New South Wales Supreme Court CITATION : ASIC v Karl Suleman Enterprizes Pty Ltd & Ors [2006] NSWSC 91 HEARING DATE(S) : 24/11/03, 09/12/03, 31/05/04 Written Submissions: 27/05/04, 29/04/05 JUDGMENT DATE : 28 February 2006 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Orders for restoration of bank cheques or quarantined proceeds thereof CATCHWORDS : CORPORATIONS - unregistered managed investment scheme - bank cheques delivered by would-be investors with view to entering into loan deed with operator of scheme - whether loan contract made - whether bank cheques or quarantined proceeds held by liquidators of operator on trust for would-be investors CASES CITED : Australian Securities and Investments Commission v Karl Suleman Enterprizes Pty Ltd (2003) 177 FLR 147 Australian Securities and Investments Commission - Plaintiff Karl Suleman Enterprizes Pty Limited (in liq) - First Defendant Suleman Investments Pty Limited - Second Defendant Karl Suleman - Third Defendant Vivian Suleman - Fourth Defendant Paul G. Weston and Neil R. Cussen - Fifth Defendants Pal Holdings Pty Limited - Sixth Defendant Froggy Holdings Pty Limited - Seventh Defendant Froggy Music Pty Limited - Eighth Defendant Froggy Mobiles Pty Limited - Ninth Defendant Froggy Mobiles (Western Sydney) Pty Limited - Tenth Defendant Froggy Mobiles (Eastern Sydney) Pty Limited - Eleventh Defendant PARTIES : Capital Finance Australia Limited - Twelfth Defendant Jesse George - Thirteenth Defendant Michael Yousef - First Applicant Nabel Audisho - Second Applicant Yashar Sarkiss - Third Applicant Mark Graczer - Fourth Applicant Samy Dawood Baba Ishak - Fifth Applicant Farha Melkei - Sixth Applicant David Mansour - Seventh Applicant Waala Soro - Eighth Applicant Chris Mansour - Ninth Applicant Brijida Yalda - Tenth Applicant Karl Suleman Enterprizes Pty Limited (in liq) - Respondent FILE NUMBER(S) : SC 5415/01 COUNSEL : Mr J.T. Johnson - Applicants Mr C.D. Wood - Liquidators SOLICITORS : Watson Mangioni - Applicants Coudert Brothers - Liquidators IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J TUESDAY, 28 FEBRUARY 2006 5415/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v KARL SULEMAN ENTERPRIZES PTY LIMITED (IN LIQUIDATION) & 12 ORS JUDGMENT 1 Ten applicants seek orders against the liquidators of Karl Suleman Enterprizes Pty Limited and Suleman Investments Limited. The order sought by each applicant is an order that the liquidators restore to the applicant a bank cheque delivered by the applicant before commencement of the windings up or, if the bank cheque has been presented and paid and the proceeds are held in segregated form by the liquidators, that the liquidators pay those proceeds to the applicant. As will be seen, each applicant's claim really relates to Karl Suleman Enterprizes Pty Limited ("KSE"). I approach the applications accordingly. 2 These applications follow on from directions given to the liquidators by the court on 15 May 2003: see Australian Securities and Investments Commission v Karl Suleman Enterprizes Pty Ltd (2003) 177 FLR 147. The substance of that decision was that, where persons had delivered bank cheques to KSE with the intention of investing in debentures in circumstances of illegal solicitation and an illegal investment scheme, on the part of that company, which bank cheques (or the quarantined proceeds thereof) were held intact by the company's liquidators and no contract had been concluded between the parties, the liquidators were justified in returning the bank cheque (or quarantined proceeds) to the person from whom they had been received. This was because, for reasons set out at paragraphs [24] and following of the earlier judgment, the moneys were held upon a constructive trust for the person who had provided them. 3 Expressly excluded from the directions given to the liquidators were persons named in sub-paragraphs (i) to (ix) of paragraph 21 of the affidavit of Paul Gerard Weston sworn on 24 October 2002 and filed on 25 October 2002 (see paragraph [31] of the earlier judgment). Those persons were, according to the affidavit, persons of whom it could not clearly be said that KSE had entered into no investment contract with them. Persons with whom KSE had entered into an investment contract were seen as standing on a different footing to those who had not. That matter was dealt with at paragraphs [20] to [23] of the earlier judgment: "[20] The unpresented bank cheques and the money in the specially established bank account are the property of the first defendant – or, more precisely, it was submitted by Mr Thomson that this is the case and there is nothing in the facts before me to suggest otherwise. It follows that if restitution based on illegality is to cause the particular funds to be returned to the persons by whom they were paid, it will have to be seen that those persons have an equitable claim in respect of the specific property. It is here