Jaques v AIG Australia Ltd
[2014] VSC 269
•13 JUNE 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
S CI 2013 02376
| KIM SAMUEL JAQUES | Plaintiff |
| v | |
| AIG AUSTRALIA LIMITED (ACN 004 727 753) | Defendant |
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JUDGE: | DIXON J |
WHERE HELD: | MELBOURNE |
DATE OF HEARING: | 2, 3 JUNE 2014 |
DATE OF JUDGMENT: | 13 JUNE 2014 |
CASE MAY BE CITED AS: | JAQUES v AIG AUSTRALIA LTD |
MEDIUM NEUTRAL CITATION: | [2014] VSC 269 |
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INSURANCE – Construction of policy - Investment management insurance policy – Special excess limit for non-executive directors – Meaning of non-executive director - Whether plaintiff a non-executive director at relevant time.
WORDS AND PHRASES - Insurance – ‘non-executive director’ - Investment management insurance policy.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr W. Houghton QC with Mr A. Strahan of counsel | Millens Pty Ltd |
| For the Defendant | Mr M. Titshall QC with Mr K. Howden of counsel | Lander and Rogers |
TABLE OF CONTENTS
The issue......................................................................................................................................... 1
Policy terms................................................................................................................................... 3
Meaning of ‘non-executive director’ in the policy................................................................... 4
Defendant’s contentions............................................................................................................... 7
Relevant circumstances.............................................................................................................. 11
The business of Holdings and its structure................................................................... 11
Jaques’ employment.......................................................................................................... 14
The relationship between Custodians and Holdings.................................................. 17
Director’s fees and tasks................................................................................................... 19
Listing.................................................................................................................................. 20
Investigating prospective acquisitions.......................................................................... 21
Conclusions.................................................................................................................................. 23
HIS HONOUR:
The issue
The defendant is an insurer that issued a policy of investment management insurance and the plaintiff was a director of the policyholder, Australian Property Custodian Holdings Ltd (Holdings). Holdings was the Responsible Entity for, and trustee of, The Prime Retirement and Aged Care Property Trust (the Prime Trust). The Prime Trust was a managed investment scheme; a public property unit trust dedicated to a specific asset class, namely retirement and aged care facilities.
Holdings appointed Mr Jaques as a director on 1 March 2001. He remained a director until 6 July 2011. Mr Jaques contends that he was a non-executive director until 26 June 2007, when Holdings by deed appointed him as an executive director.
The defendant issued an Investment Management Insurance Policy, numbered 108355, on 20 October 2010 operative for the period from 16 July 2010 to 16 July 2011. Holdings was the policyholder. By the policy, the insurer undertook to pay (or reimburse) the loss of any insured person which arose out of a claim first made during the policy period for a wrongful managerial act. It was not in issue before me that during the policy period the plaintiff, an insured person under the policy, notified a claim against him for wrongful managerial acts on various dates in 2006, 2007 and 2008. Those claims were made, firstly, by the Australian Securities and Investment Commission in proceedings in the Federal Court and, secondly, by the receivers of Holdings in proceedings in this court. The defendant accepted the claims.
The conduct that ASIC alleges, and which the defendant accepts as allegations of wrongful managerial acts by a director of the policyholder, were that on 26 August 2006 Mr Jaques breached duties that he owed to Holdings as a director, and contravened the Corporations Act. Mr Jaques voted in favour of resolutions that amended the constitution of the Prime Trust to make available a ‘listing fee’ to Holdings for the benefit of its managing director, Mr Lewski. ASIC also alleges against Mr Jaques further conduct on 26 June 2007, 27 July 2007, 23 and 24 April 2008, and 27 June 2008. For my purposes, that later conduct may be characterised as implementing the resolutions of 26 August 2006. I am not concerned with any issues of causation of the loss claimed under the policy in respect of conduct after 26 June 2007.
On 12 December 2013 following a trial during May 2013, the Federal Court handed down its judgment on liability issues adverse to the plaintiff. A penalty hearing is fixed for 18 July 2014. Pending resolution of the Federal Court proceedings, the Supreme Court proceeding is yet to proceed to trial. The Supreme Court proceeding raises substantially the same issues of fact.
Each of the five directors of Holdings was a defendant in the Federal Court proceedings. Claims for defence costs by all defendant directors during the Federal Court trial exhausted the $5,000,000 liability limit under the policy. Under the policy terms, non-executive directors became prima facie entitled to a special excess limit of $1,000,000. When the plaintiff sought that further indemnity, the defendant refused to provide the extended cover.
The plaintiff now seeks a declaration that he is entitled to indemnity under the policy in respect of his loss, as defined by cl. 4.51 of the Policy including defence costs incurred in the two proceedings, where such loss relates to the plaintiff’s conduct prior to 26 June 2007. Mr Jaques confined the period of the declaration that he seeks as to his status as a non-executive director to prior to 26 June 2007. Although he was formally appointed as an executive director on that date, the defendant contends that, in fact, Mr Jaques had acted as an executive director from about 6 April 2004. The defendant accepts that Mr Jaques was a non-executive director prior to 6 April 2004. The relevant period for my inquiry is from 6 April 2004 to 26 June 2007.
The question to be resolved in this proceeding is whether Mr Jaques was a non-executive director of Holdings during the relevant period. The significance of an affirmative answer to this question is that Mr Jaques will be entitled to the benefit of the special excess limit available under the policy. In essence, there are two questions. The legal question is the meaning of the phrase ‘non-executive director’ in the defendant’s policy. The factual question is whether Mr Jaques fell within that description.
