Group: M1 GROUP No.

24
Marking Rubric
HI6027 Business & Corporations Law
Evaluation of Group Report
Student ID Name Phone No. Email address
CEM3002 FAHID ALI 0416 366 562 CEM3002@MY.HOLMES.EDU.AU
CEM3001 ALI AKBER 0426 573 737 CEM3001@MY.HOLMES.EDU.AU
EIV3003 JAGMEET KAUR 0426 036 009 EIV3003@MY.HOLMES.EDU.AU
ARY3005 JASBIR KAUR 0406 017 816 ARY3005@MY.HOLMES.EDU.AU

Note: Student No 1 will be the Group Leader with the responsibility to submit
assignment via SafeAssign. Please attach this as the cover sheet to your group
report.

Word count (maximum 2,000 words; +/- 10%): 2013

Date Submitted: 22/05/2018

Date of presentation: (if in-class presentation, specify date; if video presentation; specify
date of uploading and submission of link on Blackboard: 25/05/2018

REPORT TOTAL 20

1. Report format: times new roman, 12 point, 1.5 lines spacing /1

2. Section 1: Introduction /2

3. Section 2: main body of the report /2

4. Section 3: Conclusion /5

5. References: 10-20, In text and list /5

6. Presentation /5
 ASIC v MAXWELL (2006)

Background Summary:

The first ever action taken against the illegal fundraising by ASIC was back in October 2003,
where it froze all assets of the companies and all personal belongings and assets of the scheme
promoters, Mr Maxwell and Mr Fortune upon orders whilst promotion of the scheme. The court
did not only impose freezing orders but also ordered to restrain the accused to further continue
with the fundraising in the breach of law.

Mr Maxwell, the one who is majorly accused in this breach of law case was an unlicensed
financial adviser who earned 10% commission on each of the investments made by the public
and continued to do so and promoting the schemes against the court orders sent by ASIC
(asic.gov.au., 2018).

What happened next was that the development companies involved failed miserably and
defaulted on payments because of the secured established financiers that led to the mortgagee
sales of the said properties and finally led to the liquidation of the two development groups.

Case Details:

This case is one of the widely known cases around the world. The Australian Securities and
Investments Commission (the accuser) purported and alleged that the perpetrators were
suspected of a breach of law. The two groups of companies nominated as suspects included
“ProCorp Group” and the “Central Development Group”. In addition to them, the officers of
these companies, an accountant and a consultant had been convoluted in the violations and the
infringements of the Corporations Act 2001 in the due course of promoting the offering and
schemes to raise fund from the external public for the procurement and expansion of the real
estate ("ProCorp Scheme" and "Central Development Scheme"). However the two companies
comprising the stated two groups liquidated quite before the judgement of Brereton J.

Various companies under the ProCorp Group had Mr. Nahed as the director and several
allegations were made against him in accordance to his involvement in the scheme. It was
found out by Brereton J. that Mr. Nahed, as an officer, was guilty and had been violating the
Corporations Act ss 717 and 734 at multiple occasions (Legal.thomsonreuters.com.au, 2018).
He was found liable to be disqualified from managing corporations due to repeated
contraventions (s 206 E (1) (a) (i)) and because of being pursuant to s 206D which states
disqualification due to insolvency.

ASIC and some other defendants reached an agreement as per the court orders. Brereton
planned to make majority of the consent order, declined a few because he felt they were
inappropriate, considered an additional restraint necessary in one and disqualifications in two
necessary as he felt that the imposition was too severe.

Mr Maxwell being the first defendant played the role of a consultant for both the groups and
was held responsible for majority of the fundraising under both the schemes. Mr Troy Fortune,
Mr Malcolm Fortune, Mr Bennet and Mr Nahed were all defendants and officers in the ProCorp
Group whereas Mr Kolios, Mr Jammal and Mr Skaf were all officers in the Centrak
Development Group. The Coakley Associates Pty Ltd rendered accounting services and
provided advisory certificates in relation to the scheme and if this was done correctly in
accordance to the law; could have easily avoided and overcome the necessities of the
fundraising provisions of the Corporations Act pursuant to s. 708(10).

In this case, ASIC v Maxwell (2006) NSWSC 1052, it was alleged by the court against a
company to have been contravening 734 (2) through the placement of advertisements in
numerous newspapers across Sydney in order to beseech funds in the form of loans from public
for various business development projects. This newspaper advertisement publication offered
securities that could be settled as loan agreements and were found competent enough to induce
people to be attracted towards the scheme and come forward applying for these loan
agreements. Such offers require disclosures towards the investors and although the required
information was provided by the company to the interested individual investors in the form of
an information memorandum describing the terms and conditions of the investor loans to the
company, it could not be regarded as the disclosure document, as specified and instructed by
the Corporations Act, 2001.

As per the Corporations Act 2001, there are certain advertising restrictions that follow and need
to be applied for various listed and unlisted securities. One such advertising restriction follows
that if a case of securities is already listed on the ASX, s734 (5)(a), it is permissible to advertise
even before writing down the disclosure document in case the advertising include statements
with the following prescribed information:
  Information about the securities issuer;
 Disclosure document made readily available;
 Consideration of the document mentioned above in decision against acquisition of that
security;
 And in case of being interested in acquisition of security, it must be done through the
application form included in the disclosure document.

On the contrary, an advertising company that is not listed is restricted to the following
information prior to its lodgement, as per the 734 (5) (b):

 Identification of offer/securities through a statement;

 A statement that ensures that the disclosure document will certainly be made available
as and when the securities will be issued;
 A statement that ascertains the investors to complete an application form that is attached
to the disclosure document;
 Or information about how to access and how to receive copy of that disclosure
document.

