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

1. [1]

   The plaintiffs are the Court-appointed liquidators of Courtenay House Pty Limited and Courtenay House Capital Trading Group Pty Ltd, pursuant to orders made on 16 May 2017 (“the appointment date”) on the application of the Australian Securities and Investments Commission (ASIC).

2. [2]

   Since 2010, Courtenay House Pty Limited and Courtenay House Capital Trading Group Pty Ltd have accepted funds from investors for the ostensible purpose of investment in foreign exchange trading. The two companies appear to have been operated as a single enterprise and for convenience I shall refer to them together as Courtenay House. Courtenay House offered investors a number of “standard products”, by which funds were to be invested for general foreign exchange trading. In addition, in 2016, Courtenay House began to offer one-off “special products” for the stated purpose of exploiting foreign exchange movements associated with significant world events. The first of these was the “US Election Special”, associated with the November 2016 United States presidential election; the second was the “Inauguration Day Special”, associated with the inauguration of the President of the United States in January 2017; and the third was the “Brexit Special”, associated with the exit of the United Kingdom from the European Union in May 2017.

3. [3]

   Courtenay House provided prospective investors with a client information booklet and an investor pack. While these did not specify how investor funds were to be held in the companies’ bank accounts, the investor pack included the following statement (emphasis added):

4. [4]

   Once an investor decided to proceed, they were provided with an investor application form, to be completed and returned. The investment did not proceed until the form was returned and the funds were deposited.

5. [5]

   The US Election Special was marketed by email to existing clients in about September 2016. Between 6 September and 31 October 2016, investors deposited approximately $20.87 million into an account in the name of Courtenay House with the National Australia Bank (“the US Election NAB Account”). Of this, approximately $4.38 million was paid in returns to investors, $12.6 million was later rolled over into another account in the name of Courtenay House with the National Australia Bank numbered 6250 (“the NAB-1 Account”), and other amounts were paid to various other bank accounts, leaving a nil balance as at the appointment date.

6. [6]

   The Inauguration Day Special was marketed in December 2016. Between December 2016 and January 2017, investors deposited approximately $27.5 million into the NAB-1 Account. On 13 January 2017, $25 million was transferred from the NAB-1 Account to the US Election NAB Account and paid as returns to investors in the Inauguration Day Special, rolled over into standard products, or paid into other bank accounts. This left a balance of $4,945 in the NAB-1 Account, which was ultimately withdrawn on 16 March 2017.

7. [7]

   In about March 2017, Courtenay House emailed material promoting the Brexit Special to its clients. It was a condition that capital invested in the Brexit Special be new, and not drawn – or “rolled-over” – from funds already invested in standard products. The application form - entitled “Trading Agreement: Extreme 3 New Account Form – Brexit” - included the following (emphasis added):

8. [8]

   The form identified the NAB-1 account as the account into which deposits were to be made.

9. [9]

   Between 15 March and 26 April 2017, clients invested approximately $28.95 million in the “Brexit Special”, all of which was deposited into the NAB-1 Account (“the Brexit Funds”). The Liquidators have been able to trace the entirety of the Brexit Funds to the investors who deposited them, with the exception only of $15,000 which was deposited in cash. The Brexit Funds remained in the NAB-1 Account on the appointment date, and have since been transferred by the Liquidators to a term deposit in their name.

10. [10]

    It appears that, despite what was represented to clients, Courtenay House undertook very little foreign exchange trading and generated minimal returns from it; in fact, they operated a Ponzi scheme, using capital deposited by more recent investors to repay earlier investors. Neither the US Election Special nor the Inauguration Day Special funds were ever traded. After returns were paid to investors (22.87% on the US Election Special, and 13% on the Inauguration Day Special) most investors would roll-over the invested funds into standard products.

11. [11]

    On 21 April 2017, at 3.11pm, following an investigation, ASIC obtained freezing orders over Courtenay House’s bank accounts; the orders were served shortly after 4.00pm the same day. A number of deposits were made by investors to the NAB-1 Account on 21 April, both before and after the making and service of the freezing orders.

