Trilogy Funds Management Ltd v Sullivan (No 2)

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FEDERAL COURT OF AUSTRALIA

Trilogy Funds Management Limited v Sullivan (No 2) [2015] FCA 1452

Citation: Trilogy Funds Management Limited v Sullivan (No 2)
[2015] FCA 1452
Parties: TRILOGY FUNDS MANAGEMENT LIMITED (ACN 080 383 679) AS THE RESPONSIBLE ENTITY FOR THE PACIFIC FIRST MORTGAGE FUND (ARSN 088 139 477) v PHILIP KEITH SULLIVAN, THOMAS WILLIAM SWAN, STEPHEN ANTHONY MCCORMICK and IAN WILLIAM DONALDSON
File number: NSD 604 of 2012
Judge: WIGNEY J
Date of judgment: 18 December 2015
Catchwords:

CORPORATIONS – directors – officers – statutory duties of directors – duty of care and diligence – duties of a responsible entity of a registered managed investment scheme pursuant to s 601FC of the Corporations Act 2001 (Cth) – duties of directors and officers of a responsible entity pursuant to s 601FD of the Corporations Act 2001 (Cth) – standard of care and diligence for directors and officers of a responsible entity acting as a professional trustee – duty of officers of a responsible entity to act in the best interests of scheme members – duty of officers to take steps to ensure responsible entity complies with Corporations Act 2001 (Cth), scheme constitution and compliance plan – where the directors and officers of a responsible entity of a registered managed investment scheme approved or purportedly approved the increase of a loan facility in circumstances where scheme constitution and compliance plan not complied with – whether directors and officers of a responsible entity of a managed investment scheme acted with care and diligence in approving increase to loan facility – where advances above the approved limit of loan facility – whether directors or officers of a responsible entity of a managed investment scheme failed to exercise care and diligence in failing to prevent advances being made – whether non-executive directors entitled to rely on management and auditors – failure of directors and officers to comply with the Corporations Act 2001 (Cth) – contravention of s 601FD of the Corporations Act 2001 (Cth) – contravention resulting in loss – compensation orders under s 1317H of the Corporations Act 2001 (Cth) – causation – relevant principles of causation in context of s 1317H of the Corporations Act 2001 (Cth) – where contraveners claim that loss inevitable irrespective of contraventions – where contraveners claim failure to mitigate loss resulting from contraventions – principles relating to mitigation of loss in context of compensation orders under s 1317H of the Corporations Act 2001 (Cth) – exoneration – whether directors and officers ought fairly to be excused for contraventions pursuant to ss 1317S and 1318 of the Corporations Act 2001 (Cth)

EVIDENCE – admissibility – opinion evidence – expert’s field of specialised knowledge – whether specialised knowledge demonstrated – whether demonstrated that opinions based on specialised knowledge – whether probative value of opinion evidence substantially outweighed by danger of undue waste of time or unfair prejudice – Evidence Act 1995 (Cth), ss 76, 79, 135

REAL PROPERTY – valuations – land value – “as is” valuations –…

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Details
Case
[2015] FCA 1452
Decision Date

CaseChat Overview and Summary

Trilogy Funds Management Limited sought compensation from Sullivan, Swan, Donaldson, and McCormick for breaches of duty by the respondents who were directors or officers of City Pacific, the responsible entity of Trilogy's managed investment scheme. Trilogy claimed that the respondents were responsible for approving or purporting to approve increases to a loan facility in contravention of the scheme’s constitution and compliance plan. They further claimed that the respondents failed to exercise care and diligence in preventing advances being made above the approved limit of the loan facility. Trilogy alleged that the loss to the Fund was $37,069,053.92, being the total amount advanced to AGA beyond the approved facility limit. The court was required to determine whether the respondents contravened their statutory duties under the Corporations Act, whether the Fund suffered damage resulting from those contraventions, and if so, whether any of the respondents should be excused or relieved of liability under s 1317S or s 1318 of the Corporations Act.

The court found that the respondents contravened their duties by approving or purporting to approve increases to the loan facility and by failing to prevent advances being made above the approved limit and in circumstances where there was inadequate security. The court held that the Fund suffered damage that resulted from those contraventions. The court further found that none of the respondents should be excused or relieved of liability under s 1317S or s 1318 of the Corporations Act. The court ordered that compensation orders be made against each of the respondents, with Sullivan and McCormick ordered to pay $37,214,088.28, and Swan and Donaldson ordered to pay $6,245,974.93, together with interest pursuant to s 51A of the Federal Court Act from 1 July 2007 to the date that judgment is entered. The court allowed the parties to confer with a view to agreeing on the appropriate orders to give effect to the judgment. If the parties could not reach an agreement, the court ordered that written submissions be filed and served on or before 10 February 2016.