Policy terms
Clause 2.19 of the policy provides:
Special excess limit (for non-executive directors)
The insurer shall pay the loss of each non-executive director, up to the special excess limit, arising from any claim against such non-executive director, unless a non-executive director has been indemnified by any insured entity for that loss, when
(i) the limit of liability;
(ii)all other applicable insurance specified in an endorsement to this policy; and
(iii)all other indemnification for loss available to any non-executive director;
has been exhausted.
The special excess limit is defined as a separate excess aggregate limit of $1,000,000 for each non-executive director, subject to a total aggregate limit to the limit of liability, for all non-executive directors.
Clause 5.4 provides:
Limit of liability
Other than in the case of the special excess limit …, the total amount payable by the insurer under this policy shall not exceed the limit of liability irrespective of the number of insured, claims made or direct financial losses discovered during the policy period … The special excess limit is a separate aggregate limit of the insurer’s liability to each non-executive director under clause 2.19 (‘special excess limit for non-executive directors’) and it is in addition to, and not part of, the limit of liability.
As defined in the policy, a director is any person who was, now is, or during the policy period becomes, an executive or non-executive director of an insured entity. The insured entity is the policy holder, Holdings, and ‘insured person’ in respect of the relevant cover includes a director of an insured entity.
The policy defines a non-executive director as any natural person who serves as a non-executive director of the policyholder at the time of any wrongful managerial act, or investigation.
Meaning of ‘non-executive director’ in the policy
The policy definition is unhelpful. In McCann v Switzerland Insurance Australia Ltd[1] Gleeson CJ stated the proper approach to interpretation of an insurance policy.
A policy of insurance, even one required by statute, is a commercial contract and should be given a businesslike interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.[2] (Citations omitted)
[1](2000) 203 CLR 579, 589 [22].
[2]See also CGU Insurance Ltd v Porthouse (2008) 235 CLR 103, 116 [43], Major Engineering Pty Ltd v CGU Insurance Ltd (2011) 35 VR 458, 470 [43]-[47].
In the introduction to its policy, the defendant describes itself as ‘understanding the complex challenges financial institutions face, purporting to cut through the complexity with innovative insurance and financial solutions that enable optimum management of risk.’ The risks covered by this policy identified its purpose. The plaintiff sought cover in respect of a claim for loss from a wrongful managerial act. The policy also responds to claims for wrongful professional acts. Relevantly, a wrongful managerial act is any matter claimed against an insured person solely because of his capacity as a director or any actual or alleged act, error or omission by a director in that capacity. The policy explicitly recognises the distinction between executive and non-executive directors with the provision of a special excess limit.
As I will shortly explain, the essential characteristic of an executive director is his or her discharge, usually as an employee, of executive functions in the management and administration of the company. Non-executive directors are usually independent of corporate management. In contemporary corporate governance theory, the role of independent, non-executive directors is encouraged.[3] The opportunity to offer indemnity against risk arising from wrongful managerial acts to persons outside of a company who agree to act as its directors has sound commercial advantages for a company. There are sound commercial advantages for the insurer as this policy was clearly intended to attract potential policy holders who seek to provide such cover in order to more readily attract appropriate persons to act as non-executive directors.
[3]See the discussion in Austin, Ford and Ramsay Company Directors Principles of Law and Corporate Governance, LexisNexis Butterworths, 2005, Ch 1, particularly at [1.5]-[1.31], [1.36].
In AWA Ltd v Daniels t/as Deloitte Haskins & Sells & Ors[4] Rogers CJ Comm Div recognised and explained the different roles of executive and non-executive directors:
The evidence of the non-executive directors developed in quite some detail their understanding and experience of the division of functions between the board and management. The directors rely on management to manage the corporation. The board does not expect to be informed of the details of how the corporation is managed.[5]
His Honour then set out the evidence of the functions for which directors relied on management in that case and continued:
Another division of function is between the non-executive directors and the chief executive officer or managing director. Generally a chief executive is a director to whom the board of directors has delegated its powers of management of the corporation’s business. Usually the chief executive is employed under a contract of service which will either include an express term or, in the absence of an express term, an implied term, that the chief executive will exercise the care and skill to be expected of a person in that position. The degree of skill required of an executive director is measured objectively. In contrast to the managing director, non-executive directors are not bound to give continuous attention to the affairs of the corporation. Their duties are of an intermittent nature to be performed at periodic board meetings, and at meetings of any committee of the board upon which the director happens to be placed. Notwithstanding a small number of professional company directors there is no objective standard of the reasonably competent company director to which they may aspire.[6]
[4](1992) 7 ACSR 759.
[5]Ibid 866 - 867.
[6]Ibid 867.
It is well accepted that the office of managing director, the classic executive director, has powers of day to day management of a company that are exercisable without reference to the board as a delegated executive management function. In contrast, appointment as a director, other than as managing director, carries no express or implied grant of executive power. As Dawson J observed in Northside Developments Pty Ltd v Registrar General & Ors,[7] the position of director does not carry with it any ostensible authority to act on behalf of the company. Directors can only act collectively as a board and the function of an individual director is to participate in decisions of the board. It is a question of fact whether a person has assumed the powers of a managing director,[8] or, I would add, an executive director, with the approval of the company. The critical aspect of that inquiry is whether the company approved, or perhaps acquiesced, in that assumption of power.
[7](1990) 170 CLR 146, 205.
