In the matter of Direct FX Trading Pty Ltd (in liq) (No 2)

1. [1]

   The First Plaintiff, Jason Tracy, is the liquidator (Liquidator) of the Second Plaintiff, Direct FX Trading Pty Ltd (in liq) (Direct FX).

2. [2]

   By an Interlocutory Process dated 4 June 2024, the Plaintiffs seek directions and judicial advice in relation to the distribution of moneys held in an account by the Liquidator, which comprise moneys deposited by 2,653 individual clients of Direct FX. These moneys are referred to in this application as the Outstanding Client Balances, and the clients who deposited those moneys are referred to as the Identified Beneficiaries.

3. [3]

   Only 74 of the Identified Beneficiaries have credit balances greater than $100.00. These 74 persons are referred to as the Proposed Beneficiaries.

4. [4]

   In short, the Plaintiffs seek directions, and judicial advice, as to whether:

   1. (1)

      the Liquidator and Direct FX are justified in treating those Identified Beneficiaries who have a credit balance of less than A$100 (or some other amount and, if so, what amount) as having no right to participate in the distribution of funds by the Liquidator; and

   2. (2)

      the Liquidator and Direct FX are justified in distributing the Outstanding Client Balances to the 74 Proposed Beneficiaries on a pro rata basis.

5. [5]

   The Plaintiffs also seek an order that the expenses associated with this application, including expenses associated with the distribution to the 74 Proposed Beneficiaries, are paid from the Outstanding Client Balances.

6. [6]

   The application is made by the Liquidator under section 90-15 of the Insolvency Practice Schedule (Corporations) (IPSC) which is Schedule 2 to the Corporations Act 2001 (Cth) (the Act), and by Direct FX under s 63 of the Trustee Act 1925 (NSW).

7. [7]

   The Plaintiffs rely on three affidavits of the Liquidator. The first, sworn 21 May 2020, describes Direct FX’s business and the investigations undertaken following his appointment; the second, sworn 4 June 2024, sets out the facts giving rise to this application; and the third, sworn 20 August 2024, addresses the steps taken to give notice of this application to interested persons.

8. [8]

   None of the Identified Beneficiaries appeared at the hearing of the application, and none has communicated to the Liquidator any opposition to the proposed course of action.

Factual Background

1. [9]

   Direct FX was incorporated in Western Australia on 14 June 2006.

2. [10]

   Direct FX held an Australian Financial Services Licence, and operated an online financial services and currency exchange business through its website www.directfx.com.

3. [11]

   Although Direct FX purported to offer its clients a broad range of over-the-counter financial products through this website, the business of Direct FX was primarily focused on facilitating the entry by retail clients into foreign exchange contracts and other contracts for difference with Direct FX over an electronic trading platform called MT4.

4. [12]

   In around October 2016, Direct FX entered into a revenue sharing agreement with Core Liquidity Markets Pty Ltd (CLM). CLM is a financial services and foreign currency investment and trading company.

5. [13]

   Pursuant to this revenue sharing agreement, Direct FX appointed CLM to act as its Corporate Authorised Representative, to carry out certain activities for Direct FX in Australia, including dealing in, and advising persons in relation to, authorised financial products.

6. [14]

   The obligations of Direct FX under this agreement included the following:

7. [15]

   The revenue sharing agreement also specified procedures to be performed by CLM. These included to check for any incoming deposits by bank wire, to check “all trust accounts (AUD, EUR, USD & GBP)”, to check sender details and the client’s account in the MT4 trading platform, and to proceed to enter the deposit for the amount received and to send the client a confirmation email.

8. [16]

   On 6 April 2018, KPMG prepared, on behalf of Direct FX, a response to a notice which had been issued by the Australian Securities and Investments Commission in December 2017. In a section dealing with Direct FX’s structure and operations, KPMG reported as follows:

9. [17]

   In addition to the revenue sharing agreement, Direct FX and CLM also entered into various loan agreements.

10. [18]

    On 11 October 2018, Mr Tracy and Mr Vaughan Strawbridge were appointed as liquidators of Direct FX. (Mr Strawbridge subsequently resigned from that role on 7 May 2021. Mr Tracy sought, and I will make, an order that the name of the First Plaintiff accordingly be amended.)

11. [19]

    As at the date of the liquidators’ appointment, Direct FX held four bank accounts with the Commonwealth Bank of Australia which included the reference “Core Liquidity” in the name of the account. These accounts were in, respectively, Australian dollars, Euros, US dollars and British pounds.

12. [20]

    Following the liquidators’ appointment, the moneys held in these four “Core Liquidity” accounts were transferred into accounts with the National Australia Bank, and were converted from their base currency into Australian dollars. The total balance of the four accounts as at the date of their conversion was A$694,115.

