CASE Introduction and Facts
Disucuss about the Case Study of ASIC v Australian Property Custodian Holdings Limited.
The case of Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3) [2013] FCA 1342 is in relation to corporation law and the duties of manages to responsibly manage an investment scheme of a disclosing entity. The court in this case had to analyze the meaning of best interest n relation to the statutory duties to act in the company’s best interest proper purpose and good faith. The court had to determine whether the test for best interest is objective or subjective in nature. In this case the duty of undivided loyalty to members of scheme was also at stake. The directors’ duty when there is a conflict of interest and the course of action which needs to be taken in such situation had also been analyzed by the court in this case. The statutory duty which is provided under section 10 of the Corporation Act 2001 (Cth) which is to exercise care and diligence also had to be analyzed by the court n relation to the standard of care and diligence which would satisfy the duty. The paper analyzes the facts of this case, the decision of the court and the importance of the decision in Australian company law.
This case has been initiated by the Australian Securities and Investment Commission alleging that the six defendants in this case had made contraventions on relation to the provisions of a Corporation Act 2001 (Cth). Allegations had been made by the ASIC that provisions of s 601FC as provided in part 5C of the CA related to “the duties imposed on a responsible entity of a managed investment scheme” had been breached by the defendants. The ASIC further alleged that the duties which an officer of such entity has in relation to a responsible entity under s 601FD have been breached by the directors of the company. In addition allegations had been made by the ASIC that rules which prohibit related parties transaction indulged into by responsible entity prior to taking approval under the provisions of section 208 of the CA from the member along with the prohibition which directors of a responsible entity involved in the breach of section 208 as per section 209 have also been contravened. The first defendant in this case was Australian Property Custodian Holdings Limited. The other five defendants were the directors of the first defendant at all relevant times. They are namely William Lionel Lewski, Mark Frederick Butler, Kim Samuel Jaques,, Michael Richard Lewis Wooldridge and Peter John Clarke.
Duties breached by the directors
In this case a resolution had been passed by the directors of the responsible entity by which they wanted to make many amendments to the constitution of the company. In relation to the amendments the directors wanted to add two new fees a listing and a removal fee. There was a clause in the constitution of the responsible entity cannot be amended without the approval of the members in case such alterations was in relation to favour or benefit of the responsible entity. Reference had also been made by the constitution in relation to section 601GC of the CA through which changes in relation to a constitution could be made without taking approval from the members only in situation where there was reasonable consideration on the part of the company the right of the members would not be affected adversely by the change. An advice had been provided by the lawyer of the responsible entity which suggested that the amendment without the members’ approval may be valid even if there is benefit of the responsible entity. Allegations had been made by the ASIC that the company and one of its shareholders was to be provided with significant gains in relation to the amendment of the constitution. This is because all the equity in the RE was held by one of the directors Mr Lewski and his family. This was further proved by the facts that the fees provisions could have been trigged a multiple times. In relation to the amendment of the constitution there was an agreement by the board to pay the RE.
- The directors have the duty to act with bona fide intensions in the best interest of the company under the provisions of section 181 of the CA.
- It is the duty of the directors in situation of a conflict of interest that they give importance to the benefits of the members of the company and not pursue personal interest when the company is solvent and in case of insolvency the directors must give importance to the creditors of the company.
- The directors have to act for a proper purpose which means to indulge in actions which are in relation to achieving the goals of the company. These actions should be indulged in with observance of bona fide intensions.
- The directors also have a duty under which they must discharge their obligations with proper care and diligence as per the provisions under section 180(1) of the Act
- When the directors are managing an professional entity their actions must comply with the standard of diligence and care of a professional
- In this case the directors acted for personal interest and also were not careful while disposing their organizational responsibility
The case had been ruled in the favour of the ASIC by the court ruling that the defendants were guilty of the alleged contraventions. It had been stated by the federal court that with respect to the passing of the resolution for lodgement in the year 2006 the responsibility contravened some of its duties as per section 601FC(1), which included acting in the best interest of the members, exercising reasonable care and complying with the provisions of the constitution. It had been stated by the court that the company also violated the provisions of section 208 of the CA which is in relation to restriction of related parties transactions. The breach was in relation to the payments which had been given as listing fee to the responsible entity. A further breach of in relation to section 601FC had been found by the court in this case where the listing fee had been paid to the responsible entity.
