Trilogy Funds Management Ltd v Sullivan (No 2)

[2015] FCA 1452

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 – highest and best use of land – whether expert valuer is required to consider the possibility of rezoning of land when preparing valuation of land

DAMAGES – losses resulting from contraventions of s 601FD of the Corporations Act 2001 (Cth) by directors and officers of a registered managed investment scheme – whether the responsible entity of a registered managed investment scheme failed to act reasonably to mitigate the loss – whether the responsible entity of a registered managed investment scheme is entitled to a compensation order pursuant to s 1317H of the Corporations Act 2001 (Cth) – relevant principles of causation and loss – test for causation and loss – whether any damage suffered by the responsible entity “resulted from” contraventions of the Corporations Act 2001 (Cth) – where contraveners claim that loss would have been suffered irrespective of contraventions – method of calculating loss

Legislation:

Corporations Act 2001 (Cth), ss 9, 180, 199A, 420, 420A, 601EA, 601EB, 601ED, 601FA, 601FB, 601FC, 601FD, 601FM, 601FS, 601GA, 601GB, 601HA, 601HG, 601JA, 601JB, 912A, 912C, 915C, 1311, 1317DA, 1317E, 1317H, 1317J, 1317S, 1318, 1325, Sch 3
Evidence Act 1995 (Cth), ss 76, 79, 135, 140
Federal Court of Australia Act 1976 (Cth), s 51A
Federal Court Rules 2011 (Cth)
Local Government (Planning and Environment) Act 1990 (Qld)
Local Government Act 1936 (Qld)
State Development and Public Works Organisation Act 1971 (Qld)
Trade Practices Act 1974 (Cth), s 82
Trusts Act 1973 (Qld), s 21

Cases cited:

ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1; [2014] FCAFC 65
Ackers v Austcorp International Ltd [2009] FCA 432
Adler v Australian Securities and Investments Commission (2003) 179 FLR 1
Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464
Arnotts Limited v Trade Practices Commission (1990) 24 FCR 313
Australian Securities and Investments Commission v Adler (2002) 168 FLR 253
Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3) [2013] FCA 1342
Australian Securities and Investments Commission v Healey (2011) 196 FCR 291
Australian Securities and Investments Commission v Healey (No 2) (2011) 196 FCR 430
Australian Securities and Investments Commission v MacDonald (No 12) (2009) 259 ALR 116; [2009] NSWSC 714
Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373
Australian Securities and Investments Commission v Rich (2009) 236 FLR 1
Australian Securities and Investments Commission v Vines (2005) 55 ACSR 617
Australian Securities Commission v AS Nominees Limited (1995) 62 FCR 504
Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 6) [2013] FCA 144
Briginshaw v Briginshaw (1938) 60 CLR 336
Chappel v Hart (1998) 195 CLR 232
Clark v Ryan (1960) 103 CLR 486
Commonwealth Custodial Services Ltd as Trustee for Burwood Trust Fund v Valuer-General(NSW) (2006) 148 LGERA 38
CSR Ltd v Della Maddalena (2006) 224 ALR 1
Dasreef Pty Limited v Hawchar (2011) 243 CLR 588
Deputy Commissioner of Taxation v Dick (2007) 242 ALR 152; [2007] NSWCA 190
Doppstadt Australia Pty Ltd v Lovick & Son Developments Pty Ltd [2014] NSWCA 158
Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (No 2) (1987) 16 FCR 410
Eric Preston Pty Ltd v Euroz Securities Ltd (2011) 274 ALR 705
Galvin v The Queen (2006) 161 A Crim R 449
Henville v Walker (2001) 206 CLR 459
HG v The Queen (1999) 197 CLR 414
I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited (2002) 210 CLR 109
ISPT Pty Ltd v Melbourne City Council (2008) 20 VR 447; [2008] VSCA 180
Jones v Dunkel (1959) 101 CLR 298
Karacominakis v Big Country Developments Pty Ltd (2000) 10 BPR 18,235; [2000] NSWCA 313
Knott Investments Pty Ltd v Fulcher [2014] 1 Qd R 21; [2013] QCA 067
Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705
Management 3 Group Pty Ltd (in liq) v Lenny’s Commercial Kitchens Pty Ltd (No 2) (2012) 203 FCR 283; (2012) 289 ALR 275
Marks v GIO Australia Holdings Limited (1998) 196 CLR 494
Masters v Cameron (1954) 91 CLR 353
McKay v Commissioner of Main Roads (No 7) [2011] WASC 223
McLellan (in his capacity as liquidator of the Stake Man Pty Ltd) v Carroll (2009) 76 ACSR 67
Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274
NMFM Property Pty Ltd v Citibank Ltd (No 7) (1999) 161 ALR 576
Pavich v Bobra Nominees Pty Ltd [1988] ANZ ConvR 556
R v Dann [2000] NSWCCA 185
R v G (1997) 42 NSWLR 451
R v Sing (2002) 54 NSWLR 31
R v Tang (2006) 65 NSWLR 681
Ryding v Miles [2012] NSWSC 153
Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5
Segenhoe Ltd v Akins (1990) 29 NSWLR 569
Travel Compensation Fund v Tambree (2005) 224 CLR 627
Velevski v R (2002) 187 ALR 233
Vines v Australian Securities and Investments Commission (2007) 73 NSWLR 451

Date of hearing:

10-14, 17-19 March, 15-17 April, 2-3 June and 16-18 July 2014

Place:

Sydney

Division:

GENERAL DIVISION

Category:

Catchwords

Number of paragraphs:

932

Counsel for the Applicant:

Mr A S Martin SC with Mr S Nixon

Solicitor for the Applicant:

Maurice Blackburn Lawyers

Counsel for the First, Second and Fifth Respondents:

Mr M W Young SC with Mr M Richardson

Solicitor for the First, Second and Fifth Respondents:

Bransgroves Lawyers

Counsel for the Third Respondent: 

The Third Respondent appeared in person

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 604 of 2012

BETWEEN:

TRILOGY FUNDS MANAGEMENT LIMITED (ACN 080 383 679) AS THE RESPONSIBLE ENTITY FOR THE PACIFIC FIRST MORTGAGE FUND (ARSN 088 139 477)
Applicant

AND:

PHILIP KEITH SULLIVAN
First Respondent

THOMAS WILLIAM SWAN
Second Respondent

STEPHEN ANTHONY MCCORMICK
Third Respondent

IAN WILLIAM DONALDSON
Fifth Respondent

JUDGE:	WIGNEY J
DATE OF ORDER:	18 DECEMBER 2015
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

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.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 604 of 2012

BETWEEN:

TRILOGY FUNDS MANAGEMENT LIMITED (ACN 080 383 679) AS THE RESPONSIBLE ENTITY FOR THE PACIFIC FIRST MORTGAGE FUND (ARSN 088 139 477)
Applicant

AND:

