The Provisional Liquidators estimate a nil return to creditors from $63.5 million of investor funds invested in Mayfair 101 (M101). They considered that Mayfair 101 ‘has been insolvent since inception’.
The Federal Court of Australia has analysed the advertising which attracted the investors to invest, the unsustainable business model and the resulting breaches of the Corporations Act 2001 (Cth) and the Australian Securities and Investment Commissions Act 2001 (Cth).
The decision is Australian Securities and Investments Commission v Mayfair Wealth Partners Pty Ltd (No 2) [2021] FCA 247 (23 March 2021) (Anderson J). The key points are:
The Mayfair 101 Group advertising
Mayfair 101 Group engaged in an internet advertising campaign using sponsored links from 3 July 2019 for its M+ Notes and Core Notes. Later on, it advertised in the print media and sent emails to subscribers on various marketing lists (from 22 November 2019 to 18 December 2019).
These are the details:
Sponsored link advertising on the internet
Mayfair 101 paid for these keywords on Google and Microsoft - related platforms: “best term deposits”, “Bank of Melbourne term deposits”, “National Australia bank term deposit”, “term deposit” and “term deposit rates”.
Members of the public who used these search terms were led to the Mayfair 101 websites which promoted its M+ Notes and Core Notes. The Mayfair 101 websites had labels (meta-title tags) which included words such as “best term deposit” to attract searches.
Newspaper advertisements and marketing emails
Mayfair 101 placed advertisements in the Australian Financial Review, the Cairns Post, The Courier Mail (Brisbane), The Sydney Morning Herald and The West Australian. This is a sample.
5.45% P.A. 12 MONTHS FIXED RATEIT’S ARRIVED
Introducing M Core Fixed Income
The Mayfair 101 Group is delighted to announce the release of a new investment product that caters to investors seeking a strong yield from a secured investment product. With interest rates at record lows and investor sentiment shifting away from traditional financial institutions towards non-bank fixed income providers, Mayfair Platinum is delighted to make this new product available to Australian wholesale investors (not available to retail investors).
The advertisement continued:
M Core Fixed Income provides a fixed monthly income at competitive interest rates backed by dollar-for-dollar security over assets held by the Mayfair 101 Group of companies.
Members of the public were invited to visit the Mayfair Platinum Website and to obtain the M+ Notes brochure and the Core Notes brochure which contained more information.
For example, this information appeared on the Mayfair Platinum Website:
Mayfair Platinum offers income-producing investment opportunities for wholesale investors involving exposure to opportunities that are typically reserved for investment banks, stockbrokers, family offices and the ultra-wealthy.
Qualified investors can access term-based investment options starting from AU$100,000 and ranging from 3 months to 5 years, with the option of monthly interest distributions.
Current Rates: 3 months 3.65%; 6 months 4.75%; 12 months 5.45%; 24 months 5.75%; 36 months 6.00%; 60 months 6.45%. (M+ Notes product)
The M+ Notes brochure stated:
M+ Notes is a smart and effective way of earning competitive rates of return
The Core Notes brochure stated:
M Core Fixed Income is a secured, asset- backed term-based investment product
The advertising campaign was very successful – the websites received over 13 million visits and more than $200 million in investor funds was raised.
Why did the Mayfair 101 investment scheme fail?
The investor funds raised on the Core Notes product were used to:
- purchase Dunk Island on vendor terms;
- purchase 119 real properties in the Mission Beach region of Queensland which were settled for cash ($54,085,011);
- pay deposits on contracts to purchase 111 real properties in the Mission Beach region ($5,852,387)*;
- provide loans to related parties ($9,515,433);
- pay unspecified operating expenses ($21,700,000).
*Mayfair 101 did not have the funds to settle the 111 Mission Beach properties when settlement fell due in December 2019. Naplend Pty Ltd, a private lender advanced the funds for settlement ($86,483,036) and took a first ranking mortgage over all properties and a PPSR security over the companies. The interest rate was 24% pa, the default rate was 40% pa and the term was 4 months.
On 16 April 2020, ASIC obtained a Court order that Mayfair 101 Group cease advertising its investment products. In June 2020, distributions to the Core Note holders ceased. In July 2020, interest payments due to Naplend and to the vendor financier of Dunk Island ceased.
In August and September 2020, provisional liquidators were appointed to the entities in the Mayfair 101 Group.
Approximately $211 million is owing to Mayfair 101 Group investors.
The liquidators reported that:
- The investor funds were channeled through a ‘treasury company’ (Eleuthera).
- M101 Nominees did not have any income-producing assets in its own right and was highly dependent on Eleuthera for cash injections. Eleuthera was itself reliant on intercompany loans which were used to fund investments in illiquid and/or for the most part, non-income producing assets.
- The provisional liquidators concluded that M101 Nominees had been trading insolvent since incorporation on the basis that it did not have a sustainable business model. That is, noteholders were investing predominantly for periods of 6 or 12 months, however the loan agreement with Eleuthera had a maturity term of 10 years. On this basis, M101 Nominees would not have adequate funds to repay Core Notes noteholders as their debentures matured or fell due.
Misleading or deceptive conduct, false or misleading representations
The Federal Court findings and declarations were that in the period from 3 July 2019 to 16 April 2020, the Mayfair 101 Group companies –
- Represented that its promissory notes called ‘Fixed Income Notes’ were comparable to, and of similar risk profile to, bank deposits. The Court declared this was false or misleading because they exposed investors to significantly higher risk than term deposits, including the lack of prudential regulations that apply to term deposits. (‘Bank Term Deposit Representations’)
- Represented that the principal would be repaid in full on maturity of the promissory notes. The Court declared this was false or misleading because Mayfair had the right to elect, and did elect, to extend the time for repayment to investors for an indefinite period of time. (‘Repayment Representations’)
- Represented that the promissory notes were specifically designed for investors seeking certainty and confidence in their investments and therefore carried no risk of default. The Court declared this was false because there was a risk that investors could lose some or all of their principal investment. (‘No Risk of Default Representations’)
- Represented that the promissory notes were fully secured financial products. The Court declared this was false because the funds were lent to an associated company, Eleuthera and were not secured by first-ranking, unencumbered asset security or on a dollar-for-dollar basis or at all; were used to pay deposits on properties prior to any security interest being registered; and were used to purchase assets that were not secured by first-ranking, unencumbered asset security. (‘Security Representations’)
The contraventions of the law were:
- Misleading or deceptive conduct under s 1041H(1) of the Corporations Act 2001 (Cth) and s 12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act);
- False or misleading representations as to standard, quality value or grade under s 12DB(1)(a) of the ASIC Act; and false or misleading representations as to performance characteristics or benefits under s 12DB(1)(e) of the ASIC Act.
The Court stood the case over to consider penalty and other relief.
For an analysis of the hearing on the application for disqualification of James Mawhinney to act as a director, refer to my case note:
Were the Mayfair 101 investment schemes Ponzi schemes?
ASIC Media Release (23 March 2021):
ASIC Deputy Chair Karen Chester said ‘ASIC’s success in Court today demonstrates firms need to do the right thing by their investors, even when they are wholesale investors. They need to make sure they accurately describe their products when advertising. The Court has shown that Mayfair 101 engaged in misleading and deceptive conduct by claiming its products were comparable to bank term deposits, when they were not.’