

appropriate for the winding up of the scheme.

48 In addition to the requirement for registration, managed investment

schemes were required to be operated by a single "responsible entity". The responsible entity had to be a public company which held an

Australian financial services licence authorising it to operate a managed investment scheme: s 601FA. There were numerous requirements in

relation to the contents of the scheme's constitution, the duties of the responsible entity, the manner in which the responsible entity was to hold assets, the preparation of a compliance plan, the auditing of the

compliance plan, and the establishment of a compliance committee (unless at least half of the responsible entity's directors were external

directors).

The repeal of the Corporations Law and the enactment of the Corporations

Act

49 On 15 July 2001 the Corporations Act replaced the Corporations

Law. The Corporations Act did not, in general, preserve the Corporations Law in relation to transitional matters. By s 1399 of the Corporations Act,

things done before the commencement of that Act which have ongoing significance have effect for the purposes of the Act as if they were done




under the corresponding provision of the new legislation. Section 1400 of

the Corporations Act provides, relevantly:

"(1) … this section applies in relation to a right or liability (the pre-commencement right or liability), whether civil

or criminal, that:

(a) was acquired, accrued or incurred under a carried over provision of the old corporations legislation

of a State or Territory in this jurisdiction; and

(b) was in existence immediately before the

commencement.

However, this section does not apply to a right or liability

under an order made by a court before the commencement.

(2) On the commencement, the person acquires, accrues or incurs a right or liability (the substituted right or liability), equivalent to the pre-commencement right or

liability, under the corresponding provision of the new corporations legislation (as if that provision applied to the

conduct or circumstances that gave rise to the pre-commencement right or liability).

(3) A procedure, proceeding or remedy in respect of the substituted right or liability may be instituted after the

commencement under the new corporations legislation (as if that provision applied to the conduct or

circumstances that gave rise to the pre-commencement right or liability)."

The terms "carried over provision", "commencement", "corresponds",

"liability", "new corporations legislation", "old corporations legislation" and "right" are defined in s 1371(1) of Corporations Act.

50 The effect of s 1400, for the purposes of this appeal, is as follows:

(a) It is necessary to determine whether, prior to the

commencement of the Corporations Act on 15 July 2001, there was an unregistered managed investment scheme

for the purposes of the Corporations Law.




(b) If there was an unregistered managed investment scheme

for the purposes of the Corporations Law, then any rights and liabilities of the appellants and the first respondents

under the Corporations Law become rights and liabilities under the corresponding provisions of the Corporations

Act.

In other words, upon the commencement of the Corporations Act, any

accrued rights and liabilities in respect of any contravention of the provisions of the Corporations Law with respect to managed investment

schemes were replaced by rights and liabilities under the provisions of the Corporations Act with respect to managed investment schemes. If Global

operated and the investors were members of a managed investment scheme as defined in s 9 of the Corporations Law, the investors have standing under s 601EE(1) of the Corporations Act to apply to have the

scheme wound up, and the Court may, under s 601EE(2) of the Act, make any orders it considers appropriate for that purpose. The provisions of the

Corporations Law and the Corporations Act with respect to managed investment schemes are identical. In the circumstances, it is unnecessary,

in these reasons, to distinguish further between the provisions of the Corporations Law and those of the Corporations Act.

The proper approach to construction of the statutory provisions

51 It is settled that the broad words of the definition of "managed investment scheme" should not be read down. See Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd

[2003] 1 Qd R 135 at 146 [17].

The concept of a "scheme" within the definition of "managed investment scheme"

52 The three elements in par (a) of the definition of "managed investment scheme" are prefaced by the words "a scheme that has the

following features".

53 In Australian Securities and Investments Commission v Takaran

Pty Ltd (2002) 170 FLR 388, Barrett J considered the concept of a

"scheme" within the definition. His Honour said, at 393 [15] – [16]:

"The essence of a 'scheme' is a coherent and defined purpose, in the form of a 'programme' or 'plan of action', coupled with a

series of steps or course of conduct to effectuate the purpose and pursue the programme or plan. In some cases, the scope of




the scheme will readily be gathered from some constitutive

document in the nature of a blueprint setting out all relevant matters. In others, there may be no writing or such as there is

may tell only part of the story, leaving the remainder to be supplied by necessary implication from all the circumstances.

Profit-making will almost invariably be a feature or objective of the kind of scheme with which the s 9 definition of 'managed

investment scheme' is concerned, given the definition's references in several places to 'benefits'. Whatever is incidental

and necessary to the pursuit of the profit (or 'benefits') will therefore be comprehended by the scheme, including, it seems

to me, steps sensible to counter risk of loss (or detriment). Every cogent plan caters for -- or, at least, recognises and takes into account -- contingencies of an adverse kind.

It must also be emphasised that a scheme having the characteristics bringing it within the s 9 definition of 'managed

investment scheme' will not necessarily possess those characteristics alone. In Royal Bank of Canada v Inland

Revenue Commissioners [1972] Ch 665, Megarry J observed, in relation to the concept of 'ordinary banking business', that 'a

statement of the essentials of a business does not seem to me, without more, to be exhaustive of all that is ordinary in that

business'. A managed investment scheme, like a banking business, may involve elements beyond the core attributes that

give it its essential character. Elements which lie beyond those attributes but contribute to the coherence and completeness which make a 'programme' or 'plan of action' must form part of

that 'scheme'. Every programme or plan of action must be taken to include the logical incidents of and consequences of and

sequels to its acknowledged components."

See also Mier v FN Management Pty Ltd (2005) 56 ACSR 93 at

102 [30].

54 In Takaran, Barrett J emphasised that a "scheme" must be capable of

identification within certain boundaries. His Honour said, at 391 [12]:

"Such identification is necessary to decide whether it has the

characteristics which bring it within the statutory definition."




The first element in par (a) of the definition of "managed investment

scheme"

55 The first element in par (a) of the definition requires that:

(a) "people contribute money or money's worth"; and

(b) the money or money's worth be contributed "as

consideration to acquire rights … to benefits produced by the scheme …"

56 This element was described in par 19.6 of the explanatory memorandum to the Managed Investments Bill 1997 as "incorporating a

purposive element in the definition". In other words, the money or money's worth must be contributed for the purpose of acquiring the

relevant rights to benefits.

57 The word "contribute" means, in this context, to pay or supply. It is implicit in the first element in par (a) of the definition, in the context of

the definition as a whole and the provisions of Ch 5C, that the people will pay or supply the money or money's worth to or as directed by the

promoter or operator of the scheme.

The second element in par (a) of the definition of "managed investment

scheme"

58 The second element in par (a) of the definition has three aspects:

(a) the contributions or some of them "are to be pooled, or used in a common enterprise";

(b) the purpose of the pooling, or use in a common enterprise, must be "to produce financial benefits, or

benefits consisting of rights or interests in property"; and

(c) those benefits must be produced "for the people … who hold interests in the scheme" (whether as contributors or

as people who have acquired interests).

59 The word "pooled" and the expression "to be pooled" in the second

element in par (a) of the definition were considered by Douglas J in Australian Securities and Investments Commission v Enterprise

Solutions 2000 Pty Ltd (1999) 33 ACSR 403, and on appeal by the Court

of Appeal of Queensland: [2003] 1 Qd R 135.