PHILIP KEITH SULLIVAN
First Respondent

THOMAS WILLIAM SWAN
Second Respondent

STEPHEN ANTHONY MCCORMICK
Third Respondent

IAN WILLIAM DONALDSON
Fifth Respondent

JUDGE:	WIGNEY J
DATE:	18 DECEMBER 2015
PLACE:	SYDNEY

REASONS FOR JUDGMENT

INTRODUCTION AND OVERVIEW	[1]
INELUCTABLE FACTS	[15]
The Fund and the responsible entity	[17]
Officers of City Pacific	[20]
Constitution of the Fund	[28]
Product Disclosure Statements	[40]
Compliance Plan	[41]
Lending Manual	[46]
Credit Committee	[49]
The Saddleback land	[53]
Zoning prior to acquisition by AGA	[54]
2004 – Establishment of the AGA Facility and initial acquisitions of the Saddleback land	[61]
2005 – Further Saddleback acquisitions and increases to the AGA facility	[66]
September 2005 – The SVP report	[71]
October 2005 – Further increase in the AGA Facility	[84]
AGA re-agitates the 1989 and 1992 rezoning approvals	[88]
City Pacific’s purported implementation of the SVP recommendations and report to ASIC	[92]
Deed of Cross-Collateralisation	[97]
The AGA facility – March 2006 to July 2006	[99]
March 2006 Valuation	[100]
Request for an updated valuation	[108]
May 2006 – Advances over the AGA facility limit	[111]
The Updated March 2006 Valuation	[117]
Purported increase of the AGA facility limit to $29 million	[119]
August 2006 – Backdated letter of offer	[133]
August to December 2006 – Further advances	[138]
August to December 2006 – Board papers	[141]
December 2006 and January 2007 – Increase of the AGA facility limit to $44.87 million or $55 million	[149]
December 2006 to July 2007 – Further advances beyond the facility limit	[168]
Default by AGA	[178]
Sale of AGA Security Properties	[182]
Default by other Gore entities	[185]
STATUTORY SCHEME AND DUTIES OWED BY THE RESPONDENTS	[186]
Duty of care and diligence – Relevant principles	[199]
Duty to take steps to ensure compliance	[218]
KEY ISSUES AND CONTENTIONS	[224]
Issue 1 – Contraventions relating to the “interim” approval of an increase of the AGA facility limit to $26 million	[226]
Issue 2 – Contraventions relating to advances between 28 April 2006 and 23 August 2006	[232]
Issue 3 – Contraventions relating to advances between 23 August 2006 and 10 January 2007	[240]
Issue 4 – Contraventions relating to the increase of the AGA facility limit to $44.87 million	[245]
Issue 5 – Contraventions relating to advances made between 11 January 2007 and 1 July 2007	[251]
Issue 6 - Did the Fund suffer any damage resulting from any contraventions?	[258]
Issue 7 – Did Trilogy, on behalf of the Fund, fail to mitigate any loss or damage?	[266]
Issue 8 – Should the respondents be exonerated?	[270]
Other issues	[272]
The Briginshaw standard and s 140 of the Evidence Act	[278]
THE CONSTITUTION, COMPLIANCE PLAN AND LENDING MANUAL	[282]
The 80 percent LVR Requirement	[290]
The Valuation Requirement	[297]
The Lending Manual Issue	[301]
CREDIT FINDINGS	[314]
Mr Sullivan	[316]
Mr Swan	[331]
Mr Donaldson	[343]
Mr McCormick	[350]
COMPLIANCE, CORPORATE GOVERNANCE AND THE SVP REPORT	[365]
FINDINGS IN RELATION TO THE VALUE OF THE SADDLEBACK LAND	[408]
FINDINGS IN RELATION TO ISSUE 1 – THE $26 MILLION APPROVAL	[425]
Factual findings – Mr McCormick	[433]
Factual findings – Mr Sullivan	[447]
Contraventions by Mr Sullivan and Mr McCormick in relation to the $26 million facility	[459]
FINDINGS IN RELATION TO ISSUE 2 – ADVANCES BETWEEN 28 APRIL 2006 AND 23 AUGUST 2006	[464]
Factual findings – Mr Sullivan and Mr McCormick	[465]
Factual findings – Mr Swan and Mr Donaldson	[470]
Conclusions in relation to contraventions in relation to advances made in the period 28 April 2006 to 23 August 2006	[494]
FINDINGS IN RELATION TO ISSUE 3 – ADVANCES IN THE PERIOD 24 AUGUST 2006 TO 10 JANUARY 2007	[502]
Findings in relation to Mr Sullivan and Mr McCormick	[506]
Contraventions by Mr Sullivan and Mr McCormick	[525]
Findings in relation to Mr Swan and Mr Donaldson	[527]
FINDINGS IN RELATION TO ISSUE 4 – THE APPROVAL TO INCREASE THE AGA FACILITY LIMIT TO $44.87 MILLION	[539]
Factual findings	[542]
Factual findings in relation to Mr McCormick	[574]
Factual findings in relation to Mr Sullivan	[577]
Factual findings in relation to Mr Donaldson	[584]
Factual findings in relation to Mr Swan	[596]
Contraventions of s 601FD(1)(b) of the Corporations Act	[611]
Contraventions of s 601FD(1)(f) of the Corporations Act	[616]
Contraventions of s 601FD(1)(c) of the Corporations Act	[625]
FINDINGS IN RELATION TO ISSUE 5 – ADVANCES AFTER 11 JANUARY 2007	[626]
Factual findings in relation to Mr McCormick	[630]
Contraventions by Mr McCormick	[633]
Findings in relation to Mr Sullivan	[637]
Findings in relation to Mr Swan and Mr Donaldson	[645]
SUMMARY OF CONTRAVENTIONS	[653]
FINDINGS IN RELATION TO ISSUE 6 – CAUSATION AND DAMAGE	[654]
Causation – Relevant principles	[661]
The parties’ submissions in relation to causation	[671]
Losses resulting from contraventions by Mr Sullivan and Mr McCormick in relation to the approval of the $26 million facility	[682]
Losses resulting from contraventions by Mr Sullivan and Mr McCormick in relation to advances between 28 April 2006 and 23 August 2006.	[687]
Losses resulting from contraventions by Mr Sullivan and Mr McCormick in relation to advances between 28 April 2006 and 23 August 2006.	[697]
Losses resulting from the contraventions by Messrs Sullivan, Donaldson, Swan and McCormick in relation to the approval to increase the AGA facility limit to $44.87 million	[701]
Losses resulting from the contraventions by Messrs Sullivan, Swan, Donaldson and McCormick in relation to the advances made between 11 January 2007 and 1 July 2007	[706]
DID TRILOGY FAIL TO MITIGAGE THE FUND’S LOSSES FROM THE AGA FACILITY?	[708]
Relevant principles	[712]
The respondents’ case that Trilogy acted unreasonably	[722]
Rejected opinion evidence	[724]
No specialised knowledge	[728]
Opinions not shown to be based on specialised knowledge	[737]
Opinions based on demonstrably wrong assumptions	[744]
Discretionary exclusion under s 135 of the Evidence Act	[753]
The alleged unreasonable failure to mitigate	[759]
Allegations of impropriety and improper purpose	[772]
Realisation of other security properties	[789]
Trilogy’s case in relation to mitigation	[799]
Conclusion – Did Trilogy act unreasonably in realising the Saddleback land?	[836]
CAUSATION – THE “HYPOTHETICAL LOANS” SUBMISSION	[840]
Consideration	[846]
ISSUE 8 – SHOULD ANY OF THE RESPONDENTS BE EXONERATED?	[861]
Relevant principles	[865]
Mr Sullivan	[875]
Mr McCormick	[880]
Mr Donaldson	[884]
Mr Swan	[893]
Conclusions in relation to exoneration	[898]
PLEADED DEFENCES TAKEN TO BE ABANDONED	[906]
QUANTUM OF COMPENSATION AND INTEREST	[907]
CROSS-CLAIMS	[923]
A NOTE IN RELATION TO DELAY	[924]
CONCLUSION, DISPOSITION AND ORDERS	[928]

INTRODUCTION AND OVERVIEW

1. This is a tale of a rapacious Gold Coast property developer with grandiose plans, a compliant and obliging valuer who lacked independence, and a responsible entity of a managed investment scheme the officers of which appeared unable or unwilling to say “no” to the developer, or to otherwise exercise appropriate care and diligence to ensure compliance with the scheme’s mandated policies and procedures.  In the end, the developer failed and the security property was found to be worth many millions of dollars less than both its supposed valuation and the outstanding loan.  The scheme and its members were left significantly out of pocket.  Did the officers of the responsible entity breach their statutory duties when they approved increases to the developer’s loan facility? Or when they failed to prevent further advances being made to the developer that took the loan well over its approved limit?  Are the officers liable to make good any losses arising from any such breaches?

2. In September 2004, a registered managed investment scheme then called the Pacific First Mortgage Fund (Fund) agreed, through its then responsible entity, City Pacific Limited (City Pacific), to lend $3.25 million to a company called Atkinson Gore Agricultural Pty Limited (AGA).  The purpose of the loan was to enable AGA to purchase some parcels of agricultural land in an area known as “Saddleback” in the Gold Coast hinterland near the township of Canungra, Queensland (the Saddleback land).  Whilst the existing zoning of the Saddleback land permitted only rural pursuits, it would appear that AGA had grand plans to subdivide and develop the land.  AGA was associated with the well-known and, at least at that time, apparently successful property developer, Mr Craig Gore. 

3. The initial AGA loan facility was increased in December 2004 and May, June and October 2005 to enable AGA to purchase additional parcels of land in the Saddleback area.  The AGA loan facility was secured by mortgages over the Saddleback land purchased by AGA.  As would be expected, valuations of the Saddleback land that had been, or was to be, purchased were commissioned and provided to City Pacific.  Each of the valuations relevant to the initial loan and the increases to the facility limit in December 2004 and May, June and October 2005 valued the land on the basis that its highest and best use was for rural pursuits as a holding proposition pending future subdivision approval.

1. As at October 2005, the approved AGA facility limit was $17.89 million.  The Saddleback land owned by AGA that secured the AGA loan facility at that time was valued at $24.975 million in September 2005. 

2. These proceedings primarily concerned two further extensions or increases to the AGA loan facility and a number of drawdowns and advances made under the facility from April 2006 to July 2007. 

3. The first extension or increase to the facility was purportedly approved in either late July 2006, or more likely August 2006.  That purported approval involved a “provisional” increase of the facility limit to $50 million pending the occurrence of certain events, and in the interim an increase to either $36 million or $26 million.  The documentation created in relation to this extension or increase to the AGA facility, including the letter of offer to AGA, falsely represented that the increase was approved in late April 2006.

4. It would appear to be tolerably clear that the reason that the documentation was backdated was related to the fact that by August 2006 the balance of the AGA loan facility was well above its approved limit.  Since late April 2006 advances continued to be made to AGA despite the fact that the loan facility was fully drawn. 

5. The second increase to the AGA facility limit occurred in late December 2006 or early January 2007.  It involved an increase of the facility limit to $55 million, though a special condition restricted the limit to $44.87 million until the occurrence of a specified event.  Once again, the documentation in relation to this increase to the AGA facility limit was backdated, this time to August 2006. 

6. Both the August 2006 and December 2006 increases to the AGA facility limit were approved, or purportedly approved, on the basis of valuations of the Saddleback land that were, to say the least, somewhat questionable.  The valuations were questionable because they were based on dubious assumptions that did not reflect the reality of the current zoning of the land.  They assumed, in various different ways, that the zoning or permitted uses of the land was such that AGA was permitted to subdivide and develop the Saddleback land.  That was despite the fact that, at all times, the zoning of the land permitted only rural pursuits. 

7. By late December 2006, or early January 2007, the AGA facility was effectively fully drawn down to the restricted facility limit of $44.87 million.  The event that would trigger the increase of the facility limit to $55 million had not occurred.  Despite that, and despite the fact that the facility limit was not increased, further advances were made to AGA.  By July 2007, the balance of the AGA facility was $54,720,906.81, almost $10 million beyond the approved facility limit.

8. The Saddleback land was never rezoned and never subdivided or developed by AGA.  By December 2008, AGA had defaulted under the loan facility, and by February 2009, receivers and managers were appointed to AGA.  The Saddleback land was eventually sold by the receivers of AGA for a total gross sum of only $7.627 million.  The balance owing by AGA was lost to the Fund.

9. Throughout 2006 and 2007, when the AGA facility limit was increased and advances under the facility continued to be made, Mr Philip Keith Sullivan, Mr Thomas William Swan, Mr Ian William Donaldson and Mr Stephen Anthony McCormick (collectively, the respondents) were senior officers of City Pacific.  Mr Sullivan was the Managing Director and Chief Executive Officer.  Mr Swan and Mr Donaldson were directors.  Mr Donaldson was the Chairman of the board of directors.  Mr McCormick occupied executive positions in which he was responsible for managing the lending of the Fund.  Each of Messrs Sullivan, Swan, Donaldson and McCormick was a member of the Credit Committee of City Pacific (the Credit Committee).