Orders

Orders of the court

1. The applicant and the respondents are to confer with a view to agreeing on the appropriate orders to give effect to this judgment on or before 10 February 2016.

2. Any agreed short minutes of order are to be sent to the associate to Wigney J on or before 10 February 2016.

3. In the event that no agreement can be reached in relation to the orders, the applicant and the respondents are to file and serve written submissions in relation to the proposed orders (not exceeding, without leave, five pages in length, 1.5 line spacing, size 12 font) together with the proposed orders on or before 10 February 2016.

4. The proceeding be listed for directions on 15 February 2016 at 9.30am.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

Trilogy claimed that each of Messrs Sullivan, Swan, Donaldson and McCormick should be ordered to compensate the Fund for losses caused by their breaches of duty. Trilogy alleged that the amount of the loss to the Fund was $37,069,053.92, being the total amount advanced to AGA beyond the approved facility limit of $17.89 million as at October 2005. INELUCTABLE FACTS Many of the facts relating to the constitution and operation of the Fund, the management of City Pacific, the nature of the Saddleback land and some aspects of the operation of the AGA facility were uncontentious. Most of the basic facts relating to those matters were either admitted or not disputed on the pleadings, otherwise agreed by the parties, or were the subject of uncontested or uncontroversial, mainly documentary evidence. The main factual controversies concerned the following matters: the timing and precise circumstances surrounding the purported interim increase of the AGA facility to $26 million or $36 million in July or August 2006; whether that purported increase complied with Fund’s mandated lending policies and procedures; the legitimacy of assumptions that provided the basis for purported valuations of the Saddleback land in March and July 2006 and the knowledge of the respondents in relation thereto; the knowledge and involvement of each of the respondents in relation to advances made to AGA made during the period April to December 2006, being advances that appeared to exceed the approved facility limit; the timing and circumstances surrounding the approval of the increase to the AGA facility limit in December 2006; whether that approved increase complied with the Fund’s mandated lending policies and procedures; the legitimacy of a purported valuation of the Saddleback land requested and received in late December 2006; and the knowledge and involvement of each of the respondents in relation to advances made to AGA made during the period January 2007 to July 2007, being advances that again appeared to exceed the approved facility limit. Before addressing those matters of controversy, which involves a close consideration of the evidence given by each of the respondents, it is useful to identify the ineluctable facts that provide the essential background and context in which to consider and determine those issues.The Fund and the responsible entity The Fund is a unit trust established by a trust deed made on 23 June 1998, as amended from time to time, which serves as the constitution of the Fund (Constitution). The Fund is, and has been since 13 July 1999, a managed investment scheme registered under s 601EB of the Corporations Act. From 13 July 1999 to 6 December 2007, the Fund was known as the City Pacific Mortgage Trust. From 7 December 2007 to 12 August 2009, the Fund’s name was changed to City Pacific First Mortgage Fund. City Pacific was the responsible entity of the Fund from 23 June 1998 until about 7 July 2009. As the responsible entity of the Fund, City Pacific was required to operate the Fund as a managed investment scheme and perform the functions conferred on it by the Constitution and the Corporations Act. During the time it was the responsible entity, City Pacific was the manager of the Fund under the Constitution.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

