In this alert, Partner Michael Hansel and Senior Associate Christina Hooper comment on the proceedings recently instigated in the Victorian Supreme Court in relation to the acquisition by Far East Consortium (Far East) of Black Capital Finance (non-bank lender) in breach of the Foreign Acquisitions and Takeovers Act 1975 (Cth) (the Act) and FIRB requirements.
Far East has developed several local property development projects within Australia and sought to acquire Black Capital Finance to assist a large number of foreign pre-sale customers who were at risk of defaulting, by reason of their ability to access finance. Black Capital Finance was intended to provide loans to foreign purchasers and hold mortgages for Far East sites.
Through a series of acquisitions, Far East purchased 23.46% of Black Capital Finance (above the foreign person threshold as set out in the Act) before increasing its interest to 38%. As Far East held more than 20% of Black Capital Finance, Black Capital Finance under the Act was also a foreign person. It is alleged that Black Capital Finance (as a foreign person due to Far East holdings) was in breach of the Act by reason of the fact that it held certain beneficial interests in trusts that held mortgages from around 22 February 2019.
This matter is presently before the Court; however it is entirely possible this matter will be determined after consideration of the broad provision of the Act in relation to discretionary trusts.
Section 18(3) of the Act provides that for the purposes of the Act if, under the terms of a trust, a trustee has a power or discretion to distribute the income or property of the trust to one or more beneficiaries, each beneficiary is taken to hold a beneficial interest in the maximum percentage of income or property of the trust that the trustee may distribute to that beneficiary.
In practice this means where a discretionary trust has a foreign person beneficiary (that isn’t prohibited or restricted from distributing to a foreign person), that trustee is deemed to be a foreign person if they have the ability to distribute that asset to the foreign person.
Foreign persons are able to purchase some types of residential land in Australia with prior notification. The application of this section means that Black Capital (as mortgagee) was also required to notify FIRB prior to the purchaser acquiring the property. The requirement to seek FIRB approval in Australia for residential land is subject to a $0 threshold, so every mortgage granted may have been in breach of the Act.
On publicly available records we are not able to ascertain whether FIRB has instituted proceedings or otherwise penalised Far East.