12. [12]

    As at the appointment date, the Companies appear to have held six bank accounts:

    1. (1)

       The “Westpac 1” account, used to pay returns and to return capital to investors, fund some limited trading services, and pay individuals and expenses. It had a nil balance.

    2. (2)

       The “Westpac 2” account, used to receive capital deposits from investors for standard products, which had a balance of $21.02 million.

    3. (3)

       The “Westpac 3” account, which had been used for an international telegraphic transfer of $134,800, and had a nil balance.

    4. (4)

       The “US Election NAB Account”, which had been used to receive investor funds for the US Election Special, and had a nil balance.

    5. (5)

       The “NAB-1 Account”, which had originally been used to receive investor funds for the Inauguration Day Special, and subsequently for the Brexit Special, which had a balance of approximately $29 million.

    6. (6)

       The “Business Cash Maximiser” NAB Account, which was used as a conduit for certain transfers of funds between other accounts, and had virtually a nil balance.

13. [13]

    The total investor funds which the liquidators have been able to identify, and the claims on them, are approximately summarised in the following table: [1]

14. [14]

    Thus, if the Brexit funds are treated as exclusively the beneficial property of the Brexit investors, they will receive a return of 100 cents in the dollar, or close to it (subject, perhaps, to the impact of liquidation costs and expenses), while the non-Brexit investors would receive a dividend in the order of 13 cents in the dollar; whereas, if all funds are “pooled”, all investors would receive a dividend in the order of 26 cents in the dollar.

15. [15]

    By originating process filed on 5 September 2017, the Liquidators applied pursuant to (CTH) Corporations Act 2001, Sch 2, s 90-15, and ss 579E, 579G and 601EE, (NSW) Trustee Act 1925, s 63, (NSW) Uniform Civil Procedure Rules 2005, r 28.2, and (NSW) Supreme Court (Corporations) Rules 1999, r 2.13(5), for advice and directions as to the manner in which they should distribute the funds in those accounts, for the winding up of the unregistered managed investment scheme under Corporations Act, s 601EE, and for the joinder of representative defendants to represent various classes of defendants. On their interlocutory process filed on 4 December 2017, an order was made that the following questions be determined separately and before the other issues in the proceedings:

16. [16]

    Although in their report the Liquidators, for whom Ms Whittaker and Ms Hulmes appeared, expressed some opinions as to what they consider fair or equitable, on the hearing they adopted a neutral position, leaving the representative defendants to advance the interests of the respective classes. [2] The first defendant J.P. Melocco Pty Ltd, for whom Mr Izzo appeared, represents the class of investors who invested in the Brexit Special whose investment funds were deposited into the NAB-1 Account on or before 21 April 2017, the date on which the freezing orders were made (“the Pre-21 April 2017 Brexit Investors”). The second defendant Alamaidan Investments Pty Ltd (as trustee for the Del Vecchio Family Trust), for whom Mr Newlinds SC and Mr Strickland appeared, represents the class of investors who invested in the Brexit Special whose investment funds were deposited into the NAB-1 Account after 21 April 2017 (“the Post-21 April 2017 Brexit Investors”). The third defendant Lifesmart Trading Pty Ltd, for whom Mr Pike SC appeared, represents other investors – that is, the class who invested in products other than the Brexit Special. In separate proceedings, Lord Kyle Lester Sheridan has at various times sought orders for the return to him of funds invested with the Companies. [3] He is a non-Brexit investor as to $2.8 million, and a post-21 April Brexit investor as to $7.8 million. In the light of the quantum of his interest, and the pendency of his separate proceedings, he was granted leave pursuant to Corporations Rules, r 2.13(1), to be heard as a creditor, without being joined as a party.

