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Australian Securities and Investments Commission v Managed Investments Ltd (No 9)

 

[2016] QSC 109

 

SUPREME COURT OF QUEENSLAND

 

CITATION:

ASIC v Managed Investments Ltd and Ors (No 9)  [2016] QSC 109

PARTIES:

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

(plaintiff)

v

ACN 101 634 146 PTY LTD (IN LIQUIDATION)

ACN 101 634 146

(first defendant)

MICHAEL CHRISTODOULOU KING

(fourth defendant)

CRAIG ROBERT WHITE

(fifth defendant)

GUY HUTCHINGS

(sixth defendant)

DAVID MARK ANDERSON

(seventh defendant)

MARILYN ANNE WATTS

(eighth defendant)

FILE NO/S:

SC No 12122 of 2009

DIVISION:

Supreme Court

PROCEEDING:

Trial

DELIVERED ON:

Reasons delivered 23 May 2016

DELIVERED AT:

Brisbane

HEARING DATE:

4 November 2013; 11-14 November 2013; 18-20 November 2013; 22 November 2013; 25-29 November 2013; 2-6 December 2013; 9-13 December 2013; 11 April 2014; 22-24 April 2014; 28-29 April 2014; 1-2 May 2014; 5-9 May 2014; 4-8 August 2014; 11-12 August 2014; 14-15 August 2014; 18-22 August 2014; 25-26 August 2014; 3-5 September 2014; 8-12 September 2014

JUDGE:

Douglas J

ORDER:

  1. Against Mr King:  declarations in the terms of the contraventions alleged against him numbered 1 to 3, 7 to 13 and 15, 16 and 17 of ASIC’s amended schedule of alleged contraventions.
  2. Against Mr White:  declarations in the terms of the contraventions alleged against him numbered 1 to 3, 7 to 13 and 15 to 68 of that schedule.
  3. Against Mr Hutchings:  declarations of contraventions in respect of the contraventions numbered 1 to 3 and 5 to 88 of that schedule.
  4. Against Mr Anderson:  declarations in the terms of the contraventions alleged against him numbered 1, 2, 5 to 10 and 12 to 46 of that schedule.
  5. Against Ms Watts:  declarations in the terms of the contraventions alleged against her numbered 1 to 9 of that schedule.
  6. None of the defendants’ conduct should be excused pursuant to s 1317S or s 1318 of the Act.
  7. I shall hear further from the parties about the consent orders proposed to be made against MFSIM, the form of the declarations, any claim for pecuniary penalties and other ancillary orders including costs. 

CATCHWORDS:

CORPORATIONS – MANAGEMENT AND ADMINISTRATION – where MFSIM was the responsible entity for the managed investment scheme, PIF – where PIF entered into a facility with the Royal Bank of Scotland for borrowing of up to $200 million for PIF’s purposes – where MFSIM as responsible entity for PIF made a payment of $130 million from PIF’s drawn down facility to another company in the MFS Group, MFS Administration – where MFS Administration caused $103 million of the $130 million payment to be paid to Fortress to repay a debt owed by a company in the MFS corporate group – where the $130 million payment was made without approval from the Investment Approval Committee of PIF or the Conflicts and Related Party Committee of MFSIM either before the transaction or at all – where MFSIM as responsible entity for PIF made a payment of $17.5 million from PIF’s drawn down facility to PacFin – where PacFin needed the money to meet its financial commitments to its debenture holders – where the payments were not authorised investments under PIF’s constitution – where it was submitted that the payments were made for no consideration to PIF – where it was submitted that the payments were explicable by a proposal to restructure MYF, a managed investment scheme operated by MFSIM, partly through investments to be made by PIF – where, after the payments were made, documents were prepared purporting to record transactions justifying those payments as having been made for the benefit for PIF – where PIF was said to have received the benefit of $62.5 million worth of interests in participation agreements with PacFin and 67.5 million units in MYF – where Mr King, Mr White, Mr Hutchings, Mr Anderson and Ms Watts were involved in the relevant conduct – whether MFSIM as responsible entity for PIF contravened the Corporations Act 2001 (Cth) – whether Mr King, Mr White, Mr Hutchings, Mr Anderson and Ms Watts contravened the Corporations Act 2001 (Cth)

CORPORATIONS – MANAGED INVESTMENTS – RESPONSIBLE ENTITY – where Mr White, Mr King and Mr Anderson were submitted to have been involved in causing PIF to transfer away $130 million for no purpose to PIF and no benefit to PIF – where Mr White, Mr Anderson, Mr Hutchings and Ms Watts were submitted to have been involved in causing PIF to transfer away $17.5 million for no purpose to PIF and no benefit to PIF  –  where Mr White, Mr King, Mr Anderson, Mr Hutchings and Ms Watts were closely and relevantly connected with MFSIM – where Mr White, Mr King, Mr Anderson, Mr Hutchings and Ms Watts were MFSIM’s high managerial agents – where MFSIM was argued to be the victim of the fraud – whether the conduct of the individual defendants is attributable to MFSIM to establish whether it, as responsible entity, contravened the Corporations Act 2001 (Cth)

CORPORATIONS – MANAGEMENT AND ADMINISTRATION – OFFICERS OF CORPORATION – where Mr King was no longer director of MFSIM when the relevant transactions occurred – where it was submitted that he had overall responsibility for MFSIM’s operations – where it was submitted that Mr White, an executive director of MFSIM and effectively the CEO of the MFS Group at the relevant time,  customarily acted in accordance with his wishes – where it was submitted that Mr King had the capacity to affect significantly the financial standing of MFSIM  – whether Mr King was an officer of MFSIM under the Corporations Act 2001 (Cth)

CORPORATIONS – MANAGEMENT AND ADMINISTRATION – OFFICERS OF CORPORATION – where Mr Anderson was an officer of MFSIM – where Mr King was found to be an officer of MFSIM – where MFSIM was the responsible entity of a registered scheme – whether Mr Anderson and Mr King were officers of the responsible entity of a registered scheme – whether an officer of an entity that is a responsible entity is an officer of the responsible entity under the Corporations Act 2001 (Cth)

CORPORATIONS – MANAGEMENT AND ADMINISTRATION – where it was submitted that no consideration passed to PIF at the time of the $130 million payment to MFS Administration – where it was submitted that consideration passed to PIF for the $130 million payment consisting of $62.5 million worth of interests in participation agreements with PacFin and 67.5 million units in MYF – where it was submitted that no consideration passed to PIF at the time of the $17.5 million payment to PacFin – where the alleged transactions were not formulated or documented at the time of the payment – where documents were later created purporting to reflect the alleged transactions and investments – whether the alleged transactions provided consideration or reimbursement for the payments from PIF’s funds at the time that the payments were made

CORPORATIONS – MANAGEMENT AND ADMINISTRATION – AUTHORITY, RIGHTS AND POWERS OF OFFICERS OF CORPORATION – AUTHORITY – where it was submitted that consideration flowed to PIF for the $130 million payment consisting of $62.5 million worth of interests in participation agreements with PacFin and 67.5 million units in MYF – where it was submitted that no consideration passed to PIF at the time of the payment to PacFin – where the relevant transactions exceeded the defendants’ limit on delegated authority to make investments – where there was no MFSIM board approval for the transactions – where the parties to the purported transactions were aware of the absence of actual authority to enter into the transactions – whether the transactions were ineffective as having been made without authority

CORPORATIONS – MANAGEMENT AND ADMINISTRATION – AUTHORITY, RIGHTS AND POWERS OF OFFICERS OF CORPORATION – RATIFICATION AND INDEMNIFICATION – where non–executive directors of MFSIM expressly declined to approve certain transactions – where the board of MFSIM was not informed about the true purpose and nature of certain transactions – whether the responsible entity MFSIM had full knowledge of all of the material circumstances surrounding the transactions – whether the transactions were ratified by the board of MFSIM

CORPORATIONS – MANAGEMENT AND ADMINISTRATION – RELATED PARTY TRANSACTIONS – where MFS controlled both MFSIM  and MFS Administration – where MFSIM had an independent board but where Mr King and Mr White, directors of MFS Administration, wielded practical influence over MFSIM’s operations – where MFS Administration controlled PacFin – where PacFin was managed exclusively by MFS Administration – where Mr White and Mr Anderson were directors of MFS Administration and two of the three directors of PacFin – whether MFS Administration and MFSIM were related parties – whether MFSIM’s $130 million payment, to the extent of the $103 million payment, was a financial benefit given by MFSIM, as responsible entity for PIF, out of scheme property to MFS Administration, a related party of MFSIM – whether PacFin and MFSIM were related parties – whether MFSIM’s $17.5 million payment was a financial benefit given by MFSIM, as responsible entity for PIF, out of scheme property to PacFin, a related party of MFSIM

CORPORATIONS – MANAGEMENT AND ADMINISTRATION – DUTIES AND LIABILITIES OF OFFICERS OF CORPORATION – OFFENCES – FALSIFICATION OF RECORDS  – where Mr Hutchings, Ms Watts, Mr Anderson and Mr White were submitted to have been involved in creating or assisting in the creation of false documents – where it was submitted that the documents were backdated to reflect transactions as occurring in 2007 that did not in fact occur in that year – where it was submitted that the documents reflected events that simply did not occur – where the alleged transactions recorded in the documents were inconsistent with contemporaneous records, accounts, proposals and decisions of the relevant entities – where it was submitted that documents containing false information were provided to banks, auditors and were reflected in PIF’s half-yearly report – whether there was a failure to record correctly and explain the transactions and financial position of MFSIM – whether MFSIM contravened the Corporations Act 2001 (Cth) – whether Mr White, Mr Anderson and Mr Hutchings contravened the Corporations Act 2001 (Cth) directly – whether Mr White, Mr Anderson, Mr Hutchings and Ms Watts were knowingly involved in MFSIM’s contraventions of the Corporations Act 2001 (Cth)

CORPORATIONS – MANAGEMENT AND ADMINISTRATION – DUTIES AND LIABILITIES OF OFFICERS OF CORPORATION – where Mr White, Mr King, Mr Anderson, Mr Hutchings and Ms Watts were closely and relevantly connected with MFSIM – where MFSIM was found to have contravened the Corporations Act 2001 – whether the defendants were knowingly involved in MFSIM’s contraventions of the Corporations Act 2001 (Cth) – whether actual knowledge of the essential facts constituting the contravention must be the only rational inference available in the circumstances surrounding the contravention – whether it would be appropriate to grant relief from liability for Mr White, Mr King, Mr Anderson, Mr Hutchings and Ms Watts’ conduct

Australian Securities and Investments Commission Act 2001 (Cth), s 79(1)

Children’s Services Act 1996 (Vic), s 26

Company Law Review Act 1998 (Cth)

Corporate Law Economic Reform Program Act 1999 (Cth)

Corporations Act 2001 (Cth), s 9, s 9(b), s 9b(i), s 9(b)(ii), s 9(b)(iii), s 50AA, s 50AA(1), s 50AA(2)(a), s 79, s 79(c), s 208, s 208(1), s 209(2), s 228, s 251A, s 286, s 286(1), s 286(1)(a), s 305, s 344, s 344(1), s 601EA(4), s 601FA, s 601FC, s 601FC(1)(a), s 601FC(1)(b), s 601FC(1)(c), s 601FC(1)(k), s 601FC(1)(l), s 601FC(2), s 601FC(5), s 601FD, s 601FD(1), s 601FD(1)(a), s 601FD(1)(b), s 601FD(1)(c), s 601FD(1)(e), s 601FD(1)(f), s 601FD(3), s 601FD(3)(a), s 601FD(3)(b), s 601FD(3)(c), s 601FD(3)(e), s 601FD(3)(f), s 601HC, s 601JA(2), s 601LA, s 601LC, s 601MA, s 1017E, s 1308A, s 1311(3), s 1317A, s 1317DA, s 1317E, s 1317E(1), s 1317E(1)(b), s 1317E(1)(f), s 1317E(1)(g), s 1317G(1), s 1317G(1)(aa), s 1317G(b)(i), s 1317G(b)(iii), s 1317S, s 1317S(2), s 1318, s 1318(1)

Criminal Code (Cth), s 12.3(2)(b)

Criminal Code (Qld), s 408C

Evidence Act 1997 (Qld), s 59(2)

Managed Investments Act 1998 (Cth), s 82A

Trusts Act 1973 (Qld), s 21

Uniform Civil Procedure Rules 1999 (Qld), r 154, r 149(i)(c)

ABC Developmental Learning Centre v Wallace (2007) 16 VR 409; [2006] VSC 171, considered

Agricultural Land Management Ltd v Jackson (No 2) (2014) 48 WAR 1; 98 ACSR 615; [2014] WASC 102, considered

Armagas Ltd v Mundogas SA [1986] 1 AC 717, cited

ASIC v ActiveSuper Pty Ltd (in liq) (2015) 235 FCR 181; [2015] FCA 342, applied

ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35; [2007] FCA 963, cited

ASIC v Fortescue Metals Group Ltd (No 5) (2009) 264 ALR 201; [2009] FCA 1586, considered

ASIC v Fortescue Metals Group Ltd (2011) 190 FCR 364; [2011] FCAFC 19, cited

ASIC v Healy (No 2) (2011) 196 FCR 430; [2011] FCA 1003, cited

ASIC v Hellicar (2012) 247 CLR 345; [2012] HCA 17, applied

ASIC v Macdonald (No 11) (2009) 256 ALR 199; [2009] NSWSC 287, cited

ASIC v Macdonald (No 12) (2009) 259 ALR 116; [2009] NSWSC 714, cited

ASIC v Rich (2005) 53 ACSR 752; [2005] NSWSC 417, cited

ASIC v Vines (2005) 55 ACSR 617; [2005] NSWSC 738, cited

Australian Communications and Media Authority v Mobilegate Ltd (No 8) (2010) 275 ALR 293; [2010] FCA 1197, applied

Australian Securities and Investments Commission v Managed Investments Limited & Ors (No 5) [2013] QSC 313, cited

Beach Petroleum NL v Johnson (1993) 43 FCR 1; [1993] FCA 283, considered

Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1; [1999] NSWCA 408, cited

Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1; [1951] HCA 480, cited

Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34, considered

Browne v Dunn [1894] 6 R 67, cited

Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd (2010) 238 FLR 384; [2010] NSWSC 233, considered

Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47; [2011] NSWCA 109, cited

Commissioner for Corporate Affairs v Bracht [1989] VR 821, considered

Deputy Commissioner of Taxation v Mutton (1988) 12 NSWLR 104, cited

Director-General of Fair Trading v Pioneer Concrete (UK) Ltd [1995] 1 AC 456, cited

DPP v Gomez [1993] AC 442, considered

Duke Group Ltd (in liq) v Pilmer (1994) 63 SASR 364, cited

Edwards v The Queen (1993) 178 CLR 193; [1993] HCA 63, cited

Elkington v Farsands Solutions Pty Ltd [2012] NSWCA 334, cited

Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471; [2004] HCA 55, cited

Erlich v Leifer [2015] VSC 499, cited

Fitzmaurice v Bayley (1856) 119 ER 1087; (1856) 6 El & Bl 868, cited

Ford v Andrews (1916) 21 CLR 317; [1916] HCA 29, cited

Forrest v ASIC (2012) 247 CLR 486; [2012] HCA 39, cited

Giorgianni v The Queen (1985) 156 CLR 473; [1985] HCA 29, cited

Goodman v J Eban [1954] 1 QB 550, cited

Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6, considered

Hamilton v Whitehead (1988) 166 CLR 121; [1988] HCA 65, cited

Hancock v Rinehart [2015] NSWSC 646, applied

Hawley Partners v Commissioner of Stamp Duties (Qld) (1996) 96 ATC 4847; [1996] QCA 270, cited

Holland v Revenue and Customs Commissioners [2011] 1 All ER 430; [2010] UKSC 51, cited

JC Houghton & Co v Nothard, Lowe and Wills [1928] AC 1, cited

JGM Nominees Pty Ltd v Australvic Pty Ltd (in liq) (No 3) [2010] VSC 623

Kern Consulting Group Pty Ltd & Anor v Opus Capital Ltd [2014] 2 Qd R 379; [2014] QCA 111, cited

Leybourne v Permanent Custodians Ltd [2010] NSWCA 78, cited

Linter Group Ltd v Goldberg (1992) 7 ACSR 580; 10 ACLC 739, cited

Lysaght Bros & Co Ltd v Falk (1905) 2 CLR 421; [1905] HCA 7, cited

Macleod v The Queen (2003) 214 CLR 230; [2003] HCA 24, considered

Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, considered

McHugh v Eastern Star Gas (2012) 88 ACSR 707; [2012] NSWCA 169, cited

Midas Management v Equator Communications [2008] NSWSC 255, cited

Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449; [1992] HCA 66, cited

Norman v FEA Plantations (2010) 191 FCR 39; [2010] FCA 1274, considered

Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146; [1990] HCA 32, cited

Owen v Madden (No 3) (2012) 201 FCR 360; [2012] FCA 313, considered

Pereira v Director of Public Prosecutions (1988) 82 ALR 217; [1988] HCA 57, cited

Presidential Security Services of Australia Pty Ltd v Brilley (2008) 73 NSWLR 241; [2008] NSWCA 204, cited

Quince v Varga [2009] 1 Qd R 359; [2008] QCA 376, cited

R v Byrnes (1995) 183 CLR 501; [1995] HCA 1, cited

Raftland Pty Ltd as Trustee of the Raftland Trust v Commissioner of Taxation (2008) 238 CLR 516; [2008] HCA 21, considered

Re Hampshire Land Co [1896] 2 Ch 743, cited

Re HIH Insurance Ltd (in prov liq); ASIC v Adler (2002) 41 ACSR 72; [2002] NSWSC 171, cited

