Appendix D

The law of conversion

The law of conversion is also relevant to the syndication of thoroughbred racehorses, especially so due to the fact that promoters typically utilize credit facilities provided by the auction sales companies to acquire horses with the intention of syndicating them during the term of the credit facility. They then apply the application money received from investors to paying for the horses and discharging the credit facility.

A conversion is the unauthorized exercise of control over the personal property of another in a manner that is inconsistent with the property rights of the owner.

Conversion is an intentional tort. However, the intent required is not necessarily that of conscious wrongdoing. The focus of inquiry is whether a person has appropriated to his or her own use the property of another person without that person’s permission and without legal right.

In circumstances where a promoter purchases a horse at auction utilizing the credit facility provided by the sales company, the promoter is usually given physical possession of the horse subject to terms which include:

  • a grant by the promoter to the sales company of a security interest attaching to the horse as security for payment of the full amount of the credit facility;
  • the right of the sales company to retake possession of the horse if the promoter does not pay for 100% of the horse within the terms of the credit facility; and
  • an obligation on the part of the promoter not to encumber the horse in any way, or transfer or otherwise dispose of the horse (or an interest in the horse), until the credit facility is fully discharged.

Wrongful conversion by the promoter of interests in the horse

If the promoter purports to sell and transfer to investors (applicants) unencumbered interests in the legal and equitable title to the horse (during the term of the credit facility), such action by the promoter is likely to be inconsistent with the property rights of the sales company in the horse.

Wrongful conversion by the promoter of application money

The application price for an interest in the horse may comprise:

  • the sale price of the interest;
  • the cost of insuring the interest;
  • a proportion of the syndicate establishment expenses; and
  • a proportion of the estimated syndicate operating expenses, including (without limitation), agistment, breaking-in and pre-training, training and ancillary expenses, for a specified period.

Payments to reduce the credit facility and payments for the horse are distinguishable.

Application money should only be applied towards payment for the horse, or interests in the horse, in circumstances where there is a simultaneous passing of unencumbered ownership to those applicants whose application money is being applied. If ownership does not transfer simultaneously, this is likely to be inconsistent with the property rights of the applicants in their application money.

The same principles apply to any proportion of the application money paid to the promoter on account of syndicate establishment and operating expenses. That proportion of such money should only be applied towards payment of those expenses upon the applicants becoming the owners of their respective interests in the horse.

Requirement for dedicated application money trust account

The current syndication regulations address this issue by requiring the promoter of an offer of shares to establish a dedicated application money trust account for receiving and holding all application money until the minimum overall subscription amount is met, thus enabling the promoter to then apply such money towards payment for the horse and ensure that ownership is transferred simultaneously to the applicants.

Racing NSW has an additional reporting requirement to ensure strict compliance with this procedure by approved promoters operating in its jurisdiction. Before a promoter can apply application money to the purchase price of the horse they must complete and provide to Racing NSW a statement listing the names of all applicants for interests, their percentage interests and the amount of money they are each contributing to the purchase price of the horse. Racing NSW then issues an authorization to the promoter to apply the application money in paying for the horse. The promoter must then provide to Racing NSW the vendor release statement and the horse registration form (in the names of the applicants whose money has been applied), which Racing NSW then reviews and passes to Racing Australia for registration.

Actual cases that demonstrate how investors can lose their money when the above procedure for the handling of application money is not followed are those involving Victorian-based unlicensed syndicators BC3[1] and JSL Racing[2]. BC3 was a high-profile racehorse syndication company operated by former racing identity Bill Vlahos [who has since been charged with operating an alleged “Ponzi” betting syndicate] and JSL Racing was a training partnership that included a high-profile Melbourne Cup winning trainer. In both cases, applicants thought they were acquiring interests in various horses in exchange for making the initial payments, but that proved not to be the case when things went wrong.

[1] BC3 Thoroughbreds Aus Pty Ltd ACN 134 305 892, administrator appointed 09/12/2013

[2] Butler v JSL Racing Pty Ltd (26/03/2013 VSC unreported)