FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v Drake (No 2)
[2016] FCA 1552
File number: QUD 596 of 2014 Judge: EDELMAN J Date of judgment: 23 December 2016 Catchwords: CORPORATIONS – directors’ duties – s 180(1) of the Corporations Act2001 (Cth) – onus of proof in relation to proving alternative courses of action in s 180 of the Corporations Act
CORPORATIONS – directors’ duties – s 181 and s 182 of the Corporations Act – test for proving improper purpose – test for causation
TRUSTS AND TRUSTEES – breach of trust – nature of trustee’s duty of care – whether trust deed can exclude equitable obligation or obligation in s 22 of the Trusts Act 1973 (Qld) to act as a prudent trustee
Legislation: Corporations Act 2001 (Cth) ss 180(1), 180(2), 181(1), 181(1)(b), 181(2), 182(1), 182(1)(a), 1317S, 1318(1)
Evidence Act 1994 (Cth) s 140
Trustee Act 1925 (ACT) s 14A(1)
Acts Interpretation Act 1954 (Qld) s 14B(3)(b)
Trusts Act 1973 (Qld) ss 4(1), 4(4), 5, 10, 20, 21, 22, 22(1), 22(1)(a), 23(3), 24, 24(1), 24(1)(a), 30B, 30B(a), 31, 60, 61, 65, 79, 111; Div 1, Pts 3, 4, 5, 6, 7, 10
Trusts (Investments) Amendment Act 1999 (Qld) s 5
Trusts (Investments) Amendment Bill 1999 (Qld)
Trustee Act 1925 (NSW) s 14A(1)
Trustee Act 1907 (NT) s 6(1)
Trustee Act 1936 (SA) s 7(1)
Trustee Act 1898 (Tas) s 7(1)
Trustee Act 1958 (Vic) s 6(1)
Trustees Act 1962 (WA) s 18(1)
Trustee Act 1925 (UK) ss 3(1)(ii), 31, 69(2)
Cases cited: Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570
Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102; (2014) 48 WAR 1
Armitage v Nurse [1998] Ch 241
Australian Iron & Steel Pty Ltd Limited v Krstevski [1973] HCA 42; (1973) 128 CLR 666
Australian Safeway Stores Pty Ltd v Zaluzna [1987] HCA 7; (1987) 162 CLR 479
Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 168 FLR 253
Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023
Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] FCA 963; (2007) 160 FCR 35
Australian Securities and Investments Commission v Fortescue Metals Group Ltd (No 5) (2009) 264 ALR 201
Australian Securities Commission v AS Nominees Limited (1995) 62 FCR 504
Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36; (2014) 254 CLR 185
Cowan v Scargill [1985] Ch 270
Currie v Dempsey (1967) 69 SR (NSW) 116
Doyle v Australian Securities andInvestments Commission [2005] HCA 78; (2005) 227 CLR 18
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640
Fouche v Superannuation Fund Board [1952] HCA 1; (1952) 88 CLR 609
Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235
Graham Barclay Oysters Pty Ltd v Ryan [2002] HCA 54; (2002) 211 CLR 540
Harvard College v Amory, 26 Mass (9 Pick) 446 (1830)
Hedley Byrne & Co. Ltd v Heller & Partners Ltd [1964] AC 465
Henderson v Merrett Syndicates Ltd and Ors [1995] 2 AC 145
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41
In re Chapman [1896] 2 Ch 763
In re Erskine’s Settlement Trusts [1971] 1 WLR 162
In the matter of Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789
Inland Revenue Commissioners v Bernstein [1960] Ch 444
Inland Revenue Commissioners v Bernstein [1961] Ch 399
John Pfeiffer Pty Ltd v Canny [1981] HCA 52; (1981) 148 CLR 218
Kelly v Cooper [1993] AC 205
Kennedy Taylor (Vic) Pty Ltd v Baulderstone Hornibrook Pty Ltd [2000] VSC 43
Kenyon, Sons & Craven Ltd v Baxter Hoare & Co. Ltd [1971] 1 WLR 519
Learoyd v Whiteley (1887) 12 App Cas 727
Lochgelly Iron & Coal Co v McMullan [1934] AC 1
Mahmood v State of Western Australia [2008] HCA 1; (2008) 232 CLR 397
Motor Vehicles Insurance Ltd v Woodlawn Capital Pty Ltd [2014] NSWSC 1503; (2014) 290 FLR 285
Nagle v Rottnest Island Authority [1993] HCA 76; (1993) 177 CLR 423
Neill v NSW Fresh Food and Ice Pty Limited (1963) 108 CLR 362
Nelson v John Lysaght (Australia) Limited [1975] HCA 9; (1975) 132 CLR 201
Nestle v National Westminster Bank Plc [1993] 1 WLR 1260
New South Wales v Fahy [2007] HCA 20; (2007) 232 CLR 486
Oriental Commercial Bank v Savin (1873) LR 16 Eq 203
Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2005] FCA 288
Permanent Building Society (in liq) v Wheeler (1994) 11 WAR 187
Photo Production Ltd v Securicor Transport Ltd [1980] AC 827
Rankine v Rankine (unreported, Sup Ct, QLD, de Jersey CJ, 3 April 1998)
Re Miller’s Deed Trusts (1978) 75 LSG 454
Re Ransome [1957] Ch 348
Re Turner’s Will Trusts [1937] Ch 15
Re Whiteley (1886) 33 Ch D 347
Roman Catholic Church Trustees for the Diocese of Canberra and Goulburn v Hadba [2005] HCA 31; (2005) 221 CLR 161
Romeo v Conservation Commission of the Northern Territory [1998] HCA 5; (1998) 192 CLR 431
Segelov v Ernst & Young Services Pty Ltd [2015] NSWCA 156; (2015) 89 NSWLR 431
Speight v Gaunt (1883) 22 Ch D 727
Speight v Gaunt (1883) 9 App Cas 1
Spread Trustee Co Ltd v Hutcheson [2012] 2 AC 194
Swain v Waverley Municipal Council [2005] HCA 4; (2005) 220 CLR 517
Swick Nominees Pty Ltd v LeRoi International Inc (No 2) [2015] WASCA 35; (2015) 48 WAR 376
Target Holdings Ltd v Redferns (A Firm) [1996] AC 421
The Commonwealth of Australia v Cornwell [2007] HCA 16; (2007) 229 CLR 519
Trade and Transport Incorporated v Iino Kaiun Kaisha Ltd [1973] 1 WLR 210
Tszyu v Fightvision Pty Ltd [2001] NSWCA 103; (2001) 104 IR 225
Vozza v Tooth & Co Limited [1964] HCA 29; (1964) 112 CLR 316
Vrisakis v Australian Securities Commission (1993) 9 WAR 395
Weissensteiner v The Queen [1993] HCA 65; (1993) 178 CLR 217
Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157; (2012) 44 WAR 1
Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11; (1987) 162 CLR 285
Wilkins v Hogg (1861) 31 LJ Ch 41
Wingecarribee v Lehman Bros [2012] FCA 1028; (2012) 301 ALR 1
Wyong Shire Council v Shirt [1980] HCA 12; (1980) 146 CLR 40
Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484
Dawson F, “Fundamental Breach of Contract” (1975) 91 LQR 380
Heydon JD and Leeming MJ, Jacobs’ Law of Trusts in Australia (8th ed, LexisNexis Butterworths Australia, 2016)
Queensland Law Reform Commission, A Report of the Law Reform Commission on the Law Relating to Trusts, Trustees, Settled Land and Charities (QLRC 8, 16 June 1971)
Queensland Law Reform Commission, A Review of the Trusts Act 1973 (Qld): Interim Report (WP No 71, June 2013)
Queensland Law Reform Commission, A Review of the Trusts Act 1973: Report (Report No 71, December 2013)
The American Law Institute, Restatement of the Law Third, Trusts Vol 3 (American Law Institute Publishers, 2007)
Date of hearing: 29-31 August, 1-2, 5-9, 13, 23 September, and 27-28 October 2016 Date of last submissions: 1 November 2016 (Second and Third Respondents) Registry: Queensland Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 543 Counsel for the Applicant: Mr PJ Davis QC, Mr S Forrest and Mr S Seefeld Solicitor for the Applicant: Australian Securities and Investments Commission Counsel for the First Respondent: Mr RJPS Jackson QC and Ms A Nicholas Solicitor for the First Respondent: Bartley Cohen Counsel for the Second and Third Respondents: Mr PA Freeburn QC and Mr SD McCarthy Solicitor for the Second and Third Respondents: James Conomos Lawyers Counsel for the Fourth Respondent: Mr KA Barlow QC and Mr G Coveney Solicitor for the Fourth Respondent: HW Litigation Counsel for the Fifth Respondent: Mr D Clothier QC and Mr D Piggott Solicitor for the Fifth Respondent: Tucker & Cowen ORDERS
QUD 596 of 2014 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Applicant
AND: PETER CHARLES DRAKE (and others named in the Schedule)
First Respondent
JUDGE:
EDELMAN J
DATE OF ORDER:
23 DECEMBER 2016
THE COURT ORDERS THAT:
1.The application against each of the first, second, and third respondents be dismissed.
2.The applicant pay the costs of the first, second, and third respondents to be taxed if not agreed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
EDELMAN J:
TABLE OF KEY PERSONNEL AND ABBREVIATIONS
Introduction
[1]
ASIC’S PLEADED CASE AGAINST THE REMAINING THREE RESPONDENT DIRECTORS
[24]
ASIC’s pleaded case concerning s 180(1) of the Corporations Act
[25]
ASIC’s pleaded case of Mr Drake’s improper purpose
[34]
THE FACTUAL BACKGROUND
[36]
Relevant entities, persons, and relationships
[36]
Outline of the various entities
[36]
The MPF
[46]
The MPF Credit Committee
[48]
Mr Drake
[52]
Mr van der Hoven
[54]
Ms Mulder
[62]
The Maddison Estate joint venture
[68]
The loans to the joint venture
[79]
The Suncorp loan in January 2008
[79]
The Maddison Estate MPF Loan Agreement on 13 November 2007
[82]
The variations to the Maddison Estate MPF Loan Agreement and the feasibility reports
[89]
The abandonment of the allegations concerning the September 2011 loan variation
[101]
The parties to the August 2012 Variation
[108]
The date of execution of the August 2012 Variation
[114]
Suncorp’s concerns
[120]
Suncorp seeking repayment of its Maddison Estate loan
[120]
The draft and final Ernst & Young reports and the responses
[122]
The July 2011 preliminary valuation
[130]
The reductions in Suncorp’s loan
[131]
LMIM’s exit plan and the course of the development
[132]
LMIM’s exit plan
[132]
An enhanced and developed concept for the Maddison Estate development, and rapid improvement in 2012
[134]
The August 2012 Variation and the circumstances preceding it
[146]
The early 2012 synopses
[146]
The MPF Credit Committee meeting on 4 April 2012
[154]
The informal meeting on 4 June 2012
[157]
Mr Fischer’s 14 June 2012 report
[159]
The June feasibility reports from Mr King and Mr Barnett
[160]
Mr Fischer’s concerns at the Sheraton hotel on 20 June 2012
[165]
The MPF Credit Committee meeting on 29 June 2012
[169]
Preparation of further feasibility reports prior to 11 July 2012
[179]
The 11 July 2012 meeting of the LMIM directors and others
[185]
The audits by WPIAS and its 12 July 2012 consideration of a feasibility report
[198]
The knowledge that the auditors had of the Maddison Estate development
[198]
The 17 July 2012 meeting with WPIAS
[202]
The WPIAS audit in 2012
[226]
The 7 August 2012 MPF Credit Committee meeting and surrounding circumstances
[231]
The deed of variation executed after August 2012
[244]
The alleged breach of trust by LMIM
[250]
ASIC’s pleading
[250]
The two issues and the answers in broad outline
[258]
Legal principles concerning a trustee’s equitable duty of care
[263]
The trustee’s equitable duty of care (the “prudent person” test)
[263]
The difference between excluding a duty and excluding liability
[277]
Can the equitable duty be excluded?
[281]
Exclusion of the equitable duty and liability in the MPF Constitution
[286]
The exclusion of LMIM’s equitable duty of care
[286]
The exclusion of LMIM’s liability for breach
[290]
Proof of loss is required to establish breach of a trustee’s equitable duty of prudence
[302]
The analogy with common law negligence
[303]
The position in England
[306]
The position in Australia
[309]
ASIC’s revised submission
[313]
Was the equitable duty breached?
[314]
Section 22 of the Trusts Act was excluded
[323]
The history and terms of s 22
[323]
The duty under s 22(1) of the Trusts Act can be excluded
[327]
Textual and structural considerations
[328]
Amendment context: position prior to the 1999 amendments
[345]
The anomalous results if the Trusts Act were to prevent exclusion of the s 22(1) duty
[351]
Contrary views
[356]
Clause 12.8 of the MPF Constitution is effective to exclude s 22(1)
[361]
Was the duty in s 22(1) of the Trusts Act breached?
[366]
The evidence of Mr Woolley
[370]
The evidence of Mr Bristow
[382]
The alleged breaches of Section 180(1) of the Corporations Act
[394]
Legal principles concerning s 180(1) of the Corporations Act
[394]
The process of drawing inferences and reaching conclusions
[402]
Application of the legal principles
[407]
Did Mr Drake “cause or permit” LMIM to approve the August 2012 Variation?
