Waldron v Auer

[1977] VR 236
(1977) 2 ACLR 514

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(Judgment by: Anderson J)

Waldron
v Auer

Court:

Judge:
Anderson J

Subject References:
Companies
Securities
Financier accepting money from the public for deposit at interest
Such money invested in various securities
Whether 'dealing in securities'
'Securities' including 'any interest as defined in s76 of the Companies Act 1961'
Meaning of 'interest'

Legislative References:
Companies Act 1961 (No. 6839) - section 76; section 81; section 83
Securities Industry Act 1975 (No. 8788) - section 12; section 32

Hearing date: 7 February, 14-18 February 1977
Judgment date: 1 March 1977

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Judgment by:
Anderson J

The application before me is made by the Commissioner of Corporate Affairs who seeks a variety of orders under s12 of the Securities Industry Act 1975 in respect of the business activities of the respondent, Laurence Gilbert Auer, who carries on business as an accountant and money- lender and is engaged in a variety of financial enterprises which have given rise to these proceedings. The summons dated 23 December 1976 which initiated these proceedings contains no specific allegations against the respondent but seeks orders which the Court or a judge thereof has power to make if the requirements of s12 or some of them are satisfied.

The Securities Industry Act 1975 seeks to prohibit dealing in securities unless the dealer is licensed under the Act or unless other precise conditions are complied with. The applicant contends that the respondent, who admittedly is not licensed or otherwise authorized under the Act, has been persistently dealing in securities and is continuing to do so. It is agreed between the parties that if the particular commodity in which the respondent has been, and is, dealing falls within the definition of "securities" in s4 of the Act, then he has been illegally dealing in securities, for the course of his business over the last few years has manifestly possessed constant features, and his conduct would readily fall within the definition of "dealing" in s4 in relation to securities and would involve conduct forbidden by s32. That section provides that a person shall not carry on a business of dealing in securities (whether or not the business is part of, or is carried on in conjunction with, any other business), or hold himself out as carrying on such a business unless he is the holder of a dealer's licence or is a recognized dealer. The respondent is neither the holder of such a licence nor a recognized dealer.

Though a large body of detailed evidence was placed before me and there were a variety of submissions as to the law and a canvassing of the implications of decisions both in this State and New South Wales, this application turns on one issue: are they "securities" in which the respondent has been and is dealing?

"Securities" is defined in s4(1) in the following terms:

"(a)

debentures, stocks or bonds granted, issued or proposed to be issued by a government;

(b)

debentures, stocks, shares, bonds or notes issued or proposed to be issued by a body corporate or unincorporate;

(c)

any right or option in respect of any such debentures, stocks, shares, bonds or notes; or

(d)

an interest as defined in s76 of the Companies Act 1961."

It was agreed that par. (d) of the definition was the only part of the definition which was relevant. That takes us to the definition of "interest" in s76 of the Companies Act 1961, which is in the following terms: "any right to participate or interest whether enforceable or not and whether actual prospective or contingent--

(a)

in any profits assets or realization of any financial or business undertaking or scheme whether in the State or elsewhere;

(b)

in any common enterprise whether in the State or elsewhere in which the holder of the right or interest is led to expect profits rent or interest from the efforts of the promoter of the enterprise or a third party; or

(c)

in any investment contract-- whether or not the right or interest is evidenced by a formal document and whether or not the right or interest relates to a physical asset but does not include" a number of things which are irrelevant to this case; (except that, by way of parenthesis, I observe that excluded from the definition of "interest" are things generally regarded as securities, e.g. debentures and shares-- things which are included in the earlier paragraphs of the definition of securities).

"Investment contract" is in turn defined in s76(1) as meaning "any contract scheme or arrangement which in substance and irrespective of the form thereof involves the investment of money in or under such circumstances that the investor acquires or may acquire an interest in or right in respect of property whether in the State or elsewhere which under or in accordance with the terms of investment will, or may at the option of the investor, be used or employed in common with any other interest in or right in respect of property whether in the State or elsewhere acquired in or under like circumstances."