Rural Press Ltd v ACCC (2003) 216 CLR 53; [2003] HCA 75, cited

Russo-Chinese Bank v Li Yau Sam [1910] AC 174, cited

SAJ v The Queen (2012) 36 VR 435; [2012] VSCA 243, cited

Shafron v ASIC (2012) 247 CLR 465; [2012] HCA 18, considered

Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449; [1988] FCA 179, cited

Snook v London and West Riding Investments Ltd [1967] 2 QB 786, considered
Sonenco (No 87) Pty Ltd v Commissioner of Taxation (1992) 38 FCR 555; [1992] FCA 560, cited

Spedley Securities Ltd (in liq) v Greater Pacific Investments Pty Ltd (in liq) (1992) 30 NSWLR 185, cited

Taylor v Smith (1926) 38 CLR 48; [1926] HCA 16, cited

Tesco Supermarkets Ltd v Nattrass [1972] AC 153, considered

The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1; [2008] WASC 239, cited

The Zamora (No 2) [1921] 1 AC 801, cited

Twinsectra Ltd v Yardley [2002] 2 AC 164, cited

Ultraframe (UK) Ltd v Fielding (2005) EWHC 1638 (Ch); [2005] All ER (D) 1397, considered

Vines v ASIC (2007) 73 NSWLR 451; [2007] NSWCA 75, cited

Walker v Wimborne (1976) 137 CLR 1; [1976] HCA 7, cited

Wellington Capital Ltd v ASIC (2014) 254 CLR 288; [2014] HCA 43, cited

White v Australian Securities and Investments Commission & Ors [2013] QCA 357, cited

White v Tomasel [2004] 2 Qd R 438; [2004] QCA 89, cited

White Industries (Qld) Pty Ltd v Flower & Hart (1998) 156 ALR 169; [1998] FCA 806, cited

Yorke v Lucas (1985) 158 CLR 661; [1985] HCA 65, cited

Young Investments Group Pty Ltd v Stripe Capital Pty Ltd [2011] FCA 1147, cited

COUNSEL:

P J Riordan SC with J P Moore SC and M T Brady for the plaintiff

P J Davis QC with D S Piggott for the fourth defendant

R P S Jackson QC with N Andreatidis for the fifth defendant

D L Williams SC (until 9 May 2014) with C Withers for the sixth defendant

B D O’Donnell QC with C K George for the seventh defendant

P A Freeburn QC for the eighth defendant

SOLICITORS:

Corrs Chambers Westgarth for the plaintiff

Tucker & Cowen for the fourth defendant

Bartley Cohen Litigation Lawyers for the fifth defendant

Kennedys for the sixth defendant

DibbsBarker for the seventh defendant

James Conomos Lawyers for the eighth defendant

Introduction

  1. This case deals with the payment of two sums totalling $147.5 million from a Premium Income Fund (PIF) for which the first defendant, Management Investments Pty Ltd, then known as MFS Investment Management Pty Ltd (MFSIM), was the responsible entity required by the Corporations Act 2001 (Cth).  MFSIM was part of a group of companies I shall call the MFS Group. 
  2. The first payment of $130 million was made on 30 November 2007 from PIF by MFSIM (via PIF’s custodian, Perpetual Nominees Limited (Perpetual)) to another company in the MFS Group, MFS Administration Pty Ltd (MFS Administration).  MFS Administration was the treasury company of the MFS Group. 
  3. The second payment of $17.5 million was made by MFSIM from PIF to another company in the MFS Group, MFS Pacific Finance Ltd (PacFin) on 27 December 2007. 
  4. The plaintiff, Australian Securities and Investments Commission (ASIC), argues that the two sums were taken illegitimately from funds drawn down from a loan facility provided to PIF by the Royal Bank of Scotland (RBS) and the benefit of which was held by PIF for its members.  ASIC alleges the funds were then paid to related parties of MFSIM, not for the benefit of PIF’s members. 
  5. Associated with those aspects of the case are allegations by the plaintiff that, in the last week in January and the first week of February 2008, false documents were prepared purporting to record transactions that sought to justify those payments as having been for the benefit of PIF.  The documents were said to be backdated or otherwise made to appear as if the transactions had occurred before the payments, and the approvals had occurred before the transactions.  The plaintiff’s case is that the individual defendants were all involved in aspects of the contraventions of MFSIM, or themselves directly contravened the Act in and about the transactions and the subsequent creation and use of the false documents. 
  6. ASIC argues that the transactions, approvals, and consideration for the payments did not occur and that the documents were designed simply to mask that fact.  Its case is that the false documents were used in a variety of ways to hide the fact of the payments having been made for the benefit of other companies in the corporate group rather than for the benefit of PIF or its members. 
  7. Alternatively, it argues that the transactions provided no consideration or reimbursement for the payments at the time the payments were made and were ineffective as having been made without authority and in circumstances where they had not validly been ratified by MFSIM. 
  8. The defendants’ case is that these impugned transactions were real and explicable by a proposal to restructure another fund called the Maximum Yield Fund (No 1) (MYF) by seeding it with assets from within the MFS Group which would then be bought with funds from PIF.  Those were the proposed transactions which ASIC seeks to impugn and which, on the defendants’ cases, provided an appropriate return to MFSIM for the payments made from PIF. 
  9. I shall set out brief details of the nature of the proceedings against the individual defendants and identify the relevant corporate entities and the other relevant individuals before going into the background facts in more detail.  Much of this information is based on a written opening by counsel for ASIC. 
  10. Much of the significant evidence in the case was documentary, based on contemporaneous emails and other corporate records.  Many of the essential facts are, therefore, not particularly contentious.  The contentious issues arose, generally speaking, from debate about the conclusions or inferences I should draw from the events that occurred.  There were also questions of credit associated with the evidence of several witnesses, including the defendants who gave evidence.  Many of those questions were able to be resolved principally by reference to contemporaneous emails and other documents but also by reference to my notes taken during the hearing. 
  11. I shall then deal with the issues raised by the pleadings and a number of legal arguments important to the final resolution of the claims against all the defendants.  I shall then discuss in more detail the cases against each of the five defendants.  Inevitably some of the factual issues will be canvassed more than once because of the need to examine the cases against the individual defendants. 

The proceedings

  1. These proceedings were commenced in October 2009.  ASIC and the first defendant (MFSIM) have reached a settlement of the proceedings between themselves, which involves the filing of a statement of agreed facts and MFSIM consenting to certain declarations of contravention being made against it.  The relief to be ordered against MFSIM will be sought at the end of the substantive proceedings.  ASIC has discontinued the proceedings against the second and third defendants.  It is still necessary, however, to consider the allegations against MFSIM in the context of the allegations made against the other defendants.  Accordingly, for the purposes of the trial, the cases to be considered involved the following defendants:
  • The fourth defendant (Mr King) - MFS Group Chief Executive Officer (CEO) until 21 January 2008.
  • The fifth defendant (Mr White) - MFS Group Deputy CEO and later MFS Group CEO from 21 January 2008.
  • The sixth defendant (Mr Hutchings) - MFSIM CEO.
  • The seventh defendant (Mr Anderson) - MFS Group Chief Financial Officer (CFO).
  • The eighth defendant (Ms Watts) - MFSIM Fund Manager.

The individual defendants

Mr King

  1. Mr King was a solicitor who co-founded McLaughlins Financial Services in 1999.  Until his resignation on 21 January 2008, he was the CEO of MFS Limited and the most senior officer within the MFS Group.  Mr King was also an executive director of MFS Limited.  Mr King’s role as CEO of MFS Limited also meant that he was CEO of the entire MFS Group.
  2. Mr King ceased being a director of MFSIM on 27 February 2007.[1]  However, he continued being CEO of the MFS Group after that time.  When questioned about his role in MFSIM after he ceased being a director, Mr King acknowledged his continuing overall responsibility for MFSIM after he ceased being a director when he answered as follows in his examination pursuant to s 19 of the Australian Securities and Investments Commission Act 2001 (Cth):[2]

“Q.  … Octaviar Investment Management Limited [MFSIM] was one of the companies and you had a role, direct role for a period of time up until early 2007.  What was your role in relation to that company post you, post ceasing as a director?

A.  In what it did and how it operated nothing; in worrying about the general activities of the MFS Group, yes, I was always peripherally involved.  I mean, I couldn’t be the CEO of the group and not be concerned about what was going on in any company … from when I resigned the idea was that that was Craig’s [Mr White ’s] baby and that, you know, that was one of his areas of responsibility, but of course I had the responsibility.

Q.  You had an overall responsibility?

A.  Yes.”

  1. This is consistent with the evidence of many witnesses about the role that Mr King played in the overall management of the MFS Group until he left the Group on 21 January 2008.

Mr White

  1. Craig White was deputy CEO of MFS Limited and had primary day to day conduct of the funds management side of the MFS Group business.  He was effectively second in command to Mr King until Mr King’s resignation on 21 January 2008.  Thereafter, Mr White became the CEO of MFS Limited and by virtue of that position, in effect, CEO of the MFS Group.
  2. Mr White was a member of the Investment Approval Committee (IAC) for both PIF and the other fund known as MYF at all relevant times.  He was also an executive director of MFSIM at all relevant times as well as being a director of other companies in the MFS Group, MFS Castle Pty Ltd (MFS Castle), MFS Administration and PacFin.
  3. He was the only defendant not to give evidence in these proceedings, a decision obviously influenced by the fact that he has also been charged with criminal offences in New Zealand.  It has been accepted that there were “substantial areas of factual overlap between the present proceedings and the New Zealand proceedings”.[3]  Having been refused a stay of these proceedings he conducted his defence on the basis that his counsel was instructed not to cross-examine or call witnesses.  Mr RPS Jackson QC and Mr Andreatides for him did, however, make substantial written and oral submissions. 

Mr Anderson

  1. Mr Anderson joined the MFS Group in March 2002.  He had previously been a partner at the accountancy firm, KPMG, specialising in insolvency related matters.  He was also a registered liquidator.  Mr Anderson was the CFO of MFS Limited and by virtue of that position acted as the CFO for the entire MFS Group.  In that role his responsibilities included overseeing the treasury and financial reporting and taxation functions for the MFS Group.  He was familiar with almost all aspects of the MFS Group’s financial affairs and provided assistance to Mr King in managing the MFS Group.
  2. Mr Anderson was a director and/or secretary of many of the MFS Group companies in Australia.  In particular, he was a company secretary of MFSIM, MFS Administration and MFS Limited and was a director of MFS Castle and PacFin.

Mr Hutchings

  1. Guy Hutchings was the CEO of MFSIM from 23 May 2007.  He was also the chief investment officer of MFSIM from earlier in 2007 and was an executive director of MFSIM.  As the CEO of MFSIM, he reported on a daily basis to Mr White (as Deputy MFS Group CEO) and also to Mr King from time to time.  Mr Hutchings was a member of the IAC for both PIF and MYF at all relevant times.

Ms Watts 

  1. Marilyn Watts was the fund manager of PIF and, on ASIC’s case but not hers, of MYF from June 2007.  In that role, she was required to be aware of the assets held by PIF and MYF and to recommend changes to the investments held by those managed funds.

MFSIM personnel structure

  1. The roles of key MFSIM personnel are described in a document titled “MFSIM Personnel Structure”.[4]  That document was emailed by Mr Hutchings to a large number of recipients in October 2007,[5] and accurately summarises the personnel structure for MFSIM at the times relevant to these proceedings.[6]  The functional structure of MFSIM is shown in the document titled MFSIM Functional Structure.[7]

The relevant companies in the group

The MFS Group

  1. The MFS Group of companies (MFS Group) was a collection of corporate entities which started as a mortgage lending business associated with a legal firm on the Gold Coast known as McLaughlins Solicitors.
  2. The companies in the group containing “MFS” in their name changed their descriptions in March 2008 to substitute for “MFS” the word “Octaviar”, apparently in response to a request from an American company, Massachusetts Financial Services Company, which also used the abbreviation “MFS”.  In this judgment (as in the pleadings) the MFS names are used rather than the later Octaviar names, as those were the corporate names in place at the time of most of the relevant events.

MFS Limited

  1. The overall holding company of the MFS Group was MFS Limited, a public company listed on the Australian Stock Exchange. MFS Limited was incorporated in 2004.  At the times relevant to these proceedings, it was the ultimate holding company for the MFS Group.
  2. The directors of MFS Limited at the relevant times included Mr King (the fourth defendant) until 21 January 2008 and Mr White  (the fifth defendant).

MFS Financial Services Ltd

  1. MFS Financial Services was incorporated in August 2002.  Its principal activity was the holding of investments in its immediate subsidiaries.  At relevant times, it was a wholly owned subsidiary of MFS Limited. 

The Stella Group

  1. In about mid-2005, MFS Limited combined its then existing investments in tourism-related businesses and established the Stella Group as a division of the overall MFS Group.  The Stella Group consisted of two main components:
  • A hospitality group of companies which owned and operated a portfolio of accommodation facilities in Australia and New Zealand.  This aspect of the business included brands such Peppers, Breakfree, Mantra, Saville and other properties.
  • The second part of the Stella Group comprised travel services.  The brands in this aspect of the business included Harvey World Travel.
  1. The Stella Group was wholly owned by MFS Limited until it sold 65 per cent of the Stella Group to CVC Asia Pacific (CVC), a private equity investor, on 3 February 2008 for $409.2 million.
  2. During the course of 2007, efforts were made by MFS Limited to sell the Stella Group.  It was envisaged that this would free up considerable capital for the use of the wider MFS Group, including to repay debt.  Mr King played the lead role in efforts to sell the Stella Group.  In May 2007, CVC made a non-binding proposal to acquire 50 per cent of Stella.  The sale did not proceed immediately, although negotiations continued with CVC from June 2007 until November 2007.

MFS Administration

  1. MFS Administration Pty Ltd (MFS Administration) was the treasury company for the entire group.  It employed all staff of the MFS Group. It was the entity through which intercompany loans within the group were maintained.
  2. Its role as a central treasury company within the MFS Group meant that MFS Administration was a party to most of the intercompany transactions within the MFS Group.  However, the managed investment schemes managed their own funds, and each fund had its own accountant.
  3. MFS Administration was a wholly owned subsidiary of MFS Limited which controlled its affairs.

Funds Management Division of MFS Group

  1. The Funds Management division of MFS was established in 1999.  Its primary business included the origination, development and management of a range of specialist investment funds at wholesale, retail and institutional levels.  By late 2007, the Funds Management division of MFS Ltd comprised a number of corporations which were licensed responsible entities under the Corporations Act.

MFSIM

  1. MFSIM was the responsible entity for a number of managed investment schemes, two of which are of particular relevance to these proceedings:
  • the PIF; and
  • the MYF.
  1. MFSIM had its own board.  During the second half of 2007, the board’s members were:
  • John Whateley - chair and non-executive director;
  • Jack Diamond - non-executive director;
  • Deborah Beale - non-executive director;
  • Mr White - executive director (the fifth defendant); and
  • Mr Hutchings - executive director (the sixth defendant).
  1. The board of MFSIM had various committees.  One of the committees was known as the Conflicts and Related Party Committee (CRPC).  The CRPC consisted of the non-executive directors of MFSIM and was charged with the review and approval of transactions involving the various MFSIM funds which may have involved a party that was related to MFS.  At the times relevant to these proceedings, the members of the CRPC were Mr Whateley, Mr Diamond and Ms Beale.
  2. In addition to the board committees, there were other important committees of MFSIM known as the Investment Approval Committees (IACs).  These were committees consisting of executives of MFSIM (including some executive directors) which had the task of reviewing submissions regarding investments and transactions for the MFSIM funds and deciding whether the relevant fund ought to proceed with the transaction or not and whether additional information was required before transactions could be progressed. 
  3. A description of the IACs’ operations is contained in the MFSIM Investment and Asset Management Department Procedures Manual dated October 2007[8] as well as in the MFSIM Business Analysis and Governance Department Procedures Manual dated November 2007.[9]
  4. Each separate investment fund had its own IAC, although there was considerable overlap in membership.  For the period of matters relevant to these proceedings, the IACs for PIF and MYF had an identical composition.
  5. During November and December 2007, the IAC for PIF and MYF consisted of:
  • Mr White;
  • Mr Hutchings;
  • Mr Kennedy;
  • Mr Kyling, until 12 December 2007, when he resigned; and
  • Mr Snowden.
  1. The MFSIM IAC had written processes[10] and a separate charter.[11] 
  2. MFSIM had a procedures manual dated 31 January 2006,[12] which was updated on 13 November 2007.[13]  It dealt with the procedures required to be followed by MFSIM staff.