17. [17]

    The Brexit Investors advanced three bases on which the Brexit funds were said to be held on trust for them. The first was an express trust, arising from the language of the documentation. The second was a resulting “Quistclose” trust, arising from the failure of the purpose for which the funds were advanced to the companies. The third was a constructive Black v Freedman [4] trust, arising from what was said to be the fraudulent Ponzi scheme. [5]

Express trust

1. [18]

   The non-Brexit Investors argued that there was insufficient certainty of intention to create a trust, there being various textual and contextual reasons, some blowing in different directions. [6]

2. [19]

   In this context, references to “intention” are to be understood, in the same way as in the law of contract, as references to the intention imputed to the parties by the objective manifestations of the words they use in their context. [7] Where the indicia are finely balanced, the necessary certainty of intention will not likely be found. [8] This is particularly so in a “commercial” context, where the imposition of trust relationships may defeat the interests and expectations of creditors, as explained by Keane J in Korda v Australian Executor Trustee (SA) Limited (citations omitted): [9]

3. [20]

   However, it is important to observe that this restraint in finding that a trust was intended applies “unless an intention to create a trust is clearly to be collected from the language used and the circumstances of the case”. [10] As Gummow and Hayne JJ pointed out in Byrnes v Kendle, use of such words as “upon trust” will manifest such an intention: [11]

4. [21]

   Likewise, Heydon and Crennan JJ: [12]

5. [22]

   To similar effect, French CJ said: [13]

6. [23]

   In the present case, the formal document by which the parties agreed to the terms of the investment described it as being held in trust. Other aspects of the document were less explicit, but favour the same view:

   1. (1)

      Courtenay House were to place and manage trades on behalf of the investor;

   2. (2)

      it was said that the initial capital plus returns will be returned to the clients, and that your full amount plus any profit will be returned to your account;

   3. (3)

      the investment was described as your capital; and

   4. (4)

      it was explained that we do not mix up funds with your other account, and that if a client has multiple accounts they are treated separately.

7. [24]

   Absent the express reference to “in trust” there may arguably have been insufficient certainty, but the presence of those unambiguous and explicit words is decisive.

8. [25]

   The possibility that there were also oral communications between investors and the companies does not detract from the force of the documentation. First, there is no evidence of any particular communication inconsistent with an intention that the funds invested be held on trust for the client. Secondly, the terms of an express trust are decisive, in the absence of any fraud, undue influence or duress; what needs to be ascertained is the intention as revealed by the words used by the parties, and further inquiry into the subjective or real intention of the settlor is unnecessary. [14]

9. [26]

   Nor is the reference to a “trading account”, or the notion that funds deposited would be pooled with those of other investors to “live trade”, inconsistent with an intention to create a trust. Receipt of funds from multiple beneficiaries into a single account is not inconsistent with a trust; the paradigm case is a solicitor’s trust account. Segregation of funds, while an indicium of a trust, is not essential, and a trustee is not always obliged to keep the trust funds separate. [15] An agreement that money be paid into a general account does not defeat a trust that would otherwise exist. [16] Particularly in the context of managed investment schemes, the idea of trust money being “pooled” for the purposes of trading, and even being used to meet certain obligations of the trustee, even in connection with other clients, is established. [17] Moreover, a trust may be recognised over the funds when first received, and over any returns from trading in them. [18]

10. [27]

    In my judgment, funds deposited by Brexit Investors were plainly to be held on trust by Courtenay House for the relevant Brexit Investor, who remained beneficially entitled to the funds.

Quistclose trust

1. [28]

   Where funds are transferred from one party to another with the intention that they not become part of the general assets of the transferee and are to be used by the transferee for a specific purpose, then - absent contrary stipulation - it is implied that if the purpose cannot be effectuated, the money is held upon trust for the transferor. [19] This involves the application of established trust principles to particular facts. [20]

2. [29]

   In the present case, it is abundantly clear that the funds were not intended to become part of the general assets of Courtenay House, but were to be used by the companies to trade on behalf of investors. They were never used for that purpose, and the freezing orders made it impossible that they be so used. This provides an alternative basis for the conclusion that they are held on trust for the Brexit Investors.

