ASIC v Macro Realty Developments Pty Ltd
In Australia, there are more than two million businesses and more than 700,000 of these businesses are companies. The majority of the companies are in of proprietary limited type, which runs small or medium enterprise. These companies are run through a minimum of one director; though, usually they are run by two or more directors (Rosa, 2015). The directors of the company have the duty to run the business of the company, on behalf of the shareholders. And due to these reasons, certain specific duties have been imposed over the directors. The act which governs these duties and the other aspects of any company in the nation is the Corporations Act, 2001 (Cth) (Latimer, 2012).
The case of Australian Securities and Investments Commission v Macro Realty Developments Pty Ltd [2016] FCA 292 deals with the breach of director duties, along with the other contraventions under the governing act. In the following case, this case has been summarized, whereby the duties breached and the decision of the court has been elucidated.
In this case, Jamie McIntyre had brought forward a new investment proposal (proposal) which got the attention of the ASIC, i.e., Australian Securities & Investments Commission. This was due to the fact that Jamie was a property spruiker from Gold Coast and ASIC had initiated proceedings in the Federal Court with regards to the sale and promotion of interest to the investors in five of the land banking schemes (Schlesinger, 2016). Undeterred by these proceedings, Jamie marketed the investment seminars so as to present the proposal. The structure which was used in this proposal was more sophisticated than any other structure of 21st century, which was the company of Jamie, used for such schemes. As per this, the investors had to pool their funds in the company of the promoter, which had acquired the properties. This structure had been used in an ingenious manner of using the same as third parties for acquisition and warehouse of properties. This proposal contained a marketing brochure which was circulated by the company 21st century and a MOU, i.e., Memorandum of Understanding, which had to be entered between Macro Realty and the investor. A number of terms were created in this; though, it was not made clear how Macro Realty would have made profits from this scheme. One of the possible ways in which Macro Realty could have made profits was by selling the option which was held by the company for purchasing the properties to the company of the investor at a premium amount and this premium was payable from the finance which had been raised against the property. This was due to the “zombie company” structure, which could facilitate this entire plan (Cordato, 2016).
The proceedings against Macro Realty were initiated by the ASIC in September 2015, along with two of the associated companies, i.e., the 21st Century Education and the 21st Century Property (ASIC, 2015). An interim injunction was obtained by the ASIC for restraining the investment proposal from being continued being marketed. There was an absence of any indication which could show the participation of the investors at the stage of proposal (Cordato, 2016).
Duties Breached
The declarations and injunctions in this case were sought by the plaintiff with regards to the conduct of the defendant in the matter of carrying of unlicensed financial services, which led to the breach of section 911A of this act; for being engaged in deceptive or misleading conduct, as a result of which, section 1014 H of this act was breached, along with section 12DA of the ASIC Act; and lastly, for being engaged in a conduct which could be constituted as procuring of or counseling the investors so as to breach section 181(1) of the Corporations Act (Federal Court of Australia, 2016).
Under the Corporations Act, 2001 (Cth), Part 2D.1 contains the duties and powers of the officers and employees of the company (Australasian Legal Information Institute, 2017). Division 1 of this part specifically contains the general duties of the directors, employees and other officers of the company (ICNL, 2017). One of such duties, contained under this division relates to the civil obligation pertaining to the good faith given under section 181 of this act (Cassidy, 2006).
As per this section, the directors of the company and the other officers of the company have a civil duty on them to ensure that when they discharge their obligations and undertake their powers, they have to act for a proper purpose, in the best interest of the company and in good faith (Federal Register of Legislation, 2017).
In case the provisions contained in this act are breached, the court has the power pursuant to section 1317 E of this act, to make a declaration of contravention (WIPO, 2015). After this has been made, the ASIC can apply to the court for pecuniary penalties to be imposed on the breaching party pursuant to section 1317 G of this act (Australian Government, 2017).
