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To the Creditor as Addressed 30 August 2019 Dear Sir / Madam

Courtenay House Capital Trading Group Pty Ltd (In Liquidation)

ACN 152 224 149

Courtenay House Pty Ltd (In Liquidation)

ACN 130 607 644

(Collectively “the Companies”)

We refer to our appointment as Joint and Several Liquidators of the Companies on 16 May 2017. We also refer to our update to creditors dated 2 August 2019 which can be found here: https://www.grantthornton.com.au/globalassets/1.-member-firms/australian-website/creditors-documents/gtal_2019_chct_2-august-2019---update-to-creditors.pdf

Westpac (Non-Brexit Hearing)

Creditors are aware that the representative proceedings with respect to whether the Westpac funds are held on trust (and if so, what the terms of that trust may be) were listed for hearing before Justice Black on 24 and 25 July 2019.

Judgement

We received the judgment from Justice Black on 28 August 2019. A summary of the judgement is provided below. a) Question of whether the funds were held in trust Justice Black found that the funds in the Westpac Accounts were held on trust for the Westpac Investors and that the Westpac Funds were held on either (or both) a Quistclose style trust, or on a Black v Freedman style trust. That is:

1. the Westpac Funds were held on trust because they were never used for the express purpose for which they were invested (Quistclose i.e Foreign Exchange trading); and

2. the Westpac Funds were also held on trust because they were procured by fraud

(Black v Freedman). Justice Black did not accept that the Westpac Funds were held on an express trust because an express trust requires certainty of the parties' intention to enter into a trust. As creditors may be aware, only some of the standard product investment forms referred to investors' funds being held "on trust”.

2

Further, due to the disorganised state of Courtenay House's records, it is not possible to determine which investors had been given forms which expressly refer to funds being held on trust. Accordingly, Justice Black found that the criteria required for an express trust were not met. However, this is academic given he found that a trust still exists on two other basis. b) Treatment of creditors Justice Black found that all of the Westpac Investors (including the Mistaken Investors and the Post-21 April 2017 Westpac Investors) were all in the same position. Therefore:

1. the Mistaken Investors' funds in the Westpac Accounts were held on trust, but they were not entitled to treat those funds as if they had had been invested in the Brexit product. The main reason for this finding was that even though it was arguable that these funds could be traced, the funds they may be traced from was a deficient trust fund;

2. the Post-21 April 2017 Westpac Investors had no better claim on the Westpac Funds than the general Westpac Investors, and they were not entitled to avoid a pari passu distribution in order to receive a greater distribution than the general Westpac Investors; and

3. Justice Black also noted that the Westpac Funds were held on trust for Nina

Girsa (partner of Tony Iervasi) and Zoja Gromova (mother of Ms Girsa), subject to them being able to satisfy the Liquidators or the Court that the source of their investments into the Westpac Account was not Courtenay House's funds.

This means that these different categories of creditors are to be treated in the same way when dealing with the Westpac monies. c) Orders made With respect to the first direction sought by the Liquidators regarding the beneficial owners of the funds, the orders Justice Black made are as follows:

1. The beneficial owners of the funds deposited in the Westpac Accounts are:

a. the Westpac Investors;

b. the post-21 April 2017 Westpac Investors;

c. the Mistaken Investors; and

d. Nina Girsa and Zoja Gromova, if they satisfy the Liquidators or the Court that the source of their deposits into the Westpac Accounts was not the Companies' funds.

A copy of the Order and judgement is available on our website.

Next Steps and Estimated Timing

As previously advised, a further application will need to be made to obtain directions regarding the method in which the Westpac Funds should be distributed to creditors. As creditors may recall, the Liquidators attempted to have the Court decide the distribution methodology last year however, the Court declined until it had heard a contested argument as to the existence of a trust.

3

Now that the existence of a trust has been determined, the next step in the proceedings will be for the Liquidators to file an application seeking that the Court determine the appropriate methodology for a distribution. The Liquidators’ Court Report (which is available on our website) sets out the various distribution methodologies and while it still remains unchanged in principle, some of the numbers may have changed as a consequence of the costs incurred in the recent legal proceedings. The primary legal issue which remains is what the Court refers to as "hotchpot". This term refers to what extent the previous payments made to creditors should be taken into account when determining the return to creditors from the remaining trust funds. That is, if hotchpot is to apply, returns previously received by investors prior to my appointment will be deducted from their gross claim to calculate a net amount and this will be the basis upon which the dividend is then paid to investors. The Liquidators are still considering whether each class of creditor will need to be represented or whether representation can be simplified to a smaller number of representatives. This is a matter which will be considered and discussed in detail with counsel prior to the Liquidators finalising any further applications. As previously advised, the Court has instructed that it requires a contested hearing on these issues of distribution methodology so this means that the Court will likely require some of the present representative creditors to be parties to argue for the method of distribution that best advantages them. The Court will then determine how the distribution should be calculated and the Liquidators will implement those directions when undertaking the dividend process.

The Liquidators are also considering whether additional directions from the Court will be required to deal with funds recovered from third parties to date. The Liquidators intend to bring as many outstanding issues as possible before the Court in one hearing in order to minimise the costs being incurred and in turn, to enable a distribution to be made to creditors as early as possible. The Liquidators will make every effort to bring the matter to bring the matter to Court for finalisation as soon as possible. It is likely that the relevant submissions for the second hearing (Stage 2) will be prepared and finalised prior to the closure of the court for the calendar year however, whether the matter is heard prior to December 2019 will be subject the court’s availability to hear the application.

Contact Details

We trust that creditors have found this update useful. Should you have any queries in relation to the above report, or the liquidation in general, please contact our office on (02) 8297 2400 or courtenay.house@au.gt.com.

Yours faithfully

Said Jahani Joint and Several Liquidator Enc.

~~► Y ~~M~•1"~

~~a.~ice;;, ~.

Case Name: In the matter of Courtenay House Capital TradingGroup Pty Limited (in liquidation) and CourtenayHouse Pty Limited (in liquidation)

Medium Neutral Citation

Hearing Date(s):

Date of Orders:

Date of Decision:

Jurisdiction:

Before:

[2019] NSWSC 1113

24 July 2019

28 August 2019

28 August 2019

Equity -Corporations List

Black J

Decision: The beneficial owners of the funds deposited in theWestpac Accounts are specified categories ofinvestors.

Catchwords: CORPORATIONS —unregistered managedinvestment scheme —winding up —application fordirections justifying distribution of funds deposited byparticular category of investors —whether fundsdeposited by investors in the category held on trust forthem.

EQUITY —trusts —express trust —intention —wherefunds variously expressed to be "managed on behalfof investors" or "held on trust" —where inconsistentusage of such expressions.

EQUITY —trusts — Quistclose trust —where fundsexpressed to be used to make trades "on behalf ofinvestors —where funds not applied for that purpose —whetherfunds held on Quistclose trust.

EQUITY —trusts — Black v S Freedman & Co trust —where companies were operating a Ponzi scheme —where scheme fraudulent in character —whether fundsheld on Black v S Freedman & Co trust.