that the position of persons with whom the first defendant actually entered into the contracts differs from that of persons who, although they had paid money, never became the recipients of a contractual promise of the first defendant. [21] I have referred earlier to the possibility of an investor's electing to rescind the contract based in or proceeding from the illegal offer or invitation. Mr Thomson's suggestion that an investor who has become party to such a contract may rescind was founded on the proposition that the first defendant was guilty of fraudulent misrepresentation but, as I have said, I do not think that the evidence allows me to come to such a conclusion in relation to any particular contract. I therefore need to consider whether the unlawful conduct of the first defendant to which I have referred (that is, solicitation of investment in circumstances of illegality attracting the s.727 sanction) is of itself sufficient to justify rescission by an investor. That will depend on the circumstances of each case. At most, it seems to me, an investor will have a right to have the court set the contract aside on the basis that he or she was induced by unlawful conduct of the first defendant to enter into it ignorant of the illegality and that equitable intervention is justified on the basis of unconscionability. But the availability of that equitable relief may depend in part on the quality of the investor's own conduct. In seeking to assert and enforce an equity to rescind a contract (or, more correctly, to have the court set it aside), an investor would have to present a case that was not successfully met by a defence based on some factor constituting a disentitlement to equitable relief or a barrier to the grant of that relief. [22] A person who is party to one of the already concluded contracts under discussion therefore cannot, in my view, be presumed to be entitled to an order setting aside the contract. Such a right will depend on the circumstances of the particular case. Each instance will have to be separately examined and adjudicated upon. This is not a 'one size fits all' situation. And since, in the case of investors with concluded contracts, rescission of the contract would be an essential prerequisite to any grant of restitutionary relief of the kind I have outlined, it is not appropriate that the court give to the liquidators any direction with respect to those cases. [23] The persons I have called 'would-be investors' – that is, those who delivered bank cheques but never received any contractual promise – stand in a different position. They are not parties to any contract and there is no question of contracts being rescinded as part of machinery causing the funds handed over by them to be restored. The situation is one in which there is simply no pretext at all for retention of the funds by the first defendant. Even if the moneys have passed into the ownership of the first defendant, that has occurred in circumstances where it cannot conceivably assert any right to retain them, the payment having been made and received for a purpose that must be taken to have been abandoned by both parties. Following the collapse of the first defendant and assumption by its liquidators of responsibility for corporate decision making, it must be accepted that the would-be investor no longer intends to become party to a loan agreement with the first defendant and that the first defendant no longer intends to become party to a loan agreement with the would-be investor. Whichever theory of the doctrine of total failure of consideration one adopts, there has been a total failure of consideration in relation to the would-be investors." 4 The threshold question to be considered in relation to each applicant is whether a contract was made between the applicant and KSE. If the answer, in relation to a particular applicant is "no", the position of that applicant will be the same as that of the would-be investors considered in the earlier judgment. But if the answer is "yes", it will be necessary to examine the applicant's position in the light of the principles and possibilities referred to in the paragraphs of the earlier judgment quoted above. It will, of course, be necessary to examine the position of each applicant separately. Most of the applicants are of Assyrian background and became aware of KSE investment opportunities by word of mouth within the Assyrian community. Beyond that, the circumstances affecting them differ. 5 I begin with the seventh applicant named in the interlocutory process, David Mansour. He deposes that, in October 2001, he decided to invest $25,000 in the KSE business. He obtained a bank cheque for that amount, made out to KSE from the ANZ Bank on 31 October 2001. The possibility of investing with KSE had been broached with Mr Mansour by his brother, John, and his affidavit makes it clear that John played a part in arranging the investment. Having obtained the bank cheque, David Mansour met with John shortly after 31 October 2001. John said, handing him a document: "This is the application form that you need to fill out for the investment. I've done one. You will get a contract in the mail after your details are processed." 