10. In these proceedings, the new responsible entity of the Fund, Trilogy Funds Management Limited (Trilogy), alleged that each of Messrs Sullivan, Swan, Donaldson and McCormick breached their statutory duties as officers of City Pacific under s 601FD of the Corporations Act 2001 (Cth) (Corporations Act).  The alleged breaches relate to the approval, or purported approval, of the increases to the AGA facility in July or August 2006 and December 2006 or January 2007, and the failure to take appropriate steps to prevent the making of advances beyond the approved facility limits from late April 2006 to 1 July 2007.  

11. 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

12. 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. 

13. 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

14. 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.

15. 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.

16. On around 7 July 2009, City Pacific was removed as the responsible entity of the Fund and was replaced by Trilogy in accordance with an extraordinary resolution passed by members of the Fund pursuant to s 601FM(1) of the Corporations Act. Trilogy has remained the responsible entity of the Fund since that time. Upon the change in the responsible entity of the Fund, the rights, obligations and liabilities of City Pacific became the rights, obligations and liabilities of Trilogy as the new responsible entity of the Fund pursuant to s 601FS(1) of the Corporations Act.

    Officers of City Pacific

17. Mr Sullivan was the Managing Director and Chief Executive Officer of City Pacific from 8 August 1997 to 12 November 2008.

18. Mr Sullivan was a man with an extensive background and experience in the property development industry.  Since the 1980s, he had been involved in several major property developments on or near the Gold Coast. 

19. Mr Sullivan was a member of the Credit Committee of City Pacific at all relevant times from April 2006 to December 2007.  The functions and responsibilities of the Credit Committee are considered later.

20. Mr Swan was a director of City Pacific from 8 August 1997.  Whilst he was a non-executive director, importantly, he was also a member of the Credit Committee at all relevant times from April 2006 to December 2007.

21. Mr Swan was highly qualified in business, accounting, commercial law and financial services, having acquired various degrees and diplomas over the years from various educational institutions.  He had also been a member of a number of professional associations in the accounting, management and tax professions since 1976.

22. Mr Donaldson was a director and the Chairman of the board of directors of City Pacific from 25 May 1998 to 16 December 2008.  Like Mr Swan, he was a non-executive director, but was also a member of the Credit Committee at all relevant times from April 2006 to December 2007.  He also chaired City Pacific’s Audit and Risk Committee.

23. Mr Donaldson had over 57 years of experience in the fields of accounting and commerce.  Amongst other things, he had been a partner of a national accounting firm for some 33 years, had been a registered company auditor for over 20 years, had been a director of five other listed public companies, and had been appointed to a number of boards by the Queensland Government.  He had been a member of the Institute of Chartered Accountants in Australia for 48 years.  He also had extensive experience in the mortgage industry. 

24. Mr McCormick was at all material times a senior manager at City Pacific.  From around March 2005 to around 30 June 2006, he occupied the position of Lending Manager.  Thereafter, and until 31 July 2009, he occupied the position of Group Executive – Property Development.  In both these roles, he was essentially in charge of the lending department at City Pacific.  He was a member of the Credit Committee at all relevant times from April 2006 to December 2007. 

    Constitution of the Fund

25. A registered investment scheme is required to have a constitution which complies with s 601GA of the Corporations Act.

26. As required by s 601GA(1)(b) of the Corporations Act, the Constitution contained a number of provisions dealing with the powers of City Pacific, as the responsible entity, in relation to making investments of, or otherwise dealing with, the Fund’s property.

27. Clause 2.2 of the Constitution provided that City Pacific held and would at all times hold the Fund’s assets on trust for members of the Fund, subject to the provisions of the Constitution and the Corporations Act.

28. Clause 7.1 provided that the role of City Pacific as the manager of the Fund was to hold all assets of the Fund in “Authorised Investments” and “to seek and invest the funds … in Mortgage Investments”.

29. Clause 1.1 contained definitions of a number of the important terms or expressions used in clause 7.1. The expression “Authorised Investments” was defined as including “Mortgage Investments”, deposits on call or for a term with any bank, bills of exchange (including commercial bills) issues, drawn, accepted or endorsed by any bank or negotiable certificates of deposit issued by any bank, any mortgage investment scheme that is a registered managed investment under the Corporations Act, including a scheme to which City Pacific is the responsible entity, and any “authorised investment” as defined in s 21 of the Trusts Act 1973 (Qld) (Trusts Act).

30. Clause 1.1 also provided that in order for a loan secured by a mortgage over land to be a “Mortgage Investment”, the total of all money advanced from the Fund and secured over such land must not exceed either 80 percent of the value of the land that has been valued by an approved valuer, or 95 percent of the value of the land that has been valued by an approved valuer provided the loan is secured by mortgage insurance to a level approved by the manager.  “Land” was broadly defined in clause 1.1 as including a freehold estate or interest in real property in Australia and as including buildings, fixtures and fittings (including furnishings) and other improvements erected or installed thereon.

31. Clauses 4.5 and 5.1 of the Constitution contained a number of provisions relating to the duties and responsibilities of City Pacific and its officers. Those duties and responsibilities broadly coincided with various statutory duties under the Corporations Act.

32. Clauses 4.5(b) and 5.1(b) provided that City Pacific and each of its officers would exercise the degree of care and diligence that a reasonable person would exercise if they were in City Pacific’s or the officer’s position. 

33. Clauses 4.5(c) and 5.1(c) provided that City Pacific and each of its officers would act in the best interests of the members and, if there was a conflict between the member’s interests and the interests of City Pacific, would give priority to the member’s interests. 

34. Clauses 4.5(h) and 4.5(j) provided that City Pacific would comply with the “Compliance Plan” and would ensure that all payments out of the assets were made in accordance with the Constitution and the Corporations Act.

35. Under clause 5.1(f), each officer of City Pacific was required to take all steps that a reasonable person would take, if they were in the officer’s position, to ensure that City Pacific complied with the Corporations Act, the Constitution and the Compliance Plan.

36. Each of Messrs Sullivan, Swan and Donaldson agreed in their evidence that they were aware of those provisions of the Constitution and understood that each of those provisions remained in force during 2006. That was hardly surprising given that each of them was a director of City Pacific, a member of the Credit Committee and a person with substantial qualifications and relevant experience. There was also no issue that Mr McCormick was aware of his duties under the Constitution as an officer of City Pacific.

    Product Disclosure Statements

37. City Pacific issued Product Disclosure Statements (PDS) in respect of the Fund as required by Pt 7.9 of the Corporations Act. The PDS informed prospective investors in the Fund of the essential features of the Fund and its management. The PDS which were current in the period April 2006 to August 2007 included statements that:

    (a)City Pacific had determined and documented lending guidelines for the approval and management of all loans;

    (b)City Pacific would limit the investments of the Fund to first Mortgages and cash investments;

    (c)City Pacific only made investments that provided adequate security for the Fund;

    (d)prudent lending ratios were maintained for lending by the Fund;

    (e)the Constitution allowed advances up to 80 percent of security property values as determined by an independent valuer; and

    (f)all loan applications were carefully considered by the Credit Committee whose members have substantial credit and property development experience.

    Compliance Plan

38. A registered managed investment scheme must have a compliance plan that meets the requirements of s 601HA of the Corporations Act. Section 601HA provides that the compliance plan must set out adequate measures that the responsible entity is to apply in operating the scheme to ensure compliance with the Corporations Act and the scheme’s constitution. The responsible entity was required to comply with the scheme’s compliance plan: s 601FC(1)(h) of the Corporations Act.

39. At all relevant times there was a compliance plan for the Fund (the Compliance Plan) that was signed by each of the directors of City Pacific in accordance with Pt 5C.4 of the Corporations Act and the Constitution. Each applicable Compliance Plan was, from time to time, lodged with the Australian Securities and Investments Commission (ASIC).

40. Each Compliance Plan applicable throughout the period 11 August 2005 to 19 July 2007 provided that City Pacific, as the responsible entity of the Fund, was the “Manager” of the Fund and set out the procedures that were required to be followed in respect of all investments made by the Fund.  The mandated procedures included that:

    (a)all investments of the Fund had to be invested in accordance with the Constitution and the PDS;

    (b)the Lending Manager of City Pacific was responsible for supervising the investment strategy of the Fund and undertaking the initial assessment of each Mortgage Investment;

    (c)investments must only be made in Authorised Investments;

    (d)before any Mortgage Investment was made a valuation had to be obtained;

    (e)the Credit Committee was responsible for approving all Mortgage Investments; and

    (f)a Mortgage Investment should be made in accordance with the Manager’s mortgage lending guidelines.

41. Each of Messrs Sullivan, Swan and Donaldson agreed, again not surprisingly, that they were aware of those requirements in the Compliance Plan.  Mr McCormick was the Fund’s Lending Manger.  There was no issue that he was aware of those requirements.

42. The Compliance Plan in force from November 2006 provided that no three consecutive valuations of an asset could be conducted by the same valuer unless approved by two members of the Credit Committee; that an acceptable valuation had to be dated not more than three months before the mortgage investment to which it related; and that the Lending Manager was required to certify to the Credit Committee that the valuation was acceptable before the Credit Committee gave consideration to approving the investment.

    Lending Manual

43. City Pacific had a mortgage lending manual (Lending Manual).  It contained City Pacific’s lending guidelines.  The existence of the lending guidelines in the Lending Manual was adverted to in both the Compliance Plan and the PDS.