The question being, was the commodity in which the respondent was dealing an "interest" as so defined, I turn now to consider the facts as they appeared from the evidence before me. Much of the evidence was not in dispute and the facts which in my opinion are relevant I shall endeavour to state as briefly as practicable. The respondent, since about 1950, has conducted what may loosely be described as the business of a financier. He is an accountant and a licensed money-lender and has conducted these business activities for several years in Ballarat, Bendigo and Maryborough. At least from the middle of 1974 his business activities have included an activity which from that time until the present has maintained essentially the same form. The essential elements of this activity are that the respondent advertises that he wishes to borrow and does borrow money at interest from the public generally. Thereafter he lends such money to a variety of classes of persons at higher rates of interest and out of such interest pays to the lenders or credits to their accounts with him the interest he has undertaken to pay them. Some of the money which is lent to him is at call and the lender is provided with a savings pass book comparable with the conventional pass book issued by banks in respect of savings bank accounts. The greater part of the money lent is invested with the respondent for various terms at higher rates of interest.

From about mid 1974 to December 1974 the respondent acknowledged his obligations to the investor by a written agreement which indicated that the money of the investor would be paid into a pool of moneys of other investors and would be used and utilized "in the business of secured loans, hire- purchase and other financing". The agreement described the respondent as the agent of the investor and it provided that after payment to the investor of the agreed amount of interest, the respondent was entitled to retain any balance of profits made in any financial year for his own use and benefit absolutely and as and for his reward for services rendered. Following upon legal advice which the respondent received late in 1974 he ceased to use this form of agreement, but continued to receive money from investors, the only documentation thereafter between the investor and the respondent (apart from the pass book) being an innocuous document entitled "deposit Certificate", which was little more than a receipt for the amount deposited which stated the term of the deposit, the rate of interest and the dates of the half-yearly interest payments.

Though the documentation was changed, the business of the respondent for practical purposes continued to be conducted as formerly. The respondent continued to advertise extensively and effectively that he would pay varying attractive rates of interest for moneys lent to him either at call or for various fixed terms and he continued to pool moneys received and lend them at higher rates of interest on a variety of securities. The business of the respondent expanded considerably and at the present time he owes in respect of money invested with him about $6,000,000, being about $2,000,000 at call and about $4,000,000 on term deposit. These amounts are about double what they were about two years ago.

The advertising employed by the respondent has taken various forms. No doubt some of the investors came on the recommendation of other investors. Some of the advertising did little more than publicize the respondent as a financier. The more significant advertising comprised, and still comprises, printed brochures, of which several thousand were distributed to the public from about July 1975 up to the present time.

One pamphlet, which was printed about May 1974 states, amongst other things, "Security. Our Investors 'own' as a group all the securities taken on loans made--Mortgages, Life Assurance Policies, Assigned Accounts, Bills of Sale, etc." The quotation marks around the word "own" suggest an artificial ownership, a sharing with others in the security of all the securities taken on the lending of their pooled contributions.

Another brochure was entitled "Investment the Golden Key to Opportunity". This is an attractively printed publication of 22 pages which has circulated from about July 1975 onwards and offers interest at 11% for money at call, up to 13 1/2% for investment for eight years. It tells of regularly paid interest each half year and that the investment money is used "On secured loans (76%); on Hire-Purchase Finance (4%); in Factors Finance (20%)". As indicating the security which an investor would have, it states that "All investors share in all the securities taken: 1st Mortgage, 2nd Mortgage, Bills of Sale, Assigned Life Insurance Policies, Assigned Interest in an Estate, Hire-Purchase Goods, Assigned Contracts."