6 A copy of the document is attached to David Mansour's affidavit. It contains merely headings against which particulars are entered. It contains no operative contractual language and no words of application. Nor is there provision for signature. 7 Mr Mansour testifies that he completed the form and gave it to John with the bank cheque. John said to him: "I'll pass all of our applications and cheques to Sami [John's wife's cousin] and he will pass them on." 8 Mr Mansour afterwards tried to have the bank cheque cancelled but the bank would not agree, as it had been deposited into a trust account of the liquidators and paid. The proceeds are thus quarantined in that account. Mr Mansour testifies that he did not sign anything beyond what he called the application form and that he received no document from KSE. 9 The first applicant named in the interlocutory process is Michael Yousef, an architect. He became aware of the investment opportunity in October 2001 through a client who put him in touch with a KSE "agent", Mr Ajaka. Mr Yousef and his wife met Mr Ajaka who gave them a document. Subsequently, on 6 November 2001, Mr Yousef and his wife met Mr Ajaka again and Mr Yousef handed him a bank cheque for $125,000 drawn in favour of KSE and obtained by Mr Yousef, whereupon Mr Ajaka gave them a contract to sign. Mr Yousef's affidavit continues: "14. Mr Ajaka then gave to me the contract to sign. When I looked at it I observed that my surname and Christine's had been spelt incorrectly. I said to Mr Ajaka: Yousef: 'Our names are not spelt correctly. Yousef is "ef" not "if".' Ajaka: 'I will have to have the contract amended. You cannot sign the contract with your names spelt wrongly and we can't hand write any amendments on it. I will take it away and amend it and I will come to your home and get you to sign it. But you can leave with me your cheque and I will date the contract today, so that you are ensured your payment on the fifteenth of this month'. Yousef: 'Okay. That's fine. When will you come over?' Ajaka: 'I will call you.' 15. On 9 November 2001, Mr Ajaka came to my home and Christine and I signed the Contract. Mr Ajaka said to me, words to the effect: Ajaka: 'I will send to you a copy of the Contract. You will receive your first payment on the fifteenth of this month.'" 10 Mr Yousef later tried to have payment of the bank cheque stopped but was unsuccessful. He was told by his bank that it has not been presented. This happened on 12 November 2001. He deposes that he did not receive any signed contract from KSE. 11 The document signed by Mr and Mrs Yousef is annexed to Mr Yousef's affidavit. It is expressed to be a deed and bears the date 6 November 2001. The parties are expressed to be Mr and Mrs Yousef and KSE. The main operative content is a promise by KSE to repay the principal sum of $125,000 plus interest. The document carries the signatures of Mr and Mrs Yousef, both attested by Mr Ajaka. Because other cases also involve a document in this form, I shall refer to the form as "the standard form". 12 I consider next the circumstances of the second applicant, Nabel Audisho. He too dealt with Mr Ajaka, having been introduced to him by others. He met Mr Ajaka on 6 November 2001 outside the office of KSE in Liverpool. Mr Ajaka was on his way to some other place but produced a form of contract for Mr Audisho to sign. Mr Audisho went into the office alone, signed the document (which was in the standard form) and left it with a person at the KSE office, together with a bank cheque for $23,750 in favour of KSE. A copy of the document which he signed is annexed to his affidavit. His signature is attested. There is no execution by KSE and Mr Audisho did not at any time receive a document executed by or on behalf of KSE. He, like the others, tried to have payment of the bank cheque stopped but was unsuccessful. He was told by an employee of the liquidators' firm that it had been deposited into their trust account. 13 The third applicant, Yashar Sarkiss, became aware of KSE through various members of the Assyrian community. He was introduced to a Mr Waseem with whom he went to an office in Smithfield on 8 November 2001. He there gave Waseem a bank cheque for $25,000 payable to KSE, whereupon Waseem produced some papers and the following conversation took place: "Waseem: 'Look. Karl's not here to sign the contract. He'll look at it and then sign it and we'll send you a copy. But you must sign the contract.' Sarkiss: 'Ok. Where do you want me to sign?'" 14 Mr Sarkiss then signed a document in the standard form. A copy is annexed to his affidavit. His signature is not witnessed. Mr Waseem asked that, when "Karl signs the contract and sends it", Mr Sarkiss send Mr Waseem a copy. Mr Sarkiss never received a signed document. He was subsequently unsuccessful in his attempts to have payment of the bank cheque stopped. 