60 In Enterprise Solutions 2000 Pty Ltd, the activities which were held

to be managed investment schemes comprised off-course punters giving money to either the second or the fifth appellant, pursuant to

betting-agency agreements, to bet on their behalf, on horses selected by the fourth appellant, with the assistance of a betting system. There were

hundreds of participants in the schemes, and the money they contributed was deposited in two bank accounts. The moneys in the accounts were

used to pay management fees payable under the betting-agency agreements, to place bets, to maintain credit balances with betting

agencies, and to pay moneys due to the scheme investors. By the betting-agency agreements, the investors appointed one or other of the

appellants to be their agent, and various duties were imposed on the agent, including a duty to pay moneys due to the investors. The procedure relating to the placing of bets was summarised in the judgment of the

Court of Appeal at 142 [3]:

"Each bet is placed by and in the name of Mr Rebbeck [one of

the appellants] and is placed on behalf of all of the investors covered by the relevant agreement, subject to the possibility that

an investor may request exclusion from a day's betting or some other variation; such requests are usually accommodated, but

can be disallowed. Subject to the possibility of the allowance of such a request, the investors have no control over either the

amounts bet, or the selection of horses on which the bets are placed."

61 The Court of Appeal noted, at 144 [9], that the words "pool" and "pooled" may be used with reference to "a fund made up of numerous payments from participants and used for a purpose they contemplate".

The Court of Appeal also noted, at 144 [8], that pooling will occur where moneys paid or supplied by people are collected in a bank account.

62 The significance and application of the word "pooled", in the context of the second element in par (a) of the definition, was explained by the

Court of Appeal at 144 [10] – [11]:

"There is, according to the appellants' argument, no trust

relationship between the holders of the bank accounts (in which monies are, the respondent says, pooled), on the one hand, and

the investors on the other. If that is right, then it would follow that, in the event of winding-up of the account-holders, all the

monies would go to the liquidators and the investors would have no right to a refund of any monies paid in; that does not




appear to be correct: Barclays Bank Ltd v Quistclose

Investments Ltd [1970] AC 567. Apart from that, there is no reason to think that the use of the expression 'pooled' has to be

confined to instances in which the contributors have a proprietary interest; so to hold might exclude from the

definition schemes in which monies are in the ordinary sense 'pooled' for the purpose of investment, but the contributors

expressly agree that they have no proprietary rights, but only rights in contract.

Another reason for rejecting, as we do, the submission that the contributions are not 'pooled' unless the result is to give the

contributors property rights in the pool is that para (ii) quoted above contemplates that the contributions 'are to be pooled ... to produce financial benefits, or benefits consisting of rights or

interests in property ...'. The benefits, consisting in monies to come to the contributors out of the pool, need not be proprietary

rights. And the 'rights' acquired need not even be enforceable, let alone proprietary."

63 The Court of Appeal rejected, at 145 [13], an argument by the appellants that "a scheme for the collection and investment of funds

cannot be a managed investment scheme (absent any 'common enterprise') unless it can be shown that the percentage return on investment in pooled

money is expected to be higher than the return which would have been gained if the identical investment had been made by each individual

contributor, using his or her own money". Their Honours said:

"The words 'to be pooled ... to produce' in para (ii) quoted above imply that the intention must be to pool the contributions and,

by use of the pool, produce benefits; they do not imply that the benefits must be of such a kind as to be unobtainable without

pooling."

64 The Court of Appeal also rejected another argument by the

appellants to the effect that the words "to be" in par (a)(ii) of the definition require that the scheme investors appreciate that their contributions are to

be pooled. Their Honours said, at 145 [13]:

"That contributions would be dealt with in that way is obvious;

but in any event under the scheme pooling occurs and that is enough." [emphasis added]




65 In Australian Securities and Investments Commission v Young

(2003) 173 FLR 441 at 449 [43], Muir J expressed the following view in relation to "pooling":

"… the concept of 'pooling' for the purposes of s 9(a)(ii), imports contributions to a discernible fund the moneys in which

are to be used in an identifiable way to provide prescribed benefits to the contributors."

Muir J then noted that his analysis "may be a little narrow", in the context of the observations of the Court of Appeal in Enterprise Solutions 2000

Pty Ltd and of Barrett J in Takaran, but it was sufficient for the purposes

of the proceedings before his Honour. His Honour said, at 449 - 450

[44] - [46]:

"Under the terms of the loan agreements … the moneys were agreed to be used for the benefit of a disparate group of persons

and corporations with differing interests. There was no expressed right on the part of the lenders to have the loan

moneys used for the development in respect of which they made the loan. The moneys could not therefore be regarded as

pooled. For similar reasons, if regard is had only to the documentation, it is impossible to conclude that the loan

moneys are to be 'used in a common enterprise'. The moneys may be used in a variety of ways, assuming that it is possible to

fulfil the obligation created by the clause under consideration, but there may be no commonality about the enterprise or

enterprises in which the moneys are employed. Some club members and respondents may benefit more than others and at different times and in many different ways. Any benefit

received by the lenders may bear no relationship to the loan moneys advanced and so on.

Notwithstanding the wording of the loan agreements, however, the respondents appropriated the money received from club

members in respect of a particular development to that development and, where real property was acquired for the

purpose of the development, used such moneys for its acquisition. It may be inferred that this was done pursuant to a

pre-determined plan or course of action by the first and second respondents.

In those circumstances the loan moneys were in fact pooled to produce financial benefits. … "




66 In Australian Securities and Investments Commission v Drury

Management Pty Ltd [2004] QSC 068, Jones J held that there could be a

"pooling" of contributions within par (a)(ii) of the definition, even though

the scheme investors were unaware that the scheme promoter intended to pool their contributions. His Honour said, at [24]:

"To suggest that for s 9(a)(ii) to be satisfied, there needs to be found in the mind of a contributor, knowledge of an intention to

pool the contribution, is, in my view, to impose an unwarranted restriction on the ordinary meaning of the words used in the

definition. The cases to which I have been referred do not suggest otherwise. The point was authoritatively determined by

the Court of Appeal in ASIC v Enterprise Solutions 2000 Pty Ltd …"

Jones J then referred to the observations of the Court of Appeal in Enterprise Solutions 2000 Pty Ltd, at [13]. In particular, his Honour

emphasised the statement by the Court of Appeal that "under the scheme

pooling occurs and that is enough". Jones J concluded, at [25]:

"The feature that the contributions 'are to be pooled' is in my

view satisfied in this case by the fact that pooling occurred. …"

67 In D.K.L.R. Holding Co (No 2) Pty Ltd v The Commissioner of

Stamp Duties (New South Wales) (1982) 149 CLR 431 at 439, Gibbs CJ

explained that the words "to be", before a past participle, and used in

relation to a noun, can express obligation, intention, possibility or simply futurity. The sense in which the words "to be" are used, in any case,

depends on the context in which they appear.

68 In my opinion where:

(a) people have paid money to or as directed by the promoter

or operator of a scheme (as contemplated by the first element in par (a) of the definition);

(b) the promoter or operator intends to pool, or does in fact pool, the money; and

(c) the pooling occurs without the agreement, approval or knowledge of the people who paid the money,

the feature in the second element in par (a), that the moneys (or contributions) "are to be pooled", will be satisfied.




69 If the promoter or operator of a scheme in fact pools money

contributed by people, and the pooling occurs without their agreement, approval or knowledge, the promoter or operator will have formed the

intention, prior to the pooling, that the pooling should be or become a characteristic of the scheme. When this intention is formed, it may

properly be said that the contributions of the people "are to be pooled" within the second element in par (a) of the definition.

70 In my opinion, the concepts and language in par (a) of the definition do not expressly or impliedly require that any pooling occur with the

agreement, approval or knowledge of the people who have paid or supplied the money or money's worth. A scheme will not avoid

characterisation as a "managed investment scheme", within par (a) of the definition, where the promoter or operator intends to pool, or does in fact pool, money or money's worth, without the agreement, approval or

knowledge of the people who have contributed it.

71 It is unnecessary, for the purposes of this appeal, to consider the

concept of a "common enterprise" in par (a)(ii) of the definition.