[8]Entwells Pty Ltd v National and General Insurance Co Ltd (1991) 5 ACSR 424, 427.
The term ‘executive’ includes, in its dictionary definition, a person ‘charged with or relating to execution of laws, or administration of affairs’ or ‘a person or body having administrative authority as in a company’.[9]
[9]Macquarie Dictionary, (5th Ed.), definition 2 and 4.
I am satisfied that the term ‘non-executive director’ in the policy refers to a person who is a director of the insured entity and who is not an executive director. A managing director is, absent special circumstances, as a matter of law an executive director. Whether a director, other than the managing director, is an executive director is a question of fact. It may depend on whether there is some feature of the company’s constitution, or conduct of the company in general meeting or of the board of directors that evidences the delegation of executive function, in the sense that I have described, to that director to operate as an executive of the company. The classic example is board approval of a contract of employment of a director as an executive of the company. Usually, an executive director has simultaneous parallel duties owed to the company; on the one hand by virtue of the office of director under statute and at general law, and on the other hand, as an executive employee under an express or implied employment agreement.
There is no explicit act of Holdings, either in general meeting or of the board, in the relevant period that evidences any delegation of power to Mr Jaques to operate as an executive director. The first such act identified in evidence is the deed of appointment of Mr Jaques as an executive director by the company on 26 June 2007. That deed of course marks the commencement of the period when it is not in dispute that Mr Jaques was an executive director.
Holdings never employed Mr Jaques, either at all or as an executive employee. Through employment and consultancy agreements involving third parties, companies in the loosely described ‘Lewski Group,’ the defendant contends that Holdings received Mr Jaques’ services. In that way, the defendant contends that Mr Jaques provided executive services to Holdings such that he was, from the commencement of those contractual arrangements in April 2004, an executive director within the terms of the policy.
I pause to note that the corporate structures employed by Mr Lewski appeared not to be one of parent and subsidiary companies, rather a larger and more amorphous grouping of companies existed that were related entities because they were either owned and/or controlled by Mr Lewski.
Defendant’s Contentions
The defendant contended that the business of Holdings was identified from its trust deed. The trust deed empowered the company to undertake any act that would be involved in managing a retirement village business. Further, one of its core business activities, revealed by product disclosure statements and also within its constitutional powers was identification and buying of properties to add to its portfolio and renovation and selling of its existing property holdings at a profit. The defendant contended that Mr Jaques was the executive who administered these activities for Holdings and his employment by Custodians was not a critical factor. That fact was demonstrated by his reporting on such matters direct to the board of Holdings and not otherwise. Buying and selling individual units in retirement villages was, it contended, necessarily part of the business of Holdings. The reason Mr Jaques was so employed, in the defendant’s submission, was, on the one hand, to improve the resale value of the properties owned by Holdings for the Trust and on the other hand, to advise in respect of prospective property acquisitions and their cost effective renovation to achieve improved resale value. That, the defendant submitted, was the source of the Trust’s income.
In 2004, Mr Jaques ceased to receive a director's fee and Custodians paid him a salary, which was the only emolument he received for his labours as a manager and as a director. The evidence did not suggest that Mr Jaques reported to any other entity than Holdings about his managerial activities. The defendant contended I should ignore corporate veils because Mr Jaques was the man in control of the business of Buderim Gardens, and later other retirement home businesses on properties owned by Holdings.
The plaintiff’s responsibilities after his appointment as an executive director were exactly what he was doing from April 2004. All that occurred in 2007 was formalisation of his de facto role for the purposes of the ASX listing.
The defendant contended that I should infer that Mr Lewski, who did not give evidence, would not have assisted the plaintiff had he done so,[10] and, further, that Mr Lewski[11] was in the plaintiff’s camp because Mr Jaques was, during an overnight adjournment, able to obtain some financial documents from him. I reject this submission for the following reasons. First, the defendant put nothing to Mr Jaques about such matters when he gave evidence. Either party could have subpoenaed Mr Lewski and neither party led any evidence about the failure of the other to do so. Counsel raised the matter for the first time in addresses.
[10]Jones v Dunkel (1959) 101 CLR 298.
[11]The rule applies to witnesses as well as parties Australian Blue Metal Ltd v Hughes (1961) 79 WN (NSW) 498, at 513.
Second, the defendant did not persuade me that Mr Lewski was in the plaintiff’s camp so that it was unrealistic for the defendant to have called him. The defendant made no attempt to call Mr Lewski, and offered no explanation for not doing so. That Mr Jaques was an executive director from April 2004 to June 2007 was a proposition of fact that the defendant was seeking to establish. It was natural for the defendant to have called the managing director to make good its proposition and it demonstrated no impediment to doing so. The defendant showed no basis to have reasonably expected that the plaintiff would call Mr Lewski. The court directed the parties to put on their evidence by affidavit well before the trial. It might be thought that Mr Lewski’s evidence would not have assisted the defendant, but I need not draw that inference.
Thirdly, whether such an inference should be drawn is a matter of discretion. I am persuaded that the defendant feared calling Mr Lewski because his evidence may not have supported its defence. As I will explain, the circumstances to which the defendant points, to be explained or contradicted, did not concern the affairs of Holdings, they concerned the affairs of Lewski Group companies (other than Holdings). The plaintiff’s evidence was of the circumstances of Holdings’ affairs.