[407]
The August 2012 Variation approval had legal consequences
[411]
The consequences pleaded by ASIC were unlikely
[420]
The general reasons for unlikelihood of legal action by unitholders
[420]
ASIC’s alleged defects in process, especially the lack of an independent feasibility study
[425]
Conclusion about ASIC’s alleged defects in process
[447]
The magnitude of harm
[448]
The burden of alleviating action
[450]
ASIC did not discharge its onus of proof on this issue
[457]
The burden of alleviating action and lack of clarity about an “independent feasibility report”
[469]
ASIC’s submission that Mr van der Hoven and Ms Mulder admitted impropriety
[478]
ALLEGED BREACHES OF SECTIONS 181(1) AND 182(1) OF THE CORPORATIONS ACT BY MR DRAKE
[485]
The terms of s 181(1) and s 182(1) of the Corporations Act
[485]
The two core aspects of ASIC’s s 181 and s 182 claims
[487]
Legal principles concerning improper purpose
[491]
The purpose of the re-establishment fee or the August 2012 Variation
[499]
ASIC’s case
[499]
The use by Mr Drake of LMA’s funds
[507]
The source of LMA’s funds
[509]
The calculation of management fees and the inference that ASIC alleged should be drawn
[512]
Conclusion on improper purpose
[534]
Conclusion
[536]
TABLE OF KEY PERSONNEL AND ABBREVIATIONS
ASIC
Australian Securities and Investments Commission. The applicant in this proceeding.
BARNETT, Luke
Development Manager of the Maddison Estate development at LMIM with a background in mechanical engineering and land development. A member of the PAM team since November 2011. He reported to Mr Tickner and, once Mr Tickner left, to Mr Fischer and Mr King. He resigned on 22 May 2013.
DARCY, Lisa
Initially the fifth respondent. Part way through the trial, ASIC abandoned its case against Ms Darcy. She was Executive Director of LMIM from September 2003 until her resignation on 21 June 2012. Ms Darcy was CFO until recruiting and training Mr Fischer for the role in March 2008. She was also the chair of the MPF Credit Committee and a member of the LMIM board. Whilst at LMIM, Ms Darcy worked closely in the process of instructing legal, signing off on serviceability analysis for all fund loans (including MPF loans), and assisting with Mr Drake’s personal finances. She worked closely with Mr Drake, and was the main contact with Ernst & Young.
DRAKE, Peter
The first respondent. The Executive Director, sole owner and CEO of LMIM. Chairman of the LMIM board, and a voting member of the MPF Credit Committee. Sole director, secretary and shareholder of LMIM Asset Management Pty Ltd. Sole director and secretary of Maddison Estate. Ultimate beneficial ownership of the shares in Maddison Estate was held by the corporate trustee (LMIM Asset Management Pty Ltd, of which Mr Drake was the sole director and secretary) of a discretionary trust, the beneficiaries of which included Mr Drake. From April 2010, director of Coomera Ridge Pty Ltd.
ERNST & YOUNG
The auditors of all of LMIM’s funds except for the MPF. Ernst & Young and WPIAS worked with the PAM team and the finance team to look at the feasibilities of development projects. Ernst & Young produced a draft and then final report concerning Maddison Estate, commissioned by Suncorp, in July and then September 2011.
ESTATE MASTER
A proprietary software program used by the PAM team to prepare feasibility reports. Estate Master required the input of numerous variables and various assumptions such as escalation rates from which it calculated a net present value of the development.
FISCHER, Grant
An accountant with qualifications in commerce. The CFO of LMIM from March 2008 to August 2012, where he was responsible for the overall financial management of LMIM and its managed investment schemes. As CFO, Mr Fischer had a finance team working for him comprising between five and 11 staff. He reported directly to Mr Drake.
Mr Fischer was an Executive Director of LMIM from 14 March 2012 to 12 August 2012, and a member of the MPF Credit Committee. Thereafter, he worked as a consultant to LMIM until January 2013. He only attended one formal LMIM board meeting as a director (on 13 July 2012).
KING, Scott
An acquisition manager with qualifications in property valuation and economics, and applied finance and investment. Employed as a Development Manager in the PAM team from November 2010 to February 2013. Worked on several projects at LMIM, including ad-hoc involvement in the Maddison Estate development. His involvement included assisting Mr Barnett with the feasibility review in June 2012 after the departure of Ms Scott, at the request of Mr Drake and Mr Fischer. Mr King was a voting member of the MPF Credit Committee.
KINGSTON, Bronwyn
Employed in LMIM as a paralegal in the commercial lending department, and then in the PAM team. Her role included the provision of organisational and administrative support to the MPF Credit Committee.
KOP, David
Employed by Suncorp as a Relationship Manager in the property finance department. This position entailed helping Suncorp resolve its portfolio of “non-core” loans via repayment when Suncorp decided to exit the property loan market. Mr Kop was responsible for the management of the Suncorp loan to Maddison Estate from September 2011 to 2013. Mr Kop’s main contacts at LMIM were Mr Tickner and Mr Fischer.
KURBATOFF, Mark
Employed by Suncorp as a Relationship Manager in the development finance section. Mr Kurbatoff was responsible for the management of the Suncorp loan to Maddison Estate from December 2010 to September 2011 (when it was transferred to Mr Kop).
LANDMARK WHITE
Commissioned by Young Land Corporation and Suncorp to conduct valuations of Pimpama Land. The valuations were contained in reports dated 6 March 2008 and 28 July 2008.
LM COOMERA PTY LTD
LM Coomera Pty Ltd was the predecessor company of Maddison Estate. It was incorporated on 14 September 2007.
LMA
LM Administration Pty Ltd. Incorporated in 1992. Trustee of the LMA Trust. LMA entered into an agreement on 1 July 2005 with LMIM whereby LMA agreed to provide LMIM with services for LMIM’s funds management operations (including the employment of staff).
LMA TRUST
LM Administration Trust, created on 30 June 2003. LMA was the trustee of the LMA Trust.
LM GROUP
The LM Group was comprised of various related companies, including LMIM, Oceanboard Pty Ltd, LMA, Maddison Estate, LM Coomera Holdings Pty Ltd and LMIM Asset Management Pty Ltd. LMIM was the principal company of the LM Group.
LMIM
LM Investment Management Ltd. LMIM was a responsible entity for a number of managed investment schemes, and, in particular, the responsible entity and the trustee of the MPF. Mr Drake was the Executive Director, sole owner and CEO of LMIM.
LMIM was made up of a number of teams, including the PAM team (led by Mr Tickner), the finance team (led by Ms Darcy and then Mr Fischer), the marketing team (led by Ms Mulder), the global operations team (led by Ms Phillips), the portfolio management team (led by Mr van der Hoven and Mr Petrik), the foreign exchange team (led by Mr van der Hoven), and the in-house legal team.
LMIM ASSET MANAGEMENT PTY LTD
LMIM Asset Management Pty Ltd was incorporated on 14 September 2007. Mr Drake was its sole director, secretary and shareholder. It held ultimate beneficial ownership of the shares in Maddison Estate.
LOUGH, Caroline
Paralegal in the PAM team.
MADDISON ESTATE DEVELOPMENT
A large residential and recreational development located at Pimpama on the Gold Coast. The plan for Maddison Estate was to sell blocks of vacant land via community title in a large setting which would consist of high tech recreational venues and a town centre. Maddison Estate was previously known as LM Coomera, One, and Arrowtown.
MADDISON ESTATE
Maddison Estate Pty Ltd. A company related to LMIM who was the receiver of the loan that is the subject of these proceedings. The loan was for a large development project on the Gold Coast (see Maddison Estate).
McDONALD, Greg
Worked for LMIM as a Development Manager. He was a member of the PAM team, and worked on the Maddison Estate development.
McCALLUM, Ann
Employed in LMIM as a loans analyst in the PAM team. She was a member of the MPF Credit Committee.
MPF
The Managed Performance Fund. The MPF was established around 2002 as an unregistered managed investment scheme which operated as a unit trust. LMIM was the trustee of the fund. The MPF was only open to investment by wholesale or sophisticated investors. On 1 November 2011, the MPF information memorandum described it as having 90% of its assets invested in Australian commercial loans. The largest of the commercial loans, $142 million, was a single loan of more than half of the size of the fund.
The MPF was governed by the MPF Constitution.
MPF Credit Committee
A committee of the MPF which assessed loans proposed as investments for the MPF and considered any required action for existing loans. The committee met as required and sometimes informally. Meetings were often preceded by an emailed information synopsis.
On 19 May 2011, the committee was comprised of Ms Darcy (the chair), Mr Drake, Mr van der Hoven, Mr Tickner, Ms Mulder, Mr King, Mr McDonald, and Mr Fischer. By 2013, there were six voting members: Ms Mulder, Mr Drake, Mr van der Hoven, Ms Phillips, Mr King, and Mr Petrik.
The MPF Credit Committee was alternatively described as “CC”, “Credit Committee”, “MPF Credit Committee”, “MPF Investment Committee” and “MPF Investment CC”.
MPF Constitution
A deed between LMIM and the members of the MPF as they were constituted from time to time, which governed the MPF. The original MPF Constitution was dated December 2001. Variations were made periodically until October 2012.
MULDER, Francene
The second respondent. Employed by LMA from 1999. She was appointed as Executive Director and Marketing Director of LMIM in September 2006. Not as actively involved in the asset management side of MPF as other directors. Her involvement was more with client communication. Member of the MPF Credit Committee.
PAM team
The Property Asset Management (PAM) team which assisted LMIM. The team was headed by Mr Tickner, although Mr Fischer took over for three to four months after Mr Tickner retired as director in 2012. It had at most 25 staff with lending, development, town planning and general property skills. The PAM team was divided into three parts, individually responsible for: (i) identifying investment opportunities for the funds; (ii) assessing the assets and working to progress the projects; and (iii) administering the loans. The PAM team reported to the various committees, including the MPF Credit Committee.
In early 2011 to late 2012 the PAM team included Mr Tickner (as the head of the team), Mr Fischer, Mr Parker, Mr King, Mr Barnett, Mr McDonald, Mr Young, Ms Scott, Ms Chalmers, Ms Kingston, Ms Lough, and Ms McCallum.
PARKER, Michael
A Commercial Lending Manager in the PAM team. He was responsible for considering and obtaining funding opportunities, proposing them to credit committees, and (if the MPF Credit Committee agreed) contracting with and lending money to developers. Mr Parker was a member of the MPF Credit Committee.
PETRIK, Andrew
Employed in LMIM as Portfolio Manager in about 2009, taking over from Mr van der Hoven. He was a member of the MPF Credit Committee.
PHILLIPS, Katherine
Employed in the London office of LMIM until around 2011. She was an Executive Director of LMIM from 13 July 2012 to 20 June 2013, as well as head of global operations. Ms Phillips liaised with all LM offices and staff on a regular basis in relation to fund and business operational issues, and was also heavily involved in marketing. She was a voting member of MPF Credit Committee.
SUNCORP
Suncorp-Metway Limited. Holder of a first mortgage in relation to its loan for the Maddison Estate development.
SCOTT, Katherine
An accountant with approximately 18 years’ experience. Initially employed by Young Land Pty Ltd, then by LMA from January 2010 to May 2012. She worked in the finance team as a management accountant, and then later moved into the PAM team.
TICKNER, Simon
Initially the fourth respondent. Part way through the trial, ASIC abandoned its case against Mr Tickner. He worked for LMIM from 2002 as Business Development Manager. He was a member of the MPF Credit Committee, Executive Director of LMIM and head of the PAM team from September 2008 until he resigned on 13 July 2012. After his resignation, Mr Tickner was re-employed as a consultant for the PAM team.
VAN DER HOVEN, Eghard
The third respondent. Employed by LMA in 2003 as Portfolio Manager until around 2009 or 2010. Executive Director of LMIM from 22 June 2006 until 30 June 2013. A voting member of the MPF Credit Committee.
WILLIAMS, Reginald
Accountant. Managing partner of WPIAS. Worked on the WPIAS audit of the MPF financial statements in 2011 and 2012 and attended the meeting on 17 July 2012.
WOOLLEY, Hugh
Funds investment manager with over 31 years’ relevant financial services experience. Called by ASIC to give expert evidence.
WPIAS
Williams Partners Independent Audit Specialists. Accountants with specialised experience in building, construction, aged care and the audit of managed funds. Specialised knowledge of the Gold Coast property market. Engaged to audit the financial reports for the MPF for the years ended 30 June 2011 and 30 June 2012. WPIAS’ main contact from LMIM was Mr Fischer.
YOUNG, David
From November 2006 to April 2010, Mr Young was a director of Young Land Corporation Pty Ltd and Coomera Ridge Pty Ltd. From April 2010 until January 2012, he was a consultant on the Maddison Estate Development and worked in the PAM team.
INTRODUCTION
This trial concerned allegations by ASIC of breach of directors’ duties against five directors of a corporate trustee of a managed investment scheme. This introduction explains, in very broad outline, the reasons why I have dismissed ASIC’s case in its entirety. The reason why ASIC’s case is dismissed requires an appreciation of how ASIC ran its case, and the rejection of the entirety of the evidence of the principal expert called by ASIC.
ASIC’s case, in very broad outline, was concerned with an investment made by LM Investment Management Ltd (LMIM) as a responsible entity and trustee of numerous funds. LMIM had offices all over the world from which its funds were marketed. Its main office was on the Gold Coast.