15 I next consider the fourth applicant, Mark Graczer. He heard of KSE at his local fitness centre. Through contacts there he was introduced to a Mr George. On 21 September 2001, he went by arrangement to an office at Liverpool where he met Mr George. He gave Mr George a bank cheque for $25,000 in favour of KSE that he had brought with him. Mr George gave him a document which he signed. A copy is in evidence. The document is expressed to be a deed and is dated 14 September 2001. The parties are named as KSE and Mr Graczer. Although not in the standard form, the document is a loan agreement. It bears Mr Graczer's signature. There is also an indecipherable signature on the line for "Signature of authorised person" in the section labelled "Executed by Karl Suleman Enterprizes Pty Limited …". The indecipherable signature is not witnessed. 16 Mr Graczer received payments from KSE. He received $2,000 on each of 3 October 2001, 15 October 2001 and 31 October 2001. 17 Mr Graczer took steps to make a further investment in November 2001. This decision was made after receipt of the payment of $2,000 on 31 October 2001. Again, Mr Graczer saw Mr George and gave him a bank cheque for $25,000. This was on 5 November 2001. He signed another contract. He does not have a copy of it. He did not receive any document executed by or on behalf of KSE. Nor did he receive any payment in respect of the second investment. He attended a meeting of creditors on 19 November 2001 at which one of the administrators "said, in substance, that anyone who had invested after 5 November 2001 and handed over a bank cheque, that those bank cheques had been placed into a separate trust account by the liquidators and that as long as we could provide proof of the bank cheque and a photocopy of it, we would be able to get our money back". 18 The fifth applicant is Samy Dawood Baba Ishak, a shop fitter. He heard of KSE from a co-worker. He also knew of Karl Suleman through his church. He went with his father to the office of a David Vrada in November 2000 but decided not to invest, although he took a copy of a form of contract given to him by Mr Vada. Mr Ishak's interest was rekindled after he heard favourable reports of Karl Suleman at a New Year's Eve party at the end of 2000. He took the form of contract to his solicitor who neither recommended nor rejected investing in KSE. Mr Ishak's interest waned again but returned in October 2001 after he spoke to a client of his employer. The client suggested he contact Jesse George. He visited Mr George's office on 7 November 2001 where he was seen by Emmanual Kadu. He gave Mr Kadu a bank cheque for $22,000 and $500 in cash. He also signed a contract which he recognised as similar to the form he had been given by Mr Vrada. A copy of the contract is annexed to his affidavit. It is in the standard form and bears his signature but there is no signature of a witness; nor is there execution by or on behalf of KSE. On 9 November 2001, Mr Ishak became aware that "Karl Suleman had been busted" and contacted Mr Kadu in an attempt to receive the bank cheque and $500 cash. Mr Kadu eventually returned the $500 but said he could not give back the cheque as it had been given to Karl Suleman. Mr Ishak, like Mr Graczer, attended the creditors' meeting on 19 November 2001 and received the same information about deposit of cheques into a separate trust account. 19 The sixth applicant is Fahra Melkei. She heard of KSE through her cousin who suggested she contact Jesse George to invest. In the end, the cousin acted as an intermediary and, on 6 November 2001, brought Ms Melkei a contract in the standard form which she signed, at the same time giving the cousin a bank cheque for $25,000 in favour of KSE. A copy of the document is in evidence. It carries Ms Melkei's signature but her signature is not attested; nor is there any execution by or on behalf of KSE. She did not receive any document executed by KSE. After hearing, a few days later, that Karl Suleman was being investigated, she contacted Jesse George and tried to retrieve the bank cheque. He said he did not have it. She later discovered through her bank that the cheque had been deposited into the liquidators' separate trust account. 20 The eighth applicant is Waala Soro, a café proprietor. He decided to invest in KSE in August 2001. On 20 August, he met a Mr Salman at KSE's office in Liverpool. He handed over a bank cheque for $24,400 and signed a document in substantially the same form as Mr Graczer's document referred to in paragraph [15] above. A copy of the document is in evidence. It is expressed to be a deed. Mr Soro's signature appears on it but is not witnessed. As in the case of Mr Graczer, there is an indecipherable signature in the space for execution by KSE and no signature of an attesting witness. Mr Soro received five payments of $2,000 each in respect of this investment between August and October 2001. 