After months of negative publicity and criticism at the Hayne Royal Commission and on some other corporate regulatory issues, ASIC is ending 2018 with a major win on a high profile case which at one stage was lost in 2016 in an adverse Federal Court ruling.
This is on top of its win earlier in the week in its case against Peter Gregg, the former Chief Financial Officer of Leighton Holdings. He was found guilty in the NSW District Court earlier this week of falsifying the company’s accounts. A jury convicted him of two counts of contravening section 1307(1) of the Corporations Act.
The jury found that Mr. Gregg, who was also a former director of Leighton, had engaged in conduct that resulted in the falsification of its books.
In ASIC’s Prime decision handed down yesterday the High Court ruled in favour of ASIC on two out of three grounds in its appeal against that Federal Court ruling involving the near $600 million failure of the Prime property trust.
A Melbourne-based retirement village operator, Prime Trust, collapsed in 2010, wiping out the savings of about 8000 investors. At its peak it was worth close to $600 million.
The High Court ruled that Melbourne businessman Bill Lewski, former federal health minister Michael Wooldridge and other directors of Prime Trust had breached their duties as directors of the property trust.
ASIC originally won its Federal Court case against Mr Lewski, Dr Wooldridge and the other directors after they were found not to have acted in shareholders’ best interests when approving a $33 million payment to Mr Lewski.
That ruling included a 15-year ban from being a company director for Mr Lewski and a two-year, three-month ban for Dr Wooldridge. Fellow directors Kim Jaques and Mark Butler were each banned for four years.
Another director, Peter Clarke – the former head of Victoria’s state building authority and a Liberal Party member – was not banned, but was fined $20,000 due to his short tenure on the board ahead of the decisions to award Mr Lewski the payment. That decision was overturned by the Full Court. ASIC did not appeal the Full Court’s decision regarding Mr Clarke.
In a 2016 decision, the Full Court of the Federal Court had quashed the disqualification orders against Mr Lewski, Dr Wooldridge and three other Prime directors.
The directors were able to convince the Full Court that the judgment should be overturned on the basis that ASIC had filed its case a month late and was therefore outside the six-year statute of limitations.
“The failure of ASIC to commence proceedings before August 23, 2012 has been the primary cause for the complexities introduced into the proceeding, as no direct reliance could be placed upon the conduct that occurred on July 19, 2006 as establishing a contravention,” the Full Court found in 2016.
That Full Court ruling was not only embarrassing for ASIC but threatened to cost tens of millions of dollars in legal fees after it was ordered to pay the costs of the directors.
A year ago this month, ASIC launched its appeal against the full Federal Court loss.
The High Court substantially overturned the Full Federal Court’s ruling, finding Mr Lewski, Dr Wooldridge, Mr Butler and Mr Jaques had engaged in misconduct when granting Mr Lewski the listing fee payment.
In its decision, the High Court found that “any consideration of public inconvenience cannot ignore the injustice caused to members by an amendment that permits $33 million of their equity to be paid away without authority.”
“The Loyalty Duty requiring a director to give priority to the members’ interests in circumstances of conflict of interest is narrower in one respect than the equitable rule concerning conflict of interest and duty70. It does not proscribe acts of a director that put herself or himself in a position of conflict71. It only proscribes acts in the course of that conflict that do not give priority to the members’ interests. Nevertheless, the duty is not satisfied by an honest or reasonable belief. A contravention occurs when a director prioritises her or his own interests over those of the members, no matter how honest or reasonable the director was in doing so,“ The High Court found….”The Full Court erred in concluding that the Improper Use Duties were fulfilled by the honest beliefs of the Directors at the time of the Lodgement Resolution.”
The High Court decision did not allow ASIC’s appeal against the Full Court decision to overturn a declaration that the directors also breached their duties by knowingly allowing the responsible entity of the Prime Trust, Australian Property Custodians Holdings, to breach its duties to unit holders of Prime.
The matter will be sent back to the Federal Court to reassess the penalties and disqualification periods for the directors other than Mr Clarke.