One of LMIM’s funds was an unregistered managed investment scheme established in 2002, the LM Managed Performance Fund (the MPF). This was an aggressive fund with reasonably high risk. It was aimed at wholesale and sophisticated investors who accessed the fund through financial planners. As one of the former directors of LMIM explained, the MPF was a fund that could have a number of assets including second mortgages and direct property interests. It had a very broad investment mandate. It was marketed as an aggressive fund with higher returns than what was on offer from some other funds including other funds managed by LMIM. After the global financial crisis, some of the MPF loans required a focus upon development because the borrowers in those loans had begun to default on their mortgages. The MPF investments were marketed through means which included information memoranda. The sophisticated investors would have been immediately aware from the information memoranda and investment application that the fund was far from low risk. For instance, on 1 November 2011, the MPF information memorandum described the MPF as having 90.75% of its assets invested in Australian commercial loans. The largest of the commercial loans, $142 million, was a single loan of more than half of the size of the fund. That is the loan which is the subject of these proceedings.
The particular investment by LMIM (as trustee for the MPF) with which this case is concerned was a loan made to a related company which became called Maddison Estate. The loan, secured by two mortgages, was for a large development project on the Gold Coast (the Maddison Estate development). The interest rate was eventually set at 25%. The interest rate was designed to ensure that Maddison Estate, which was a special purpose vehicle, did not obtain any of the profit from the development. ASIC did not allege that the loan involved any breach of duty although ASIC alleged that it was, in effect, a disguised equity participation in a development.
The loan from LMIM to Maddison Estate (the Maddison Estate loan) was made in November 2007 with an initial limit of $40 million. In 2008 the limit of the loan was increased to $58 million. In 2009 the limit was increased to $70 million. In 2010 it was increased to $95 million. In 2011 it was increased to $115 million. Again in 2011 it was increased to $180 million. Then, in August 2012, it was increased to $280 million (the August 2012 Variation).
aSIC did not allege that the loan was imprudent. Nor did ASIC allege that the loan was made by the directors of LMIM without care and diligence. Nor did ASIC allege that there was any breach of duty arising from the approval of the loan variations in 2008, 2009 or 2010. After the conclusion of the evidence, ASIC also abandoned any allegation of breach arising from the loan variation in 2011, and therefore abandoned the whole of its case against the fourth and fifth respondents, Mr Tickner and Ms Darcy respectively. ASIC’s case against the remaining three respondent directors of LMIM, Mr Drake, Ms Mulder, and Mr van der Hoven (the first, second and third respondents respectively), was solely based upon the variation which increased in the loan limit in 2012.
The abandonment of ASIC’s case against Mr Tickner and Ms Darcy, and its case concerning the 2011 loan variation, was likely due to the evidence of ASIC’s final witness, the expert witness Mr Woolley. As I explain later in these reasons, Mr Woolley’s evidence was, in the literal sense, incredible. Senior counsel for ASIC very properly accepted that the Court should not accept any of the evidence from Mr Woolley other than where it was essentially unchallenged. Even on those points where there was little or no challenge, ASIC placed very limited reliance upon Mr Woolley. My concerns with Mr Woolley’s evidence were so serious that I do not accept his evidence on any contested matter, even if it was not the subject of any substantial cross-examination. Mr Woolley’s evidence did not merely cause a substantial impairment of ASIC’s case in relation to the 2011 variation. It created substantial gaps in the whole of ASIC’s case.
The decision by ASIC not to allege any breach of duty in making the loan, or any breach of duty in any of the series of variations to the loan limit before 2012, was likely to have been based on the nature and terms of the MPF. As I have explained, the fund was reasonably high risk and was only open to wholesale or sophisticated investors who invested through financial advisers.
ASIC’s allegations against the three remaining directors were that the directors breached their duties of care and diligence under s 180(1) of the Corporations Act 2001 (Cth) in causing or permitting LMIM to approve the August 2012 Variation. This breach by each director was based on the allegation that each caused LMIM to breach its duties by failing to act as a prudent trustee and that each exposed LMIM to a foreseeable risk of harm, namely civil proceedings by unitholders in the MPF.
ASIC’s case concerning why LMIM did not act as a prudent trustee shifted a number of times which made it very difficult to follow. The shifting nature of ASIC’s case was perhaps due to ASIC’s case having been dependent upon Mr Woolley’s evidence. At times during the trial it appeared that ASIC’s case was either that the breach by LMIM, or (at least) a crucial part of the breach by LMIM, was its failure to obtain an independent feasibility report before approving the August 2012 Variation. For instance, ASIC’s expert, Mr Woolley, said that “other than obtaining an independent feasibility analysis of the anticipated future cash flows from the Maddison Estate development, no further inquiries or steps needed be taken by a prudent trustee” ([211], see also [223]-[225]). During oral submissions, senior counsel for ASIC accepted that the allegation of a lack of an independent feasibility report was “crucial” to ASIC’s case (ts 648). Presented in this way, this was an allegation of imprudence by LMIM in the process of approving the August 2012 Variation.
An allegation of imprudence in process is a different case from one which alleges imprudence in outcome. In the course of argument, the example I gave to senior counsel was as follows (ts 724). Suppose, in 1976, a trustee decided to invest a large part of a trust fund in a stock beginning with the letter “A”. The trustee seized randomly upon a stock named “Apple”. Suppose also that, at the same time, the world’s most brilliant analysts would have reached the same conclusion by a prudent process of careful data analysis. Objectively, the decision by the trustee was not imprudent but the process of reaching it was imprudent.
At other points during the hearing, senior counsel for ASIC submitted that ASIC’s case was not, or was not merely, a process case. It may be that ASIC presented its case in this alternative way because, as senior counsel recognised, imprudence merely in process would have required a “leap” to reach the conclusion that there was a risk of action by unitholders which was a pleaded basis for the breach (ts 724). Unitholders would be likely to bring an action only if there was a prospect of recovering compensation, which requires proof of causative loss. It is extremely unlikely that they would bring a costly civil action merely to expose defects in a process relating to a past decision that caused no loss. Hence, senior counsel for ASIC ultimately put ASIC’s case on the basis that the imprudence by LMIM was making the decision to approve the August 2012 Variation. In other words, ASIC’s allegation was imprudence in the outcome.
The difficulty with the submission about imprudence in outcome (ie imprudence in the decision taken) is that ASIC never explained what a prudent trustee in LMIM’s position would have done. ASIC constantly reiterated that LMIM should not have made a decision to approve the August 2012 Variation. But despite numerous requests for ASIC to explain what decision should have been made, ASIC did not present any such case.
There were two possible alternatives concerning what a prudent trustee in LMIM’s position should have done instead of approving the application to vary the limit of the loan. ASIC did not present a case on either basis. The first alternative was that the decision whether to approve the August 2012 Variation application, on the same or different terms, should have been deferred. The second alternative was that the August 2012 Variation application should have been refused.
An explanation of what a prudent trustee would have done required ASIC to examine whether a prudent trustee would have taken one of these alternatives. That required an assessment of the circumstances in which LMIM as trustee for the MPF found itself on 7 August 2012 when the MPF Credit Committee was asked to approve an extension of the loan limit of an additional $100 million. Those circumstances included the following:
(1)Maddison Estate already owed more than $150 million to LMIM as trustee for the MPF (the precise amount is very difficult to determine due to retrospective entries in the loan accounts arising from later transactions);
(2)the bank financing the loan, Suncorp-Metway Limited (Suncorp), had a prior security to LMIM, securing a debt of around $22 million;
(3)Suncorp wanted to exit its loan but LMIM had not been able to find a replacement funder;
(4)an “as is” valuation in July 2011 of the land acquired for the Maddison Estate development had assessed the value at between $35 million and $40 million, so a foreclosure by Suncorp would leave little, if any, of the $150 million or more for LMIM as trustee for the MPF;
(5)work had commenced on site, but until refinancing was obtained, the work could not continue in the absence of further funding from LMIM;
(6)Mr Fischer, the CFO of LMIM and one of ASIC’s key witnesses, had told others that the best prospect of recovery of the Maddison Estate loan was to find another funder to take out MPF’s position. The goal was for this to occur after completion of Stage 1 of the development which required further LMIM funds; and
(7)the use of the additional $100 million loan would only involve around $16.5 million of funds actually leaving the MPF, because the remainder was capitalised interest and other additions to the loan (including a loan re-establishment fee), which would increase the amount of the loan but would not involve any existing funds being spent.
ASIC mentioned very few of these circumstances. Instead, ASIC focused heavily upon matters such as: (i) the number of previous loans (none of which was alleged to involve a breach of duty); (ii) the absence of any explanation for why the additional increases in limit had not previously been foreseen; (iii) delays in the progress of the development; (iv) a hotly disputed report by Ernst & Young (which was not tendered for the truth of its contents); and (v) the LMIM process in relation to feasibility reports which supported the additional $100 million loan, including the lack of what was described by ASIC as an “independent feasibility report”.
A consideration of all of the relevant circumstances in August 2012, on the limited evidence before the Court including the position in which LMIM found itself, suggests that if a prudent trustee had to make a decision either to approve the loan variation or to refuse it then approval would have been given.
The alternative of deferral is not as simple although, unfortunately, the details of this alternative were not explored in evidence or submissions. If ASIC had brought its case on the basis that the decision to grant the August 2012 Variation should have been deferred (for example, until an independent feasibility report was obtained or so that the proposal could be amended such as to reduce the limit of the loan), then it would need to have led evidence and made submissions concerning the nature of the deferral and the considerations relevant to that decision by a prudent trustee in LMIM’s position. Putting to one side ASIC’s failure to explain precisely what was meant by an “independent feasibility report”, what would the cost be for an independent feasibility report? How long would such a report take to produce? What were the risks to LMIM in the meantime, including the possibility of default under the loan from the first mortgagee? Could those risks have been managed pending the deferred decision? The answer to these questions would all inform an explanation of what a prudent trustee in LMIM’s position would have done. But none of these matters was explored. To the extent that it is possible to assess any of these options, I conclude that there are also significant reasons which might suggest that deferral might not have been a prudent option.
Apart from these factual obstacles to ASIC’s case of imprudence by LMIM as trustee, there was a significant legal obstacle. The legal obstacle was that the trust instrument had excluded the duty to act prudently. ASIC submitted that in Queensland, although not in any other State which has similar legislation upon which the Queensland legislation was modelled, this duty could not be excluded. I do not accept that submission. Further, the failure of ASIC to prove that any loss was caused by any act of imprudence is a further reason why ASIC’s claim based on breach of trust must be dismissed.
In broad terms, therefore, ASIC’s case in relation to the alleged breaches by all three respondents of directors’ duties of skill and diligence must be dismissed because (i) no breach of trust was proved, and (ii) no reasonable alternative open to LMIM or the directors was proved. Further, to the extent to which there was information before the Court to assess the alternative choices, ASIC failed to prove that a reasonable director of a company in LMIM’s circumstances, with the responsibilities of each respondent, would have refused to approve the August 2012 Variation.
Separately to the allegations of breach of s 180(1) of the Corporations Act, ASIC also made another allegation against Mr Drake. This allegation was that by causing or permitting the August 2012 Variation in a manner which caused LMIM to commit a breach of trust against the MPF, Mr Drake acted for an improper purpose, and to gain an advantage for himself and a different trust. The improper purpose and advantage was increasing the cash flow to a separate trust from which he withdrew funds to maintain an extravagant lifestyle.
This “improper purpose” allegation was also tied to ASIC’s allegation of breach of trust. The failure of the breach of trust claim means that the improper purpose case must also fail. In any event, however, ASIC failed to prove the improper purpose.
The application against each of the remaining three respondent directors of LMIM must be dismissed.
ASIC’S PLEADED CASE AGAINST THE REMAINING THREE RESPONDENT DIRECTORS
In one respect, ASIC’s case in relation to all breaches was consistent, although the premise of ASIC’s case might be doubted. ASIC consistently alleged that in order for each of the directors to be liable for breach of their duties to LMIM it was necessary for LMIM to have committed a breach of trust. In other words, and as I explain further below, in order for the directors to have breached s 180(1) of the Corporations Act, ASIC’s case was that it first needed to prove a breach of trust by LMIM as trustee.
ASIC’s pleaded case concerning s 180(1) of the Corporations Act
ASIC pleaded that the directors breached their duties under s 180(1) of the Corporations Act because they caused or permitted LMIM to commit a breach of trust, and exposed LMIM to a foreseeable risk of harm, namely civil proceedings by unitholders in the MPF. ASIC essentially pleaded that this foreseeable risk of harm was greater than that to which a director, exercising his or her powers and discharging duties with the required care and diligence, would have permitted.
As for that part of the s 180(1) plea that the directors “caused or permitted LMIM to commit a breach of trust”, ASIC’s case was that LMIM breached its duty to exercise the care, diligence, and skill that a prudent person engaged in the profession or business of acting as a trustee or investing money would exercise in managing the affairs of other persons. This duty was pleaded in two ways: (i) as a statutory duty under s 22(1)(a) of the Trusts Act 1973 (Qld) (Trusts Act), and (ii) as an equitable duty.
In some respects ASIC’s case was opaque. The matters which were not clear were (i) how LMIM breached its duties as trustee, and (ii) how each respondent breached his or her duties as director under s 180(1) of the Corporation Act. Each is addressed separately later in these reasons. It suffices to observe at this point that at times ASIC alleged that it was not required to prove how any breach had occurred.
As to LMIM’s alleged breach of its duties as trustee, ASIC pleaded:
(1)numerous circumstances that existed at the time of the August 2012 Variation ([147]-[151]);
(2)that in those circumstances, LMIM exposed the MPF to a foreseeable risk of capital loss by approving the August 2012 Variation ([153]); and
(3)that in those circumstances, the degree of risk to which the MPF was exposed was greater than the risk to which a trustee exercising its powers of investment with the degree of care, diligence and skill that a prudent person engaged in the business of acting as a trustee or investing money would permit the MPF to be exposed ([154]).