21 Mr Soro took steps to invest a further $90,000 in October 2001. He met Jesse George at the KSE office in Liverpool and gave him a bank cheque for $90,000, at the same time signing a document which he describes as "similar to" the one signed on the first occasion. No copy of this document is in evidence. Mr Soro did not receive any document purportedly executed on behalf of KSE. 22 Mr Soro took steps to make a third investment on 6 November 2001 when he went again to the KSE office and saw a man whose name he does not recall but who introduced himself as "an agent for Mr Suleman". He gave the man a bank cheque for $22,500 payable to KSE and asked for a contract. The man said that he would have to wait until the next day for Mr Suleman to sign a contract. The man asked Mr Soro to sign a contract (which he says was similar to the first one). The contract and the cheque were left with the man. Mr Soro never received any contract executed by KSE. 23 After hearing that KSE was in trouble, Mr Soro saw a solicitor. It was established that the cheque for $22,500 had been paid into the liquidators' separate trust account. He made a statutory declaration on 18 July 2002 referring to the $22,500 investment and saying that the funds "were sourced from my resources and independent of any distribution of capital and interest from the investment scheme operated by Karl Suleman Enterprizes or any person or corporation related to Karl Suleman or Karl Suleman Enterprizes Pty Ltd, except the sum of $8,000". On 9 July 2003, the liquidators paid $14,500 to Mr Soro. The covering letter said: "The balance of $8,000 will be refunded to you once the Court is satisfied with the fact that those funds were sourced from repayments from a previous contract does not have any impact on the moneys due to be refunded to you in accordance with the directions given by the Court." 24 The ninth applicant is Chris Mansour, a dental technician. He became aware of KSE through the Assyrian community. He made an inquiry about investing by direct contact with the KSE office at Fairfield in September or October 2001. On 5 November 2001, he obtained a bank cheque for $17,750 and took that, with cash of $7,250, to the Fairfield office. He saw a man called Zaia who introduced himself as "an agent for Mr Suleman". A woman was with Zaia. Mr Mansour gave Zaia the bank cheque and cash. Zaia gave him a document and left the room. The woman told him that he must sign the contract, pointing to the places in the document to be signed. She also said, "When Mr Suleman is back from his trip, I will get him to sign it and then send you a copy of the signed contract". He signed as asked but did not get a copy of the document at that time. A copy annexed to his affidavit shows it to be in the standard form, with Mr Mansour's signature appended but unattested and with no execution by or on behalf of KSE. He never received any document executed by KSE. 25 The tenth applicant is Brijida Yalda. She heard of KSE through the Assyrian community. A friend, Julia Marha, told her of having invested in KSE. After discussion with her husband, Ms Yalda decided to invest. Her husband obtained a bank cheque for $12,500 in favour of KSE on 5 November 2001. Ms Marha brought a contract document to Ms Yalda's home on the same day. Ms Yalda signed the document and gave it to Ms Marha together with the bank cheque. Ms Marha said that she would give the document and the cheque to her cousin "who is Karl Suleman's agent". Ms Yalda never received any document. About a week later, Ms Yalda heard through the Assyrian community that the business of Karl Suleman had collapsed. Her husband tried to stop payment of the bank cheque but was unable to do so. She has been told by the liquidators that the proceeds are in their trust account. 26 Evidence filed by the liquidators makes it clear that the funds provided by all ten applicants are held intact in quarantined form, so that no difficulties of tracing arise. 