The corporate regulator has won a landmark appeal in the High Court against the directors of a managed investment scheme that collapsed in 2010, owing $550 million to investors.
ASIC’s case against the former directors of the Prime Trust was not in relation to its collapse. The appeal concerned the approval by its directors, including former federal health minister Michael Wooldrige, of a $33 million listing fee to the group’s founder, Bill Lewski.
Australian Property Custodian Holdings Pty Ltd (APCHL) was the responsible entity of the Prime Retirement and Aged Care Property Trust (Prime Trust), a managed investment scheme which owned retirement villages in Queensland, NSW and Victoria. APCHL collapsed in 2010, owing investors approximately $550 million.
ASIC took action in August 2012, when it challenged the lawfulness of a decision by APCHL’s board in 2006 to amend the constitution of the Prime Trust to introduce and or amend various fees payable to APCHL.
The amendments resulted in a fee of approximately $33 million being paid to APCHL (an entity owned by interests associated with Mr Lewski) subsequent to the listing of Prime Trust on the ASX in August 2007.
Although ASIC was successful in the Federal Court in 2014, resulting in disqualifications and fines for Prime’s five directors, an appeal by the directors to the Full Court of the Federal Court of Australia overturned this decision in 2016.
ASIC then applied to the High Court of Australia for special leave to appeal, which was granted.
A judgement was reached late last week, in which the High Court found that there is no concept of interim validity in the Corporations Act (act) which allows an unlawful amendment to a scheme constitution to take effect, upon its lodgment with ASIC, until it is set aside by an order of the court. The law does not confer validity upon an amendment invalidly made.
The court also found that a director’s subjective honest belief of validity of amendments to the constitution is not sufficient to absolve a director and responsible entity of breaches of their duties under the act. Directors have a duty of loyalty to the members and must act in the members’ interests and not make improper use of their position.
In addition, the High Court found that, contrary to the contention of the directors, it is a ‘members’ right’ to have a scheme administered according its constitution and that the trial judge had been correct in finding that the relevant conduct by the directors had adversely affected members’ rights. The directors were required to consider this before resolving to lodge the amended scheme constitution.
However, The High Court dismissed ASIC’s ground of appeal relating to the operation of s208(3) of the Corporations Act, finding that the directors had not breached the contravention against being involved in related-party payments by the responsible entity because ASIC could not meet its onus to prove that they knew the scheme constitution did not permit the payments to be made. These payments were made in 2009 to interests associated with Mr Lewski.
“ASIC welcomes the significant High Court decision handed down in the APCHL matter. The judgment is a significant win for ASIC after a number of years of pursuing justice through the courts,” ASIC commissioner John Price said.
“Directors who are officers of responsible entities have an obligation to scheme members to discharge their duties with care and diligence, not improperly use their position, comply with the law and act in the interests of investors. The matter also highlights the need for people in business to recognise they are custodians of other people’s money,” he said.
Mr Price said the High Court result provides clear guidance regarding important issues of principle that needed to be clarified for the benefit of responsible entities, their officers and investors.
“It is a positive outcome for investors, who need to be able to trust their representatives to act in their interests,” he noted.
“This also shows that ASIC’s willingness to take hard cases and litigate them through to superior courts when needed. ASIC has the people, the powers and the desire to hold those engaged in misconduct to account.”
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