In the matter of Courtenay House Capital Trading Group Pty Limited (in liquidation)

By a Statement of Claim filed on 20 September 2018, the Plaintiffs, Courtenay House Capital Trading Group Pty Ltd (in liq) and Courtenay House Pty Ltd (in liq) (together, “Companies”), seek final relief against, inter alia, Mr David Sipina, Sipina Enterprises Pty Ltd (“Sipina Enterprises”) and Arbejo Pty Ltd (“Arbejo”) (together, “Sipina parties”) and against Mr Athan Papoulias and a company associated with him, TheNowGroup.com.au Pty Ltd (“NowGroup”) (together, “Papoulias parties”), including recovery of amounts paid to them, and claim compensation under s 1317H of the Corporations Act 2001 (Cth), s 12GF of the Australian Securities and Investments Commission Act 2001 (Cth) (“ASIC Act”) and at general law.

By Interlocutory Process filed on 29 August 2018, the Plaintiffs seek orders, under s 1323 of the Corporations Act 2001 (Cth), continuing freezing orders previously made against, relevantly, the Sipina parties and the Papoulias parties, which restrained them from dissipating their assets, with variations to limit exceptions that previously permitted the payment of reasonable ordinary living expenses and legal expenses up to specified amounts. In particular, the Plaintiffs now seek to exclude from those exceptions specified bank accounts of Sipina Enterprises, the Sipina Family Superannuation Fund and Arbejo and specified accounts of Mr Papoulias and NowGroup, so that such living expenses and legal expenses could not be paid from those accounts.

The Sipina parties do not oppose the continuance of the existing restraint, subject to the existing exceptions, or the extension of that restraint to Arbejo, and I understand the Papoulias parties to take the same position in respect of the orders against them. However, the Sipina parties and the Papoulias parties oppose the variations of the proposed orders to prevent them using the specified bank accounts for reasonable and ordinary living expenses and legal expenses. I address that question below.

The Plaintiffs relied on a redacted version of the liquidators’ report dated 27 October 2017 (Ex A1). In that report, the liquidators express the view that the Companies were operating a Ponzi scheme since their inception at 2011, in the sense that they were paying substantial returns to investors, largely funded by receipt of new funds from new investors. The liquidators there note that the Companies paid regular and consistent monthly returns between 18% and 90% per annum, and that about two-thirds of all funds deposited into the Companies’ bank accounts were paid back as returns to investors and about 20% of those funds remained in bank accounts on the appointment of liquidators. The amounts involved were substantial, and it appears that an amount of $249.2 million was deposited into the Companies’ bank accounts, of about which $165 million was returned to investors and about $199.2 million transferred out of the Companies’ bank accounts. The liquidators also observe that the Companies purportedly offered different types of foreign exchange trading strategies to investors and later marketed “special products” to existing investors by reference to current events, raising a further $63 million from investors by doing so. They indicate that, based on their investigations to date, the Companies undertook minimal foreign exchange trading and generated a modest loss on the small amount of trading they undertook. That trading, and the loss generated from it, could not have funded the substantial returns paid to investors. The Companies also did not trade in respect of the events which had been the basis of “special products”, and instead paid returns to investors in the “special products” from existing investor capital, or investors rolled over their returns into the Companies’ other products. There was no dispute as to that broad outline of the Companies’ affairs for the purposes of this application.

The Plaintiffs also relied on a further liquidators’ report dated 1 November 2018 (Ex A2) and its annexures. The second liquidators’ report referred to the result of the liquidators’ examination of investors’ net positions, including in respect of various groups of investors, and identified the potential return to investors on several scenarios. That report also referred to amounts deposited and received by the Sipina parties and the Papoulias parties from the Companies and concluded that each of them had received substantially more from the Companies than they had deposited with the Companies. That report noted the liquidators’ intention to seek to recover the additional funds paid to the Sipina parties and the Papoulias parties.

The Plaintiffs also relied on the affidavits of one of the joint and several liquidators, Mr Said Jahani, dated 2 March 2018 and 9 March 2018 and the exhibits to those affidavits (Exs A3 – A5). In his first affidavit, Mr Jahani outlined the background to the liquidators’ appointment and the progress of their investigations to date. Mr Jahani also there expressed the view that the Companies were operating an unregistered investment scheme in the nature of a Ponzi scheme, with approximately 400 to 500 investors and a total deficit of at least $142 million, before the costs and expenses of the liquidation. The Plaintiffs also relied on Mr Jahani’s affidavits dated 21 March 2018 and 28 August 2018. By his affidavit dated 21 March 2018, Mr Jahani corrected an error in his earlier affidavit and referred to the liquidators’ report dated 27 October 2017. Mr Jahani’s evidence, as corrected by his affidavit dated 21 March 2018, is that approximately 4% of funds received by the Companies during the period from 2014 to 2017 (approximately $8.5 million) have been paid to entities which the liquidators have not yet been able to identify; and approximately 7% of funds received by the Companies from 2014 to 2017 (approximately $14.3 million) have been paid to parties related to the Companies including Mr Iervasi, Mr Sipina and Mr Papoulias. Mr Jahani’s affidavit dated 28 August 2018 set out the reasons for the liquidators’ application to extend and vary the freezing orders, and referred to public examinations of, inter alia, Mr Iervasi, Mr Sipina and Mr Papoulias conducted in April, May and June 2018. That affidavit also contained a reconciliation of payments made by the Companies to the Sipina parties totalling $5,410,328 and referred to information published by the Companies concerning Mr Papoulias’ role in the Companies.