44. It would appear that City Pacific’s Lending Manual was significantly updated during 2005 and was, at various times, under review during 2006.  There was an issue between the parties about the version of the Lending Manual that was operative at the time of the contentious AGA facility limit increases and advances in 2006 and 2007.  It will be necessary to return to that contentious issue later, though ultimately not a great deal turns on it.  Suffice it to say at this stage that each version of the Lending Manual included statements to the effect that:

    (a)it was essential that the operating routines set out in the Lending Manual be followed precisely, because the accuracy and integrity of the management of the Fund’s portfolio could only be established through a consistent approach to all processing (section 1.2);

    (b)it was the role of the Credit Committee, in respect of each proposal for a loan, to determine whether the loan should be approved or declined (section 1.3);

    (c)all loan proposals together with the supporting information were to be given to the Credit Committee for approval (section 1.3);

    (d)a valuation of the security property was “our primary credit document” (section 1.4) and “the primary credit assessment tool utilised” (section 10);

    (e)the valuation report needed to be attached to the loan proposal (section 1.5);

    (f)when a valuation was received, it was to be read carefully (section 10);

    (g)if a valuation was conditional upon a certain requirement, that requirement had to be met (section 10); and

    (h)City Pacific would not settle any loan that had a valuation that did not conform with the requirements of the Lending Manual (section 10).

1. Section 5 of the version of the Lending Manual that was operative throughout much of 2006 set out various categories of loans that could be made by the Fund and the conditions applicable to each category.  They included residential property loans (5.1), commercial property loans (5.2), industrial property loans (5.3), retail property loans (5.4), strata-title hotel/apartment suite loans (5.5), strata-title studio apartment loans (5.6), collateral second mortgages (5.7), asset/non-conforming loans (5.8) and construction/development loans (5.9).  The asset/non-conforming loan category (category 5.8) appeared to include loans that did not fall within any other category of loan.  As will be seen, whilst it was common ground that the AGA facility did not fall within any of categories 5.1 to 5.7 and 5.9, the question whether the AGA facility therefore fell within category 5.8 was contentious.  That was important because rural properties that were more than 10 hectares in area were not acceptable security for category 5.8 loans.  The Saddleback land compromised a rural property that was more than 10 hectares in area.  A later version of the Lending Manual deleted category 5.8.

   Credit Committee

2. As indicated earlier, under the Compliance Plan, the Credit Committee was responsible for approving all mortgage investments.  The PDS also stated that all loan applications were carefully considered by the Credit Committee and represented that the members of the Credit Committee had “substantial credit and property development experience”.  The Lending Manual provided that all loan proposals, together with supporting information, including the valuation report, were to be given to the Credit Committee, and that it was the role of the Credit Committee to determine whether a loan proposal should be approved or declined.  Each of the respondents was a member of City Pacific’s Credit Committee.

3. The role of the Credit Committee was further explained in City Pacific’s Credit Committee Charter.  The Credit Committee Charter was lodged with ASIC as part of City Pacific’s compliance material.  The Credit Committee Charter contained the following statements:

   1.     INTRODUCTION

   …

   The Credit Committee of the Company (“Committee”) has the ultimate responsibility to the investors in the Schemes for which City Pacific Limited acts as Responsible Entity and Manager. 

   The Committee is dedicated to fulfilling these duties in a lawful and professional manner, and with the utmost integrity and objectivity. 

   Good credit assessment policies and procedures are critical for ensuring that the Committee carries out its duties effectively and efficiently to the benefit of the Company and the investors as a whole. 

   This document outlines the Company’s credit assessment policy, which is a written policy document that defines the respective roles, responsibilities and authorities of the Committee, both individually and collectively.  As such, it establishes the guidelines within which the Committee members are to operate as they carry out their respective roles. …

   3.     THE ROLE OF THE COMMITTEE

   The Committee is ultimately responsible for all matters relating to the credit assessment procedures of the Company.

   The Committee has responsibility for ensuring that the Company’s lending practices are consistent and that all loans and transactions are correctly processed. 

   The Committee meets as and when required to review loan proposals together with the supporting information.  Loan proposals to be considered must be given to the Committee for review.  The decision to approve or decline a loan rests with the members of the Committee in accordance with the Credit Committee Approval Policy (refer Appendix 3).  Loan applications are carefully considered by the Committee whose members have substantial credit and property development experience. 

   (Emphasis added.)

4. The central importance of the Credit Committee could not be doubted. 

5. On or around 11 November 2005, the board of City Pacific resolved to adopt a Credit Committee Approval Policy, which provided that the following delegated authorities would apply to all new loans:

   (a)Less than $5 million: any two members of the Credit Committee;

   (b)From $5 million to $20 million: any three members of the Credit Committee;

   (c)From $20 million to $50 million: all members of the Credit Committee;

   (d)More than $50 million: all members of the Credit Committee plus the board members of City Pacific.

   The Saddleback land

6. As outlined earlier, the land that AGA acquired in 2004 and 2005 using loan funds obtained from the Fund was in the area known as “Saddleback” in the Gold Coast hinterland. 

   Zoning prior to acquisition by AGA

7. The predecessor in title to some of the Saddleback lots later acquired by AGA was a company called Cromview Pty Limited (Cromview).  The Saddleback land acquired by Cromview was zoned rural at the time of acquisition. 

8. It would appear that at some stage Cromview applied for a rezoning of the land.

9. On or about 13 September 1989, the Beaudesert Shire Council (the Council) notified Cromview that the Council proposed to approve the rezoning of Cromview’s Saddleback land from rural to “Special Facilities Zone”, subject to 20 specified conditions.  A letter dated 13 September 1989 from the Council to Cromview stated that the 1989 rezoning approval was considered to be the maximum development allowed on the property and that no further development beyond the proposed approval would be considered.

10. At the time of the 1989 rezoning approval, the procedures by which land could be rezoned were contained in the Local Government Act 1936 (Qld).  It is unnecessary to delve into the intricacies of that Act.  Suffice it to say that for land to be rezoned, the relevant council and the relevant Minister were required to take a number of steps.  One of those steps was the publication of an Order in Council made by the Governor in Council.  That publication, commonly called a “gazettal”, was required before a rezoning became legally effective.  It was common ground that no such gazettal occurred in the case of the 1989 rezoning approval.  The approval conveyed by the Council in its letter dated 13 September 1989 accordingly was never effective.

11. At some stage following the 1989 rezoning approval, Cromview was placed into receivership.  In September 1992, the receivers of Cromview applied to the Council for an amendment to the 1989 rezoning approval.  That amendment was granted by the Council.  In November 1992, the Council notified the receivers of Cromview that it had amended the 1989 rezoning approval by amending some of the conditions attached to it.  The Council also granted an extension of time for the 1992 rezoning approval to 15 April 1994.

12. By the time of the 1992 rezoning approval, the rezoning of land was governed by the Local Government (Planning and Environment) Act 1990 (Qld). It is again unnecessary to deal in any detail with the requirements of that Act. As was the case under the previous Act, for land to be effectively rezoned it was necessary for the council and the relevant Minister to take a number of steps. Again, one of the steps was the publication in the Government Gazette of an Order in Council made by the Governor in Council. The rezoning was not legally effective until that gazettal.

13. It was again common ground that the 1992 rezoning approval did not reach the gazettal stage.  Accordingly, the land owned by Cromview which was the subject of the 1989 and 1992 rezoning approvals remained zoned “rural” at all relevant times.

    2004 – Establishment of the AGA Facility and initial acquisitions of the Saddleback land

14. In early 2004, AGA took a number of steps to enable it to borrow money from the Fund for the purpose of acquiring land in the Saddleback area.

15. In early March 2004, AGA sought and obtained a valuation, on a current market value basis, from PRP Valuers and Consultants Gold Coast Pty Ltd (PRP) in relation to approximately 394 hectares of land in the Saddleback area.  The valuation report by PRP was dated 5 March 2004 and headed ‘Valuation of a Rural Site ‘Saddleback’ – Darlington Range Road and Toe Holt Road, Canungra QLD 4275’.

16. The land which was the subject of the March 2004 PRP valuation comprised Lot 36 Crown Plan W311683, Lot 48 Crown Plan W312309 and Lot 10 RP 866564 in the County of Ward, totalling 394.185 hectares gross area.  PRP expressed the opinion that the current market value of the land was $5.9 million.  That valuation was based on the fact that the highest and best use of the land was for “rural pursuits as a holding proposition pending future subdivision approval”.  Importantly, the March 2004 PRP valuation took into account that the Saddleback land that was being valued was part of a larger parcel of land that was the subject of the 1989 and the 1992 rezoning approval.  It noted that the larger parcel had since been split up and that the land was zoned rural.

17. On 30 June 2004, AGA applied for a loan from the Fund.  On 14 July 2004, City Pacific, as the responsible entity of the Fund, wrote to AGA and offered a total facility of $3.25 million to AGA secured by a first registered mortgage over the land that was to be acquired.  That offer was accepted by AGA on 9 September 2004.

18. Following the initial loan and initial Saddleback acquisitions, AGA applied to City Pacific to increase the loan facility to enable it to purchase an additional 15 parcels of Saddleback land (comprising Lots 1, 2, 7 and 8 on RP 901269; Lots 3, 4 and 9 on RP 901270; Lots 5, 6 and 10 on RP 901271; Lot 8 on Crown Plan W 31574; Lot 17 on Crown Plan W 311369; Lot 45 on RP 36858; Lot 36 on Crown Plan WD 3323; and Lot 371 on Crown Plan WD 3324).  On or about 9 December 2004, City Pacific, as the responsible entity of the Fund, offered to provide a total facility to AGA of $9.29 million secured by registered mortgages over the existing lots owned by AGA and the additional 15 parcels of land to be acquired.  That offer was accepted, the funds were advanced, and the additional parcels were subsequently purchased by AGA on 21 December 2004.