Separately from those circumstances, ASIC also pleaded that:
(4)a trustee exercising its powers of investment with the degree of care, diligence and skill that a prudent person engaged in the business of acting as a trustee or investing money would have obtained an independent feasibility analysis of the anticipated future cash flows from the Maddison Estate development ([152]).
Early in ASIC’s case, I asked questions about the nature of ASIC’s pleaded case. ASIC appeared to plead two cases concerning the alleged breach of trust by approving the August 2012 Variation. The first case was a process case. It was an allegation that, irrespective of whether the August 2012 Variation would have been approved by a prudent trustee, the breach consisted of the failure by LMIM to follow a prudent process in making its decision to approve the variation. The second case was an outcome case. It was an allegation that the approval itself was imprudent (ts 87).
After a short adjournment, senior counsel for ASIC explained that the two aspects of the alleged breach were “cumulative”, and that only a single breach of trust was alleged. The single breach of trust alleged was the act of approving the August 2012 Variation. ASIC’s case was that the failure to obtain an independent feasibility report was just one factor which contributed to the breach. So, even if an independent feasibility report might have concluded that approval was a reasonable option, the other circumstances were still such that approval should not have been given (ts 89-90).
Several points about ASIC’s pleading should be noted:
(1)ASIC did not plead any possible alternative course that a prudent trustee would have adopted other than not to approve the August 2012 Variation. ASIC did not allege that a prudent trustee would have deferred the decision, preferring to wait to obtain an independent feasibility report. Nor did ASIC plead that a prudent trustee would have refused to approve the August 2012 Variation. ASIC’s case was that a prudent trustee would not, in the circumstances, have made the decision to approve the August 2012 Variation but it refused to say which of the two possible alternatives a prudent trustee would have taken.
(2)A crucial circumstance relied upon by ASIC as a reason why a prudent trustee would not have approved the August 2012 Variation was LMIM’s failure to obtain an independent feasibility report (ts 647-648). The absence of the independent feasibility report was important to ASIC’s case because its absence was said to increase the foreseeable risk of capital loss.
(3)Although ASIC’s case was that a prudent trustee would not have approved the August 2012 Variation, ASIC did not deny that a variation to allow the same further $100 million loan would not have been made in any event. ASIC did not lead any evidence about what an independent feasibility report might have concluded. In other words, ASIC accepted that it was possible that an independent feasibility report might have concluded that a reasonable course would have been to grant a variation permitting the proposed variation.
In closing submissions, ASIC submitted as follows ([274]):
ASIC’s case on breach of trust is simply this. A prudent trustee in [the] circumstances would not have approved the advance. The approval of that advance breached the duty prescribed by s 22 of the Trusts Act and exposed the MPF to a foreseeable risk of capital loss, being the risk of default by the borrower if the estimated cash flows generated by the development did not eventuate.
ASIC’s pleaded case of Mr Drake’s improper purpose
ASIC pleaded its allegations of Mr Drake’s contravention of s 181(1) and s 181(2) of the Corporations Act as based upon a plea of improper purpose. That plea was expressed in ASIC’s statement of claim as follows ([167]):
in causing and/or permitting LMIM to approve the August 2012 Variation and agreeing to advance to Maddison Estate a further $100 million in a manner which caused LMIM to commit a breach of trust against MPF, [Mr Drake] exercised his powers and discharged his duties as a director and officer of LMIM for the purpose of maximising the cash flow available to LMA as trustee for the [LMA] Trust to fund the loans to [himself] (Improper Purpose).
This improper purpose is pleaded as amounting to a failure by Mr Drake to exercise his powers and discharge his duty as a director and officer of LMIM in good faith in the best interests of LMIM or for a proper purpose; and improper use by Mr Drake of his position as a director of LMIM to gain an advantage for himself and for the LMA Trust (defined below).
THE FACTUAL BACKGROUND
Relevant entities, persons, and relationships
Outline of the various entities
On 31 January 1997, LMIM was incorporated. Mr Drake was appointed as director of LMIM at the time of incorporation. In June 2006 and September 2006 respectively, Mr van der Hoven and Ms Mulder were also appointed as directors of LMIM.
Separate from LMIM was another company, called LM Administration Pty Ltd (LMA), which was the trustee for the LM Administration Trust (the LMA Trust) which was created on 30 June 2003.
LMA (as trustee for the LMA Trust) and LMIM entered into a service agreement (LMA Service Agreement). The service agreement was provided in Sch 1 to be effective from 1 July 2005 although, curiously, the cover page bore the date 1 July 2010. In the LMA Service Agreement, LMA agreed to provide LMIM with services for LMIM’s funds management operations. Those services included the provision of staff, equipment, and other services for the proper management and administration of LMIM’s business including matters such as payment of operating costs, debt collection, preparation of financial statements, and contract negotiation. The cost for the services was agreed to be (i) a percentage of LMA’s total expenses, and (ii) all management fees earned by LMIM as the manager of its managed investment schemes.
The personnel who assisted LMIM (but were employed by LMA not LMIM) were organised into teams. There was a lack of clarity in some of the evidence and submissions concerning who employed these various personnel. I accept the evidence of Mr Fischer and Ms Mulder that employees were employed by LMA and not by LMIM (see also the LMA Service Agreement which I discuss below). Further, ASIC’s statement of claim, in paragraph [10], alleged that LMA employed Mr Drake, Ms Mulder, Mr van der Hoven, Mr Tickner, Ms Darcy, Mr Barnett, Mr Fischer, Mr King, and Ms Chalmers.
One of the teams which assisted LMIM was the Property Asset Management (PAM) team which contained employees of a related company, LMA. The PAM team was led by Mr Tickner. Another team was the finance team led by Ms Darcy and then Mr Fischer. A third was the marketing team led by Ms Mulder. A fourth was the global operations team led by Ms Phillips. A fourth was the portfolio management team led by Mr van der Hoven and Mr Petrik. A fifth was the foreign exchange team led by Mr van der Hoven. And a sixth was the in-house legal team.
The PAM team had around 25 staff. Their skills included areas of lending, development, town planning and general property. The team was divided into three parts responsible for: (i) identifying investment opportunities for the funds; (ii) assessing the assets and working to progress the projects; and (iii) administering the loans. The PAM team reported to the various committees, including the MPF Credit Committee (discussed further below). In 2012, when Mr Tickner retired as a director, Mr Fischer became the leader of the PAM team.
On 4 December 2001, LMIM entered a deed which produced a constitution for the MPF. The MPF Constitution was expressed as a deed between LMIM and the members, as they were constituted from time to time, of the MPF. The MPF was described as the “Scheme”. It was a unit trust to which members could subscribe by application following an offer or invitation to subscribe. The MPF Constitution was amended on a number of occasions after 4 December 2001.
On 4 May 2007, the MPF entered into a loan agreement granting a loan to Mr Drake. Although the loan agreement document was not in evidence at trial, its existence can be inferred from a variation deed that was in evidence. Mr Drake immediately drew down $8 million of the loan. By 30 June 2011, he had drawn down more than $15 million ($15,226,498.65).
On 14 September 2007, LMIM Asset Management Pty Ltd was incorporated. Mr Drake was its sole director, secretary and shareholder.
On 14 September 2007, Maddison Estate was incorporated. It was then known as LM Coomera Pty Ltd.
The MPF
The MPF was only open to investment by wholesale or sophisticated investors. As Mr van der Hoven explained, the MPF funds were only sold to investors via a network of financial advisers. LMIM conducted “Introducer Days” in Australia and overseas at which presentations would be given by directors and other LMIM staff.
It is important to reiterate the point I made in the introduction to these reasons that the sophisticated investors and their advisers would have been immediately aware from the few pages of the information memorandum and investment application that investment in the MPF involved considerable risk. Returns, however, were high. They were around 25% per annum. As an example, the 1 November 2011 MPF information memorandum and application form for investors contained six pages of information entitled “About the LM Managed Performance Fund” and “LM Managed Performance Fund”. Those pages explained that the MPF invested in “commercial loans, direct real property, and cash” and had around $274 million of assets. Those $274 million of assets included around $248 million invested in Australian commercial loans. The largest of the commercial loans was described as being $142 million, more than half of the size of the fund.
The MPF Credit Committee
The MPF investment decisions were made by an LMIM committee called the MPF Credit Committee.
Mr Drake, Ms Mulder, and Mr van der Hoven were all members of the committee. Ms Darcy was the chair until her resignation from LMIM on 21 June 2012. Other persons who were members of the credit committee included Ms McCallum (a member of the PAM team who served as a loans analyst) and Mr Parker (who was responsible for obtaining loans). Paralegal staff from the PAM team, Ms Chalmers and Ms Kingston, would organise and facilitate the meetings, and would take minutes. Development managers would also attend the committee meetings from time to time.
The role of the MPF Credit Committee was to assess loans proposed as investments for the MPF and to consider any required action for existing loans. The procedure involved preparation of a synopsis paper which was circulated to the committee members at the meeting. The meeting papers generally also included a feasibility model prepared by the development manager from the PAM team. The MPF Credit Committee would review the information and if a decision could not be made, the meeting was adjourned.
There were documentary guidelines and procedures for the MPF Credit Committee. One guideline was that “LM Directors require that all [MPF Credit Committee] decisions are to be made at a meeting as opposed to email voting (unless the topic for decision is a very simple, non-material matter)”. However, occasionally a decision would need to be made without a physical meeting and members would vote electronically through their email response.
Mr Drake
In an information memorandum and application dated 1 November 2011, Mr Drake’s position and responsibilities were described as follows:
Peter Drake
Chairman and Chief Executive Officer
Peter founded LM in 1998, after 20 years’ experience in Australia’s financial services and life insurance sectors. As 100 per cent shareholder and CEO, Peter is principally responsible for the strategic vision, direction and structured growth of LM. Since its inception, Peter has been actively involved with LM’s expansion to ten international offices, now servicing beyond 60 countries. Peter is particularly active in the design and marketing of LM’s Australian dollar and currency hedged investment products. Working closely with LM’s Portfolio Manager to manage the growth of funds under management, Peter also plays an integral role in LM’s Funds Management Committee. With significant experience in direct property and joint venture property developments across Australia, Peter is also a member of LM’s Credit/Investment Committee, responsible for approving and setting the conditions of loans within LM’s mortgage portfolio. Peter’s vision of an innovative and prudential funds manager holds true as LM continues its dynamic growth in Australia’s financial services, business and property sectors. Peter is a member of LM’s Credit/Investment Committee, Funds Management Committee and Property Research and Analysis Committee.
A similar biography was provided in other information memoranda produced by LMIM from 2009 to 2012.
Mr Drake can comfortably be described as the prime mover behind the Maddison Estate development. The extent of his control is plain from the diagrammatic relationship of all of the relevant entities, set out later in these reasons. But his involvement was far more comprehensive than these formal roles. As I explain below, the Maddison Estate development became closely associated with his conception and vision for it, including as Mr Barnett described, Mr Drake’s desire to have a development which was different from anywhere else in the world.
Mr van der Hoven
In the same information memorandum and application described above in relation to Mr Drake, Mr van der Hoven’s position and responsibilities were described as follows:
Eghard Van Der Hoven
Executive Director, Portfolio Manager
In 2003 Eghard joined LM as Portfolio Manager, responsible for the monitoring and ongoing performance of LM’s various funds. As Executive Director, Eghard’s sound understanding of the investment industry spanning almost 20 years includes extensive experience in stock broking, auditing, investment analysis, business strategy and policy planning. As the Chair of LM’s Funds Management Committee, Eghard is responsible for joint decisions in relation to the asset allocation, geographic spread allocation, cash flow, delivery rate forecasting and budgeting of LM’s funds. He holds a Master of Commerce, majoring in Economics, and a Bachelor of Commerce (Hons) in Economics, from University of Pretoria, South Africa. Eghard is a member of LM’s Property Research and Analysis Committee, Credit/Investment Committee and Arrears Committee.
Mr van der Hoven commenced employment with LMA (the service provider to LMIM) in late 2003 as Portfolio Manager, and held this position until around 2009. As Mr van der Hoven explained, as Portfolio Manager he was primarily responsible for monitoring and managing the funds’ cash flows and measuring their profitability (which could determine the distribution rate that could be paid to investors). Mr van der Hoven was the Portfolio Manager of the MPF until Mr Petrik took over in about 2009. Despite this, Mr van der Hoven continued to be involved in the portfolio management process.
On 22 June 2006, Mr van der Hoven was appointed as Executive Director of LMIM. Also around this time, he was appointed as the head of LMIM’s Foreign Exchange team. His focus shifted to managing the foreign exchange activity of the various funds. He explained that his role as Executive Director did not change his core focus on portfolio management and foreign exchange management. However, he consequently became more involved in other parts of the business.
As an Executive Director, Mr van der Hoven sat on the board of directors and reported to the board on foreign exchange dealing, and was involved in making company decisions that were brought to the attention of the board. Mr van der Hoven was a voting member of the MPF Credit Committee and other committees including the Property Research and Analysis Committee.
Mr van der Hoven was paid a salary and bonuses. His bonus was calculated as 2.5% of the profit of the LM Group. Mr Fischer explained that the bonus was paid from the operating cash flow of the LM Group. ASIC submitted, without dispute, that his salary and bonuses (relevant to the business judgment rule upon which he relied) were as follows, with his salary apparently calculated by subtracting his bonus from total taxable income:
(1)2010: salary $209,460; bonus $95,574;
(2)2011: salary $244,066; bonus $129,811; and
(3)2012: salary $244,047; bonus $236,786.