The Plaintiffs relied on affidavits of their solicitor, Mr Hedge, dated 31 August 2018 and 14 November 2018. By his affidavit dated 31 March 2018, Mr Hedge referred to confirmation received from the Australian Securities & Investments Commission (“ASIC”) that ASIC’s investigations under s 13 of the ASIC Act in relation to the relevant conduct were ongoing. Mr Hedge also referred to the trust deed of the Sipina Family Superannuation Fund, which recorded that Mr Sipina was both the trustee of that fund and a member and beneficiary of that fund. By his second affidavit dated 14 November 2018, Mr Hedge referred to a further confirmation from ASIC that Messrs Sipina and Papoulias are persons of interest in its ongoing investigation into the management and affairs of the Companies and also referred to relevant documentation, including communications between Mr Sipina and Mr Papoulias and investors and a LinkedIn profile for Mr Sipina. He also referred to an occasion on which Mr Sipina, or entities associated with him, had instructed the transfer of a substantial amount from an account held by Sipina Enterprises to Mr Sipina’s legal representatives, although that transfer did not proceed after the liquidators brought an application in this Court concerning it and the parties reached arrangements between themselves.

The Plaintiffs also relied on affidavits of two clients of the Companies, Mr Andrea Agus dated 8 November 2018 and Mr Luke Buxton dated 14 November 2018. Mr Agus’ affidavit referred to the circumstances in which he was introduced to the Companies, to meetings with Mr Sipina and further correspondence with the Companies and to his investment with the Companies. I will refer to Mr Buxton’s evidence below. The Plaintiffs also relied on the affidavit of a forensic accountant, Mr Alex Bell dated 28 August 2018 and the exhibits to that affidavit, to which I also refer below.

Mr Sipina relied on his affidavit dated 29 May 2017 filed in earlier proceedings brought by ASIC, which refers to his earlier affidavits dated 22 and 23 May 2017 and extends his disclosure of assets and liabilities to refer to his ownership of a block of land in Croatia, with an approximate value of $100,000. Mr Sipina also relies on a further affidavit dated 26 October 2018 and an exhibit to that affidavit (Ex S1) which addresses, inter alia, his role with the Companies. I will address that evidence below. Mr Papoulias relied on two affidavits dated 19 May 2017 filed in the earlier proceedings brought by ASIC which refer to his assets and expenses, his affidavit dated 30 October 2018 which addresses, inter alia, his role with the Companies and an affidavit dated 1 November 2018 of his solicitor, Mr Tiedt. I will address that evidence below.

Section 1323 of the Corporations Act provides that, relevantly, the Court may make specified orders where an investigation is being carried out under the ASIC Act or the Corporations Act in relation to an act or omission by a person, being an act or omission that constitutes or may constitute a contravention of the Corporations Act, or a civil proceeding has been begun against a person under the Corporations Act, and the Court considers it necessary or desirable to do so for the purpose of protecting the interests of a person (“aggrieved person”) to whom the person who is the subject of that investigation or proceeding is liable, or may be or become liable, to pay money, whether in respect of a debt, by way of damages or compensation or otherwise, or to account for financial products or other property, including on the application of the aggrieved person. The requirement that a civil proceeding has begun against the Sipina parties and the Papoulias parties is at least satisfied here. There is also evidence of an ongoing investigation by ASIC. I am also satisfied that the Companies are “aggrieved persons” within the terms of s 1323(1) of the Act.

Mr Scruby, who appears with Mr Robertson for the Plaintiffs, summarises the principles applicable to the making or variation of orders made under s 1323 of the Corporations Act, by reference to authority: Re HIH Insurance Ltd (In prov liq); Australian Securities and Investments Commission v Adler [2001] NSWSC 451; (2001) 38 ACSR 266 at [7]; Re Richstar Enterprises Pty Ltd; Australian Securities and Investments Commission v Carey (No 3) [2006] FCA 433; (2006) 57 ACSR 307 at [21]-[29]; Australian Securities and Investments Commission v Krecichwost [2007] NSWSC 948; (2007) 64 ACSR 411 at [22]–[38]; Re Courtenay House Capital Trading Group Pty Ltd [2017] NSWSC 467 at [10]; Australian Securities and Investments Commission v CFS Private Wealth Pty Ltd [2018] FCA 1070; (2018) 129 ACSR 171. The operation of the section was described in Re Richstar Enterprises Pty Ltd above at [25]–[27] as follows:

As Mr Scruby points out, the purposes of orders under this section include preserving the status quo pending the outcome of civil proceedings that have been commenced against the relevant person(s) under the Corporations Act, for the benefit of those who may have a claim against those persons. Although a power to make freezing orders is not expressly mentioned in s 1323, the Court may make such orders where it would appoint a receiver or trustee to property of a person but concludes that orders restricting or prohibiting a person dealing with property are a more appropriate “alternative or lesser order”: Australian Securities and Investments Commission v Krecichwost above. To the extent that the Court’s ability to appoint a receiver is a prerequisite to the exercise of that jurisdiction to make a freezing order, as suggested by the decision in Australian Securities and Investments Commission v Ostrava Equities Pty Ltd [2015] FCA 425; (2015) 106 ACSR 332, I am satisfied that that jurisdiction is available here, in the sense that the Court would have had power to appoint receivers to the property of the Sipina parties and the Papoulias parties had it not made and continued the relevant freezing orders.