PIF

  1. PIF was by far the largest managed investment scheme conducted by MFSIM, with reported assets under management on 31 October 2007 of approximately $787 million.  It was described on occasion as the “flagship fund” of MFSIM.  These assets were primarily commercial loans, asset backed investments and interests in managed investment schemes.  PIF was a retail fund, in the sense that it was open to retail investors for a minimum of a $5,000 investment.
  2. The operations of PIF were governed by a number of documents including its constitution,[14] its compliance plan[15] and its product disclosure statements as in force from time to time.[16]
  3. Clause 15 of the PIF constitution provided that it was the role of the responsible entity to seek and invest the funds of PIF in “authorised investments”.  They were defined to include the following:
  • mortgage investments, being a loan secured by a registered mortgage of land;
  • bank deposits or call deposits;
  • bills of exchange (including commercial bills) issued, drawn, accepted or endorsed by any bank or negotiable certificates of deposit issued by any bank;
  • any registered investment schemes, including those of which MFSIM was the responsible entity; and
  • any investment authorised under s 21 of the Trusts Act 1973 (Qld), which the responsible entity considered a prudent investment for PIF.
  1. Section 21 of the Trusts Act provides that a trustee may, unless expressly forbidden by the instrument creating the trust, invest trust funds in any form of investment and at any time vary any investment or realise an investment of trust funds and reinvest an amount resulting from the realisation in any form of investment.
  2. PIF also had a product disclosure statement (PDS).[17]  Part A of the PIF PDS was dated 2 July 2007 and replaced a PDS dated 13 December 2006 and a supplementary PDS dated 26 March 2007.  Part A dealt with PIF’s authorised investments and how PIF was to assess its investment opportunities.  Part B of the PDS specified the target rates of income return (interest rates) for each of the different investment periods and was regularly updated. 
  3. The PIF PDS states that the constitution authorised PIF to invest in the following authorised investments:
  • commercial loans;
  • fixed interest securities, including structured transactions, floating rate and income securities, convertible, reset and hybrid securities and other high yield securities;
  • property backed managed investment schemes;
  • asset backed investments; and
  • cash and equivalents.
  1. In one respect, the PIF PDS varied from the constitution in relation to authorised investments.  The PIF PDS stated that MFSIM would not lend to, or invest in, MFS Ltd majority owned entities.[18]  However, there was no such restriction or requirement in PIF’s constitution.
  2. The PIF PDS also described the establishment of a CRPC to monitor related party transactions and investments.[19]
  3. In addition to the constitution and PDS, PIF also had a compliance plan.[20]  The compliance plan was established on 1 December 2005 and it described the processes necessary to ensure that the operations of PIF were conducted in accordance with the responsible entity’s (MFSIM’s) Australian Financial Services Licence,[21] the PIF constitution, the Corporations Act and other legislation.
  4. Clause 19 of PIF’s compliance plan focused on related party transactions.  The clause was aimed at ensuring that a financial benefit was not given to a related party of MFSIM out of PIF’s property, or that could diminish or endanger PIF’s property, unless the Corporations Act was complied with.  The clause required that each related party transaction must be in the best interests of the unitholders of PIF, must be on commercial terms and must be properly documented.
  5. Clause 35 of the compliance plan focused on investment restrictions and required that assets of PIF were invested in authorised investments in accordance with the PIF constitution and the PIF PDS.  “Authorised investments” were not defined in PIF’s compliance plan.  Clause 35 provided that the management of PIF was to assess all relevant opportunities on their individual merits and to ensure that assets were only invested in authorised investments.
  6. The compliance plan provided that PIF’s assets would be held by an external custodian in accordance with general ASIC guidance.  Perpetual was appointed by MFSIM to act as PIF’s external custodian.  Perpetual as custodian acted in accordance with instructions given to it by MFSIM.
  7. Under PIF’s compliance plan, PIF also had an IAC and a CRPC.

MYF

  1. Until at least the end of November 2007, MYF was a managed investment scheme which had a little over $2 million in cash.  It had 13 members who were for the most part senior employees or officers or, entities associated with them, within the MFS Group.  Its funds were invested in a savings account in the period to the end of November and it was not active in terms of investing.  It was closed to new investors and was, for practical purposes, dormant.
  2. The proposed restructuring of MYF from the end of November 2007 is part of the subject of these proceedings.

MFS Castle

  1. MFS Castle was a wholly owned subsidiary of MFS Limited.  It was formerly known as MFS Investment Holdings No. 17 Pty Ltd.  It did not itself conduct any business, but it was the corporate vehicle through which the MFS Group held a loan facility with Fortress Credit Corporation (Australia) II Pty Ltd (Fortress) for $250 million.  The debt had been guaranteed by MFS Limited and MFS Financial Services.

PacFin

  1. The MFS Group also carried on business in New Zealand.  There were several entities conducting business in New Zealand, the most significant of which was, for present purposes, PacFin.  PacFin raised funds in New Zealand from retail investors by issuing notes or debentures and invested those funds predominantly in loans and securities.
  2. Unlike the Australian companies noted above, PacFin was not wholly owned by MFS Limited, but was about 40 per cent owned by MFS Limited.[22]  MFS Administration however had a management agreement with PacFin whereby it managed the business of PacFin from MFS’s corporate headquarters in Southport, Queensland.[23]  MFS Administration managed all cash flow of PacFin and, if there was a shortfall, arranged any required funds.
  3. Mr Anderson (the seventh defendant) and Mr White were directors of PacFin.  They gave instructions and directions to the New Zealand management of PacFin on ASIC’s case although Mr Anderson challenged the extent of his role in that context. 
  4. MFS Limited had entered into a put option deed with PacFin, the effect of which was that MFS Limited would pay PacFin the value of any loss on a loan or investment up to a value of $50 million.[24]  In respect of long to medium term policy and strategic direction, the local New Zealand management of PacFin received instructions and directions from Mr King.  Mr King oversaw the New Zealand operations of the MFS Group.[25]

CVC Asia Pacific Limited

  1. CVC was the Asia Pacific division of CVC Capital Partners, a private equity investment advisor and manager.  CVC considered the acquisition of all or a part of the Stella Group from about May 2007.  Ultimately, CVC purchased a 65 per cent interest in the Stella Group for $409 million on 3 February 2008.  CVC later purchased the remaining 35 per cent of the Stella Group in July 2009.

Sunleisure Group Ltd

  1. In May 2007, MFS Limited acquired the Sunleisure Group.  The Sunleisure Group held Sunleisure hotels and other Sunleisure businesses.  It focused on managing and letting hotels, residential developments and retail commercial centres in Queensland.  In particular, it managed a number of hotels including the Q1 Resort on the Gold Coast.  It owned and managed the Q1 Observation Deck as part of the Q1 Resort.

Royal Bank of Scotland

  1. On 29 June 2007, RBS provided MFSIM with a loan facility of $200 million.  Clause 3.2 of the Loan Agreement provided that “The Borrower must use the net proceeds of a Funding Portion only for the purposes of the Trust”.[26]  The purpose of this facility, as described in PIF’s PDS, was to help manage the liquidity of the fund, ie, managing the payment of distributions and redemptions, and to provide short term funding for opportunistic investments where the fund did not have surplus cash to provide for the investments that may arise on an opportunistic basis.[27]
  2. In November and December 2007, PIF drew down the total amount of the $200 million facility.

Other relevant individuals

  1. The following persons are of particular relevance.

Cheryl James

  1. Ms James was at relevant times a finance manager in the MFSIM team.  Her role was to manage the accounts for some of the managed investment schemes operated by MFSIM, including PIF and MYF.  She was responsible for preparing monthly management accounts and the half-yearly financial statements, and also assisted senior managers with audit processes.

Janina Howard

  1. During the relevant period, Ms Howard was the head of business analysis and governance of MFSIM.  She was responsible for dealing with the daily running of MFSIM’s custodial obligations, including ensuring all of MFSIM’s obligations as the responsible entity concerning documentation and record keeping were being complied with.  She also assisted with getting documents ready for audits, assisted the compliance team with any inquiries they might have, and ensured that units in, and distributions from, the relevant managed investment schemes were correct.

Karen Platts

  1. Ms Platts was a corporate advisor to the MFS Group, and particularly to Mr White .  She reported directly to Mr White and worked closely with him.

Kim Kercher

  1. Ms Kercher joined the MFS Group in 2001 as financial controller and before that she had been an auditor at KPMG.  Ms Kercher became a company secretary of many corporate entities within the MFS Group including MFSIM and MFS Limited.

Mike Skepper

  1. Mr Skepper was the MFS Group Compliance manager.  In February 2008 he identified a number of breaches in relation to the payments totalling $147.5 million by PIF to MFS Administration and to PacFin in November and December 2007.

Nigel Fitzgerald

  1. Mr Fitzgerald was the MFS Group internal auditor.  In March 2008 he prepared a draft internal audit report in relation to the transactions arising from the $147.5 million payment.

Rolf Krecklenberg

  1. Mr Krecklenberg was appointed as an executive director of MFS Limited on 14 April 2005 after MFS Limited acquired Peppers.  He resigned from that position in February 2008.  Before joining MFS in 2005, Mr Krecklenberg was a managing director of Peppers.  He was chief executive officer of the Stella Group until 29 February 2008 and also a director of MFS Limited.  He had a primary role in conducting the Stella Group’s business.  He was also closely involved in efforts to sell the Stella Group during the course of 2007 and early 2008.

History leading up to and including the impugned transactions

The RBS Loan Agreement

  1. In 2006, PIF had a facility with the National Australia Bank to enable PIF to have the liquidity to move quickly on deals that were presented to it.  However, the relationship between MFS and NAB broke down at some point before mid-2007, necessitating that a facility from another finance provider be obtained.
  2. On 29 June 2007, MFSIM as responsible entity of PIF entered into a facility with RBS (RBS Loan Agreement) for borrowings of up to $200 million, which could be drawn down from time to time.  The amount of the facility was undrawn before the end of November 2007.  The loan facility was to be used for the purposes of PIF.

The Fortress Loan Agreement

  1. On 1 June 2007, MFS Castle entered into a loan facility with Fortress for $250 million,[28] which was used for the purposes of the MFS Group (Fortress Loan Agreement).  The whole $250 million was drawn down on 1 June 2007.  The money drawn down was paid to MFS Administration.
  2. It was originally envisaged that this facility would be a short term one as it was expected that significant funds would come into the MFS Group from the proposed sale of the Stella side of the MFS Group or from the finalisation of a $450 million corporate banking facility.  The original date for repayment of the loan was 31 August 2007.  However, the sale of Stella did not proceed with the speed that was originally envisaged and MFS agreed with Fortress to extend the date for repayment to 30 November 2007.
  3. During November 2007, it became apparent that the Stella sale would not occur at least in time for its proceeds to be used to repay the Fortress Loan Agreement.  On 17 November 2007, Mr King was still expecting that there would be an offer for 50 per cent of Stella by the end of that week,[29] but that did not eventuate.  Negotiations with CVC for the sale of Stella had stalled by about 21 November 2007 and CVC had not made a binding offer to purchase an interest in Stella.  Further, the assets of Stella could not be used to make the payment because those assets had been ring-fenced from the wider corporate group by Stella’s own finance facility with UBS.
  4. By late November 2007, it was apparent that none of MFS Castle, MFS Limited and MFS Financial Services had sufficient funds on hand to enable the repayment in full of the $250 million debt to Fortress by the end of November 2007.  On 22 November 2007, Mr Anderson sent an email to Mr White setting out the serious cash flow difficulties that the Group faced at that time.[30]

Further background facts

  1. In 2007 and early 2008, the MFS Group consisted of a large number of corporate entities engaged in a multitude of businesses.  Relevantly for ASIC’s case, the MFS Group included two quite distinct categories of enterprise.  The first comprised funds management and financial services businesses, which included the management of a number of managed investment schemes.  The second class of enterprise was the collection of tourism and travel-related businesses, I have referred to as Stella, or the Stella Group.
  2. PIF’s principal activity was the investment of retail investors’ funds in equities, debt instruments, cash and registered mortgages in return for which investors would receive monthly distributions of income over fixed investment periods with repayment of their principal at maturity.  By 31 October 2007, it had total funds under management of approximately $787 million.
  3. By the middle of 2007, the MFS Group had a $250 million loan with Fortress.  This loan was held by a company which came to be called MFS Castle, a wholly owned subsidiary of MFS Limited, whose sole purpose was to hold this loan.  The loan was guaranteed by MFS Limited and another company in the MFS Group, MFS Financial Services.
  4. The $250 million Fortress loan was originally due for repayment on 31 August 2007 but this was extended to 30 November 2007.  Despite efforts by the MFS Group to raise funds to enable this loan to be repaid or refinanced by the due date, it was unable to do so from the funds then readily available to it.  It was likely to have been able to raise the funds, however, by going to the market either by issuing shares or issuing debentures.  An inability to repay the loan to Fortress on time could have had potentially devastating effects for the MFS Group, especially given that the loan was secured by the parent company.
  5. During late November 2007, Mr King negotiated with Fortress to defer repayment of the loan either in whole or in part.  Those negotiations resulted in an agreement between the MFS Group and Fortress for the payment by 30 November 2007 of $100 million plus an extension fee of $3 million, with the balance of $150 million payable by 1 March 2008.
  6. This necessitated the MFS Group finding $103 million in order to pay Fortress by 30 November 2007.  On 27 November 2007 MFSIM as the responsible entity for PIF drew down $150 million of the $200 million loan facility that it had with the RBS.  To that time, no money had been drawn down under the RBS facility.  The RBS facility should have been used solely for the purposes of PIF and not for the purpose of providing funds to repay the debts of other MFS Group companies.
  7. Of the sum drawn down of $150 million, $130 million was paid by MFSIM via Perpetual to MFS Administration.  MFS Administration in turn caused $103 million of this payment to be paid to Fortress on 30 November 2007, thus ensuring that MFS Castle did not default on its facility and that the guarantees given by MFS Limited and MFS Financial Services were not called upon.
  8. The sum of $130 million was paid by MFSIM, on ASIC’s case, as responsible entity for PIF to MFS Administration for the purpose of repaying the Fortress debt.  In other words, ASIC alleges that PIF borrowed money from RBS, on the security of the assets held by it as responsible entity for the managed fund, in order to repay the debt of another company in the investment arm of the MFS corporate group. 
  9. In December 2007, PIF drew down the balance of the RBS facility as follows:
  • $15,000,000 on 13 December 2007;
  • $25,000,000 on 18 December 2007; and
  • $10,000,000 on 24 December 2007.
  1. On 27 December 2007, MFSIM as responsible entity for PIF made the payment of $17.5 million to PacFin.  On ASIC’s case this payment was made for the benefit of PacFin, which needed $16 million to meet its financial commitments to its debenture holders and not for the benefit of PIF or its unitholders or “members” (the term used in the Act).  Again ASIC argues that PIF received no benefit for this payment.  Of the $17.5 million, PacFin paid $1.5 million to MFS Administration on 28 December 2007.

Countervailing considerations - the proposed restructuring of MYF during 2007

  1. The facts I have recited so far reflect the view of the evidence supporting ASIC’s case.  It is also necessary to keep in mind the evidence that supported the submissions for the defendants that the payments were explicable by a proposal to restructure MYF partly, at least, through investments to be made by PIF.  The evidence relating to that was usefully summarised in Mr Jackson’s written submissions for Mr White.[31]
  2. Ms Howard agreed that in early to mid-2007, Mr Hutchings expressed the view to her that MYF should be restructured.[32]  By 24 July 2007, the desire to consider alternative investment opportunities for MYF as a fund was flagged to the board of MFSIM.[33]  By October 2007, a business planning document entitled “End to End Business Planning October 2007” had been prepared (the End to End Document).[34]  It set out a plan involving the re-structure of MYF[35] that involved PIF investing in the asset backed sector through a restructured MYF[36] and Causeway Private Debt Opportunity Fund.
  3. PIF had been investing in the asset backed sector through Causeway Private Debt Opportunity Fund (referred to in some of the documents as “Causeway PDOF” or just “PDOF”) from at least April 2007.[37]  There was a view that a fund was a success if it had $100 million of funds under management.[38]  Ms Cole agreed with the proposition that the saleability to the public of a restructured MYF was enhanced by it having built momentum in this way.[39]  Mr Hutchings’ evidence was consistent with this. 
  4. On 8[40] and 9[41] November 2007 there were email exchanges about restructuring MYF in the immediate future.  Mr King was told of aims and objectives in relation to relaunching MYF.[42]  By 13 November 2007, the possibility of a new class of units being set up within MYF was being discussed.[43]  Board papers circulated about a week before[44] the 21 November 2007 MFSIM board meeting included a presentation entitled “Update on Business Strategy & Structure”[45] that dealt with, amongst other things, a product strategy that included the restructured MYF.  Also on 21 November 2007, a presentation was given to the MFSIM board that included a reference to the restructure of MYF.[46]
  5. Mr Hutchings also gave evidence as to the restructure of MYF to the effect that he was told by both Mr Kyling and Mr White that MFSIM wanted to build a Macquarie Bank/Morgan Stanley/JP Morgan/Goldman Sachs/Babcock & Brown type of investment management model.[47]
  6. He also said he was involved in presentations made to the board and senior management of MFSIM concerning the “five saleable products”,[48] namely the proposed investment funds that MFSIM would offer to investors during the next year.  He was working on that strategy and various plans for PIF with his team and in consultation with Mr White, Mr Kyling and others in the first three quarters of 2007.[49]
  7. On 11 September 2007 Mr Anderson sent an email to Mr Hutchings and Mr White attaching a listing of assets for potential investments in PIF which relevantly included some of the investments recorded in the allegedly false documents.[50] 
  8. As at October 2007, PIF had approximately $142 million worth of assets due to mature within the coming months and Mr Hutchings was fairly certain that loans with a large combined value would mature within the coming months.  With that in mind he discussed the pending maturity of those investments with Mr White, Wendy Bennett, Mr Kennedy and Ms Watts. Those people discussed the need to find suitable replacement investments.[51] 
  9. By mid 2007 it was recognised within MFSIM that MYF needed to be reorganised and restructured and there was significant discussion of that between June and November 2007.[52]  The restructure of MYF was to take place in two parts, the first of which was intended to take place quite quickly and would attract investment from sophisticated investors including seeding from PIF.[53] 
  10. As at 26 September 2007, Mr Hutchings was considering that two of the loans that had been purchased with PIF’s money at that time referred to as the Domain/Guardian loans might be bought instead by MYF with PIF investing in it to facilitate that.  Mr Hutchings gave evidence that the Domain/Guardian loans were being considered for investment by MYF at around the time of the email dated 26 September 2007.  He agreed that that would be part of a restructuring of MYF and was a proposal which involved seeding.[54]  
  11. At some stage in mid to late 2007, Mr Hutchings had conversations with Mr White to the effect set out in para 143 of Mr Hutchings’ affidavit, including that Mr White told him that he had been working on the “pipeline”[55] and that there were a number of appropriate deals being generated within the MFS Group that made this suitable for PIF.
  12. Mr Hutchings had in mind that such investments might be purchased through PIF seed funding MYF.[56]  On the morning of 26 November 2007, he had a telephone discussion with Mr White during which Mr White told him that PIF needed some new investments and that he had identified a number he wanted to “run with”.  He told Mr Hutchings that they were like the ones that he and Mr Hutchings had talked about a lot in recent months.[57] 
  13. A note in Mr Hutchings’ diary on the date 28 November 2007, apparently dealing with possible loan investments,[58] was a note of things for Mr Hutchings to discuss with Mr White or a note of discussions he had with Mr White.[59]  I shall discuss this note in more detail later but Mr Jackson submitted it was likely that it was made around the time he had a discussion with Mr White or was preparing for one.[60]  Mr Jackson also argued it was more likely to be a note of a conversation with Mr White given Mr Hutchings’ evidence he was not familiar with the details of the loans.  The note refers to the strategy of having five saleable products. It makes reference to a restructured MYF being seeded by PIF, by use of the term “pipeline”, and refers to PIF seeding a reorganised MYF and investments broadly consistent with those which are ultimately recorded in the allegedly false documents. 
  14. Mr Jackson also observed that the diary note contained the notation “SK OK”. He interpreted that notation to mean “Steve Kyling is OK” and submitted it may reasonably be inferred to be a reference to a conversation Mr Kyling refers to having had with Mr Hutchings.[61]  ASIC did not put to Mr Hutchings that the note was a fabrication or that it must have been made on or after any particular date. It was not suggested that it was prepared at the time or after the preparation of the false documents. In any case, that was, he submitted, unlikely to be so.
  15. It was, he also submitted, broadly consistent with the investments that appear in the allegedly false documents, rather than an exact copy of the false documents.  Had it been prepared later, one would expect that it would be more accurate and more extensive.  The note was consistent with the notion of PIF seeding MYF but the exact extent to which it would do so was not identified.[62]
  16. In submitting that the ASIC theory behind the drawdown of funds was flawed Mr Jackson also drew attention to the fact that the decision to drawdown was made before the agreement with Fortress was reached, which was contended to supply the motive for the drawdown.  ASIC’s case did not confront the fact that the direction to commence the drawdown of the $150 million was given before the decision not to sell Stella was made and before the negotiations with Fortress began (both events being 24 November 2007). The submission was that, rather than directing the drawdown in circumstances where an agreement had been reached which identified the amount, it was at least equally likely that the money was to be used for investment purposes when regard is had to the following evidence:
  • On 19 November 2007, an update was given at the management team meeting held that day that there would be a drawdown on the RBS facility for the purposes of an investment and thereafter steps were taken to action that direction.[63]
  • On 21 November 2007, a direction was given to commence necessary processes to draw down on the RBS Facility.[64]  This was confirmed to be the $150 million drawdown.[65]
  • On 23 November 2007, a direction was given to start the process for a drawdown by PIF “next week” from the RBS facility in respect of some anticipated investments.[66]
  • On 23 November 2007 there was a discussion between Mr King and Mr Kelleher from Fortress.[67]  However, Mr Kelleher confirmed that as at 23 November 2007 there was no mention of Fortress requiring payment of $100 million on the maturity date.[68]
  1. He also submitted that it was commonplace at MFS for investments to be made with related entities with money moving through the treasury company MFS Administration.
  2. Let me go on now to summarise the later developments leading to the drawing down of the funds.  

