5 Key takeaways and implications for future financial services enforcement
Introduction
After a lengthy and hard-fought legal battle, the High Court has rejected the Mayfair 101 group of companies and their director James Mawhinney’s special leave applications. What can financial services licensees and their directors learn from the Mayfair 101/Mawhinney saga? How could this impact ASIC’s tactics in initiating future enforcement action and the strategic decisions of private parties in defending such proceedings?
Practical Guidance Legal Writer Luba Poukchanski analyses the proceedings brought by the Australian Securities and Investments Commission (ASIC) against both the Mayfair 101 group and James Mawhinney personally. The case raises interesting issues of policy and legislative interpretation, and provides useful lessons for the corporate regulator, as well as for private parties.
READ NEXT: Three tips for banking and finance lawyers when responding to an ASIC advertising query
Background and procedural history
Australian Income Solutions (previously Mayfair Wealth Partners), M101 Holdings, M101 Nominees, and Online Investments (trading as Mayfair 101) (together with Mayfair Group) offered investments in various financial products, including fixed-income and promissory notes and debentures.
ASIC commenced Federal Court proceedings against the Mayfair Group (Mayfair Proceedings), alleging that it had made several false, misleading and deceptive statements in advertising its financial products in breach of s 1041H(1) of the Corporations Act 2001 (Cth) (Corporations Act) and ss 12DA(1), 12DB(1)(a) and 12DB(1)(e) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).
ASIC also separately commenced proceedings against Mayfair Group Director James Mawhinney (Mawhinney Proceedings), seeking a broad-ranging injunction under ss 1101B(1) and 1324(1) of the Corporations Act (Mawhinney Injunction) to permanently restrain him from receiving or soliciting funds in connection with financial products, advertising, promoting or marketing financial products. The Mawhinney Injunction was granted on an interim basis prior to a final hearing, together with orders appointing provisional liquidators to the Mayfair Group.
In the Mayfair Proceedings, the Federal Court (Anderson J) found the Mayfair Group liable for breaches of the Corporations Act and ASIC Act in relation to various representations concerning its products, and in a subsequent penalties judgment, ordered it to pay $30M in pecuniary penalties as well as publish adverse publicity notices. His Honour also permanently restrained the Mayfair Group from using specified phrases in any future advertising, marketing or promotion (Mayfair Injunction). In the Mawhinney Proceedings, Anderson J granted the Mawhinney Injunction permanently for a period of 20 years.
Both the Mayfair Proceedings and Mawhinney Proceedings were appealed to the Full Federal Court. In the Mayfair Proceedings, the Full Court dismissed the appeal in relation to liability and pecuniary penalties but allowed it in respect of the Mayfair Injunction, finding that it was too broad and did not have sufficient connection to the contraventions. In the Mawhinney Proceedings, the Full Court allowed the appeal on the basis that Mr Mawhinney had been denied procedural fairness due to the fact that the primary judge had granted the Mawhinney Injunction on the basis of a prima facie case and without ASIC having established any actual or prospective contraventions of the Corporations Act or ASIC Act by him. The Full Court reinstated the interlocutory injunctions and remitted the matter for a new hearing to another judge of the Federal Court.
Both sets of proceedings were then appealed again to the High Court and special leave was denied in both.
What are the practical implications of these Proceedings?
- The importance of injunctions
These proceedings highlight the importance of applications for injunctions against both entities and individuals being properly framed. The Federal Court has signalled that it is not disposed to grant injunctions sought prematurely, framed in an overly broad manner (in terms of length and/or ambit), that are not sought on the correct legislative basis or do not have a sufficient connection to proven contraventions.
In the Mayfair Proceedings, the Full Court overturned an injunction permanently restraining the Mayfair Group from using the phrases “bank deposit”, “certainty”, “fixed term”, “term deposit” and “term investment” (subject to certain very narrow exceptions) in any future marketing or advertising. In the Mawhinney Proceedings, the Full Court overturned a permanent 20-year injunction effectively prohibiting Mr Mawhinney from any participation in the financial markets, in circumstances where it had not yet been established that he had engaged (or been knowingly concerned in) any unlawful conduct.
In the Mawhinney Proceedings, there was simply no proper basis for a permanent injunction under a proper construction of either s 1324 or s1101B. The Court emphasized that ASIC had brought the proceedings prematurely, and put a “flimsy” case, seeking the injunction on preliminary and incomplete information. In the Mayfair Proceedings, the Court considered whether to reframe the injunction to be narrower in scope, but ultimately declined to do so on the basis that it was so broad that it exposed an error of principle.
Thus, parties to proceedings brought by ASIC should be alive to various grounds to challenge the basis and scope of injunctions sought by the regulator, against both corporate entities and individuals. By the same token, it is to be expected that ASIC may now be especially wary of “jumping the gun” to prematurely request final injunctions and will instead choose to commence proceedings against the directors of impugned companies at a later stage (i.e. upon receipt of a final liquidators’ report rather than, as was the case in these proceedings, a provisional liquidators’ report). This of course will require a longer period of investigation during which a director will be expected to co-operate with both liquidators and ASIC, subject to strategic considerations involving privilege claims.
- Adequacy of evidence
These proceedings also demonstrate the practical difficulties ASIC often faces in collecting adequate evidence in proceedings alleging Corporations Act and ASIC Act breaches. The regulator effectively ran the Mawhinney Proceedings on the basis of interlocutory evidence which proved an insufficient basis, despite the fact that it had obtained orders that evidence filed in the Mayfair Proceedings also served as evidence in the Mawhinney Proceedings.