Mr Scruby submits, and I accept, that, in deciding whether or not to make a freezing order under s 1323, the Court is not bound to consider all the discretionary matters required to be considered under the general law for the making of an interlocutory injunction. However, as Mr Scruby recognises, evidence of dissipation of assets and evidence of at least a reasonably persuasive case are powerful discretionary considerations that would affect the Court’s willingness to make an order, and the scope of any such order. Mr Scruby also accepts that the Court should not seek to resolve conflicts in the evidence of witnesses in this application and should take into account the Defendants’ evidence in determining whether, on all the evidence, the Plaintiffs have demonstrated a prima facie or reasonably persuasive case against each of the Defendants. Mr Scruby goes further to submit, possibly inconsistently, that where there is a conflict in the evidence, the Court should assume that any such conflict would be resolved in the Plaintiffs favour. I do not consider I could proceed on that basis, particularly where there is a conflict in evidence as to a critical factual matter, namely Mr Sipina’s and Mr Papoulias’ knowledge that the Companies conducted a Ponzi scheme.

Mr Scruby submits that the exclusion of the relevant bank accounts from the exceptions to the freezing orders is sought on the basis that there is a strong prima facie case that the funds in those bank accounts are trust funds. The Plaintiffs submit that, between 2012 and 2017, the Companies paid Mr Sipina and Sipina Enterprises amounts totalling $5,622,276 and relies on Mr Bell’s evidence for the submission that, as at 30 June 2017, Sipina Enterprises and Arbejo held in their bank accounts amounts totalling $1,085,866.34 that are identifiable and traceable as funds paid by the Companies. Mr Jahani’s evidence is that payments totalling $2,453,129.47 were made from bank accounts held by the Companies to Mr Papoulias or entities controlled by him (Jahani 28.8.18 [37]), although the Plaintiffs submit that the Companies paid Mr Papoulias or NowGroup amounts totalling a higher amount, $2,837,055, between 2013 and 2017. The Plaintiffs rely on Mr Bell’s evidence to establish that, as at 31 March 2017, the Papoulias parties held amounts totalling $692,127.59 that are identifiable and traceable as funds paid by the Companies.

The Plaintiffs submit, first, that there is a strong prima facie case that the funds in the Companies’ bank account were trust funds. Mr Scruby submits that there is at least a strong prima facie case that:

The Plaintiffs also submit that there is a strong prima facie case that the traceable proceeds of funds paid out of the Companies’ bank accounts remain in the Sipina parties’ and the Papoulias parties’ hands. Mr Scruby submits that Mr Bell’s analysis demonstrates that the funds in the Sipina parties’ and the Papoulias parties’ accounts at the times identified by him were traceable proceeds of funds paid by the Companies. The Sipina parties accepted this proposition for the purposes of this application subject to an issue raised by them as to the amount of traceable funds and I also proceed on that basis. The Papoulias parties did not admit that the payments to them were made out of funds held on trust for investors and were made in breach of trust, but did not contest that proposition for the purposes of this application.

The Sipina parties submit that the Plaintiffs have not proved that the whole of the monies held in those accounts are arguably trust monies. The Sipina parties point out that, even on Mr Bell’s evidence, a sum of $141,302.94 has not been shown to be trust monies. There is force in that submission. However, in exercising the Court’s jurisdiction under s 1323 of the Corporations Act, the Court is not limited to making an order directed to funds that are shown to be trust monies. I may also have regard to the substantial claims for compensation made by the Companies against the Sipina parties and it seems to me that those claims have a substantial prospect of success. For the reasons sets out below, I consider that the monies held in those accounts, which would be available to satisfy those claims, should not be permitted to be expended for living expenses and legal costs where Mr Sipina has other (albeit less liquid) assets available to him which he has not presently realised to pay those costs.

Second, the Sipina parties submit that the Plaintiffs’ tracing analysis wrongly treats a sum of $650,000 as withdrawn from Mr Sipina’s account with the Companies as monies used for his purposes, that this amount was reinvested in the Companies and, on that basis, the monies that are not arguably shown to be trust monies are $527,600.86. I do not accept that submission. It is common ground that the monies withdrawn from that account were invested with the Companies for the benefit of Mr Sipina’s sister. There is a strong prima facie case that that withdrawal amounted to an expenditure for Mr Sipina’s purposes to benefit his sister, and did not discharge any liability owed by Mr Sipina or the other Sipina parties to the Companies, which obtained no economic benefit from treating an amount previously purportedly invested by Mr Sipina as now purportedly invested by his sister.

The Plaintiffs submit that there is a strong prima facie case that the Sipina parties and the Papoulias parties did not receive funds from the Companies as bona fide purchasers for value. First, the Plaintiffs disputed that the Sipina parties and the Papoulias parties were purchasers for value, although they accepted that Mr Sipina and Mr Papoulias had provided services to the Companies in spending time convincing people to invest money in products purportedly offered by the Companies. It is not necessary to address that question in order to determine this application. There was also a dispute as to whether the Plaintiffs have a seriously arguable case that the Sipina parties and the Papoulias parties had notice of relevant matters.

The parties addressed the legal principles applicable to determining whether the Sipina parties and the Papoulias parties had received funds from the Companies as bona fide purchasers for value without notice. The Plaintiffs submit there is a strong prima facie or reasonably persuasive case that each of the Sipina parties and the Papoulias parties at least had knowledge of facts that would put a reasonable person on notice as to whether or not the Companies were conducting a Ponzi scheme. Mr Scruby accepts that the Plaintiffs bear the onus of establishing such notice. He refers to the categories of knowledge identified in Baden Delvaux & Lecuit v Societe Generale pour Favoriser le Development du Commerce [1992] 4 All ER 161; [1993] 1 WLR 509 at 575–576, 581–583 and notes that it is sufficient “notice” for relevant purposes if a person has, inter alia, knowledge of circumstances which would indicate the facts to an honest and reasonable person and knowledge of circumstances which would put an honest and reasonable person on inquiry. The Papoulias parties did not dispute that, for relevant purposes, notice of matters that would put an honest and reasonable person on inquiry is sufficient to deprive a person of the status of a bona fide purchaser without notice.