MFS Ltd’s capacity to raise funds by November 2007

  1. It is clear that the MFS Group was one where deal making was a constant and transactions involving many millions of dollars were not uncommon.  There was also evidence that it was possible for MFS Ltd to raise money at the time through the market on short notice but, by the same token, that path was not preferred by Mr King.  On 24 November 2007 he described the possibility of raising $250 million as “debt or hybrid or equity capital” as the “worst case”.[69]  He also said to Mr Kelleher of Fortress in an email of that date:[70]

“If you were to insist we would seek to repay you off the back of an equity and hybrid raising to be launched off our announcements on Wednesday this week.  We do NOT want to do such a raising on such short notice and before we have had a chance for the market to understand the Stella numbers (ie we will have to do it at a higher cost of capital and a higher transactional cost) BUT if you insist then that is what we will do all be it costly inconvenient and undesirable You will achieve repayment in full but at great cost to us.  We are saying plainly that is your right and if that is, despite our position as explained below, your position we will act upon it and complete.”

Several other possibilities for raising cash are referred to in contemporaneous documents during November 2007 where the focus, at least of Mr White’s efforts, was on the funds available to be drawn down from the RBS facility by PIF.  ASIC’s written submissions included a useful chronology relating to the payments of the two sums of $130 million and $17.5 million in the context of its allegations about the impropriety of the payments made by MFSIM.[71]  Much of it I shall now set out but one needs to bear in mind the alternative interpretation sought to be put on the facts by the defendants.  It is also important to know what ASIC alleges are the contraventions committed by MFSIM itself.

The $130 million payment

  1. Although MFSIM has agreed to the finding of certain contraventions against it in the compromise it has reached with ASIC it is still necessary to consider whether those contraventions have been established for the purposes of the cases against the other defendants.  They are said to have been knowingly concerned in the contraventions so whether there were contraventions must be decided.  In approaching that task it is useful to consider first what ASIC’s allegations are concerning the $130 million payment.  I shall set out the other allegations of contraventions relating to the $17.5 million payment and the impugned transactions later. 

MFSIM’s alleged contraventions concerning the $130 million payment

  1. The pleaded contraventions against MFSIM relating to the impropriety of the $130 million payment were that:[72]
  • A reasonable person in MFSIM’s position would have prevented the making of the $130 million payment and the $103 million payment until they were satisfied that it was for investments which were authorised under PIF’s constitution and for the benefit of PIF and its members.  MFSIM did not do that.
  • In permitting $103 million of PIF’s money to be paid to Fortress MFSIM as responsible entity for PIF contravened:
  1. s 601FC(1)(a) of the Act, by not acting honestly;
  2. s 601FC(1)(b) of the Act, by  failing to exercise the degree of care and diligence that a reasonable person would exercise if they were in MFSIM’s position;
  3. s 601FC(1)(c) of the Act, by not acting in the best interests of the members of PIF;
  4. s 601FC(1)(k) of the Act, by failing to ensure that the $130 million payment to the extent of the $103 million payment was made in accordance with PIF's constitution;
  5. and, therefore, s 601FC(5) of the Act; and
  6. in making the $130 million payment to the extent of the $103 million payment and in permitting $103 million of PIF’s money to be paid to Fortress, MFSIM, contravened s 208(1) of the Act, as modified by s 601LC of the Act because there was a financial benefit given by MFSIM, as responsible entity for PIF, out of scheme property to MFS Administration, a related party of MFSIM.

MFSIM’s alleged misconduct concerning the $130 million payment

Chronology from November 2007 onwards

  1. MFS Limited did not have the capacity to repay the amount due at the end of November 2007 under the Fortress Loan Agreement and would have been unable to obtain the necessary funds unless such finance could be raised “off the back of an equity and hybrid raising to be launched off” MFS’s announcements on Wednesday, 27 November 2007.[73]
  2. The cash flow position of MFS as at November 2007 was extremely tight and by emails on 12 November 2007 Mr Anderson estimated that MFS needed at least $30 million cash flow without a number of allowances including any net payment to Fortress.[74]  Mr Ball increased the projected negative cash flow at the end of that month to $104,133,046.[75]  ASIC’s submission was that these facts provided a cogent motivation for the conduct that led to the alleged contraventions.

PIF did not intend to make acquisitions in November 2007?

  1. ASIC argued that as at November 2007, PIF was not intending to make any significant acquisitions (and did not intend to take on too much debt) as demonstrated by the following evidence:
  • Mr Hutchings sent a report to Mr King by email at 7:04 pm on Sunday, 18 November 2007 in which he stated, with respect to PIF’s best significant acquisition opportunity “no obvious candidates yet but early days”.  The report also advised MFS Limited:  “don’t take on too much debt (use company paper) - due to rising interest rates, possibility of more credit market problems and prolonged US slowdown; don’t rush - good opportunities will present in 2008 as some financial services organisations lose sales momentum and/or a part mark to market valuations of sub-par assets”.[76]
  • The minutes of MFSIM investment management meetings at the time did not disclose any proposed acquisitions; see, eg, minutes of meetings on 12 November 2007[77] and Monday, 3 December 2007.[78]
  • The absence of any reference to, or approval of, acquisitions in IAC meetings in the period leading up to and including November 2007 except for a purported meeting on 23 November 2007, which in fact did not occur and the documentation in relation to which was not created before the last week of January 2008.
  • PIF did not, in fact, make any other acquisitions from November 2007.

The $130 million payment was effected without approvals

  1. The $130 million payment was made without approval from the IAC of PIF or the CRPC of MFSIM, either before the transaction or at all.  Nor was there approval given by the members of PIF for the $130 million payment to the extent of the $103 million payment, which, ASIC submitted, was to be inferred from the fact that there was no transaction effected, and thus nothing that could have been approved.

The timing for the drawing down of the funds by PIF from RBS coincided with the requirement of the funds by MFS Limited

  1. The timing for the drawing down of the funds by PIF from RBS coincided with the requirement of the funds by MFS, which is demonstrated by the evidence that by early November 2007 Mr King recognised that the funds to repay the Fortress loan would not be available from the sale of Stella by the end of November 2007.  In particular ASIC relied on the following:
  • Mr King’s report to the MFS board at the Park Hyatt on 7 November 2007 that the issue of the partial sell-down of Stella to private equity “should have resolved by end of November”,[79] which he acknowledged meant it was when MFS would know if the partial sell-down was proceeding but was not a reference to its settlement.[80]
  • At the 12 November 2007 MFS Limited finance and investment committee (FIC) meeting Mr King reported on the Stella project and “potential hybrid notes/bank debt”.[81]  It should also be noted that there was no reference to any sale of assets to PIF.
  • As noted above, by email at 12:02 pm on Monday, 12 November 2007, Mr Anderson projected the $30 million cash flow shortfall without allowing for any payment to Fortress.[82]
  1. On Thursday, 15 November, 2007 Mr King, Mr White and Mr Anderson had a lengthy meeting (about six hours).  Reporting to MFS Limited directors Barry Cronin and Paul Manka, Mr King said it was a “good session (most of the day)”.[83]
  2. ASIC’s argument was that it was inherently unlikely that such a discussion would not have included sources of funds and other financial options to meet the upcoming liabilities, in particular that owed to Fortress.  This conclusion was likely particularly because Mr Anderson had reported the upcoming liability on the previous Monday,[84] and Mr King, Mr White, and Mr  Anderson frequently discussed cash flow issues,[85] and because Mr King said he was a person who, generally, would discuss the need for Plan B and Plan C options for financing.[86]
  3. Mr King originally said that this meeting was about the new template[87] but, when it was put to him that he had reported to the MFS board on 7 November 2007 that he was meeting with Mr White on that day,[88] he said he did not recall the “all day” meeting.[89]  Mr Anderson said that he recalled that the template was discussed this day and did not believe that the Fortress liability would have been discussed because it was not of concern to him whether there had been discussions with Fortress or not.[90]
  4. Whether there was a discussion at this meeting or not, it was submitted that it was inherently unlikely that, in the circumstances, there would not have been conversations at this time between the CEO, the CFO and Mr White, as Deputy CEO, about the management of the upcoming Fortress liability.
  5. On Monday, 19 November 2007 at 4:29 pm,[91] Ms Watts sent an email to Ms Howard, copied to Mr Hutchings, wanting to “discuss the possibility of drawing down on the PIF loan facility from RBS to fund some planned investments later this week”.  ASIC submitted that on the evidence this could not have been referable to anything but the repayment of the Fortress debt.  This is reinforced by Ms Watts’ evidence that she did not recall what the planned investments were[92] and that it was Mr White who told her there was going to be a drawdown.[93] 
  6. I have already pointed to the alternative possibility developed in the defendants’ submissions that there were plans on foot to seed MYF with new investments possibly from PIF.
  7. Up to about the same time Mr Kelleher of Fortress was dealing with Mr White but “[Mr Kelleher] was obviously becoming very nervous about what was happening with the Stella sale process, not getting what he’d call straight answers as to when he was going to get his money back, and like any good credit guy he’d gone to the top”,[94] and he “wanted to hear firsthand from the CEO”.[95]  Consequently, Mr White arranged a tele-conference with himself, Mr King and Mr Kelleher at 5:00 pm on Tuesday, 20 November 2007.[96]
  8. On Wednesday, 21 November 2007, Ms Howard responded by email to Ms Watts  and Mr Hutchings regarding “RBS facility” saying “I am ready to go when you are” advising that the maximum drawdown was approximately $155 million and the funds would go into the PIF operating account two business days after lodgement of forms.[97]  ASIC submitted that the advice regarding the maximum draw down showed that the “planned investments” were more than just a temporary cash flow shortfall.
  9. On Friday, 23 November 2007 at 1:53 pm,[98] Ms Watts replied to this email from Ms Howard (copied to Mr Hutchings) requesting Ms Howard to start the process of drawdown by PIF from the RBS facility “to fund some anticipated investments late next week … the amount of the drawdown and the period for which it would be required has not yet been finalised, but I will have a better idea on Monday”.
  10. Apart from there being no other prospective acquisition involving PIF at this time, ASIC argued that its submission that this drawdown related to the repayment of the Fortress loan was supported by the fact that Mr King said that, before drafting the email to Mr Kelleher in the early hours of Saturday morning, he had had conversations with Mr White (or Mr Anderson)[99] and had been told that the $25 million, which he offered to Mr Kelleher, was available.[100]
  11. Accordingly, ASIC submitted that the reason that Mr King offered $25 million in his email the next morning and accepted without further negotiation Mr Kelleher’s counter-offer of $100 million on the same day was because he had been informed by Mr White of the sum of money which was available from the RBS facility through PIF.  Mr King described Mr White’s funds as a “life line” in his s 19 examination,[101] a term he tried, ASIC submitted, unsuccessfully, to walk away from in his evidence at the trial.[102]
  12. ASIC’s submission was that it was inherently implausible that Mr King would immediately agree, without further negotiation or caveat, to a requirement to pay Fortress $100 million within a week - an obligation he accepted he was “paranoid” about complying with[103] - without the security of knowing the money was definitely available and having to undergo “all the trouble and inconvenience of doing a capital raising [in one day]”.[104]
  13. Counsel for Mr Anderson submitted that I should not infer that when Mr King accepted the amount of $100 million as the figure that should be repaid to Fortress, that he did so because he had been informed by Mr White that the money was available from the RBS facility through PIF.  A more plausible explanation, they submitted, was that Mr King had no doubt that he could achieve the $100 million outcome from a capital raising or from the realisation of liquid assets in the form of cash and shares.
  14. On Saturday, 24 November 2007 at 7:06 am, Mr King sent an email to Mr Kelleher, copied to Mr White and Mr Anderson, requesting an extension of the loan until 1 March 2008 on the basis that there would be a part-payment of $25 million.  He stated that if Fortress demanded payment by the end of the month “we would seek to repay you off the back of an equity and hybrid raising to be launched off our announcements on Wednesday this week”.[105]
  15. After the receipt of this email, there was a telephone conversation between Mr Kelleher and Mr King in which Mr Kelleher made a counter-offer for a $100 million part-payment and says that Mr King “quickly agreed in principle to the counter-offer of $100 million part-payment of the loan facility without any hesitation”.[106]  ASIC submitted that Mr King was able to respond immediately in the affirmative to the counter-offer because he was aware that the $100 million was within the $155 million limit of funds that could be drawn down from RBS by PIF.  It was submitted that Mr King, having been told by Mr White that $25 million was available for the “start of a negotiation”,[107] would have been told that in fact the inquiries had revealed that $155 million was available from PIF.
  16. At 12:31 am on Sunday, 25 November 2007, Mr Kelleher replied to Mr King, copied to Mr White and Mr Anderson, saying that he has the “go ahead as per our conversation of today”.[108]  At 7:07 am Mr King sent an email to Mr Krecklenberg saying “I am getting somewhere on Fortress which is workable” and made no reference to equity raising or how else the $100 million could be raised.  ASIC submitted this was because at this point he knew that the money was available from RBS through PIF.[109]
  17. By 8:00 am on Monday, 26 November 2007, Ms Watts was aware that the drawdown was going ahead and reported to the MFSIM management team meeting that she was “facilitating several large settlements which will drain the liquidity position in PIF.  To draw down on RBS facility to fund and will be running a fairly tight ship in the coming weeks”.[110]
  18. By email at 11:09 am Monday, 26 November 2007 to Mr Hutchings, Scott Parker attached the PIF cash flow requirements for 29 November 2007 to 30 November 2007.  It showed that there was a projected net outflow of funds of nearly $16 million but did not show any acquisitions in that period.[111]
  19. In the morning of Monday, 26 November 2007 Mr Hutchings and Mr White had conversations, which are referred to by Mr White in an email to Mr Hutchings at 10:44 am in which he instructed Mr Hutchings to put in motion the drawdown of $150 million and requests “aim for Thursday with Friday fallback”.[112]  Mr Hutchings responded by forwarding the email to Ms Howard and Ms Watts with the instruction to implement Mr White’s request[113] and replied to Mr White saying “currently being arranged”.[114]
  20. By an email exchange on Tuesday morning, 27 November 2007 between Ms Howard, Ms Watts and Dana Malipaard, Ms Howard advised that there will not be any IAC minutes or other backup for the funding notice for the drawdown from RBS.  However she suggested to give it to Mr White “to sign first as he is aware of it”.[115]
  21. The correlation between the moneys coming in from Mr White and the moneys going out to Fortress was confirmed by an exchange of emails between Mr White and Mr Anderson on Tuesday afternoon when Mr Anderson noted that “we are getting c$130m on Friday” and Mr White forwarded him the Fortress bank details (for the payment out) and said that he was waiting for Mr Anderson to provide the bank account details of MFS Administration (for the payment in).[116]
  22. At 5:16 pm on Wednesday, 28 November 2007, Mr White informed Mr King by email that he had the $150 million “in our account ready to transfer to MFS Administration tomorrow if need be”.[117]  In context, the reference to “our account” ASIC submitted could only be a reference to PIF’s account.
  23. On Thursday, 29 November 2007, Mr King telephoned Mr Kelleher to confirm that he had the $100 million for Friday.[118]
  24. On Friday, 30 November 2007, there was extensive email correspondence with respect to the transfer of the $130 million received into the PIF account with Perpetual to the MFS Administration account.[119]  However, at 1:55 pm, Mr Anderson sent an email confirming that the funds had been received in MFS Administration’s account “so where are we please with the payment of the $100m?” (ie the payment to Fortress).[120]
  25. By email at 2:50 pm on 30 November 2007, Mr Anderson confirmed to Ms Guest and Mr White that the $103 million had been sent to Fortress “in the last 20 minutes”.[121]
  26. By email at 4:50 pm to Mr King copying Mr White, regarding the Fortress Deal (after a further email exchange with Mr Slack of Fortress), Mr Anderson advised “All done all signed all sent all received” and Mr King replied:  “Great work guys”.[122]