Mr van der Hoven gave evidence. He was cross-examined vigorously, although fairly. He was measured in his evidence and I consider that he was entirely truthful and, to the extent to which he could recall detail, reliable.
ASIC submitted that parts of Mr van der Hoven’s evidence had been contrived after he observed Ms Mulder give evidence before him. In particular, it was submitted that Mr van der Hoven’s affidavit evidence had referred only to auditors assessing the Maddison Estate development’s feasibility generally. In cross-examination, Mr van der Hoven’s evidence about his belief concerning the auditors became more precise. He said that he believed that the auditors were reviewing escalation rates (ts 683). ASIC submitted that this precision came only after he had heard similar questions asked in cross-examination of Ms Mulder.
Mr van der Hoven was a respondent to very serious allegations. He was present for much of the court hearing, which was entirely appropriate and to be expected given the gravity of the allegations against him. He could not possibly be criticised for observing Ms Mulder give evidence. I do not understand ASIC’s submission to have suggested this. However, ASIC’s submission misconstrues Mr van der Hoven’s increased precision in his answers as a basis upon which it could be said that his evidence had been moulded following his observations of Ms Mulder’s questions. I do not accept this submission about a witness who presented as honest and measured. As I explain later in these reasons, there is also an independent basis to accept Mr van der Hoven’s evidence concerning his belief in the role of the auditors.
Ms Mulder
In the 1 November 2011 information memorandum and application, Ms Mulder’s position and responsibilities were described as follows:
Francene Mulder
Executive Director, General Manager Distribution/Product
Francene commenced with LM in 1999, following a 20 year career in the commercial, legal and securities sectors. Prior to joining LM, Francene held managerial positions focused on the areas of commercial mortgages, conveyancing and the property sector. Specific experience in mortgage securities and the marketing of financial products provided a solid background for Francene to successfully undertake her role within LM. As Executive Director, Francene is primarily responsible for the marketing and expansion of distribution of LM’s products on a wholesale and retail basis, throughout Australia and international markets. Francene takes an active role in the direction of all client communication, company communication, corporate literature and service. Francene is also a member of LM’s Property Research and Analysis Committee, Funds Management Committee, Credit/Investment Committee and Arrears Committee.
Ms Mulder explained that after secondary school, she commenced work at various law firms, primarily in conveyancing and then general mortgages. In August 1999 she commenced working as marketing manager at LMIM within a small treasury division, although she was employed by LMA.
After having worked at LMIM for 7 years, Ms Mulder was appointed as Executive Director and Marketing Director of LMIM on 30 September 2006. Ms Mulder explained her duties as follows:
I was appointed Executive Director and Marketing Director of LMIM on 30 September 2006. As Marketing Director, I managed the marketing/business development teams, communications team, and the team that put the product disclosure statements together. After transitioning from Marketing Manager to Director I was still heavily involved in dealing with daily marketing activities. As such, though I was a member of various committees, I travelled frequently and often did not attend committee meetings. During this time, LMIM established further satellite offices and I was involved in assisting the teams with growing market presence in regions those offices were servicing.
…
In my role as Director, Marketing Manager and in publishing information intended for financial advisors relating to disclosure or particular assets of the fund, I was reliant on information reported to me by the finance team and the CFO. In a similar manner, I was reliant on information reported by the PAM Team in credit committee meetings in relation to fund assets… LM had processes and experienced senior people in place in each department and I was comfortable with that and relied on their expertise to assist me in making decisions as a Director and Marketing Manager. I discuss this in further detail below with respect to Maddison Estate.
I was an active working director. LM was a large organisation and my daily involvement was within the Marketing and Communications teams.
As Ms Mulder explained, her main focus from 2011 until the end of 2012 was the First Mortgage Income Fund. During this time, the other directors were working across the other areas of the business to allow Ms Mulder to focus on the First Mortgage Income Fund. Ms Mulder explained that she generally did not read valuations, loan documents, feasibility models or advices as that was not her area of expertise or her role. She said, and I accept that she believed, that it was the role of the expert individuals in the specialised in-house PAM team to understand these documents and to present the relevant information to decision-makers. She trusted their experience and expertise.
Like Mr van der Hoven, Ms Mulder was paid a salary and bonuses (calculated in the same way as Mr van der Hoven’s). ASIC submitted, without dispute, that her salary and bonuses (relevant to the business judgment rule upon which she relied) were as follows (again, apparently by calculating salary by deducting bonus from total taxable income):
(1)2010: salary $178,620; bonus $104,142;
(2)2011: salary $244,066; bonus $129,811; and
(3)2012: salary $208,784; bonus $236,786.
Ms Mulder gave evidence. She was also cross-examined vigorously, although again fairly. ASIC submitted that an inference should be drawn that Ms Mulder was deliberately evading being committed on any matter of detail beyond what she relies upon for her defence. I do not accept this submission. I have no doubt at all that Ms Mulder was a thoroughly honest witness and that she answered all questions truthfully and to the best of her ability. Like Mr van der Hoven she had a limited recollection of matters that were discussed at MPF Credit Committee meetings. To the extent that she did recall those meetings, I consider that her answers were truthful and reliable.
The Maddison Estate joint venture
On 12 September 2007, the MPF Credit Committee considered a proposal for a $36.75 million loan by the MPF to a special purpose vehicle, LM Coomera JV Pty Ltd, for the Maddison Estate development. This was the genesis of the loan which was at the heart of the proceedings in this case.
A synopsis dated 11 September 2007 was sent to the MPF Credit Committee describing how LM Coomera JV Pty Ltd would on-lend funds to a company in the Young Land Group called Coomera Ridge Pty Ltd (Coomera Ridge) under joint venture agreements, or to another joint venture special purpose vehicle as part of the Young Land Group. Coomera Ridge had an entitlement to 31 parcels of land at Coomera, sometimes described as the “Pimpama Land”.
The 11 September 2007 synopsis explained that the proposal was for the MPF to enter a joint venture with a company owned by Mr Young (a director of the Young Land Corporation) to develop and sell the Pimpama Land into a residential subdivision comprising approximately 1532 residential lots (combining (i) some land sales, and (ii) some house and land packages). Mr van der Hoven explained that the expected gross revenue was said to be $577.8 million, and that the expected net profits to each joint venturer was said to be $65 million.
The security for the loan was described as “generally secured by way of second mortgage”, and a fixed and floating charge over all of the assets of the joint venture special purpose vehicle company.
On 13 and 14 September 2007, the members of the MPF Credit Committee approved the proposal for a loan of $36.75 million. The loan, which somehow became $40 million, was made from the MPF to a company which became known as Maddison Estate.
On 19 November 2007, several agreements gave effect to the joint venture:
(1)a joint venture development agreement was entered into by Maddison Estate and CRDC Pty Ltd (CRDC). CRDC was incorporated in September 2007 by Mr Young for the purpose of participating in a joint venture with Maddison Estate to develop the Pimpama Land. Mr Young was CRDC’s sole director and secretary until October 2010. The agreement provided for the equal sharing of proceeds and provision of $40 million by Maddison Estate. It was signed by Mr Drake for Maddison Estate and by Mr Young for CRDC. Curiously, it provided for a contribution from Maddison Estate of $40 million;
(2)a land availability agreement was entered into by Maddison Estate (signed by Mr Drake), Coomera Ridge, and CRDC (both signed by Mr Young); and
(3)a development management agreement was entered into by Maddison Estate, CRDC, and Young Land Project Management Pty Ltd (Young Land Project Management) to engage Young Land Project Management as the development manager.
As Mr Young had conceived it, the Maddison Estate development was for: (i) initial sales of land only; (ii) subsequent sales of house and land packages; and (iii) eventual sales of town houses and units. The plan involved approximately 1,458 dwellings on 700 residential lots with another 700 attached dwellings. This plan had obtained preliminary development approval from the Gold Coast City Council on 16 November 2009. It received final approval on 6 May 2010.
However, by 2010, the property market on the Gold Coast and other parts of Queensland had declined, in part due to the global financial crisis. Mr Young’s companies, including Young Land Project Management, were unable to meet their liabilities. Mr Young became personally bankrupt. Mr Young and Mr Drake agreed that Maddison Estate and CRDC would terminate the joint venture. Around April 2010, a number of agreements were entered to terminate the joint venture.
around the time of the termination of the joint venture:
(1)Maddison Estate entered into a development management agreement with LMA (LMA Development Management Agreement). LMA agreed to provide development services, effectively replacing Young Land Project Management. Mr Young, Mr Fischer and other former employees of Young Land Project Management were employed by LMA. Under the LMA Development Management Agreement, LMA would receive a monthly development management fee which commenced at $250,000 (plus GST) a month, and increased to $300,000 (plus GST) a month from July 2011. The LMA Development Management Agreement provided that the agreement would terminate on 30 June 2015.
(2)Mr Young transferred his interest in the Maddison Estate development to Mr Drake, and Mr Drake became the sole director of Coomera Ridge.
Also following termination of the joint venture, Maddison Estate was substituted as the sole borrower under the Suncorp loan facility (explained further below).
Some of these matters, and the relationships between the relevant entities, are represented in the diagram below.
The loans to the joint venture
The Suncorp loan in January 2008
In January 2008, Suncorp extended a finance facility to Maddison Estate and CRDC with a limit of $6,464,000. The facility was secured in part by first ranking charges over the assets and undertakings of Maddison Estate and CRDC.
On 23 January 2008, $5,836,377.50 was drawn down under the Suncorp loan facility. The loan facility was subsequently increased. By October 2011 the loan was drawn down to around $34 million. However, by March 2012 it had been reduced to $26 million.
Young Land Corporation and Suncorp commissioned valuations of the Pimpama Land on an “as is” basis. The valuations by Landmark White were dated 6 March 2008 and 28 July 2008 respectively. The valuations valued the Pimpama Land at around $54 million in March 2008, and $72.5 million in July 2008. The 28 July 2008 valuation noted that the total area of the 32 parcels of land was 109 hectares. It observed that at the date of valuation all of the properties were being used as rural homesteads and that a number of the lots had limited development potential due to town planning restrictions.
The Maddison Estate MPF Loan Agreement on 13 November 2007
On 13 November 2007, LMIM as trustee for the MPF entered a loan agreement with Maddison Estate (the Maddison Estate MPF Loan Agreement). In that agreement, LMIM agreed to lend $40 million to Maddison Estate to give effect to the joint venture.
The date for repayment was the date when LMIM demanded payment from Maddison Estate. The Maddison Estate MPF Loan Agreement did not provide for any guarantor. It provided that Maddison Estate would indemnify LMIM against any expense, loss, loss of profit, damage or liability which LMIM may suffer as a consequence of any default by Maddison Estate.
The Maddison Estate MPF Loan Agreement provided for an interest rate to be determined by LMIM on the basis that Maddison Estate should have no distributable income at the end of each financial year. Interest instalments were to be paid monthly. The interest rate provision (Item 6) provided:
Such rate as is determined by [LMIM] in its absolute discretion from time to time (with the intent that such rate results in [Maddison Estate] having no distributable income at the end of each financial year), or in default of such determination by the Lender, 18% per annum.
The Maddison Estate MPF Loan Agreement was executed by Mr Drake and Ms Darcy as directors of LMIM. It was executed also by Mr Drake as the sole director of Maddison Estate.
One of the recitals provided that LMIM entered into the agreement only in its capacity as trustee for the MPF.
The Maddison Estate MPF Loan Agreement did not initially provide for any security. Security was subsequently provided under a deed of variation on 11 November 2008 where Maddison Estate agreed to provide a charge over “all the property, assets and undertaking of [Maddison Estate] of whatsoever nature and kind and wheresoever situated, present and future”.
On 20 May 2010, the interest rate was varied to be a “rate of 25% per annum, provided that such rate may be adjusted in the absolute discretion of the Lender on each anniversary of the loan, to equal the market rate for loans of such nature, to be determined by the Lender in its absolute discretion. If no adjustment is made the rate will remain at 25%”. The interest rate was set at 25% to ensure that Maddison Estate did not make a profit. Legal advice was received about the propriety of the interest rate increase in light of Mr Drake’s potential conflict of interest.
The variations to the Maddison Estate MPF Loan Agreement and the feasibility reports
The Maddison Estate loan limit could not have been intended to cover all of the costs of the Maddison Estate development and capitalised interest. There was little evidence on this point. ASIC asserted that the variations to the limit showed that LMIM’s “track record of properly forecasting development and other costs and adhering to budgeted projections was abysmal”. In contrast, Ms Mulder and Mr van der Hoven submitted that there was no evidence that the loan and variations were required to be a “once only loan”.
The evidence does not reveal whether the MPF Credit Committee ever considered the extent to which the initial limit and subsequent variations would need to be increased again in the future. Any conclusion about what maximum limit would be needed might have been extremely difficult to reach. One reason for the uncertainty is that the scope and detail of the project changed as it progressed and it seems that these changes were welcomed. Another reason for the uncertainty is that the limit of the loan would depend on how long the development took, which would be extremely difficult to estimate. The longer that the development took, the more capitalised interest would add to the loan amount. At 25%, the capitalised interest only on a $60 million loan would require $15 million per annum. A third reason for uncertainty is that LMIM’s exit plan, at least from late 2011, was to be bought out. This could only occur when a purchaser could be found to whom the debt could be assigned. When that occurred, no further limit would be needed by LMIM.
There are strong reasons why the initial limit, and variations, might reasonably not have been expected to be the permanent limit to the loan. It is notable that the independent lender, Suncorp, was prepared to lend with an initial limit of $6.4 million in January 2008 but to allow that limit to increase to around $34 million by October 2011.