Mr Scruby also draws attention to the detailed consideration of the degree of notice that would deprive a party of the status of a bona fide purchaser without notice by the Full Court of the Federal Court in Great Investments Ltd v Warner [2016] FCAFC 85; (2016) 243 FCR 516 at [112]ff. The Court here observed that:

The Plaintiffs rely on several matters to establish that there is a strong prima facie or reasonably persuasive case that each of the Sipina parties and the Papoulias parties at least had knowledge of facts that would put a reasonable person on notice as to whether or not the Companies were conducting a Ponzi scheme, namely:

I do not reach any finding, in this application, as to whether or not Mr Sipina had actual knowledge that the Companies were conducting a Ponzi scheme or, more precisely, that the Companies’ could not have paid the relevant returns to investors from profits on foreign exchange trading and must have been paying them from funds invested. Mr Iervasi had advised the liquidators, and subsequently informed ASIC, that Mr Sipina knew the Companies were operating a Ponzi scheme from around 2015 (Ex A5, tab 3, p30); that Mr Sipina saw bank statements that reflected the commissions he was getting paid and saw open trading accounts, which had limited amounts in them; and that Mr Sipina and Mr Iervasi had discussions from 2015 as to “how to get out of our situation”. In a liquidators’ examination, Mr Iervasi’s evidence was that he had told Mr Sipina that the Companies were paying investors’ returns from other investors’ capital in around March 2015 (Jahani 28.8.18 [39]–[42]). Mr Sipina denies that evidence.

The Sipina parties submit that Mr Iervasi’s evidence set out above should not be accepted, and also submit the Sipina parties invested in the scheme to the end, including making a late investment for the benefit of Mr Sipina’s sister and further investments of the family superannuation fund and Mr Sipina’s wife. It is not appropriate or possible to determine the question whether Mr Iervasi’s evidence should be accepted now, and the significance of further investments is a matter to be tested at the substantive hearing, recognising that it is not impossible that early investors in a Ponzi scheme would choose to continue to invest in that scheme, even after they become aware of its character, where losses are more likely to be suffered by later investors than themselves. Those are, however, matters properly left to a substantive hearing.

I now turn to the matters relevant to whether the Sipina parties had at least constructive notice that the Companies were conducting a Ponzi scheme or, more precisely, that the Companies’ could not have paid the relevant returns to investors from profits on foreign exchange trading and must have been paying them from funds invested. I have referred to the Plaintiffs’ evidence as to Mr Sipina’s role above. Mr Sipina was recorded by ASIC as a director of Courtenay House Capital Trading Group Pty Ltd (in liq) from 24 November 2015, although he has denied consenting to act as a director (Jahani 2.3.18 [30]) and it appears that ASIC has since corrected that record. A number of creditors have informed the liquidators that Mr Sipina was one of the persons they dealt with when contacting either of the Companies (Jahani 2.3.18 [32]). A client information booklet in respect of the Companies refers to Mr Sipina as a consultant and business development manager to the Companies (Ex A3, tab 6, p27). Mr Jahani also referred, in his affidavit dated 2 March 2018, to payments made to Mr Sipina and Sipina Enterprises.

Mr Jahani’s further affidavit dated 9 March 2018 referred to Mr Sipina’s role in the Companies. Mr Jahani’s evidence (Jahani 9.3.18 [19]), read without objection, was that the liquidators’ investigation had revealed that:

Mr Jahani also refers, in evidence led without objection, to conversations with investors who advised that Mr Sipina handled their investments or that they spoke to him if they had queries about the investments (Jahani 9.3.18 [28]). There is evidence of numerous emails between Mr Sipina and various investors. For example, Mr Sipina represented to one investor on 28 October 2015 (Ex A5, tab 1, p1) that:

A product disclosure statement dated 13 February 2017 in respect of the Courtenay House Capital Investment Fund (Ex A4, tab 3) identified Mr Sipina as one of the key persons responsible for implementing that fund’s investment strategy and recorded that he would dedicate 90% of his time to executing the funds’ investment strategy, and identified a risk to investment that the investment selection process was dependent on the continuation of the services and skill of Mr Sipina and Mr Iervasi. Mr Sipina’s LinkedIn profile described him as “[s]pecialising in developing a customised month-to-month cash flow strategy for clients via electronic foreign exchange currency and commodity trading with minimal risk” (Ex A8, tab 13). At other times, Mr Sipina held himself out to clients as being the Companies’ compliance officer who dealt with ASIC (Ex A8, tab 5, p 966).

A recording of one presentation by Mr Sipina to an investor is in evidence, in which Mr Sipina referred to the investor seeing “live money, live trading”, to insurance held by the Companies and to money being placed with brokers and traders and to an average return between 32% and 36% per year. Mr Sipina also plainly represented that he personally was trading, staying up until the early morning hours “to watch all the trades, get everything organised for the next day, because to run this business, like any business, its very complicated” and represented that he personally was dealing with clients’ monies, claiming that:

In a liquidators’ examination, Mr Sipina described his role with the Companies as “basically a sales role” and observed that he was “generating … clients for myself and organising appointments” and was “prospecting, presenting and following up” (Ex A7, tab 3, pp 145). In that examination, Mr Sipina’s evidence was also that he had reviewed the product disclosure statement for the Courtenay House Capital Investment Fund before it was issued, and the description of his role in the fund was incorrect (Ex A7, tab 3, pp 194–195). It seems to me that, in determining the scope of Mr Sipina’s responsibilities, for the purpose of identifying the matters which would have come to his attention had he performed them, I should proceed on the basis of the description of those responsibilities that he permitted the Companies to issue, rather than his more recent claim that that description was incorrect.