    2005 – Further Saddleback acquisitions and increases to the AGA facility

19. On or about 24 February 2005, City Pacific as the responsible entity of the Fund, offered to provide a total facility to AGA of $8.8 million secured by registered mortgages over the Saddleback land already owned by AGA, and also over a further property, which was to be acquired by AGA, namely, Lot 61 on Crown Plan W312489.  That offer was accepted by AGA on 25 February 2005 and the additional properly was subsequently acquired.

20. On or about 28 April 2005, PRP, under instructions from City Pacific, provided a valuation of the Saddleback land that had been acquired by AGA on a current market value basis.  The report by PRP was dated 28 April 2005 and headed ‘Valuation of a Large Rural Site ‘Seven Mountains’ – Darlington Range Road and Toe Holt Road, Canungra QLD 4275’.  The land which was the subject of PRP’s April 2005 valuation was said to comprise 693.6718 hectares gross area.  PRP expressed the opinion that the current market value of that land was $19.075 million.  This valuation was again based on the fact that the highest and best use of the subject land was for “rural pursuits as a holding proposition pending future subdivision approval”.  The valuation referred to the 1989 and 1992 rezoning approvals.  It noted, however, that the land was nominated as “Regional Landscape and Rural Protection Area” in the draft South East Queensland Regional Plan.  This latter consideration led the valuer to note that “we have not allowed for any such potential [for future subdivision] and have undertaken this valuation based on the current rural uses”.

21. Shortly after this valuation, the AGA facility was again increased; first to $10.6 million in May 2005, and then to $13.35 million in June 2005.  Having regard to the April 2005 PRP valuation, the facility limit represented a loan to valuation ratio (LVR) of 52.8 percent (in May 2005) and 61.1 percent (in June 2005).

22. In September 2005, PRP was instructed to provide a further valuation of the February 2005 Saddleback land, together with six additional lots (Lots 30 and 31 RP 31446, Lot 1 RP 78799, and Lots 34, 35 and 36 RP 36859), comprising a total of 832.5525 hectares gross area  (together the September 2005 Saddleback Land).  PRP provided a valuation dated 30 September 2005 (the September 2005 Valuation), which valued the September 2005 Saddleback Land at $24.975 million.  The basis of that valuation was again that the highest and best use of the land was for rural pursuits as a holding proposition pending future subdivision approval.

23. The September 2005 Valuation included the following important note concerning approvals:

    The site was part of a larger parcel which was granted a re zoning to “Special Facilities” on 13^th of September 1989. The approved uses included a hotel, 18 hole golf course / clubhouse, equestrian centre, retain and tourist centres and 400ow density residential properties. The re zoning contained 20 conditions. The rezoning was not acted on and the parent parcel “split” with other parcels sold off during the 1990’s. The zoning has since reverted to Rural.

    September 2005 – The SVP report

24. Whilst City Pacific was approving increases to the AGA facility during 2005, it would appear that there were a number of issues concerning the Fund that were exciting the interest of ASIC. On 18 February 2005, ASIC wrote to the directors of City Pacific expressing concerns about the liquidity of the Fund. The letter enclosed a written notice issued under s 912C(1) of the Corporations Act that required City Pacific to give ASIC information about its financial services to assist ASIC in forming a view about the liquidity of the Fund. Following further correspondence in relation to that issue, ASIC advised City Pacific in May 2005 that it had two options available to it. It could either immediately follow the “Non-Liquid Scheme redemption process”, or it could engage external experts to review “firstly the loan book and underlying mortgages in the scheme and secondly the liquidity of the scheme”.

25. Plainly the “Non-Liquid Scheme redemption process” was not an attractive proposition for City Pacific.  The board of City Pacific opted for the second option offered by ASIC.  On 20 June 2005, City Pacific engaged SV Partners Pty Limited (SVP) to conduct the review required by ASIC, including a review of the Fund’s loan book. The review of the loan book was to involve, for every mortgage loan made by the Fund, an assessment of whether City Pacific had complied with the valuation and security requirements of the Constitution, the Compliance Plan and the Lending Manual. The directors of City Pacific approved the terms of SVP’s engagement.

26. On 21 June 2005, ASIC notified City Pacific that its Australian Financial Services Licence (AFSL) had been varied to add a condition that City Pacific must engage an external expert, approved by ASIC, to, amongst other things, “comprehensively review the assets of [the Fund]” and provide a report that included “any specific or general recommendations or comments that the [e]xpert may have in relation to the findings of the review”. That development was undoubtedly a most serious issue for City Pacific. City Pacific was required by s 912A(1)(b) of the Corporations Act to comply with the conditions of its AFSL. ASIC had the power under s 915C(1)(a) of the Corporations Act to suspend or cancel City Pacific’s AFSL if it did not comply with its obligations under s 912A. The holding of an AFSL was a prerequisite under s 601FA of the Corporations Act for City Pacific to be the responsible entity of the Fund.

27. On 28 September 2005, SVP furnished its report to both City Pacific and ASIC.  There could be no doubt that each of Messrs Sullivan, Swan and Donaldson was provided with, or saw, a copy of the SVP report, on or shortly after 28 September 2005.

28. The SVP report was detailed and lengthy.  Part A of the report dealt with SVP’s findings concerning the liquidity of the Fund.  Those findings, whilst undoubtedly important and significant for City Pacific, are not directly relevant to the issues in these proceedings.

29. Part B of the SVP Report dealt with SVP’s findings and recommendations concerning the Fund’s loan book. The report contained a number of general recommendations, but only one loan-specific recommendation which related to a loan that did not comply with the Constitution and the Compliance Plan. That loan was the AGA facility. The SVP report included the following findings and recommendations concerning the AGA facility:

    SVP has identified a loan where [City Pacific] has approved lending to 60% of the valuation but where SVP considers the loan is outside all current policy areas.

    i.SVP’s analysis is again based on use of the loan funds, this time for rural land banking at Canungra prior to rezoning of lands from Rural – Regional Landscape & Rural Protection to (the attempted) inclusion in the urban footprint of the recently released South East Queensland Regional Plan.  Under asset / non-conforming loans rural properties of not more than 10 hectares are considered acceptable as security.  The properties (the [Fund’s] security) now total 832.5 hectares. 

    ii.The loan is to Atkinson Gore Agricultural Pty Ltd (Craig Gore / John Atkinson) and approved to $13.35 million (with interest capitalised from date of initial draw down).

    Recommendation

    The loan be repaid (refinanced) if it is not confirmed in writing from the relevant government planning authority that the land can be included under the urban footprint of the recently released South East Queensland Regional Plan by 31 December 2005.  At the December review SVP also recommends obtaining another valuation from a different valuer to check the analysis of land values in the Canungra area based on permitted uses.  This valuation must also be satisfactory for the loan to remain as part of the portfolio.

    (Emphasis in original.)

30. Section 19 (and Table 19) of the SVP report also identified a number of loans in respect of which SVP recommended that an updated valuation be obtained.  One of the loans identified in Table 19 was the AGA facility.  The stated purpose of the updated valuation to be obtained in relation to the AGA facility was: “[c]urrent zoning and check analysis of Canungra land values by a different valuer based on permitted uses”.  The report noted that the updated valuation was “[t]o be requested if loan is not repaid by 31 December 2005”. 

31. The AGA facility was the only loan in the Fund’s loan book that SVP recommended be repaid or refinanced by a particular date if certain conditions were not met.

32. There was one additional general finding or observation included in the SVP report that is relevant to the events that transpired in relation to the AGA facility in 2006.  That finding concerned the certification of valuations.  SVP noted that the Compliance Plan provided that the lending manager must certify to the Credit Committee that the valuation is acceptable before approval.  SVP found, in effect, that this requirement was not being complied with.  The SVP report stated:

    As the lending manager signed off each lending proposal, SVP is advised that the members of the lending committee considered this to indicate the valuation was acceptable; but SVP sighted no specific evidence on file of separate certification.

    SVP are advised that new processes being introduced will incorporate a specific certification.

33. The “new processes” that SVP was advised were being introduced were in fact later implemented by City Pacific.  On 27 October 2005, each of Messrs Sullivan, Swan, Donaldson and McCormick were advised that City Pacific had adopted and implemented a new practice note in relation to valuations.  That practice note included a new form of credit proposal that was to be completed by the Lending Manager.  The new proposal was required to include the following:

    VALUATION CERTIFICATION

    In recommending this proposal, the Lending Manager certifies that the accompanying valuation is acceptable, subject to any qualification listed above.

1. On 5 October 2005, Mr Sullivan and Mr McCormick were sent a draft “matrix”, prepared by City Pacific’s lawyers, which summarised SVP’s recommendations.  The draft matrix included SVP’s specific recommendation in relation to the AGA facility.  The draft matrix also included a column into which was to be inserted the action City Pacific proposed to take in relation to each recommendation and the person or persons at City Pacific who bore the responsibility for taking that action (the action plan). 

2. The draft matrix, including the action plan, was reviewed by Mr Sullivan and others.  It was finalised and sent to ASIC on 11 October 2005.  Copies of the final version of the matrix and action plan were sent to Mr Swan and Mr Donaldson on 11 October 2005.  It could not seriously be doubted that each of Messrs Sullivan, Swan, Donaldson and McCormick were well aware of the SVP recommendations concerning the AGA facility and City Pacific’s action plan in relation to those recommendations from at least that time.

3. It will be necessary, in due course, to return to the SVP report and City Pacific’s response to it. On any view it alerted, or at the very least should have alerted, each of Messrs Sullivan, Swan, Donaldson and McCormick to serious issues concerning the AGA facility, including whether the facility complied with the Constitution, Compliance Plan and Lending Manual, and whether the existing valuation of the Saddleback land held by City Pacific was adequate. The extent to which those issues registered with each of Messrs Sullivan, Swan, Donaldson and McCormick was, however, a matter of some considerable dispute and contention. Each of them gave evidence and was cross-examined at length on that topic.