13. [21]

    The liquidators formed the view, based on their investigations, that these accounts contained funds which had been paid by CLM to Direct FX. The liquidators’ report to creditors dated 11 January 2019 referred to the four “Core Liquidity” accounts, which had a total balance of $694,116, and included the following note:

14. [22]

    In May 2020, the liquidators applied in these proceedings for directions concerning monies and recoveries, totalling approximately A$269,000, which they considered to be client monies which fell within section 981A of the Act. On 1 October 2020, Black J gave directions that the liquidators were justified in pooling those moneys, and also ordered that the Plaintiffs’ costs of that application were properly incurred by the liquidators in the winding up of Direct FX and may be paid out of those moneys: In the matter of Direct FX Trading Pty Ltd [2020] NSWSC 1338.

15. [23]

    The liquidators did not, at that time, seek any directions or advice regarding the distribution of the moneys identified in their report as the “outstanding client balances” that comprised part of the funds held in the four “Core Liquidity” accounts (the Outstanding Client Balances).

16. [24]

    That was because the liquidators had formed the view at that time, as set out in the Liquidator’s affidavit of May 2020, that all of the funds held in the four “Core Liquidity” accounts were not client funds, as they were in operating accounts.

17. [25]

    However, as a result of further investigations, the Liquidator has now formed the view that a portion of the funds held in the four “Core Liquidity” accounts (being the Outstanding Client Balances) are moneys owing to some 2,653 individual clients who were referred to Direct FX by CLM (referred to as the Identified Beneficiaries).

18. [26]

    The Liquidator’s investigations have revealed that the total of the Outstanding Client Balances owed to the Identified Beneficiaries was A$43,205.60. The Liquidator separated those moneys from the other funds that had previously been held in the four “Core Liquidity” accounts and paid them into an interest-bearing account (the Outstanding Client Balances Account).

19. [27]

    As at 15 August 2024, the balance of the Outstanding Client Balances Account was A$49,213.69.

20. [28]

    The Liquidator set out the basis on which he formed the view that the Outstanding Client Balances represent moneys owing to the Identified Beneficiaries. In particular, the Liquidator has concluded, as a result of his investigations into the affairs of Direct FX, that the Identified Beneficiaries deposited moneys into an account or accounts held by CLM; that CLM then transferred those moneys into the “Core Liquidity” accounts held by Direct FX; and that no person, other than the Identified Beneficiaries, has established an entitlement to the Outstanding Client Balances.

21. [29]

    I was provided with a complete list of the 2,653 Identified Beneficiaries and their balances, and with financial analysis in respect of this information. This analysis shows that:

    1. (1)

       317 of the Identified Beneficiaries have an Outstanding Client Balance greater than $25;

    2. (2)

       172 of the Identified Beneficiaries have an Outstanding Client Balance greater than A$50; and

    3. (3)

       74 of the Identified Beneficiaries have an Outstanding Client Balance greater than A$100.

22. [30]

    The Plaintiffs now seek directions and judicial advice that they would be justified in distributing the moneys in the Outstanding Client Balance Account to the 74 persons who have an Outstanding Client Balance greater than A$100, these being the “Proposed Beneficiaries”.

23. [31]

    The Liquidator proposes this course on the basis that it is likely that the cost of distributing the Outstanding Client Balances to all of the 2,653 Identified Beneficiaries would exceed the available funds, because:

    1. (1)

       the Liquidator does not hold contact details for the Identified Beneficiaries, save for email addresses which were previously obtained from the Managing Director of CLM (which may not be correct or current); and

    2. (2)

       the Liquidator does not hold bank account details for any of the Identified Beneficiaries.

24. [32]

    Accordingly, the Liquidator expects that he and his staff will be required to undertake the following activities, for each of the Identified Beneficiaries, in order to facilitate payment:

    1. (1)

       to provide each beneficiary with formal notice of any distribution;

    2. (2)

       to liaise with each beneficiary to request their bank account details, in order to process the distribution;

    3. (3)

       to attend to the confirmation of the bank account details; and

    4. (4)

       to provide confirmation of the completed distribution.

25. [33]

    The difficulties in dealing with these matters, and the issue of proportionality, can be illustrated by some evidence given by the Liquidator regarding steps taken by him in order to give notice of this application to the Identified Beneficiaries. The Liquidator deposed that he was unable to give notice to 48 of the Identified Beneficiaries because he did not have any email or postal contact details for them. These 48 persons have a combined claim of $26.10, with the highest individual claim being $1.34.