Mr Sipina addresses his role with the Companies and his knowledge of relevant matters in his affidavit dated 26 October 2018. He refers to his introduction to Mr Iervasi and the Companies and to occasions on which he had seen a person at the Companies apparently undertaking foreign currency trading, and to his having been introduced to a trader who had explained the trading strategy. Mr Sipina also refers to having been shown documents which he contends showed that Mr Iervasi was trading successfully overall and making a profit from trading currencies, although those documents are not in evidence. Mr Sipina refers to his investments in the Companies, made between mid-2011 and mid-2012 and to investments made by his family superannuation fund in the Companies made in mid-2015 and late 2016. He also refers to a transfer of amounts which Sipina Enterprises had invested with the Companies in the name of his sister. Mr Sipina refers to the receipt of returns from the Companies and to reinvestment of some of those funds with the Companies. He says that:

Mr Sipina also refers to his role with the Companies, which included referring clients to the Companies after his initial investment and receiving commissions from month to month from the Companies. He refers to his engagement by the Companies as a “business development manager” in early 2015 and indicates his role was to “present to potential investors to invest in [the Companies] and liaise with [his] existing investors”. Mr Sipina’s evidence is also that he never had access to accounts of the Companies and did not make decisions for the Companies and that, as business development manager, he provided documentation to clients that was given to him by staff of the Companies, usually Mr Iervasi or his personal assistants. Mr Sipina gives evidence of matters which he claims had led him to form a genuine belief that the Companies were foreign exchange trading companies (Sipina 28.10.18 [61]). That belief, however, is not sufficient to provide a basis for any belief that the Companies could generate sufficient profits from foreign exchange trading, undertaken on a sufficient scale, to pay the substantial returns that were being paid to investors. At least some of the matters to which Mr Sipina refers, including payments made to clients on request, are consistent with the early operation of a Ponzi scheme, until the point at which the funds received from new investors are no longer sufficient to pay returns to existing investors. Mr Sipina also refers to his personal circumstances, to which I have had regard but which I need not summarise in this judgment.

The Sipina parties submit that the Plaintiffs will have difficulty in establishing constructive knowledge, by identifying circumstances that placed Mr Sipina in a different category to other investors, against whom the Plaintiffs make no claim of notice. They submit, plainly correctly, that many investors invested in the Companies notwithstanding that, with hindsight, they offered returns that were “too good to be true”. It seems to me, however, that Mr Sipina’s position is readily distinguished from that of other investors, given the responsibilities which he claimed to perform in respect of the Companies and the inquiries which he would have needed to have made properly to perform those responsibilities and to make the representations to investors in the Companies that he in fact made to those investors. The Sipina parties submit that Mr Sipina was not involved in trading or managing the traders and was in a “sales” role, that he did see traders come to the office regularly, and that he believed that some traders worked from home. It seems to me, however, that the Plaintiffs have at least a seriously arguable case that that falls well short of the level of inquiry that would be required for Mr Sipina, when he was placed on inquiry as to the level of the Companies’ returns, to satisfy himself that they were capable of being sourced from trading profits.

The Sipina parties also submit that:

It seems to me that the Plaintiffs have established a strong prima facie case that Mr Sipina will not be able to establish that he is a purchaser for value in good faith in respect of the monies received from the Companies. At least so far as constructive knowledge is concerned, that question should be approached by reference to the steps which Mr Sipina ought to have taken, having regard to the responsibilities that he held or claimed to hold and the activities he claimed to undertake in documents issued to, and communications with, investors, not by reference to the more limited role he now says he played within the Companies. Where Mr Sipina permitted himself to be held out by the Companies as a key person, involved in business development and the development of investment strategy for clients, and where he made representations to clients as to the Companies’ activities and performance, he necessarily had to acquire an understanding of the Companies’ trading activities. It seems to me that any steps, of any substance, taken to obtain such an understanding would have disclosed that the Companies’ trading activities were minimal and loss-making and would not have supported the substantial returns paid to investors. The Plaintiffs have a strong prima facie case that Mr Sipina, and the other Sipina parties through him, had constructive notice of that matter, even if his evidence that he made no such inquiries and had no such knowledge may ultimately be accepted, and Mr Iervasi’s evidence is not led or not accepted.

I have referred above to the several matters on which the Plaintiffs rely to establish that there is a strong prima facie or reasonably persuasive case that the Papoulias parties at least had knowledge of facts that would put a reasonable person on notice as to whether or not the Companies were conducting a Ponzi scheme. I do not reach any finding, in this application, as to whether or not Mr Papoulias had actual knowledge that the Companies were conducting a Ponzi scheme or, more precisely, that the Companies’ could not have paid the relevant returns to investors from profits on foreign exchange trading and must have been paying them from funds invested. In a liquidators’ examination, Mr Iervasi’s evidence was that he had told Mr Papoulias that the Companies were paying investors’ returns from other investors’ capital in late 2015 (Jahani 28.8.18 [39]–[42]). Mr Papoulias denies that evidence, and neither party contended that it would be possible for the Court to reach a determination of that question in this application.

