In the case of Atlas Advisors, Black J of the NSW Supreme Court considered claims of Misleading & Deceptive Conduct and Unconscionable Conduct against Atlas Advisors and its director, Ms Zhuang, in relation to a $4.8m investment Lijuan Xue made in a fund known as the "Stellar Fund".
Before investing, Ms Xue had repeatedly informed Zhuang that she was looking for a low risk, high yield investment that she could make in order to raise sufficient funds to buy a home in Sydney. She stated to Zhuang on multiple occasions:
"I explained this to [Ms Zhuang] on many occasions during my discussions with her, so often that I cannot remember precisely how many times, usually saying to her things like ‘it has to be safe’, ‘I don’t want risk’, and ‘I cannot lose money’."
Despite these representations, Zhuang encouraged Xue to invest in the Stellar fund, advising her that it was a "safe" property investment scheme supported by mortgages and personal guarantees.
In fact, the Stellar Fund was a high risk scheme vulnerable to collapse, verging on being a Ponzi scheme.
With respect to the Misleading & Deceptive Conduct claim, in contravention of section 1041H of the Corporations Act 2001 (Cth) and section 12DA of the ASIC Act, it was alleged Zhuang and Atlas had misled and deceived Xue into investing in the Stellar Fund. That claim was dismissed by Black J.
Unconscionable conduct claim
Xue moved to Australia in January 2017 (with millions of dollars to invest), having previously managed a significant State owned/linked transportation company in China. At the time, she was unable to read, write or speak English and communicated exclusively in Mandarin.
Prior to moving to Australia, Xue, who was already acquainted with Zhuang and had relied on her to assist with things like her emigration to Australia, quickly became close, such that by March 2017 she relied on Zhuang to help her with almost every aspect of daily life:
"at the end of March 2017, Ms Zhuang had involved herself in Ms Xue’s life in many important respects, not just in terms of Ms Xue continuing her business dealings with Atlas, but in Ms Xue’s personal life, including being a school contact point for Ms Xue’s young son, paying household accounts, attending with Ms Xue to inspect a house Ms Xue subsequently purchased , accompanying Ms Xue to open a bank account - and generally in various aspects of Ms Xue’s personal life."
At this same time, Xue told Zhuang that she was looking for a place to invest the money she had brought with her from China and wanted to invest in a fund that would yield her enough money to buy a substantial residence in Sydney.
Zhuang encouraged Xue to place her money into the Stellar Fund (operated by her and her partner, Guy Hedley, under the name Atlas Advisors Pty Ltd) telling her it was a "zero-risk" investment, secured by mortgages and personal guarantees that would return around 10% per annum.
Zhuang supplied Xue with an information memorandum written in English that detailed the features of the Stellar fund (and also accurately represented the risks) as well as the relevant investment forms (also written in English).
Application of the law
In dismissing Xue’s claim of unconscionable conduct, Black J adopted the High Court’s decision in Kobelt, as described by the majority in the Full Court of the Federal Court in Quantum Housing, to reiterate that unconscionability does not require a special disability or vulnerability. He repeated:
"that statutory unconscionability could be established if conduct was against conscience, as informed by the norms and values of acceptable commercial behaviour, including honesty, fairness and dealing with customers, and the performance of commercial bargains. … I accept that the majority there held (at ff) that the case law, including Kobelt, did not require that there necessarily be some form of pre-existing disability, vulnerability or disadvantage of which advantage was taken, in order to establish unconscionability under ss 12CB or 12CC of the ASIC Act."
With respect to Xue, Black J held that despite having expressed a desire to invest in a 'safe' investment and not being able to read, write or speak English (the information memorandum and all investment documentation were in English): she was nevertheless:
a sophisticated business-woman;
had a good knowledge of financial products and investments;
was a sophisticated investor;
was the sole director of an Australian company, a role that carries with it a multitude of statutory and fiduciary duties;
was an experienced property investor in China;
had managed a transport company in China;
had demonstrated a familiarity with numerous financial and investment; constructions, including understanding the link between risk and return; and
had taken some time to consider and make the decision to invest in the Stellar Fund.
Overall, Black J held that Xue was not under a special disadvantage because of her close relationship with Zhuang and lack of English language skills, and was still capable of apprehending and understanding the risks associated with the Stellar Fund investment as expressed in the information memorandum - that is, even though those documents were written in English.
By Rob Norton and Louise Gehrig