Analysis Of ASIC V Australian Property Custodian Holdings Ltd: Importance Of Director Duties

Facts of the Case

The ASIC v Australian Property Custodian Holdings Limited (No 3) [2013] FCA 1342 (hereinafter referred as the case) is a recent case in which the importance of director duties was highlighted by the court. The judgement of this case is a good lesson for directors of responsible entities (REs) operating in Australia. The directors of a responsible entity have to ensure that they use their powers for adequate purposes and avoid taking business decisions which could adversely impact the interest of the members of the company. In this case, the directors of the company violated their duties by making amendments in the Constitution of the company without the prior approval of the members (Donald, Ormiston and Charlton, 2014). The matters were exacerbated because one of the directors, Mr Lewski, along with his facility made a significant profit after making amendments to the Constitution of the company. This report will focus on evaluating the facts of the case and analysing various director duties which were breached in the case. The decision given by the court will be critically analysed in this report as well along with understanding the reason for such decision. The relevance of this case and its decision on Australian corporations will be discussed in the case as well

The case involved issues regarding making amendments to the Constitution of the company. The directors of the company misused their position and power to amend the constitution in order to impose two new fees on members for gaining personal benefits. In July 2006, a resolution was passed by the board of RE in which the directors made different amendments in the constitution of the company (Austlii, 2013). The amendments were made without the prior approval of members of the enterprise. One of the key amendments was the insertion of two new fees in the constitution. One was a listing fee, and another was a removal fee. Both fees were imposed at 2.5 percent of the gross asset value of the trust. The value was to be determined at the relevant time. Moreover, an amendment was to be made regarding increase in the takeover fee to 2.5 percent according to the gross asset value of the company. Previously, the calculations regarding these prices were made as per the price of the units acquired by the members (Jade, 2013). The Constitution of the company contained a clause which provides that the constitution cannot be amended without the prior approval of the members. This approval was necessary when the amendments are in the favour or resulted in a benefit to the RE.

Breached Director Duties

It was also given that the Constitution complies with the provision of section 601GC of the Corporations Act 2001 (Cth). It provided the amendments can be made by the parties without the prior approval of members if the changes will not adversely affect their rights. Before the amendments made in July 2006, the lawyer of RE provided that it is possible to interpret the Constitution that making changes without the prior approval of members is valid in case such changes benefit the RE (Wolters Kluwer, 2013). However, it is provided that the provision of 601GC must comply by the parties. The deed formed by the directors in which the amendments were included was not dated by them until August 2006 (Hills, 2014). This was done because when the amended Constitution could be lodged with ASIC which was to be uploaded with a supplementary PDS. The RE and one director of the company, Mr Lewski, along with his family gained substantial profits because the director and his family owned all the equity in the RE. Moreover, the provisions made regarding the fees were triggered multiple times after the amendments. The board of the company agreed to a pay a listing fee to the RE in 2007 for the amendments made in the constitution.

Directors of a corporation have to comply with various duties which are imposed by the Corporations Act. The objective of the imposition of these duties is to ensure that they did not focus on their personal benefits and take business decisions to achieve the organisational goals. Firstly, section 180 of the act provides that the directors have to maintain care and diligence. This care should be maintained by them while they are discharging their duties. They are expected to maintain a standard which a reasonable person will maintain while acting in such position. Section 181 imposes a duty on directors for acting in good faith. The directors must prioritise the interest of the company above their personal interest while discharging their duties (AICD, 2017). They should avoid the conflicts between their personal and professional interests. They owe a fiduciary duty towards the company based on which they have to act in good faith. Section 182 of the act provides that the directors should no improperly use their position. Directors have to ensure that they use their apex position in the company for proper purposes only. They should not use their position in a way which could cause determent to the corporation or its members.

Court’s Decision and Analysis

Section 601FC of the act provides the duties of a responsible entity. It provides that the RE must act honestly and maintain a level of care and diligence which a reasonable person would in the particular situation. It also provides that the constitution of the company should comply with the requirements given under section 601GA and 601GB (Austlii, 2018). It should also not gain unfair advantage for itself or another person by causing detriment to its members. These principles are imposed on the officers of RE under section 601FD. Subsection 1 (b) of this act provides that directors should perform their actions while maintaining a degree of care and diligence which a reasonable person would in such situation. Section 208 provides that parties are required to get the approval of members while giving financial benefits to the related parties of the firm. Section 601GC provides that while changing the constitution of the company, a special resolution passed by the member is necessary or the changes must not adversely affect the rights of members (Austlii, 2018). In this case, the above mentions duties are breached by the directors of the RE.

They failed to act with care and diligence during this whole incident since they did not maintain a standard of care while amending the constitution. The changes were made in the constitution which adversely affected the rights and interest of members yet still their prior approval was not taken which violated the principle of section 601FC, and the directors breached section 601FD (1) (b) (Hills, 2014). Moreover, Mr Lewski and his family gained significant profits from the amendments; however, permission regarding this related party transaction was not taken by the members that violated section 208 of the act. The personal gain which the director gets violated section 181 since the fiduciary duty was breached to gain personal benefits. Section 601GC was violated as well since the interest of the members was changes without their prior approval (Baxt, 2015). Before the meeting of directors in July 2006, only ten or fifteen minutes were given to the directors in order to give their decision on the matter which was not enough as per the court, thus, the directors did not act reasonably, and they misused their position which violated section 182.