   October 2005 – Further increase in the AGA Facility

4. Within a week of receiving the SVP report, City Pacific approved an increase in the total facility available to AGA to $17.89 million.  The increase was specifically approved by each of Messrs Sullivan, Swan, Donaldson and McCormick as members of the Credit Committee.  The proposal to the Credit Committee in relation to the increase to the AGA facility limit was prepared by Mr McCormick.  The proposal stated that the current value of the security land was $26.775 million “TBV” – meaning “to be valued” or “to be verified”.  The proposal recommended that the increase be approved “subject to valuation”.  It is to be noted that the September 2005 Valuation valued the September 2005 Saddleback Land at $24.975 million, not $26.775 million.  It is common ground that City Pacific had not been provided with a valuation which valued the Saddleback land at $26.775 million.

5. It would appear that the proposal was not discussed at any meeting of the Credit Committee.  Rather, the proposal was circulated for signature to each of the members of the Credit Committee.  Mr Swan noted, in an email that conveyed his acceptance of the proposal, that his approval was “subject to … the receipt of an acceptable valuation”.

6. Despite the fact that the Credit Committee’s approval was subject to the receipt of a valuation confirming the supposed valuation of the security property of $26.775 million, on 6 October 2005, City Pacific communicated its offer to AGA to increase the facility.  The offer specified that the loan facility of $17.89 million was to be secured by registered mortgages over the September 2005 Saddleback Land, together with Lot 2 RP 78799 and a Deed of Cross-Collateralisation.  AGA accepted that offer on the same day.

7. One additional point to note about this increase to the AGA facility limit was that the maturity date of the loan remained the same.  City Pacific’s letter of offer specified that the term of the loan was “[r]eview for clearance 9 December 2005”.  As will be seen, the Credit Committee did not formally review or extend the loan until December 2006.

   AGA re-agitates the 1989 and 1992 rezoning approvals

8. On 7 September 2005, AGA wrote to the Council concerning the 1989 and 1992 rezoning approvals.  The letter requested that “the Council now proceed to make a final decision” on the approval.  That request was repeated in a letter dated 15 November 2005.  In that letter AGA requested that “Council now [approve] the 1989 rezoning approval (updated in 1992) in relation to the plateau and [forward] the approval to the State Minister for immediate Gazettal”.

9. Unfortunately for AGA, on 13 December 2005, the Council rejected AGA’s request to have it revisit the rezoning of the Saddleback land.  In its letter to AGA dated 21 December 2005, the Council stated that its reasons for refusing the rezoning of the Saddleback land to “special facilities” zone were that the rezoning:

   Ÿis contrary to Council’s current and future planning intent for the Shire;

   Ÿwill adversely impact upon the Council’s preferred pattern of development and orderly planning within the Shire;

   Ÿis out of sequence in terms of the Council’s preferred delivery of infrastructure within the Shire;

   Ÿwill adversely impact upon the amenity of the Shire;

   Ÿis not in accordance with the preferred pattern of development in the Regional Plan;

   Ÿwill adversely impact upon the amenity and proper functioning of the Canungra township; and

   Ÿthere is no need for the proposed development.

10. On 19 January 2006, AGA filed an appeal in the Planning and Environment Court of Queensland from the decision of the Council to reject its rezoning application.  It would appear, for reasons that are not entirely clear, that the appeal related to only three lots of the Saddleback land, amounting to just less than half of the Saddleback land owned by AGA.  In any event, as will be seen, AGA did not take any, or any meaningful, steps to prosecute the appeal.  It was eventually discontinued by AGA’s receivers in 2013.

11. In due course, AGA advised City Pacific that its efforts to revisit and re-agitate the 1989 and 1992 rezoning approvals had been unsuccessful.  On 15 February 2006, AGA sent a report to Mr Sullivan and Mr McCormick which summarised the steps AGA had taken to pursue development approvals in relation to the Saddleback land.  The report noted that the Council had refused AGA’s request to recommend to the minister that the 1989 and 1992 rezoning approvals be gazetted and that the refusal was the subject of an appeal in the Planning and Environment Court of Queensland.

    City Pacific’s purported implementation of the SVP recommendations and report to ASIC

12. In the latter part of 2005 and into early 2006, there was a degree of internal activity at City Pacific in relation to City Pacific’s response to, and implementation of, the SVP report recommendations.  Various action plans were prepared and circulated, and strategies were proposed.  Despite this internal activity, however, nothing much was in fact achieved in terms of implementing some of SVP’s recommendations.  In particular, nothing at all had been done to implement SVP’s recommendations concerning the AGA facility.  As at 31 December 2005, City Pacific had not obtained written confirmation that Saddleback had been included in the Urban Footprint area under the South East Queensland Regional Plan.  Nor had it required the AGA facility to be repaid, or obtained a fresh valuation from a different valuer based on permitted uses.

13. On 27 January 2006, ASIC wrote to Mr Sullivan to request a report on the progress of City Pacific’s implementation of the SVP recommendations.  On 8 February 2006, Mr Sullivan sent ASIC a letter enclosing a “full progress report”.  Mr Sullivan’s letter and the enclosed report were subsequently sent to Mr Swan and Mr Donaldson.  In relation to the AGA facility, a table in the enclosed report stated that “[o]n receipt of zoning gazettal and finalised valuation, both imminent, we will review [the] facility”.  The basis of the statement that a zoning gazettal and finalised valuation were “imminent” is, at best, unclear.  Given that the Council had refused AGA’s application to have the 1989 or 1992 rezoning applications gazetted, there would appear to have been no basis for the statement that gazettal was “imminent”.

14. Perhaps more significantly, the progress report stated as follows in relation to the AGA facility:

    A Draft valuation prepared by a different valuer (on panel), has been sighted at a substantially higher value.  Legal opinion is held from an eminent QC that the 1989 rezoning to ‘Special Facilities’ is valid for this property.  On receipt of zoning gazettal and finalised valuation we will review the facility.  Advice that we have received is that the gazettal is now a formality and is imminent.

15. That statement was unquestionably misleading, if not completely false.  No valuation by a different valuer had been commissioned, let alone sighted by City Pacific.  City Pacific did not hold an opinion from an eminent QC that the 1989 rezoning was “valid”.  Nor did it hold any advice that gazettal was “a formality and … imminent”.  Indeed, as already indicated, the Council had already refused AGA’s request relating to the approval and gazettal of the 1989 and 1992 rezoning approvals.  Mr Sullivan was made aware of this within days of sending the report to ASIC.  He did not advise ASIC of that refusal or otherwise seek to correct the statements made in the report to ASIC.

16. The evidence of Messrs Sullivan, Swan, Donaldson and McCormick in relation to City Pacific’s non-compliance with the SVP recommendations concerning the AGA facility and the false report to ASIC is considered in detail later.  Suffice it to say at this stage that the evidence concerning the knowledge and involvement of each of the respondents in relation to those matters provides important, if not critical, background and context to the events that occurred later in 2006 and 2007 in relation to the AGA facility.  If the respondents knew about SVP’s findings and recommendations concerning the AGA facility, knew that the recommendations had not been implemented, and knew that ASIC had been misled in relation to the implementation of the recommendations, it could hardly be accepted that they were not aware that there were potentially serious issues or problems with the AGA facility.  It could hardly be contended in those circumstances that the respondents saw the AGA facility as just another loan in the Fund’s loan book.  Rather, one would reasonably expect that each of Messrs Sullivan, Swan, Donaldson and McCormick would, at the very least, approach any proposal to increase the AGA facility with particular caution and care.  As will be seen, that is not what occurred.

    Deed of Cross-Collateralisation

17. On or around 9 March 2006, City Pacific as the responsible entity of the Fund, as trustee for City Pacific Private Fund (CPPF), and in its own capacity, entered into a Deed of Cross-Collateralisation with the Public Trustee of Queensland as custodian of the Fund, AGA, and a number of companies that, like AGA, were part of the Gore Group of companies.  Those companies were Atkgor Investments Pty Limited (Atkgor), Atkinson Gore Group Pty Limited (AGG), Sickle Avenue Pty Ltd (Sickle), Maudsland Pty Limited (Maudsland) and Treetops Pty Limited (Treetops).  City Pacific, as the responsible entity of the Fund, had loaned significant amounts of money to each of those companies.  With the exception of Atkgor, those loans were still outstanding as at March 2006 and were secured by mortgages over various properties. 

18. The effect of the Deed of Cross-Collateralisation was that the loan facilities then in place between City Pacific, in its various capacities, and AGA, Atkgor, AGG, Sickle, Maudsland and Treetops were cross-collateralised.  That meant that in the event of default by AGA, City Pacific could have recourse to the properties that secured the loans to Atkgor, AGG, Sickle, Maudsland and Treetops.  It is clear, however, that the Deed of Cross-Collateralisation only applied to the loan facilities then in place.  In the case of AGA, it only applied in respect of the facility with the limit of $17.89 million that was offered and accepted in October 2005.  Once the AGA facility limit was increased and the facility extended, the Deed of Cross-Collateralisation could not, without amendment, operate to provide additional security for the AGA facility.

    The AGA facility – March 2006 to July 2006

19. Trilogy’s case against the respondents focussed in particular on the events from about March 2006 onwards. In simple terms, Trilogy contended that the AGA facility should never have been increased or extended beyond the limit of $17.89 million approved in October 2005, and that no advances should have been permitted beyond that limit. Trilogy’s case was that the two increases to the AGA facility that were approved, or purportedly approved, in 2006 did not comply with the Fund’s Constitution, Compliance Plan, PDS and Lending Manual, and that no officer of a responsible entity, exercising the appropriate degree of care and diligence that a reasonable person would exercise if in the officer’s position, would have approved the increases. Trilogy also contended that none of the advances made from late April 2006 onwards complied with the Constitution, Compliance Plan, PDS and Lending Manual, and that no officer of a responsible entity, exercising the appropriate degree of care and diligence that a reasonable person would exercise if in the officer’s position, would have permitted the advances to be made.

