Lewski V ASIC (No 2) [2017] FCAFC 171: Case Analysis

Background of the Case

Lewski v Australian Securities & Investments Commission (No 2) [2017] FCAFC 171

A Responsible Entity (RE) of a managed investment scheme (The fund – the Prime Retirement and Aged Care Property Trust) was Australian Property Custodian Holdings Limited (APCHL). The four directors of APCHL decided that the constitution of The Fund must be amended and the decision is taken on 19^th July 2006. By amending the constitution of The Fund, the directors of APCHL decided that a substantial and new fees to be paid to APCHL in certain specified conditions and events which also comprises of an event of listing of the fund on the ASX. (Jade 2018)

Later on 22^nd August 2006, the directors of APCHL conducted a board meeting and they decided that the amended constitution of the APCHL must be lodged to ASIC and the resolution is called the lodgment resolution. The constitution was lodged to ASIC on 23^rd August 2006. It is after the lodgment of the constitution APCHL has listed the trust on the ASX and fees of listing @ $33 million was given to APCHL from The Fund. The fees were then given to the entities that were linked with Mr Lewski (The director of APCHL).

On this account the ASIC has sued the directors of APCHL including Mr Lewski and four other persons and initiated proceedings in 2012 in the Federal court.

Thus, it was contended by ASIC that there was violation of the statutory duties by the directors of the APCHL. The duties were breached by the directors when the lodged the resolution related to the amendment of the constitution, when they gave consent to the fees and thus must be charged with civil penalties. It was also contended by ASIC that the directors of APCHL are also involved in the violation of the prohibition on related party transactions.  

Thus, after understanding the basic facts that resulted in the current proceedings, it is now important to understand the duties that were expected to be breached by the directors of APCHL and the reasons for the violation of the duties.

ASIC has submitted that after conserving the acts of the directors of APCHL, the main duties and the reasons for their breach are:

1. Breach of section 601FD of the Corporation Act 2001 – It was contended by ASIC that the conduct of the directors relating to the resolution to amend  the constitution of the APCHL  and which took place on 22nd August 2006 is an act of the violation of section Corporation Act 2001.
2. Breach of section 208 of the Corporation Act 2001 – It was contended by ASIC that the payment of the listing fees @ $33 million to APCHL from The Fund I the violation of the section as the acts has contravened the rule relating to the ‘related party transactions by the responsible entity’

• Breach of section 601FC of the Corporation Act 2001 – The section is also considered to be breached when the decision of taken by the board for the payment of the listing fees.

It is now important to understand the decision of the court before understanding the reasons for such decision.

It is ordered by the court that:

1. The court allowed the appeal and dismissed the cross appeal;
2. The trial Judge orders on 2^ndDecember 2014 in the proceedings VID 594 of 2012 are set aside (ASIC v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) [2014]. Thus, the claim of the plaintiff by the originating process is dismissed;

• The costs of the defendants at the trial, proceeding are paid by the first respondent including reserved costs;

1. The costs of appeal and the cross appeals of the appellant is paid by the first and the second respondents. The costs includes reserved costs and any other costs;

 Now it is important to understand the reasons which has led the final decision of the court.

ASIC’s Contention

By trial court

 It was held by Murphy J that:

1. When the directors of APCHL approved the lodgment resolution then they are found to be in contravention of their statutory duties under section 601FD(1)(b). The directors have also violated the duty by not acting in the company’s best interest.  
2. The judge also held that there is contravention of section 208 of the Act as the directors are involved in the violation by the Reliance Entity of the prohibition on related party transactions. The Judge held that the amendments were not valid and thus the exception under section 208 (3) is not applicable.

Aggrieved by the decision of the Trial court, an appeal is filed by ASIC.

On appeal the decision of the trial Judge was overturned by Greenwood, Middleton and Foster JJ and thus dismissed the allegations of ASIC which are made against the directors of APCHL and APCHL.

The court has considered the three allegations made by ASIC and consider them one by one in reaching the conclusion and thus over turned by decision of the trial judge.

It is important to submit that ASIC was not able to challenge the validity of the resolution that was passed by APCHL on 19^th July 2006 which is the contravention of section 601FD of the Act, because as per section 1317K of the Act the challenge can be made by ASIC only within 6 years and the same was not made ASIC.  

Now, the main reasons for the decision are:

1. Contravention of section 601FD of the corporation Act 2001
2. The court submitted that since ASIC cannot rely on the declaration made by the directors on 19^thJuly 2006 as the same is barred because of the application of section 1317K, thus it is necessary that the ASIC has to prove its allegation on the basis of the resolution that was passed on 22^nd August 2006. In proving the contravention, ASIC has relied on the events that took place around 19^th July 2006 which were considered as the events that have resulted in the contravention of the statutory duties by the directors.