The third element in par (a) of the definition of "managed investment

scheme"

72 The third element in par (a) of the definition requires that the

members not have "day-to-day control over the operation of the scheme", whether or not they have the right to be consulted or to give directions.

73 The term "day-to-day" connotes routine, ordinary, everyday. See The New Shorter Oxford English Dictionary (1993), page 598; The

Macquarie Dictionary (Third Edition), page 492.

74 As the Privy Council observed in Bermuda Cablevision Ltd v Colica Trust Co Ltd [1998] AC 198 at 207, expressions such as "control" take

their colour from the context in which they appear: there is no general rule as to the meaning of the word "control". The expression "day-to-day

control" is not a term of art. It must be given the meaning which the context requires. See also Canwest Global Communications Corporation

v Australian Broadcasting Authority (1998) 82 FCR 46 at 77 – 79.

75 In Australian Securities and Investments Commission v IP Product

Management Group Pty Ltd (2002) 42 ACSR 343, Byrne J considered

the third element, and observed, at 348 [22], in relation to the expression

"day-to-day control":




"It will be recalled that under para (iii), the existence of a right

in a member to be consulted or to give directions as to the operation of the scheme does not necessarily lead to the

conclusion that that member has day-to-day control over its operation. The Law contemplates, therefore, some greater

involvement."

After referring to the documents relating to the scheme the subject of the proceedings in IP Product Management Group, his Honour stated, at

348 [22]:

"As a matter of legal right, it is clear that the members have no day-to-day control over the operation of the scheme. The

evidence shows, too, that they exercised no such control as a matter of fact. For the most part, the operation of the scheme was conducted in places distant from the residence of the

investors and there is no evidence that, having paid their money, they took any interest in the detail of its operation."

76 In Australian Securities and Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778, Owen J considered

whether scheme investors had day-to-day control of an investment scheme in circumstances where the investors had delegated "management" of the

scheme to a company related to the promoters. His Honour said, at 791 [67]:

"The question is whether the members have day-to-day control. It is not difficult to discern the distinction that the legislature

was attempting to make. Very broadly, it is between the investment activities of an individual and that of a group. By the express terms of the applications, the investors have delegated

'management' of the investment to CCML. There is no reservation of day-to-day or any other control or functions. I am

not sure that the appointment of a committee of some of the investors to monitor the investments would make much

difference. The question still remains: who has the day-to-day control?"

77 In Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561, the first

defendant, Pegasus Leveraged Options Group Pty Ltd, was established by the second defendant, Mr McKim, and attracted investments from

numerous people by offering exorbitant rates of return. Each of the investors was informed that his or her moneys would be used, together




with the moneys of other investors, in a business transaction or

transactions which would create profits sufficient to enable Pegasus to pay the rate of interest which was promised. Davies AJ held that each

investor had invested in a managed investment scheme. His Honour found, at 570 [32], that there was no doubt that the investors did not have

day-to-day control over the operation of the scheme. Davies AJ also found that Mr McKim contravened the statute by operating the managed

investment scheme which was unregistered. His Honour also considered the meaning of "operate" in the context of s 601ED, and said, at

574 [55] – [56]:

"The word 'operate' is an ordinary word of the English language

and, in the context, should be given its meaning in ordinary parlance. The term is not used to refer to ownership or proprietorship but rather to the acts which constitute the

management of or the carrying out of the activities which constitute the managed investment scheme. …

I have concluded that Mr McKim operated the managed investment scheme. He was the living person who formulated

and directed the scheme and he was actively involved in its day to day operations. He supervised others in their performance."

78 The purpose of the legislation is to regulate collective investment schemes with more than 20 participants which are promoted and managed

by persons or entities who may or may not be participants in the scheme.

79 In my opinion, the third element in par (a) of the definition is

concerned with control in fact as distinct from the legal right to control. It is also concerned with control in fact by the members of a scheme as a whole. The members as a whole may not have control in fact even though

the constitutive document for a scheme may confer on them the legal right to control.

80 The members of a scheme will have "day-to-day control over the operation of the scheme" if:

(a) the members as a whole participate in making the routine, ordinary, everyday business decisions relating to its

management; and

(b) the members as a whole are bound by the decisions which

are made.




Conversely, if the members as a whole do not participate in making the

routine, ordinary, everyday business decisions relating to the management of the scheme or if the members as a whole are not bound by the decisions

which are made, they will not have day-to-day control over its operation.

81 The concept of "day-to-day control over the operation of the

scheme", within par (a) of the definition, does not, of course, require that there be activities in relation to the scheme on each and every day or even

on most days during the term of the scheme.

82 In my opinion, the circumstance that the promoter or operator of a

scheme manages the scheme (or certain aspects of it) on behalf of the members does not mean that the members by their agent, the promoter or

operator, have day-to-day control in fact over the operation of the scheme. In other words, the management activities of the promoter or operator in relation to the scheme are not to be imputed to the members in

determining whether the members have such day-to-day control.

83 My construction of the third element in par (a) of the definition gives

effect to the evident legislative purpose or object embodied in the definition and Ch 5C. If:

(a) the third element in par (a) of the definition was concerned with the legal right to control and not control

in fact; or

(b) the management activities of the promoter or operator in

relation to the scheme were to be imputed to the members in evaluating whether the third element was satisfied or

not, with the consequence that if the promoter or operator had "day-to-day control over the operation of the scheme" then the members, by their agent, the promoter or

operator, would have day-to-day control,

the legislative framework for the regulation of managed investment

schemes would be seriously, if not entirely, eroded.

The variation of a "scheme"

84 A scheme which has, or does not have, the three "features" required by par (a) of the definition may, of course, be varied and supplemented

from time to time. Some characteristics of the scheme may be implemented or performed, other characteristics may not be implemented

or performed, some characteristics may be abandoned, and new characteristics may be adopted. In other words, a scheme may be a




diverse and evolving programme or plan of action. It is feasible that a

scheme, as originally formed, may not be a "managed investment scheme", as defined, in that it may not have all of the three "features"

required by par (a) of the definition, but the scheme may subsequently, through variation by conduct or otherwise, fall within the definition and

require registration. If, at any time, a scheme has the three "features" required by par (a) of the definition, and it is operated without having

been registered under s 601EB, the scheme will be liable to be wound up in accordance with s 601EE.

The winding up of an unregistered managed investment scheme

85 Section 601EE(1) provides:

"If a person operates a managed investment scheme in contravention of subsection 601ED(5), the following may apply to the Court to have the scheme wound up:

(a) ASIC;

(b) the person operating the scheme;

(c) a member of the scheme."

86 By s 601EE(2):

"The Court may make any orders it considers appropriate for the winding up of the scheme."

87 In Australian Securities and Investments Commission v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240, Barrett J

said, at 243 – 244 [12] - [13]:

"In relation to s 601EE(2) of the Corporations Act, I accept that

the powers conferred upon the court are very broad. The concept of winding up, as it is applied by s 601EE to an unregistered managed investment scheme, is not the subject of

any explanation or elaboration in the statute. It seems to me, as a matter of general principle, however, that what is

contemplated is the realisation of assets of the scheme, discharge of liabilities and distribution of any surplus among

beneficiaries or members in an appropriate way. So much is clearly implied by the expression 'winding up', the general

meaning of which may be gathered from approaches taken to that general subject under statutes dealing not only with




companies but also with partnerships. Those statutory

approaches were built on foundations which pre-dated legislation in either area.

Given that s 601EE(2) enables the court to make 'any orders it considers appropriate for the winding up of the scheme'

(emphasis added), it must be accepted that the court has jurisdiction to settle or prescribe any aspect or element of the

basis for winding up or the winding up process which it is necessary to supply because that element cannot be obtained

from any other source. In this respect, it is noteworthy that the statute itself does not attempt to lay down the basis for or

method of winding up. That is, to my mind, an indicator of intention that the court should be able to act in the comprehensive way I have outlined."