27 The cases of Michael Yousef, Nabel Audisho, Yashar Sarkiss, Samy Ishak, Fahra Melkei and Chris Mansour may be dealt with together. In each of those cases, the applicant concerned gave a bank cheque in favour of KSE to a person who was believed to have some kind of contact or association with KSE and signed a document expressed to be a deed between KSE and the applicant; there was, in most cases, no attestation of the applicant's signature; there is no evidence that KSE ever executed the deed; and the applicant never received a document executed by KSE. Nor, importantly, did the applicant receive, in respect of the sum paid over, any payment retention of which might have indicated the applicant's acquiescence in the existence of a contractual relationship with KSE. 28 It cannot be accepted that each of these six persons intended to relinquish his or her interest in the relevant moneys at the point of handing over the bank cheque. The intention could only have been that KSE's promises under the foreshadowed deed would be received by the person and that a loan would be completed. None of the supposed intermediaries with whom these persons dealt is shown to have had authority to bind KSE. Each dealing was on the basis that the supposed intermediary would convey the bank cheque and partially signed document to KSE, on the footing that KSE would then execute the document and provide the promise to repay that was of the essence of the loan. On the evidence before me, that promise was never given in any of those six cases. 29 The six cases just mentioned are thus of the kind referred to at the beginning of paragraph [23] of the earlier judgment. Each of the six persons is a "would-be investor" of the kind there mentioned, that is, a person who delivered a bank cheque but never received any contractual promise. In each such case, therefore, there was a total failure of consideration and the moneys now held by the liquidators of KSE in quarantined form are, for the reasons stated in the earlier judgment, held upon a constructive trust for the person by whom they were provided. 30 The conclusion just stated also applies to David Mansour. He dealt only with his brother John. There is no suggestion that John had authority to bind KSE. He was himself investing at the same time. Mr Mansour did not sign any contractual document. The document he completed contained no more than a list of particulars. He was told by his brother that once the cheque and the list of particulars had been submitted, "You will get a contract in the mail …". Mr Mansour received no such document. The situation was thus clearly one in which money was paid in anticipation of the making of a contract which was never made. 31 The same principles govern the case of Brijida Yalda. Her situation is the same as that of the six persons dealt with at paragraphs [27] and [28] above, save that there is no evidence of the form and content of the document she signed. It is clear, however, that she did not deal with any person having authority to bind KSE; also that she never received any document containing contractual promises by KSE. She, like the others, parted with her money on the basis that she was to receive contractual promises in return. She, like them, was accordingly in a position where she never became party to any contract referable to the moneys comprised in the bank cheque handed over by her. 32 That leaves for consideration Mr Graczer and Mr Soro. Their circumstances differ from those of the other applicants in that they had made earlier investments and had received returns. But in each case, the application now before me is advanced in relation only to a separate attempted transaction undertaken in early November 2001 (on 5 November in Mr Graczer's case and 6 November in Mr Soro's case). As regards those attempted transactions, the facts are, in essence, the same as in the cases with which I have already dealt. A bank cheque was handed over on the basis that a contractual promise of payment would be given in return, but no such promise was ever given. The same principles therefore apply to produce a finding that the relevant funds are held upon a constructive trust for the person who provided the bank cheque. 33 I am accordingly of the opinion, in relation to each of the ten applicants, that the threshold question posed at paragraph [4] above must be answered "no", with the result that each is entitled to recover from the liquidators either the bank cheque still held in unpresented form or the quarantined proceeds thereof held in the liquidators' trust account. 34 The orders of the court are as follows: 1. Order that Paul G. Weston and Neil R. Cussen, in their capacity as liquidators of Karl Suleman Enterprizes Pty Limited, restore to each of the following applicants the bank cheque in an amount indicated against the name of the applicant received from the applicant and held by those liquidators (or, if the bank cheque so received has been presented and paid and the proceeds are separately held in a trust bank account of the liquidators, pay those proceeds to the applicant together with such interest, if any, as has been earned upon the proceeds in the trust account): Michael Yousef - $ 125,000 Nabel Audisho - 23,750 Yashar Sarkiss - 25,000 Mark Graczer - 25,000 Samy Dawood Baba Ishak - 22,000 Fahra Melkei - 25,000 David Mansour - 25,000 Waala Soro - 22,500 Chris Mansour - 25,000 Brijida Yalda - 12,500 2. Order that the costs of the applications be costs and expenses of the winding up of Karl Suleman Enterprizes Pty Limited. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.