Black v Freedman trust

1. [30]

   Where money has been stolen, or obtained by fraud, it is held on trust by the recipient. [21] Here, contrary to what was represented to investors, funds were procured by the companies, not for the purpose of undertaking foreign exchange trading, but to return capital and return on investment to earlier investors, in the course of a Ponzi scheme. While the non-Brexit investors submitted that whether a trust arose must depend on the facts of each individual case, and that - as the Brexit Investors were all existing clients with an established relationship with the companies - there may well be more to the relationship, in my view it is inconceivable that any would have invested had they understood that their funds were to be used not for foreign exchange trading, but to pay out earlier investors, and that repayment to them would be dependent upon the survival of the scheme. Accordingly, this is a further alternative basis for concluding that the funds invested with Courtenay House were held on trust for the investors.

Pooling and set-off

1. [31]

   The non-Brexit investors submitted that if the Court were to conclude that the funds invested by the Brexit Investors were held on trust for those investors, then the funds invested by non-Brexit Investors were also held on trust, and that the funds should be “pooled”, or at least returns derived by Brexit Investors from their investments in non-Brexit products should be set off against their entitlement to recover their Brexit investments.

2. [32]

   The first limb of this proposition is in my judgment correct. The documentation for the other special products was relevantly indistinguishable from that used for the Brexit Special, and the documentation for standard products in more recent times was to similar effect. Although it is conceivable that Courtenay House still held some funds which had been invested under the earlier documentation which did not contain the explicit reference to being “held in trust”, it is likely that the overwhelming proportion of the funds held as at the appointment date had been subscribed under documentation which did contain those words. Accordingly, I accept that Courtenay House held the funds subscribed by non-Brexit investors on trust for the clients who invested them.

3. [33]

   Mr Pike SC submitted that a direction should be made (under Corporations Act, s 601EE(2)) for pooling, in order to avoid a situation in which one trust (the Brexit Investments) benefits at the expense of another (the non-Brexit Investments). This submission was founded on a passage in BBY No 2, [22] which – when the context is examined – was directed to a situation in which trust funds had been mixed. In BBY No 2, I endeavoured to explain that pooling was a pragmatic remedy which a liquidator might be directed to adopt where the identification and tracing of the interests of individual clients is not in the circumstances of the particular case reasonably and economically practical, on the basis that it is reasonable in the circumstances that the funds be regarded as irreversibly deficient and mixed. The theoretical basis for pooling is the principle that all contributors to a deficient mixed fund hold an equitable charge over the entire fund and its traceable proceeds to the value of their contributions, subject to any dealings and costs, or are equitable tenants in common of the mixed fund as a whole, including its traceable proceeds, subject to such deductions, so that each contributor has an “entitlement” in each fund, although the pragmatic nature of the jurisdiction to give advice and directions to a liquidator means that neither strict proof of mixing such as would entitle a beneficiary to an equitable proprietary remedy, nor absolute impossibility of tracing, is required. However, because the effect of pooling two or more accounts is to treat each client’s entitlement to one as identical to its entitlement to the other(s), and so to treat each client as having a rateably equal interest in each fund, it will be warranted only when the funds have become so intertwined that each client’s entitlement to one account may reasonably be regarded as identical to its entitlement to the other(s), and this will be so when it is reasonable in all the circumstances to regard each as having a rateably equal interest in the mixed fund. [23]

4. [34]

   Generally, the Court’s power (under Corporations Act, s 601EE(2)), to make any orders it considers appropriate for the winding up of an unregistered managed investment scheme does not authorise a distribution of surplus assets other than to those entitled to the assets in proportion to their entitlements, [24] although that general principle yields in cases where it is not pragmatic to ascertain the proprietary rights. [25] As Black J observed in MF Global, “the case law has recognised that, where there are relatively clear property interests in particular property, this cannot "be altered by reference to some notion of common misfortune", [26] and that “accounts should only be pooled … if mixing or another proper basis for pooling is established”. [27]