The defendant pointed to evidence of statements by the plaintiff, and statements by the company about his position, contending that the plaintiff appreciated the difference between an executive and a non-executive director. In the 2003 product disclosure statement, prior to his employment by Custodians, Mr Jaques was described as ‘non-executive director’. Like with every other signatory, Mr Jaques signed the supplementary product disclosure statement dated 5 July 2004, as ‘executive director’. He said that was a mistake - that the document was prepared by others and he signed above his name - but counsel was critical of that explanation. In the two following product disclosure statements, Mr Jaques is not described as ‘executive director’, merely as ‘director’. The first of these product disclosure statements, in August 2005, states that two properties – Buderim Gardens and Hibiscus Group – are managed by an entity associated with two of the directors (Mr Lewski and Mr Jaques). That product disclosure statement describes Mr Lewski as managing director, Mr Beck as Chairman and the remaining directors simply as directors. The product disclosure statement does not say that Mr Jaques has any executive responsibilities in relation to Holdings.
A supplementary product disclosure statement in August 2006 followed the appointment of a new chairman and a new director. Again, Mr Jaques is described simply as a director, without any reference to executive function. A minute of a meeting of the board on 22 August 2006, and Mr Jaques took the minutes, states that three executive directors had media training. Mr Jaques admitted in cross-examination that he was one of those who took media training.
At a board meeting in October 2006, in the context of discussion of a report from consultants engaged for the ASX listing, the composition of the board was discussed. Further ‘dilution’ of the board with more external representation was recommended. Mr Jaques described himself as a ‘working director’ when referring to the need for directors who understand the business to remain on the board, which counsel described as ‘a pretty good coverall description of what an executive director is’. The board agreed to retain the current directors and to appoint a second non-executive director in 3-6 months and a third in 9 months. At that time, the chairman had been replaced and one additional director had been appointed.
The plaintiff had only one email address and it was at a domain called ‘primetrust.com.au’.
The defendant contended that the formal appointment of the plaintiff as an executive director in June 2007 was not a change in his position, merely an administrative regularisation pending ASX listing.
The defendant contended that I ought to be persuaded that the plaintiff saw himself as an executive director, and was seen as such by Holdings because of the way in which he had been employed by Lewski related entities. The defendant submitted that the deed of appointment simply formalised Mr Jaques’ existing responsibilities without affecting any change to those responsibilities, a circumstance that ought persuade me that Mr Jaques had at least in a de facto, if not in a de jure, sense been an executive director of Holdings since April 2004. For these reasons, I should find that he was an executive director from April 2004 and was not entitled to the special excess limit.
Relevant circumstances
To resolve the question of Mr Jaques’ standing it is necessary to look closely at the nature of the business of Holdings and the structure employed by it to carry on that business. Secondly, it is necessary to examine the nature of the plaintiff’s employment by Custodians and the circumstances in which his services were employed in relation to the business and affairs of Holdings.
The trial proceeded largely on documentary evidence and Mr Jaques’ oral evidence. I accept Mr Jaques’ evidence. Although his recall of events was not perfect, that was unsurprising. The relevant period ended about 7 years ago. He accepted that he had given some unhelpful answers under oath on prior occasions and had signed documents that were contrary to his principal contention, but his demeanour in the witness box was open and honest and there was substantial consistency between his evidence and the documents on matters that properly fell within his personal knowledge. What follows are my factual findings.
The business of Holdings and its structure
The controlling personality behind Holdings was Mr Bill Lewski. Mr Jaques (who has a background in real estate) became professionally acquainted with Mr Lewski, when Mr Lewski was looking for someone with property experience to serve as a director of Holdings in early 2001. Mr Jaques accepted Mr Lewski’s invitation to become a non-executive director of Holdings in March 2001. When appointed, Mr Jaques was in full time employment in the property industry and remained in full time employment until early 2004.
Holdings’ business was essentially that of a landlord. The trust owned retirement village properties. Other entities, initially only Primelife Corporation Ltd, managed the retirement village businesses operated on the Prime Trust properties. On 15 August 2003, Holdings issued a product disclosure statement for the Prime Trust that demonstrates the business of Holdings and the structure through which it was carried on, immediately prior to the relevant period. Holdings was both the responsible entity and the trustee of the Trust. The Trust was a public property unit trust dedicated to a specific asset class, namely retirement and aged care facilities. Its objective was to provide monthly income distribution to unit holders and to maintain and accrue the real capital value of its assets. The Trust assets were properties occupied by Primelife under long-term management deeds or leases. The product disclosure statement stated that Primelife must manage and operate each property and the associated business with diligence and efficiency and in a proper businesslike manner and, after paying all outgoings and costs, including maintenance and repairs, pay to Holdings an annual fee or rental.
The product disclosure statement revealed that Holdings intended that the Trust acquire, over a period of time, further properties, or securities within the retirement and aged care asset class. The product disclosure statement described Holdings to be responsible for the proper promotion and management of the trust as a management investment scheme. It represented to the investing public that Holdings had been responsible for selecting the properties owned by the Trust and preparing the product disclosure statement. Its ongoing responsibilities would include instructing the Custodian, keeping accounts, co-ordinating and determining distributions to unit holders and preparing financial statements for the Trust. Mr Jaques stated that he had no role in Holdings in these aspects of its business.
In August 2003, Holdings had two executive directors, including Mr Lewski, its managing director. In the August 2003 product disclosure statement, Mr Jaques was described as a non-executive director, and he signed the statement by directors in that product disclosure statement in that capacity. In that product disclosure statement, he is described as having extensive experience in commercial and retail property management. No specific responsibilities in the affairs of Holdings are enumerated as executive responsibilities of Mr Jaques in the product disclosure statement.