Payment effected without consideration flowing to PIF

  1. The defendants’ allegation that consideration flowed to PIF for the $130 million payment was as follows:[123]
  • $62.5 million worth of interests in participation agreements with PacFin.
  • 67.5 million class A units valued at $67.5 million (out of a total of $85 million class A units) purchased in MYF associated with:
  1. MYF’s purported acquisition of $55 million worth of interests under the participation agreements from PacFin; and
  2. a $30 million loan to Sunleisure Group Limited so it could repay a debt due to MFS Administration.
  1. It is convenient at this stage to call these the alleged transactions.
  2. ASIC submitted that I should find that the payment was not made in consideration of the alleged transactions for the following reasons:
  • The payment was transferred directly from the Perpetual account to MFS Administration and no part of it was paid to MYF or PacFin.[124]
  • The alleged transactions were not formulated or documented until January 2008.
  1. ASIC also submitted that I should find that the alleged transactions were not formulated or documented until January 2008 for the following reasons:
  • There was no contemporaneous consideration or approval of the alleged transactions before the $130 million payment.
  • Before about 23 January 2008, the officers and employees of MFSIM and MFS Limited had no understanding of the consideration for the $130 million payment and despite requests were not informed about the alleged transactions.
  • The alleged transactions were not formulated until about mid-January and not documented until late January/early February 2008.
  • The alleged transactions were inconsistent with contemporaneous accounts of PIF, PacFin, Sunleisure and MYF. 
  • The alleged transactions were inconsistent with contemporaneous MYF proposals.
  • The alleged transactions were inconsistent with contemporaneous Sunleisure decisions.

MFSIM and MFS Administration were related parties in respect of the $130 million payment for the purposes of s 208 of the Act

  1. ASIC alleges that MFSIM, in making the $130 million payment to the extent of the $103 million payment, contravened s 208(1) of the Act (as modified by s 601LC) because it constituted a financial benefit out of scheme property to MFS Administration, a related party of MFSIM.  The case against MFSIM was said to be established by admissions made by MFSIM.
  2. Further, ASIC alleges that Mr King, Mr White and Mr Anderson were each “involved” in the contravention within the meaning of s 79(c).  Section 79(c) requires proof they were directly or indirectly knowingly concerned in the contravention.
  3. ASIC submitted that Mr King, Mr White and Mr Anderson were knowingly concerned in each of the elements of the contravention, which are as follows:
  • MFSIM gave a financial benefit to MFS Administration out of scheme property being the $130 million payment to the extent of the $103 million payment made by PIF to MFS Administration.  The $130 million payment is admitted in the defences of Mr King, Mr White and Mr Anderson.
  • MFS Administration and MFSIM were related parties because MFS controlled both MFSIM and MFS Administration.  The control arises from the fact that MFSIM was a subsidiary of MFS Limited and MFS Administration was a subsidiary of MFS Limited.
  • The fact of the $130 million payment and the fact that MFSIM and MFS Administration were subsidiaries of MFS Limited were:
  1. admitted in the defence of Mr King.  The knowledge of Mr King is to be inferred from his positions as the CEO of MFS, a director of MFS Limited, a director of MFS Administration from 21 June 2002 to 25 June 2007, a director of MFSIM from 8 August 2002 to 27 February 2007 together with his evidence[125] including the production of an organogram, showing, among other things, MFS Limited subsidiaries;[126]
  1. admitted in the defence of Mr White.  The knowledge of Mr White is to be inferred from his positions as the executive director of MFSIM, a director of MFS Administration and the deputy CEO of MFS Limited between 23 May 2007 and 21 January 2008; and
  2. admitted in the defence of Mr Anderson.  The knowledge of Mr Anderson is to be inferred from his positions as the company secretary and CFO of MFSIM, a director and company secretary of MFS Administration and CFO of MFS Limited, together with his evidence.[127]
  • There was no approval given by the members of PIF for the $130 million payment or the $103 million payment.  That is inferred from the fact that there was no transaction effected, and thus nothing that could have been approved.
  1. The involvement of Mr King arises out of his knowledge pleaded in para 56 of the statement of claim[128] and in particular is to be inferred from the fact that there was no transaction effected, and thus nothing that could have been approved.
  2. The involvement of Mr White arises out of his knowledge pleaded in para 58 of the statement of claim and in particular is to be inferred from the fact that there was no transaction effected, and thus nothing that could have been approved.
  3. The involvement of Mr Anderson arises out of his knowledge pleaded in para 60 of the statement of claim and in particular is to be inferred from his knowledge that there was no transaction effected, and thus nothing that could have been approved.

The alleged transactions were not the subject of contemporaneous consideration or approval

  1. ASIC submitted that the evidence shows that, with respect to the alleged transactions, there was:
  • no contemporaneous consideration undertaken;
  • no reference in the minutes of MFSIM investment management meetings; and
  • no approval by the board of Directors of MFSIM, the IAC or the CRPC.[129]
  1. In those circumstances, ASIC submitted that it cannot be the case that the $130 million payment was in the best interests of PIF’s members.  It cannot be in the best interests of PIF’s members for over $100 million of their funds (held on trust for them by MFSIM[130]) to be transferred without certainty about what PIF was receiving in return for it.
  2. It submitted that it was implausible that investments representing about one-sixth of the total value of the PIF fund, which would be financed with borrowings, would be properly undertaken without implementation of these procedures and that I should reject the purported minutes of the PIF IAC dated 23 November 2007[131] on the basis that:
  • the evidence recited below shows that the minute was not documented before late January 2008; and
  • Mr Kyling who purportedly attended the meeting, has given evidence that he was not informed of the meeting and did not attend the meeting.[132]

No understanding of the consideration for the $130 million payment by MFSIM officers and employees

  1. ASIC submitted that the officers and employees of MFSIM and MFS Limited demonstrated no understanding of the consideration for the payment before January 2008 and, despite requests, were not informed about the alleged transactions.  This was said to be demonstrated by the following evidence.
  2. The Monthly Operational Board Report for MFSIM for November 2007, provided by Mr Hutchings to the board on 28 December 2007, notes nothing about the alleged transactions but says (emphasis added):

“The Fund drew down $150m from its Royal Bank of Scotland (RBS) leverage facility on 28th November.  This was to facilitate a short term cash flow mismatch between new commercial loans and investments due to settle at the end of November and other loans in the Fund which are due to be repaid in December.  The facility will be repaid during January 2008.”[133]

  1. Immediately after the $130 million payment, on Monday, 3 December 2007, at the 9:00 am MFSIM management team meeting it was noted that “$130m was drawn down from RBS facility on 29 November, so fund size will spike, for repayment in 3 weeks time (in DEC 07)”[134] (emphasis added).
  2. By email at 10:21 am on Monday, 3 December 2007 to Ms Howard, Ms Watts says “Will need details on the $130m asap, but as [Mr Hutchings] not in yet, I thought you may have heard something”.[135]
  3. At 10:32 am Ms Howard replies attaching the email exchange with respect to MFS Administration’s bank account details and saying, “This is all our guys got, not much I’m afraid”.[136]
  4. By email at 4:53 pm on Wednesday, 5 December 2007 to Ms Watts, Mr Hutchings and others, Mr Parker attached the November 2007 asset report for PIF and says “you’ll see the $150 million drawdown is included in the assets but not in the units issued.  There will be more information to come on this…”.[137]
  5. By email at 10:48 am on Thursday, 6 December 2007 to Ms Watts, Ms Cole, Mr Hutchings and Ms Howard copying others, Mr Parker attached the completed Asset and Holdings Report for PIF as at 30 November 2007.  It separates the $130 million asset (row 65, line item 13 under “Asset Backed Investments”) as “Other Loan”.  He says “There will be a little more detail to come on the ‘other loan’ …”.[138]
  6. By email at 11:49 am on Thursday, 6 December 2007 to Ms Watts, Mr Hutchings and Ms Malipaard - Mr Parker notes a few changes and says “Yet to be updated on the $130m”.[139]
  7. By email at 6:07 pm on Friday, 7 December 2007 to Ms Watts and others, David Petherick attaches the November accounts for PIF.  He notes that, “The weighted average of return for the Asset backed investments is negatively impacted upon by the result of no interest being accrued on the 170M of loans that have yet to be classified”.[140]  The $130 million paid to MFS Administration appears to have been included in “Alternate investments” (row 21) of $359,443,537 by comparison with the Alternative investments of $232,209,219 in the Balance Sheet as of 31 October 2007.[141]
  8. By Monday, 10 December 2007 the MFSIM management team do not appear to have received any information regarding the use of the RBS drawdown.  At 8:00 am there was a meeting of the MFSIM management team.[142]  After the meeting, by email at 9:32 am, Ms Watts reported to Mr Chan, Mr Parker and Mr Rundle copying Ms Howard (emphasis added):

“At our management team meeting this morning we decided that the Nov PIF accounts prepared by David Petherick last Friday should be considered ‘draft’ as we are still awaiting finalisation of the classification of the $130m loans and the accrued interest thereon.  [Ms Howard] will follow up with [Mr Anderson] so final accounts can be provided asap.”[143] 

  1. On Tuesday, 11 December 2007, Mr Parker’s belief that the $130 million was a short term loan to MFS Administration was confirmed by Mr Parker who noted, by email at 11:12 am, that the MFS Administration loan of $130 million was listed under “Possible assets to mature by 31/12/2007”.  At 11:22 am Ms Watts forwarded that email to Mr Hutchings saying, “We will definitely require some and preferably all of the loans maturing on by [sic] 31st December to be repaid by that date”.[144]
  2. The fact that MFS personnel were not aware of the alleged transactions or, indeed, any sales or assignments of loans to PIF (in whole or in part) is demonstrated by the fact that on Tuesday, 18 December 2007, at 10:00 am there was a meeting of the MFS Limited FIC consisting of Mr Cronin, Mr King and Mr Manka.  Ms Kercher and Mr Anderson were also in attendance.  In relation to “Financial Matters” the company noted that MFS had acquired HFA shares in the recent HFA capital raising.  Half-year reporting process was in train.  There were no further matters referred to.[145]
  3. By 18 December 2007, Ms Howard was not aware of the alleged transactions because she said to Mr White “Give me back my money” and Mr White replied “It’s all right, its all been sorted.  I’ll talk to Mr Hutchings.  Don’t worry”.[146]  She then sent an email at 5:34 pm to Mr Hutchings copying Ms Watts - Ms Howard says “Just had a quick chat to [Mr White ].  He will talk to you about the $130 on Thursday in your meeting”.[147]
  4. At 4:00 pm on 19 December 2007 there was scheduled to be a meeting between Mr White and Mr Hutchings regarding “Updated:  $130 structuring”, which had been confirmed by email at 8:43 am.[148]
  5. On 28 December 2007, Ms Watts blamed the lack of information about the $130 million for the delay in producing the December Monthly Investor Report.[149]  Mr Hutchings reported to the MFSIM board that the $150 million drawdown was for a short term cash flow mismatch rather than for the alleged transactions.[150]
  6. On 2 January 2008, Ms Watts is still providing to Ms Howard a holdings report showing the $130 million paid to MFS Administration as “other loans”.  By email at 10:45 am to Ms Watts and Mr Parker, Ms Howard says “Help please, just wondering where can I find an up to date [holdings report]”; and says she is having a meeting with Mr White  and Mr Hutchings.  By email at 11:06 am to Ms Howard and Mr Hutchings, Ms Watts provides a holdings report for PIF, which shows (at row 66, line item 14 under “Asset Backed Investments”) the $150 million drawn down from RBS as $130 million in “Other loans” and $20 million going to cash (see the cell annotation).  She saysI have just added the balance of the loans made through drawing down the RBS facility”.[151]
  7. From about mid 2007, Luke Gannon and Stephen Cecil were negotiating with banks to obtain substantial lines of credit.  After 30 November 2007, they made the following attempts to get information for the purposes of making full disclosure to the banks:
  8. By email at 1:35 pm on 19 December 2007 to Mr Anderson copying Mr Cecil, Mr Gannon says (emphasis added): “As I understand it, PIF has lent MFS $100m recently.  Can you give me the brief terms of this loan viz term, interest rate, security?” (emphasis added).[152]
  9. At 1:37 pm Mr Anderson replies to all saying:

“… this is not the case

PIF has not loaned MFS any funds

MFS has transferred to PIF the benefit of certain loans.”[153]

  1. At 1:49 pm on 19 December 2007 Mr Gannon forwards the emails to Mr Cecil saying, “From this it would appear that PIF is not a lender to MFS, which is the way you described it to be the case a couple of weeks ago”.[154]
  2. By email at 7:41 am on Thursday, 20 December 2007 to Mr Anderson and Mr Gannon, Mr Cecil responds to Mr Anderson’s email from 1:37 pm the previous day.  Mr Cecil requests a copy of the documentation underlying the transfer of these loans to PIF because he needs them in his discussion with the Commonwealth Bank of Australia  (CBA) and St George.[155]
  3. On Monday, 24 December 2007, by email at 11:54 am to Mr Gannon, Mr Cecil advises that following the withdrawal by St George (the previous day), CBA has asked a series of questions relating to the sale of the MFS loans that reduced the Fortress loan by $100 million.[156]
  4. At 1:28 pm on 27 December Mr Cecil acknowledges receipt of the documentation extending the Fortress facility but says he is still awaiting details of the $100 million worth of loans sold to PIF:

“Could you please advise the status of this information request?  If you do not have access to this information could you please direct me to the person who does have this documentation.”[157]

  1. At 1:41 pm on 27 December Mr Anderson replies to Mr Cecil saying that:

“Sorry I don’t understand

As I mentioned to you shortly after you joined MFS assets at the lower level within MFS companies often move - the transactions you speak of are just some of many.”

Mr Anderson adds that he does not understand why these transactions need to be the subject of discussion with CBA and others.[158]

  1. At 1:57 pm on 27 December Mr Cecil replies to Mr Anderson explaining why he needs the information.[159]
  2. By email at 12:07 pm on Thursday, 3 January 2007 to Mr Gannon, Mr Cecil says (emphasis added):

“Further to our discussion regarding the sale of a $100mill loan to reduce the Fortress debt, I have been seeking information regarding the details of the sale. … I have asked David Anderson for information and have been unsuccessful in my endeavours.”