5. [35]

   This is not a case in which it is not pragmatic to ascertain entitlements to the Brexit funds: the Liquidators have (with the insignificant exception already mentioned) traced every contribution to the Brexit funds. Whether it is possible to trace the deposits of the non-Brexit investors remains under inquiry but appears improbable, not only due to the number of transactions, but also because the fund is manifestly deficient. But it has been possible to trace the deposits of each Brexit Investor, and to establish that the trust property is still in existence, in the NAB-1 account, and that there is no deficiency.

6. [36]

   There has been no mixing of the Brexit funds with other funds, and the fund is sufficient to meet the claims of all those who contributed to it. Just because all the deposits from all investors were received on trust for the relevant depositor does not mean that somehow there was a single trust fund; to the contrary, the capital deposited by each investor was held on trust for that investor. The money deposited by the Brexit Investors remained a separate extant fund, which was always segregated from other non-Brexit funds, was not mixed, and was not deficient. There has been no mixture into them of non-Brexit funds which might give non-Brexit investors a claim on the Brexit funds.

7. [37]

   The non-Brexit Investors submitted that but for the freezing orders made on 21 April 2017, the Brexit money would have been used to repay other investments. There are two answers to that proposition: the first is that they were not so used; and the second is that, had they been so used, that would have represented a mixture of the Brexit funds into the other funds, giving the Brexit investors a claim to trace into the other funds, and if (as appears to be the case) the other funds were deficient, to a charge over the other funds to the extent of the contributions made to them by the Brexit funds. On no basis would it give non-Brexit Investors a claim to the Brexit funds.

8. [38]

   Where there is no difficulty in identifying the beneficial entitlements to the Brexit funds, no deficiency in them, and they have not been mixed with any other money, there is no warrant for pooling, which would amount to no more than disregarding clear property interests in particular property on account of some notion of common misfortune.

9. [39]

   The “set-off” argument, which was also mentioned in the Liquidators’ report, says that it would be unfair for Brexit Investors to receive back their Brexit Investment and also to retain such return as they may already have received in respect of any other investment. It was argued that this would somehow confer an unfair windfall on the Brexit Investors.

10. [40]

    An endeavour was made to illustrate this by reference to the amount which a selected Brexit investor had already received by way of return from investment in non-Brexit products, as well the amount which would be received from a 100c in the dollar return from the Brexit investment. However, I did not find this persuasive. It might have been otherwise if Brexit funds had been used to repay earlier investments, but they were not. Moreover, a beneficiary’s entitlement to recover its property from one fund is not affected by what the same beneficiary has received from another fund. Insofar as the argument is analogous to the rule in Cherry v Boultbee, [28] that rule concerns set-off of claims and liabilities in respect of a single fund. And while, in the context of a deficient mixed fund, it may be appropriate that returns received by some beneficial owners be taken into account in order to do equity in distribution of what remains in the fund, [29] the Brexit Investment fund is, as has been explained above, neither deficient, nor mixed with non-Brexit funds.

11. [41]

    There is no proper basis for setting off returns derived by Brexit Investors from their investments in non-Brexit products against their entitlement to recover their Brexit investments.

Conclusion and orders

1. [42]

   For the foregoing reasons, I have concluded that:

   1. (1)

      the Pre-21 April 2017 Brexit Investors are the beneficial owners of the funds deposited by them into the NAB-1 Account, and the liquidators are justified in distributing the funds deposited by the Pre-21 April 2017 Brexit Investors to them only, and not to other creditors of the Companies; and

   2. (2)

      the Post-21 April 2017 Brexit Investors are the beneficial owners of the funds deposited by them into the NAB-1 Account, and the liquidators are justified in distributing the funds deposited by the Post 21 April 2017 Brexit Investors to them only, and not to other creditors of the Companies.

2. [43]

   The Court orders that the preliminary questions be answered as follows: