in the matter of QLS Superannuation Pty Ltd (ACN 059 795 998) v Parker
[2002] FCA 196
•22 FEBRUARY 2002
FEDERAL COURT OF AUSTRALIA
Australian Securities & Investments Commission,
in the matter of QLS Superannuation Pty Ltd (ACN 059 795 998) v Parker
[2002] FCA 196PROCEDURE - application to strike out statement of claim - company carrying on business as trustee of superannuation fund - whether loss of trust moneys invested in commercial loans by directors of a trustee company involved breach of statutory duty under s 232(4)
Corporations Law, ss 232(4) and 1317 HA
Pancontinental Mining Ltd v PosGold Investments Pty Ltd (1994) 121 ALR 405
Young v Murphy [1996] 1 VR 279IN THE MATTER OF QLS SUPERANNUATION PTY LTD
ACN 059 795 998AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v GERALD LEONARD PARKER, ANTHONY ASHTON TARR, BRENDAN MATTHEW FRANKCOMBE AND MERCEDES BARRIE
Q 3004 OF 2001DRUMMOND J
22 FEBRUARY 2002
BRISBANE
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
Q 3004 OF 2001
IN THE MATTER OF QLS SUPERANNUATION PTY LTD
ACN 059 795 998
BETWEEN:
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
PLAINTIFFAND:
GERALD LEONARD PARKER
FIRST DEFENDANTANTHONY ASHTON TARR
SECOND DEFENDANTBRENDAN MATTHEW FRANKCOMBE
THIRD DEFENDANTMERCEDES BARRIE
FOURTH DEFENDANT
JUDGE:
DRUMMOND J
DATE OF ORDER:
22 FEBRUARY 2002
WHERE MADE:
BRISBANE
THE COURT ORDERS THAT:
1.The notices of motion filed by the second, third and fourth defendants on 17 January 2002, 18 January 2002 and 21 January 2002 respectively be dismissed.
2.The second, third and fourth defendants pay the plaintiff’s costs of and incidental to the motions to be taxed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
Q 3004 OF 2001
IN THE MATTER OF QLS SUPERANNUATION PTY LTD
ACN 059 795 998
BETWEEN:
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
PLAINTIFFAND:
GERALD LEONARD PARKER
FIRST DEFENDANTANTHONY ASHTON TARR
SECOND DEFENDANTBRENDAN MATTHEW FRANKCOMBE
THIRD DEFENDANTMERCEDES BARRIE
FOURTH DEFENDANT
JUDGE:
DRUMMOND J
DATE:
22 FEBRUARY 2002
PLACE:
BRISBANE
REASONS FOR JUDGMENT
I have before me notices of motion by the second to fourth defendants seeking an order striking out the Australian Securities and Investments Commission (“ASIC”) statement of claim against them. Counsel confirmed what is implicit in his outline of submissions, viz, that the object of the motions is to summarily terminate the actions against these three defendants.
The authorities, including those cited, show that the hurdle that the defendants must surmount to have the action summarily terminated at this early stage is a high one.
The statement of claim asserts that QLS Superannuation Pty Ltd (“QLSS”) is the trustee of the Law Employees’ Superannuation Fund (“the Fund”). That was its sole business. Its legal duties are pleaded in par 2(e) of the statement of claim. The first to fourth defendants were the directors and thus officers within s 232 the Corporations Law of QLSS from the start of its operations as trustee of the Fund. The first respondent resigned as a director on 23 December 1998, but remained as secretary of QLSS until 2 May 2000. The second defendant resigned as a director on 25 March 1999.
Section 232(4) the Corporations Law upon which ASIC relies provides:
“[Care and diligence] In the exercise of his or her powers and the discharge of his or her duties, an officer of a corporation must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation’s circumstances.”
It is alleged in par 7 of the pleading that by operation of s 232(4) the Corporations Law the second to fourth defendants were each under a duty, in the exercise of their powers and the discharge of their duties, to exercise a degree of care and diligence that a reasonable person in a like position in a corporation would exercise “in QLSS’ circumstances”. The allegation is of a duty framed in the wide-ranging terms of the statute, but which takes into account not just directors’ duties in the abstract, but directors’ duties in the context of a company like QLSS.
Until April 1997, QLSS invested its trust moneys only in institutionally managed funds. From April 1997, it commenced to invest part of its trust moneys in commercial loans it made with the approval of the second to fourth defendants. Though it made these loans with trust moneys, it embarked upon and thereafter engaged in this loan business in the circumstances set out in par 10 of the pleading, ie, without any documented procedures by which the loan applications and lending risks were to be assessed, without employing staff or consultants who were experienced in the business of commercial lending and without any of the detailed procedures for the prudential assessment of the creditworthiness of loan applicants, and of the risks of making particular loans set out in par 10(c) of the pleading.