88 In Mier, Keane JA (with whom McMurdo P and Douglas J agreed)

referred to those observations of Barrett J and said, at 99 [18]:

"I would add only one caveat. While it is true that the Act does not explicitly lay down a method for the winding up of an

unregistered scheme it must be assumed that, in general, a court would be guided by analogies with the law relating to the

winding up of companies, partnerships and trusts when deciding on the appropriate procedure for the winding up of a scheme.

The best analogy would suggest the procedure to be followed. In my opinion, good reason should be shown before a court

would make an order in the winding up of a scheme that did not have a precedent or parallel in the Act, partnership legislation or the law relating to the winding up of trusts. Of course, the best

analogy might be thought to be the winding-up procedure applicable to a registered scheme. Unfortunately for present

purposes, the Act, beyond directing that a registered scheme be wound up in accordance with its constitution, also leaves the

detail of the winding up of a registered scheme in the hands of the court, which may make such orders as it 'thinks necessary to

do so'."

89 As Keane JA explained in Mier, at 98 [16], whatever may be the

precise details of the procedure which a Court implements to wind up an unregistered scheme, an essential first step must be the determination of

the property which is the subject of the scheme.




90 In s 9, the term "scheme property" is defined, in relation to a

"registered scheme", as follows:

"scheme property” of a registered scheme means:

(a) contributions of money or money’s worth to the scheme; and

(b) money that forms part of the scheme property under provisions of this Act or the ASIC Act; and

(c) money borrowed or raised by the responsible entity for the purposes of the scheme; and

(d) property acquired, directly or indirectly, with, or with the proceeds of, contributions or money referred to in

paragraph (a), (b) or (c); and

(e) income and property derived, directly or indirectly, from contributions, money or property referred to in paragraph

(a), (b), (c) or (d)."

91 In Mier, Keane JA, after referring to this definition, said at 101 [26]:

"Because the definition of 'scheme property' applies only to a registered scheme, it does not apply of its own force in relation

to an unregistered scheme, but there can be no doubt that the scheme property of an unregistered scheme is to be identified

by reference to the terms of the scheme in relation to the contribution of assets to the enterprise involved in the scheme."

Later, his Honour said, at 102 [30], that, of necessity, it is necessary to examine the terms of an unregistered scheme to ascertain the property

interests which have been contributed, or which are otherwise subject, to the scheme.

92 The power of the Court under s 601EE includes not only the making

of an appropriate winding up order initially, but also the subsequent making, as necessary, of such further orders as may be required. See Australian Securities and Investments Commission v Takaran Pty Ltd (No 2) (2002) 43 ACSR 334 at 337 – 338 [11] – [12]. Plainly, a winding

up can occur in stages, and the Court can regulate the manner in which the winding up is to proceed. See Crocombe v Pine Forests of Australia Pty

Ltd (2005) 219 ALR 692 at 703 [71].




93 Also, the Court is empowered under s 601EE to give directions to the

person appointed by the Court to carry out the winding up. The directions would be analogous to those given to a company liquidator under s 479(3)

or to a controller of property of a corporation under s 424(1). See Australian Securities and Investments Commission v Tasman

Investment Management Ltd [2005] NSWSC 1332 at [8].

The learned Judge's reasoning

94 The learned Judge referred, in par 16 of her reasons, to the status of the appellants and the first respondents as registered first co-mortgagees

under a mortgage registered pursuant to the Transfer of Land Act. Her Honour continued:

"They are therefore entitled to the rights and protections under the mortgage. These rights must be determined by reference to the terms of the mortgage document itself as supplemented by

the various relevant provisions of the Transfer of Land Act and the general law. Their primary right is to have their loan repaid

in full and not to have their rights as mortgagee disturbed unless and until that occurred. Absent fraud (and there is no

suggestion of fraud in this case) the registered mortgagees' rights are indefeasible: see Conlan v Registrar of Titles (2001)

24 WAR 299 at 326 – 329. This trite statement of principle should be borne in mind as it provides a backdrop to everything

that follows."

95 The learned Judge set out, in par 19 of her reasons, par (a) of the

definition of "managed investment scheme". Her Honour then said, in par 20:

"It is conceded by [the first respondents] that the loan to

[Newrose] satisfies the first two requirements of a managed investment scheme. It is said, however, that the third

requirement is not satisfied. It is said that it has not been established that the members do not have day-to-day control

over the operation of the scheme. On behalf of the [appellants] it is said that all aspects of the definition are satisfied."

96 The learned Judge considered, in par 21 of her reasons, whether or not the investors had day-to-day control over the operation of "the pooled

mortgage investment". Her Honour said:




"The starting point is to look at what the day-to-day control of

the operation might be. Global Finance received funds from individual investors and invested those funds pending

settlement of the loan. It would appear that Global Finance had an unfettered right to invest the funds it held from individual

investors prior to settlement of the loan. That is the effect of the interest disposal authority. If the scheme is seen as including all

steps between investment and repayment, it might be said that this 'investing prior to settlement' was part of the scheme and,

hence, is evidence that the investors had divested themselves of day-to-day control. However, there is no evidence to suggest

that at this stage in the overall investment process there was to be any pooling of the funds held on behalf of each investor pending settlement. For example, these funds could be received

at different times, deposited in different bank accounts or placed in different short-term investments. For this reason, the initial

part of the investment process cannot be a managed investment scheme or part of such a scheme."

97 The learned Judge said, in par 22 of her reasons, that:

"(a) … if indeed there is a scheme, it does not include any

period of investment prior to the pooling of moneys at settlement; and

(b) As a result, I do not consider that the unfettered right to invest given to Global Finance by each individual

disposal authority supports a conclusion that the pooled mortgage investment meets the third criteria [sic] in the definition of a managed investment scheme …".

98 The learned Judge then said, in par 23 of her reasons, that if she was wrong in the conclusion expressed in par 22, then "once settlement took

place, any power that Global Finance may have had to control the investment was limited by the terms of the mortgage". Her Honour

added:

"The relationship between the member as mortgagee and the

mortgagor was covered by the provisions of the mortgage. True it is that Global Finance received payments of interest, but they

did so in their capacity as agent of each individual investor. … As a general proposition, it does not follow that appointing an

agent to act on a person's behalf in relation to an investment is




an act relinquishing day-to-day control over the investment.

Much will depend on the nature of the investment and the terms of the agency. In the context of a mortgage, there is, in my

view, little scope for arguing that the appointment of an agent removes the principal's day-to-day control over the investment.

There can be no suggestion that Global Finance could lawfully have retained the interest payments and invested them

elsewhere. Nor is there anything to suggest that, if the borrower had decided to make early repayment, Global Finance could

have lawfully invested the money due to the investors without reference to the investors. Although Global Finance held the

title deed, I consider that to be a matter of convenience where there are multiple first mortgagees rather than evidence of the handing over of day-to-day control by the mortgagees."

99 The learned Judge referred, in par 24 of her reasons, to the fact that the total funds raised by Global ($3,705,000) were less than the amount of

the loan which was originally proposed ($3,750,000), that Global did not disclose the shortfall to the investors, and that the loan was made to

Newrose despite the shortfall. Her Honour then said:

"This, it is said by the [appellants] is evidence that the

mortgagees did not have day-to-day control of the investment. The flaw in this argument is that the broker could create the

situation said to evidence a lack of day-to-day control on the part of the investors by failing to act appropriately or lawfully

with respect to the investment or failing to keep the investors properly advised."