Mr Cecil asks to be directed to the appropriate source to answer specific questions for the purposes of providing information to the banks.[160]

  1. By email at 2:09 pm on Thursday, 3 January 2007 to the banks, Mr Cecil provides certain information but he says he is “awaiting the return of staff from leave to provide the outstanding information” requested by the banks about the sale of loans with the RBS funds referred to in the email at 4:58 pm on 21 December 2007.[161] 
  2. By email at 6:54 pm on Friday, 4 January 2007 to Mr Gannon, Mr Cecil sends his list of current issues which includes:  “I am having difficulty obtaining information from David Anderson (see my emails that were copied to you on 20/12/07 and 27/12/07) regarding the sale by MFS of loans which facilitated a repayment of $100 mill to Fortress”.[162]
  3. By email at 2:34 pm on Monday, 14 January 2007 to Mr Anderson, Mr Baker on behalf of Mr Gannon asks Mr Anderson whether he has the details of what assets were sold/income earned to fund the $100 million paydown of Fortress.  Also “RBS questions outstanding - [Mr Cecil] to send me details so I can work on them”.  He also notes the “OK” of an action plan from a recent meeting with Mr King.  The subject of the email is “Conference call re bank refinancing...”, which is the same subject as the previous email arranging a meeting between Mr Gannon, Mr King, Mr Anderson, Mr Cecil and Mr Baker at 2:00 pm EST.[163]
  4. At 6:06 pm Mr Anderson replies to Mr Gannon, Mr Baker, and Mr Cecil copying Lyndie Easton regarding “Funding of $100m for Fortress”.  He states in summary that MYF acquired about $100 million in loans from MFS Limited subsidiaries and PacFin; and as PacFin owed substantial funds to MFS Administration, MYF paid the purchase money for the loans to MFS Limited in repayment of PacFin’s debt.  He said the loan assets included three specified investments.[164]
  5. By email at 8:57 am on Wednesday, 16 January 2007 to Mr Anderson, Mr Cecil thanks Mr Anderson for that email and asks for “30 minutes this morning to discuss”.  At 10:11 am Mr Anderson replies saying:

“Yes if needed

Best to come around and I will see what I can do at that time!”[165]

The alleged transactions were not formulated until about mid-January and not documented until late January/early February 2008

  1. ASIC’s submission was that by Thursday, 3 January 2008, there is evidence of the first attempt to formulate retrospectively a transaction that could justify the $130 million payment.  This first formulation is that $130 million was drawn down to provide a loan to MYF which would then undertake certain transactions.  This is inconsistent with both the alleged transactions, as ultimately formulated, and the fact that contemporaneous MYF-related documents show that no such proposal was being considered.
  2. This first formulation is by an email at 1:57 pm from Ms Howard to Ms Watts copying Mr Hutchings.[166]  It attaches a draft request to the PIF IAC and the MYF IAC, each dated 30 November 2007.  The draft purported proposal was that PIF would enter “into a commercial leverage facility with MFS Max Yield Fund and … may elect to call on its Royal Bank of Scotland facility in order to undertake this transaction”.[167]  The proposal to the MYF IAC was that, “The fund has available funds of $130 million via its leverage facility with MFS Premium Income Fund.  Max Yield is now able to undertake a number of commercial transactions”.[168]
  3. At 2:06 pm Ms Watts replies saying that she was giving the papers “a good butchering” and would get back by close of business.[169]  By email at 2:57 pm EST to Ms Watts and Ms Howard, Mr Hutchings attaches an amended draft request for approval to the MYF IAC dated 30 November 2007.[170]  At 3:50 pm Ms Watts replies to Mr Hutchings and Ms Howard thanking Mr Hutchings for his comments on Ms Howard’s paper.  She attaches her own unfinished version and suggests a “slightly different tack”.[171]
  4. On Friday, 4 January 2008 at 9:00 am there was a meeting between Ms Howard, Ms Watts, and Mr Hutchings by telephone.[172]  Presumably this meeting provided information regarding the financials because at 10:54 am Ms Howard sends an email to Ms James saying “I have an answer on the $17.5, so pop in when you are ready”.[173]  This is a follow up to the following email exchange between Ms Howard and Ms James:
  • Email 28 December 2007 at 10:48 am from Ms Howard to Ms James, “Yesterday $17.5 was paid to MFS Pacific.  Details of the transaction will be coming from [Mr Hutchings] and [Mr White] shortly”.
  • Email 3 January 2008 from Ms James to Ms Howard at 12:02 pm, “Do we have the details on this yet?”.
  • Email 3 January 2008 from Ms Howard to Ms James at 12:02 pm, Ms Howard replies “nope - afraid not.  will chase [Mr Hutchings/Mr White]:)”.[174]
  1. On 4 January 2008 at 11:06 am Mr Hutchings sends an email to Ms Watts and Ms Howard attaching a draft asset list of PIF which shows:
  • a $75 million loan to MYF (tab “All Assets Current”, row 72, line item 14 under “Asset Backed Investments”); and
  • “Other Loans” $125 million (row 73) with details “TBA C Mr White”.[175]
  1. However, Ms Watts replies by email identifying the problem that, “If we put all $200m in ASB, we go over 40 per cent limit; Would prefer ASB’s MYF exposure be $147.5m, and balance of $52.5m to go to cash sector (liquid callable deposit with MFSA?)”.[176]
  2. On 4 January 2008 at 11:52 am Ms Howard sends an email to Ms Watts and Mr Hutchings attaching the further draft MYF IAC paper dated 30 November 2007 which purports to record that “The Fund has entered into a leverage facility with MFS Premium Income Fund which gives it the funding to enter into a number of commercial transactions”, a suggestion not ultimately proceeded with.[177]
  3. On 4 January 2008 at 11:55 am the idea that PIF might acquire MYF units is first raised in an email from Ms Watts, which attaches Mr Parker’s version of PIF’s holding report as at 31 December.  The holding report notes “Maximum Yield Fund units??? $130,000,000” and “Other Loans $17,500,000” still to be confirmed by Mr White (tab “All Assets Current”, rows 66-67, line items 14-15 under “Asset Backed Investments”).[178]
  4. This suggestion of acquisition of units does not appear to have been shared with Ms Howard because two minutes later she sends an email to Ms James and Mr Parker saying that PIF has a revolving credit facility in place with MYF.  She says (emphasis added):

“Just to let you all know, what info has come to hand so you can finalise asset reports/holding reports and accounts.  PIF now has a revolving credit facility to MFS max yield fund. Value of $150m. 3 month term. 12% low rate plus exit fee.  held in asset backed sector of PIF. … If you could amend any reports and reissue for November would be appreciated.  Have a chat with [Ms Watts] or myself if you need any further details.”[179]

  1. However, the inconsistency appears to have been recognised by her because at 2:14 pm she sends another email to Ms James and Mr Parker asking them to disregard her previous email advising: “More advices coming shortly”.[180]
  2. On 4 January 2008 at 12:23 pm Ms Watts sends to Mr Hutchings and Ms Howard a second draft of a PIF IAC paper on PIF providing a leverage facility to MYF “for your review”.  She notes, “We need to check the extent of the breach of the 20% related parties rule”.  Mr Hutchings replies asking when the completed paper can be run past Mr Corolis in Compliance.[181]
  3. At 12:30 pm on 4 January 2008 Ms Howard emails Ms Watts, “Draft related party register for PIF for December.  some values may change as holding report finalises.  looks like we should say push up to 30% to give us room”.[182]
  4. At 12:49 pm on 4 January 2008 Ms Howard sends to Ms Watts a further draft amended PIF IAC paper dated 30 November 2007 in relation to an investment into MYF.[183]  Ms Howard’s further draft paper states that PIF will call upon the RBS facility for the purpose of entering into a commercial leverage facility with MYF, which will provide PIF with the flexibility to hold either a debt or equity position in MYF.  It states “This proposal assumes that in early December 2007 the IAC will approve a proposal to commence the reorganisation of the Maximum Yield Fund with existing assets to be invested on a short term basis.”
  5. At 12:58 pm on 4 January 2008 Ms Howard sends an amended PIF related party document to Ms Watts noting that the related party transactions will be 24 per cent.  She asks Ms Watts to amend the IAC paper accordingly.[184]
  6. On 4 January 2008 by email at 2:33 pm to Mr Hutchings and Ms Howard, Ms Watts attaches “Latest simpler version of IAC paper” and says “Now working on board paper”.[185]  The attached paper proposes PIF would “invest in a loan to XXXXXXXX XXXX to the value of $147.5 million”.  It notes that:
  • PIF would call on its RBS facility to undertake the transactions and proposes a yield of 12 per cent per annum; and
  • as the size of this proposed loan is greater than $50 million, MFSIM board approval is required.
  1. At 3:07 pm on 4 January 2008 Ms Watts sends a further email to Mr Hutchings and Ms Howard attaching a draft PIF IAC paper dated 28 November 2007 plus the board proposal dated 28 November 2007.  She says she has changed the date from 30 November to 28 November so it is consistent with the drawdown date of the RBS facility.[186]  These draft papers do not refer to a loan/unit with MYF, which appears to be the result of a concern about the related party provisions because at 3:57 pm Ms Watts sends an email to Ms Howard stating, “Looks like we are now comfortably under the 20% now that the MYF units/loan is gone!”.[187]
  2. On 4 January 2008 by email at 4:22 pm to Mr Hutchings and Ms Howard, Ms Watts attaches the PIF IAC paper and the board proposal with a few corrections to typos and says, “I have advised [Mr White] he will not be getting anything to read in hard copy from us today for his flight home tonight”.[188]
  3. By email at 6:11 pm to Mr Parker, Ms James attaches “very draft” PIF trial balance which shows the RBS-sourced investments as “ALTN - Investments - Other $147,865,349.71”.[189]
  4. On Monday, 7 January 2008 there was a meeting of MFSIM investment management committee consisting of Mr Parker, Ms Watts, Mr Chan and Mr Rundle.  Mr Hutchings was an apology.  The minutes record that the documentation for the MYF revolving line of credit “is almost bedded down”.  It notes “$200m facility has been fully invested. $150m lent at 12%”.  Mr King has directed that no new investments transactions will be settled before the end of January.[190]
  5. By email at 7:52 am on Monday, 7 January 2008 to Mr White copying Ms Watts and Ms Howard, Mr Hutchings attaches a draft PIF IAC paper:

“in relation to the first step for PIF to replace $130m currently maturing asset backed investments with $147.5m asset backed investments utilising the RBS facility. 

We are also assessing the opportunity for the assets to be transitioned to the Max Yield fund as part of its relaunch as step 2.”[191]

  1. The attached draft IAC memo purportedly dated 28 November 2007 states, “The purpose of this paper is to seek approval for a proposal to invest in the following loan assets with a combined value of $147.5 million” with the identity of the loan assets not completed - left blank.[192]
  2. At 8:00 am on Monday, 7 January 2008 there was a MFSIM management team meeting consisting of Ms Cole, Mr Hart, Ms Howard, Mr Hutchings, Ms Molesworth and Ms Watts.  There is still no reference to the alleged transactions or any proposed PIF acquisition.[193]  The minutes still refer to the MYF restructure to be relaunched on 30 March 2008, which was genuinely circulated for approval of the IAC on 6 December 2007.[194]
  3. By email at 10:26 am on Monday, 7 January 2008 to Ms James copying Ms Bennett and Ms Howard, Mr Parker asks whether the MYF revolving line of credit will be administered by Homer (the software used to administer loans) and Loan Administration.[195]
  4. By email at 9:52 am on Tuesday, 8 January 2008 to Ms Howard, Ms Malipaard says that she noticed, in the related party register for November, the $130 million is listed as units in MYF and asks whether that is correct.  At 10:06 am Ms Howard replies saying it is wrong and it will have to come out; and that the same change will have to be made to the MYF register.  At 10:21 am Ms Malipaard replies asking “Does the $130 million need to go on the related party register at all??  If so - do I just call it MFS A loan?”  At 10:48 am Ms Howard replies saying “We still don’t have a definitive on what it is so we just need to remove. :)”.[196]
  5. By email at 10:49 am on Tuesday, 8 January 2008 to Ms Howard copying Ms Bennett, Ms Watts says she has heard nothing about the draft IAC paper and board paper relating to the PIF investment since Mr Hutchings sent it to Mr White on 7 January at 7:52 am.[197]
  6. By email at 3:48 pm on Friday, 11 January 2008 to Ms Watts copying Ms Bennett, Ms Howard replies to Ms Watts’ email of 9 January at 10:49 am saying Mr Hutchings said yesterday that “we should know by today” about the draft PIF IAC paper; and asking whether they had heard anything.  She says she has to get the audit packs out on Monday.[198]  At 3:52 pm, Ms Watts says she hasn’t heard anything and suggests ringing Mr White.[199]
  7. By email at 4:38 pm on Friday, 11 January 2008 to Ms Cole and Ms Howard copying Ms Molesworth, Ms Watts attached her handwritten comments to the draft MFSIM scheme report for PIF.  The handwritten note includes that PIF drew down the $200 million from RBS to fund new loans ahead of impending maturity of other loans and that RBS would be repaid by the end of January.[200]
  8. On Sunday, 13 January 2008 at 7:00 am there was a meeting of the MFS Limited board of directors including Mr King with Mr Anderson and Mr White as invitees.  There was no reference to PIF drawing down the RBS loan, substantial repayments by Sunleisure and PacFin or the alleged transactions.[201]
  9. By email at 8:00 am on Monday, 14 January 2008 there was a meeting of the MFSIM management team consisting of Ms Cole, Mr Hart, Ms Howard, Ms Molesworth and Ms Watts. Mr Hutchings was an apology.  Ms Watts reported (emphasis added):  “No new investments of any significance.  Still drawn down by $200m (expecting repayment by end of month, however still to be confirmed)”.[202]
  10. By email at 3:59 pm on Monday, 14 January 2008 to Mr Hutchings copying Ms Watts, Ms Howard attached the email from Mr Hutchings of 7 January, which attached the draft PIF IAC paper dated 28 November 2007 and asks “any word on below from [Mr White].  Just wanting to finalise accounts as auditors are wanting files before they arrive next week”.[203]
  11. By email at 8:30 am on Tuesday, 15 January 2008 to Mr Hutchings, Mr White responds to Mr Hutchings email of 8:18 pm on the previous day regarding “draft PIF IAC paper”.  He says:

“Looks pretty good

Doesn’t really sell to IAC the return and portfilio [sic] return up side as much as could though.”[204]

  1. At 9:41 am EST Mr Hutchings replies to Mr White saying, “Need your assistance with paragraph 1 in red attached”.  The attachment highlights the blank details of loans.[205]
  2. At 6:07 pm Mr White forwards Mr Hutchings’ email on to Mr Anderson saying (emphasis added):

“Need your creative brain

Basivally [sic] I am sure you can work out what the $147.5m went to

I want to allocate as $30m against Q Deck + $100m against the PAC loan + ??? $12.5m to get this allocated.

also need names that deal with these assets/loans …”[206]

  1. The email is inconsistent with there being any settled transactions involving the $130 million payment, and is inconsistent with the alleged transactions.
  2. By email at 12:27 pm on Wednesday, 16 January 2008 EST to Ms Watts, Ms James says, “I never heard anything back from [Ms Howard] last night regarding the $147,500,000 issue.  Have you heard anything further?”[207]
  3. At 1:00 pm Ms Watts replies to Ms James, copying Mr Chan and Mr Hutchings, saying:

“I spoke to [Mr White] yesterday regarding the further detail requested by [Ms Howard].  He did not have it with him but is well aware of it being needed for the audit process.  I will try again this afternoon.  It might be worth having a chat with [Mr Hutchings]…”[208]

  1. By email at 8:45 am on Thursday, 17 January 2008 to Ms Watts and Ms Howard, Ms Cole says “Here is what I propose to send to [Mr Hutchings]” and attached the draft product proposal for the relaunch of MYF with a March 2008 launch date, which records the Current Assets of the MYF Fund as being Golden Circle Note Trust.[209]
  2. By email at 9:57 am on Friday, 18 January 2008 to Mr Hutchings regarding “Any news on the $17.5m?”, Ms James says “Have you heard anything yet?”[210]
  3. At 1:03 pm on 18 January 2008, Ms James sends a further email to Mr Hutchings regarding “Loan balances” saying “I understand that everyone is busy today.  But I really need an answer by COB today as I have auditors coming in first thing Monday and they will need to see accounts...”.[211]  By email at 2:00 pm to Mr Anderson copying Mr White, Mr Hutchings attaches Ms James’ email at 1:03 pm and says “Genuinely appreciate we are all under the pump but this is important on a number of fronts - please see below [Ms James email]”.[212]
  4. At 3:26 pm on Friday, 18 January 2008 Ms James sends a further email to Mr Anderson and adds a copying to Mr White and Mr Hutchings regarding loan balances.  She says:

“I have just been on the phone to [Mr Hutchings] regarding the $147.5 million I still have sitting in PIF’s accounts with no allocation against it. As I am sure you are aware, I have auditors arriving at 9am on Monday morning and this will need to be addressed before then.[213]

  1. The responses to this email are made on Sunday, 20 January as follows:[214]
  2. At 10:55 am EST (11:55 am) Ms James sends a further email to Mr Hutchings and Ms Watts regarding loan balances - URGENT.  “I still have not had any response from [Mr Anderson] or [Mr White] regarding the $147.5m”.  She says she understands it is to be split between three investments and, in the absence of any other information, proposes a split without allocating a name to the lines as yet.[215]
  3. At 11:29 am Ms Watts replies to Ms James copying Mr Hutchings and agrees with the treatment Ms James recommended. “I still have no details from [Mr White] that I can give you, I’m sorry”.[216]
  4. At 11:31 am Ms James replies to Ms Watts saying she will send the balance sheet, profit and loss and trial balance shortly for her to look at.[217]
  5. By email at 11:46 am on Sunday, 20 January 2008 to Mr White copying Mr Anderson, regarding “Loan balances - URGENT”,  Mr Hutchings forwards the email from Ms James at 10:55 am on 20 January.[218]
  6. At 11:57 am Mr Anderson replies to Mr Hutchings saying he was going to ring the auditors and tell them that they needed to delay their arrival by a day.[219]
  7. By email at 12:06 pm on Sunday, 20 January 2008 to Ms Watts copying Mr Hutchings, Ms James advises that Mr Anderson had phoned and said he would phone the auditors.  She attaches the accounts completed as suggested in her email at 11:55 am on 20 January (see para [230] above) and says she has charged 12 per cent on the three loan facilities.  She adds, “we do need to have the details ASAP from [Mr Anderson/Mr White] as we don’t want to end up with a qualified audit report or Compliance breaches”.[220]
  8. At 12:10 pm Ms Watts replies copying Mr Hutchings thanking Ms James for her work.[221]
  9. By email at 12:17 pm on Sunday, 20 January 2008 to Mr Hutchings copying Ms James and Mr White, Mr Anderson says he had spoken to Brett Delaney of PwC and he agrees to wait until Tuesday to start the half-year review.[222]  Mr Anderson admits making this call.[223]
  10. By email at 11:26 pm on Monday, 21 January 2008 to Mr Hutchings copying Ms Platts, Mr Bailey of RBS requests a list of all assets by current value, maturity date and asset class, which he required because of “recent press coverage and announcements within the MFS Group”.[224]
  11. At 11:55 am Mr Hutchings forwards the email to Mr White and Mr Anderson, saying “This will also need urgent attention and I will need your assistance”.[225]  At 1:55 pm Ms Platts forwards Mr Bailey’s email to Mr Parker and requests a list of assets in PIF.[226]
  12. By an email at 5:13 pm on Monday, 21 January 2008 to Mr White copying Mr Anderson and Ms Kercher, Mr Hutchings says “I have just received some information which I regard with very serious concern and which I believe requires our urgent attention”.  He proceeds to say that contrary to indications he now has been told that the $200 million drawn down was not used to purchase assets to replace a similar amount of facilities that are maturing in the next month or so.[227]
  13. By email at 10:12 pm on Monday, 21 January 2008 Mr Anderson emails Mr White regarding “Keep it up superstar” and tells him that he needs to talk to Mr Hutchings “but it could be the bomb that needs diffusing [sic].  Need (I think) to focus on what is best for the PIF investors in getting all the loans back in that deal etc”.[228]
  14. At 10:19 pm Mr White replies to Mr Anderson saying “Tomorrow you and I need to have a pretty frank conversation”; and he (Mr White) has a plan.[229]
  15. By email at 7:53 pm on Monday, 21 January 2008 to Mr White, Mr Hutchings thanks Mr White for the call earlier in relation to “today’s issues”.[230]