Between April 1997 and June 1997 when the second to fourth defendants approved the $2,500,000 loan the subject of these proceedings, they had only approved, and QLSS had only made, two other loans to commercial borrowers. All were introduced to QLSS by the first defendant.
At the time of approval of the $2,500,000 loan by the second to fourth defendants, the pleading alleges that that loan, recommended by the first defendant, was approved by the other defendants shortly after they had been informed that one of these two existing loans made by the company, also upon the recommendation of the first defendant, was in default; the particulars refer to a loan principal of $1,000,000 not having been repaid in respect of this particular loan.
The Fund controlled by the first to fourth defendants was a relatively small fund. Only $20,000,000 or so of assets were under its control at the time of the $2,500,000 loan. That loan thus represented about 14% of the Fund’s entire assets.
The second to fourth defendants by their counsel describe par 56 of the statement of claim as identifying the bases of their alleged contraventions of s 232(4) that are relied upon by ASIC. It alleges:
“56. Tarr, Frankcombe and Barrie each contravened s.232(4) of the Law:
(a)in permitting QLSS to undertake a lending business in the circumstances referred to in paragraphs 10 herein;
(b)in approving a loan of $2,500,000 to Perdriau in the circumstances referred to in paragraphs 10, 26, 27, 28 and 29;
(c)in failing to seek full disclosure from Parker concerning the nature and extent of his financial relationship with Perdriau;
(d)in authorising Parker to be responsible for undertaking and/or supervising due diligence of the proposed loan to Parker in the circumstances referred to in paragraphs 29;
(e)in failing to inform themselves of the results of the required due diligence, and in particular in failing to obtain or read any valuation of the property offered as security and to ascertain whether the terms and conditions of the loan approval had been satisfied.”
In par 58 of the pleading it is alleged that if the second to fourth defendants had not contravened that provision, the $2,500,000 loan transaction would not have been made, firstly, because the company QLSS would not have engaged in the business of making any commercial loans and, secondly, for a number of different reasons, the particular loan of $2,500,000 would not have been made. In par 59, the pleading alleges that by reason of the loan transaction in question, QLSS suffered loss and damage. Particulars are given. It is apparent from what is alleged that only part of the principal of $2,500,000 has been recovered. Opportunity costs are also claimed and a variety of other relief is also sought. The relief sought in the prayer for relief includes an order pursuant to s 1317HA the Corporations Law that the four defendants compensate QLSS in respect of the loss or damage caused to the company by the acts or omissions constituted by their respective contraventions of s 232(4).
The second to fourth defendants attack the sustainability of the case sought to be made against them by the ASIC on the basis that it depends upon establishing that those three defendants should not have relied on Parker, the first defendant, with respect to, among other things, the implementation of the $2,500,000 loan. It is said that the statement of claim discloses no viable case because the ASIC does not, in effect, propose to undertake the burden of establishing that matter.
But that is a very incomplete way of identifying the ASIC case as pleaded. To return to par 56 of the pleading, the allegations in sub-pars (c) and (d) that s 232(4) has been breached involve showing that the second to fourth defendants were at fault because they left much to Parker with respect to the $2,500,000 loan. But in sub-par (a), there is the allegation of a contravention by those three defendants of the statutory provision on an entirely separate basis. In par 56(b), there is an allegation which is capable, if sustained at trial, of showing a contravention of the provision on a separate basis again; and in par 56(e), there is also an allegation of a contravention of the statutory provision by these three defendants on another separate basis.
Each of this last group of allegations in par 56(a), (b) and (e) can be made out by the ASIC without reliance on Parker’s conduct with respect to the introduction of the $2,500,000 loan and with respect to the deficient steps he is said to have taken with respect to implementation of the loan, the subject matter of the allegations in pars 56(c) and (d).
In my opinion, it is at least arguable that each of the first to fourth defendants as sole directors of QLSS were in breach of the statutory provision with respect to the making of the $2,500,000 loan in question in the circumstances of this case and quite apart from any reliance they placed in Parker.
These circumstances, as pleaded, are, firstly, the fact that QLSS’ business was limited to conducting and managing, as trustee, a superannuation fund for the benefit of a certain class of employees. Secondly, that it was the second to fourth defendants, rather than a separate executive staff, who undertook the tasks of receiving, assessing and determining whether to approve each loan application. QLSS did not have any such staff. That work was all done by the board, and in relation to the three loans advanced between April and June 1997 by the second to fourth defendants, because of the declared conflict of interest by the first defendant, which resulted in him not participating in decisions to approve any of the three loans. The third consideration is this. QLSS conducted a small superannuation fund with assets at the time of the $2,500,000 loan of only about $20,000,000. The second to fourth defendants, by approving the $2,500,000 loan, thus exposed a substantial part of the entirety of the Fund’s assets to the risks inherent in making commercial loans. Fourthly, the business of making commercial loans was a new one for QLSS, it having made, as I have said, the first loan only in April, with the instant loan being only the third such loan. Fifthly, the first to fourth defendants had not established any of the controls and procedures for conducting such an inherently risky business as commercial lending, being controls and procedures of the kind set out in par 10 of the statement of claim.
