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Corporations – financial services and markets – whether defendants were carrying on a financial services business by issuing financial products – whether loan agreements were financial products

In ASIC v Secure Investments Pty Ltd (No.2) [2020] FCA 1463 (14 October 2020) the Australian Securities and Investment Commission (ASIC) sought, among other relief, declarations that Secure Investments Pty Limited (company) and individuals associated with it carried on a financial services business without authorisation pursuant to an Australian Financial Services Licence (AFSL) in contravention of s911A of the Corporations Act 2001 (Cth) (Corporations Act).

The company was not the holder of an AFSL. One of the issues was whether certain loan agreements entered into between the company and individuals were, in fact, in the nature of investments in a financial product.

Background: Loan agreements were entered into between the company and individuals or their superannuation funds over a period from 1 November 2014 to July 2019 (loan agreements). The loan agreements were in substantially the same terms. The amount of the loan, its repayment date and the applicable rate of interest were identified in a schedule to the agreements. The agreements otherwise contained standard terms and conditions which are ordinarily found in loan agreements.

The proceeds of the “loan funds” were used to invest in property development for which the “lenders” would receive varying rates of return in the form of “interest”.

Under s765A of the Corporations Act, a “credit facility within the meaning of the regulations” is not a “financial product” for the purposes of Chapter 7. The expression “credit” for the purposes of r7.1.06 means a contract, arrangement or understanding under which one person incurs a deferred debt to another person and includes a financial benefit arising from or as a result of a loan (r7.1.06(3)).

ASIC contended that the loan agreements were not a “credit facility” as used in s765A because the definition in r7.1.06 excludes credit facilities if they are “financial products” (see ss763A and 763B of the Corporations Act). The arrangements between the investors and the company would be a facility through which a financial investment was made, and therefore “financial products”, if, in accordance with s763B:

(a)      the investors gave money or money’s worth (the contribution) to the company (s763B(a)) and

(b)     the investors intended the company would use the contribution to generate a financial return, or other benefit, for them (even if no return or benefit was in fact generated) (s763B(a)(ii)) and

(c)      the investors had no day-to-day control over the use of the contribution to generate the return or benefit (s763B(b)).

Did the company contravene s911A of the Corporations Act? Justice Derrington found that the facts supported the conclusion that the first and third elements identified above were satisfied. As to the second element, his Honour said that:

(a) A mere loan agreement by which money is lent in return for its repayment together with interest is unlikely to satisfy the requirement that it was intended the contribution would be used by a borrower to generate a financial return for the lender.

(b) The question of what was the intended use of the funds is to be answered in the context of all of the relevant circumstances, including what the investors were told about the transaction.

(c) The following circumstances supported a conclusion that the arrangements between the parties was that the company would use the investors’ funds to generate profits for them:

(i) public statements which the company made on its website and in brochures to the effect that it provided clients with investment options and profitable returns in respect of property development

(ii) the rate of interest payable was identified as being between a range such as 7 to 10% or 10 to 12%. In the context of the terms of the loan agreements this lacked any rationality in a legal logical sense. However, if it was the expectation of the parties that the investor had directly invested in a project, the expressed range of percentages can be discerned as being the scope of the expected profit

(iii) from time to time the company sent correspondence to investors indicating that higher rates of return might be achieved in certain circumstances. This correspondence is consistent with the arrangement being in truth a managed investment rather that of only lender and borrower.

The court concluded that the company was carrying on a financial services business by issuing financial products to investors. As the company was not authorised pursuant to an AFSL to carry on that business, the court found that it had contravened the prohibition in s911A of the Corporations Act.

Anthony Lo Surdo SC is a barrister, arbitrator and mediator at 12 Wentworth Selborne Chambers, Sydney, Lonsdale Chambers, Melbourne, and Outer Temple Chambers, London, Abu Dhabi and Dubai. Theresa Power is a barrister at 12 Wentworth Selborne Chambers, Sydney.

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