Under this structure, Holdings was a passive investor as a landlord taking no part in active management of the tenant businesses that generated rentals or annual fees paid to the Trust, which constituted trust income. Holdings’ business activity was its investment decisions, that is selection of the properties included in its portfolio, and it was the registered proprietor of trust properties. Holdings also kept accounts, determined and co-ordinated distributions to unit holders, prepared financial statements, and made all relevant ongoing investment decisions. In his employment by Custodians, Mr Jaques had no duties in respect of these responsibilities. His duties, as described, concerned some of the businesses that, as ‘tenants’, paid rentals or annual fees to the Trust. An objective of the trust was to seek to make further acquisitions and appropriate investments over time and Mr Jaques had a role to play in this activity that I will shortly discuss.
The reason that Holdings constrained its activities was the taxation advantages that were promoted by Holdings to potential investors in successive product disclosure statements. Holdings was bound by a constitution[12] and the Corporations Act 2001 (Cth)[13] in its management of the Prime Trust. Although Holdings clearly had power under the constitution to manage the businesses conducted on the properties that it owned, it was not at liberty to exercise every available power under the constitution. The business of the trust was limited to that promoted by product disclosure statements in reliance on which members of the public invested in the trust.[14] Holdings could not manage the retirement villages without exposing the Prime Trust to claims by unit holders that its business was other than as represented in product disclosure statements.
[12]Corporations Act 2001, s 601GA.
[13]Corporations Act 2001, ss 601FB(1), 601FC(m).
[14]Corporations Act 2001, ss 601FB(1), 601FC(1)(b) and (c).
I can explain why taxation laws produced this advantage by adopting an opinion expressed by a firm of accountants that was included in the product disclosure statement dated 26 June 2007. A public unit trust that carries on a business that is not an eligible investment business is taxed on the trust’s net income at the corporate tax rate. Unit holders are subject to tax on the amount of any dividends received (with credit for any attached franking credits). Plainly, the Trust was a public unit trust. However, its business was an eligible investment business as it invested in land primarily for the purpose of deriving rent. In the accountant’s opinion, the description in the product disclosure statement of the arrangements relating to management of the facilities owned by the Trust demonstrated that the public trading trust corporate taxation provisions would not apply. Consequently, unit holders in the Trust paid Australian tax (at their relevant tax rate) on their share of the distributed net income (before tax) of the trust for each year.
Jaques’ employment
In late 2003, Holdings was negotiating to purchase Buderim Gardens, a substantial retirement village of 400 units in Buderim Queensland, for the portfolio of the Prime Trust. Holdings intended that Primelife would continue to manage Buderim Gardens following settlement of the purchase but, ultimately, it was unable to negotiate a successful commercial arrangement with either Primelife or other service providers. Shortly prior to settlement of the purchase, Mr Lewski informed the board of his decision to form a management company, Retirement Guide Pty Ltd, to run this retirement village, and possibly others where required or appropriate. The Holdings board agreed that it would grant the management rights to Retirement Guide. Once it completed the purchase of Buderim Gardens, Retirement Guide became the manager of the village.
Mr Lewski invited Mr Jaques to work for him managing the retirement village and Mr Jaques agreed to do so. Mr Jaques resigned his employment and, by a written agreement, entered employment with Australian Property Custodians Pty Ltd (Custodians), a company owned and managed by Mr Lewski. Mr Jaques remained in full time employment with Custodians to 31 March 2014, when his employment was terminated. It appears that Custodians agreed with Retirement Guide to provide Mr Jaques’ services to it, although the precise nature and terms of that arrangement were not in evidence. Initially, Mr Jaques’ duties involved management of Buderim Gardens, particularly the refurbishment of the village facilities and of the individual units, as and when they came up for sale. He continued in office as a director of Holdings. The role of Retirement Guide as a manager of retirement village businesses was disclosed in a product disclosure statement dated 30 August 2005.
Mr Jaques was appointed as the general manager of Custodians by the employment agreement. Custodians’ business was defined as property consultancy services including but not limited to syndication and joint venture structuring on projects. The definition in the agreement refers to ‘the new business of Custodians’, which was described as not including the same activities or business already existing in the associated or related entities of Custodians or its directors. The definition is ambiguous. Whether ‘business’ was intended to exclude the business of Holdings depends on understanding the identity and affairs of associated or related entities of Custodians and the ‘old’ business of Custodians. There was no evidence of these matters.
Mr Jacques’ duties were allocated by the board of Custodians. The agreement otherwise provided that Mr Jacques was remunerated and reimbursed his expenses by Custodians and was subject to performance review by the Custodians’ board. A restraint on employment after the date of termination of the agreement might have been, if ever successfully enforced, sufficiently wide to preclude Mr Jacques from continuing to serve as a director of Holdings for a period of 12 months.
Mr Jaques stated that Holdings was not involved in running the retirement villages and that he performed his duties, initially managing Buderim Gardens, for Retirement Guide through its services agreement with his employer. Later, he became more extensively involved in managing the expanding business of Retirement Guide, which managed numerous facilities for Holdings.
