A recent Federal Court decision of His Honour Feutrill J provides guidance on how equitable principles (including pooling, tracing and hotchpot) apply to an insolvent managed investment scheme to take into account earlier scheme payments.
The liquidator of a corporate trustee applied for directions regarding the scheme including tracing, priorities and distribution method.
Eight distribution methods for the mixed fund were considered, the methods chosen were based on the “hotchpot” principle to bring earlier scheme payments into account.
PONZI SCHEME
The liquidators were justified in treating the scheme as a ponzi [3].
His Honour, referred to an earlier decision, identifying the "classic insolvency conundrum" caused by a Ponzi of limited funds, co-mingled accounts and extensive withdraws and deposits [4].
TRUSTS, POOLING AND TRACING
The liquidators were justified in treating proceeds and property as a single mixed fund, with scheme members having an equitable charge to the value of their contributions (subject to costs)[118].
Funds acquired by the corporate trustee and director were trust funds in which the scheme members had a beneficial interest [120].
Tracing was considered preliminary to the making of a claim. Investors who received funds and found out that they had taken advantage of a fraud risked being parties to that fraud and liable, bona fide recipients without notice of wrongdoing not liable [187].
PRIORITIES AND DISTRIBUTION (HOTCHPOT)
The cost and expenses of the liquidators, the scheme receivers (who were the liquidators) and the interim receivers were to be paid first out of the fund available to scheme members [138].
The distribution methods considered included the methods set out in ASIC v Letten (No 20) [2012] FCA 1283 and pari passu options.
His Honour selected the appropriate method of distribution based on principle rather than on the potential scheme member outcome [180].
The equitable principle of "hotchpot" was considered, in effect, being whether scheme members were required to "bring in" their preliminary dividend before participating in a further dividend [53] [188] to [196].
Based on the Letten decision “hotchpot” in effect, being a clawback of prior returns when calculating an investor's share of the funds available for distribution [229].
The object of the two main distribution methods was to give effect to the "hotchpot" principle by postponing distributions to scheme members who had received the benefit of payment out of scheme property until they had "brought in" the value of the benefit received [250].
CONCLUSION
In addition to making scheme and pooling directions, His Honour set out a method and formula for distribution based on the “hotchpot" principle [252] to [260].