ASIC’s record with land banking schemes has been the story of shutting the stable door after the horse has bolted. It has wound up insolvent schemes long after the investor’s cash has well and truly dissipated.

For example:

VKK Investments: Around 125 investors invested a total of approximately $22 million into the VKK scheme, which started in May 2010, on the expectation that the land at Hutton Road, Keysborough in Victoria would be re-zoned. This did not occur. The funds were completely dissipated. The scheme was wound up on 20 April 2018. ASIC Media Release

So it comes as a pleasant surprise that on 19 March 2019, ASIC wound up a land banking scheme in which investors were set to receive a windfall profit:  Australian Securities and Investment Commission v Aviation 3030 Pty Ltd [2019] FCA 377 Federal Court of Australia (O’Callaghan J).

It was a contested application. The promoters of the scheme opposed ASIC’s application and the investor group supported it. This is an analysis.

The facts

Aviation raised around $10.59 million from approximately 73 investors (shareholders and unitholders) to purchase 756 Aviation Rd, Point Cook for $7.8 million in 2011, for rezoning. The balance of the expenditure was funded by debt.

In 2012, the property was rezoned from “Green Wedge Zone” to “Farming Zone” which significantly increased its value. A further re-zoning to “Residential” was in prospect which would greatly increase its value.

In March 2016, two directors of Aviation decided to divert a substantial part of the prospective increase in value to themselves, by issuing 160 million shares representing 63.33% of the share capital at 1/100th of a cent per share to companies associated with them under an “option agreement” dated 18 September 2012.

In October 2018, Aviation entered into a contract to sell the land to a Shanghai-based property development company for $135 million. The purchaser paid Aviation a deposit of $27 million, which was released, and was partly applied to repay the debt of $11.68 million. The balance price of $108 million is payable in April 2023.

The effect of the share issue of March 2016 upon the investors was to dilute their shareholdings and reduce their profit entitlement from $1,136,363.64 to $416,666.67 per 1,000,000 shares.

Legal Principles

ASIC’s application was for a winding up order under s 461(1)(k) of the Corporations Act, i.e.:

[if] the Court is of opinion that it is just and equitable that the company be wound up.

The Court quoted with approval, Gordon J in Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) (2013) 93 ACSR 189 (at [19] et seq):

It has long been established that a company may be wound up where there is a justifiable lack of confidence in the conduct and management of the company’s affairs and thus a risk to the public interest that warrants protection ... 

For example, a winding up order may be necessary to ensure investor protection or where a company has not carried on its business candidly and in a straightforward manner with the public ... Alternatively, it might be justified in order to prevent and condemn repeated breaches of the law ...

... it has been said that a stronger case might be required where the company was prosperous, or at least solvent ...: Solvency, however, is not a bar to the appointment of a liquidator on the just and equitable ground, particularly where there have been serious and ongoing breaches of the Act ...

After considering the grounds the promoters of the scheme raised to resist the application, including that the sale price of the land was many times the purchase price, it was a single purpose entity, injunctions would be sufficient, and the various undertakings proffered to protect the interests of the investors would suffice, the court concluded:

In my view, the case that ASIC makes to wind up Aviation is an overwhelming one. … directors have issued to themselves and to their associates large numbers of shares at a gross undervalue; they have fabricated correspondence and invoices; they have provided false instructions to the company’s external solicitors; they duped and misled investors; they entered into related party loans; and they made unauthorised and exorbitant expenditures. The audacity of the March 2016 share issue alone could well be enough to warrant a winding up order, but it is not necessary to decide the case on that sole basis because of the many and varied ways that the directors have demonstrated that they are unfit to sit on the board of Aviation. [paragraph 169]

ASIC’s application was also for the winding up of the Aviation scheme under s 601EE(2) of the Corporations Act, i.e.:

[ASIC may apply to wind up] a managed investment scheme [if operated] in contravention of subsection 601ED(5) [because it is unregistered]

The Aviation Scheme was a managed investment scheme because: the investors contributed money to acquire rights to the benefits produced by the scheme; the contributions were pooled; and Aviation, rather than the investors, had day-to-day control over the scheme.

The scheme had more than 20 members and was required to be registered under s 601ED(1) of the Corporations Act. The issue of interests in the Aviation scheme would have required the issue of a Product Disclosure Statement. The Court concluded:

In circumstances where I am satisfied that there has been misconduct and mismanagement in the affairs of the scheme of the type described in detail above, I will make the orders ASIC seeks in respect of the Aviation scheme being wound up.

Note: The proceedings have not concluded. On 20 March 2019, the Court granted a 7 day stay of orders - Australian Securities and Investment Commission v Aviation 3030 Pty Ltd (No 2) [2019] FCA 391

ASIC Media Release

ASIC Commissioner John Price said, ‘The orders made by the Court will allow an orderly and lawful winding up of the companies and the investment scheme they have operated and will place the future process of distribution of funds to investors into independent hands. This action shows ASIC will intervene where directors prioritise their own interests above those of investors.’

‘ASIC has targeted and wound up a number of land banking schemes due to concerns they are operating outside the law.  ASIC will continue to scrutinize investment schemes suspected of operating outside of the managed investment scheme legislative regime.’