The court held that the proposal was, pursuant to section 763A of this act, a financial product. Section 911A(1) of this act had been breached by the 2nd and the 3rd defendant as they failed to carry on the business regarding making available the financial services by making statements of opinion or recommendations which meant to influence the people in making the decision for acquisition, varying or disposing of the proposal. This was due to the fact that these defendants did not hold an Australian Financial Services Licence which was required for covering the quoted provisions pertaining to the financial services. The view which was presented was that the individuals who attend the seminar should enter into the proposal for investing in a real property; they should enter into the proposal for investing in the real property through a document which was published over a website and that the general public should do so. These promotions contravened the duty of acting in good faith for proper purpose (Jade, 2017).
Beach J, on March 23rd 2016, made the granted orders as permanent, with regards to restraining the promotion, as well as, marketing and the receipt, as well as, disposal of funds with regards to the investment proposal. The order was made on three different bases by Justice Beach. The contravention of section 181(1) of the governing act was due to the failure on part of the director in discharging his given duties in a proper manner. The explanation given by Lord Denning MR in Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606, with regards to the fiduciary duty was adopted by the judge in this case (Jade, 2017).
Decision of the Court
In Boulting v Association of Cinematograph, Television and Allied Technicians, Lord Denning had stated that an individual who has been given the duties of fiduciary nature for discharging could not be permitted to form any engagement which could lead to the individual binding himself for disregarding these duties. Lord Denning MR also stated that no such condition can be deemed as legal which he agrees to for carrying out his obligations as per the instructions given by someone else, instead of their own conscientious judgment (Jade, 2017).
With regards to the present case certain relevant factors were identified by Justice Beach. It was agreed by the investor to fetter them to act in a manner which is as per the directions given by Macro, in advance of the company’s establishment. Apart from this, the fact that as per the MOU, the investor had to be the only shareholder, along with being the only director, as per which, the consent of the shareholder could not be operated for excusing a director from the liability for a contravention of the statutory duties which are contained in section 181 of the Corporations Act, 2001. Both 21st Century and Macro Realty were held to be involved in the marketing and promotion of the MOU. Both 21st Century and Macro Realty were held to be liable by the court with regards to the procurement and counseling of the investors for contravention of section 181(1) of this act and as a result of this, restraining orders were made against the two companies pursuant to section 1324 of this act (Federal Court of Australia, 2016).
By marketing and promoting the proposal during the relevant period, the defendants had breached section 1014 H of this act, along with the section 12DA of the ASIC Act as it was represented to the prospective investors that the proposal was risk free essentially; that the duties of the investor were fulfilled as being a company director by merely signing off the annual return; and lastly, that the proposal did not require any money, or capital and even no fees was involved (Ashurst, 2016).
The court held that both the brochure and the MOU were such documents, which constituted the proposal, were infected and incomprehensible with internal inconsistencies. The proposal was such that the investor had to be a director of the company in which Macro was the sole decision maker for any and all activities, where it retained the entire control of the company and where the decisions regarding the business of the company would have been made only by the defendant and the investor had to abide by each and every thing which the defendant required the investor to do, for running of the business, as deemed fit by Macro (Federal Court of Australia, 2016).
The Court also differentiated between this case and that of Thorby v Goldberg (1964) 112 CLR 597. The quoted case was related to the limited arrangement with regards to the prior entry in the transaction which the directors had, due to the consideration of what could be deemed as best interest for the company. There was an absence of expansive fettering of the general powers and discretions of the directors. However, unlike the quoted case, in the given case, the fettering was not at all limited to set of transactions or a more limited transaction. Also, in the present case, the directors failed to give the necessary consideration to the interest of the company, let alone its best interest. This was coupled with the fact that the defendants had the requisite knowledge pertaining to the key facts which would have led to the breach of section 181 of the Corporations Act. And this is evidenced from the fact that the same was described in the MOU. And the requisite state of mind was present with the defendants for the purpose of section 1324 of this act, with regards to procuring or counseling (Federal Court of Australia, 2016).
As per this order of the Court, the defendant was restrained by itself, along with through its agents, officers or servants from marketing or promotion of proposal; entering into agreement relating to the proposal; doing anything in future with regards to this proposal; and lastly, from disposing off, receiving or soliciting funds with regards to the proposal. The defendant was also ordered to pay the costs to the plaintiff and this included all of the reserved costs. Hence, the declarations and injunctions sought by the ASIC were granted by the Federal Court (Ashurst, 2017).