100 The learned Judge engaged in a limited discussion of the authorities

in relation to managed investment schemes in pars 26 and 27 of her reasons, as follows:

"The cases in this area are not a great deal of assistance. There are a number of cases where schemes involving contributory

mortgagees have been held to be managed investment schemes. Such cases include ASIC v Young (2003) 173 FLR 441, ASIC v

IP Product Management Group Pty Ltd (2002) 42 ACSR 343, Kay v ASIC (2002) 43 ACSR 229, ASIC v Pegasus Leveraged

Options Group Pty Ltd (2002) 41 ACSR 561, ASIC v Hutchings (2001) 38 ACSR 287, ASIC v Chase Capital Management Pty

Ltd (2001) 36 ACSR 778, ASIC v Takaran Pty Ltd (2002) 43 ACSR 46 and Re Lawloan Mortgages Pty Ltd [2003] 2 Qd R




200. However, each of these cases is distinguishable on its

facts. In some cases there was not even a dispute as to whether or not the investors had day-to-day control of their investment.

Indeed, it is difficult to draw any broad statement of principle from these cases. Certainly these authorities do not support the

plaintiffs' proposition that a pooled loan secured by a contributory mortgage is a managed investment scheme for the

purposes of s 160EE [sic] of the Act.

For their part, the first defendants relied upon the decision of

the Full Court of this Court in Maunder-Hartigan v Hamilton (1984) 8 ACLR 937. That was a case which dealt with

so-called "prescribed interest" under earlier legislation. It is an authority which, in my view, must be treated with caution when dealing with managed investment schemes."

101 The learned Judge's conclusion that there was not a managed investment scheme is set out, in par 28 of her reasons, in these terms:

"In light of the matters to which I have referred, I have come to the conclusion that the members do have day-to-day control

over the operation of the scheme. That, I think, is the effect of their rights under the mortgage. Such was the nature of the

investment that in fact, all things being equal, there was no need for any day-to-day control over the operation of the scheme.

The scheme called for money to be pooled and lent and secured by mortgage with interest to be paid monthly. Nothing else was

required. But when some steps needed to be taken, for instance, when there was a default under the loan, it was the mortgagees who had the right to act and not a scheme manager. In my

view, the third limb of the definition is not satisfied. …"

102 The learned Judge then said, in par 29 of her reasons, that even if,

contrary to the conclusion she had expressed, there was a managed investment scheme, the orders sought by the appellants should not be

made. According to her Honour:

"The power given to the Court under s 601EE(2) of the Act is a

power to wind up the managed investment scheme. Here there is nothing to wind up. Furthermore, if a liquidator were to be

appointed to this scheme, absent agreement from all of the mortgagees, the property being secured property, he or she

would have no power to sell it: see generally s 554D – s 554J




of the Act. If the Court were to appoint a receiver under

s 500(2) of the Act, or O 51 of the Rules of the Supreme Court, it would be subverting the indefeasible rights of the [first

respondents] were it to direct that a receiver sell the property. To do so would be inappropriate and, since there is no other

purpose for the appointment, an order appointing a receiver should not be made. In reading [sic] this conclusion, I have not

taken into account the fact that the [first respondents] hold a significantly larger interest in the properties than any other

investor. In my view, the proportion of the interest held by each investor is irrelevant."

103 The learned Judge therefore dismissed the appellants' application.

The grounds of appeal

104 The appellants rely upon three grounds of appeal, as follows:

"Her Honour:-

1. erred in law and in fact in characterising the scheme

entered into by the [appellants] and the [first respondents] as commencing at settlement of the loan when

her Honour should have found that the scheme was [constituted by (a) receipt, investment and management

by Global of the [appellants'] and [first respondents'] loan moneys, (b) the express and implied rights, powers,

duties and interests in the contract and security which is Department of Land Information registered mortgage

G892202 (including all personal covenants) and (c) in the absence of repayment of the loan moneys, all rights and powers necessary to complete recovery of the loan

moneys from the security property and under the borrower's and guarantor's personal covenants (the

"Scheme")];

2. erred in law and in fact in holding that the [appellants]

and the [first respondents] had day to day control over the operation of the Scheme found by her Honour and,

consequently, that Scheme was not a managed investment scheme within the meaning of that term in the

Corporations Act 2001 when her Honour should have held that:




2.1. the [appellants] and the [first respondents] did not

individually, further or alternatively collectively, have day to day control of the Scheme; and

2.2. the Scheme was a managed investment scheme;

3. erred in law and in fact in holding there to be 'nothing to

wind up' and that to appoint a receiver to wind up the Scheme would subvert s.68 of the Transfer of Land Act

1893 ('TLA'), when her Honour should have held that the contributory mortgage (including all rights and powers

under that mortgage) and personal covenants between the borrower and guarantor and the [appellants] and [first

respondents] were, consistently with the TLA, Scheme property properly the subject of an order under s.601EE of the Corporations Act 2001."

105 The notice of appeal included a further ground of appeal, but this was abandoned.

Ground 1

106 A critical issue, in applying the definition of "managed investment

scheme", properly construed, is whether there was, at any material time, a "scheme" and, if so:

(a) the identification of its characteristics; and

(b) the determination of whether the scheme had the three

"features" which are required by par (a) of the definition.

107 In my opinion, Global promoted and operated, and the investors

participated in, a programme or plan of action, and therefore a scheme, which had characteristics, relevantly, as follows:

(a) The investors contributed funds which were paid to

Global for investment in a pooled loan to be made to Newrose, with the loan to be secured by a single

registered mortgage over the East Perth land and a personal guarantee from Mr Sadek.

(b) Global was to deposit the investors' contributions in its trust account, as they were received.




(c) The primary purpose of the loan was to assist Newrose in

completing the purchase of the East Perth land. A secondary purpose was to make provision for the

payment of interest on the whole of the loan.

(d) After Global had disbursed funds to enable Newrose to

complete the purchase of the East Perth land, Global would retain part of the loan (namely, an amount of

$388,125) upon trust for the investors, and pay that amount to them during the 12-month term of the loan in

discharge of Newrose's obligation to pay interest on the whole of the loan.

(e) In the case of investors who signed an interest disposal authority, those investors and Global were entitled to share interest derived from Global's investment of those

investors' funds in the "money market" in accordance with the authority.

(f) In the case of investors who did not sign an interest disposal authority, those investors were entitled to share

interest derived from Global's investment of those investors' funds in the "money market".

(g) During the 12-month term of the loan Global was authorised and obliged to administer all matters relating

to the loan and the mortgage.

(h) The loan was to be repaid by Newrose at the expiration of

the 12-month term.

(i) If the loan was not repaid by Newrose at the expiration of the 12-month term, the investors would be repaid by

enforcing their rights and remedies under the mortgage or by enforcing Mr Sadek's guarantee.

108 The characteristics in subpars (a), (c), (d), (h) and (i) of par 107 above are apparent from the terms of the letters of invitation which the

investors received from Global, and also, in the case of subpars (h) and (i), from the terms of the mortgage.

109 The characteristic in subpar (b) of par 107 above arises from the terms of the letters of invitation and also from s 48 of the Finance Brokers

Control Act 1975 (WA). Global was a licensed finance broker. Its




licence was granted under the Finance Brokers Control Act, and Global

was subject to that Act. At all material times, s 48(1) provided:

"Every finance broker shall maintain at least one trust account,

designated or evidenced as such, with a bank in the State and shall, as soon as practicable, pay to the credit of that account all

moneys received by him for or on behalf of any other person in respect of loans negotiated or arranged by the finance broker or

in respect of interest on such loans collected by him."

110 The characteristic in subpar (e) of par 107 above is apparent from the

terms of the interest disposal authority.

