Supreme Court New South Wales Medium Neutral Citation: Validus Advisory Group Pty Ltd v Consolidated Tin Mines Ltd; Consolidated Tin Mines Ltd v Validus Advisory Group Pty Ltd [2018] NSWSC 417 Hearing dates: 3 April 2018 Date of orders: 03 April 2018 Decision date: 06 April 2018 Jurisdiction: Equity - Commercial List Before: Stevenson J Decision: Cross-claimant entitled to judgment Catchwords: CORPORATIONS — Capital raising — agreement to provide corporate advisory services — whether advisor obliged to hold Australian Financial Services Licence — whether agreement related to the provision of financial services — whether advisor providing financial product advice — whether client entitled to rescind agreement under s 925A of the Corporations Act 2001 (Cth) — whether client gave notice of rescission in reasonable time EQUITY — Trusts and trustees — Resulting trusts — Quistclose trust — funds advanced on account of fees — funds held on trust — whether funds withdrawn without authority Legislation Cited: Civil Procedure Act 2005 (NSW) Corporations Act 2001 (Cth) Cases Cited: Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) (1978) 141 CLR 335; [1978] HCA 45 Australian Securities and Investments Commission v Park Trent Properties Group Pty Ltd (No 3) [2015] NSWSC 1527 Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 Compass Resources Ltd v Sherman (2010) 42 WAR 1; [2010] WASC 41 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; [1992] HCA 48 Category: Principal judgment Parties: Consolidated Tin Mines Limited (Cross-Claimant) Validus Advisory Group Pty Ltd (Cross-Defendant) Representation: Counsel: M Izzo (Cross-Claimant) Solicitors: King & Wood Mallesons (Cross-Claimant) File Number(s): SC 2017/73817 Judgment 1. On 3 April 2018 I entered judgment in favour of Consolidated Tin Mines Ltd ("CSD") against Validus Advisory Group Pty Ltd in the sum of $199,091.49 and ordered that Validus pay CSD's costs of the cross-claim. 2. These are my reasons for entering that judgment and making that order. 3. I have been greatly assisted by the clear and concise submissions made by counsel for CSD, Mr Izzo. I accept those submissions and have, with gratitude, adopted them to a very large extent in formulating these reasons. 4. CSD is a base metals minerals producer listed on the Australian Stock Exchange. From late 2015, it experienced financial difficulties and explored options to restructure the company and raise capital. 5. By an agreement dated 6 July 2016, CSD appointed Validus as its corporate advisor. 6. The agreement outlined the role and services of Validus as follows: "(a) [Validus] will complete all due diligence including accounting and legal, commission a report outlining a summary of the market's risks factors, relative business sector comparisons and a valuation all compiled into one report. (b) [Validus] will compile & complete all tasks associated with the CSD business plan, business modelling and financial forecasting this will include a prospectus for the purpose of relisting on the ASX that will include a new share structure & equity capital raise. (c) [Validus] would act as Corporate Advisor and liaise with and coordinate with ASIC, ATO, FIRB or ASX or third parties as required on matters arising as part of any restructure, placement, prospectus, capital raising, acquisition, sale or joint venture. [Validus] will assist in the structuring and negotiation of any of these agreements or proposals. (d) Providing CSD with continuing support and advice as is necessary in the scope of investor relations, acquisitions and procurement of Australian professional services." 1. Clause 3 of the agreement provided for fees in the following terms: "(a) CSD or its associates shall deposit $250,000 into a trust account in the Validus name as detailed below. Validus shall invoice CSD as required, funds shall be withdrawn from the trust account for payment of invoices upon written email confirmation by CSD. A/c Name: Validus Advisory Group Trust Swift: XXX BSB: XXX A/c: XXX (b) At the signing of this agreement, [Validus] (and/or its nominees) will receive a fee of $50,000 (plus GST) from the Trust Funds. (c) [Validus] will receive a 3% fee (plus GST) of the total amount raised and accepted by CSD, on either debt or equity raised. This fee will be payable upon Invoice." 