    March 2006 Valuation

20. On 7 March 2006, City Pacific as the responsible entity of the Fund instructed PRP to prepare a valuation of the September 2005 Saddleback Land together with an additional lot, Lot 2 RP 78799.  The letter of instructions was dated 7 March 2006, addressed to Mr Christopher Kogler of PRP, and signed by Mr Matt Gillam, Assistant Lending Manager.  It instructed PRP to value the land the subject of the valuation on the following basis:

    Site Value AS IS (with current development approval if applicable).  The valuation is to reflect the 1989/1992 ‘Special Facilities’ rezoning approval over the Original Saddleback lands.  It is to also take into consideration the Canungra Development Control Plan which exists over part of the subject lands.

21. This represented a fundamental departure from previous instructions given to Mr Kogler.  It is difficult to interpret this instruction as meaning anything other than an instruction that the valuer was to assume that the 1989/1992 rezoning approval by the Council had been gazetted and was legally effective.  That is despite the fact that the rezoning approval had never been gazetted, was legally ineffective and the Council had made it plain to AGA that it refused to revisit or gazette the earlier approvals.   

22. On or around 20 March 2006, Mr Kogler of PRP provided City Pacific with a valuation as instructed.  For reasons not explained in the valuation itself, the report valued not only the September 2005 Saddleback Land and Lot 2 RP 78799, as instructed, but also two additional lots (Lot 49 RP 31445 and Lot 381 WD 3324).  The two additional lots, which were not referred to in City Pacific’s letter of instructions, were not then, or at any time, security for the AGA facility.  The basis for including these extra two lots in the valuation was never explained. 

23. Mr Kogler’s report was dated 20 March 2006 and headed ‘Valuation of Englobo Development Site ‘Seven Mountains’ – Darlington Range Road and Toe Holt Road, Canungra QLD 4275’ (the March 2006 Valuation).  The land which was the subject of the valuation was said to comprise land with a gross area of 886.67 hectares.  Mr Kogler, expressed the opinion that the current market value of the March 2006 Saddleback land was $64.1 million.

24. It is clear from the terms of the March 2006 Valuation that Mr Kogler, as effectively instructed, valued the land on the basis that the 1989 or 1992  rezoning approval was legally effective and that development approval had been given in relation to the lots the subject of that rezoning.  Only that assumed change in zoning could explain the huge increase of almost $40 million in the valuation from the September 2005 Valuation. 

25. Mr Kogler’s reasoning in his valuation was also instructive.  He noted that the current zoning of the land was “rural” and that its permitted uses were “for agricultural pursuits, mainly cattle fattening and breeding”.  He also noted that the land had been nominated as a “Regional Landscape and Rural Protection Area” in the South East Queensland Regional Plan.  He expressly referred to the fact that the Council had, in December 2005, refused AGA’s application to approve and send for gazettal the 1989 or 1992 rezoning approval.  Despite that fact, Mr Kogler valued the land that was the subject of the 1989 or 1992 rezoning approval on the basis that AGA “holds the major development approval”.  He assessed that land as being worth $372,906 per hectare.  In contrast, those lots that were not the subject of the supposed rezoning and development approval were valued as being worth $22,500 per hectare on the basis that the current zoning of those lots was “rural”.  

26. There was no dispute that Mr McCormick received and read the March 2006 Valuation.  Nor was there any real dispute that Mr McCormick provided the valuation to Mr Sullivan.

27. The evidence of Messrs Sullivan, Swan, Donaldson and McCormick in relation to the March 2006 Valuation is considered later.

    Request for an updated valuation

28. On or about 20 April 2006, City Pacific instructed PRP to prepare an addendum to the March 2006 Valuation.  Those instructions were provided by way of letter to Mr Kogler, again signed by Mr Gillam.  The letter gave Mr Kogler the following additional instructions:

    We would be pleased if you could issue an addendum to your valuation report which also expresses the valuation on the following two (2) additional (yet separate) bases:

    1.valuation on basis that the development proposal known as Seven Mountains on the lands the subject of this valuation is declared under the State Development and Public Works Organisation Act 1971 as a ‘State significance’ project;

    2.valuation on basis that the lands are included in the “Urban Footprint” area under the SEQ Regional Plan.

29. This was, to say the least, a most unusual instruction in the circumstances.  Mr Kogler was effectively being asked to value the Saddleback land on the basis of assumptions that did not reflect reality and may never come to pass.  As Mr Kogler himself made clear in the March 2006 Valuation, the Saddleback land had in fact been excluded from the Urban Footprint area under the South East Queensland Regional Plan.  It was nominated as “Regional Landscape and Rural Protection Area.”  Whilst a SEQ Regional Plan Draft Amendment had issued, there was no proper basis to assume that the amendment would include the Saddleback land in the Urban Footprint, particularly given the Council’s stance on the development approval in relation to part of the Saddleback land.  The March 2006 Valuation also made it clear that a declaration of State Significance was, at that time, simply an alternative avenue which AGA “may investigate”.  There had certainly been no such declaration.  Nor was there any proper basis upon which it could be assumed that such a declaration was likely, let alone imminent.

30. The timing of the request for an updated valuation was also interesting.  The request was made at the time the AGA facility had effectively been drawn down to its limit.  The available inference is that it was intended that the updated valuation, based on false, or at least highly dubious, assumptions, would support an increase to the facility.  As will be seen, however, the updated report was not received until late May 2006.  In the intervening period, advances continued to be made to AGA, despite the fact that no increase to the facility limit had been proposed, let alone approved, and despite the fact that the advances took the facility well over its approved limit.

    May 2006 – Advances over the AGA facility limit

1. The circumstances of Mr Swan’s case are also such that it cannot be concluded that he ought fairly to be excused. Mr Swan’s conduct, on any view, fell well short of the standards of care and diligence that he was required to meet in all the circumstances. His contravention of s 601FD of the Corporations Act was serious and involved significant potential and actual consequences for the Fund. It cannot be accepted that Mr Swan was at all contrite.

2. 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

3. 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.

4. 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.

5. 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.

6. 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. 

7. 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.

8. 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.

9. Significantly, all this occurred in circumstances where the Fund’s assets, held on trust for its members, were valued at around $1 billion.  Messrs Sullivan, Swan, Donaldson and McCormick seemed to have forgotten or ignored the fact that they were making decisions about other people’s money.  It is doubtful that they would have acted in the same way if it was their money that was being advanced to AGA.

10. In all these circumstances, the seriousness of the respondents’ contraventions can be readily appreciated. Relief under either s 1317S or s 1318 of the Corporations Act would be wholly inappropriate in the case of any of the respondents.

    PLEADED DEFENCES TAKEN TO BE ABANDONED

11. In their lengthy and detailed submissions, the respondents did not pursue a number of defences included in the pleadings.  Those defences are taken to be abandoned.  They include:

    (a)The defences based on the Deed of Cross-Collateralisation.  Those defences included that the security available in respect of advances made under the AGA facility after 28 April 2006 included properties held as security in respect of loan facilities between City Pacific and Atkgor, AGG, Sickle, Maudsland and Treetops.  Accordingly, so it was pleaded, any assessment of the LVR of the AGA facility had to be calculated having regard to those additional security properties.  It also appeared to be pleaded that the respondents understood and believed that was so.

    (b)The claim that the cause of any loss suffered by City Pacific or the Fund from the AGA facility was “the GFC of 2008 and thereafter”. The onset of the global financial crisis was relied on as part of the Hypothetical Loans submission, but not as a standalone defence to Trilogy’s case in relation to causation under s 1317H of the Corporations Act.

    (c)The allegation that the loss suffered by the Fund under the AGA facility was caused not by the respondents’ contraventions of the Corporations Act, but by the failure of the directors of AGA to meet their obligations under the guarantees given by them in respect of the AGA facility.

    QUANTUM OF COMPENSATION AND INTEREST

12. Subsection 1317H(1) of the Corporations Act provides that an order made under s 1317H requiring a person to compensate a registered scheme for damage suffered by the registered scheme that resulted from a contravention or contraventions of a corporation/scheme civil penalty provision (which includes s 601FD) must specify the amount of the compensation.

13. The effect of the findings that have been made against Mr Sullivan and Mr McCormick is that the damage suffered by the Fund that resulted from their contraventions of s 601FD of the Corporations Act was the sum total of all the advances made by City Pacific as the responsible entity of the Fund to AGA from 28 April 2006 to 1 July 2007. The advances made to AGA during this period was an agreed fact ([101], [116] and [126] of the Compendium of Agreed Facts and Facts Not in Dispute). The sum total of the advances was $42,489,088.28. Trilogy accepted, however, that this amount should be reduced by $5,275,000 reflecting repayments that were made by AGA in May and July 2007.

14. The effect of the findings that have been made against Mr Swan and Mr Donaldson is that the damage suffered by the Fund that resulted from their contraventions of s 601FD was the sum total of all the advances made by City Pacific as the responsible entity of the Fund to AGA in the period from 11 January 2007 to 1 July 2007. That sum total of the advances made during that period was $11,520,974.93. Trilogy also accepted that this amount should be reduced by $5,275,000 as a result of the repayments made in May and July 2007.

15. Trilogy contended that the compensation orders should also include interest pursuant to s 51A(1)(a) of the Federal Court of Australia Act 1976 (Cth) (FCA Act).  Subsection 51A(1)(a) provides as follows:

    In any proceedings for the recovery of any money (including any debt or damages or the value of any goods) in respect of a cause of action that arises after the commencement of this section, the Court or a Judge shall, upon application, unless good cause is shown to the contrary, either:

    (a)order that there be included in the sum for which judgment is given interest at such rate as the Court or the Judge, as the case may be, thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date as of which judgment is entered

16. Practice Note CM 16 – Prejudgment interest provides as follows:

    1.Section 51A(1)(a) of the Federal Court of Australia Act 1976 (Cth) provides for the making of orders for the inclusion of interest in judgments.