The final formulation of the alleged transactions

  1. ASIC submitted that, following the conversation with Mr White, Mr Hutchings requested Mr Parker to provide him with the current holdings report - which Mr Parker did by email at 12:45 pm on Tuesday, 22 January 2008 to Mr Hutchings regarding RBS report stating “As requested”.  The attached holdings report for PIF still has an entry with the description (row 63, line item 14 under “Asset Backed Investment”) “Loans $147,946,438.36” for maturity on 31 January 2008.[231]
  2. However, by email at 1:17 pm on Tuesday, 22 January 2008 to Ms Watts and Mr Parker, Mr Hutchings attached a PIF Holdings report as at 22 January 2008.  The report replaces the loan of $147,946,438.36 with four new assets described simply as “New Loans” totalling the same figure being (rows 65-67, line items 13-15 under “Asset Backed Investment” and row 38, line item 33 under “Complying Loans”).[232]
  3. On the same day by email at 2:58 pm to Ms Platts copying Ms Watts and Mr Hutchings, Mr Parker attaches Maturity Breakdown, PIF Holdings Report January 2008 and Profile of Investors “to answer the RBS queries stated in the email you forwarded me from RBS”. The PIF Holdings Report had shown the same asset entries as the attachment to the previous email including the “New Loans”.[233]
  4. By email at 7:06 am EST to Mr Hutchings regarding “Heads Up”, Ms Platts says that she did not get to speak to Mr White about the information “we are after for the RBS … So can you please chase up from your end again”.  By email at 7:10 am to Ms Platts copying Mr White and Mr Anderson, Mr Hutchings replies stating “Will do.  Just spoke to David Anderson and he is confident of way forward”.[234]
  5. By email at 8:06 am on Wednesday, 23 January 2008 to Mr White, Mr Anderson attaches a simple list of six loans totalling $105 million “as requested”.[235]  However by 8:27 am he emails to Mr White a list of 10 loans totalling $147,511,950, which for the first time includes nine of the investments, which are ultimately included as the alleged transactions:[236]
Investment List amount Final Alleged Transaction
MFS Bluesky $30 million $45.1 million
GIPL $10 million $9.9 million
MFS Rap $5 million $4.883 million[237]
Young Village Estates $15 million $23.683 million
MFS Sagacious $5.5 million $5.174 million[238]
Copperfield $17.63 million $10 million
Investment Enterprises $12.5 million $10.1 million
Southport Holdings $20 million $11.057 million
Qdeck $30 million N/A
Kiwi International $1.88 million N/A
     
  1. By email at 8:32 am on Wednesday, 23 January 2008 EST to Mr Hutchings and Ms Platts regarding “Listing of Loans (2).xls”, Mr White attaches a listing of loans and says:

“sorry for the delay

this is the Max Yeild [sic] portfolio of high return MFS sub loans.”[239]

  1. The loans totalled a slightly different sum - $147,946,438 - but the significant difference is the removal of Kiwi International.
  2. By email at 10:19 am to Ms Platts, Mr Anderson attaches the list of 10 loans totalling $147,511,950 noting, “as discussed”.[240]
  3. By email at 10:30 am on Wednesday, 23 January 2008 to Ms Kercher copying Ms Watts, Mr Hutchings forwarded on Mr White’s email at 8:32 am EST with the attached “Listing of Loans (2).xls” document.  He asked Ms Kercher to provide Ms Watts with information as a matter of urgency about the ownership structure and whether they are related party transactions.[241]
  4. At 12:00 pm on Wednesday, 23 January 2008 there was a meeting of the board of Directors of MFSIM which consisted of Mr Whateley, Mr White, Mr Hutchings, Mr Diamond and Mr Beale.  Ms Kercher, Ms Watts, Mr Corolis and Mr Skepper were invitees.  The board papers make no mention of the alleged transactions and state that “It is expected that most, if not all, of the $200m drawn down from RBS will be repaid by the end of January 2008”.[242]
  5. By email at 2:28 pm on Wednesday, 23 January 2008 to Mr White and Mr Anderson, Ms Platts attached a new PIF asset report as at 22 January 2008.  This spreadsheet incorporates the loans totalling $147,946,438 precisely as they were in Mr White’s list sent through at 8:32 am (except Qdeck $30 million becomes MYF Fund No 1 $30 million) as Asset Backed Investments or Property Managed Investment Schemes.  The email states “Need to provide to RBS this afternoon” and she says she “discussed with [Ms Watts] from MFSIM - so I have them on board”.  The assets totalling $147,946,438 are highlighted.[243] 
  6. By email at 3:17 pm on Wednesday, 23 January 2008 to Ms Platts copying Mr Hutchings regarding PIF asset reports, Mr White forwards Ms Platts the same PIF asset report as at 22 January 2008 as in the email at 2:28 pm and asks her to get it to Mr Hutchings.[244]
  7. By email at 3:49 pm on Wednesday, 23 January 2008 to Ms Watts, Ms Platts attaches the same PIF asset report as at 22 January 2008 and asks Ms Watts to call.  The subject of the email is “Final Version”.[245] 

The creation of the alleged transactions

  1. By email at 5:11 pm on Wednesday, 23 January 2008 to Ms Platts regarding “Sample IAC paper”, Ms Watts attached an example of a format for an IAC paper as discussed “Many, many, many, many thanks”.[246]
  2. In the morning on Thursday, 24 January 2008 there is a meeting in Mr White’s office on the Gold Coast between Mr White and Mr Anderson and Mr Stride.  Mr Stride is directed to prepare documentation in relation to the transactions, which were explained.[247]  Mr Anderson gives evidence of such a meeting.[248]
  3. By email at 12:35 pm on Thursday, 24 January 2008 to Ms Platts, Ms Watts replies to Ms Platts’ email at 3:59 pm the previous day attaching the same PIF asset report as at 22 January 2008 and asking her to add two columns to the list with details as to security behind each loan and the industry of the borrower.[249]
  4. By email at 7:32 am on 25 January 2008 to Mr Hutchings, copying Ms Watts, Ms Kercher responds to Mr Hutchings’ email of 23 January at 10:30 am stating:  “A number of the entities noted are MFS associate entities, therefore prima facie will need to be considered by the RPC”.[250]
  5. By email at 7:40 am on Saturday, 26 January 2008 Mr Hutchings replies to Ms Kercher’s email of 7:32 pm the night before copying Ms Watts, Mr White and Ms Platts regarding “Urgent:- Listing of Loans (2).xls”.  He says Mr White has asked for ratification of the investments by the IAC and CRPC and that Ms Platts is assisting with the drafting of IAC and CRPC papers.  He requests that Ms Platts be provided with details of the ownership structure of the assets.  At 10:12 am Ms Kercher replies to all stating that Ms Platts has that information.[251]
  6. By email at 7:44 am on Saturday, 26 January 2008 regarding “IAC” to Mr White copying Mr Kennedy, Ms Kercher and Ms Platts, Mr Hutchings says he proposes that the papers for consideration/ratification be considered by circular as soon as possible.[252]
  7. By email at 2:12 pm on Saturday, 26 January 2008 to Ms Platts, Ms Watts attaches the 6 December 2007 IAC paper in relation to the MYF Proposed Restructure and interim investment of $2.1 million for 3 months.[253]
  8. By email at 5:28 pm on Saturday, 26 January 2008 to Mr Bailey copying Ms Platts and Ms Watts, Mr Hutchings says he will provide material including “List of assets acquired using the RBS facility ie sources and uses of funds - Monday”.[254]  (On Monday, 28 January Mr Hutchings sends a further email to Mr Bailey copying Ms Platts and Ms Watts providing the information foreshadowed in the previous email except for the list of assets acquired using the RBS facility.[255])
  9. By email at 11:09 am on Sunday, 27 January 2008 to Ms Platts, Mr Hutchings attaches the proposed paper regarding restructuring and relaunching MYF that Ms Cole had sent on 19 January at 6:27 pm.[256]
  10. By email at 2:15 pm on Sunday, 27 January 2008 to Ms Watts and Mr Hutchings, Ms Platts attaches “the final version of the split of investments in relation to funds out of PIF on 30 November and 27 December” together with “the relevant IAC papers for your review, documentation matches to outflows”.[257]
  11. The papers involve a further related party submission which has to be drafted “by splitting the investments as per the attached IAC papers we are within all Asset Allocation Thresholds and Related Party 20% Threshold”.  She suggests that the MFS Sagacious listing be replaced with the MFS RAP investment. She says that she is happy to review the final asset listings which Ms Watts would like to provide to RBS.  Attached are purported drafts of IAC submission dated 28 November 2007 seeking approval of a loan participation agreement with PacFin for $62.5 million; listing of loans as at 30 November and IAC submission dated 10 December 2007 for PIF to buy 85 million units in MYF.
  12. By email at 12:18 pm on Monday, 28 January 2008 to Ms Platts copying Ms Watts, Mr Hutchings thanks Ms Platts for her email the previous day and attaches an example of a CRPC paper.[258]
  13. By email at 12:19 pm on Monday, 28 January 2008 to Ms Platts, Ms Watts asks if PIF was “issued its 85m units in MYF at $1.00?”  At 3:07 pm Ms Platts responds saying “Yes it will” (emphasis added).  At 3:05 pm Ms Watts forwards these emails to Ms James, “FYI”.[259]
  14. At 4:05 pm on 29 January, Ms James replied to Ms Watts and Ms Platts saying that MYF’s constitution requires the units to be issued at NAV (net asset value), which was $1.10 on 30 November, adding:

“From the below I take it that Max are issuing units and not receiving a loan from PIF? (If PIF receives units we will have to consolidate and if they issue a loan we will not have to consolidate into PIF.)”[260]

  1. Less than a minute later, Ms Platts replies to Ms Watts and Ms James saying:

“I have this under control.  We are issuing different class of units.  Please leave with me (yes there may be a consolidation issue).”[261]

  1. By email at 12:23 pm on Monday, 28 January 2008 (during the course of the above email exchange) to Ms James, Ms Watts attaches “Listing of loans as at Nov 30.xls” and says she is “confirming with [Ms Platts] that the MYF units were purchased by PIF at $1.00, but for the time being that should be the assumption”. The attached list identifies loans totalling $147,500,000 at various interest rates.[262]
  2. By email at 1:35 pm on Monday, 28 January 2008 to Mr Parker, Ms Watts attaches a “PIF Asset Report as at 25 Jan 08.xls” which highlights the RBS related loans.[263]
  3. By email at 2:46 pm on Monday, 28 January 2008 to Ms Watts and Mr Hutchings, Ms James attaches the draft PIF January 2008 balance sheet, profit and loss and trial balance.  Relevantly, she writes:  “The $147.5 - I have allocated these amounts out.  Assumptions for now - the final $17.5m that was sent on 27/12/07 was relating to Q1 and interest has been adjusted accordingly”.[264]
  4. By email at 10:52 am on Tuesday, 29 January 2008 to Ms Watts and Mr Parker, Ms Platts attaches a listing of loans as at 30 November and 31 December 2007.  She requests that the differences be noted which included Sagacious Opportunity Trust being replaced by MFS RAP Limited in December.[265]
  5. By email at 6:32 pm on Thursday, 31 January 2008 to Mr Hutchings regarding “IAC Papers”, Ms Platts says “Let me know what you think about all of this?”.  She attaches a CRPC proposal regarding the purchase of 85 million class A units by PIF in MYF; draft IAC submission for a participation agreement with PacFin for $62.5 million and draft IAC minutes for PIF in relation to the purchase of 85 million units in MYF dated 30 November.[266]
  6. By email at 8:12 pm on Thursday, 31 January 2008 to Ms Platts, Mr Gavras-Moffat attaches MYF class A unit application form and MYF information memorandum regarding 85 million units.[267]
  7. By email at 8:56 pm on Thursday, 31 January 2008 to Mr Hutchings, Ms Platts forwards the MYF information memorandum regarding the issue of class A units and says the corresponding IAC paper is to follow.[268]
  8. By email at 11:24 pm on Thursday, 31 January 2008 to Mr Hutchings, Ms Platts attaches the draft IAC Submission in relation to the issue of class A units in MYF and says “OK … last one for tonight … speak to in the morning”.[269]
  9. By email at 8:35 am on Friday, 1 February 2008 EST to Ms Watts, Mr Hutchings forwards Ms Platts’ email of the previous day at 7:33 pm with IAC minutes dated 30 November 2007; information paper for loan participation agreement with PacFin and CRC paper regarding MYF.  At 3:26 pm Ms Watts forwards the email to Ms Platts attaching PIF IAC minutes dated 23 November 2007 saying, “Corrected version attached.  Date should have read 23 Nov not 30 Nov.  Other minor changes for you to check”.[270]
  10. By email at 10:48 am on Friday, 1 February 2008 to Ms Watts and Ms Platts, Mr Hutchings attaches the board proposal dated 31 October 2007.  The proposal is for 100 million class A units ranking behind existing investors.[271]
  11. By email at 9:57 am on Monday, 4 February 2008 to Ms Platts and Ms Bennett, Ms Watts says that she is not having luck sending the mortgage loan documentation to RBS as they are too big.  She asks Ms Platts, “How is the Loan Participation Agreement and MYF docs going?”  At 10:59 am Ms Platts replies, “In short it’s not ... I need to have a few more discussions with [Mr White ] re: same ... will let you know soon”.[272]
  12. By letter dated 4 February 2008 to Mr Bailey, Mr Hutchings certifies the gearing ratio as at 31 December 2007 was 21.06 per cent and liquid assets comprise not less than 5.2 per cent of total assets.[273]
  13. By email at 5:57 pm on Monday, 4 February 2008 to Ms Howard, Mr Gavras-Moffat attaches a unit certificate certifying that PIF is the registered holder of 85 million class A units in MYF.[274] 
  14. By email at 6:12 pm on Monday, 4 February 2008 to Mr Bailey copying Mr Hutchings, Ms Platts and others, Ms Watts attached the loan participation agreement between PIF and PacFin which covers loans totalling $62.5 million and a new loan notice effective 31 December 2007 which purports to amend the loan participation agreement by changing the identity of one of the borrowers or the amounts of the loans (ie MFS RAP Ltd is substituted for MFS Sagacious Opportunity Trust, Young Villages Estate Pty Ltd loan is reduced from $24,358,806.95 to $23,683,612.88 and Southport Holdings Ltd loan is increased from $10,091,499.08 to $11,057,278.66).[275]
  15. By email at 5:13 pm on Tuesday, 5 February 2008 EST to Ms Cole and Ms Watts, Ms Platts requests the final version of the MYF information memorandum.  At 5:54 pm Ms Watts replies saying she has not got a soft copy but she can forward it to Ms Platts.  At 6:55 pm Ms Cole replies to Ms Watts saying “I haven’t changed the date, can you please just update that?”.  At 6:46 pm Ms Watts replies to Ms Platts copying Ms Cole attaching the latest version of the MYF information memorandum.  She says, “The date needs chaning [sic] at the top and in the body of the doc from Nov 1 to Nov 20 I think”.[276]
  16. By email at 7:59 pm on Tuesday, 5 February 2008 to Ms Watts, Ms Platts attaches the MYF IAC and board papers.  She suggests these need to be finalised before PIF can finalise theirs.  “I will send thru PIF’s next”.[277]  The attachments are:
  • Minutes of MYF IAC meeting consisting of Mr White and Mr Hutchings dated 28 November 2007 approving MYF’s investment of $55 million in PacFin loans and a short-term unsecured loan of $30 million to Sunleisure [DEL.2004.0001.7474];
  • MFSIM board proposal dated 1 February 2008 ratifying the issue of 100 million additional A Class units in MYF [DEL.2004.0001.7463];
  • MYF IAC Submission dated 27 November 2007 for MYF to enter into a loan participation agreement with PacFin for a total value of $55 million [DEL.2004.0001.7468];
  • MYF IAC Submission dated 20 November 2007 for the issue of new class A units [DEL.2004.0001.7470];
  • MYF IAC minutes of meeting consisting of Mr White and Mr Hutchings dated 21 November 2007 approving the issue of the MYF class A units [DEL.2004.0001.7472];
  • MYF IAC Submission dated 28 November 2007 from Ms Watts regarding approval of the $30 million Sunleisure loan [DEL.2004.0001.7465].
  1. By email at 8:03 pm on Tuesday, 5 February 2008 to Ms Watts regarding “PIF IAC & Board Papers”, Ms Platts attaches the following documents:[278]
  • MFSIM board proposal dated 1 February 2008 for the ratification of a participation agreement with PacFin and the purchase of A Class units in MYF signed by Mr Hutchings [DEL.2004.0001.7455];
  • PIF IAC minutes dated 23 November 2007 approving participation agreement with PacFin and the purchase of 85 million class A units in MYF signed by Mr Hutchings [DEL.2004.0001.7460];
  • PIF IAC Submission dated 20 November 2007 recommending the participation agreement with PacFin - unsigned [DEL.2004.0001.7458];
  • MFSIM CRPC proposal for approval of the CRPC in connection with PIF’s purchase of 85 million units in MYF - unsigned but with provision for signature by Ms Watts  and Mr Hutchings [DEL.2004.0001.7456].
  1. By email at 7:40 am on Wednesday, 6 February 2008 to Ms Platts, Ms Watts says “Here are my comments on the MYF papers you have prepared.  PIF ones to follow within half an hour” and attaches the documents forwarded by Ms Platts with handwritten amendments and comments.[279]
  2. By email at 8:03 am on Wednesday, 6 February 2008 to Ms Platts, Ms Watts says “Here are my comments on the PIF part of the transactions” and attaches the PIF documentation forwarded by Ms Platts and her handwritten amendments and comments.[280]
  3. By email at 8:45 am on Wednesday, 6 February 2008 to Ms Howard and Mr Gavras-Moffat, Ms Platts responds to the Mr Gavras-Moffat email at 5:57 pm on the previous day saying:

“Just FYI - I have changed the November register to $67,500,000 and done a further one for December which reflects $85,000,000.