The pooling aspect of moneys invested with other moneys invested is further emphasized by another part of the brochure where the several ways in which the investment money is used is described in more detail and it is explained that help is given to clients to raise finance by "Loans from $1000 to $100,000 each; loans to approved applicants secured by 1st mortgage; loans to approved applicants secured by an assignment of a long-standing cash-valued life assurance policy; loans to approved applicants secured by 2nd mortgages; financial assistance to approved applicants through the regular hire-purchase channels on full recourse to dealer; factored book debts; a growing finance system; loans made with or without security to approved clients; loans to approved applicants secured by an assignment of an interest in an estate; loans to approved applicants secured by a registered bill of sale."

Another brochure which was described as the "Lion and Mouse" brochure further advertises the respondent's business. This quarto-sized brochure has been distributed from February 1976 onwards. It is printed in black and white, is of 16 pages and contains the conversation of two cartoon characters: a massive lion wearing a crown who describes the advantages of investing with the respondent to the second character, a timorous mouse, who is seeking assurance as to the safety of an investment with the respondent. The lion tells the mouse that saving money is not enough and that the mouse must invest his money and earn up to 13 1/2% interest per annum. When the mouse asks, "But is it really safe to invest my money, Leo?", the lion replies, "Good heavens yes! Mousie...Where I invest, my money is secured by mortgages and registered assignments, supported with life assurances and insurances! How safe can you get?!!" The following pages continue the conversation in which the lion explains the various terms on which money can be deposited, the rates of interest and how the investment grows and other aspects. Finally, in answer to Mousie's question, "Leo, this all sounds beaut...but where do I go to invest my money?" Leo points to a panel containing the respondent's name and addresses in nine country towns, and says, "Here's your key to golden opportunity, my friend." Other letterpress in the brochure exhorts readers to invest with the respondent and describes the advantages of doing so.

That the respondent's business was conducted along the lines indicated in the brochures is not in dispute. Anyone reading the literature and investing either at call or for a term would be aware his money is merged with the money of others and the common money was then lent, obviously at interest, to a variety of classes of persons who gave security for the loans. Some part of the moneys invested was lent without any formal security, but the respondent said in evidence that in such cases he was satisfied that the borrower was of sufficient substance and that the security was the assets the borrower was known to possess. Indeed, one of the brochures states that one of the so- called "securities" on which investors' money was lent out was "loans made with or without security to approved clients". The amount of the loans made by the respondent which were not conventionally secured, though substantial, seems to be relatively insignificant in the overall picture of the respondent's business; but irrespective of its size, it does not, in my opinion, affect the issue.

Much of the argument addressed to me on behalf of the respondent was to the effect that there was no investment on behalf of an individual investor in a specific security and therefore what was being dealt in was not securities. In support of such a submission, reference was made to Waldron v MG Securities A/asia Ltd., [1975] VR 508; and to Corporate Affairs Commission v MG Securities Australasia Ltd., [1974] Aust. Co. Law Cases, par. 40-108 and the same case on appeal (1975) 1 ACLR 157, wherein it appeared that what was represented to prospective investors was mortgage security for each investor, and though as it transpired individual investors did not receive specific mortgages as security for their investment referable only to them, the moneys received being pooled and then invested, it was in mortgages that the moneys were invested. It was then argued, as I understood the submission, that since in the present case the nature of the security in which the investor's money would be invested was not specified and since, too, it might be lent without security, there was not a dealing in securities, but what was being offered to the investor and what he was getting, whatever else it might be, was not an interest in securities.

I think that such a circumstance is immaterial, for it ignores that the definition of "securities" in s4(1) of the Securities Industry Act includes "interest" as defined in s76 of the Companies Act. It is not necessary that the moneys contributed should ultimately be invested in "securities"; the definition of "interest" is not concerned with conventional securities. The incorporation of "interest" in the definition of "securities" creates a new class of "securities" for the purpose of the Securities Industry Act. The "interest", and thus "securities", is, in this case, as it was in the two MG Securities Cases, what the investor gets from the dealer, the "stock-in- trade", as Street, CJ, described it in AG for NSW v Australian Fixed Trusts Ltd., [1974] Aust. Co. Law Cases, par. 40-100; (see, too, the MG Securities Case at first instance, supra, at p. 27, 768, and per Pape, J., in Waldron v MG Securities A/asia Ltd., [1975] VR 508, at p.530). Such an "interest" may have nothing whatever to do, directly or indirectly, with the conventional "security", as the definition makes clear.