In my opinion, ASIC can succeed in making out a case against the second to fourth defendants if it proves this range of matters at trial. It needs to be remembered that in dealing with an application like the present, as Beaumont J said in Pancontinental Mining Ltd v PosGold Investments Pty Ltd (1994) 121 ALR 405 at 414:
“[u]nder the modern system of pleading, the question is not whether the facts pleaded are in themselves sufficient to give rise to a cause of action. Rather, the question is whether it would be open to the applicant upon the pleadings to prove facts at the trial which would constitute a cause of action.”
ASIC also relies on other circumstances which need to be considered together with those that I have already referred to in determining whether an arguable case for the relief claimed, particularly in par 5 of the prayer, is set up in the statement of claim.
These other circumstances are, sixthly, that the loan, like the two previous ones, was introduced by Mr Parker to the board of QLSS. Seventhly, that it is alleged that the second to fourth defendants knew the matters alleged in par 29, which included the fact that Parker had no experience or qualification in commercial lending, and, eighthly, that at the time they had approved the $2,500,000 loan, they had recently been told of the default by the borrower under one of the earlier two loans advanced after having been introduced by Parker.
On this aggregation of eight circumstances, ASIC also has, in my opinion, an arguable case for establishing breach of the statutory provision on the basis alleged in pars 56 (a) and (b) of the statement of claim.
The circumstances alleged in par 56(c) and (d) of the pleading are not therefore critical to whether the ASIC has pleaded an arguable case against the second to fourth defendants. But if those circumstances are established at trial, they will serve to strengthen ASIC’s case.
The circumstances in par 56(e) of the statement of claim are, I think, of particular significance. ASIC may fail to show, as alleged in par 29, that Parker - the man to whom the second to fourth defendants entrusted implementation of the actions required to be taken before draw-down could be made by the borrower - lacked experience and competence in commercial lending. Even so, when the circumstances in par 56(e) are taken into account with the other circumstances referred to above, the arguability of ASIC’s case that the second to fourth defendants breached the statutory provision in the Corporations Law by making the loan is, in my opinion, further strengthened.
Counsel for the second to fourth defendants also submitted that, it being pleaded in par 2(d) of the statement of claim that QLSS had as its sole business the performance of its duties and functions as trustee of a superannuation fund, it will suffer a loss only if it is liable to the beneficiaries of the trust to make good any trust funds lost. Counsel points out that no such liability is pleaded.
The point has only been briefly argued. I have very considerable reservations, in the context of QLSS being the trustee of a superannuation fund, whether such a point is a good one in respect of which there may not be in existence, at the time a loss of trust moneys occurs, any beneficiaries or even potential beneficiaries but only people moving towards the status of potential beneficiaries. Before the matter could be resolved, it would be necessary to have regard to the trust deed under which QLSS operates to identify the qualifications an employee or former employee must have to claim a benefit and the extent to which QLSS has a discretion to deny a benefit to a person otherwise qualified.
But, putting these reservations to one side, an answer to the point is, I think, provided by what was said in the Victoria Full Court in Young v Murphy [1996] 1 VR 279 in the leading judgment of Phillips J at 301 ll 43 to 52 and at 302 ll 3 to about 45.
There is a further consideration raised by this submission. ASIC has sued for the compensation order I have referred to under s 1317HA the Corporations Law. That provision provides that where, on an application for a civil penalty order against a person in relation to a contravention, the Court is satisfied that the person committed the contravention and the corporation in relation to which the contravention was committed has suffered loss or damage as a result of the act or omission constituting the contravention, the Court may order the person to pay to the corporation compensation of such amount as the order specifies. I think it is arguable, as a matter of statutory interpretation, that the requirements of the section are satisfied if QLSS establishes that it has suffered a loss of trust moneys to which it has the legal title by reason of the contravention of s 232(4) by any of the second to fourth defendants.
For these reasons, I dismiss each of the motions.
I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Drummond. Associate:
Dated: 5 March 2002
Counsel for the Plaintiff: PDT Applegarth SC and DA Kelly Solicitor for the Plaintiff: Australian Securities and Investments Commission Counsel for the Second Defendant: S Couper QC Solicitor for the Second Defendant: Corrs Chambers Westgarth Counsel for the Third Defendant: S Couper QC Solicitor for the Third Defendant: Minter Ellison Counsel for the Fourth Defendant: S Couper QC Solicitor for the Fourth Defendant: Walters & Co Date of Hearing: 22 February 2002 Date of Judgment: 22 February 2002
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