Section 1317K simply submits that the party can rely on the contraventions that are made before 6 years provided there is continuous course of the contravention just before the declaration of the contravention is made. The court held that ASIC could have relied on the prior conducts of the directors and can content that those actions has resulted in the need to passing of the resolution of 22^nd August 2006 (which is nothing but the reconsideration of the resolution p-assed on 19^th August 2006). However, ASIC has not made any such kind of contention against the directors.

1. The directors submitted that the trial judge was erred in concluding that the passing of the resolution on 22^ndAugust 2006 has resulted in any kind of contraventions on the part of the directors. it was alleged by the directors that the resolution that was passed on 19^th July 2006 has bound the directors to carry out their actions in a certain manner. Thus, the passing of resolution of 22^nd August was an act of administrative nature and thus does not involve any kind of statutory violations.
2. The directors also submitted that there are various matters that were taken into account before the passing of the 22^ndAugust 2006 resolution and thus making it a non controversial act which has not violated any of the provisions of the corporation Act 2001.
3. The court held that adequate considerations are given by the directors of APCHL before any resolution is passed n 19^thJuly 2006. That Dr Wooldridge was right that the trail judge was in error as he only focused on the deliberations that are made on 19^th July 2006 in order to consider whether any considerations are made or not and nothing prior to the event was taken into consideration (Lock v Westpac Banking Corporation And Others (1991)).
4. The court held that the constitution that was amended in 22^ndAugust 2006 was supported by the amendment that has already taken place on 19^th July 2006. Generally, the APCHL being the relevant entity is not permitted to amend the constitution to put additional fess but the directors are not required to re visit the decision as they have acted as per the provisions of the amended constitution and has no reason to believe that the constitution is amended without complying the procedural guidelines.

1. It was concluded by the court that the reliance entity has the power to bring alteration to the constitution without eking the approval of the members as per section 601GC (1) of the Act.
2. Contravention of section 208 of the corporation Act 2001

The court held that  as per section 208 of the Corporation Act, an approval is required from the members for any financial benefit. However, no such approval was taken by the detectors. Also section 208(3) is also not applicable. So, there was no need for ASIC to prove that the director is already aware that the changes are ineffective when the listing fee was paid. the court held that there is changes are bought in the constitution as per which listing fee is permitted to pay and thus the directors were capable to make such payment and there is no contravention of section 208 of the Corporation Act 2001.

The court held that as per the amended constitution, payment of listing fees is already provided and thus there is no requirement for the compliance of section 208 (3) of the Act, that is, the approval of the members for the payment of the listing fees (Adler v Australian Securities and Investments Commission (2003).

• Contravention of section 601FC of the corporation Act 2001

Decision of the Court

The court held that the directors are not found to be in breach of section 601FC of the corporation Act 2001 as the listing fees that is granted was authorized by the amended constitution and the directors are of the good belief that the amendment that are made are valid and have no reason to believe that reconsideration to be made to the said amendments. The court held that the trial court was in error in concluding that the right to have a scheme manages as per the constitution is a members rights and this right was influenced by an unauthorized amendments.

The court held that there were no contraventions that were made by the directors of APCHL and submitted that surrounding circumstances should be taken into account while deciding whether any contravention is made by the directors in any given event or not.

It is now important to understand the possible impact of the decisions on the Australian corporation law.

The decision that is laid down in the Lewski case submits that the narrow approach that is taken upon the reliance entity powers and the concept of section 601GC(1)(b) as analyzed in  360 Capital Re Ltd v Watts (2012) is a better approach in comparison with the approach that is taken in the Barrett J in ING Funds Management Ltd v ANZ Nominees Ltd (2009).

The rule submits that once a scheme of the constitution is amendment and are lodge to ASIC then such lodgment will have legal effect unless and until the same is set aside. The amendments that are made are considered to the basis upon which the directors are held to be authorized to make their decisions. A distinction is made amid the approach that is taken by the court while imposing civil penalties from the approach when there is breach of the rights of the members which involve criminal penalties.

Reference List

Case laws

Adler v Australian Securities and Investments Commission (2003) 46 ACSR 504 at [413]:

Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) [2014] FCA 1308 

ING Funds Management Ltd v ANZ Nominees Ltd (2009) 228 FLR 444.

Lewski v Australian Securities & Investments Commission (No 2) [2017] FCAFC 171.

Lock v Westpac Banking Corporation And Others (1991) 25 NSWLR 593.

360 Capital Re Ltd v Watts (2012) 36 VR 507

Online Material

Ashurst, Duties of directors of REs: civil penalties overturned, 2018 < <https://www.ashurst.com/en/news-and-insights/legal-updates/duties-of-directors-of-res-civil-penalties-overturned/>.

Jade, Lewski v Australian Securities & Investments Commission (No 2) [2017] FCAFC 171, 2018 https://jade.io/article/560922.

Hwlebsworth , Full Federal Court overturns ASIC’s win, 2018, <https://hwlebsworth.com.au/full-federal-court-overturns-asics-win/>.