    2Practitioners and litigants should expect that where, pursuant to section 51A(1)(a), interest in respect of a pre-judgment period is to be included in a judgment, the Court will have regard to the following rates, being rates agreed upon by the Discount and Interest Rate Harmonisation Committee established following a referral by the Council of Chief Justices of Australia and New Zealand:

    (a)in respect of the period from 1 January to 30 June in any year – the rate that is 4% above the cash rate last published by the Reserve Bank of Australia before that period commenced, and

    (b)in respect of the period from 1 July to 31 December in any year – the rate that is 4% above the cash rate last published by the Reserve Bank of Australia before that period commenced.

17. Trilogy contended that it was entitled to interest calculated on the basis that a separate cause of action arose in relation to each advance made to AGA that went beyond the October 2005 facility limit of $17.89 million.  Thus, for example, interest was payable in respect of the advance of $173,767.32 made on 1 May 2006 from that date until judgment.  Similarly, interest was payable on the advance made on 11 May 2006 of $1 million from the date of that payment until judgment.  Trilogy calculated the interest on the basis of the guideline interest rate in Practice Note CM16 in the Federal Court Rules 2011 (Cth).

18. Messrs Sullivan, Swan and Donaldson opposed Trilogy’s interest claim. They contended that interest pursuant to s 51A of the FCA Act was not appropriate because the compensation orders should reflect any damage suffered by the Fund arising from the fact that it was deprived of the use of the funds that had been advanced to AGA. They submitted that the regime in s 1317H of the Corporations Act precluded the award of interest and only permits the recovery of compensation for the actual loss suffered, which relevantly includes all loss up to judgment. They based this argument on the position taken by the Australian Securities and Investments Commission in Adler v ASIC.  It is clear, however, that the Court of Appeal in that case expressed no view as to whether that was the correct approach.

19. Messrs Sullivan, Swan and Donaldson also contended that the Court should not award interest at the rate referred to in Practice Note CM16, but instead should “give regard to the evidence as to the actual loss the Fund would have suffered”.  They submitted that the Fund did not suffer any loss because if it had not loaned the money to AGA, it would have loaned the money to someone else who would not have repaid it.  In this respect, the submission echoed the Hypothetical Loans submission made in the context of causation.

20. The matters raised by Messrs Sullivan, Swan and Donaldson do not constitute a “good cause” for why interest under s 51A of the FCA Act should not be ordered as part of the compensation orders. The fact that Trilogy could have, but did not, claim that the damage suffered as a result of the contraventions included the loss resulting from the fact that the Fund was unable to earn a return by loaning the funds to other borrowers, does not mean that Trilogy cannot seek and obtain an award of damages under s 51A of the FCA Act. Otherwise, the submissions of Messrs Sullivan, Swan and Donaldson relied heavily on the Hypothetical Loans submission. The Hypothetical Loans submission is rejected for the reasons already given. It accordingly provides no good cause for not making an order for pre-judgment interest under s 51A of the FCA Act.

21. The determination of the appropriate amount of compensation order is not materially different to the assessment of damages for a common law claim, such as negligence. The fact that relief is granted in the form of a compensation order rather than a judgment for an amount of damages does not mean that the “compensation regime” of s 1317H of the Corporations Act is any different to the assessment of damages at common law.

22. In Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 6) [2013] FCA 144 (Bathurst v LGFS No 6), Jagot J rejected a contention relevantly the same as the contention made by Messrs Sullivan, Swan and Donaldson in these proceedings.  The respondents in that case submitted that the applicants should not be awarded pre-judgment interest because they had not proved any profit they might have made, or any loss suffered, by reason of being kept out of their money by reason of the respondents’ negligence.  Jagot J referred to Management 3 Group Pty Ltd (in liq) v Lenny’s Commercial Kitchens Pty Ltd (No 2) (2012) 203 FCR 283; (2012) 289 ALR 275 (Management 3 Group) where the Full Court said (at [25]) that “[p]re-judgment interest is awarded to compensate an applicant for being kept out of the applicant’s money by the respondent’s refusal to pay that which the court at trial orders to be paid”. Jagot J found that the applicants were entitled to interest pursuant s 51A of the FCA Act even though they had not proved any profit they would have made if they had not been kept out of their money. Her Honour said (at [14]):

    For these reasons the councils and LGFS are in an equivalent position in terms of my findings.  They would not have invested in the CPDO notes and would not have lost their money but for the unlawful conduct of S&P and ABN Amro.  Hence, they would have had the use of those funds for the period from investment onwards.  Beyond that, the next step in the reasoning process involves hypothesis for the councils not a finding (that is, the hypothesis the councils might have invested rather than spent the money) and neither hypothesis nor finding for LGFS.  But I do not accept this means that the councils and LGFS are not entitled to pre-judgment interest to compensate them for the loss of their money.  They will have been kept out of their money from the date of cash-out until the date orders are made.  On the date of cash-out they lost their principal and their future interest.  It is the purpose of pre-judgment interest to compensate them for that loss.  They did not need to prove a profit they otherwise would have made.  The compensatory purpose extends to the loss of the use of the money they otherwise would have had.  That is sufficient to enliven the compensatory purpose unless good cause is shown to the contrary.  No good cause is shown.  It is just that the councils and LGFS be awarded pre-judgment interest, the relevant starting date, however, being the date of cash-out rather than the date of initial investment.  Confining the period of pre-judgment interest in this way is appropriate because the councils and LGFS were out of their money from that date onwards.

23. Exactly the same reasoning applies here.  Trilogy is entitled to pre-judgment interest to compensate the Fund for the loss of its money.  It was not necessary for Trilogy to prove the profit it would otherwise have made from the use of the money.

24. It is also to be noted that Jagot J found that the relevant commencement date for pre-judgment interest was the “cash-out” date (the date when the councils would have been entitled to cash-out their investments), not the date that the investments were made.  The position is somewhat analogous to this case.  Whilst the facts and circumstances of Bathurst v LGFS No 6 are not precisely analogous to this case, a similar issue in relation to the commencement date of the interest calculation arises.  Trilogy claimed that the commencement date for the interest calculations was the date each advance to AGA was made.  The better view, however, is that pre-judgment interest should be calculated on the basis of the total of the relevant advances and should commence on 1 July 2007, not from the date that each separate advances was made. 

25. The main reason for this is that a number of the advances that were made during the period 28 April 2006 to 1 July 2007, had the effect of capitalising interest.  Those advances were typically made on the first day of the month when interest was due.  Under the loan facility, interest was payable monthly in arrears.  When monthly interest payments were not made, the interest rate was typically added to the principal outstanding and recorded as a loan advance.  The compensation orders to be made will include amounts referable to those advances that had the effect of capitalising interest.  It follows that if Trilogy were to receive pre-judgment interest from the date each of the advances were made, it would effectively be compensated twice.

26. As for whether the relevant interest rate for the calculation of pre-judgment interest should be derived from Practice Note CM16, the Full Court in Management 3 Group said as follows in relation to Practice Note CM16 (at [25]):

    The proper rate of interest to be applied should be the rate prevailing from time to time in the market place which would represent the cost of the money to a successful applicant.  The Court has suggested in Practice Note CM16 that that rate is 4% above the cash rate fixed by the Reserve Bank.  In our opinion that rate is a rough and ready guide of the prevailing interest rate at any given time and should be applied in relation to pre-judgment interest on any award which has been calculated as at the date that the cause of action arose.

27. It not having been shown that there is “good cause” for not awarding pre-judgment interest under s 51A of the FCA Act, there should be included in the compensation orders interest on the damages found to have resulted from those contraventions. That interest should be calculated from 1 July 2007 and should use interest rates calculated in accordance with Practice Note CM16.

    CROSS-CLAIMS

28. The respondents’ cross-claims concerned claims that Trilogy was obliged to indemnify them for their legal costs pursuant to a Deed of Indemnity dated 7 April 2009 (in Mr McCormick’s case) and a Deed of Indemnity dated 26 April 2001 (in the case of Messrs Sullivan, Swan and Donaldson). Under the terms of both deeds, and more significantly by reason of s 199A(3) of the Corporations Act, the respondents are not entitled to an indemnity where they have been found liable to compensate Trilogy under s 1317H of the Corporations Act. In light of the findings that have been made in relation to the respondents’ liability under s 1317H, it must follow that they are not entitled to an indemnity in respect of their legal costs under the deeds and the cross-claim must be dismissed.

    A NOTE IN RELATION TO DELAY

29. There has been a long delay between the hearing of this matter and the delivery of this judgment.  That delay is unfortunate and regrettable.  It was due, in no small part, to the very large volume of documentary evidence and the extremely lengthy written submissions relied on by the parties. 

30. Despite being the subject of specific directions and debate, the final tender bundle of documents filled over 20 lever arch folders and comprised well over 1200 documents and many thousands of pages.  Regrettably, the majority of those documents were not referred to, let alone explained by, any witness and were not the subject of any, or any detailed, oral submissions.  Many were, at best, referred to in a footnote in the detailed and lengthy written submissions.  The relevance of many of them was at best doubtful. 

31. The parties’ written submissions ran to over 550 pages.  The written submissions of Messrs Sullivan, Swan and Donaldson ran to 320 pages (single-spaced with attachments).  Even though no directions were made limiting the length of the written submissions, it is doubtful that such lengthy submissions were warranted.  Submissions of that length are not always helpful.  Indeed, they can sometimes be counterproductive and even oppressive.

1. 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

2. 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).

3. 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.

4. 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.

5. 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.

6. 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. 

I certify that the preceding nine hundred and thirty-two (932) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Wigney.

Associate:

Dated:        18 December 2015