Mr Jaques gave evidence that his salary was always paid by Custodians by cheque, but his PAYE annual payment summaries for the years 2005 and 2006 described the payer as ‘APC Property Group’, not Custodians. His tax return for the year ending June 2007, and for following years, identified the payer of his salary as ‘Australian Property Group’. However, that organisation appears to have the same ABN as APC Property Group. Mr Jaques was unable to explain this discrepancy, which looked like a data entry error in the tax return. He said he had never noticed it. A business name search that showed the name ‘APC Property Group’ as owned by Custodians was produced as an exhibit to his affidavit. However, what that search established was that on 1 January 2010, Custodians became the registered owner of that business name. Prior to that time, that business name was registered to Australian Property Administrators Pty Ltd, whose ownership and governance structure was not revealed in evidence. Some of the companies in the Lewski Group may have been trustees of unit or discretionary trusts. The use of the business name ‘APC Property Group’ by Custodians on PAYG certificates prior to 1 January 2010 suggests that Australian Property Administrators Pty Ltd may have been a member of the Lewski Group.
The cross-examiner challenged Mr Jaques’ claim that he was paid his salary by Custodians. During an overnight adjournment, Mr Jaques obtained some financial records of Custodians from Mr Lewski to repel the cross-examiner’s attack. In re-examination, he produced accounting records for the financial years ended June 2005 and June 2007. On examination of the records produced, I was satisfied that they purported to be financial accounts consisting of a draft balance sheet and profit and loss statement, individual account transaction lists, journal entries, lists of presented cheques, some handwritten notes about adjustments and some bank statements. Many of these documents appeared to be printouts from a computer based accounting package. I admitted these financial records into evidence over the defendant’s objection.[15]
[15]Corporations Act 2001, ss 1305 and 1306
These records show that Custodians was the trustee of the ACE No 2 Trust. The principal income of the ACE No 2 Trust is described in the accounting records as management fees paid by Retirement Guide and other unidentified payers. In each of those years, Mr Jaques’ salary was an expense of that trust and the records supported his statement that, notwithstanding the business name search, the PAYG Summary and his tax returns, his salary during the relevant period was paid by Custodians by cheque. Custodians distributed its net profit to the unidentified beneficiaries of the ACE No 2 Trust.
Whatever be the explanation for these anomalies, two matters are clear. During the relevant period, Mr Jaques did not receive his salary from Holdings. Further, there is no evidence that any fee was paid by Holdings to Custodians referable to any services rendered by Mr Jacques to Holdings in the performance of his duties as directed by Custodians. At its highest, the evidence suggests that Retirement Guide paid management fees to Custodians, which is consistent with the arrangements instituted by Mr Lewski when Holdings acquired title to Buderim Gardens in 2004.
I should refer to other evidence - subsequent product disclosure statements that I accept as evidence deserving of weight and a draft service agreement exhibited by Mr Jaques to an affidavit that I would not give any weight to - that might bear on the probabilities of establishing the administrative arrangements between Holdings and Mr Jaques.
The relationship between Custodians and Holdings
Product disclosure statements reveal that Holdings had a management agreement with APCH Administrators Pty Ltd (Administrators). On 22 August 2006, Holdings issued a supplementary product disclosure statement updating changes to the Prime Trust operations. This product disclosure statement disclosed the appointment of two directors of Holdings and disclosed the acquisition of further properties by the Prime Trust. In relation to the management of the Prime Trust, it stated:
The Responsible Entity has appointed [Administrators], a company associated with William Lewski, to provide management and administration services to the Responsible Entity under a Management Agreement dated 22 August 2006. Under the management agreement, [Administrators] will provide corporate secretarial services to the Responsible Entity for the operation of the fund including, but not limited to, registry services, compliance services, employment of staff, leasing of premises and entering into service agreements with third parties. [Administrators] will receive a project management fee, being an amount for reimbursement of all costs incurred by [Administrators] in connection with the performance of its management services plus a margin of up to 15% of those reimbursed costs.
That product disclosure statement suggests that Administrators had other agreement with third parties, possibly including Custodians. The precise nature and status of any service agreement between Administrators and Custodians was not established in evidence. An unsigned copy of an agreement produced some time in 2007 was exhibited to Mr Jaques’ affidavit. He stated that he did not have an executed copy of it. Mr Jaques deposed that Custodians and Administrators agreed to make his services available to Administrators ‘for the purpose of performing management and administration services for Prime Trust retirement villages’. He did not state that he had sighted an executed copy of this agreement.
The draft agreement recited that Holdings had appointed Administrators as manager to ‘perform management and administration services for the trust’, including hiring employees and entering into service agreements with service providers for the provision of services to the Trust. Custodians had agreed to make available the services of its employees and consultant to the manager for the purpose of performing management and administrative services for the Trust and in order for the responsible entity to fulfil its function as responsible entity of the Trust. Custodians had retained the services of Mr Jaques and Mr Lewski as employees, and another director, Mark Butler, as a consultant. The draft agreement does not provide for the payment of any service fee by Administrators as Custodians apparently agreed to accept other benefits as consideration for making the services of personnel available to the manager and the Trust. The draft states that the benefits from fees charged by Holdings in acting as the responsible entity of the Trust would provide a direct or indirect benefit to Custodians or its shareholders.
I give no weight to this draft service agreement in my deliberations. Contrary to Mr Jaques’ affidavit, the draft agreement does not provide that his services were being made available for management and administration of retirement villages. Even if I assumed that this agreement became operative in the terms of the draft, which was a matter about which Mr Jaques had no knowledge, I have no evidence that it had operative effect in the relevant period before Mr Jaques was appointed as an executive director. Possibly, and I am speculating, it came into effect when Holdings was documenting existing arrangements for its ASX listing in August 2007. I accept the representations made in product disclosure statements that there were agreements, but I am unable to make any finding based on the terms of the draft service agreement about the arrangements between Administrators and Custodians concerning the services of Mr Jaques that were provided to Administrators during the relevant period as distinct from the provision of Mr Jaques’ services to Retirement Guide.