The court provided that by making changes in the constitution of the RE, the provisions given under section 601FC are violated. The members did not act reasonably, and they failed to maintain a standard of care. Section 208 was violated as well since the information regarding the related party transaction was not given to the members of the company. The entity also failed to make a duly payment of the listing fee due to which section 601FC was violated. While making the decision for making amendments to the constitution, the directors violated their duties given under section 601FD (Austlii, 2013). They did not act in the best interest of the company and failed to maintain a degree of reasonable care. The directors violated their duties given under section 180, 181 and 182 since the focused on personal interest rather than the interest of the company, and they misused their position. The court provided that the RE also violated the provision while submitting the listing fees in ASIC (Hills, 2014). Thus, the court held the RE, and its directors for violating the provisions given under these sections and civil penalty was imposed by the court.

Relevance of the Case on Australian Corporations

The judgement given in this case is relevant to understand the duties imposed on directors and REs operating in Australia. In this case, the duties which are given under the Corporations Act are violated by the directors and RE while making changes in the amendments. The Law clearly specifies that prior approval of members is necessary when any changes are made in the constitution of the company which could adversely affect their rights and interest. However, in this case, the directors did not consult or take permission from the members while making changes in the constitution of the company. The main objective of directors was to gain personal profits by making changes in the constitution of the company by introducing two new fees. Moreover, the directors also violated while paying the listing fees to ASIC while lodging the amended constitutions and other documents. The court held both the RE and its directors liable for violating the provisions given under the act. Therefore, this is a relevant case since it focuses on the importance of maintaining a degree of care and diligence by the directors of a corporation while they are taking business decisions (Donald, Ormiston and Charlton, 2014). They operate in the apex position in the company based on which they have to ensure that they did not misuse their position to gain personal benefits. They owe a fiduciary duty to prioritise the interest of the company and its members above their personal interest. In case these duties are violated by the directors, then they suffer consequences along with the company. This case also shows that decisions which are taken with prior approval of members and by maintaining proper transparency enable the directors to get personal benefits while ensuring that it is not causing any detriment to the company or its members.

Conclusion

Based on the above analysis, it can be concluded that this is a relevant case to understand the importance of director duties. In this case, the constitution of the responsible entity was amended by its directors in order to introduce two new fees. The Law provides that prior permission of the members is required before making these changes, however, the directors failed to take their permission. The purpose of introducing these fees was to gain personal advantage by the directors as well. Thus, the court held that the directors and the entity are liable for contravening various provisions of the Corporations Act. These provisions are violated by the parties since a degree of care was not maintained by the directors. They misused their position to gain personal advantage while causing detriment to the company and its members. The court held both the company and its directors liable in its judgement and imposed penalties on the parties. The judgement of this case is relevant to understand why directors have to act honestly and maintain a standard of care while discharging their duties. Effective compliance with duties ensures the directors are properly complying with their policies which ensure that the interest of the company and its members are protected.

References

AICD. (2017) General duties of directors. [Online] Available at: https://aicd.companydirectors.com.au/resources/director-tools/practical-tools-for-directors/duties-of-directors/general-duties-of-directors [Accessed 25/09/2018].

Austlii. (2013) Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3) [2013] FCA 1342 (12 December 2013). [Online] Available at: https://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2013/1342.html?stem=0&synonyms=0&query=title(australian%20securities%20and%20investments%20commission%20near%20australian%20property%20custodian%20holdings) [Accessed 25/09/2018].

Austlii. (2018) Corporations Act 2001. [Online] Available at: https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/ [Accessed 25/09/2018].

Baxt, B. (2015) Directors’ counsel: Examining criminal sanctions. Company Director, 31(2), p.60.

Donald, M.S., Ormiston, J. and Charlton, K. (2014) The potential for superannuation funds to make investments with a social impact. Company and Securities law Journal, 32(8), pp.540-551.

Hills, S. (2014) Directors of REs (responsible entities) have great responsibilities. [Online] Available at: https://www.mondaq.com/australia/x/313296/Trusts/Directors+of+REs+responsible+entities+have+great+responsibilities [Accessed 25/09/2018].

Jade. (2013) Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3) [2013] FCA 1342. [Online] Available at: https://jade.io/article/311903 [Accessed 25/09/2018].

Wolters Kluwer. (2013) AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v AUSTRALIAN PROPERTY CUSTODIAN HOLDINGS LIMITED (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (CONTROLLERS APPOINTED) (NO 3), Federal Court of Australia, 12 December 2013. [Online] Available at: https://iknow.cch.com.au/document/atagUio2345554sl483763884/australian-securities-and-investments-commission-v-australian-property-custodian-holdings-limited-receivers-and-managers-appointed-in-liquidation-controllers-appointed-no-3 [Accessed 25/09/2018].