26. [34]

    Even if distribution is limited to the 74 Proposed Beneficiaries, the Liquidator estimates that, after allowing for the expenses of taking the steps outlined above for each of those beneficiaries, the remaining balance of the Outstanding Client Balances Account will be less than the claims of these 74 persons. For that reason, the Plaintiffs seek directions and judicial advice that they would be justified in distributing to the Proposed Beneficiaries on a pro rata basis.

27. [35]

    The Liquidator does not seek to draw any remuneration in relation either to the making of this application or to the future distribution of the funds held in the Outstanding Client Balances Account. However, the Liquidator does seek an order that the expenses associated with this application and the distribution be paid from the Outstanding Client Balances. That order is sought in circumstances where, other than the Outstanding Client Balances Account, the only other funds available to the Liquidator from which expenses could be drawn is an account which was created for the purpose of holding and transacting certain general company funds of Direct FX, which has a current balance of A$3,609.60 (the Further Account).

28. [36]

    As mentioned above, the Liquidator sent a notice in respect of this application to creditors of Direct FX, including all Identified Beneficiaries (other than those for whom he did not have any contact details).

29. [37]

    As at the date of the hearing, the Liquidator had not received any objection from any creditor in relation to this application.

Relevant Principles

1. [38]

   Section 90-15 of the ISPC provides that the Court “may make such orders as it thinks fit in relation to the external administration of a company”, including “an order determining any question arising in the external administration of the company”.

2. [39]

   The Liquidator, as an officer of Direct FX, has standing to apply for a direction of s 90-15: see IPSC, s 90-20(1)(d); and s 9AD(1)(h) of the Act.

3. [40]

   The principles relating to applications for directions under s 90-15 are conveniently summarised by Black J in Re Montpac Pty Ltd (in liq) and Global Network Link Pty Ltd (in liq) [2020] NSWSC 1237 at [8]:

4. [41]

   Section 63 of the Trustee Act provides that a trustee “may apply to the Court for an opinion advice or direction on any question respecting the management or administration of the trust property, or respecting the interpretation of the trust instrument.”

5. [42]

   In Montpac at [9], Black J noted that this provision permits relief aimed at resolving legitimate doubts held by a trustee as to the proper course of action. His Honour continued:

6. [43]

   In Montpac at [11], Black J noted that the applicable principles regarding an application by a trustee for judicial advice were summarised by Jagot J in Equititrust Ltd (in liq) (rec apptd) (recs and mgrs apptd) v Equititrust Ltd (in liq) (rec apptd) (recs and mgrs apptd) (No 4) [2017] FCA 1133 at [7], as including the following:

7. [44]

   The Plaintiffs also drew attention to the following remarks of Brereton J in Re BBY Ltd (recs and mgrs apptd) (in liq) (No 2) [2018] NSWSC 346 (BBY (No 2)) at [40]:

8. [45]

   Those observations have particular significance where, as here, there is a very modest sum of money held in trust, and a very large number of persons with claims upon it (such claims being, for the main part, in trivial amounts).

Orders regarding distribution of funds

1. [46]

   Section 981A of the Act relevantly provides as follows:

2. [47]

   Section 981H(1) of the Act provides as follows:

3. [48]

   The use of the term “on behalf of” in ss 981A and 981H is not limited to an agency relationship. For the purposes of the Act, the term “on behalf of” includes “on the instructions of”: s 9. In Re MF Global Australia Ltd (in liq) [2012] NSWSC 994 at [195]-[196], Black J made the following observations:

4. [49]

   The Outstanding Client Balances represent moneys which were paid to a licensee (namely, Direct FX).

5. [50]

   I am satisfied, having regard to the available evidence and in particular the terms of the revenue sharing agreement between Direct FX and CLM, that those moneys were likely paid to Direct FX in connection with a financial service that was to be provided to a person (namely, an Identified Beneficiary): s 981A(1)(a).

6. [51]

   Further, the evidence indicates that the Identified Beneficiaries deposited money into an account or accounts held by CLM, which was then transferred by CLM into an account held by Direct FX with the Commonwealth Bank. Those moneys were therefore likely paid to a licensee (Direct FX) by a person (CLM) who was acting on behalf of the clients (the Identified Beneficiaries): s 981A(1)(b).

7. [52]

   The available evidence does not establish that any of the exclusions in s 981A(2) applies. The Plaintiffs drew the Court’s attention to s 981A(2)(c), which has the effect that the Subdivision does not apply where “the money is paid to acquire … a financial product from the licensee, whether by way of issue or sale by the licensee”. They noted that the phrase “paid to acquire” in that provision means “money paid by the client to the licensee on a final basis, in the nature of the purchase price for that product”: MF Global at [202] (Black J), applying BBY No 2 at [157]-[161] (Brereton J). The Plaintiffs acknowledged that the evidence does not disclose whether the money was paid by the Identified Beneficiaries in order to purchase a financial product from Direct FX. However, the Outstanding Client Balances do not appear to have been treated by either Direct FX or CLM, and have not been treated by the Liquidator, as falling within s 981A(2)(c) (and in that regard, I refer to the passage from the Liquidator’s report to creditors of January 2019 which is quoted at paragraph [21] above).