1. In compliance with cl 3(a), $249,982 was deposited into Validus' trust account on 11 July 2016. The $18 difference is accounted for by transaction fees. 2. Less than two weeks later, on 19 July 2016, the directors of CSD resolved to appoint voluntary administrators pursuant to s 436A of the Corporations Act 2001 (Cth). On 8 December 2016 CSD entered into a deed of company arrangement ("the DOCA"). The DOCA was effectuated on 12 January 2017. 3. In the meantime, the following sums were withdrawn by Validus from the trust account: 1. on 11 July 2016, the $55,000 payable pursuant to cl 3(b); 2. between 13 and 18 July 2016, the following payments (totalling $67,700): 1. $27,500 in payment of fees to Patersons Securities Ltd; 2. $22,000 for the transfer of funds to Hall Chadwick; 3. $18,200 for the transfer of funds to Hall Chadwick. 1. Those withdrawals were authorised by CSD by "email confirmation" as contemplated by cl 3(a) of the agreement. 2. Validus withdrew the following further amounts (totalling $127,290) from the trust account: 1. $27,500 on 12 August 2016 for "Patersons CSD Fees"; 2. $5,000 on 12 August 2016 for "VAL CSD Capital Raising Presentation"; 3. $50,000 on 12 August 2016 for "VAL CSD Fees"; and 4. $44,790 on 31 August 2016 for "VAL CSD Fees". 1. CSD did not give written email confirmation for the withdrawal of those funds. 2. On 17 January 2017, Validus announced it had raised $34,060,050 in equity. 3. On 8 February 2017 Validus confirmed that the engagement under the signed mandate dated 6 July 2016 had concluded. 4. On 9 March 2017 Validus commenced proceedings in the Common Law Division of the Court seeking to recover from CSD $449,253.20, being the 3% fee referred to in cl 3(c) of the 6 July 2016 agreement. 5. At around that time, the Manager of Corporate Finance at CSD became aware that Validus may not hold an Australian Financial Services Licence ("AFSL"). 6. Accordingly, on 30 March 2017, the solicitors for CSD wrote to the solicitors for Validus stating that searches of the Australian Financial Services Licensee Register and the Australian Financial Services Representative Register (both maintained by ASIC) suggested that Validus did not hold an AFSL and sought confirmation that this was the true position. 7. The solicitors for CSD followed the matter up a few days later. On 10 April 2017 the solicitor for Validus said that he would provide a reply "this week". 8. No reply was received. 9. On 5 May 2017 CSD purported to rescind the agreement pursuant to s 925A(1) of the Corporations Act. 10. On 1 September 2017, by which time the proceedings had been transferred to the Commercial List, Validus' claim against CSD was dismissed by consent. Mr Izzo informed me the dismissal evidently reflected, amongst other things, Valdius' recognition that it could not prosecute its claim bearing in mind the terms of the DOCA. 11. In the meantime, on 12 July 2017, CSD had brought a cross-claim against Validus seeking recovery of the amounts it had paid to Validus under the agreement. 12. On 7 February 2018 the solicitors formerly acting for Validus ceased to act. 13. The claim was fixed for hearing before me on 3 April 2018. 14. When the matter was called, Validus did not appear. 15. Since then, Validus has communicated with CSD's lawyers by one or both of its directors. The evidence establishes that those directors were aware that CSD's cross-claim was listed for hearing on 3 April 2018. 16. For the following reasons, I was satisfied that CSD is entitled to recover: 1. the $55,000 it paid Validus on 11 July 2016 pursuant to cl 3(b) of the agreement; 2. the four amounts referred to at [12] above, totalling $127,290, that Validus withdrew from the trust account without authority. 1. CSD does not seek to recover the three amounts, totalling $67,700, referred to at [10(b)] above. CSD's claim for breach of trust 1. I accept CSD's submission that the $249,982 it paid to Validus was paid subject to a trust in CSD's favour. That is clear from the reference to "trust account" in cl 3(a) of the agreement and the reference to "Trust Funds" in cl 3(b). 2. As CSD submits, on proper analysis the trust is most likely a Quistclose trust, since the parties contemplated monies being held by Validus on trust for a specific purpose, namely payment of its invoices upon written email confirmation from CSD. 3. The purpose of that trust is no longer capable of fulfilment given that capital raising is complete and Validus confirms its mandate has come to an end. There is an implied term that any surplus be repaid to CSD: Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 at 580; Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) (1978) 141 CLR 335; [1978] HCA 45 at 353 (Gibbs CJ); Compass Resources Ltd v Sherman (2010) 42 WAR 1[ [2010] WASC 41 at [57]-[78] (Beech J). 