Legislation Cited: -Corporations Act 2001 (Cth) Sch 2, s 90-15

- Trustee Act 1925 (NS1l~ s 63

Cases Cited: -Associated Alloys Pty Ltd v ACN 007 452 106 PtyLtd (in liq) [2000] HCA 25; (2000) 202 CLR 588- Australasian Conference Association Ltd v MainlineConstructions Pty Ltd (in liq) [1978] HCA 45; (1978)141 CLR 335- Australian Securities and Investments Commission vIdylic Solutions Ltd [2009] NSWSC 1306; (2009) 76ACSR 129- Barclays Bank Ltd v Quistclose Investments Ltd[1970] AC 567- Black v S Freedman & Co [1910] HCA 58; (1910) 12CLR 105- Brady v Stapleton [1952] HCA 62; (1952) 88 CLR322- Korda v Australian Executor Trustees (SA) Ltd[2015] HCA 6; (2015) 225 CLR 62- Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135- Re BBY Ltd (recs and mgrs apptd) (in liq) (No 2)[2018] NSWSC 346; (2018) 363 ALR 492- Re Courtenay House Capital Trading Group PtyLimited (in liq) and Courtenay House Pty Limited (inliq) [2018] NSWSC 404; (2018) 125 ACSR 149- Re French Caledonia Travel Service Pty Ltd (in liq)[2003] NSWSC 1008; (2003) 59 NSWLR 361- Re Magarey Farlam Lawyers Trust Accounts (No 3)[2007] SASC 9; (2007) 96 SASR 337- Re MF Global Australia Ltd (in liq) (2012) NSWSC994; (2012) 267 FLR 27- Russell Gould Pty Ltd v Ramangkura [2014] NSWCA310- Salvo v New Tel Ltd [2005] NSWCA 281- Sons of Gwalia Ltd (subject to deed of companyarrangement) v Margaretic [2006] FCAFC 92; (2006)232 ALR 119- Wambo Coal Pty Ltd v Ariff [2007] NSWSC 589;(2007) 63 ACSR 429

Texts Cited: - J D Heydon and M J Leeming, Jacobs' Law of Trustsin Australia (LexisNexis Butterworths, 7t" ed, 2006)

Category: Procedural and other rulings

Parties: Said Jahani and John Mcinerney in their capacity asjoint and several liquidators of Courtenay House PtyLimited (in liq) and Courtenay House Capital TradingGroup Pty Limited (in liq) (First PlaintifflCourtenay House Capital Trading Group Pty Ltd (inliquidation) (Second Plaintiff

2

Courtenay House Pty Limited (in liq) (Third PlaintiffJ P Melocco Pty Ltd (First Defendant)LifeSmart Trading Pty Ltd (Second Defendant)Peter Caron and Anke Seidlitz (Third Defendants)Ralph Del Vecchio (Fourth Defendant)

Representation: Counsel:R Scruby SC/L E Hulmes (Plaintiffs)M A Izzo SC%B Michael (First Defendant)R Pike SC/B Ng (Second Defendant)E L Beechey (Third Defendants)D Barlin (Fourth Defendant)

Solicitors:Colin Biggers &Paisley (Plaintiffs)Ashurst (First Defendant)Johnson Winter &Slattery (Second Defendant)Jones Day (Third Defendants)Diamond Conway Lawyers (Fourth Defendant)

File Number(s): 2017/269831

Publication Restriction:

JUDGMENT

1 By Originating Process filed on 5 September 2017, the Plaintiffs, Messrs

Jahani and McInerney as liquidators ("Liquidators") of Courtenay House

Capital Trading Group Pty Limited (in liq) and of Courtenay House Pty Limited

(in liq) (together "Companies") seek orders and directions as to the manner in

which they should distribute funds held in certain bank accounts to former

clients of the Companies. An earlier question whether funds held in an

account with the National Australia Bank Limited ("NAB-1 Account") should be

distributed to Brexit Investors (as defined) was determined by Brereton J as a

separate question in Re Courtenay House Capital Trading Group Pty Limited

(in liq) and Courtenay House Pty Limited (in liq) [2018] NSWSC 404; (2018)

125 ACSR 149. I will refer to his Honour's judgment in respect of that

question below, since it has significant relevance to the issues that I now have

to determine.

3

2 By an Interlocutory Process dated 31 October 2018, the Liquidators and the

Companies sought directions as to these issues under s 90-15 of the

Insolvency Practice Schedule (Corporations) being Sch 2 to the Corporations

Act 2001 (Cth) ands 63 of the Trustee Act 1925 (NSW). I will refer below to

the several directions sought, and will also deal below with other interlocutory

applications filed by other parties. The Liquidators take a neutral approach in

respect of the controversial issues in this hearing, consistent with the proper

approach in a trust dispute where the case is being properly presented by the

beneficiaries: Sons of Gwalia Ltd (subject to deed of company arrangement) v

Margaretic [2006] FCAFC 92; (2006) 232 ALR 119 at [6]; Re MF Global

Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 at [2]. The

Liquidators' submissions also refer to alternative scenarios by which a

dividend could be calculated if the monies in the Westpac Accounts (as

defined) are found to be held on trust for the Westpac Investors (as defined),

including an approach which has reference to capital only or an approach

which has regard to the returns received by an investor on their capital, by

reference to equitable principles of "hotchpot": see Australian Securities and

Investments Commission v Idylic Solutions Ltd [2009] NSWSC 1306; (2009)

76 ACSR 129 at [77]. The Liquidators do not seek to have that question

determined in this application.

3 Several parties were joined, in their own right and as representatives of

classes of creditors, for the determination of those issues. The First

Defendant, J P Melocco Pty Ltd ("JPM"), represents itself and persons who

deposited funds into the Companies' Westpac Accounts to participate in

investment opportunities other than the "Brexit Special" product, with the

exclusion of several categories of persons who are largely separately

represented. LifeSmart Trading Pty Ltd ("LifeSmart"), for itself and

representing some of the Westpac Investors, contends for the position that

the funds deposited into the Westpac Accounts are not held on trust for the

Westpac Investors. That finding may be to the advantage of those investors if

it has the result that amounts already paid to them cannot be taken into

account by the application of "hotchpot" principles in equity, in calculating their

returns in the liquidation. The Third Defendants, Peter Caron and Anke

4

Seidlitz, and those represented by them ("Post 21 April 2017 Westpac

Investors") are investors who deposited funds after a freezing order took

effect over the monies in the Westpac Accounts on 21 April 2017. The Fourth

Defendant, Ralph Del Vecchio, and those represented by him ("Mistaken

Investors") are persons who sought to invest in the Brexit Special product but

mistakenly deposited funds into the Companies' Westpac 2 Account, rather

than the NAB-1 Account nominated by the Companies for that product.

Factual background and Liquidators' affidavit evidence

4 The factual background to this application is uncontroversial, and has been

addressed in earlier judgments of the Court, including Brereton J's judgment

in Re Courtenay House Capital Trading Group Pty Limited (in liq) above.

have drawn on those judgments and the parties' submissions as to the

background facts in the summary which follows.

5 The Companies were promoted by Mr lervasi and later, other individuals, as

conducting a foreign exchange trading business (Ex L1, [68]-[84]). The

Companies offered several forms of investments to investors, namely

"standard products", which comprised three different types of trading

strategies described as "Swing", "Extreme" and "Elite" (Ex L1, [93]-[100]), and

"special products" which were offered to existing investors based upon current

affairs around the world, including the Brexit Special product (Ex L1, at [101]—

[107]). It is common ground that the Companies in fact operated as a Ponzi

scheme (Ex L1, [1 ]). Capital deposits from newer investors were used to pay

purported returns on investment and purported returns of capital to earlier

investors (Ex L1, [171]). Over the life of the scheme between $213 million and

$248 million of funds was deposited by investors into the bank accounts of the

Companies (Ex L1, [172]). Little foreign exchange trading was done; only

about $4 million in payments were made by the Companies into foreign

exchange trading accounts; and the Liquidators estimate the Companies

incurred an overall loss of $1.2 million from FX trading (Ex L2, [3.32]—[3.34]).

5

6 It appears that investors who decided to invest in the Companies were

generally provided with an application form for the relevant investment

strategy which they were asked to complete and return to the Companies (Ex

L1, [137]). The Companies did not provide consistent information and

documents to investors; it is unclear which investors received what

documentation (Ex L1, [125]); and the Liquidators have not located a signed

application form for every investor (Ex L1, [138]). The Liquidators have

identified several template application forms and trading agreements in the

Companies' records (Ex L6, Tabs 2-40). Some of the template application

forms for standard products state that the funds deposited by the individual

investor are held in the Companies' "trading account held in trust" and others

do not expressly make that statement. The Liquidators are unable to confirm

that the documents they have located are all the application forms and trading

agreements used by the Companies, given the state of the Companies'

records (Hedge 7.2.19 [11]).