The definition of "interest" is in very wide terms, creating rights hitherto unknown to the law and possibly unenforceable in some instances. One gets assistance from the elucidation of the definition in the several cases to which I have referred, in which in each instance it was held that the particular schemes there under consideration involved the dealing in an interest. But in determining whether the respondent's "stock-in-trade" constitutes an interest, one does not, as counsel rather suggested, look to see whether the "stock-in-trade" in this case contains the elements which the "stock-in-trade" in those cases possessed. One looks to the definition of "interest" and then at the "stock-in-trade" in this case to determine whether it contains the necessary elements to constitute it such an "interest" as defined. The interest or right to participate which may constitute the interest as defined need not be enforceable and may be actual, prospective or contingent, and the right or interest need not be evidenced by a formal document and the right or interest need not relate to a physical asset.

The question, then, is, is what was offered and sold--what was dealt with-- by the respondent such a right to participate or interest "(a) in any profits assets or realization of any financial or business undertaking or scheme ..."? I consider the answer to that question is, yes. The respondent's activities which are under consideration constitute a financial or business undertaking or scheme--that of borrowing money at interest and lending out that money at higher rates of interest, and in that business or undertaking he receives funds by way of interest payments from the borrowers, out of which he pays the interest he has contracted to pay. The investors who lend money to him have a right to interest at the rate contracted for, such interest payments coming from the profits of the respondent's business, "profits" bearing the meaning attributed to it by Pape, J., in Waldron v MG Securities A/asia Ltd., [1975] VR 508, at pp. 529-30, namely, a gain, benefit or advantage occurring from the management, use or sale of property or from the conduct of business. The observations of Pape, J., at p. 530 and those of Street, CJ, which his Honour quotes at that page are almost all equally opposite to this case mutatis mutandis. I need not repeat them.

The view I have thus expressed means that the applicant has established his case that the respondent has been, and is, dealing in securities. If it were necessary for me to determine whether what was being dealt in is a right to participate or interest under par. (b) of the definition of interest, namely, a common enterprise in which the holder of the right or interest was led to expect profits, rent or interest from the efforts of the promoter of the enterprise, I would answer the question, yes, for the reasons of Street, CJ, adopted by Pape, J., in the MG Securities Case at p. 531. And were I required to determine whether the "stock-in-trade" was a right to participate or interest under par. (c) of the definition of interest, namely an investment contract, as defined in s76 of the Companies Act, I would likewise answer, yes, for the reasons given by Pape, J., at p. 531, where he expressed further agreement with Street, CJ.

Having found that the respondent has illegally dealt in securities, it follows (and this is not disputed by the respondent) that he is also in breach of s81 of the Companies Act 1961, for he is not a company, and that section forbids any person except a company or a duly authorized agent of a company to issue or offer to the public any interest as defined in s76 already referred to. He is likewise in breach of s83 of the Companies Act, which requires an approved deed to be executed before a person may lawfully issue or offer to the public any interest.