Director’s fees and tasks
When initially appointed to the board, Mr Jaques was paid director’s fees of $5,000 per annum. There was also a bonus arrangement and Mr Jaques earned and received a bonus payment on two occasions. Holdings ceased paying director’s fees once Mr Jaques commenced employment with Custodians and only resumed paying director’s fees at some point after the public float in August 2007 when Mr Jaques had been appointed an executive director. Mr Jaques was still in receipt of a salary from Custodians after his appointment as an executive director of Holdings.
As a non-executive director, Mr Jaques attended monthly board meetings and there was occasional telephone attendance on Mr Lewski. Each director had, and exercised, an equal vote on board business. Mr Jaques often reported about the management of Buderim Gardens, and later other Retirement Guide managed facilities to the board. Mr Jaques said the subject matter of his reports did not change other than by reference to the expanding portfolio of Retirement Guide after he was appointed as an executive director. It initially struck me as curious that Mr Jaques would report to Holdings about the business of Retirement Guide rather than to the board of that company, but there is a relationship between the capital value of a retirement village and its management. That relationship arises from the fact that the turnover of individual units in a village is a major driver of both management profitability and improvement in capital value, matters of interest to landlords as well as managers of retirement villages. The fact that the board of Holdings had an interest in issue of maintenance and improvement of both units and common facilities in retirement villages is unsurprising. The fact that Holdings was interested in aspects of the financial performance of tenant businesses managing its facilities is also unsurprising. Neither of these matters persuades me that the general manager of the business was charged with any executive function of Holdings.
Mr Jaques believed that he was appointed an executive director in 2007 on the recommendation of Holdings’ corporate advisers in respect of the ASX listing and that it was merely a name change as the substance of his role as a director did not change. That belief seems a reasonable inference in the circumstances of the minute of the board meeting of 26 June 2007. Mr Lewski, who was the managing director, was also confirmed as an executive director by that meeting.
Listing
On 26 June 2007, Holdings issued a further product disclosure statement to facilitate listing Prime Trust on the ASX. In relation to asset management, this product disclosure statement revealed that there were, by June 2007, three principal managers of Prime Trust assets, Primelife, SCV Group, and Retirement Guide Group. The arrangements concerning Retirement Guide Group that were revealed by this product disclosure statement were complex and suggested that, following listing, the assets operated by Retirement Guide Group would be transferred to and operated by a third party. The June 2007 product disclosure statement restated the existence of a management agreement between Holdings and Administrators and further stated that Administrators held contracts for services with various entities associated with Mr Lewski, including Retirement Guide Group. This product disclosure statement further stated that as a consequence of agreements to which Holdings was a party:
Prime Trust does not have any direct management employees. It is the manager’s responsibility to provide management resources. The manager is responsible for contracting with individuals as to their employment conditions including remuneration [both fixed and bonuses]. However, as noted in the next section, four of the key management executives are also board members of the Responsible Entity.
This product disclosure statement represented that by a resolution of the board of Holdings on 26 June 2007, Mr Jaques and others were appointed as executive directors and two new directors were appointed as non-executive directors. The deed of appointment of Mr Jaques as an executive director that was produced in evidence was also an unsigned copy, which contained tracked changes. However, there was no issue between the parties that Mr Jaques was appointed as an executive director on 26 June 2007. The draft deed describes the executive service functions to be performed by Mr Jaques as those provided for by the ‘executive service arrangement’, which in turn was defined as the arrangements under the employment agreement between Custodians and Mr Jaques and the service agreement between Holdings and Custodians. Further, the term of Mr Jaques’ appointment as an executive director was tied to his engagement as general manager of Custodians.
A minute of a board meeting of Holdings on 26 June 2007 records the resolution of the board to enter into this deed of appointment. The June 2007 product disclosure statement described Mr Jaques’ responsibilities as being for the management of the resorts owned by Prime Trust ensuring that resort staff are properly trained and able to look after the best interests of both residents and unit holders. He has overall responsibility for the renovation of the units as they become available to ensure that they meet the exacting standards of our potential residents.
Investigating prospective acquisitions
Over time, Mr Jaques’ duties for Custodians expanded. He also investigated the feasibility of possible acquisitions of other retirement villages by the Trust. His assessments formed part of the information that was put before the board of Holdings, which took the decision whether to require further properties. This activity differs from managing the business of the villages for Retirement Guide. Although Holdings, by its product disclosure statements, limited its business to passive real estate investing, Holdings’ intended that it would expand its portfolio of properties by acquisition of suitable properties.
The arrangements made by Holdings for property acquisition were revealed in the June 2007 product disclosure statement. Holdings entered into a Property Acquisition Consultancy Agreement with Australian Property Syndications Pty Ltd (Syndications). By that agreement, Syndications was appointed as exclusive consultant of Holdings for the procurement of opportunities for Holdings to acquire property and any other property related assets on behalf of Prime Trust. Syndications was a Lewski controlled company.
In evidence, Mr Jaques described his role in relation to acquisitions in the following terms:
I’d inspect the villages, look at their condition, and look at the opportunity for upsiding, refurbishment, changing the units’ interiors so that they were more presentable, more acceptable to the modern market. I’d look at the management of the village itself, in terms of the people management staff and then I’d give a report to Lewski would then combine that with his – he had a software thing that he used to value the villages and he’d put all that together to make a recommendation.