I now turn to the matters relevant to whether the Papoulias parties had at least constructive notice that the Companies were conducting a Ponzi scheme or, more precisely, that the Companies could not have paid the relevant returns to investors from profits on foreign exchange trading and must have been paying them from funds invested. I have referred above to aspects of the Plaintiffs’ evidence as to Mr Papoulias’ role. Creditors have informed the liquidators that Mr Papoulias was one of the persons they dealt with when contacting either of the Companies (Jahani 2.3.18 [50]). On 23 November 2016, Mr Papoulias emailed Mr Sipina and Mr Iervasi referring, inter alia, to his roles as an adviser, managing compliance and being Mr Iervasi’s “number 2 and helping run the [Companies] and intercepting the issues [Mr Iervasi doesn’t] need to deal with”. He suggested that his role be changed to managing director and key accounts and that he would invoice for that each month (Ex A6, tab 8, p48–49). A client information booklet of the Companies identified Mr Papoulias as a senior business analyst and as a person that investors or potential investors should contact if they had questions in relation to insurance maintained by the Companies or the “CHCT Business Direction” (Ex A3, tab 6, p32). By an email dated 28 February 2017 from Mr Papoulias to a client, Mr Papoulias advised the client that he handled all new clients and also ran the day-to-day operations of the Companies when Mr Iervasi was not available, and Mr Iervasi would only step in if he could not resolve an issue (Ex A6, tab 7, p47).

Mr Buxton’s evidence (Buxton 14.11.18 [7]) is that he spoke to Mr Papoulias about a potential investment with the Companies in July or August 2016 and Mr Papoulias said that:

I now turn to Mr Papoulias’ evidence as to these matters. By his affidavit dated 30 October 2018, Mr Papoulias refers to his background and employment history and to the circumstances in which he was introduced to Mr Iervasi and the Companies. He refers to the information which was provided by Mr Iervasi as to the Companies’ trading strategies and his evidence is that he understood that Mr Iervasi was a “successful for[eign] ex[change] trader” (Papoulias 30.10.18 [30]). His evidence is that Mr Iervasi gave him information about the several products offered by the Companies and a high level explanation of how foreign exchange and commodity trading worked. He refers to having made his first investment with the Companies in the amount of $50,000 in March 2013 and gives evidence that Mr Iervasi assured him that Mr Iervasi could be trusted with his money (Papoulias 30.10.18 [44]–[45]).

Mr Papoulias also refers to a conversation with his father in January 2015 when his father raised the risk that he could be “ripped off” or that Mr Iervasi could abscond with the funds and suggested that Mr Papoulias should make sure that Mr Iervasi had insurance. He refers to a conversation with Mr Iervasi in March 2015 in which Mr Iervasi said that the Companies had tried and failed to get insurance for any of their products and advised that, if Mr Papoulias could obtain such insurance, he could work for the Companies and “write [his] own cheque” (Papoulias 30.10.18 [60]). Mr Papoulias also refers to having made a further investment with the Companies in July 2015, and to steps which he then took to arrange insurance for the Companies, and to a fourth investment made with the Companies in the name of an associated company in December 2015.

Mr Papoulias’ evidence is that he sat in on client meetings with Mr Iervasi and a trader in early 2016 and formed the belief, from those meetings, that the Companies were trading on the foreign exchange market and were making real profits. He also refers to his subsequent relationship with Mr Iervasi, which he characterises as that of a consultant, and his evidence is that he was not given access to the Companies’ accounts. He refers to executing a contract with Mr Iervasi and the Companies in April 2016 which provided for payment to him for specified services. Mr Papoulias then elaborates, at some length, on his further dealings with the Companies. He refers to having developed an interest in late November 2016 in a senior management role with the Companies and he then sent the email dated 23 November 2016 (to which I referred in paragraph 37 above) which he characterises as “pitching” that proposal to Mr Iervasi. Mr Papoulias’ evidence is that he exaggerated what he had done for Mr Iervasi and the Companies to support that proposal (Papoulias 30.10.18 [141]).

Mr Papoulias’ evidence is that he made subsequent investments with the Companies. Mr Papoulias’ evidence is also that Mr Iervasi did not tell him, at the time that freezing orders were obtained by ASIC or at any other time, that the Companies were operating a Ponzi scheme (Papoulias 30.10.18 [163]). His evidence (Papoulias 30.18.18 [167]–[168]) is that:

I have addressed the Plaintiffs’ submissions, which are largely common to the relief sought against both the Sipina parties and the Papoulias parties, above. In addition to the matters on which the Plaintiffs relied against both the Sipina parties and the Papoulias parties, they submit that:

The Papoulias parties respond that Mr Papoulias’ efforts to obtain insurance for the Companies was not evidence that he believed that something was “very wrong” with the Companies, where that suggestion emanated from his father, and he saw that course as an opportunity to further his career, and members of his family invested substantial amounts with the Companies. I would not infer, for present purposes, that Mr Papoulias’ pursuit of insurance indicated actual knowledge that the Companies were operating a Ponzi scheme, or that the returns from trading would not support the returns to investors, not least because the insurance that was obtained would not have been sufficient to protect investors generally, or Mr Papoulias and his interests particularly, from losses that would be suffered in that situation.

In submissions, the Papoulias parties rely on Mr Papoulias’ evidence that he understood that achieving consistent returns from foreign exchange trading was difficult but could be done; that the Companies were generating returns from foreign exchange trading; that he believed that stop loss mechanisms were in place to minimise losses; and submit that there is no evidence that the returns of the Companies were “extraordinarily high” for foreign exchange trading or that “promised returns” had been paid consistently or were guaranteed. They submit that Mr Papoulias’ lack of awareness of who was trading and the strategies employed does not assist the Plaintiffs where he knew trading was being undertaken by Mr Iervasi and one of two others and his evidence is that he saw trading occur, and there was no reason for him to inquire as to strategy, although he knew that a stop loss strategy was in place. They submit that Mr Papoulias was under no obligation to investigate the trading statements or accounts; he had no entitlement to see such statements or accounts; and Mr Iervasi did not share such information with him; and there is no evidence that examination of trading statements and accounts would have revealed there was a Ponzi scheme or, implicitly and more precisely, that the returns from trading were not sufficient to support the returns being paid to investors. These submissions are largely directed to the question of Mr Papoulias’ actual knowledge, rather than the knowledge he would have had had he made inquiries consistent with the role he claimed to perform in the Companies and sufficient to support the representations he made as to their trading activities and profitability.

