New South Wales Supreme Court CITATION : ASIC v Elm Financial Services Pty Ltd & Ors (No 2) [2004] NSWSC 335 HEARING DATE(S) : 14 April, 2004 JUDGMENT DATE : 14 April 2004 JURISDICTION: Equity Division JUDGMENT OF : Palmer J DECISION : Interim orders made. CATCHWORDS : CORPORATIONS - FUNDRAISING - INTERIM ORDERS - investment schemes promoted - ASIC alleges breach of disclosure requirements of Part 6D.2 Corporations Act - whether interim compliance orders and asset preservation injunctions justified. LEGISLATION CITED : Corporations Act 2001 (Cth) - s.708, s.1324(4) Australian Securities and Investments Commission - Plaintiff Elm Financial Services Pty Ltd - First Defendant Elm Nominee Services Pty Ltd - Second Defendant Elm Management Services Pty Ltd - Third Defendant Elm Property Developments Pty Ltd - Fourth Defendant Fletcher Securities Pty Ltd - Fifth Defendant PARTIES : E Star Developments Redfern Pty Ltd - Sixth Defendant E Star Developments Surry Hills Pty Ltd - Seventh Defendant Dennis Howell Terracini - Eighth Defendant Andrew Dennis Terracini - Ninth Defendant Duncan Grant McCartney - Tenth Defendant Robert John Kay - Eleventh Defendant Howard Young - Twelfth Defendant FILE NUMBER(S) : SC 2313/04 COUNSEL : D.R. Stack - Plaintiff M.A. Pembroke SC, A. Harding - Defendants SOLICITORS : Jan Redfern - Plaintiff Turks Legal - Defendant Ex tempore 1 On 6 April 2004, the Plaintiff ("ASIC") applied ex parte to Campbell J for orders against the Defendants designed to protect the positions of members of the public who had invested in various investment schemes promoted by the corporate Defendants, or some of them. 2 His Honour granted ex parte relief, including the making of what were referred to as compliance orders, the making of what were referred to as investor asset preservation orders, a Mareva injunction and consequential relief. The proceedings were stood over before the Duty Judge today and I have heard substantial argument from the parties. Mr D.R. Stack appears for ASIC and Mr M.A. Pembroke SC and Mr A. Harding appear for the Defendants. 3 At the outset, Mr Pembroke informed me that he was not in a position to fight the matter on a fully contested basis. This was so because of the urgency with which the matter had been brought on. Nevertheless, Mr Pembroke contended that the ex parte relief granted by Campbell J should not be continued for a variety of reasons. The first was that there had been inadequate disclosure of circumstances to his Honour by the Plaintiff on its ex parte application and that, if those matters had been disclosed, it is likely that the orders made by his Honour would either have not have been made at all or would not have been made in the terms in which his Honour made them. 4 The second basic ground of opposition to the continuation of the orders was that they were far wider than was necessary or appropriate and would inflict greater damage than was necessary on the Defendants and their operations in order to protect the position of the investors in the various schemes. 5 Mr Stack said that he would formally apply for the appointment of a receiver to the corporate Defendants, but the essence of the disputes between the parties today has been as to whether the compliance orders and the asset preservation orders and the Mareva injunction ought to be continued. 6 I indicated early in the course of argument that in view of the shortness of time in which the Defendants have had the opportunity of preparing a substantial defence, I would not make orders today continuing any interim injunctions or orders until further order, that is indefinitely until the proceedings could be disposed of finally. I said that what I would do would be to make orders, if appropriate at all, only upon a short term basis until the matter could be brought back for fuller argument, the Defendants having had an opportunity of properly preparing for that contest. I asked Mr Pembroke how long he would need for affidavits to be filed on his side, bearing in mind the urgency and the character of the application. He informed me that he would be able to file affidavits by close of business this Friday, that is 16 April. It is with that pressure of time and in that context that I consider what relief it is appropriate to grant today. 7 I should say that I regard the matter as one of great urgency as the protection of substantial numbers of members of the public is at stake. Accordingly, I propose to make the following orders for the further disposition of the proceedings. I will stand the Plaintiff's interlocutory process over to 20 April 2004 at 10.00am before me. I expect that the matter will then be argued on a fully contested basis and in issue will be what, if any, relief should be afforded to ASIC pending final determination of the proceedings. 8 I will direct that the Defendants file and serve all affidavits upon which they intend to rely in that interlocutory application by 4pm on Friday 16 April 2004. I direct the Plaintiff to file and serve its affidavits in reply by 4pm on 19 April 2004. 9 I now turn to consider what relief, if any, should be afforded to the Plaintiff between now and the hearing on 20 April. 10 In view of the shortness of the duration of any relief to be afforded, I do not think it is appropriate at this stage to investigate in great depth the evidence which has been adduced, nor is it appropriate to comment upon it, except insofar as is necessary to demonstrate the substance of the reasons for the granting of relief. That is necessarily so because the evidence is at this stage preliminary, not only on the part of ASIC, but even more so in the case of the evidence to be adduced by the Defendants. 11 It appears that the corporate Defendants have been the promoters of a number of investment schemes. They are conveniently identified in paragraphs 7(a) to (f) of the orders that were made on 6 April. So far as the evidence presently suggests, the schemes were opened to the public for investment. No prospectuses were issued and no disclosure statements were given to investors, in reliance upon the exemptions provided by s.708(10) of the Corporations Act 2001 (Cth). Without quoting the section at length, that subsection is designed to dispense with the requirement for the provision to investors of the type of information which is usually contained in prospectuses or disclosure statements where the particular investor is of some degree of sophistication so that the full provision of the normal information for an investment is not really necessary or appropriate in the protection of the investor's interests. 12 The evidence so far adduced suggests that investors who were induced to invest in the schemes promoted by the Defendants were anything but what could properly be called sophisticated investors. The evidence so far adduced – and I emphasise that by no means is the evidence complete – suggests that the pattern of investors could be described as, generally speaking, elderly, inexperienced in any form of investment and from country areas. 