Director ordered to repay $1 million after BestEx collapse

The Federal Court of Australia has ordered a former director of failed financial services firm BestEx Pty Ltd to repay $1 million advanced by an investor after finding the funds were held on a Quistclose trust and diverted for the director’s personal benefit shortly before the company’s collapse.

BestEx Pty Ltd was an Australian financial services firm involved in a securities trading and brokerage venture known internally as “Block Event.” Its business centred on facilitating institutional trading in equities, with plans to expand operations into Asian markets through BestEx Asia Ltd, a Hong Kong-based affiliate.

In December 2016, Rosemont Capital Investments Pty Ltd advanced $1 million to BestEx to capitalise BestEx Asia so it could satisfy liquidity requirements tied to a Hong Kong Securities and Futures Commission Type 1 securities licence. Instead of applying the funds to subscribe for shares on behalf of BestEx, director Phillip Weinberg caused the shares to be issued to himself personally.

BestEx entered voluntary administration in March 2020 and was later wound up, leaving Rosemont unable to recover the funds from the insolvent company. With the corporate borrower defunct, the investor pursued Mr Weinberg directly in the Federal Court, alleging breach of trust, misleading conduct, and deceit.

The Court accepted that the advance was not a general loan. The surrounding communications showed a clear shared intention that the money be used only to capitalise the Hong Kong subsidiary and support regulatory capital requirements associated with the planned Asian expansion of the trading platform known internally as “Block Event”. Because the funds were earmarked for that narrow purpose, they were impressed with a Quistclose trust.

Within days of receiving the money, Mr Weinberg directed BestEx to transfer the funds to BestEx Asia. The Court found that the company then issued the relevant shares to Mr Weinberg personally rather than to BestEx. Justice Cheeseman held that this step defeated the agreed purpose of the transaction and constituted a breach of trust.

The judge also found that Mr Weinberg had represented to Rosemont that BestEx Asia was a wholly-owned subsidiary of BestEx, a statement that was untrue because the shares were in fact held by him personally. That representation was material to the investor’s decision to advance the funds and amounted to misleading or deceptive conduct under Australian statutory regimes as well as the tort of deceit.

Because Mr Weinberg controlled the entities involved and knew the relevant facts, the Court concluded that he knowingly procured the breach of trust and must restore the funds. Orders require him to compensate Rosemont for the $1 million misapplied investment.

Read the decision here.

Professionals involved:

• Eli Ball of 7 Wentworth Selborne, counsel, and Gillis Delaney, solicitors, for Rosemont Capital Investments Pty Ltd