4. On this basis, CSD is entitled to recover the four amounts referred to at [12] above which total $127,290. CSD claim based upon the unenforceability of the agreement 1. Agreements with unlicensed persons in relation to the provision of financial services in certain circumstances are rendered unenforceable by Subdivision B of Division 11 of Pt 7.6 of the Corporations Act. 2. Section 924A provides that Subdiv B of Div 11 of Pt 7.6 applies, relevantly, where: 1. an agreement constitutes, or relates to the provision of a financial service by a person; 2. the agreement is entered into in the course of a financial services business; 3. the person does not hold and is not exempt from holding an AFSL covering the provision of the financial service. The agreement relates to provision of a financial service 1. A person provides a financial service where, relevantly, the person provides "financial product advice" (s 766A(1)(a) of the Corporations Act). 2. The phrase "financial product advice" is defined in s 766B(1). It requires, relevantly, a recommendation or a statement of opinion that could reasonably be regarded as intended to influence a person in making a decision in relation to a particular financial product or an interest in a particular financial product. A "financial product" includes a security, whether it be a share or debenture or an interest in such a security (s 764A(1)(a) and s 761A definition of "security"). 3. The agreement related to the provision of "financial product advice" because: 1. it contemplated Validus dealing with investors in relation to the possibility of acquiring debt or equity in CSD: cll 1(c) and 1(d). This necessarily involved Validus giving a recommendation or a statement of opinion that could reasonably be regarded as intended to influence those investors to invest in CSD. As CSD submitted, the terms "recommendation or a statement of opinion" are not confined to formal advice but extend to any explicit or implicit encouragement to invest: Australian Securities and Investments Commission v Park Trent Properties Group Pty Ltd (No 3) [2015] NSWSC 1527 at [361]-[369], [381] (Sackville AJA); 2. it involved Validus providing advice to CSD about the appropriate capital structure, including by modelling and forecasting and preparing a prospectus: cll 1(b) and 1(c). Any advice Validus provided in this regard would necessarily constitute a "recommendation or a statement of opinion" that would influence CSD in deciding what capital structure to adopt (including whether to raise debt or equity) and how to market any capital raising. The agreement was entered into in the course of a financial services business 1. A "financial services business" is defined in s 761A of the Corporations Act to mean "a business of providing financial services". The work Validus undertook to do was done in the course of a business of providing financial services. Validus did not have an AFSL 1. Validus did not hold an AFSL. Validus has not pleaded that any exemption applied to it and it is not apparent that any of the exemptions in s 911A(2) did apply. 2. Where, as here, Subdiv B of Div 11 of Pt 7.6 of the Corporations Act applies, a party in the position of CSD may give "the non-licensee" written notice rescinding the agreement. Such notice must be given "within a reasonable period after becoming aware of the facts entitling [CSD] to give the notice" (s 925A(2)). 3. In the circumstances I have outlined at [17] to [20] above, I am satisfied that CSD gave notice within a reasonable time. 4. The result is that, by reason of s 925H of the Corporations Act, CSD can recover, as a debt, any amount paid by way of brokerage, commission or other fee paid under the agreement. 5. CSD is entitled to recover those funds from Validus under s 925H and also as money paid under a mistake as to the legal effect of the agreement: David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; [1992] HCA 48 at 378. 6. For these reasons, my conclusion is that CSD is entitled to recover the $249,982 it advanced to Validus, save for the payments made by Validus to third parties (being the three amounts referred to at [10(b)] above which CSD does not seek to recover): a total of $182,282. 7. Taking into account interest under s 100 of the Civil Procedure Act 2005 (NSW), the total amount to which CSD is entitled is $199,091.49. ********** 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. Decision last updated: 06 April 2018