13 The rates of interest offered to these investors were, at least in some cases, extremely high. The evidence also suggests that while the information made available to investors contained, in part, statements to the effect that there was no precise obligation on the part of the recipient of the funds to invest in any particular project, nevertheless, funds were to be invested in profitable projects or investment schemes, whether real estate development or shares or other ventures likely to produce profit. 14 The evidence also suggests that a substantial proportion of funds solicited from the public have been paid, not for investment in particular projects or profit-making schemes, but rather to other members of the Elm Group in order to enable them to pay interest on monies earlier solicited from the public and in order to pay other debts incurred by members of the Group. 15 While it is impossible at this stage to form any firm view as to the propriety of the schemes, it is sufficient to say that it is cause for concern that the monies are solicited from the public upon the basis of information which suggests that they will be invested in profit-making schemes but that one finds the monies being used to pay the interest owing to investors in other schemes. As I say, it is not appropriate at this stage to form a final view or even a firm view about those matters. Why I refer to them is because what has appeared at present suggests that the evidence may finally disclose a pattern of conduct on the part of the Defendants whereby investments are solicited from inexperienced and vulnerable people in the community upon the promise of high returns and those monies are being used, not for the purposes suggested in the information provided, but rather to finance the ongoing operations of the Group itself. 16 As I have observed in the course of Counsels' addresses, if that pattern of conduct is established ultimately by the evidence, then it is a pattern of conduct which is familiar to all those who have had any experience in the investment crashes of the last two decades. I do not need to say anything more about what the evidence may ultimately show. It is sufficient for my purposes to say that enough has emerged in the course of the hearing today to persuade me that some form of protection is required for the funds held by these companies until the matter can be more fully investigated when the interlocutory process is heard next week. 17 It seems to me that the asset preservation orders contained in paragraphs 7 and 8 of the orders made on 6 April should be continued. It may be, as Mr Pembroke suggests, that it will be difficult for the Defendants to comply with those orders because their records may not indicate, with sufficient clarity, where monies received in a particular scheme have gone. If that is the case, then the difficulty is one created by the Defendants and I do not think that they should now have the benefit of it. 18 It has been urged upon me that I should not make the orders in paragraphs 8 or 9 because the companies thereby affected will not be able to pay liabilities which they currently have. However, as Mr Pembroke frankly conceded in the course of submissions, there is no evidence that the making of orders in paragraphs 7 and 8 would deprive the companies concerned of all means of paying the liabilities which are referred to; in other words, there is no evidence to suggest that the relevant Defendants do not have any cash resources with which to meet their liabilities other than those which would be caught by paragraphs 7 and 8. In those circumstances, it does not seem to me that there is evidence which would lead to the conclusion that the making of the orders in paragraphs 7 and 8 would necessarily bring to a halt the continuing activities of the relevant Defendants or would deprive the relevant Defendants of their ability to survive financially, at least until the interlocutory hearing is finally disposed of. 19 The question then arises whether there should be a Mareva order in terms of paragraph 9 of the orders made on 6 April. I do not think that it has been shown that there is any real risk of the Defendants removing or permitting to be removed from this State or from Australia assets in order to avoid the consequences of any judgment which may be obtained against them. It seems to me that the continuation of the order in paragraph 9, at least between now and the hearing of the interlocutory application, is not warranted. It would expire in some twenty minutes time and I do not propose to continue it. 20 The issue arises as to whether I should continue the compliance orders provided in paragraphs 4 to 6 of the orders made on 6 April. I think that it is appropriate to make some compliance orders in exercise of the statutory jurisdiction conferred by s.1324(4) of the Corporations Act . However, I think that the terms of paragraphs 4, 5 and 6 are wider than is appropriate for such compliance orders. There are particular matters of which complaint is made by ASIC as being in breach of the sections referred to in those paragraphs and it seems to me that if compliance orders are to be made, then they should be framed in such a way as to give as much particularity as is possible to the Defendants as to what is prohibited by the orders. I would certainly be prepared to entertain an application for compliance orders framed in more precise terms than paragraphs 4 and 6 of the present orders. 21 Whether it is necessary to apply for such orders between now and next Tuesday is a matter which I leave to the good sense and discretion of ASIC. It is now late in the day and I do not think it appropriate to hear such an application now, but I will hear such an application tomorrow morning if one is sought. However, as I say, bearing in mind that proceedings are now hotly in contest and the Defendants are certainly well aware of the general nature of the complaints made against them, ASIC should consider the utility of any further proceedings between now and Tuesday which might deflect the parties from the demanding task of preparing that interlocutory application for hearing. 22 Accordingly, for those reasons I will continue the orders in paragraphs 7 and 8 of the orders made on 6 April 2004 up to 4pm on 20 April 2004. I give the directions for the preparation of those proceedings which I have earlier indicated. 23 I grant liberty to the parties to apply on such notice to the others as is reasonable in the circumstances. 24 Costs of today should be reserved. – oOo – Last Modified: 04/28/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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