A related, and as yet unresolved, issue in this regard is the question of whether applications under ss 1101B and/or 1324 to restrain individuals or corporations are punitive in nature and thus attract the privilege against self-exposure to penalties. If so, this would significantly affect strategic considerations in defending proceedings brought by ASIC. For example, defendants would need to take care not to unintentionally waive privilege in engaging with ASIC, and material such as examination transcripts would not be admissible in proceedings to impose injunctions.
These proceedings illustrate the need for both adequate evidence of contravention and specificity in the framing of that evidence by ASIC. In the Mawhinney Proceedings, it referred to a wide range of conduct that had not yet been alleged or found to be unlawful as the ostensible basis for seeking the injunction. The issue of adequacy of evidence is a live one for defendants in any proceedings brought by ASIC and their legal advisors, and parties should always critically probe the evidence of contravention gathered by the regulator.
- Framing of representations and declarations
ASIC elected to frame the representations alleged in the Mayfair Proceedings in terms that did not correspond exactly to Mayfair’s marketing and promotional materials. It alleged that the Mayfair Group had represented that its M Core Fixed Income Notes were “fully secured financial products” when the actual language of the materials stated that they were “supported by first ranking, unencumbered asset security”, “secured by a pool of assets in respect of which first-ranking, registered security interests have been granted” and “revalued at least yearly to ensure dollar-for-dollar secured asset support”. This was an issue raised on appeal. While the Full Court ultimately read down the representations to find that this combination of statements amounted to a representation that the Notes were full secured, it would arguably have been more straightforward for ASIC to simply plead the representations in the natural language used in the marketing materials, without the additional gloss. Defendants and their counsel should carefully review the representations alleged by ASIC against the actual language used in promotional materials, market announcements or other source materials and be alert for allegations that go beyond that.
The Mayfair Group argued before the Full Federal Court and High Court that the declarations made by the primary judge did not adequately specify which defendants committed each contravention, the exact conduct that constituted the contraventions, and the total number of contraventions that took place (including whether particular misrepresentations were singular or plural). These arguments were not successful, indicating that declarations of contravention may be framed in reasonably general terms by simply describing the relevant conduct.
- Relevant class of consumers
The question of how to characterise the relevant class of consumers or investors and the ordinary and reasonable member of that class is a perennial one in claims of misleading or deceptive conduct and representations under the Corporations Act, the ASIC Act and the Competition and Consumer Act 2001 (Cth).
In the Mayfair 101 Proceedings, the appellants argued that the target class of investors defined as high net worth “wholesale investors” in their marketing and promotional materials were invariably “experienced” and financially “sophisticated”. However, both the primary judge and the Full Federal Court rejected the elision between a particular level of wealth and financial sophistication, finding that in fact, many lacked extensive knowledge of financial products or investment experience and so were dependent on the Mayfair Group’s marketing materials. It remains an open question dependant on the facts of each case whether the relevant class can be distilled down to a single representative reasonable class member, or (as here) a range of people of varying levels of knowledge and experience. However, defendants should be wary of advancing an argument to “cherry pick” the target class of their representations as only the most knowledgeable and experienced of those who may see them.
- Scope and use of ss 1101B and 1324
As mentioned above, the Mawhinney Proceedings raised the issue of the proper scope and construction of both ss 1101B and 1324 of the Corporations Act. The Full Federal Court’s interpretation (accepted by ASIC on appeal and not disturbed by the High Court) was that:
- s 1324 requires ASIC to establish that “the” person (whether an individual or corporation) to be the subject of the restraining order has engaged or proposed to engage in contravening conduct (or to have been a party to, or knowingly concerned in such a contravention within the meaning of s 79(c)); and
- s 1101B has a broader ambit, only requiring ASIC to establish a contravention by “a” person. Thus, s 1101B ostensibly allows ASIC to seek to restrain a director on the basis of an established contravention by a company, without needing to plead that the individual was knowingly involved. However, it is plainly more sound to establish that the person against whom a restraint is sought was a party to the contravention (and ASIC has in fact now explicitly pleaded this in respect of all allegations against Mr Mawhinney on the remitter).
ASIC is now presumably very alive to the proper construction of both these provisions. Nonetheless, defendants to restraint applications by ASIC would be well advised to ensure that applications against them are based on the correct legislative provision, and to consider challenging those not explicitly based on their own established knowing involvement.
In addition, it is arguable that as a policy matter, both ss 1324 and 1101B should be construed more narrowly as intended to restrain future conduct that is squarely related or attributable to the initial contravention, rather than operating as a foundation for a much more wide-ranging injunction against all involvement in financial services for a lengthy or indefinite period of time. On this view, disqualification provisions under Pt 2D.6 (including ASIC’s administrative banning power under s 206F) are better suited to that kind of broad restraint. It remains to be seen whether this is an issue pursued on the remitter, and a potential ground to raise for other defendants against whom ASIC may seem similarly broad restraint orders.
What’s likely to be next in the Mawhinney Proceedings?
The remitter in the Mawhinney Proceedings, which had been stayed pending the determination of the special leave application, will now proceed before O'Callaghan J. ASIC is clearly determined to make an example of Mr Mawhinney and perhaps considers this matter a test of the breadth of the Court’s injunctive powers.
Equally, Mr Mawhinney (who is separately pursuing defamation proceedings against ASIC and its Deputy Chair in respect of statements made in a media release) appears intent on pursuing all available avenues. Therefore, whatever the outcome of the remitter proceedings, further appeals are likely.
LexisNexis® Practical Guidance Corporations will provide further updates and analysis on these proceedings and other developments in corporate law and practice in our latest legal updates and Practice Area Round-ups. (You can subscribe to Practice Area Round-ups HERE.)