Conclusion
The discussion carried in the previous part suggests that the directors and other officers of the company have certain duties, which have been imposed on them through the Corporations Act, 2001. And these duties were also imposed on the directors of Macro in the case of Australian Securities and Investments Commission v Macro Realty Developments Pty Ltd. However, it was held in this matter, by Justice Beach that the plaintiff had breached these duties with regards to the best interest of the company. This was because in the present case, instead of keeping the best interest of the company as supreme, the personal interest was upheld. And as a result of this, the court passed restraining orders against the defendant, which restricted them from promoting and marketing of the proposal. Along with this, the costs of the plaintiff were also asked to be paid by the defendant.
References
Ashurst. (2016) Financial Services Update – Developments in disputes in the Australian financial markets and financial services sector. [Online] Ashurst. Available from: https://www.ashurst.com/en/news-and-insights/legal-updates/financial-services-update—developments-in-disputes/ [Accessed on: 30/05/17]
Ashurst. (2017) Ashurst Australian Disputes Year in Review 2016. [Online] Ashurst. Available from: https://www.ashurst.com/en/news-and-insights/insights/ashurst-australian-disputes-year-in-review/ [Accessed on: 30/05/17]
ASIC. (2015) 15-250MR ASIC restrains Macro Realty Developments Pty Ltd and Jamie McIntyre’s 21st Century Property and 21st Century Education from promoting Pilbara property investment. [Online] ASIC. Available from: https://asic.gov.au/about-asic/media-centre/find-a-media-release/2015-releases/15-250mr-asic-restrains-macro-realty-developments-pty-ltd-and-jamie-mcintyres-21st-century-property-and-21st-century-education-from-promoting-pilbara-property-investment/ [Accessed on: 30/05/17]
Australasian Legal Information Institute. (2016) Australian Securities and Investments Commission v Macro Realty Developments Pty Ltd [2016] FCA 292 (23 March 2016). [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2016/292.html?stem=0&synonyms=0&query=Macro%20Realty%20Developments%20Pty%20Ltd [Accessed on: 30/05/17]
Australasian Legal Information Institute. (2017) Corporations Act 2001. [Online] Australasian Legal Information Institute. Available from: https://www.companydirectors.com.au/director-resource-centre/organisation-type/organisation-definitions [Accessed on: 30/05/17]
Australian Government. (2017) Corporations Act 2001. [Online] Australian Government. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 30/05/17]
Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.
Cordato, A.J. (2016) Court declares ‘zombie company’ structure contravenes a director’s duty of good faith. [Online] Lexology. Available from: https://www.lexology.com/library/detail.aspx?g=abb99b1f-a6e7-425b-87cb-95b6f4f98689 [Accessed on: 30/05/17]
Federal Court of Australia. (2016) Australian Securities and Investments Commission v Macro Realty Developments Pty Ltd [2016] FCA 292. [Online] Federal Court of Australia. Available from: https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2016/2016fca0292 [Accessed on: 30/05/17]
Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 30/05/17]
ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on: 30/05/17]
Jade. (2017) Australian Securities and Investments Commission v Macro Realty Developments Pty Ltd [2016] FCA 292. [Online] Jade. Available from: https://jade.io/article/459661 [Accessed on: 30/05/17]
Latimer, P. (2012) Australian Business Law 2012. 31st ed. Sydney, NSW: CCH Australia Limited.
Rosa, D.D. (2015) Are you in breach of your duties as a director of your company?. [Online] Di Rosa Lawyers. Available from: https://dirosalawyers.com.au/breach-duties-director-company/ [Accessed on: 30/05/17]
Schlesinger, L. (2016) Macro Realty and spruiker Jamie McIntyre banned from promoting Pilbara scheme. [Online] AFR. Available from: https://www.afr.com/real-estate/macro-realty-and-spruiker-jamie-mcintyre-banned-from-promoting-pilbara-scheme-20160323-gnq1l1 [Accessed on: 30/05/17]
WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 30/05/17]
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