One reason why the initial loan, and subsequent variations might not have been expected to be permanent is that the synopsis dated 17 September 2008, which supported an increase of the loan from $40 million to $58 million, described the purpose of the loan to be to “acquire 32 parcels of land, consolidate and re-develop into a residential Master Planned community comprising approx 1500 dwellings”. The synopsis explained that the “total purchase price of the land lots is $73M + fees + stamp duty + interest”. Even with the Suncorp loan, the first extension to $58 million would barely cover the costs associated with acquiring all 32 parcels of land, still less the costs of the massive development until revenue streams began. The synopsis also observed that the initial $40 million loan did not apply to ongoing costs, and that the increase to $58 million was necessary “to allow for ongoing budgeted payments” (emphasis added).
The inference that at least some of the limits which were varied by subsequent variations were not expected to be permanent is also supported by the fact that some of the variations were expressed as applying only for a particular period. For instance, the September 2011 variation was agreed on the basis that it would only provide the funding required until the end of March 2012. There was no evidence that any of the members of the MPF Credit Committee considered it surprising at that time that the additional $65 million limit was needed although it would only provide short term funding for six months (to the end of March 2012) up to a limit of $180 million. At least in relation to this variation, rather than suggesting an “abysmal” track record of forecasting as ASIC had submitted, the MPF Credit Committee was potentially quite accurate. By the end of March 2012, the loan balance of the Maddison Estate MPF Loan Agreement was $177,766,781.23 (to the extent that the loan balance can be relied upon despite retrospective additions to it based on later events).
The Maddison Estate MPF Loan Agreement was varied on the following occasions:
(1)An increase from $40 million to $58 million (with MPF Credit Committee approval on 18 September 2008) by a deed of variation entered on 11 November 2008. The variation took effect on 18 September 2008.
(2)An increase from $58 million to $70 million (with MPF Credit Committee approval on 5 August 2009) by a deed of variation entered on 6 October 2009. The variation took effect on 30 July 2009.
(3)An increase from $70 million to $95 million (with MPF Credit Committee approval on 25 February 2010) with a deed of variation executed on 14 April 2010. The variation took effect from 11 December 2009.
(4)An increase from $95 million to $115 million (with MPF Credit Committee approval on 28 July 2010) with a deed of variation executed on 28 June 2011. The variation took effect on 14 February 2011.
(5)An increase from $115 million to $180 million (with MPF Credit Committee approval on 25 September 2011) with a deed of variation executed on 19 October 2011. The variation took effect on 15 February 2011.
(6)An increase from $180 million to $280 million (with MPF Credit Committee approval on 7 August 2012) with a deed of variation executed on 1 July 2012 (the August 2012 Variation). The variation took effect on 30 June 2012.
Prior to each variation of the loan, feasibility reports were prepared and used to provide a synopsis for the MPF Credit Committee.
The feasibility reports were prepared by the PAM team using a proprietary software program called “Estate Master”. Estate Master required the input of numerous variables from which it calculated a net present value of the development. The variables which were inputted by members of the PAM team included projected revenue data, projected expense data and various assumptions such as escalation rates (the rates by which the value of lots might escalate in price during the timeframe of the development).
Ms Phillips explained that the revenue and expense inputs were not all externally obtained. Some, such as sales prices and valuations, were researched from independent reports and other research such as market sales prices, real estate agents, and sales reports. Those valuations were scrutinised by the board of LMIM in informal meetings.
Other inputs were externally obtained. Mr Barnett gave evidence that information was derived from external consultants concerning council fees, consultants’ fees and construction cost estimates from engineers and landscape architects. Mr Young also said in his affidavit and in his oral evidence that he obtained estimates of development costs from companies such as Mortons Urban Solutions (ts 413).
Mr King explained that apart from these cost and revenue inputs, the escalation rate was the remaining variable (although discount rates also needed to be applied to the model). As Mr Barnett explained, the escalation rates are an increment by which the value of the property is multiplied to estimate the amount by which the value of the property will improve over time. The increment is applied annually to estimate the amount by which property will increase in value from year to year. The values of property to be released through Stage 1 were the baseline. The escalation rates were applied to that baseline.
Mr Barnett said that it was usual to obtain the escalation rates from an independent property analyst. He and Mr King used a report from BIS Shrapnel entitled “The Outlook for Residential Land in Gold Coast”. Mr Barnett also subsequently referred to sales revenue escalation rates from a third party property consultant called RP Data.
The abandonment of the allegations concerning the September 2011 loan variation
From the inception of the case until shortly after ASIC’s evidence concluded, ASIC alleged breaches by the respondents in relation to the September 2011 loan variation. Although the allegations were abandoned, it is necessary to explain the background to that variation in a little more detail because ASIC continued to rely on that background in a slightly opaque submission that, although the variation was not said to be a breach of duty, it could somehow cast a shadow over the August 2012 Variation which was said to be a breach of duty.
By 18 September 2011, the loan balance of the Maddison Estate loan was around $140 million. This exceeded the previously approved limit of $115 million. A synopsis dated 22 September 2011 sought an increase to $200 million. The members of the MPF Credit Committee discussed, and approved, an increase in the limit of the advance from $115 million to $180 million a few days later.
On 25 September 2011, Mr Tickner sent an email to the members of the MPF Credit Committee (including the respondents) which attached the 22 September 2011 synopsis. The email said:
Attached is the synopsis regarding the increase to the maximum Approved Loan Amount.
This was discussed by ST LD PD EVH and FM and agreed to an amount of $180M based upon the funding required until end March 2012 on the basis of anticipated project related costs, Suncorp’s amortisation requirements interest and also MPF’s interest.
Can you please confirm your acceptance by voting.
The initials refer to, respectively, Mr Tickner, Ms Darcy, Mr Drake, Mr van der Hoven, and Ms Mulder. However, Ms Mulder’s evidence was that this loan was approved at a meeting when she was in Hong Kong, and too unwell to attend the meeting. I accept Ms Mulder’s evidence. In any event, Ms Mulder would have become aware of the approval shortly afterwards.
In the synopsis which was provided to the MPF Credit Committee to assist them in considering the variation to the loan, it was observed that the loan balance was more than $140 million (which exceeded the approved limit of $115 million). The synopsis noted that development approval had been granted and further applications were being made for the first stage of subdivision, although the number of proposed dwellings and lots would be subject to further feasibility and cash flow analysis once the approvals progressed. It was also noted that Suncorp held a first mortgage which secured a $38 million debt. It was observed that Suncorp was not continuing with development loans, was reducing all of its facilities, and had requested a paydown of the loan facility of $2 million a month for the six months which commenced in August 2011. The increase in the loan would “cover the principal reductions ($2M per month) and interest on the Suncorp loan (approx $350K p/m), interest on the MPF facility (currently $2.5M p/m and capitalising) and development costs for Stage 1 completion”.
ASIC’s claim initially alleged that the September 2011 loan variation was a breach of trust by LMIM, and a breach of s 180(1) of the Corporations Act by the directors. But, after the evidence of Mr Woolley, ASIC abandoned this allegation. Nevertheless, ASIC’s pleading and submissions still relied upon circumstances surrounding the September 2011 variation which had previously been pleaded in the context of the allegations of breach of trust, in particular:
(1)the respondents’ possession of a report produced by Ernst & Young in January 2011 which was critical of the development;
(2)the respondents’ knowledge of the Landmark White preliminary valuation for Suncorp in July 2011 which assessed the “as is” value of the Pimpama Land as between $35 million and $40 million based on its “highest and best use”;
(3)LMIM’s previous increases in the loan from $40 million in November 2007; and
(4)the respondents’ awareness that construction on the development had yet to commence.
Section 181(1) of the Corporations Act provides as follows:
Good faith - directors and other officers
(1)A director or other officer of a corporation must exercise their powers and discharge their duties:
(a)in good faith in the best interests of the corporation; and
(b)for a proper purpose.
(2)A person who is involved in a contravention of subsection (1) contravenes this subsection.
Section 182(1) of the Corporations Act provides:
Use of position - directors, other officers and employees
(1)A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a)gain an advantage for themselves or someone else; or
(b)cause detriment to the corporation.
(2)A person who is involved in a contravention of subsection (1) contravenes this subsection.
The two core aspects of ASIC’s s 181 and s 182 claims
The issues in dispute in relation to both s 181(1)(b) and s 182(1)(a) concerned ASIC’s plea that Mr Drake caused or permitted LMIM to approve the August 2012 Variation:
(1)in a manner which caused LMIM to commit a breach of trust against MPF; and
(2)not in the best interests of the company but for an improper purpose.
The pleaded improper purpose was that Mr Drake approved the August 2012 Variation “for the purpose of maximising the cashflow available to LMA as trustee for the [LMA] Trust to fund the loans to [himself]”.
Neither of the elements (1) or (2) of ASIC’s claim is established.
I have already explained why (1) was not established, that is why no breach of trust was committed by LMIM. The section which follows explains why ASIC did not prove that Mr Drake exercised his powers for an improper purpose or used his position to gain the pleaded advantage. The words “for” and “to” require a causal or connecting link.
Legal principles concerning improper purpose
The concept of “impropriety” was considered in Doyle v Australian Securities andInvestments Commission [2005] HCA 78; (2005) 227 CLR 18, 28 [35] where the Court held that impropriety on the part of a director would arise where there was:
a breach of the standards of conduct that would be expected of a person in his position by reasonable persons with knowledge of the duties, powers and authority of his position as director, and the circumstances of the case, including the commercial context. Such standards, expressed according to objective criteria, are ultimately stated, as necessary, by the courts.
(Footnotes omitted.)
In Permanent Building Society (in liq) v Wheeler, Ipp J (with whom Malcolm CJ and Seaman J agreed) said that the principles applicable to determining whether directors have acted for an improper purpose and in abuse of their powers were well settled. Those principles were common ground in this case. As Ipp J explained (218):
(a)Fiduciary powers and duties of directors may be exercised only for the purpose for which they were conferred and not for any collateral, or improper purpose.
(b)It must be shown that the substantial purpose of directors was improper or collateral to their duties as directors of the company. The issue is not whether business decisions were good or bad; it is whether the directors have acted in breach of their fiduciary duties.
(c)Honest or altruistic behaviour by directors will not prevent a finding of improper conduct on their part if that conduct was carried out for an improper or collateral purpose. Whether acts were performed in good faith and in the interests of the company is to be objectively determined, although statements by directors about their subjective intentions or beliefs will be relevant to that inquiry.
(d)The court must determine whether but for the improper or collateral purpose the directors would have performed the act impugned.
Although these principles were not in dispute, (b) and (d) may be controversial in the context of the Corporations Act. I proceed only on the basis of these two principles because they were common ground and, in the case of (d), because ASIC accepted the higher burden for its case and made a conscious decision to run its case in that way.
As to (b), the question of whether improper purpose is objective or subjective, or a combination of the two, is not wholly settled. As Black J observed in In the matter of Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789 [421], the bulk of authority favours the objective approach. In addition to Permanent Building Society (in liq) v Wheeler, cases which might support this approach include Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 168 FLR 253 [738]-[740] (Santow J); Parker v Tucker [2010] FCA 263; (2010) 77 ACSR 525, 543 [73] (Gordon J), and Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157; (2012) 44 WAR 1, 170 [933] (Lee AJA), 353 [1988], 362 [2027], 371 [2073] (Drummond AJA). However, in Bell Group, Carr AJA held at 566-567 [2923] that the test whether directors had acted for an improper purpose was primarily subjective. It is unnecessary to resolve this issue.
As to (d), initially none of the submissions by ASIC and Mr Drake addressed the test of for causation. In written submissions, ASIC initially assumed that the question of purpose was binary: it was assumed that Mr Drake could only have one substantial purpose and that purpose was either in the best interests of the company or it was an improper purpose. Hence, ASIC submitted that it was necessary to examine the substantial purpose for which Mr Drake approved the loan increase, and to reach a conclusion whether that purpose was proper. I do not accept that such a strict approach is required. The substantial (improper) purpose might be one of a number of purposes. Proceeding in this way does not create any unfairness to the Mr Drake. His cases would not have been conducted any differently whether the issue was whether his purpose was the substantive purpose or a substantive purpose.
ASIC also assumed that s 181(1) or s 182(1) require proof that a transaction involving an improper purpose would not have occurred but for the improper purpose. In contrast, in Eclairs Group Ltd and Glengary Overseas Ltd v JKX Oil & Gas plc [2015] UKSC 71 [21] Lord Sumption said (Lord Hodge agreeing):
The statutory duty of the directors is to exercise their powers “only” for the purposes for which they are conferred. That duty is broken if they allow themselves to be influenced by any improper purpose. If equity nevertheless allows the decision to stand in some cases, it is not because it condones a minor improper purpose where it would condemn a major one. It is because the law distinguishes between some consequences of a breach of duty and others. The only rational basis for such a distinction is that some improprieties may not have resulted in an injustice to the interests which equity seeks to protect. Here, we are necessarily in the realm of causation.
Lord Sumption’s approach recognises a mere influence as sufficient for a breach of duty. This conclusion rests upon the fact that people are often motivated to act by a number of purposes. They need not be motivated by any single factor, or even any single substantial purpose. The recognition of a mere influence as a breach of duty means that the “but for” test (would the respondent have entered the transaction but for the improper purpose) does not apply to the question of whether a breach has occurred. But the “but for” test would still apply in relation to whether the consequences of the breach of duty are that a transaction should be set aside or compensation paid. It is established in Australia that the transaction will not be set aside unless “but for” the breach of duty the transaction would not have occurred or the power would not have been exercised: Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11; (1987) 162 CLR 285, 294.
