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14.02.2019

News

Landmark win for ASIC – directors take note

In a landmark win for the corporate regulator, the High Court has ruled against Melbourne businessman Bill Lewski, former federal health minister Michael Wooldridge and other directors of failed retirement village owner Prime Trust for breaching their duties as directors.

Highlighting the positive outcome for investors and welcoming the High Court decision, ASIC Commissioner John Price said, "Directors who are officers of responsible entities (REs) 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 interest of investors".

Partner Selina Nutley outlines what happened in this important case and explains the key warning message for directors and REs.


THE BACK STORY

Australian Property Custodian Holdings Pty Ltd (APCH), the RE of Prime Trust, collapsed in 2010 owing investors about $550 million. ASIC originally won its Federal Court challenge of APCH's decision to amend the Prime Trust constitution resulting in a $33 million fee being paid to Mr Lewski.

While the Federal Court initially fined and imposed lengthy disqualifications on the directors, the Full Federal Court later overturned this decision much to ASIC's surprise. You can find more details about these proceedings in our article published in the July 2016 edition of Fundamental.

ASIC then appealed to the High Court about the approval by the directors of the $33 million fee to Mr Lewski.


WHAT DID THE HIGH COURT HAVE TO SAY?

In summary, the High Court said 'rights', as in 'members' rights', in the Corporations Act should be interpreted to mean 'interests'. The High Court's view supported the current prevailing authority that members have a right to have the scheme administered according to its terms.

The High Court said lodging the amended constitution with ASIC did not give it 'interim validity': if the original amendments were invalid, then lodging the constitution did not make them valid.

The step of lodging the constitution with ASIC and then making the payments was, on the part of the directors (except for one director who had only been appointed the day before), negligent, a breach of the
duty of loyalty, constituted an improper use of their position and their duties of compliance.

The High Court said it "cannot ignore the injustice caused to members by any amendment that permits $33 million of their equity to be paid away without authority".

The penalties and disqualification periods of the directors will now be reassessed by the Federal Court.


WHAT DOES IT ALL MEAN?

For directors and REs it means most changes to a constitution are likely to affect members' rights, and directors must continue to carefully consider whether the change will adversely affect those rights.

Our Funds Management lawyers can explain the implications of what the High Court had to say and can help with your queries.


Authors

Selina Nutley

Selina Nutley

Partner

Contact McMahon Clarke

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