I recognise that the fact of Mr Papoulias’ continued investments in the Companies, and of family members’ investment in the Companies, tends against his having actual knowledge that the Companies were a Ponzi scheme, although it should also be recognised that it is not impossible that early investors in a Ponzi scheme, who have received and are receiving high returns from it, could chose to continue in it even after they become aware of its nature, because later investors are more likely to bear the bulk of any losses. However, Mr Papoulias’ position is distinct from other investors in the scheme, who invested in it although they were aware of promised returns which may well have been unrealistic, because his involvement with obtaining insurance from the Companies and soliciting investors’ participation in the Companies would have led an honest and reasonable person to make inquiries that other investors would not be expected to make.

Although Mr Papoulias’ level of involvement with the Companies, and the responsibilities that he had represented he assumed, seem to have been less than Mr Sipina’s level of claimed responsibilities, it seems to me that the fact that he was responsible for obtaining insurance for the Companies which would have required knowledge and disclosure of their operations, the nature of his dealings with investors and the representations he made to them, and the level of returns which he was receiving from the Companies together constitute a strong prima facie case that he had knowledge of circumstances which would have put an honest and reasonable person on inquiry.

The parties also addressed the question whether, once it is found that there is a seriously arguable case that the relevant monies were the traceable proceeds of trust funds and were not received by the Sipina parties and the Papoulias parties as bona fide purchasers for value without notice, they should nonetheless be permitted to use those funds to pay their living expenses or legal costs and the usual carve-out for such expenses and costs should extend to the accounts in which such funds are held. This issue raised questions of the balance of convenience and Mr Scruby recognised, in submissions, that the Court may consider the balance of convenience in deciding whether, as a matter of discretion, to make a freezing order under s 1323 of the Act.

The Plaintiffs refer to the position at general law, as addressed in Polly Peck International Plc v Nadir (No 2) [1992] 4 All ER 769 at 784, Solomon v Corporate Affairs Commission (NSW) (1992) 10 ACSR 67 at 76 and, most recently, in Birketu Pty Ltd v Westpac Banking Corporation (No 2) [2018] NSWSC 494. In the last of those cases, Garling J observed (at [60]–[61]) that, where a plaintiff had a proprietary claim to the money in relevant accounts, there was an “obvious risk of injustice” to it if that money was expended on the defendant’s living and legal expenses; if the plaintiff ultimately succeeded in obtaining final relief, its funds would then have been used to finance the defendant’s unsuccessful defence, compounding the loss suffered as a consequence of the alleged fraud; and that a “careful and anxious judgment” was required, by which the Court must assess whether any injustice to the plaintiff would be outweighed by any potential injustice to the defendant if he was precluded from accessing funds, and was therefore perhaps denied the opportunity to advance an arguable defence. His Honour was there satisfied that the defendant should not be allowed to access money to which he had no legal or moral right to enable him to spend it on his own living expenses and on private representation of his choice.

The Sipina parties rely on an observation of Lloyd J in PCW (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158 at 164 as follows:

The Papoulias parties submit that the usual position when making freezing orders is that an allowance is made for living expenses and legal expenses, including when orders are made under s 1323 of the Corporations Act: Australian Securities and Investments Commission v Oliver Banovec (No 2) [2007] NSWSC 961 at [34]; Australian Securities and Investments Commission v Burnard [2007] NSWSC 1217 at [20]; Australian Securities and Investments Commission v Sigalla [2010] NSWSC 1423 at [31]. On the other hand, a carve-out for ordinary living and legal expenses from orders made under s 1323 of the Corporations Act was also not permitted in Australian Securities and Investments Commission v Carey (No 15) [2007] FCA 544. The Papoulias parties also rightly accepted that different considerations may apply in respect of trust property and there is no predisposition to allow access to trust funds for payment of a defendant’s living and legal expenses: Petar v Macedonian Orthodox Community Church St Petka Inc [2006] NSWCA 277 at [59]; Badman v Drake [2008] NSWSC 968 at [6]; Australian Spirit Management Pty Ltd v Commissioner of Taxation [2012] NSWSC 123 at [11]. The Papoulias parties also recognised the relevance of the strength or otherwise of the Plaintiffs’ case and that the Court may have regard to the balance of justice between permitting the Defendants to expend funds which might belong to the Plaintiffs, and refusing to allow them to expend funds which might belong to them: Independent Trustee Services Ltd v GP Noble Trustees Ltd [2009] EWHC 161 (Ch) at [6].

The Sipina parties submit that the Plaintiffs’ case is weak. At this interlocutory stage, it seems to me that I need say no more than, having regard to the evidence set out above, I do not share that view. Second, the Sipina parties submit that the effect of the orders would be that Mr Sipina and his family would be unable to pay their living expenses and unable to defend a complex but weak case. I do not accept that the effect of the orders would be that Mr Sipina and his family would be unable to pay their living expenses, where (as I will find below) he has other assets capable of being realised; I do not accept that they mean that he would be unable to defend the case, although he may have to realise other assets to do so, and if they are insufficient, may have to defend himself and seek leave, which would likely be granted, to represent his associated companies in the proceedings; and I do not, as I note above, accept that the case against him is weak. I also do not accept the Sipina parties’ submission that the Plaintiffs seek orders that “would cut off at the knees the Sipina parties’ ability to defend themselves”, as distinct from reserving monies that are substantially, even if not wholly, trust monies for the benefit of parties who have a strong claim to them.