I have doubt whether the “but for” test applies at the stage when it is determined whether a breach of duty occurs. However, all parties assumed that it did and the case was conducted in that way. As I explain below, I accept the submission by senior counsel for ASIC that in this case “different tests of causation are probably unlikely to make much practical difference”.
The purpose of the re-establishment fee or the August 2012 Variation
ASIC’s case
The August 2012 Variation was the sixth variation to the original loan agreement. But the August 2012 Variation was the first time that a re-establishment fee was charged by LMIM to Maddison Estate.
This curiosity of this first occasion for the re-establishment fee may have been the reason why ASIC pleaded that the inference for the charging of this re-establishment fee was the improper purpose of procuring funds for Mr Drake to draw from LMA.
Further suspicion as to Mr Drake’s conduct arises from Mr Fischer’s evidence, which I accept, concerning a presentation Mr Fischer gave on 20 June 2012. On that day, Mr Fischer gave a presentation to the LMIM directors which included an overview of the LM Group’s profit forecast. That profit was $8.4 million for the next financial year. Mr Fischer said that he “noted” that the profit included $9 million from the re-establishment fee. All three respondents were at this meeting and the obvious conclusion that they would have drawn, whether correct as a matter of accounting or not, was that without the re-establishment fee there would be a loss suffered by the LM Group for the 2012 financial year.
ASIC submitted that the need for the re-establishment fee to make a profit “directly links the decision to approve the August 2012 Variation with the profit forecast for the LM Group for the financial year, and therefore the prospect of whether performance bonuses would be paid for that financial year to the directors”.
Several points must be made about this submission. First, there was no evidence that Mr Drake was paid, or entitled to, any bonuses. Secondly, to the extent that it is relevant, I do not consider that Ms Mulder or Mr van der Hoven were contemplating their bonuses when they approved the August 2012 Variation (although ASIC did not cross-examine them on the basis that they have subjectively considered this). The bonuses were paid on a monthly, not an annual basis (ts 693). Ms Mulder had even mistakenly (but honestly) been under the impression, which continued until cross-examination, that the loan was carried in the accounts at the discounted net present value (ts 675). Thirdly, to the extent that this submission by ASIC raises an objective question of whether a profit would have occurred without the re-establishment fee, this invites consideration of whether Mr Fischer’s statement in the 20 June 2012 presentation was correct. As it turned out, the financial report presented on 13 July 2012 forecast a net profit of $10,207,000 and the re-establishment fee became $9.8 million. So it might have been expected on 7 August 2012 that there would have been a small profit made even without the re-establishment fee (although compare the 20 July 2012 minutes which forecast a group profit of $8.4 million).
Perhaps the most fundamental difficulty with an inference that the purpose of imposing the re-establishment fee was to increase funds to LMA was that the $9.8 million re-establishment fee involved no movement of funds from Maddison Estate to the MPF. The re-establishment fee would not, and did not, result in any actual movement of funds to LMIM and the MPF because the loan was simply increased by the amount of the fee. In other words, the practical effect of the re-establishment fee was to increase the amount of the loan by $9.8 million rather than to provide any additional available funds. Hence, as Mr Fischer explained, there was no cash to use from that $9.8 million to fund Mr Drake’s lifestyle (ts 324).
Since it was not possible to infer that the purpose of the re-establishment fee was directly to increase funds to LMA, ASIC’s case instead alleged that the improper purpose of the re-establishment fee, or the August 2012 Variation generally, was to fund Mr Drake’s lifestyle in an indirect way as follows (ts 326, 743-744, 771-772, 775-776; submissions [399]):
(1)LMA funded Mr Drake’s lifestyle;
(2)LMA’s primary source of funding was LMIM’s management fees;
(3)LMA’s management fees could be drawn subject to a limit of 10% of the balance of the total assets of the MPF; and
(4)increases in the MPF loan balance increased the total assets of MPF and hence increased the upper limit of the management fees which were payable.
As I explain below, I accept each of these points. But the inference which ASIC seeks does not flow from them because any funding of Mr Drake’s lifestyle could not reasonably have been expected to be affected by the upper limit of the management fees which were payable.
The use by Mr Drake of LMA’s funds
Mr Drake relied on LMA’s funds to maintain his lifestyle. He was not paid an income from LMA but he drew funds from LMA (as trustee) which he spent on his lifestyle. Those drawings were recorded as a loan to Mr Drake in the financial reports of LMA, rather than as an expense. There was no issue at this trial concerning the legality of these drawings or the manner of their accounting as a “loan”.
Mr Fischer monitored Mr Drake’s drawings and expenditure. He said that Mr Drake spent between $5 million and $6 million per year on matters such as his home mortgage, personal expenses, travel, personal staff, and his divorce settlement. One documentary exhibit showed a weekly payment of $50,000 to Mr Drake’s former wife and $21,293 for Mr Drake’s household in the UK. In 2012, Mr Drake also drew money from LMA to make interest payments on a loan he had taken from the MPF (with a $17 million balance in 2012) for his LMIM business expenses. Prior to 2009, the interest on that loan had been paid, but after the global financial crisis and until 2012, Mr Drake had been capitalising the interest. Mr Drake admitted that the yearly balances for his LMA “loan” were as follows:
(1)$3,925,901.26 as at 30 June 2009;
(2)$9,815,559.82 as at 30 June 2010;
(3)$12,157,570.58 as at 30 June 2011; and
(4)$22,490,723.44 as at 30 June 2012.
The source of LMA’s funds
Prior to 2009, the LM Group had received revenue from management fees from the LM First Mortgage Income Fund (FMIF, a managed investment scheme for which LMIM was the responsible entity) and other funds. In March 2009, after LMIM suspended redemptions to the FMIF, the revenue source for the LM Group increasingly became the MPF. Mr Fischer said in a report on 14 June 2012 that there was a backlog of cash payments for the LM Group of more than $2.5 million and that this was “at a critical point and must be repaid”.
The increased reliance on management fees from the MPF can be seen in a chart produced by ASIC:
Financial year ending Management fees from MPF to LMIM (or direct to LMA) Management fees from FMIF to LMIM (or direct to LMA) 30 June 2010 $2,740,000 $12,000,000 30 June 2011 $3,270,787 $10,997,188 30 June 2012 $26,953,511 $5,180,443
There is one respect in which this chart is not entirely accurate. The amount on 30 June 2012 of $26,953,511 million was described in the MPF audited balance sheet as management fees paid or prepaid. Note 12 to the 2012 audited financial statements disclosed that on 30 June 2012, $15,585,329 million (the change in prepayments from 2011) of the $26,953,511 million management fees had been prepayments. Note 12 also disclosed that management fees expensed to the MPF for the year ended 30 June 2012 had been $11,368,182 million. This was said in Note 12 to represent 3.1% of the average net assets of the MPF.
The calculation of management fees and the inference that ASIC alleged should be drawn
Senior counsel for Mr Drake put to Mr Fischer in cross-examination that the idea to charge a re-establishment fee was Mr Fischer’s. Mr Fischer denied this, saying that Mr Drake had told him to include the re-establishment fee. I accept Mr Fischer’s evidence on this point. I also accept his evidence that prior to the meeting on 7 August 2012, Mr Drake had asked Mr Fischer to look at a re-establishment fee of 4% (ts 308).
The submission by ASIC was that an inference should be drawn that Mr Drake’s purpose in asking Mr Fischer to include a re-establishment fee was to increase the book value of the MPF’s assets, so that larger management fees could be drawn by LMA in order to fund his lifestyle. Even taking into account Mr Drake’s failure to give evidence (which I have addressed above), there are five obstacles to this inference, each of which by itself would be sufficient to prevent the inference from being drawn.
First, an increase in the assets of the MPF would not have any real practical effect on the limit of the funds which Mr Drake was able to draw from LMA (I reiterate that I say nothing about whether it was lawful for him to draw those funds from LMA, or for them to be treated as “loans”; the only issue was whether the re-establishment fee was for the improper purpose of increasing the funds to LMA to permit more drawing).
As Mr Fischer explained, LMIM was entitled to take a management fee of up to 10% per annum of the net value of the MPF (ts 326). The entitlement of LMIM to management fees came from cl 17.3 of the MPF Constitution. From June 2007 until at least October 2012, that clause provided:
The Manager [LMIM] is entitled to be paid a management fee from the Scheme Property up to 10% per annum of the Net Fund Value in relation to the performance of its duties as detailed in this Constitution and the Law. This fee is to be calculated monthly and paid at such times as the Manager determines.
The management fee paid to LMIM would accrue to LMA because the LMA Service Agreement between LMIM and LMA (as trustee for LMA Trust) provided in cl 5 for service fees to be paid according to Sch 1 of the MPF Constitution. Section 8 of Sch 1 provided that the service fees included “all management fees on behalf of [LMIM] earned in [LMIM’s] capacity as manager of all of its managed investment schemes”.
If Mr Drake wished to ensure that LMA had sufficient funds to allow him to maintain his lifestyle then he could simply have increased the LMIM management fee (and therefore the management fee which would accrue to LMA under the LMA Service Agreement). He did not need to increase the assets of the MPF to do this because the management fees paid to LMIM were significantly less than 10%. As I have explained, the 30 June 2012 audited financial statements for the MPF described the management fees paid to LMA as 3.1% of average net assets.
Hence, a simple way for LMA’s cash assets to increase would have been for LMIM to charge higher management fees, which would then be paid to LMA. It was not necessary to increase the assets of the MPF, or to charge a re-establishment fee, in order to charge these higher fees.
Secondly, although a large part of LMA’s staff were devoted to MPF business (ts 325), Mr Fischer explained that the management fees paid to LMA remained too low. Mr Fischer regularly had conversations with Mr Drake to the effect that the management fees were too low and Mr Fischer would ask Mr Drake why more management fees were not taken from the MPF (ts 326).
Once again, not only would there have been little obstacle to increase LMA’s cash assets by LMIM charging higher management fees, but Mr Drake was under pressure to take this course. An example is the minutes of the 4 June 2012 meeting which described how Mr Fischer had emphasised to directors (including Mr Drake) the importance of declaring a fee to which LMIM was entitled of up to 10% of the funds under management.
If Mr Drake had wanted to increase LMA’s funds in order to increase his “loan” to fund his lifestyle then the simplest step to take would have been to agree to the course of charging higher management fees.
Thirdly, during 2012 Mr Fischer had been putting pressure on Mr Drake to reduce his expenses from LMA which had been used to fund Mr Drake’s lifestyle. So, to the extent that Mr Drake was contemplating any further amount which he could “borrow” from LMA, he must have been aware that it was being watched closely and that there would be resistance to any more borrowing.
Mr Fischer closely monitored Mr Drake’s “loans” from LMA. He described the amount of those loans and, from his recollection, the use to which the money was put in considerable detail. He explained how if a payment to Mrs Drake from the divorce settlement was missed, he would often receive a phone call from Mrs Drake, or from her lawyer. Mr Fischer also said, and I accept, that in 2012 he had told Mr Drake on several occasions that he (Mr Fischer) was concerned about the amount of money Mr Drake was drawing from the business. Mr Fischer had also mentioned this to other directors of LMIM. I have little doubt that Mr Drake was under considerable pressure to reduce his drawings from LMA.
In around June or July 2012, Mr Drake’s accountant and Mr Fischer both separately declined to support Mr Drake’s request for an equity payment from a bank to pay out $5 million to Mr Drake’s ex-wife. Mr Drake’s accountant and Mr Fischer also refused Mr Drake’s request to borrow against the business in order to buy the property next door to his home, so that he could build a tennis court.
After Mr Fischer put pressure on Mr Drake to reduce his LMA drawings (or “loan”), Mr Drake agreed to do so, although he did not ultimately do so. The reasons for the large increase in LMA drawings or “loan” were not explored in any of the parties’ submissions. It seems from one LMA accounting record that at least part of the increase in 2012 ($1,207,277) was due to Mr Drake using these “drawings” to repay his loan from the MPF for LMIM business expenses. Another difference in the 2012 financial year which contributed to the larger amount of “drawings” was a payment on the last day of the financial year from LMA of more than $2.4 million for “Loan Reduction … Maddison Estate …” which may have been a repayment of part of the capital for Mr Drake’s loan from the MPF for his LMIM business expenses. However, other matters were plainly Mr Drake’s personal expenses. For instance, more than $4 million was transferred to his ex-wife.
In any event, the increased pressure from Mr Fischer militates against an inference that, at least by August 2012, Mr Drake would have sought to increase the assets of the MPF so that he could raise the ceiling for the LMA’s fees (which had not come close to reaching the ceiling) in order to maintain or increase his expenditure from an increased “loan” or drawings from LMA.
Fourthly, Mr Drake was a party to efforts to reduce the MPF’s assets by reducing prepaid management fees (which were recorded as an asset) and expensing those fees. Going into the 2013 financial year, those efforts had proved fruitful (ts 326). As Note 12 to the audited financial statements, observed, “as at the date of this report [December 2012] the balance had reduced to $17.7 million [from $26.9 million]”. It would be a curious scheme by Mr Drake to attempt to inflate the assets of the MPF in order to increase the limit for management fees and yet, at the same time, to pay down prepayments dramatically, causing an equivalent decrease in the assets of the MPF which prevented him from increasing the limit by which he could charge higher management fees.
Fifthly, there are a number of competing inferences. As for the decision to approve the 2012 Loan Variation itself, the obvious inference was that this decision was one which was made to preserve the project against the potentially disastrous alternatives of refusing the variation or deferring it. There is no need to draw an inference, against the four matters above, that the 2012 Loan Variation was somehow motivated by an improper purpose of increasing the assets of the MPF in order to allow an increased limit for management fees that could be paid to LMA.