Decision – Discussion and Analysis
When the resolution had been passed with respect to the lodgement, the court in this case came to a conclusion that the defendant directors in context have violated the statutory duties imposed in them via the provisions of section 601FD which also takes into consideration the duty imposed by the law to act towards the interest of the members of the company and also of deploying reasonable care. It had been stated by the court in this case that the involvement of the directors where the company violated section 208 resulted in the breach of section 209 of the CA. A further breach in relation to the provisions of section 601FD had been found by the court in relation to the payment of the listing fees.
In the given situation it was provided to the court that in the meeting which took place in 2006 only 15 minutes have been provided by the directors in consideration of the amendment of the constitution. The court came to the finding that such time provided was not adequate. It was stated by the court in this case that the evidence provides that the directors did not address the issue in a reasonable manner through the application of diligence and care of a standard of a director in their position. The court held that they should have provided sufficient time for the purpose of important matters like this and not doing so will account to the breach of duty. Any reasonable director who is placed in such a position would have ensured that reasonable time is provided to consider the issue related to the amendment of the constitution.
In this case it had also been stated by the court that the process of voting has to be conducted in a formal manner rather than have a collegiate approach in relation to it. Where it is found that any particular director does not indulge in the process of voting such information has to be formed the part of the meeting minutes. In the given situation submission had been made by two of the defendant directors that they had not indulged in the process of voting. However the court did not accept such submission as stated that it can only be taken into consideration when such information has been written down in the meeting minutes.
It was further held by the court that where the legal advices which have been provided is unequivocal in nature as it was in the present case it is a requirement on the part of the directors to look for more legal advice, member approval or judicial discretion. If this is not done it does not make it reasonable on the part of the directors to reply upon such legal advice as it was found by the court in the case. Further as provided by the facts of the case the resolution in relation to the alternation of the constitution had been taken in July and further in august a resolution to lodge the constitution had been taken. In this resolution the deed of amendment had been assented and signed. The court with respect to such facts was of a view that stated that there was a duty imposed on the directors via which they needed take reasonable care towards the latter resolution and even in case where the issue was related to the responsible entity being paid the listing fee down the track. The court stated that a director cannot assume that their responsibility in relation to a particular matter has come to an end via the virtue of a reasonable resolution as per the case of Australian Securities and Investments Commission v Fortesque Metals Group Ltd and Another (No 5) (2009) 264 ALR. The court clarified that the duty of taking reasonable care is not limited to a particular instance but is ongoing in nature.
It had been stated by the court with respect to the provisions of section 601FD(1)(b) and section 180(1) of the CA and the directors on context that the a standard of care which needs to be applied in situation where a company is a professional trustee, depicting out to the public the same and being paid for such reason is going to the “often more exacting”. This finding was in compliance with Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170.
- In this case it was made clear that the directors of the responsible entity in context must not make an assumption that the ASIC will limit its claim in relation to the responsible entity only. Much more is expected of a director of a professional trustee as compared to a director of any other kind of company operating in Australia. The directors gave to consistently ensure that they are carrying out repeated compliance with the legal procedure.
- The case implies that the directors should have provided sufficient time for the purpose of important matters like amendment of constitution and not doing so will account to the breach of duty. Any reasonable director who is placed in such a position would have ensured that reasonable time is provided to consider the issue related to the amendment of the constitution.
- The case also suggests that the process of voting has to be conducted in a formal manner rather than have a collegiate approach in relation to it. Where it is found that any particular director does not indulge in the process of voting such information has to be formed the part of the meeting minutes.
- Where the legal advice which have been provided is unequivocal in nature as it was in the present case it is a requirement on the part of the directors to look for more legal advice, member approval or judicial discretion. If this is not done it does not make it reasonable on the part of the directors to reply upon such legal advice
- The case also reaffirms that the duty of exercise reasonable care is ongoing
References
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 Fortesque Metals Group Ltd and Another (No 5) (2009) 264 ALR
Australian Securities and Investments Commission, In the Matter of QLS Superannuation Pty Ltd v Parker (2003) 21 ACLC 888
Corporation Act 2001 (Cth)
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170
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