The future for investors in LM First Mortgage Income Fund (FMIF) is more certain after a court yesterday appointed a receiver to it.

The Queensland Supreme Court appointed David Whyte of BDO.

The move effectively takes control for the winding up out of the hands of the liquidators appointed to FMIF’s responsible entity, LM Investment Management Limited (LM). Until their appointment as liquidators, John Park and Ginette Muller of FTI consulting, had been acting as voluntary administrators of LM since March 2013.

ASIC Commissioner Greg Tanzer said, ‘The appointment will see the winding up proceed in the most efficient and cost effective way. We want to see the maximum returned for investors.’

The move follows ASIC’s intervention in May this year, in a court case about the future of the FMIF (refer: 13-183MR). ASIC sought orders to wind up the FMIF and to appoint registered liquidators as receivers to the FMIF. Mr Park and Ms Muller had been resisting any attempt to remove them from control of the FMIF.

ASIC’s intervention followed a concern that Mr Park and Ms Muller were not putting the interests of unitholders of the FMIF before their own when they called a meeting of unitholders in April this year to change the responsible entity of the fund.

ASIC was concerned the meeting had not been validly called. ASIC was also concerned, after Mr Park and Ms Muller had recommended strongly against the changing of the responsible entity, that the outcome of the meeting (which was held on 13 June) would be largely pointless and not in the broader interests of unitholders.

In dealing with the conduct of Mr Park and Ms Muller, Justice Dalton said:

‘The administrators of [LM] have, in my view, demonstrated a preparedness to act in a way inconsistent with those owing duties as responsible entity and trustee under the Corporations Act. My view is that they have preferred their own commercial interests to the interests of the fund. This is demonstrated in the conduct ... in relation to the 13 June 2013 meeting; their dealings with ASIC, and their conduct with this litigation. It extends to the point where both administrators have sworn to matters which they either conceded were wrong on cross-examination ... or in my view are not consonant with reality ... In a winding-up where conflicts may well arise, and may involve questions of some complexity, I feel no assurance that the current administration would act properly in the interests of members of the fund in identifying those issues or dealing with them. In my view, that makes it necessary that someone independent have charge of winding-up FMIF...’

Trilogy Funds Management Limited (Trilogy) also applied to be appointed by the court as a temporary responsible entity for the FMIF. The court ruled Trilogy’s application to be incompetent and further found that for a number of reasons, including potential conflicts of interest, it did not regard the appointment of Trilogy as responsible entity as being in the interests of members of the FMIF.

Prior to the proceedings, Deutsche Bank, a secured creditor of the FMIF, appointed McGrathNicol as receiver of the FMIF. ASIC anticipates that orders will be made for the incoming receiver to work in conjunction with Deutsche Bank’s receiver for an orderly realisation of the assets of the FMIF.

ASIC’s inquiries into the collapsed Gold Coast-based fund manager LM Investment Management, which controls FMIF, are continuing.

Background

Investors and unitholders caught up in the LM collapse should check ASIC’s dedicated LM webpage for further information.

Mr Whyte was previously appointed to wind up the Equititrust Premium Income Fund, following ASIC’s application, in 2011 (refer: 11-238AD).

Download the judgement from the Supreme Court of Queensland’s website

Editor's note 1:

A Notice of Appeal was filed by LM Investment Management Limited on 23 September 2013 seeking to appeal the decision of Justice Dalton. The appeal is currently scheduled to be heard on 28 November 2013.

Editor's note 2:

An appeal filed by LM Investment Management Limited against the decision of Justice Dalton was dismissed by the Court of Appeal (QLD) on 6 June 2014. The Court of Appeal upheld the orders appointing Mr Whyte as receiver of the FMIF.

Download the judgment from the Court of Appeal's (QLD) website