Mr Jaques gave written reports about acquisitions to Mr Lewski, not to the board. It is a reasonable inference that those reports were given to Mr Lewski as a director of Syndications. Mr Jaques stated that it was Mr Lewski who reported to the board on whether Prime Trust should acquire any property that he had inspected or investigated. It is a reasonable inference that Mr Lewski reported to the board of Holdings on behalf of Syndications.
The defendant questioned Mr Jaques about correspondence between 13 and 19 November 2004 addressed to the registered proprietor of various retirement villages indicating to them the interest of Prime Trust in acquiring their property should they consider selling it. Although Mr Jaques suggested that the use of Holdings’ letterhead for this correspondence was a mistake - because he was not the general manager of Holdings but was the general manager of Custodians - I am not persuaded that this correspondence demonstrates that any relevant executive function of Holdings’ business had been delegated by the board to Mr Jaques. The 13 general inquiry letters are, at best, isolated conduct insufficient to support the inference contended for by the defendant.
Mr Jaques’ description of the information he provided to Mr Lewski for the purposes of Mr Lewski’s or Syndications’ evaluation of possible acquisition is consistent with his expertise in management of retirement villages. Plainly, factors to be assessed by Mr Lewski and/or Syndications, when making acquisition recommendations to the board of Holdings, would include the condition of the premises and the performance of the existing management. Those factors would affect the existing value of the property and its potential for capital improvement. I am satisfied that in performing the functions that he described, Mr Jaques was not performing executive functions for Holdings. His activities were directed by Mr Lewski and for the benefit of other Lewski controlled entities, particularly Syndications, and drew upon his experience managing facilities for Retirement Guide through his employment with Custodians.
Conclusions
From the circumstances that I have described, I draw the following conclusions that support Mr Jaques’ contention that he was not an executive director of Holdings until his appointment in June 2007.
(a)Mr Jaques was employed by and worked for Custodians. Neither Custodians’ agreement to employ Mr Jaques nor its agreement to provide his services in connection with retirement village businesses conducted on properties owned by Holdings can operate as a delegation of executive responsibility by Holdings to Mr Jaques. That employment agreement is inconsistent with Mr Jaques being an executive of Holdings. That is not to say that there may never be circumstances where a corporate executive’s services are provided by a third party pursuant to a consultancy arrangement rather than directly by an employment agreement, only that this is not such a case.
(b)The distinction is that Mr Jaques’ consultancy services were not provided in connection with the business of Holdings. His services were provided to Retirement Guide after it obtained management agreements with Holdings in respect of properties that Holdings had acquired or to Syndications where his services concerned evaluation of potential acquisitions.
(c)Those management agreements were entered because Holdings could not and did not intend to manage the retirement village businesses that paid rent or fees to Holdings. Because the relationship between Holdings and Retirement Guide was essentially one of landlord and tenant, the logical extension of the defendant’s contentions is that by managing the tenant’s business, Mr Jaques was a de facto executive of the landlord. Not only could Holdings not perform the work done by Retirement Guide without losing the tax benefits that determined the income stream represented to investors, it simply did not do so.
(d)I am satisfied that the affairs of Holdings were carefully structured to ensure that in doing the work that he did, Mr Jaques was not working as an executive of Holdings.
(e)I do not accept the defendant’s contention that what occurred in June 2007, including the appointment of Mr Jaques as an executive director, was no more than formalising pre-existing arrangements. What occurred at that time was that Holdings restructured from being the responsible entity of an unlisted property trust to being a listed entity. This was a substantial restructuring of the funding of Prime Trust, no doubt undertaken to raise capital for further acquisitions. Public listing of the Trust required significantly greater regulatory compliance and presented the opportunity for restructuring of the arrangements for services provided to Prime Trust, the operation of businesses on the land owned by Prime Trust, and the management of Prime Trust. As counsel for Mr Jaques submitted, there was an obvious commercial rationale for Mr Jaques’ appointment as an executive director in 2007, given the circumstances of the public listing. That appointment was explicit conduct evidencing a delegation of executive managerial responsibility that Mr Jaques had not previously assumed.
(f)At all times, Mr Jaques’ loyalties and contractual obligations as an employee were to Custodians. While he owed loyalties and statutory obligations as a director to Holdings, there was no relationship between his employment and his directorship sufficient to persuade me that at any time prior to June 2007, Mr Jaques was an executive director of Holdings. Mr Jaques’ employment obligation, the executive duties that he discharged, all pointed away from Holdings towards the businesses operated by Mr Lewski, notably Custodians, Retirement Guide and Syndications. Even if it could be said that Holdings relevantly conducted the business of the retirement villages, which proposition I reject, the delegation of executive function for those management services could not be said to have been made to Mr Jaques. The evidence was that these executive functions were the subject of consultancy agreements with a Lewski Group company.
For these reasons, I will declare that the plaintiff is entitled to indemnity from the defendant under clause 2.19 of Investment Management Insurance Policy numbered 108355, issued by the defendant to Australian Property Custodian Holdings Limited for the period from 16 July 2010 to 16 July 2011 (Policy), in respect of loss, as defined in clause 4.51 of the Policy, including defence costs incurred in:
(i) Federal Court of Australia Proceeding VID 594 of 2012; and
(ii) Supreme Court of Victoria proceeding SCI 2012 1199;
where such loss relates to the plaintiff’s conduct prior to 26 June 2007.
I will hear counsel on costs.
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