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18-377MR High Court decision on Prime Trust directors
The High Court has handed down judgment in the appeals brought by ASIC against the former directors (Mr Bill Lewski, Dr Michael Wooldridge, Mr Mark Butler and Mr Kim Jaques) of Australian Property Custodian Holdings Pty Ltd (APCHL).
The Court unanimously allowed ASIC’s appeals in part, finding that ASIC had succeeded in two of its three grounds of appeal. The effect of the High Court’s decision is to set aside orders made by the Full Court of the Federal Court dismissing ASIC’s claim and to reinstate all declarations made by Murphy J in the Federal Court at first instance, other than those in relation to another former director, Mr Peter Clarke and those that related to the ground of appeal upon which ASIC did not succeed.
APCHL was the responsible entity of the Prime Retirement and Aged Care Property Trust (Prime Trust), a managed investment scheme which owned retirement villages in Queensland, NSW and Victoria. APCHL collapsed in 2010 when administrators were appointed owing investors approximately $550 million.
The High Court found that:
- there is no concept of interim validity in the Corporations Act (Act) which allows an unlawful amendment to a scheme constitution to take effect, upon its lodgement with ASIC, until it is set aside by an order of the Court. The law does not confer validity upon an amendment invalidly made.
- a director’s subjective honest belief of validity of amendments to the constitution is not sufficient to absolve a director and responsible entity of breaches of their duties under the Act. Directors have a duty of loyalty to the members and must act in the members’ interests and not make improper use of their position.
- contrary to the contention of the directors, it is a ‘members’ right’ to have a scheme administered according its constitution and that the trial judge had been correct in finding that the relevant conduct by the directors had adversely affected members’ rights. The directors were required to consider this before resolving to lodge the amended scheme constitution.
The High Court dismissed ASIC’s ground of appeal relating to the operation of s208(3) of the Act, finding that the directors had not breached the contravention against being involved in related-party payments by the responsible entity because ASIC could not meet its onus to prove that they knew the scheme constitution did not permit the payments to be made. These payments were made in 2009 to interests associated with Mr Lewski.
‘ASIC welcomes the significant High Court decision handed down in the APCHL matter. The judgment is a significant win for ASIC after a number of years of pursuing justice through the courts,’ said ASIC Commissioner John Price.
‘Directors who are officers of responsible entities have an obligation to scheme members to discharge their duties with care and diligence, not improperly use their position, comply with the law and act in the interests of investors. The matter also highlights the need for people in business to recognise they are custodians of other people’s money.’
‘The High Court result provides clear guidance regarding important issues of principle that needed to be clarified for the benefit of responsible entities, their officers and investors. It is a positive outcome for investors, who need to be able to trust their representatives to act in their interests.’
‘This also shows that ASIC’s willingness to take hard cases and litigate them through to superior Courts when needed. ASIC has the people, the powers and the desire to hold those engaged in misconduct to account’ concluded Commissioner Price.’
The proceeding has been ordered to be remitted to the Full Court for determination of what effect the decision has on the penalties and disqualification orders made against the directors (other than Mr Clarke), together with ASIC’s cross-appeals about the adequacy of the penalties ordered by Murphy J.
In the case of ASIC’s High Court appeal concerning Mr Clarke, this was conducted due to procedural requirements. ASIC did not ask the High Court to set aside the Full Federal Court’s finding that Mr Clarke had not breached his duties and no adverse findings have been made against him by the High Court. ASIC remains liable to pay his costs of the Federal Court trial and appeal proceedings.
ASIC commenced its proceeding on 22 August 2012 (12-208MR) when it challenged the lawfulness of a decision by APCHL's Board in 2006 to amend the constitution of the Prime Trust to introduce and or amend various fees payable to APCHL. The amendments resulted in a fee of approximately $33 million being paid to APCHL (an entity owned by interests associated with Mr Lewski) subsequent to the listing of Prime Trust on the ASX in August 2007 (13-339MR).
Although ASIC was successful in the Federal Court, resulting in disqualifications and fines (14-323MR), an appeal by the directors to the Full Court of the Federal Court of Australia overturned this decision (16-225MR). ASIC then applied to the High Court of Australia for special leave to appeal, which was granted.
Justice Murphy delivered the following disqualifications and penalties in the Federal Court decision on 2 December 2014:
- William Lionel Lewski – disqualified for managing a company for 15 years and fined $230,000
- Mark Frederick Butler – disqualified for managing a company for 4 years and fined $20,000
- Kim Jaques – disqualified for managing a company for 4 years and fined $20,000
- Dr Michael Wooldridge – disqualified for managing a company for 2 years, 3 months and fined $20,000
- Peter Clarke – was not disqualified from managing a company but was fined $20,000; the Full Federal Court’s order overturning that fine was not appealed by ASIC and is unaffected by the High Court’s judgment delivered 13 December 2018).
Editor's note 1:
The first case management hearing has been listed for 15 March 2019.
Editor's note 2:
On 15 March 2019 at a case management hearing the Court
said that it would list the matter for hearing on a date (to be advised) in
August 2019. Download the Court’s procedural orders