8. [53]

   Having regard to:

   1. (1)

      the list of the balances of the individual Identified Beneficiaries, the vast majority of which are for very small amounts;

   2. (2)

      the Liquidator’s evidence of the steps required in order to distribute an amount to each Identified Beneficiary; and

   3. (3)

      the Liquidator’s estimate that the costs of such distribution would likely exceed the available sums;

9. [54]

   I note that a similar course was adopted in comparable circumstances in BBY No 2 and in Kelly (Liquidator), Halifax Investment Services Pty Ltd (In Liq) v Loo [2021] FCA 531 (Markovic J) (Kelly v Loo).

10. [55]

    In Re BBY No 2 at [393]-[397], Brereton J concluded, and gave a direction, that the liquidators would be justified in treating those clients with a balance of $100 or less as having no entitlement to participate in the funds in issue. His Honour commented (at [396]) that:

11. [56]

    Similarly, in Kelly v Loo, Markovic J concluded, and made a direction, that the liquidators would be justified in disregarding account balances which were under $100, in circumstances where the “steps to be taken vis a vis those clients do not differ from those to be taken in relation to clients with higher account balances”, and “the costs associated with distributing funds to each client with an account balance of less than AUD100 will considerably exceed those clients’ account balances” (at [394]).

12. [57]

    Her Honour referred to, and adopted, the remarks of Brereton J in BBY (No 2) which I have quoted above, stating (at [398]):

13. [58]

    Those observations apply with equal, if not greater, force here. The Liquidator’s evidence establishes that the costs associated with administering the claims of all of the Identified Beneficiaries would exhaust the whole of the available funds, leading to a situation where no Identified Beneficiary received any amount in respect of their claim. The Liquidator’s proposed course ensures that those Identified Beneficiaries with a significant balance (of greater than A$100) will achieve a substantial return in respect of their claims.

14. [59]

    Finally, it is significant that the Liquidator has notified creditors of the proposed orders, including all of the Identified Beneficiaries for whom he had contact details, and none has expressed any opposition to the relief sought or the Liquidator’s proposed course of action.

15. [60]

    For those reasons, I will make the directions and give the advice sought by the Liquidator.

Application in respect of expenses of application and distribution

1. [61]

   The Liquidator sought an order that the expenses of this application and the expenses of distributing the Outstanding Client Balances to the Proposed Beneficiaries be paid out of the Outstanding Client Balances.

2. [62]

   As I have noted above, other than the Outstanding Client Balances Account and the Further Account (which has a balance of $3,609.60), there are no other moneys available to the Liquidator in order to fund those expenses.

3. [63]

   The appliable principles were stated as follows by Brereton J in In the matter of AAA Financial Intelligence Ltd (in liq) ACN 093 616 445 [2014] NSWSC 1004 at [13(2)-(3)]:

4. [64]

   I am satisfied that the order sought by the Liquidator is appropriate, having regard to the following matters:

   1. (1)

      there is evidence that the Liquidator’s expenses of this application and of distributing the Outstanding Client Balances to the Proposed Beneficiaries are likely to exceed the total of:

   2. (2)

      the Liquidator is seeking to be paid expenses solely referrable to work done in relation to administering trust assets – namely, the Outstanding Client Balances – from those trust assets; and

   3. (3)

      the Liquidator is not seeking to draw any remuneration in respect of this application or the distribution from the Outstanding Client Balances Account.

5. [65]

   For those reasons, I make the following orders.

   1. (1)

      Order that the name of the First Plaintiff be changed to “Jason Tracy in his capacity as liquidator of Direct FX Trading Pty Ltd (in liquidation) ACN 120 189 424”.

   2. (2)

      The Plaintiffs are justified in treating the Identified Beneficiaries (as that term is defined in the affidavit of the First Plaintiff sworn 4 June 2024) who have a credit balance of less than AU$100 as having no right to participate in the distribution of funds by the First Plaintiff.

   3. (3)

      The Plaintiffs are justified in distributing the Outstanding Client Balances (as that term is defined in the Affidavit) on a pro rata basis to the 74 Proposed Beneficiaries (as that term is defined in the Affidavit).

   4. (4)

      Order that the expenses associated with this application including expenses associated with the distribution to the 74 Proposed Beneficiaries are paid from the Outstanding Client Balances.