The Sipina parties also submit that the detriment to be suffered by them if the orders were made would “dwarf” that of the Plaintiffs if it were not made. I also do not accept that submission. At worst, the Sipina parties would be required to sell assets that may not be particularly liquid, which he has not presently sold, rather than defend the proceedings and pay his living expenses from monies paid to them by the Companies, as to which the Plaintiffs seem to me to have a strong claim. Conversely, if the Sipina parties are permitted to defend the proceedings, from the monies which are the subject of that claim, there is a substantial risk that they will be dissipated and the Plaintiffs will be deprived of a remedy, irrespective of the merit of their claims.

Mr Scruby responds that the Sipina parties’ submission that they will not be able to afford legal representation to defend the proceedings or living expenses if the freezing orders are varied is not made out on the evidence. Mr Scruby also rightly points out that that submission highlights the risk that the relevant funds will be dissipated, by being applied to payment of the Sipina parties’ (and the Papoulias parties’) legal expenses, if the Plaintiffs ultimately establish that they are trust funds to which the Companies are entitled. Mr Scruby also points to the absence of explanation of how other funds paid by the Companies to the Sipina parties (and the Papoulias parties) have been expended, which seems to me to be a matter relevant to assessing their present ability to fund such legal costs. Fourth, Mr Scruby points to the fact, and the evidence establishes, that significant funds have been expended by both the Sipina parties and the Papoulias parties since the freezing orders were originally made in reliance on the exceptions from them.

It is plain that Mr Sipina has other assets, which I recognise are less liquid than the funds held in the bank accounts, which could be realised, but which he has not sought to realise, to fund the payment of his living and legal expenses. Mr Sipina’s own evidence establishes that he owns two motor vehicles which have substantial value and has equity in an investment unit, and that he also has shares of significant value (although they may not be liquid where they are not shares in listed companies) and real property of value in Croatia. There is evidence that Mr Sipina’s wife also has monies in bank accounts and is now working, and has the capacity to contribute to the payment of family living expenses, although I make no assumption that she would contribute to the payment of Mr Sipina’s legal expenses.

I am satisfied that, in these circumstances, the exception for living expenses or legal costs should not be available in respect of monies held in the relevant accounts of the Sipina parties, even at general law. There is no greater, and potentially less, reason to permit such an exception where orders are made under s 1323 of the Corporations Act.

I turn now to the position in respect of the Papoulias parties. Mr Papoulias gives evidence of the difficulties which he has had in obtaining employment since his involvement with the Companies, and with respect to his present asset position. He refers to the costs of defending the proceedings and to his solicitor’s advice that that solicitor will not continue to act for him if he cannot pay the solicitor’s fees. His evidence is that his parents have also suffered losses with the Companies and are not in a position to, and are not willing to, fund his costs of defending the proceedings and that he has no other source of funds available to him (Papoulias 30.10.18 [189]–[190]).

The Papoulias parties rely on Mr Papoulias’ evidence that his only asset of any value is the cash held in the relevant accounts, and he has no other source of funds, whether from his parents or otherwise, and will be “unable to defend the proceedings” if the freezing orders are varied in the manner that the Plaintiffs seek. They also refer to their solicitor’s evidence that the solicitor is not prepared to act for the Papoulias parties if his fees are not paid. They submit that the “inability” of the Papoulias parties to defend the proceedings is a matter which weighs heavily against the exercise of the discretion, and to do so may cause a serious injustice. Mr Scruby points out that that submission highlights the risk that the relevant funds will be dissipated, by being applied to payment of the Papoulias parties’ legal expenses, if the Plaintiffs ultimately establish that they are trust funds to which the Companies are entitled. Mr Scruby also points to the absence of explanation of how other funds paid by the Companies to the Papoulias parties have been expended, which seems to me to be a matter relevant to assessing their present ability to fund such legal costs. Mr Scruby also points to the fact, and the evidence establishes, that significant funds have been expended by the Papoulias parties since the orders were originally made, emphasising the risk of dissipation of the funds.

I do not accept that the exclusion of the exceptions would mean that Mr Papoulias would be unable to defend the case, although he may have to defend himself and seek leave, which would likely be granted, to represent his associated company in the proceedings. Conversely, if the Papoulias parties are permitted to defend the proceedings, from the monies which are the subject of that claim, there is a substantial risk that they will be dissipated and the Plaintiffs will be deprived of a remedy, irrespective of the merit of their claims. I am satisfied that the exception for living expenses or legal costs should not be available in respect of monies held in the relevant accounts of the Papoulias parties, even at general law, and there is again no greater, and potentially less, reason to permit such an exception where orders are made under s 1323 of the Corporations Act.

For these reasons, I am satisfied that the freezing orders should be continued, and varied as proposed by the Plaintiffs. The parties may also wish to give consideration to a matter raised in the course of oral submissions, whether the language “except from the following bank accounts” in paragraphs 4(a)–4(c) of their proposed orders, which is in the nature of an exception from an exception, would be better formulated by language such as “provided that no such payment may be made from the following bank accounts”. My preliminary view is that the Sipina parties and the Papoulias parties should pay the Plaintiffs’ costs of this application, as agreed or as assessed. However, I will hear the parties as to costs if they seek to be heard.