7 The funds that are in issue in this application were contained in three bank

accounts of the Companies. The first bank account, the NAB-1 Account (or

Brexit NAB Account) was used to receive investor funds for the special

products including, relevantly, the Brexit Special product (Ex L1 [181]). The

Liquidators were able to trace substantially all of the funds deposited for the

Brexit Special product to the investors who deposited them, and the position

in respect of those funds was determined by Brereton J's judgment in Re

Courtenay House Capital Trading Group Pty Limited (in liq) above and orders

made by his Honour on 22 June 2018. A second account, the "Westpac 1

Account" was used by the Companies to pay returns to investors and to return

capital to investors, primarily using funds transferred from a third account, the

"Westpac 2 Account" (Ex L1, [300]—[303]) and had an almost nil balance on

the Liquidators' appointment (Ex L2, [2.19]). The "Westpac 2 Account" was,

from about August 2012, the primary bank account used by the Companies to

receive capital deposits from investors in standard products (Ex L1, [304]).

Approximately $185 million had been deposited to that account in the period

since it was opened and it had a balance of approximately $21 million on the

Liquidators' appointment (Ex L2, [2.19]). The Liquidators have prepared

summaries of the nature and amounts of the deposits and withdrawals from

the NAB-1 Account (Ex L1, [36]) and the Westpac Accounts (Ex L2, [2.19]).

The Liquidators also prepared a summary of deposits made by the Post 21

April 2017 Westpac Investors (also referred to as the "Category E" and

"Category F" investors) (Ex L2, Appendix F) and a summary of the deposits

made by the investors represented by the Fourth Defendant (referred to as

the "Mistaken Investors" or the "Category G" and "Category H" investors) (Ex

L2, [4.51 ]—[4.56]).

8 The Australian Securities and Investments Commission ("ASIC") obtained

freezing orders over the Companies' bank accounts on 21 April 2017 (MFI 2).

The Liquidators note that, on that date, before the freezing orders were made

by the Court, a deposit of $100,000 was made by one investor; after the

freezing orders were made, three deposits totalling $375,000 were made by

three investors; a withdrawal of $60,000 was then made from the Westpac 2

Account, despite the freezing orders; and, after 21 April 2017, five further

deposits totalling $300,000 were made into the Westpac 2 Account.

9 Turning now to the affidavit evidence, the Liquidators read Mr Jahani's

affidavit dated 13 June 2018, which referred to the separate question

determined by Brereton J in Re Courtenay House Capital Trading Group Pty

Limited (in liq) above; the steps subsequently taken by the Liquidators to

prepare for payment of a distribution to the Brexit Investors; to other issues in

respect of the Brexit Investors and to a claim by Mr Kyle Sheridan. Mr Jahani

also there referred to the position in respect of the Mistaken Investors, being

investors in the Brexit Special product who mistakenly deposited funds into

the Westpac 2 Account, and to the position in respect of several potential

claimants who will largely no longer press their claims in the liquidation.

10 Mr Jahani's second affidavit dated 7 December 2018 again referred to the

background to the liquidation; the separate question heard by Brereton J in

respect of the Brexit Investors; and also identified several classes of investors

who would be differently affected depending upon the approach adopted to a

distribution of the monies held in the Westpac Accounts. That affidavit

7

identified the issues that are now to be addressed in this application, namely

whether or not the Westpac Investors are the beneficial owners of the funds

deposited by those investors into the Westpac Accounts and the position of

the Mistaken Investors and the Post 21 April 2017 Westpac Investors; and

also addressed the identification of representatives of those classes and a

proposed regime for payment of their costs in respect of this application. Mr

Jahani's further affidavit dated 15 May 2019 addressed the potential

outcomes for investors of different approaches in a distribution.

11 The Liquidators also read the affidavit dated 21 June 2018 of their solicitor, Mr

Hedge, which referred to service of their Interlocutory Process and supporting

affidavit on investors; the steps taken in respect of the Mistaken Investors;

and the position in respect of several investors who; as noted above, will

largely no longer lodge claims in the liquidation. Mr Hedge's second affidavit

also dated 21 June 2018 provided further information as to matters addressed

in his first affidavit of that date. Mr Hedge's affidavit dated 12 November 2018

dealt with the giving of notice of the Interlocutory Process and evidence in

support to creditors of the Companies; and referred to further correspondence

with several investors and to several scenarios for distribution of the funds of

the Companies addressed in the Liquidators' reports; and to meetings of the

committee of inspection.

12 Mr Hedge's affidavit dated 10 December 2018 referred to orders made by

Brereton J in respect of a regime for approval and payment of the

representative creditors' legal fees and the Liquidators' remuneration, costs

and expenses and legal costs. Mr Hedge's further affidavit dated 7 February

2019 identified the trading agreements which had been located by the

Liquidators in the Companies' documents, which included additional forms of

agreements that had been identified since the Liquidators' first report, and

also referred to documents which were provided to investors prior to investing

funds with the Companies, including an "Investor Pack", "Corporate Profile"

and other documents. By his affidavit dated 23 July 2019, Mr McKenzie, a

solicitor acting for the Liquidators, addressed the position in respect of claims

by related parties to the Companies, several of which will not be pressed by

reason of other developments in the liquidation.

13 The Liquidators also tendered, without objection, their first report to the Court

dated 27 October 2017 (Ex L1) and their second report to the Court dated 1

November 2018 (Ex L2). I will also refer below to several affidavits on which

representative Defendants rely in dealing with the relevant issues.

Distribution of funds in respect of the Westpac Investors

14 The first direction or order sought by the Liquidators and Companies is

directed to the question whether they are justified in distributing the funds

deposited by the Westpac Investors (as defined) to those investors, and not to

other creditors of the Companies, on the basis that those investors are the

beneficial owners of the funds deposited by them into the Westpac Accounts.

The term "Westpac Investors" is there defined as:

"[T]he investors who deposited funds into the Westpac Accounts (or any ofthem) to participate in investment opportunities other than the investmentidentified by the Companies as the "Brexit Investment", excluding:

(a) the Non-Brexit Post 21 April 2017 Investors (referred to in Category Eof the Liquidators' Second Report);

(b) the Non-Brexit Post Final Withdrawal Investors (referred to inCategory F of the Liquidators' Second Report);

(c) David Sipina and related entities (referred to in Category J of theLiquidators' Second Report);

(d) Athan Papoulias and related entities (referred to in Category J of theLiquidators' Second Report)."

15 As matters developed in the hearing, neither the Liquidators or any other party

contended that the Non-Brexit Post 21 April 2017 Investors (as defined) or the

Non-Brexit Post Final Withdrawal Investors (as defined) should be treated

differently from the Westpac Investors, in respect of the existence of a trust

over funds in the Westpac Accounts, although those parties contended that

they could establish a beneficial interest in funds in the NAB-1 Account. I will

address that matter below.. No question arises in respect of claims by Mr

.,

Sipina and Mr Papoulias and their related entities, because other events in

the proceedings have had the result that no such claims would be made.

16 As I noted above, the Liquidators point out that they are unable to confirm that

the several forms of agreements that are in evidence are all of the

agreements that existed for the Companies, by reason of the difficulties with

the manner in which the Companies held their documents. They point out

that the finro main documents provided to potential investors were a "client

information booklet" (Ex L1, [127]) and an "investor pack" (Ex L1, [133]) and

point out that the frequently asked questions section of the client information

booklet referred to funds being traded in "pools" (Ex L1, [130]). Some

investors. also received a corporate profile document which referred to losses

being "paid out of the trust account" (Hedge 7.2.19 [12]; Ex L6, 259-260).

The Liquidators also refer to a practice by which investors were provided with

investment application forms for the relevant investment (Ex L1, Annexures H

and I; Hedge 7.2.19 [11 ]). They note that at least the newer investment

application forms for the standard products and the special products state that

funds deposited by individual investors are held in the Companies' "trading

account held in trust" and that multiple accounts from an investor would be

"treated separately". They note that earlier investment application forms for

standard products state that funds are held in the Companies' "trading

account" without any reference to their being held in tryst. It appears, from

the detailed analysis undertaken by the parties in submissions, that not all

later documents referred to funds being held in trust in respect of standard

products.

17 Turing now to the position advanced by JPM and LifeSmart; JPM's

Interlocutory Process dated 29 January 2019' and LifeSmart's Interlocutory

Process also dated 29 June 2019 also address the question whether the

Westpac Investors are the beneficial owners of the monies held in the

The term "Westpac Investors" was defined in JPM's Interlocutory Process in somewhat differentterms from the definition in the Liquidators' application, so as also to exclude four other persons. Twoof those persons will not now be pressing claims in the liquidation. The position in respect of the thirdand fourth of those persons will not be determined by this application, since they have not been joinedas party to it and have not sought to intervene in it. I will return to their position below.

10

Westpac Accounts. As I noted above, JPM and LifeSmart are in opposed

interests in respect of that question. JPM relied on the affidavit dated 5 March

2019 of its director, Mr Melocco, which referred to its investment in several

investment products offered by the Companies, and to the deposit of funds to,

inter alia, the Westpac 2 Account.

Whether an express trust is established

18 Mr Izzo, with whom Ms Michael appears for JPM, submits that the funds paid

into the Westpac Accounts were held on trust on several bases. First, he

submits that deposits into the Westpac Accounts are subject to an express

trust by reason of the language of the forms which accompanied the deposits.

JPM submits that, even where the words "in trust" are not used, each relevant

form refers to trades being managed "on behalf of the investor and to "your

capital" being returned. Mr Izzo submits that, in the relevant circumstances,

an intention to create a trust can be seen from the language used by the

parties and from the relevant circumstances. He points out that the more

recent standard product investor application forms stated that funds deposited

would be "held in trust" and submits that that demonstrates an express

intention to create a trust, consistent with the reasoning of Brereton J in Re

Courtenay House Capital Trading Group Pty Limited (in liq) above. He

submits, and I accept, that there is no evidence which would rebut the stated

intention to create a trust in respect of more recent investor application forms

for standard products, where pooling of the relevant funds does not do so for

the reasons noted below.

19 Mr Izzo also submits that the Court may infer the relevant intention to create

the trust in respect of earlier standard product investor application forms

which did not expressly refer to a trust, and the nature of the transaction and

the circumstances attending the relationship between the parties: Associated

Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) [2000] HCA 25; (2000) 202

CLR 588 at [34]. Mr Izzo relies on similar statements to those which Brereton

J referred in Re Courtenay House Capital Trading Group Pty Limited (in liq)

above as supporting the existence of a trust, including that funds would be

11

"treated separately" where investors had multiple accounts, and that investors'

capital would be returned to them and was "your capital". He submits,

consistently with the reasoning of Brereton J in Re Courtenay House Capital

Trading Group Pty Ltd (in liq) above, and the case law to which his Honour

had referred, the fact that funds were pooled and the reference to a trading

account in some investor application forms does not exclude a trust.

20 LifeSmart conversely submits that there is no proper basis on which the Court

can find or impose a trust where, it contends, the relationship between the

Companies. and investors is a purely commercial contractual arrangement, by

which an investor gives money to the Companies, which they invest in large part

at its discretion and, in return, the Companies pay a set return to the investor at a

certain time. LifeSmart also submits that the Court should not find that there

was an express declaration of trust by the Companies in favour of each

investor in the Companies' standard products because the Court cannot be

satisfied on the available evidence that the Companies had the requisite clear,

explicit and express intention to create a trust in favour of each investor over

that investor's funds in its standard products. It submits that, where the

relevant forms do not use the words "held in trust" but state that "trades are

being managed on behalf of investors" or "capital is returned to investors",

those words are insufficient to elevate a debtor and creditor relationship in a

commercial context to that of trustee and beneficiary. LifeSmart contends that

on the available evidence, the Court also should not impute a trust in favour of

each investor in the Companies' standard products.

21 The primary question in determining whether an express trust is established is

whether the Companies' and investors' agreement involved an intention

(objectively assessed) to create a trust, and a trust may be implied, inferred or

imputed on the basis of an assumed intent. In Korda v Australian Executor

Trustees (SA) Ltd [2015] HCA 6; (2015) 225 CLR 62, French CJ (at [5]) referred

to a summary of the requirements for an express trust in J D Heydon and M J

Leeming, Jacobs' Law of Trusts in Australia (7th ed, LexisNexis Butterworths,

2006,) at [306], where the learned authors note that an intention to create a trust

may be found based on language which expressly or impliedly expresses that

12

intention, or from the conduct of the parties concerned, but that no trust will be

established if there is any uncertainty as to that intention. Hayne and Kiefel JJ

also there noted (at [72]) that whether a trust should be found to exist depends on

the proper construction of the documents which record the parties' intention, and

Gageler J observed (at [109]) that whether recognition and enforcement of a trust

is appropriate is to be determined according to ordinary principles of contractual

construction.

22 In Re Courtenay House Capital Trading Group Pty Limited (in liq) above,

Brereton J (at [19]—[22]) summarised the circumstances in which an express

trust will be found, based on an intention to create a trust. His Honour there

recognised, with reference to the case law, to the fact that references to

intention to create a trust are to be understood as references to the intention

imputed to the parties by the objective manifestations of the words they use in

their context; that, where the indicia are finely balanced, the necessary

certainty of intention will less readily be found, particularly in a commercial

context, where the imposition of trust relationships may defeat the interests

and expectations of creditors; and that the use of such words as "upon trust"

will manifest such an intention.

23 His Honour also observed (at [23]—[27]), with reference to the documents

provided to the Brexit Investors, to several matters, in the context of the Brexit

Investors, which indicated the existence of an express trust. The frst, and to

my mind the most significant, was that the formal documents by which the

Brexit Investors agreed to the terms of the investment described it as being

"held in trust". By contrast, the parties' comprehensive review of the

documents available to the Liquidators indicate inconsistencies as to whether

the documents relating to the standard products described the monies as held

in trust, with some documents containing such a reference and others,

including some documents in the later period, not doing so. His Honour there

also referred to other aspects of the documents relating to the Brexit Special

product which were "less explicit" but which his Honour considered favoured

the view that the investments were held in trust, namely that the Companies

were to place and manage trades "on behalf of the investor"; it was said that

13

the initial capital and returns would be returned to the investors; the

investment was described as "your capital" and there was reference to not

mixing funds with other accounts. Here, references to trading "on behalf of

the investor" were more common in documents relating to standard products

than references to the monies being "held in trust". The other matters to

which Brereton J referred are also present in some documents, and seem to

me to be consistent with the existence of a trust, but not sufficient to support a

finding of a trust, without any clearer reference to the monies being "held in

trust", where they are also consistent with a relationship of debtor and

creditor.

24 I accept that, as Brereton J observed in Re Courtenay House Capital Trading

Group Pty Limited (in liq) above, the reference to a "trading account" and the

references to funds being deposited being pooled with those of other

investors to trade are not inconsistent with an intention to create a trust. His

Honour noted (at [26]) that:

"Nor is the reference to a "trading account", or the notion that funds depositedwould be pooled with those of other investors to "live trade", inconsistent withan intention to create a trust. Receipt of funds from multiple beneficiaries intoa single account is not inconsistent with a trust; the paradigm case is asolicitor's trust account. Segregation of funds, while an indicium of a trust, isnot essential, and a trustee is not always obliged to keep the trust fundsseparate. An agreement that money be paid into a general account does notdefeat a trust that would otherwise exist. Particularly in the context ofmanaged investment schemes, the idea of trust money being "pooled" for thepurposes of trading, and even being used to meet certain obligations of thetrustee, even in connection with other clients, is established. Moreover, a trustmay be recognised over the funds when first received, and over any returnsfrom trading in them."

25 By contrast with the position in respect of the Brexit Investors, the documents

governing investments in standard products that are in issue in this

application did not consistently refer to the investments being held in trust,

although some did as I noted above. On balance, it seems to me that neither

the declaration or direction sought by the Liquidators or JPM, nor the contrary

direction sought by LifeSmart, could be made on the basis of an express trust.

Whether an express trust existed would depend on an inquiry of the terms on

which a particular investor had invested and, in my view, such a trust would

14

not be established unless at least a reference to the funds being "held in trust"

was contained in the relevant documents. It will not be necessary to

undertake that detailed inquiry given the findings that I reach on other grounds

below.

Whether a Quistclose trust is established

26 Alternatively, JPM submits that deposits into the Westpac Accounts are

subject. to a Quistclose trust. That submission refers to the principles

recognised in Barclays Bank Ltd v Quistc/ose Investments Ltd [1970] AC 567,

where a company declared a dividend and sent a cheque to the appellant

bank under the cover of a letter requesting, among other things, that the

amount of that dividend be banked into a new account and confirming that the

amount would only be used to meet the dividend due on a specified date. The

company was later wound up and the bank sought to apply the funds by way

of set off against other indebtedness of the company to it.

27 In the House of Lords, Lord Wilberforce (Lord Reid, Lord Morris of Borth-y-

Gest, Lord Guest and Lord Pearce agreeing) observed (at 580) that the

"mutual intention" of the company and the bank and "the essence of the

bargain" befinreen them was that the money advanced would not become part

of the assets of the company but that it should have been applied exclusively

to the payment of the dividend, disbursing the money to the particular class of

creditors so entitled, namely the shareholders. His Lordship distinguished

cases where payments were made on the unqualified basis that they should

be included in a company's assets and observed (at 581-582) that:

"... when the money is advanced, the lender acquires an equitable right tosee that it is applied for the primary designated purpose ...: when the purposehas been carried out (i.e., the debt paid) the lender has his remedy againstthe borrower in debt: if the primary purpose cannot be carried out, thequestion arises if a secondary purpose (i.e., repayment to the lender) hasbeen agreed, expressly or by implication: if it has, the remedies of equity maybe invoked to give effect to it, if it has not (and the money is intended to fallwithin the general fund of the debtor's assets) then there is the appropriateremedy for recovery of a loan. I can appreciate no reason why the flexibleinterplay of law and equity cannot let in these practical arrangements, andother variations if desired: it would be to the discredit of both systems if they

15

could not ... [T]he intention to create a secondary trust for the benefit of thelender, to arise if the primary trust, to pay the dividend, could not be carriedout, is clear and I can find no reason why the law should not give effect to it."

The House of Lords there found that the money was held on trust by the

company as trustee for the shareholders as beneficiaries until such a time that

the dividend was paid. When it was impossible to pay the dividend when the

company went into liquidation, the money was held on trust for the lender.

28 These principles were noted by the High Court in Australasian Conference

Association Ltd v Mainline Constructions Pty Ltd (in liq) [1978] HCA 45;

(1978) 141 CLR 335, where Gibbs ACJ (Jacobs and Murphy JJ agreeing)

noted (at 353) that Quistclose:

"... is authority for the proposition that where money is advanced by A to B,with the mutual intention that it should not become part of the assets of B, butshould be used exclusively for a specific purpose, there will be implied (atleast in the absence of an indication of a contrary intention) a stipulation that ifthe purpose fails the money will be repaid, and the arrangement will give riseto a relationship of a fiduciary character, or trust."

29 These principles have been applied in many subsequent cases, including

Salvo v New Tel Ltd [2005] NSWCA 281 at [45]—(46], where a trust was found

in respect of monies applied by investors to a deposit for the acquisition of a

company, and in Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135, where

Campbell JA (Meagher and Barrett JJA agreeing) observed that (at [51]):

"Quistclose recognises that sometimes there can be a trust whose terms arethat the trust property is to be paid to particular people, and if it is not paid tothose people, it is to be held for someone else. That is a matter arising fromanalysis of the facts of the particular case in accordance with well establishedprinciples for identifying when there is a trust, not because there is anyseparate legal institution known as a "Quistclose trust'."

30 I n Re Courtenay House Capital Trading Group Pty Limited (in liq) above,

Brereton J found that funds deposited into the NAB-1 Account by the Brexit

Investors were held subject to a Quistclose trust. His Honour summarised the

requirements to establish such a trust (at [28]) as follows:

"Where funds are transferred from one party to another with the intention thatthey not become part of the general assets of the transferee and are to be

16

used by the transferee for a specific purpose, then —absent contrarystipulation — it is implied that if the purpose cannot be effectuated, the moneyis held upon trust for the transferor. This involves the application ofestablished trust principles to particular facts." [footnotes omitted]

His Honour also observed that, in respect of the Brexit Investors, that:

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

31 Turning now to the position in this case, the Liquidators note that, even where

documents issued by the Companies to investors did not use the word "trust",

language was used on some occasions that was suggestive of funds being

used for a particular purpose consistent with the existence of a trust, such as

"managing the trades on behalf of the investor". JPM in turn submits that a

Quistclose trust should be found because the funds were paid by investors for

the exclusive purpose of foreign exchange trading and it was not intended that

they form part of the Companies' general assets. They emphasise that each

relevant form contained language to the effect that the funds were to be used

by the Companies to place trades "on behalf of the investor. JPM submits

that the circumstance that orders have been made winding up the Companies

and appointing liquidators (as distinct from the freezing orders, on which it had

initially relied) means the funds can no longer be used for the specified

purpose and they must be returned to investors.

32 LifeSmart responds that, if the Court accepts its principal contention that the

arrangement is a commercial contractual one, and is not satisfied that there

was an express trust on an explicit or imputed basis, then there was also no

Quistclose trust of each investor's funds. I do not accept that submission,

since the factors that may establish a Quistclose trust, including that funds

were not intended to become part of the general assets of the Companies and

were to be used by the Companies to trade on behalf of investors, may be

established even if an express trust would not be established for all purposes.

17

33 It seems to me that Brereton J's reasoning in Re Courtenay House Capital

Trading Group Pty Limited (in liq) above, in respect of the Brexit Investors, is

equally applicable in respect of the Westpac Investors. The numerous

documents provided to the Westpac Investors, notwithstanding their

inconsistencies, emphasise that funds were to be used by the Companies to

trade "on behalf of investors in respect of the standard products, although

they were in fact not applied for that purpose in the relevant circumstances.

The freezing orders made by the Court on 21 April 2017 (MFI 2), either on

that date or when continued, made it practically impossible for the Companies

to continue the limited foreign exchange trading that they had previously

undertaken, by, inter alia, restraining dealings with funds in the relevant bank

accounts and restraining their carrying on an unregistered managed

investment scheme, dealing in financial products or making available financial

products including trading in foreign exchange on behalf of investors. The

appointment of the Liquidators confirmed that impossibility. At least from. that

time, the purpose for which funds had been made available by the Westpac

Investors to the Companies could not be implemented, and it seems to me

that the funds were held on trust for those investors.

Whether a trust is established under the principles in Black v S Freedman & Co

34 JPM also submits that the funds deposited by the Westpac Investors with the

Companies were procured by fraud and are held on trust under the principle

in Black v S Freedman & Co [1910] HCA 58; (1910) 12 CLR 105. In that

case, the High Court held that money given by a thief to a third party who

received that money as a volunteer could be recovered by the victim of the

theft although the third party had not participated in the theft. In Wambo Coal

Pty Ltd v Ariff [2007] NSWSC 589; (2007) 63 ACSR 429 at [40]—[41], White J

(as his Honour then was) summarised the relevant principles as follows:

"Where property is stolen, the property is trust property in the hands of thethief ... The property is trust property in the hands of the thief because thethief is bound in conscience to hold the property on behalf of its true owner.Whether the trust is characterised as a resulting trust (Robb Evans of RobbEvans & Associates v The European Bank Ltd (2004) 61 NSWLR 75 (at 100-101), or as a constructive trust (Westdeutsche Landesbank v Islington

iE:3

London Borough Council per Lord Browne-Wilkinson at 716), the trust is of aninstitutional rather than a remedial character. It arises because. theconscience of the thief is bound.

In the same way, where property is acquired by fraud and there is a completefailure of consideration, the trust arises immediately on the receipt of theproperty: (Orix Australia Corporation Ltd v Moody Kiddell &Partners Pty Ltd[2005] NSWSC 1209 at [155]—[156] and cases cited). So, in Neste Oy vLloyds Bank plc [1983] 2 Lloyd's Rep 658, referred to with apparent approvalin Re Goldcorp Exchange Ltd [1995] 1 AC 74 at 104; where the payeereceived payment from its principal of moneys which were not impressed withan express trust, but which were to be used in performance of a contractwhich the payee knew could not take place, the payee held the payment ontrust for the payer from the time of its receipt. The circumstances whichcreated the trust in Neste Oy were that the payee knew (as was the fact) thatthere could be no performance under its contract, so that there was a totalfailure of consideration for the payment, and the payment could not inconscience be retained. The trust was an institutional trust which attached tothe moneys from the time of receipt."

35 In Re Courtenay House Capital Trading Group Pty Limited (in liq) above,

Brereton J similarly observed at [30] that:

"Where money has been stolen, or obtained by fraud, it is held on trust by therecipient. Here, contrary to what was represented to investors, funds wereprocured by the companies, not for the purpose of undertaking foreignexchange trading, but to return capital and return on investment to earlierinvestors, in the course of a Ponzi scheme. While the non-Brexit investorssubmitted that whether a trust arose must depend on the facts of eachindividual case, and that — as the Brexit Investors were all existing clients withan established relationship with the companies —there may well be more tothe relationship, in my view it is inconceivable that any would have investedhad they understood that their funds were to be used not for foreign exchangetrading, but to pay out earlier investors, and that repayment to them would bedependent upon the survival of the scheme. Accordingly, this is a furtheralternative basis for concluding that the funds invested with Courtenay Housewere held on trust for the investors." [footnotes omitted]

36 JPM relies, as the factual basis for this submission, on the circumstances that

deposits into the Westpac Accounts were procured by the Companies, not for

the purpose of undertaking foreign exchange trading, but to return funds to

earlier investors in the course of a Ponzi scheme (Ex L1, [171]—[174]). That

submission is supported by the Liquidators' observation that the Companies

did not carry on the business that the documentation provided to investors

informed them was being carried out, and that very little foreign exchange

trading was carried on (Ex L1, [6], [51 ]—[52], [401 ]—[408]). The correctness of

that proposition is starkly illustrated by the Liquidators' observation that

19

between $213 million and $248 million was deposited by investors into the

Companies' bank accounts, but only $4 million in payments were made by the

Companies into foreign exchange trading accounts, as to which the

Liquidators estimate an overall loss of $1.2 million was incurred from foreign

exchange trading (Ex L1, [172]; Ex L2, [3.33]—[3.34]). The relevance of the

loss for present purposes is not to demonstrate the lack of success of the

foreign exchange trading, but instead to emphasise its relatively small scale

against the size of the funds raised by the Companies. The Liquidators point

out that investors were not repaid funds out of profits generated by trading,

but rather out of capital deposited by other investors.

37 LifeSmart responds that the Court cannot be satisfied that an investor's money

was stolen or a fraud was committed in relation to that investor such that it

operated against the conscience of the Companies and cannot impose a trust

under the principle in Black v S Freedman & Co above with respect to any one

investor who invested in the Companies' standard products. LifeSmart also

submits that there was some trading of investors' funds, and with respect to those

investors whose funds were traded, no such trust should be imposed over those

funds. LifeSmart submits that those funds (consistently with the statements in

the investor pack, client information booklet and correspondence with some

investors) were traded in pools where investors' funds were mixed together; there

is no evidence before the Court as to which investors had their funds traded by

the Companies or in what amount; and, from the point of view of the individual

investor whose funds had been traded, there was a foreign exchange trading

business. I am not persuaded by these valiant, but hopeless, submissions, for

the reasons noted below.

38 It seems to me that such a trust is available to the Westpac Investors in the

relevant circumstances. The fact that the Companies conducted some

minimal foreign exchange trading, whether in their own names or in the name

of one of their directors, Mr Tony lervasi, is insufficient to displace the

essentially fraudulent character of a Ponzi scheme, or the fraud involved in

their representation to investors that monies would be used for trading

purposes, whereas they were in fact used to pay the returns to investors,

20

exposing all investors in the scheme, and especially later investors, to the

substantial risk of its ultimate collapse. It seems to me that the funds invested

with the Companies by the Westpac Investors were held in trust for those

investors on that basis.

Post 21 April 2017 Westpac Investors

39 By an Interlocutory Process dated 12 February 2019, Mr Caron and Ms

Seidlitz, for themselves and represented persons, sought a declaration that

the Post 21 April 2017 Westpac Investors are the beneficial owners of the

funds deposited by them into the Westpac Accounts on or after 21 April 2017

and an order that the amount of $60,000 withdrawn from the Westpac 2

Account on 21 April 2017 be deducted pro rata across all investor deposits in

that account on 21 April 2017. Nine investors fall within the category of "Post

21 April 2017 Westpac Investors". Funds of four of those investors (referred

to by the Liquidators as the "Category E" investors) totalling $475,000, were

deposited to the Westpac 2 Account on 21 April 2017, the same day as a

freezing order was made by the Court on ASIC's application, but before a

withdrawal of $60,000 from that account on that day. Funds of five of those

investors (referred to by the Liquidators as the "Category F" investors)

totalling $300,000 were deposited into the Westpac 2 Account after 21 April

2017.

40 Ms Beechey, who appears for the Post 21 April 2017 Westpac Investors,

adopts JPM's submissions as to the existence of separate trusts for each

investment, and contends that funds are similarly held on trust for the Post 21

April 2017 Westpac Investors under an express trust, a Quistclose trust or a

Black v S Freedman & Co trust. Consistently with that position, the Third

Defendants accept that the funds in the Westpac Accounts are also held on

trust for the Westpac Investors. Ms Beechey also identifies finro additional

reasons why the Post 21 April 2017 Westpac Investors submit that the funds

they deposited are held on trust. She submits that application forms were

updated around May 2015, and that it is highly likely that investments made in

late April 2017 were made on the basis of the new application form which

21

stated that the funds were "held in trust", and that the freezing orders made by

the Court on 21 April 2017 on ASIC's application made it impossible for the

funds deposited on or after that day to be used, supporting the contention that

a Quistclose trust operated in respect of them. These matters would be

significant if a trust had not been established in respect of the Westpac

Investors generally, but do not distinguish the position of the Post 21 April

2017 Westpac Investors where a trust was established in respect of the

Westpac Investors generally.

41 All parties now seem to accept that funds held in the Westpac Accounts would

be held on trust for the Post 21 April 2017 Westpac Investors if they are held

on trust for the Westpac Investors generally, and the Post 21 April 2017

Westpac Investors no longer press a claim that any distribution should be

made to them immediately without regard to "hotchpot" principles. LifeSmart

contends that the Post 21 April 2017 Westpac Investors are not the beneficial

owners of those funds, but by reference to the same matters by which it

contends that the Westpac Investors are not the beneficial owners of that

fund, and I have not accepted that submission above.

42 It appears that there is still a contested issue as to whether the Post 21 April

2017 Westpac Investors should share in the amounts held in the Westpac

Accounts pro rata with the Westpac Investors and I should address that

question. Ms Beechey points out that their funds can be separately identified

as part of the remaining funds in the Westpac Accounts, subject to the

withdrawal of $60,000 to which I referred above. She points out that, by

contrast, the Liquidators cannot separately identify the funds deposited by the

Westpac Investors generally within the funds in the Westpac Accounts at the

commencement of the winding up, due to the numerous withdrawals from

those accounts.

43 Ms Beechey submits that the Post 21 April 2017 Westpac Investors should

not be subject to a pari passu distribution with the earlier Westpac Investors

because that would ignore their relatively clear property interests in particular

property by reference to a notion of common misfortune, using the language

22

adopted in Re MF Global Australia Ltd (in liq) above at [78]; because equity

does not require that available funds be divided between all people who can

establish a claim on a mixed bank account, and the Court is able to give a

remedy founded on tracing some individual claims where evidence is

available which enables that property to be more specifically traced, relying on

Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008;

(2003) 59 NSWLR 361 at [176], [189]; that it would be inequitable for Post 21

April 2017 Westpac Investors to be required to bear losses that were incurred

over the seven years before they placed their monies on trust, relying on Re

Magarey Farlam Lawyers Trust Accounts (No 3) [2007] SASC 9; (2007) 96

SASR 337 at [119]-[120]; and that the deposits of the Post 21 April 2017

Westpac Investors have not become so intertwined with earlier investments

that it is reasonable to regard each investor as having a rateably equal

interest in the mixed fund; and a pari passu distribution would extend the

effect of the Ponzi scheme to investors who invested after the Ponzi scheme

had ceased to operate, by reason of the freezing orders.

44 JPM and LifeSmart are in a partly opposing interest to the Post 21 April 2017

Westpac Investors. JPM submits that the Post 21 April 2017 Westpac

Investors are in the same position as the Westpac Investors; their deposits

into the Westpac Accounts are held on trust for the same reasons as funds

deposited by other investors to the Westpac Accounts; and the Post 21 April

2017 Westpac Investors cannot receive repayment of their investments in full.

JPM submits that each deposit into the Westpac Accounts gives rise to a

separate trust (relying on Re Courtenay House Capital Trading Group Pty

Limited (in liq) above at [36]) and those trusts have become mixed in a fund

which is now deficient. JPM also submits that it is not practicable to

determine by tracing the entitlements of each investor to that fund, and the

trusts should be pooled and directions given to the Liquidators to distribute the

fund on the basis that (subject to the operation of the doctrine of hotchpot)

each investor has a rateable equal interest in it: Re BBY Ltd (recs and mgrs

apptd) (in liq) (No 2) [2018] NSWSC 346; (2018) 363 ALR 492 at [38]—[83].

LifeSmart also submits that the Post 21 April 2017 Westpac Investors are in no

different position to the Westpac Investors. It submits that, if the Court finds

23

that there is a trust on any one of the three bases advanced by JPM, it adopts

JPM's submissions that the Post 21 April 2017 Westpac Investors are not

entitled to a distribution from the Westpac Accounts where those investors

receive the full amount of their investment.

45 It seems to me that Ms Beechey's submissions, to which I referred in

paragraph 43 above, have real force but, with hesitation, I am ultimately not

able to accept them. The only significance of 21 April 2017 is that the Court

made a freezing order on ASIC's application on that date, and that does not

seem to me to provide a principled basis for distinguishing the position of the

Post 21 April 2017 Westpac Investors from that of other Westpac Investors on

the immediately preceding days. Other than for that matter, the position of the

Post 21 April 2017 Westpac Investors is little different from that of investors

on 20 April 2017, or 19 April 2017, or possibly 21 March or 21 February or 21

January 2017. Where that difference is ultimately only a matter of degree, it

does not seem to me to be sufficient to support a different treatment of those

investors from the other Westpac Investors.

46 I note, for completeness, that the Category E investors accepted that they

should share proportionately in the loss of $60,000 to the single withdrawal on

that date, spread across all investments made on or before 21 April 2017 in

respect of which claims are made (that is, all investors other than the

Category F investors). That question does not arise given the finding that

reached above. As I noted above, Ms Beechey did not press a further

contention that a distribution to the Post 21 April 2017 Westpac Investors

should be ordered at this stage and acknowledged that questions of whether

hotchpot should apply to the Post 21 April 2017 Westpac Investors will need

to be determined at a subsequent hearing.

47 For these reasons, it seems to me that the Westpac Investors and the Post 21

April 2017 Westpac Investors fall in the same class, and each has the benefit

of a separate trust or trusts in respect of their monies, over the funds in the

Westpac Accounts which are, regrettably, insufficient to meet their claims in

full. The Post 21 April 2017 Westpac Investors would be treated the same

24

way as the Westpac Investors in respect of a distribution and, as Ms Beechey

fairly accepted, that distribution would need to be deferred in respect of them

until it can be determined whether "hotchpot" principles are applicable, where

several of those investors were also investors at earlier times.

Mistaken Investors

48 By an Interlocutory Process dated 30 January 2019, Mr Ralph Del Vecchio,

on behalf of the Mistaken Investors sought an order that they are the

beneficial owners of the funds initially deposited by them into the Westpac

Accounts for the purpose of investing in the Brexit Special product offered by

the Companies. As I noted above, the Mistaken Investors are persons who

sought to invest in the Brexit Special product, as to which investors were

generally required to deposit their funds to the NAB-1 Account, who

mistakenly deposited funds to the Westpac 2 Account (Ex L2, [4.46]). The

effect of the decision of Brereton J in Re Courtenay House Capital Trading

Group Pty Limited (in liq) above is that, if those funds had been deposited to

the NAB-1 Account, then the Mistaken Investors would have had the benefit

of a trust over the monies held in that account and received payment of all or

a substantial portion of those funds.

49 In submissions, the Liquidators note that the Mistaken Investors comprise four

investors (in "Category G" in the Liquidators' report) who deposited an amount

for the purposes of investment in the Brexit Special product into the Westpac

2 Account rather than the NAB-1 Account, where equivalent amounts were

transferred from the Westpac 1 Account into the NAB-1 Account; and five

investors (in "Category H" in the Liquidators' report) who deposited funds into

the Westpac 2 Account rather than the NAB-1 Account, where no equivalent

transfers were made into the NAB-1 Account. The Liquidators recognise, and

it is common ground, that at least some of the Category G investors were told

by representatives of the Companies that they would arrange transfers of

funds deposited into the Westpac 2 Account to the NAB-1 Account, as to

which funds ought to have been initially deposited.

25

50 Mr Del Vecchio read the affidavit of Ms Riordan dated 21 November 2018.

Ms Riordan referred to her involvement in investments with the Companies

from October 2016 and to her transfer of $100,000 into the Westpac 2

Account in respect of the proposed Brexit Special product. She referred to

further correspondence with the Companies, including an email indicating that

the funds had been deposited into an incorrect account, a proposal for

transfer of the funds to the correct account and a confirmation that the

investment had been received. An affidavit dated 22 November 2018 of Mr

Del Vecchio's solicitor, Mr Mazzone, annexed correspondence with the

Liquidators in respect of the Mistaken Investors' claim that the funds

deposited to the Westpac Accounts could be traced to the NAB-1 Account,

and banking details relating to the relevant transactions.

51 Mr Del Vecchio also read an affidavit dated 23 July 2019 of Ms Timberg, who

is a "Category H" investor. She had sought to deposit funds in the NAB-1

Account, but was not able to do so when she arrived too late at the bank; she

then met with an employee of the Companies and left a cheque with her; she

later discovered the monies had been deposited to the Westpac Accounts;

and an employee of the Companies then explained that he had not known

that her cheque had been deposited to the wrong account, and would ensure

the cheque was deposited into the correct account. That did not occur. An

affidavit dated 4 June 2019 of Mr Peter Teklic, who is also a "Category H"

investor, referred to his and his wife having made an investment in the week

of 10 April 2017 in the Brexit Special and in the Extreme trading products. Mr

Teklic's evidence is that he was not informed of a need to deposit funds to the

NAB-1 Account for the Brexit Special product until after he had made the

investment when, on 19 or 20 April 2017, he was advised that he should have

put the money into a separate account and that the Companies would

undertake the transfer internally. That also did not occur.

52 There appears to be no contest as to the proposition raised by Mr Del

Vecchio's Interlocutory Process that the Mistaken Investors are the beneficial

owners of funds deposited by them into the Westpac Accounts for the

purpose of investing in the Brexit Special product. LifeSmart did not press the

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contrary position in respect of the Westpac Accounts, having regard to the

judgment of Brereton J in Courtenay House Capital Trading Group Pty Limited

(in lig) above. There does appear to be a contest, not raised by that

Interlocutory Process, as to whether the Mistaken Investors have a claim in

respect of amounts held in the NAB-1 Account. I will address that contest for

completeness.

53 Mr Barlin, who appears for Mr Del Vecchio, submitted that the findings of

Brereton J in Re Courtenay House Capital Trading Group Pty Ltd (in liq)

applied with equal force to the position where the Mistaken Investors

deposited funds to the Westpac 2 Account rather .than the NAB-1 Account.

As I noted above, no party contended to the contrary and that proposition

seems to me that submission is plainly correct. However, the consequence of

that proposition in the present circumstances is that funds in the Westpac 2

Account are held on trust, inter alia, for the Mistaken Investors and that does

not, without more, establish any claim of the Mistaken Investors to a trust over

the NAB-1 Account.