In any event, the delay between the hearing and judgment is relevant to a consideration of the credibility findings referred to earlier in these reasons. It will be apparent that those credibility findings were primarily based on the recorded and documentary evidence: cf CSR Ltd v Della Maddalena (2006) 224 ALR 1 at [44]-[48]. That said, the demeanour of the witnesses, in particular Messrs Sullivan, Swan, Donaldson and McCormick did play a part in those findings. Despite the delay, there was no difficulty in recalling witness demeanour. CONCLUSION, DISPOSITION AND ORDERS Each of Messrs Sullivan, Swan, Donaldson and McCormick have been found to have contravened s 601FD(1)(b) (c) and (f) of the Corporations Act in approving, or purporting to approve, increases to the AGA facility limit (in the case of Mr Sullivan and Mr McCormick, in July or August 2006 and in December 2006; in the case of Mr Swan and Mr Donaldson, in December 2006) and in failing to prevent advances being made to AGA above the approved facility limit and in circumstances where there was inadequate security (in the case of Mr Sullivan and Mr McCormick, in respect of advances made during the period 28 April 2006 to 1 July 2007; in the case of Mr Swan and Mr Donaldson, in respect of advances made during the period 11 January 2007 to 1 July 2007). It has been found that the Fund suffered damage that resulted from those contraventions. Accordingly, compensation orders should be made pursuant to s 1317H of the Corporations Act against each of the respondents. In the case of Mr Sullivan and Mr McCormick, it has been found that the damage that resulted from their contraventions totalled $37,214,088.28 (being the total of the advances made during the period 28 April 2006 to 1 July 2007 less repayments of $5,275,000). The compensation orders against Mr Sullivan and Mr McCormick should be for that amount, together with interest pursuant to s 51A of the FCA Act calculated at the interest rate arrived at in accordance with Practice Note CM 16 from 1 July 2007 to the date that judgment is entered. In the case of Mr Swan and Mr Donaldson, it has been found that the damage that resulted from their contraventions totalled $6,245,974.93 (being the total of the advances made during the period 11 January 2007 to 1 July 2007 less $5,275,000). The compensation orders against Mr Donaldson and Mr Swan should be for that amount, together with interest pursuant to s 51A of the FCA Act calculated at the interest rate arrived at in accordance with Practice Note CM 16 from 1 July 2007 to the date that judgment is entered. None of the respondents should be relieved of their liability in respect of these s 1317H compensation orders by reason of s 1317S or s 1318 of the Corporations Act. Trilogy sought an order that the respondents pay the costs of the proceedings. None of the respondents made any submissions in relation to costs. There would appear to be no reason why costs should not follow the event. It is proposed to make orders reflecting each of these findings. The appropriate course, however, would be to allow the parties to confer with a view to agreeing on the appropriate form and content of the orders. The matter will be listed for directions on 15 February 2016 at 9.30 am. If the parties agree on the orders, they will be made on that day. In the event that the parties cannot reach agreement on the appropriate orders, the parties should prepare short written submissions (not to exceed, without leave, five pages in length, 1.5 line spacing, size 12 font) in relation to the orders. Those submissions (together with the orders proposed by each party) should be filed and served on or before 10 February 2016. In the event that it is necessary for there to be oral argument in relation to the orders, a date for the hearing of that argument will be set at the directions hearing.

Ratio Decidendi

Legal Principle Established

In all the circumstances, it cannot be accepted that Mr Swan ought fairly to be excused and relieved of liability in relation to his contravention. Conclusions in relation to exoneration One of the common and central findings made in relation to each of the respondents on the question of whether they should be excused or relieved of liability was that their contraventions of s 601FD of the Corporations Act were serious. That common finding is deserving of some elaboration. Section 601FD of the Corporations Act forms part of the statutory scheme in relation to managed investments schemes in Chapter 5C of the Corporations Act. The obvious statutory purpose of Chapter 5C is to provide an appropriate degree of regulation of managed investment schemes, and the entities and persons who operate and manage them. In simple terms, managed investments schemes involve the holding of assets on trust for the members of the scheme. Responsible entities effectively operate the scheme as professional trustees. The ultimate purpose of the Chapter 5C scheme is to provide a significant measure of protection for members of registered investment schemes. It is perhaps not surprising in those circumstances that Chapter 5C contains detailed and highly prescriptive requirements in relation to registration, the responsibilities and powers of responsible entities and the duties and responsibilities of their officers, the contents of the constitution and compliance plan, and the establishment and functions of a compliance committee. The tightly regulated and highly prescriptive statutory scheme all amounts to nought, however, if officers of responsible entities do not comply with their duties under s 601FD of the Corporations Act. There is, for example, little point in having a comprehensive constitution and compliance plan if the officers of the responsible entity effectively ignore their provisions, or do not take reasonable steps or act with care or diligence to ensure that they are complied with. That is effectively what happened here. The actions of Mr Sullivan and Mr McCormick, in particular, but also Mr Swan and Mr Donaldson, made a mockery of the statutory scheme. Mr Sullivan and Mr McCormick thumbed their noses at the Constitution and the Compliance Plan and other policies and procedures put in place under them. They ignored them and dealt with the Fund’s assets as they saw fit. Mr Swan and Mr Donaldson turned a blind eye to Mr Sullivan’s and Mr McCormick’s disregard of the constituent documents. Even on their own evidence, they did not attentively read important parts of board papers that were provided to them for the purposes of board meetings. More significantly, they simply signed and thereby approved major loan proposals without giving them any independent scrutiny or analysis. If their evidence concerning their scrutiny of loan proposals was to be accepted, it is difficult to see the point of them sitting on the Credit Committee. Indeed, it is difficult to see the point in them being directors.