One of the major regulatory stories over the last 12 months concerns the investigation and subsequent Federal Court proceedings by the Australian Securities & Investments Commission (ASIC) concerning ‘land banking’ schemes in Victoria, Queensland and Western Australia.

This article discusses the scope of those proceedings, and outlines some key risk-management concepts for reputable developers and others in the property sector.

WHAT DO WE MEAN BY ‘LAND BANKING’?

Land banking refers most broadly to the practise of aggregating parcels of land for future sale and development. As a concept, the practice is lawful and uncontroversial.

However, in Australia and the UK, the concept of land banking has also become associated with complex high-risk investment schemes which have attracted significant attention from regulators and law enforcement agencies.

In one model, purchasers were sold options over hypothetical future lots, where the land had not yet been subdivided or received planning approval. The model contemplated that the option fees would contribute to the funds required for the development to proceed.[1]

It should be noted that ASIC, as a corporate and financial regulator, does not have jurisdiction over ‘vanilla’ land sale transactions. Accordingly, a property venture that attracts the attention of ASIC will typically be something out of the ordinary, which raises issues concerning company, credit or financial services law.

THE COURT PROCEEDINGS

In a series of ongoing court proceedings,[2] ASIC has variously:

  • alleged that particular ‘land banking’ schemes were in fact unregistered managed investment schemes, a financial product that is regulated under the Corporations Act 2001 (Cth)
  • obtained orders appointing provisional liquidators over certain companies associated with the schemes, with a mandate to investigate their affairs and any contraventions of the law
  • obtained injunctions restraining the further promotion of particular projects to consumers.

A report by provisional liquidators issued on 15 December 2015 indicated among its preliminary findings that one group of development companies had raised $6.68 million collectively from 152 investors, and that each of the companies in question were now insolvent.[3]

On 10 March 2016, the Federal Court ordered that those companies be wound up, and granted leave for ASIC to amend its case so as to seek orders at the final hearing that two of the key individuals be disqualified from managing corporations in future.

On 15 April 2016, the Federal Court ordered the winding up of two more companies, associated with the ‘Hermitage Bendigo’ and ‘Foscari’ development schemes. Although $24 million had been raised in respect of those developments, primarily from ‘mum and dad’ investors, Justice Beach found that both companies were insolvent, and in any event that they ought to be wound up by the Court on just and equitable grounds.

In respect of the latter decision, Justice Beach held that:

  • he had little confidence in the management of either company
  • they were effectively controlled by a shadow director
  • their financial records were in an unsatisfactory state
  • the companies had been knowing participants in schemes that had facilitated the misappropriation of investors’ funds.

THE SENATE INQUIRY

In September 2015, individuals associated with the land banking schemes were called before a hearing of the Senate Economics Committee, as part of its ongoing inquiry into the financial advice sector.

In the course of the hearing, the head of one land banking group was repeatedly labelled a ‘con man’ by Labor Senator Sam Dastyari.[4]

The Senator suggested that the Committee’s report, now due by 31 August 2016, was likely to include recommendations for reform aimed at dealing with the schemes in question.

LESSONS FOR THE REPUTABLE DEVELOPMENT SECTOR

The ASIC proceedings largely concern players on the fringes of the development sector, who have had encounters with regulators in the past.

However, the ASIC investigation of land banking schemes serves to highlight two key points that apply equally to all players in the property development sector – particularly if they have a reputation to maintain.

Those points are identifying legal and regulatory risks, and managing your brand.

  1. Identifying legal and regulatory risks

On one hand, innovation is the life blood of business, and new opportunities may arise from exploring alternative structures and sources of capital.

On the other hand, the familiar structures and transactions that are typical of a ‘standard’ property development or other commercial enterprise have arisen over the course of time, and they usually exist for a reason.

In one proceeding, ASIC has alleged that the options sold to investors by one promoter of land banking schemes were not a standard property interest, but that the structure of the investment in fact comprised an interest in a managed investment scheme.

A managed investment scheme is defined under the Corporations Act 2001 (Cth) to mean, with certain exceptions, a scheme where:

  • members contribute money or money’s worth as consideration to acquire rights to benefits produced by the scheme
  • any of the contributions are to be pooled or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the members who hold interests in the scheme
  • the members do not have day to day control over the operation of the scheme (whether or not they have the right to be consulted or give directions).

If ASIC’s allegations are upheld by the Court, the structure employed in relation to those schemes would take the participants well outside of the legal framework that applies to a traditional property development, and deep into the highly regulated territory applicable to financial products and services.

In some circumstances, operating an unregistered managed investment scheme, and doing so without an Australian financial services licence, may constitute a criminal offence.

Accordingly, when considering any structure that is outside of the industry norm, it is important to seek advice from a lawyer with broad commercial experience. The ASIC proceedings are a powerful illustration of how the implications of a particular transaction are not always apparent on the face of the documents themselves.

  1. Managing your brand

A reputation is a valuable asset, but can be difficult to restore once damaged.

The media reporting of this matter has focussed some attention on the fact that land banking schemes were promoted at seminars and events to which attendees were drawn in by high profile business and motivational speakers, most notably Richard Branson and Arnold Schwarzenegger.[5]

Although there is no suggestion the drawcard speakers were involved in, or even aware of the nature of the schemes in question, the attention is embarrassing at best. At one stage, Senator Nick Xenophon issued a press release calling on Mr Schwarzenegger to return his appearance fees and attend as a witness before the Senate inquiry.[6] It is easy to imagine how other service providers whose names were associated with the schemes or the investigation might feel a level of discomfort.

As always, it is important to be aware of the projects and partners by which your business will be known, and consider whether they reflect its values and the perception it would like to achieve in the market.