Another major clause said that though advertising through images was subjected to normal
advertising against any product or service to attracted new and potential customers and retain
the older ones is not subject to the fundraising advertising restrictions imposed as per s 734 (3).
In addition to this, s 734 (9) states that forwarding draft disclosure documents to people names
as sophisticated investors or professional investors exemption as per s 708 (8), (10) and (11) is
not held as a contravening factor against the pre-lodgement advertising restrictions. The section
734 (7) allows for only a few approved advertisements and publications that include publicity
of a notice or a report of an annual general meeting or a genuine comment or a news report and
pertains to the lodgement of a disclosure document or information in such a document. Any
news report or media comment that gives any form of consideration or benefit to anyone against
publishing it is not permitted at all (Thomson Reuters Australia, 2018).

What happened in real was that the Mr Maxwell, held responsible for advertising the offering
placed advertisements in the leading newspapers and also approached the potential investors.
The advertisement clearly claimed to grow the money indefinitely at a rate of 30% per annum
with no fees associated. He claimed the investment to be secured, guaranteed and ideal for
investors, superannuates and the self-funded retirees.
The investors that were deemed as potential were contacted, if they responded, they were
provided with a brochure for promotional purposes, an information memorandum and an offer
document. The brochure restated the advertisements reclaiming a 30% return whereas the offer
document supported an offer made by the group of companies in order to enter a loan agreement
with the said potential investor. The information memorandum given to the potential investors
was a memorandum prepared by Coakleys claimed it to be an excluded offer made by the
development group through Coakley Associates Pty Ltd with no prospectus, no disclosure
document and a few conditions over the financial service licensee as per the section 708 (10)
of the Corporations Act. These conditions call that the licensee must be satisfied with respect
to the past experience of the investor in terms of investment, be aware of the risks and merits,
value of security offering, risks associated with offer acceptance, and adequacy to any
information required.

Allegations:

The major point of disputation and conflict for ASIC was that ProCorp had violated and
disregarded the points of Corporations Act by not providing the disclosure document as per the
Chapter 6D requirements. Section 727(1) of the act clearly states that an offer of securities
cannot be made or an application form cannot be distributed where disclosure is required
Similarly, Part 6D of the Section 706 clearly states that a disclosure is majorly required in case
of an offer of securities until and unless s 708 states so. Yet again, another violation was in the
form of Section 734(1) that states that no statement should be advertised or published that
directly or indirectly pertains to an offer of securities made or intended and that requires
disclosure. Similarly, if disclosure document is required for an offer made or intended, it is not
permissible for an individual to advertise the offer or make a publication that links to the offer
or may induce people to apply for it.

The statement of reasons issued were not according to the s 708(10) requirements since
Coakley did not meet majority of the investors, nor investigated them or their financial stability.

One allegation was of carrying a financial service business in Australia without a license that
violated the s 911A section of the act. Another allegation was of being involved in a misleading
and deceptive conduct as per the s 1041H (1). Mr Nahed had also breached duties as a director
as per the 180 (1), 181 (1) and 182 (2) of the Corporations Act 2001. ASIC claimed Mr Nahed’s
disqualification as per 206D for a span of 20 years.
Decisions:

The court issued judgements against Maxwell, being the main promoter behind the two groups
to be permanently disqualified from the act of managing corporations. He could no longer
provide any financial service as he was disqualified to do that too and he was further ordered
to pay a penalty compensation of approximately $ 1.122 million. Several others involved were
also banned for some period along with a compensation cost to be paid for the breach and
contravention of law. The disqualifications were due to promotions without disclosure
documents, failure in duties as directors and misleading and deceptive representations.

It was affirmed in the court of law that the allegations were all right and violation on fundraising
was attempted on almost 94 occasions, information memorandum and an offer of securities
was also a violation of law.

It was also affirmed that Mr Nahed had not personally contravened any of the act sections but
as a director and an officer body of an organization that had violated the law. All the supporting
documents produced and issued by the groups were misleading and deceptive which was again
a breach however it was concluded that he had not breached his duties of care and diligence as
a director. He remained in good faith as per his position with his duty to exercise his powers
and perform his duties in the best interest of his corporation. On the contrary, he was to be
questioned because he was in lead when several businesses of ProCorp failed and went
insolvent. The way insolvency took place and the way it was managed accounted for Nahed’s
failure. He was liable as per 206D to be disqualified.

Conclusion:

The case is well-known across the territory and globally as one of the major contravention
examples that live even today. It shows how scheme promoters and company directors may
always exploit and manipulate circumstances in their best interest without any consideration
for the law or rights of investors. It sent a message across that ASIC is actively working and
will not take any immoral or crooked advisers or companies that lack competency in an active
investment market. It is also a warning to all those who fall flat for such schemes that claim to
be ‘secured’ and offers ‘high returns’.
References:

Asic.gov.au. (2018). 06-364 Illegal fundraising sees scheme promoter ordered to pay over $1
million and banned for life | ASIC - Australian Securities and Investments Commission.
[online] Available at: http://asic.gov.au/about-asic/media-centre/find-a-media-release/2006-
releases/06-364-illegal-fundraising-sees-scheme-promoter-ordered-to-pay-over-1-million-
and-banned-for-life/ [Accessed 13 May 2018].

Legal.thomsonreuters.com.au. (2018). [online] Available at:

https://legal.thomsonreuters.com.au/browse/law-annuals/pdf/corporations-legislation-2014-
key-section-annotation-example-thomson-reuters.pdf [Accessed 15 May 2018].

Thomson Reuters Australia. (2018). Principles of Taxation Law 2018. [online] Available at:
https://legal.thomsonreuters.com.au/principles-of-taxation-law-2018/productdetail/125991
[Accessed 15 May 2018].