A recent case holds important lessons for directors of responsible entities (REs). The case is Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3)  FCA 1342 (12 December 2013).
The facts of the case were as follows:
- The Board of the RE passed a resolution in July 2006 to make various amendments to the Constitution.
- The amendments were the insertion of two new fees (a listing fee and a removal fee), each at 2.5 per cent of the gross asset value of the trust at the relevant time, and the increase of a takeover fee to 2.5 per cent of gross asset value (from a calculation previously made by reference to the price of units acquired).
- The Constitution of the RE contained a clause saying that no amendment to the Constitution could be made without member approval where the amendment was in favour of or resulted in a benefit to the RE. The Constitution also made reference to section 601GC of the Corporations Act 2001 which allows changes to a Constitution to be made in the absence of member approval only where the RE reasonably considers that the change will not adversely affect members' rights.
- The RE's lawyers provided advice prior to the July 2006 meeting saying that it was possible to interpret the Constitution such that amendment without member approval was valid, even where there was a benefit to the RE, provided that section 601GC of the Corporations Act 2001 was complied with.
- The deed making the amendments was not dated until August 2006 when the amended Constitution could be lodged with ASIC along with a supplementary PDS.
- By the time ASIC started proceedings, it was out of time to bring any action in relation to the resolution at the July 2006 meeting so instead brought action in relation to a resolution to lodge the amended Constitution, made at the August 2006 meeting of the Board.
- The RE and one of the directors stood to make a significant gain from the amendments to the Constitution – particularly as the relevant director, Mr Lewski and his family ultimately owned all the equity in the RE. This was exacerbated by the fact that it was possible for the fee provisions to be triggered multiple times.
- In 2007, the Board agreed to pay a listing fee to the RE pursuant to the amended Constitution.
The Federal Court found that, in passing the resolution for lodgment in August 2006, the RE breached some of its duties under section 601FC(1) of the Corporations Act 2001, including the duties to exercise reasonable care, act in the members' best interests and comply with the Constitution. It found that the RE breached section 208 of the Corporations Act 2001 which prohibits related party transactions. This was due to the payment of the listing fee to the RE. The Court found a further breach of section 601FC in the payment of the listing fee to the RE.
In passing the resolution for lodgment, the Federal Court found the directors of the RE breached their duties as officers of an RE under section 601FD, including the duties to act in the members' best interests and to exercise reasonable care. It found that the directors' involvement in the RE's breach of section 208,amounted to contravention of section 209 of the Corporations Act 2001. The Court found a further breach of section 601FD in the payment of the listing fee to the RE.
There are some interesting takeouts for Boards of REs.
- At the meeting of July 2006, only 10 or 15 minutes were given to consideration by the directors of the proposed amendments. The Court said this was not enough. It said, "The evidence shows that they did not deal with these issues properly or with reasonable care." Make sure the Board dedicates sufficient time to important matters.
- Voting processes should be formal and not based on a "collegiate" approach. If particular directors abstain from voting, this should be recorded in the minutes. In this case, two directors alleged that they refrained from voting at the July 2006 meeting but this was not recorded in the minutes.
- Where legal advice is equivocal, as it was in this case, it may be necessary to seek further legal advice, judicial direction or member approval. The Court said that should have been done in this case.
- In this case, the resolution to amend the Constitution was made in July and a further resolution to lodge the amended Constitution was made in August, at which time the deed of amendment was also signed. In the view of the Court, the directors had to take reasonable care regarding this subsequent resolution and also when it came to payment of the listing fee to the RE down the track. Do not assume that your responsibility for a particular issue has ended because a resolution has been made. The duty to take reasonable care is ongoing.
The Court said, in relation to directors, and the respective requirements set out in section 601FD(1)(b) and section 180(1) of the Corporations Act 2001 that:
the standard of care applicable where a corporation is a professional trustee, holding itself out to the public and being paid as such, will often be more exacting.
Tip: As the director of an RE, do not assume that ASIC will stop at the RE when bringing proceedings. Also, more is expected of you as the director of a professional trustee than it would be if you were the director of some other kind of corporation. Go through our takeouts and check that you are doing enough.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.