The transgressions by the respondent of both the Securities Industry Act and the Companies Act are very substantial and serious. The provisions of both Acts in relation to dealing in "securities" and "interest" are stringent and designed to safeguard prospective investors by ensuring that a person will not be licensed to deal in securities and will not be authorized to offer or issue securities unless elaborate conditions are fulfilled. On what has been revealed on the evidence before me, it seems to me that very few of those conditions could be fulfilled by the respondent. In any event, being an individual, he could not comply with the requirements of s81 of the Companies Act. For the greater part of two years the respondent must surely have been aware of the very doubtful legality of his activities, if not actually aware of their illegality. A letter from his solicitors dated 9 December 1974 informed him of the illegality of the business as then being conducted and advised him to stop advertising for funds until the position was finally clarified. In about mid 1975 the respondent embarked upon a substantial advertising campaign, some particulars of which I have set out above. The respondent may have received some advice to the effect that he could lawfully conduct his business if the only right the investor had was to interest, and that he had no right to participate in any security which the respondent might take in relation to his investment of the proceeds of the loans to him. If he were so advised, as will be seen from these reasons for judgment, he was , in my opinion, wrongly advised. In any event, his advertising from mid 1975 onwards represents to prospective investors that they, in effect, would have an interest in or right in respect of all the securities taken by the respondent. The nature of that right and whether or not it would be enforceable is immaterial. It is perhaps comparable with the otherwise undefined equitable right, which Street, CJ, and, subsequently, the New South Wales Court of Appeal referred to, without, however, elaborating on its precise nature or how, if at all, it might be enforced. In any event, the representation or the existence of such an amorphous right is not a necessary ingredient of an "interest" as defined (see per Street, CJ, [1974] Aust. Co. Law Cases at p. 27,769).

The foregoing observations are relevant to a consideration of whether there has been a persistent or continuing breach of the Act. It is obvious that there has been, and though the Court has a discretion as to whether or not to grant the restraining order which the applicant seeks under s12 of the Act, I agree with respect with the remarks of Pape, J., in the MG Securities Case, at p. 533, that once it has been established that the respondent has, contrary to s32, carried on the business of dealing in securities whilst unlicensed, the Court really has no option but to make a restraining order, for the Court cannot countenance or permit infringements of the Act. There are a number of matters to be taken into account before other orders which s12 empowers the Court to make are made, and I am prepared to hear counsel further on these matters.

There was a considerable body of evidence before me which related to aspects of the conduct of the respondent's business which were unsatisfactory in various respects. These included haphazard accountancy methods, incorrect and inadequate records and the like. Whether or not the respondent's business is solvent, the unsatisfactory records and the absence of other records cause disquiet. If millions of dollars of investors' moneys can be haphazardly handled by an unlicensed dealer in this manner, the need for such legislation as the Securities Industry Act and the provisions of the Companies Act, to which I have referred is apparent.

The order under s12 of the Securities Industry Act is an order restraining the respondent from "dealing" in securities, that is, from doing any of the acts which are enumerated in the definition of that expression in s4. His business is borrowing money and lending it out. His dealings in securities involve the offering and selling of interests, that is, the right to participate in the business by receiving interest on moneys invested in the respondent's business. The restraining order at least prohibits him from advertising for money or inviting investors to invest, and also from accepting money for the purpose of his business. The definition is involved and comprehensive and it may extend further, but I am not concerned to explore its limits. A restraint on "dealing" involves a restraint on all those matters mentioned in the definition.

It was urged upon me by counsel for the respondent that in the event of my finding that the pattern of the respondent's business was illegal I should indicate what the illegal elements were and the manner in which the respondent may lawfully carry on his business. I do not intend to embark upon such a course. It is not the role of the Court to advise people how they may conduct their business in a lawful manner or to work out for them a scheme to circumvent the safeguards which Parliament has seen fit to prescribe. It is evident, however, that at least part of his business must cease. He may no longer solicit or receive any funds for investment.

Looking at the matter broadly it seems to me the respondent's business must be wound up with all convenient speed. Interest payable on loans must, of course, be met when it is due. It seems, too, that in order to effect repayment to investors of money invested, loans made by the respondent should be called up as soon as the terms of the mortgage or other securities on which the money has been advanced allow. Any money to be repaid by the respondent to investors will come from interest payments on, and the repayment of, money lent by the respondent. The restraining order precludes his receiving further money by way of investment which might otherwise be used to meet interest or other payments to earlier investors.

I have not considered separately from the respondent's business as a financier his venture, via some proprietary companies, into the motel business. These companies are borrowers from him in the course of his financing business.

The order I will make will be the restraining order which is sought by the Commissioner under s12(1) of the Securities Industry Act.

Order accordingly.