111 The characteristic in subpar (f) of par 107 above arises in equity. At

all material times, s 48(3) of the Finance Brokers Control Act provided:

"Loan moneys received by a finance broker in the course of negotiating or arranging a loan and moneys received by a

finance broker in respect of interest on loans, shall not be withdrawn from his trust account except for the purpose of

completing the loan or paying in accordance with subsection (4) the moneys in respect of interest on loans, or as otherwise

authorized by this Act, or as otherwise authorized by the prior written consent of all parties to the loan."

There was no evidence at trial that any of the investors gave his or her prior written consent to Global investing his or her funds in the "money

market". If Global invested in the "money market" the funds of investors who did not complete, sign and return an interest disposal authority and

who did not otherwise authorise that investment by giving their prior written consent to Global, Global was obliged, in equity, to account to the investors for the interest it received.

112 The characteristic in subpar (g) of par 107 above is apparent from the terms of the endorsement on the letter of invitation which each investor

signed.

113 I have mentioned that the first respondents received from Global an

interest disposal authority, which they completed and signed, and returned to Global. There was no direct evidence that any of the other investors

received an interest disposal authority. The learned Judge said, in par 8 of her reasons:




"There is no direct evidence that each of the [investors] signed

an interest disposal authority. However, on the available material, it is reasonable to assume that they did."

One of the first respondents, Dr Arcus, annexed the interest disposal authority to the affidavit which he swore and which was tendered by the

first respondents. None of the affidavits tendered by the appellants annexed or even referred to an interest disposal authority. Senior counsel

for the appellants submitted that the copy of the interest disposal authority which was annexed to Dr Arcus' affidavit was a standard form, printed

document, prepared by Global. Senior counsel also submitted that the printed form of acknowledgement and consent embodied in the interest

disposal authority was general, and not specific to the transaction in which the investors were invited to participate. These submissions may be accepted. They do not, however, overcome the deficiency in the evidence

relating to whether an interest disposal authority was signed by any of the appellants. In my opinion:

(a) the fact that the first respondents completed, signed and returned an interest disposal authority; and

(b) the characteristics of the interest disposal authority to which senior counsel for the appellants referred,

are an insufficient foundation from which to infer that each of the appellants signed an interest disposal authority, especially where none of

the appellants gave evidence that he or she had signed the document. In the circumstances, the finding of the learned Judge in par 8 of her reasons

that it is reasonable to assume that each of the investors signed an interest disposal authority cannot be sustained.

114 The programme or plan of action which I have described had the

feature referred to in par (a)(i) of the definition of "managed investment scheme", in that:

(a) each of the investors paid money to Global;

(b) the investors' money was contributed as consideration to

acquire rights to benefits produced by the scheme;

(c) the benefits produced by the scheme were:

(i) interest on the investment in the "money market"; and




(ii) interest on the loan to Newrose, and the

repayment of the principal; and

(d) the rights of the investors to those benefits comprised:

(i) their rights to interest as against Global in respect of the investment in the "money market"; and

(ii) their rights to interest as against Newrose in respect of the loan, and their rights to repayment

of their principal under the mortgage and the guarantee.

115 The programme or plan of action which I have described also had the feature referred to in par (a)(ii) of the definition of "managed investment

scheme", in that:

(a) the money contributed by the investors was "to be pooled" in relation to the investment in the "money

market" and in relation to the loan to Newrose;

(b) the purpose of the pooling was to produce financial

benefits, namely, interest, and benefits consisting of rights or interests in property, namely, the proprietary

interests of the investors in the East Perth land under the mortgage and the choses in action against Newrose and

Mr Sadek conferred on the investors under the mortgage and the guarantee; and

(c) those benefits were to be produced for the investors, as persons holding interests in the scheme, whether as

original contributors to the scheme or as assignees of the original contributors.

116 I will consider, in the context of ground 2 of the appeal, whether the

programme or plan of action which I have described also had the feature referred to in par (a)(iii) of the definition of "managed investment

scheme".

117 The learned Judge was, with respect, in error in holding that the

conduct of the investors in contributing funds to Global, for the purpose of making the loan, was not part the scheme, and that the scheme did not

commence until Global disbursed funds to enable Newrose to complete




the purchase of the East Perth land. Her Honour made this finding, in

pars 21 and 22 of her reasons, because, in her view:

" … there is no evidence to suggest that at this stage in the

overall investment process there was to be any pooling of the funds held on behalf of each investor pending settlement. For

example, these funds could be received at different times, deposited in different bank accounts or placed in different

short-term investments. For this reason, the initial part of the investment process cannot be a managed investment scheme or

part of such a scheme."

This passage reveals that her Honour:

(a) misconstrued the nature of the requirement in par (a)(ii) that "any of the contributions are to be pooled"; and

(b) delineated too restrictively (in relation to temporal

aspects and matters of substance) the scheme which Global promoted and in which the investors obtained an

interest.

118 In my opinion, the investors' money was "to be pooled" prior to

"settlement" (that is, prior to the making of the loan to Newrose), in that:

(a) the investors' money was in fact deposited by Global in

its trust account prior to "settlement";

(b) that money was in fact invested by Global, as a discrete

fund, in the "money market" prior to "settlement";

(c) as I have mentioned, a scheme will not avoid

characterisation as a "managed investment scheme", within par (a) of the definition, where the promoter or operator intends to pool, or does in fact pool, money or

money's worth, without the agreement, approval or knowledge of the people who have contributed it; and

(d) it is to be inferred from:

(i) the facts set out in subpars (a) and (b) of this

paragraph;

(ii) the nature of Global's business as a licensed

finance broker; and




(iii) Global's role as the promoter and operator of the

scheme,

that Global formed the intention, prior to the receipt of

the investors' money, to deposit that money in its trust account and then invest it, as a discrete fund, in the

"money market" prior to "settlement".

119 Accordingly, even if some or all of the investors (except the first

respondents) were unaware of and did not consent to the investment of the investors' money, as a discrete fund, in the "money market", that does not

mean that the pooled investment of the investors' money which in fact occurred prior to "settlement" was not a characteristic of the scheme.

120 In my opinion, any step or course of conduct on the part of:

(a) the investors in contributing money for the purpose of making the loan to Newrose (including the payment of

money by the investors to Global as the promoter and operator of the scheme); and

(b) Global, in receiving and paying that money into its trust account,

was part of the scheme.

121 Accordingly, even if (contrary to the opinion I have expressed) the

investment of the investors' money, as a discrete fund, in the "money market" prior to "settlement" was not a characteristic of the scheme, any

step or course of conduct on the part of:

(a) the investors in contributing money for the purpose of

making the loan to Newrose; and

(b) Global in receiving and paying that money into its trust account,

was part of the scheme.

Ground 2

122 In my opinion, the scheme which Global promoted and operated, and in which the investors had an interest, contemplated managerial activities,

as follows:

(a) Global to receive funds from the investors.




(b) Global to deposit the investors' funds in its trust account.

(c) Global to determine the amount which it was required to hold in trust on account of interest payments, and to

determine the amount required to be advanced to Newrose in accordance with the letters inviting the

investors to participate in the loan.

(d) Global to retain and give instructions to solicitors to

prepare the mortgage and the guarantee, and Global to check the settlement statements relating to the proposed

loan and the completion of the acquisition of the East Perth land.

(e) Global to attend at settlement of the completion of the purchase of the East Perth land, to pay funds to or at the direction of Newrose at settlement, to obtain a duly

executed and stamped registrable mortgage and a duly executed and stamped guarantee, and to obtain the

duplicate certificate of title to the East Perth land.

(f) Global to instruct solicitors to register the mortgage.

(g) Global to pay interest due to the investors.

(h) Global to keep appropriate records.

(i) Global to keep investors informed of matters relevant to the scheme.

(j) Global to communicate with Newrose with regard to the proposed sale of the East Perth land and the repayment of

the loan at the expiration of the 12-month term.

(k) Global to contact Newrose and Mr Sadek in relation to any delay in making payments or repayments due under

the mortgage.

(l) If Newrose repaid the loan, Global to arrange preparation

and execution of a discharge of mortgage, to obtain repayment of the loan, to distribute the repayment to the

investors in accordance with their entitlements, and to deliver the duplicate certificate of title to or in accordance

with the direction of Newrose.




(m) If Newrose failed to repay the loan, Global to

communicate with the investors in relation to the protection and exercise of their rights and remedies

against Newrose and Mr Sadek, including the investors' rights and remedies under the mortgage and the

guarantee.

123 These intended operational aspects of the scheme are to be discerned

from:

(a) the express terms of the letters inviting the investors to

participate;

(b) the express terms of the endorsement on the letter of

invitation, which each investor signed, to the effect that the investors appointed Global as their agent to administer all matters relating to the mortgage;

(c) implied terms of the letters of invitation and the endorsement;

(d) Global's control over the investors' funds; and

(e) the nature of a contributory mortgage investment.

124 Prior to 19 February 1999 (when administrators were appointed to Global), Global in fact performed various managerial activities including

several of the contemplated activities referred to in par 122 above. In particular:

(a) Global arranged the loan to Newrose, including the terms of the loan, without the investors meeting or dealing with

representatives of Newrose;

(b) Global received funds from the investors and deposited them in its trust account;

(c) Global retained and gave instructions to solicitors to prepare the mortgage and the guarantee;

(d) Global paid funds to or at the direction of Newrose at settlement of the completion of the purchase of the East

Perth land;

(e) Global instructed solicitors to register the mortgage;




(f) Global paid interest due to the investors;

(g) Global deducted from the funds contributed by the investors various amounts which it paid for purposes

connected with the loan to Newrose; and

(h) Global maintained a trust account ledger card in respect

of the loan to Newrose.

125 The learned Judge said, in par 23 of her reasons:

" … once settlement took place, any power that Global Finance may have had to control the investment was limited by the

terms of the mortgage. The relationship between the member as mortgagee and the mortgagor was covered by the provisions of

the mortgage. True it is that Global Finance received payments of interest, but they did so in their capacity as agent of each individual investor. That is made clear by the endorsement on

the copy of the letter signed by the investor when funds were handed over. As a general proposition, it does not follow that

appointing an agent to act on a person's behalf in relation to an investment is an act relinquishing day-to-day control over the

investment. Much will depend on the nature of the investment and the terms of the agency. In the context of a mortgage, there

is, in my view, little scope for arguing that the appointment of an agent removes from the principal day-to-day control over the

investment. There can be no suggestion that Global Finance could lawfully have retained the interest payments and invested

them elsewhere. Nor is there anything to suggest that, if the borrower had decided to make early repayment, Global Finance could have lawfully invested the money due to the investors

without reference to those investors. Although Global Finance held the title deed, I consider that to be a matter of convenience

where there are multiple first mortgagees rather than evidence of the handing over of day-to-day control by the mortgagees."

This analysis cannot, with respect, be accepted. As I have mentioned:

(a) the third element in par (a) of the definition is concerned

with control in fact by the members of a scheme as a whole;

(b) the members of a scheme will not have "day-to-day control over the operation of the scheme" if the members




as a whole do not participate in making the routine,

ordinary, everyday business decisions relating to the management of the scheme or if the members as a whole

are not bound by the decisions which are made; and

(c) the mere fact that the promoter or operator of a scheme

manages the scheme (or certain aspects of it) on behalf of the members does not mean that the members by their

agent, the promoter or operator, have day-to-day control in fact over the operation of the scheme; that is, in

evaluating whether the members have such day-to-day control, the management activities of the promoter or

operator in relation to the scheme are not to be imputed to the members.

126 Accordingly, I consider that Global's status as agent for the investors

in relation to numerous aspects of the scheme does not mean that the investors had day-to-day control in fact over the operation of the scheme.

After each investor paid his or her money to Global, each and every managerial activity in relation to the scheme was undertaken by Global.

Prior to 19 February 1999, when the administrators were appointed, the investors were not consulted by Global in relation to the management of

their investment, and they did not give any directions to Global. By reason of the nature of the scheme and its characteristics, the number of

investors and the managerial role of Global, the investors did not, either individually or collectively, have day-to-day control in fact over the

operation of the scheme. Although the terms of the mortgage governed the relationship between the investors as mortgagees on the one hand, and Newrose as mortgagor on the other, the mortgage did not confer on the

investors such day-to-day control.


"There was in fact a shortfall of funds proposed to be raised for the mortgage. Global did not disclose this fact to the

mortgagees and the loan proceeded despite the shortfall. This, it is said by the plaintiffs, is evidence that the mortgagees did

not have day-to-day control of the investment. The flaw in this argument is that the broker could create the situation said to

evidence a lack of day-to-day control on the part of the investors by failing to act appropriately or lawfully with respect

to the investment or failing to keep the investors properly advised."




I consider, however, that the power of Global to control the disbursement

of the investors' money is evidence that the investors did not have day-to-day control in fact over the disbursement of the money (or any

other aspect of the scheme).


" … the members do have day-to-day control over the operation of the scheme. That, I think, is the effect of their rights under

the mortgage. Such was the nature of the investment that in fact, all things being equal, there was no need for any

day-to-day control over the operation of the scheme. The scheme called for money to be pooled and lent and secured by

mortgage with interest to be paid monthly. Nothing else was required. But when some steps needed to be taken, for instance, when there was a default under the loan, it was the mortgagees

who had the right to act and not a scheme manager."

This analysis cannot, with respect, be accepted. The uncontested facts

indicated that there were numerous activities which Global, as promoter and operator of the scheme, would, in the ordinary course, undertake prior

to, during and after the 12-month term of the loan. See par 122 above. Further, the uncontested facts revealed that prior to 19 February 1999,

when the administrators were appointed, Global in fact performed numerous managerial activities in relation to the scheme. See par 124

above. These managerial activities of Global in relation to the scheme are not, however, to be imputed to the investors in determining whether the

investors had day-to-day control in fact. Finally, in this context, the circumstance that the investors (and not Global) would determine the enforcement action (if any) to be taken consequent upon default under the

loan does not indicate that the investors had day-to-day control in fact over the operation of the scheme. The determination of whether any and,

if so, what enforcement action should be taken consequent upon default is not a routine, ordinary, everyday business decision relating to the

management of the scheme.

Global operated an unregistered managed investment scheme

129 The appellants have established grounds 1 and 2 of the appeal. Global promoted and operated, and the investors were members of, an

unregistered managed investment scheme.

Ground 3





" … even if … this was a managed investment scheme, there is,

in my view, no basis for making the orders sought by the plaintiffs. The power given to the Court under s 601EE(2) of

the Act is a power to wind up the managed investment scheme. Here there is nothing to wind up."

I have held, however, that the programme or plan of action promoted and operated by Global was a managed investment scheme, and that the

characteristics of the scheme included:

(a) the repayment of the loan by Newrose at the expiration of

the 12-month term; and

(b) if the loan was not repaid by Newrose at the expiration of

the 12-month term, the repayment of the investors by the enforcement of their rights and remedies under the mortgage or by the enforcement of Mr Sadek's guarantee.

131 In Interstate Mortgage & Investments Pty Ltd v Australian Securities & Investments Commission, unreported; SCt of NSW

(Austin J); 22 July 2002, an application was made under s 601EE for the winding up of certain managed investment schemes, in essence solicitors'

mortgage schemes, operated by the plaintiff company. The plaintiff made the application under s 601EE(1)(b) as "the person operating the scheme".

There was evidence that the plaintiff operated the mortgage schemes in question, but that changes to the regulation of managed investment

schemes had made it necessary for the schemes of the plaintiff, with respect to the law firm Halliday & Stainlay, to be wound down. On

12 July 1999, Halliday & Stainlay entered into an agreement under which another company assumed the role of the plaintiff in relation to the lending facilities of the mortgage practice which were not in default.

There were eight remaining lending facilities and these were in default. Austin J said, at [5]:

"The jurisdictional question which arises in these circumstances is whether it is appropriate to describe the plaintiff as the person

operating the scheme under s 601EE(1)(b) when the various mortgages under administration by the plaintiff are mortgages

in default and the plaintiff's activity relates to realising security rather than conducting anything like an ongoing business. It

seems to me that the natural meaning of the words 'operating the scheme' is wide enough to encompass the activity by way of

winding down and realisation of security that I have described




because that activity is a natural part of the operation of such a

scheme."

See also the observations of Barrett J in Takaran, at 400 - 401 [45] - [48].

132 In my opinion, it is not correct to assert that, in the case of the unregistered scheme in which the investors have an interest, "there is

nothing to wind up". The enforcement of the investors' rights and interests under the mortgage granted by Newrose and the guarantee

provided by Mr Sadek, and the distribution to the investors of the net balance realised upon the enforcement of those rights and interests, are

characteristics of the scheme. Those rights and interests are part of the scheme property, and may be the subject matter of winding up orders

under s 601EE. It is irrelevant that Global has ceased to operate the scheme.


"If the Court were to appoint a receiver … it would be subverting the indefeasible rights of the [first respondents] were

it to direct that a receiver sell the property. To do so would be inappropriate and, since there is no other purpose for the

appointment, an order appointing a receiver should not be made."

I am unable to uphold this reasoning and conclusion.

134 It was common ground between the parties before the learned Judge,

and before this Court, that the exercise of the investors' powers under the mortgage granted by Newrose requires the unanimous approval of the

investors. (The position in relation to the enforcement of rights and remedies by mortgagees who join in contributing the moneys secured, either in equal or in unequal shares, and who take the mortgage as tenants

in common, is summarised in Francis & Thomas, "Mortgages and Securities", 3rd ed, pp 71 – 72. See also Owen v Carrington Confirmers

Pty Ltd (in liq), unreported; Fed C of A; 28 April 1995; Drake v Templeton (1913) 16 CLR 153.) I have mentioned that the proceedings

were commenced by the appellants in consequence of the failure of the parties to agree upon the manner in which their security should be

enforced.

135 The concept of indefeasibility of title, in the context of Torrens

system land, refers to a title which cannot, in general, be defeated or annulled. There are, of course, exceptions. Generally see ss 52, 63, 67,

68, 76, 134, 188(ii), 199, 202, 222 and 231 of the Transfer of Land Act.




In Leros Pty Ltd v Terara Pty Ltd (1992) 174 CLR 407, at 419,

Mason CJ, Dawson and McHugh JJ said:

"It is an incident of the indefeasibility of the title of the

registered proprietor not only that he or she holds free from prior unregistered interests, except those specified in s.68, but

also that he or she has the capacity to transfer a title to the interest of which he or she is proprietor to a successor, free from

such unregistered interests."

136 Section 68 and other provisions of the Transfer of Land Act are not,

however, inconsistent with the existence and enforcement of personal rights as between or as against registered proprietors. See Hillpalm Pty

Ltd v Heaven's Door Pty Ltd (2004) 220 CLR 472 at 491 [54].

137 The making of an order for the winding up of the unregistered scheme in which the investors have an interest would not impeach the

investors' title under the mortgage granted by Newrose.

138 If this Court were to appoint a receiver to wind up the scheme, with

power to sell the East Perth land under the mortgage, the capacity of the first respondents to maintain the deadlock which has arisen in relation to

the realisation of the investors' security would, of course, be defeated. Presumably, the learned Judge, in referring to the subversion of the

"indefeasible rights" of the first respondents, had in mind their power to prevent a sale of the East Perth land, or otherwise prevent the realisation

of the investors' security under the mortgage, in consequence of the requirement that the investors act unanimously.

139 Parliament may, by a clearly expressed intention in a subsequent enactment, qualify or override rights and powers which a registered mortgagee would otherwise have under the Transfer of Land Act or the mortgage. Compare Miller v Minister of Mines [1963] AC 484 at 494; Pratten v Warringah Shire Council [1969] 2 NSWR 161 at 164 - 167;

Quach v Marrickville Municipal Council [Nos 1 & 2] (1990) 22 NSWLR 55 at 63 - 64; Hillpalm Pty Ltd at 504 – 505 [98] – [99].

140 In my opinion, Parliament intended that the Court should have power under s 601EE to order the winding up of an unregistered managed

investment scheme where, as in the case under appeal:

(a) the scheme property includes an estate or interest in

Torrens system land (including a registered mortgage); and




(b) several persons hold that estate or interest as tenants in

common, and are required to act unanimously in relation to it (including, in the case of a registered mortgage, in

relation to the enforcement of rights under it).

141 Section 601EE(2), which empowers the Court to make any orders it

considers appropriate for the winding up of an unregistered managed investment scheme, is part of a statutory framework that is designed to

regulate managed investment schemes which require registration, and facilitate the winding up of unregistered schemes. The broad and general

power in s 601EE(2) is an integral part of a comprehensive set of provisions which deal specifically with managed investment schemes

including unregistered schemes.

142 The appellants have established ground 3 of the appeal.

The learned Judge's decision should be set aside

143 For the reasons I have given, the learned Judge's decision to dismiss the appellants' application should be set aside.

How should the appellants' application be determined?

144 It is therefore necessary for this Court to determine whether the

unregistered scheme in which the investors have an interest should be wound up under s 601EE.

145 No doubt, the rights and interests which the members of an unregistered managed investment scheme have acquired under the

scheme, and the manner in which any orders under s 601EE(2) may affect those rights and interests, must be considered by the Court in the exercise

of its discretion to make orders.

146 The first respondents have acquired rights and interests under the mortgage granted by Newrose. In particular, the first respondents are

entitled to withhold their consent to the sale of the East Perth land. Subject to s 601EE, the investors' security under the mortgage may not be

realised without the unanimous consent of all of the investors. The first respondents are also owed more money than any of the other investors.

They jointly advanced $1,400,000 of the total amount of $3,705,000.

147 In my opinion, however, the rights and interests of the first

respondents are significantly and decisively outweighed by other facts and considerations which militate strongly in favour of the exercise of the




Court's power under s 601EE to order winding up. These other facts and

considerations are as follows:

(a) Newrose has been in default under the mortgage since in

or about February 1999 (that is, for more than 7 years);

(b) attempts were made by the investors to sell the East Perth

land in 2000 and 2001, but no offers to purchase were received;

(c) since November 2001 there has been a deadlock between the investors in relation to the enforcement of their

powers of sale under the mortgage;

(d) the only revenue derived from the property is

significantly less than the holding and other costs which the investors are incurring;

(e) there is no credible evidence that the investors are likely

to recover significantly more money by postponing for a specified period or the foreseeable future the realisation

of their security under the mortgage; and

(f) some of the appellants are elderly and in retirement; they

need to realise their security, and obtain income by re-investing their share of the net sale proceeds.

148 In these circumstances, I consider it just and equitable that orders be made under s 601EE for the winding up of the unregistered scheme, and

for the appointment of a receiver with power to sell the East Perth land.

Conclusion

149 I would allow the appeal. Counsel should be heard as to the precise terms of the orders.


[2006] WASCA 71

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