TGIF 19 April 2024 - Ponzi-scheme company liquidators given time to investigate scam ‘winners’

In this week’s TGIF, we explore Re Mirror Trading (Pty) Ltd (in liq) [2024] FCA 305.

Key Takeaways

• Going forward, the complexity and scale of investigating multinational schemes will be a strong factor in granting liquidators an extension of time to pursue voidable transactions.
  
  
• With the increasing presence of investment scams in Australia, ‘winners’ of international Ponzi-type schemes may increasingly become the subject of liquidators’ investigations into voidable transactions.
  
  
• Liquidators investigating potential voidable transactions may not be required to serve or give notice to potential defendants where investigations to identify all defendants are ongoing.

Background

Mirror Trading (Pty) Ltd (Mirror Trading) was a South African company that had been placed into liquidation on 30 June 2021. The liquidation was recognised in Australia as a foreign main proceeding pursuant to the Cross-Border Insolvency Act 2008 (Cth) on 6 October 2023.

In late April 2023, a judgment of the High Court of South Africa found that the company had operated an illegal, Ponzi-type scheme involving Bitcoin. Investors in Mirror Trading were said to benefit from a ‘trading pool’ of Bitcoin that was managed by a bot with artificial intelligence. Neither the trading pool nor the artificial intelligence bot were found to exist.

The liquidators of Mirror Trading claimed to have identified over 300,000 investors across 234 countries, including 866 Australian participants, who had received a return of Bitcoin from the scheme. They argued that the Australian ‘winners’ of the scheme were potential defendants to future claims the defendant company may bring. However, their investigations had not yet been able to determine the existence of any voidable transactions to pursue.

In ordinary circumstances, the liquidators would have been required to apply for orders about voidable transactions by 23 December 2023, pursuant to s 588FF of the Corporations Act 2001 (Cth). The liquidators sought an extension to allow their investigations to continue in view of any future voidable transaction applications.

The High Court of Australia’s decision in Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher (2015) 254 CLR 489 had found that shelf orders were available under s 588FF(3)(b), allowing an extension of time to be granted in relation to transactions that were not able to be identified at the time of the order.

Decision

The Federal Court found in favour of the liquidators, ordering that the time for them to make any application(s) under s 588FF of the Corporations Act be extended for a period of 12 months from the date of the decision. The Court held that a number of discretionary factors supported the granting of an extension, including that:

• The final orders for the appointment of liquidators had been delayed by seven months;
  
  
• The sheer scale of the scheme had made investigations complex and time consuming;
  
  
• The liquidators had decided to pursue recoveries in 86 jurisdictions and had to pursue or defend a range of other litigation, including recognition claims;
  
  
• The application for the shelf order had been made as soon as practicable after recognition of the liquidation in Australia, which only took place in October 2023;
  
  
• The fraudulent nature of the scheme meant an extension would be in the public interest; and
  
  
• As it was likely that future claims would be brought against ‘winners’, as opposed to creditors or other commercial arm’s length parties, considerations of prejudice were not as important as they might be.

The Court accepted that there was no ‘natural justice’ requirement for the plaintiffs to serve potential Australian defendants as none had been identified. Moreover, the Court said that further investigations would be needed to ascertain their existence and prospects of success.

Comment

The Australian Competition and Consumer Commission’s most recent 'Targeting Scams’ report revealed that investment scams caused the most financial loss to Australians in 2022, accounting for combined losses of $1.5 billion. Increasingly complex and multinational schemes are likely to mean that liquidators require additional time to commence proceedings. In considering whether to grant extensions of time, the Mirror Trading decision shows that the Court will canvas a range of factors, including the size of a scheme, the presence of ‘winners’ from that scheme, and the public interest in seeing its resolution.