As to the re-establishment fee, one competing inference is that the re-establishment fee was included because that is the fee which should be charged for a development loan of this nature. Mr Fischer accepted that for a development loan of this kind there were typically re-establishment fees of between 2% and 3% (ts 324). It is true that none of the other increases in the loan had charged a re-establishment fee. But none of the other increases had been for $100 million.
Another competing inference is that the re-establishment fee was used so that management fees which had been prepaid could be expensed (instead of treated as a prepayment, and hence an asset) so that the total net assets would remain unchanged. I emphasise that at no stage in this case did ASIC plead or submit that Mr Drake had prepaid the large amount of management fees in 2012 ($15,585,329) as part of any improper scheme or for any illegitimate purpose concerning an artificial increase in the assets of the MPF. The massive increase in prepayments in 2012 is, to say the least, extremely curious and there was evidence from Mr Fischer that he and Ms Darcy were not happy with the increase (ts 389). But it was not part of ASIC’s case that the prepayments were for any improper purpose and no attention was directed to the purpose for this prepayment in 2012 other than the submission that the purpose was for LMA to obtain cash to run its business.
The competing inference of using the re-establishment fee as a means of offsetting the increased prepayments might be inferred from the following.
The evidence was that management fees could be paid as an expense or as a prepayment. The difference for accounting purposes was that recording the management fees as a prepayment meant that they were an asset on MPF’s balance sheet. But recording them as an expense meant that they reduced the MPF’s net profit. The difficulty with recording the fees as “pre-paid” is that they could not be recorded in this way forever, especially as LMA was continually performing work and earning fees. But a reduction in the amount of prepayments (and corresponding increase in expense) would have the effect of decreasing the MPA’s assets (as the prepayment is an asset) and decreasing its net profit (due to the increased expense). As Mr Fischer observed, a consequence of reducing assets on the balance sheet could be a reduction in the unit price of the fund which was one dollar. Mr Fischer often heard Mr Drake say that he did not want to affect the unit price of the funds.
If assets (and the unit price) of the MPF were to be maintained then the MPF needed a scheme to maintain the asset value. This scheme would need to address a fall in assets which resulted from the recording a pre-payment as having become an expense. Mr Fischer accepted in cross-examination that a result of charging the re-establishment fee was that in the process the assets of the MPF were not depleted despite the reduction in prepayments and, consequently, the unit price of the MPF was unaffected (ts 324). By December 2012, the MPF had reduced prepayments by around $9.2 million. The loan re-establishment fee of $9.8 million ensured that the total assets of the MPF were unaffected by this reduction in the prepayment asset.
Conclusion on improper purpose
For the reasons above, I do not accept that the pleaded improper purpose was, either objectively or subjectively, a motivating factor for Mr Drake voting to approve the August 2012 Variation.
Nor do I accept that, even if it was a subjective purpose in Mr Drake’s mind, it was a purpose but for which Mr Drake would not have approved the August 2012 Variation. Initially, in oral closing submissions, senior counsel for ASIC conceded that ASIC could not establish that but for the alleged improper purpose Mr Drake would not have approved the August 2012 Variation. Although that concession was later retracted, it was properly made for the reasons I have explained above.
CONCLUSION
ASIC’s claims against each of the remaining three respondent directors of breach of s 180(1) of the Corporations Act must be dismissed. In broad terms the claims must be dismissed for each of the following reasons:
(1)ASIC ran its case on the basis that a breach of trust was a precondition to establishing liability, but the duty of care upon which that breach was based had been excluded by the MPF Constitution;
(2)ASIC’s pleaded case, properly construed, required an actionable breach of trust as a precondition to establishing liability, but ASIC failed to prove that any breach caused any losses to be suffered;
(3)ASIC’s pleaded case was that the act which constituted the breach of s 180(1) was the decision by the respondents to approve the August 2012 Variation on 7 August 2012, but ASIC’s case omitted to assess alternative choices to a prudent trustee on 7 August 2012 (either to defer the decision or refuse the loan variation). A breach of s 180(1) in the circumstances of this case required ASIC to prove that a prudent trustee would have chosen one of those alternatives; and
(4)to the extent to which there was information before the Court to assess the alternative choices, ASIC failed to prove that a reasonable director of a company in LMIM’s circumstances, with the responsibilities of each respondent, would have refused to approve the August 2012 Variation.
Much of the difficulty and gaps in ASIC’s case were caused by what can only be described as the implosion of its expert witness, Mr Woolley. For instance, as to (3), even Mr Woolley who generally would not concede even the clearest points, accepted that deciding whether something is a prudent decision to approve involves an identification of the alternatives and an assessment of the alternatives (ts 604). But Mr Woolley singularly failed to do so and ASIC’s case followed suit.
I reiterate that ASIC’s case for contravention of s 180(1) against each of Mr Drake, Ms Mulder, and Mr van der Hoven was concerned only with an alleged breach of duty arising from LMIM’s decision on 7 August 2012. By the conclusion of trial, no claim was made that any earlier decision or any earlier conduct was itself a breach of duty. The assessment of breach as at 7 August 2012 is based on all the circumstances in which LMIM found itself: with $190 million of investors’ money protected by a second mortgage over a development where the first mortgage holder was anxious to exit, the loan was overdrawn, and, on one view, the only realistic prospect for the investors recovering some or all of their money was to complete Stage 1 of the development and move towards the exit plan.
In light of the conclusion I have reached, it is unnecessary to deal with the pleas by each of the respondents for relief from liability based on s 1317S and s 1318(1) of the Corporations Act. Whether such relief would be given would depend upon the nature of the breach which had been found and the circumstances of that breach. For instance, the submissions by Ms Mulder and Mr van der Hoven on this point speculated upon different possible findings about the nature of a breach which might be established and what findings might be made about an independent feasibility analysis. It would be inappropriate to attempt to catalogue all possible adverse findings in order only to address a hypothetical relief against liability. However, for completeness, and in circumstances in which both Ms Mulder and Mr van der Hoven gave evidence, I record my conclusion that both were honest and reliable witnesses and that I accept from their evidence, and in all the circumstances, that the decision that each took on 7 August 2012 was taken honestly, in good faith for a proper purpose, and which decision they rationally believed to be in the best interests of the corporation. There would be strong grounds to conclude that each ought fairly be excused depending upon the nature of the liability which was found.
Each of the matters in the penultimate sentence in the paragraph above could also be a strong basis for concluding that the business judgment rule, contained in s 180(2) of the Corporations Act, applied subject to the issues of (i) whether the respondents informed themselves about the subject matter of the judgment to the extent they reasonably believed to be appropriate, and (ii) whether the respondents had a material personal interest in the subject matter of the judgment. It is unnecessary to reach any conclusions on these issues but it suffices to say that there would have been real obstacles in the path of the respondents establishing that the 7 August 2012 business judgment, which caused the re-establishment fee to be payable and which affected Mr van der Hoven and Ms Mulder’s bonus entitlements, was one in which they did not have a material personal interest in the subject matter of the judgment.
The claims against Mr Drake for contravention of s 181(1)(b) and s 182(1)(a) of the Corporations Act also fail for the following reasons:
(1)LMIM did not commit a breach of trust for the two independent reasons described above; and
(2)ASIC failed to prove that Mr Drake acted for the pleaded improper purpose.
Finally, it is necessary to make one observation about an assumption which underpinned the way this case was run. I alluded to this point earlier when discussing Ms Blank’s report. This observation is not said critically of the conduct of a lengthy and detailed case by skilled counsel and solicitors. The assumption was made by the parties generally although, most clearly by ASIC because some submissions by the respondents can be read as doubting the assumption. It was that the Maddison Estate loan should be treated as a loan for the purposes of assessing matters such as its net present value, recoverability and so on. However, one of the surrounding circumstances relied upon by ASIC (and which I have taken into account) was that Maddison Estate was a special purpose vehicle “set up for the purpose of allowing the MPF to mimic [although not precisely] a de facto equity position in the development while carrying the amount of the loan in the assets of the fund as an amount receivable and referring to the investment in various information memoranda as a commercial loan”. There is a tension between this stance and ASIC’s assumption that the loan should be treated as a loan for the purposes of matters such as its net present value and recoverability. If the loan were properly to be characterised as an equity position then it might be strongly arguable that assessments of the value of the “loan” for the purposes of “recoverability” should not include the “capitalised interest” of potentially around $100 million at the time of the August 2012 Variation decision. The “recoverability” of an equity position would be recoverability of the capital contribution, not recoverability of speculative profits. The amount of “capitalised interest” might, on an equity participation view, be properly characterised as profits at the conclusion of the development with the treatment of it as capitalised interest income to be, as described in the information memoranda, “only for taxation purposes”. But these issues were not explored. They were not the subject of any detailed expert evidence. I have put them to one side in these reasons and treated the loan in the way that it was treated in the evidence, albeit taking into account its terms as a loan to a special purpose vehicle which was designed not to profit from the development.
I will hear from the parties concerning costs but prima facie the appropriate order should be that ASIC pay the costs of the first, second and third respondents, to be taxed if not agreed.
I certify that the preceding five hundred and forty-three (543) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edelman. Associate:
Dated: 23 December 2016
SCHEDULE OF PARTIES
QUD 596 of 2014 Respondents
Second Respondent
FRANCENE MAREE MULDER
Third Respondent
EGHARD VAN DER HOVEN
Fourth Respondent
SIMON JEREMY TICKNER
Fifth Respondent
LISA MAREE DARCY
- AGLC
- Australian Securities and Investments Commission v Drake (No 2) [2016] FCA 1552
- Case
- [2016] FCA 1552
- Decision Date
CaseChat Overview and Summary
The court held that ASIC failed to prove the directors' liability under sections 180, 181, and 182 of the Corporations Act. The court found that ASIC's case relied on the premise that a breach of trust by LMIM was a precondition for establishing liability, but ASIC could not demonstrate a breach of trust. Moreover, ASIC did not prove that the directors' decisions were made without good faith or for an improper purpose, nor did it establish that the directors failed to consider alternative courses of action. The court also noted that the directors' decisions were made in the context of a complex financial situation, and the evidence did not support the claim that a reasonable director would have acted differently.
The court dismissed ASIC's claims against the directors, concluding that ASIC did not meet the burden of proof required to establish a breach of directors' duties. The court found that ASIC's case was weakened by the failure of its expert witness to adequately assess alternative courses of action and the absence of clear evidence of a breach of trust. The court further held that the directors' decisions were made in good faith and for proper purposes, and the directors fulfilled their duty of care.
The court ordered that the application against each of the respondents be dismissed, and the applicant pay the respondents' costs. This decision underscores the importance of thorough evidence and clear legal arguments in establishing breaches of directors' duties under the Corporations Act.
Orders
Orders of the court
1. The application against each of the first, second, and third respondents be dismissed.
2. The applicant pay the costs of the first, second, and third respondents to be taxed if not agreed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Background
Background to the litigation
Evidence
Evidence Before The Court
Full text does not contain this section.
Decision
Reasons for decision
Ratio Decidendi
Legal Principle Established
In one respect, ASIC’s case in relation to all breaches was consistent, although the premise of ASIC’s case might be doubted. ASIC consistently alleged that in order for each of the directors to be liable for breach of their duties to LMIM it was necessary for LMIM to have committed a breach of trust. In other words, and as I explain further below, in order for the directors to have breached s 180(1) of the Corporations Act, ASIC’s case was that it first needed to prove a breach of trust by LMIM as trustee.ASIC’s pleaded case concerning s 180(1) of the Corporations Act ASIC pleaded that the directors breached their duties under s 180(1) of the Corporations Act because they caused or permitted LMIM to commit a breach of trust, and exposed LMIM to a foreseeable risk of harm, namely civil proceedings by unitholders in the MPF. ASIC essentially pleaded that this foreseeable risk of harm was greater than that to which a director, exercising his or her powers and discharging duties with the required care and diligence, would have permitted. As for that part of the s 180(1) plea that the directors “caused or permitted LMIM to commit a breach of trust”, ASIC’s case was that LMIM breached its duty to exercise the care, diligence, and skill that a prudent person engaged in the profession or business of acting as a trustee or investing money would exercise in managing the affairs of other persons. This duty was pleaded in two ways: (i) as a statutory duty under s 22(1)(a) of the Trusts Act 1973 (Qld) (Trusts Act), and (ii) as an equitable duty. In some respects ASIC’s case was opaque. The matters which were not clear were (i) how LMIM breached its duties as trustee, and (ii) how each respondent breached his or her duties as director under s 180(1) of the Corporation Act. Each is addressed separately later in these reasons. It suffices to observe at this point that at times ASIC alleged that it was not required to prove how any breach had occurred. As to LMIM’s alleged breach of its duties as trustee, ASIC pleaded:(1)numerous circumstances that existed at the time of the August 2012 Variation ([147]-[151]);(2)that in those circumstances, LMIM exposed the MPF to a foreseeable risk of capital loss by approving the August 2012 Variation ([153]); and(3)that in those circumstances, the degree of risk to which the MPF was exposed was greater than the risk to which a trustee exercising its powers of investment with the degree of care, diligence and skill that a prudent person engaged in the business of acting as a trustee or investing money would permit the MPF to be exposed ([154]). Separately from those circumstances, ASIC also pleaded that:(4)a trustee exercising its powers of investment with the degree of care, diligence and skill that a prudent person engaged in the business of acting as a trustee or investing money would have obtained an independent feasibility analysis of the anticipated future cash flows from the Maddison Estate development ([152]).