54 Mr Barlin fairly recognised that, in respect of Mr Del Vecchio and others where

amounts could be identified as transferred to the NAB-1 Account, and a

fortiori in respect of other Mistaken Investors where there was no evidence of

such a transfer, any such transfer would take place from the Westpac 2

Account, where funds held on trust for the Mistaken Investors were mixed with

funds held on trust for the Westpac Investors generally. However, he refers to

Brady v Stapleton [1952] HCA 62; (1952) 88 CLR 322 as authority that equity

permits tracing into an "indistinguishable mass", and extending to money paid

into a bank account, and also submits that equity allows for tracing intermixed

accounts, and equity may grant or recognise a charge over such a fund in

order to preserve an equitable interest arising from an addition or contribution

to it: Russell Gould Pty Ltd v Ramangkura [2014] NSWCA 310. It seems to

me that that submission is not to the point, where the difficulty facing the

Mistaken Investors is not merely that their funds were transferred into a mixed

fund to which they and the Westpac Investors had claims, but also that that

fund was then insufficient to meet the claims against it. The difficulty with that

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submission seems to me that, while the Companies treated amounts

transferred from the Westpac Accounts to the NAB-1 Account as referable to

Mr Del Vecchio and several other Mistaken Investors, those investors did not

have a sufficient interest in the Westpac Accounts to support that treatment,

because their funds had been paid into an account which was then in

deficiency, having regard to the claims of the other Westpac Investors against

that account.

55 Mr Barlin in turn submits that the transfer from the Westpac 2 Account to the

Westpac 1 Account, and then to the NAB-1 Account, which the Companies

treated as referrable to Mr Del Vecchio, was a "re-instatement of trust funds"

by the Companies to the order of Mr Del Vecchio and other Mistaken

Investors. The difficulty with that proposition is that any such reinstatement

was not made by the Companies from assets which they owned beneficially,

but from the Westpac Accounts which were, as I have found above, then held

on trust for the Westpac Investors, and was insufficient to meet their then

claims. The position is a fortiori in respect of those Mistaken Investors where

no transfer can be identified.

56 JPM submits that the Mistaken Investors are in the same position as the Post

21 April 2017 Westpac Investors and the Westpac Investors; that their

deposits into the Westpac Accounts are held on trust for the same reasons as

funds deposited by other investors to the Westpac Accounts; and that the

Mistaken Investors cannot receive repayment of their investments in full. Mr

Izzo submits that, so far as the Mistaken Investors' claim a trust over funds

held in the Westpac Accounts, they stand in no better position than the

Westpac Investors, and there is no basis for a separate trust different to the

trust or trusts that exist in favour of each of the Westpac Investors. Mr Izzo

also submits that, while it is accepted that the Mistaken Investors are the

beneficial owners of funds they deposited to the Westpac 2 Account, it does

not follow that they are entitled to return of those funds in full.

57 Mr Izzo also points out that, so far as the Mistaken Investors seek to assert a

trust over the NAB-1 Account, that proposition appears to depend on an

inference that the Companies moved amounts paid by the "Category G"

Mistaken Investors from the Westpac 2 Account to the Westpac 1 Account

and then to the NAB-1 Account. Mr Izzo points out that that inference has the

difficulty that there were numerous transfers in and out of the Westpac 2

Account during the period befinreen the initial deposit by each of the "Category

G" Mistaken Investors into the Westpac 2 Account and the date of the

subsequent transfer from the Westpac 1 Account to the NAB-1 Account

referring to that investor. Mr Izzo also submits that there is no means to

determine whether the Companies moved the "Category G" Mistaken

Investors' funds from the Westpac 2 Account to the Westpac 1 Account prior

to the transfer from the Westpac 1 Account to the NAB-1 Account. Mr Izzo

also submits, and I accept, that no inference that the Companies acted in

accordance with their representations to several Category G Investors that

they would transfer their funds to the NAB-1 Account can be drawn, where

this application arises from the wider fraud undertaken by the Companies

upon their investors. Mr Izzo also submits that there is no basis for an

inference that capital relating to the "Category H" Mistaken Investors was

moved to the NAB-1 Account, where they cannot point to any earlier transfer

between the Westpac 2 Account and the Westpac 1 Account, or between the

Westpac 1 Account and the NAB-1 Account, in sums equivalent to their

deposits or with narrations linking such transfers to them.

58 LifeSmart accepts that, in accordance with Brereton J's findings in Re

Courtenay House Capital Trading Group Pty Limited (in liq) above, the Court

should find that there was a trust in relation to the Mistaken Investors. It

otherwise adopts the submissions of JPM that the trust on behalf of the

Mistaken Investors is a trust over the funds in the Westpac Accounts and that

they are not entitled to a distribution from the Westpac Accounts by which

they receive the full amount of their investment. The Third Defendants also

adopted JPM's submissions in relation to the Mistaken Investors.

59 For the reasons that I have set out above in addressing Mr Barlin's

submissions, and for the reasons pointed out by Mr Izzo in submissions, it

seems to me that the Mistaken Investors are in the same category as the

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Westpac Investors, with a beneficial interest in the Westpac Accounts but no

entitlement to a beneficial interest in the NAB-1 Account. That result is

consistent with the terms of the order sought by the Mistaken Investors in their

Interlocutory Process dated 30 January 2019 which did not, in terms, seek an

order extending beyond the Westpac Accounts to the NAB-1 Account,

nofinrithstanding the submissions made by Mr Barlin in that respect.

Excluded Defendants

60 The Interlocutory Processes filed by JPM and LifeSmart each excluded, inter

alia, Ms Nina Girsa and her mother, Ms Zoja Gromova from the definition of

"Westpac Investors". Ms Girsa and Ms Gromova had submitted proofs of debt

to the Liquidators in which they claim they invested, in the case of Ms Girsa,

$50,000 in the Brexit Special product and $100,000 in standard products and,

in the case of Ms Gromova, $100,000 in standard products (McKenzie

23.7.19 [14] and Annexure A). Ms Girsa was the partner of Mr lervasi at the

time of the investment and the Liquidators have identified a concern that

funds of the Companies may have been used as the source of the funds for

Ms Girsa and Ms Gromova's investment, but have not yet formed a final view

(McKenzie 23.7.19 [16]). Ms Girsa and Ms Gromova were not party to these

proceedings and were not included in the classes of investors represented by

the Defendants. The orders initially proposed in JPM's Interlocutory Process

were amended to preserve Ms Girsa's and Ms Gromova's position for future

determination if necessary.

Orders

61 For these reasons, I order that:

The beneficial owners of the funds deposited in the Westpac Accounts are:

(a) the Westpac Investors;

(b) the Post 21 April 2017 Westpac Investors;

(c) the Mistaken Investors; and

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(d) Nina Girsa and Zoja Gromova, if they satisfy the Liquidators or

the Court that the source of their deposits into the Westpac

Accounts was not the Companies' funds.

In these orders, defined terms have the meanings in Annexure A below.

ANNEXURE A

Definitions

Companies means, collectively, the Second and Third Plaintiffs

Liquidators' means the Liquidators' Report to Court dated 1Second Report November 2018.

Liquidators means Said Jahani and John McInerney in their capacityas joint and several liquidators of the Companies.

Mistaken means the investors referred to in categories G and H ofInvestors the Liquidators' Second Report.

Post 21 April means the investors referred to in Categories E and F of2017 Westpac the Liquidators' Second Report.Investors

Westpac means Westpac account number 265692, WestpacAccounts Account number 490253 and Westpac account number

819577 (or any of them).

Westpac means the investors who deposited funds into theInvestors Westpac Accounts (or any of them) to participate in

investment opportunities other than the investmentidentified by the Companies as the "Brexit Investment"product, excluding:

(a) the Post 21 April 2017 Westpac Investors;

(b) the Mistaken Investors;

(c) Mr David Sipina and related entities (referred to inCategory J of the Liquidators' Second Report);

(d) Mr Athan Papoulias and related entities (referredto in Category J of the Liquidators' SecondReport);

(e) Vanessa and Bozo Relja and Nina Girsa (referredto in Cate o I of the Liquidators' Second Re ort)

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and Zoja Gromova.

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I cert~ tFiat tFiir and tFie preceding 31 pagesare a true copy of the reasons for judgment Hereinof Fii r .7fonour,~ustice Mack

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Associatemate: 28August 2019

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