[Ms Howard] - remind me later today to follow up applications forms.”[281]

  1. By email at 9:44 am on Wednesday, 6 February 2008 to Ms Watts, Ms Platts replies saying she has gone through the documents, “give me a call when you are free”.[282]
  2. By email at 3:21 pm on Wednesday, 6 February 2008 to Mr Hutchings copying Ms Watts, Ms Platts says “Final Papers for your review in relation to Max Yield.  PIF to follow.  Please let me know if you have any changes”.[283]  It attached:
  • MYF IAC minutes dated 21 November 2007 for the issue of A Class units in MYF signed by Mr Hutchings [DEL.2004.0001.7375];
  • MYF IAC submission dated 20 November 2007 for the issue of A Class units in MYF signed by Ms Watts  [DEL.2004.0001.7373];
  • MYF IAC submission dated 27 November 2007 regarding participation agreement with PacFin - unsigned, but with provision for signature by Ms Watts  [DEL.2004.0001.7371];
  • MFSIM board proposal dated 1 February 2008 for ratification of issue of MYF A Class units signed by Mr Hutchings [DEL.2004.0001.7366];
  • MYF IAC minutes dated 28 November 2007 regarding participation agreement with PacFin and Loan Agreement with Sunleisure - unsigned, but with provision for signature by Ms Watts  [DEL.2004.0001.7377];
  • MYF IAC submission dated 28 November 2007 regarding loan agreement with Sunleisure - unsigned, but with provision for signature by Ms Watts [DEL.2004.0001.7368].
  1. By email at 3:25 pm on Wednesday, 6 February 2008 to Mr Hutchings copying Ms Watts - Ms Platts asks for a review of the PIF papers “asap”.[284]  Attached to the email are the following documents:
  • MYF information memorandum dated 23 November 2007 - unsigned [DEL.2004.0001.7335];
  • MFSIM Related Party and Conflict Committee proposal undated, for approval of PIF’s purchase of the units in MYF - unsigned, but with provision for signature by Ms Watts  [DEL.2004.0001.7331];
  • MFSIM board proposal dated 27 January 2008 regarding suspension of redemptions and distributions from PIF signed by Mr Hutchings [DEL.2004.0001.7329];
  • MFSIM board proposal dated 1 February 2008 for ratification of the participation agreement and purchase of A Class units in MYF signed by Mr Hutchings [DEL.2004.0001.7328];
  • PIF IAC minutes dated 23 November 2007 approving participation agreement with PacFin and the purchase of 85 million class A units in MYF signed by Mr Hutchings [DEL.2004.0001.7363];
  • PIF IAC submission dated 20 November 2007 regarding participation agreement with PacFin - unsigned, but with provision for signature by Ms Watts [DEL.2004.0001.7333].
  1. By email at 4:03 pm EST on Wednesday, 6 February 2008 to Mr Bailey copying Mr Hutchings and Ms Watts, Ms Platts attaches an information memorandum for MYF regarding PIF’s investment in class A units in MYF and MYF’s constitution.  She explains why further information cannot be provided.[285]
  2. By email at 5:38 pm on Wednesday, 6 February 2008 to Ms Platts, Mr Gavras-Moffat attaches “Updated Unit Certificates” for PIF’s purchase of 67,500,000 class A units in MYF dated 2007 and 17,500,000 class A units in MYF dated 2007.[286]  The only date was the year although space was left for a more precise date.
  3. By email at 6:34 pm on Wednesday, 6 February 2008 to Ms Platts copying Ms Watts, Mr Hutchings replies to Ms Platts’ email at 3:26 pm saying “No changes from me”.[287]
  4. By email at 6:43 pm on Wednesday, 6 February 2008 to Ms Platts copying Mr Hutchings, Ms Watts replies to Ms Platts’ email at 3:25 pm EST saying “All okay.  Many thanks”.[288]
  5. By email at 6:59 pm on Wednesday, 6 February 2008 to Ms Platts, Ms Molesworth says that she has updated the IAC Register with the relevant meeting minutes for 21, 23 and 28 November:  “I cut and paste the major crux from the papers, but you may want to review”.[289]
  6. By email at 9:04 am on Thursday, 7 February 2008 to Mr Bailey, Ms Platts attaches the executed loan participation agreement between MYF and PacFin.[290]
  7. By email at 10:24 am on Friday, 8 February 2008 to Mr Anderson copying Mr Hutchings, Ms Platts attaches the following documents:[291]
  • IAC minutes for MYF dated 21 November 2007 [DEL.2004.0001.7205];
  • IAC minutes for PIF dated 23 November 2007 [DEL.2004.0001.7207];
  • IAC minutes for MYF dated 28 November 2007 [DEL.2004.0001.7209];
  • IAC submission for MYF dated 28 November 2007 regarding the Sunleisure loan [DEL.2004.0001.7211];
  • IAC submission for MYF dated 27 November 2007 [DEL.2004.0001.7213];
  • IAC submission for PIF dated 20 November 2007 [DEL.2004.0001.7215]; and
  • IAC submission for MYF dated 20 November 2007 [DEL.2004.0001.7217].
  1. The IAC minutes show the attendees as Mr White, Mr Hutchings and Mr Kyling as follows:
  • 21 November 2007 [DEL.2004.0001.7205];
  • 23 November 2007 [DEL.2004.0001.7207]; and
  • 28 November 2007 [DEL.2004.0001.7209].
  1. By email at 12:36 pm on Monday, 11 February 2008 to the MFSIM directors, Mr Hutchings attaches a board proposal to ratify a decision to issue 100 million class A units through an updated information memorandum dated 23 November 2007.  It says board approval was not sought in November because of an “oversight”.[292]

The alleged transactions were inconsistent with contemporaneous accounts of PIF, PacFin, Sunleisure and MYF

  1. ASIC submitted that the alleged transactions were not recorded in or consistent with the following contemporaneous accounts of the relevant entities:
  • Friday, 30 November 2007

(a)Monthly Operational Board Report for MFSIM for November 2007.  The Update notes that the fund size of PIF as at 30 November 2007 was $781.1 million and says “The Fund drew down $150m from its Royal Bank of Scotland (RBS) leverage facility on 28th November.  This was to facilitate a short term cash flow mismatch between new commercial loans and investments due to settlement at the end of November and other loans in the Fund which are due to be repaid in December.  The facility will be repaid during January 2008”.[293]  In particular it is to be noted that this report is not consistent with the acquisition of assets exceeding $100 million because, despite the drawdown of the RBS facility, the fund is about the same as it was at the end of November 2007 ($787.2 million).[294]  This report is in fact sent to the board by Mr Hutchings by email at 12:37 pm on Friday, 28 December 2007.[295]

  • Wednesday, 5 December 2007
  1. By email at 11:05 am to Mr Parker, Mr Petherick attaches the PIF trial balance as of 30 November 2007 for the Asset report.  It shows (at row 90) the amount for “ALTN (alternative) Investments - Other” as $171,821,738.12.[296]
  1. By email at 3:30 pm to Ms Bennett, Mr Parker attaches the November “07 Asset Report.xls” and asks her to check the loans section of the report, which shows (at row 91) that “Other Loans” have increased from $41,821,738 on 31 October 2007 to $171,821,738.12.  He says he is “pretty happy with the accuracy of Dave’s numbers”.[297]
  2. By email at 5:27 pm to Mr White copying Ms Watts and Mr Hutchings, Mr Parker attaches the “most up to date holdings report for PIF as at 30 November 2007.  This report includes the $150m drawdown”.  In the report the $150 million obtained from the RBS facility has been included in row 64, line item 12 under “Asset Backed Investments” which reads “Domain/Guardian Loans - $171,821,738.12”.[298]
  • Thursday, 6 December 2007

(a)By email at 10:48 am to Ms Watts, Ms Cole, Mr Hutchings and Ms Howard copying others, Mr Parker attached the completed Asset and Holdings Report for PIF as at 30 November 2007.  It separates the $130 million asset (row 65, line item 13 under “Asset Backed Investments”) as “Other Loan”.  He says “There will be a little more detail to come on the ‘other loan’”.[299]

  • Monday, 10 December 2007

(a)By email at 7:41 am to Ms Howard copying Ms Watts and others, Kristen Cruise (fund accountant with MFSIM) attaches the MYF balance sheet and income statement.  The balance sheet shows (at row 39) that as at 30 November 2007 the net assets of the fund were $2,136,271.[300]

  • Monday, 17 December 2007

(a)By email at 10:47 am to Ms Watts and others, Petherick attaches the updated PIF November accounts, which still appears to show (at row 21) the $130 million as “Alternate [sic] investments”.[301]

(b)By email at 4:55 pm to Ms Watts and Mr Hutchings copying Mr White, Mr Parker attaches updated holdings report which shows (row 65, line item 13 under “Asset Backed Investments”) “Other Loan $130,000,000.00”.[302]

  • Wednesday, 19 December 2007

(a)By email at 11:31 am to Mr White copying Ms Watts, Mr Hutchings and Ms Guest, Mr Parker attaches the PIF Holdings Report as at 17 December 2007.  The report records (at row 65, line item 13 under “Asset Backed Investments”) the $130 million as “Other Loans” with the comment “TBA - C Mr White”.[303]

  • 31 December 2007

(a)The PacFin monthly management information pack for December 2007 records that PacFin’s investor net funds increased $12 million, which includes a PIF investment of $17.5 million and a MYF investment of $2.1 million, to which it primarily attributes the loan portfolio increase of $19 million.[304]

  • 8 January 2008

(a)By email at 12:03 pm to Ms Watts, Mr Parker attaches the PIF holdings report for 31 December 2007.  In the report (tab “All Assets Current”, row 65, line item14 under “Asset Backed Investments”) is an entry “Loans” for $149,261,788.07.  It shows a 12 per cent interest rate and maturity on 31 January 2008.[305]

  • 10 January 2008

(a)By email at 5:13 pm to Ms Howard and Mr Kendall, Ms James attaches the monthly accounts for MYF for December 2007, which shows (tab “Max BS”, row 22) its assets at $2.1 million.[306]

  • 22 January 2008

(a)By email at 12:45 pm to Mr Hutchings regarding RBS report, Mr Parker attaches the holdings report for PIF, which still has an entry with the description (row 63, line item 14 under “Asset Backed Investment”) “Loans $147,946,438.36” for maturity on 31 January 2008.[307]

The alleged transactions were inconsistent with contemporaneous MYF proposals

  1. By November 2007, MYF was a managed investment scheme which had a little over $2.1 million in cash.  MYF had one key investment of 1,300,000 units in the Golden Circle Note Trust.  The notes had been repaid on 5 November 2007.  MYF had 13 members who were for the most part senior employees or officers or entities associated with them, within the MFS Group.  MYF’s cash funds had been re-invested in a savings account in the period to the end of November and it was not active in terms of investing.  It was closed to new investors and was, for practical purposes, dormant.
  2. In the MFSIM Monthly Operational Board Update for October 2007, Mr Hutchings reported that “We are seeking to employ a new fund Manager with a view to relaunch the fund”.[308]
  3. Before the MFSIM management team meeting on Monday, 12 November 2007, by email at 11:30 am on 9 November 2007, Ms Watts asks a few questions about a restructure of the MYF fund.  Ms Howard answers by an email of the same day at 2:00 pm.  The email notes that:
  • An Extraordinary General Meeting will be required to effect the restructure.
  • A new fund setup would take about a month or a unitholder meeting would take 5-6 weeks from “pushing go to end.  Best chance is that we don’ t [sic] impact unitholders rights and reopen existing fund up and relaunch for v3.”[309]
  1. At 9:43 am on 13 November the email is forwarded by Ms Watts to Mr Hutchings and Ms Cole.[310]
  2. With respect to the MFSIM management team meeting on Monday, 12 November 2007, the minutes record:[311]

“Maximum Yield Fund - to change from a closed end to an open end fund. Either need to distribute income to existing investors and go ahead and restructure, or could set up a new asset class.

GH, JH and MW to meet and discuss before putting together a proposal.”

  1. There is no reference to a MYF restructure in the agenda[312] or the Action Items arising from the meeting.[313]
  2. By 21 November 2007, at 1:05 pm Mr Anderson, who is an investor in MYF, suggests the $2.1 million in MYF be taken out of AAA Saver and invested in PacFin.  At 2:55 pm Mr Hutchings replies to Ms Howard copying Mr White and Mr Anderson saying (emphasis added), “please implement … There will now be no assets going into the fund in the short term.  At 5:43 pm Ms Howard replies to Mr Hutchings copying Ms Watts saying, “Is it appropriate for iac to consider and approve?  Assume mw [Ms Watts] to do paper?”.[314]
  3. By email at 8.45 am on 26 November 2007 to Ms Howard, Ms Brown asks whether MYF was investing $2.1 million into PacFin today.  Ms Howard forwards the email to Ms Watts and asks for the status of IAC and says “Once approved, then we can move funds”.  By email at 9:35 am Ms Watts replies including a copying to Mr Hutchings stating that MYF will not be investing $2.1 million into PacFin.  She says “we are currently evaluating another investment option for the MYF”.  Ms Howard replies by email at 9:36 am saying “cool.  Does David Anderson know?”.[315]
  4. By email at 5:40 pm on 26 November 2007 to Mr White and other directors, Mr Hutchings attaches the October 2007 MFSIM monthly operational board update, which shows the PIF fund size as at 31 October 2007 at $787.2 million.  It also shows the MYF fund size at 31 October 2007 at $2.8 million and notes it as “Closed Fund”.[316]
  5. By email at 3:41 pm on 3 December 2007 to Ms Howard, Ms Watts asks to “tee up a time to talk about possible restructuring MYF and/or reinvestment of recently matured GC notes into appropriate assets that meet the IM’s guidelines?”.  At 3:46 pm Ms Howard replies stating that Mr Anderson had told her that MYF was going to have some exposure to a land fund:  “Has Jenny done up a term sheet for restructure at all?  Can’t remember if we even asked her too [sic]”.  At 3:48 pm Ms Watts replies saying “No, nothing done at all on MYF as we weren’t sure whether it would be simple reinvestment of matured funds or a full-blown restructure.  We still need to make a decision one way or the other”.[317]
  6. On 4 December 2007, a draft PIF IAC paper for a proposed restructure of the Maximum Yield Fund is prepared for IAC approval.[318]  In summary the document recorded that:
  • MYF was a fund that “has” 13 high net worth investors who “are” MFS employees or well known to MFS employees.
  • It “has” $2.1 million in funds under management which are the proceeds of the recent repayment of the schedule’s only investment in Golden Circle notes.
  • The proposed restructure of MYF which in truth was being considered at this time.  Four alternative strategies are identified:

(a)MYF be wound up and proceeds distributed to unitholders.

(b)MYF unitholders be advised that new investments unlikely to meet 15 per cent and further instructions sought.

(c)MYF unitholders be advised that authorised investment will be widened to include related party transactions to achieve 15 per cent return.

(d)MFSIM seek permission to completely restructure into an open-ended MIS to be relaunched in 2008.

  1. By email at 12:11 pm on 5 December 2007 to Mr Hart, Ms Cole, Mr Hutchings and Ms Howard, Ms Watts attached this draft paper.[319]
  2. By email at 10:41 am on Thursday, 6 December 2007 to Ms Molesworth copying Mr Hutchings, Ms Watts replies to Mr Hutchings’ request to proof-read the proposed submission to the PIF IAC and requests it be circulated to the PIF IAC as a circular resolution.  It differs from the draft PIF IAC paper circulated the day before[320] in that it recommended that MYF funds be invested in PacFin for a period of three months during which time a proposal to re-organise and re-launch MYF would be approved and implemented.[321]
  3. As requested at 12:01 pm, Ms Molesworth circulates the PIF IAC submission to the members of the IAC for consideration via circular.[322]  Email responses supporting the resolution were received.[323]
  4. The minutes of a meeting of the PIF IAC on 6 December 2007 via circular, which included Mr Hutchings and Mr White, recorded unanimous approval in support of:
  • seeking permission from MYF unitholders to restructure the fund to transform it into an open-ended MIS which would be re-launched in 2008; and
  • the proposed interim investment of the $2.1 million in PacFin.[324]
  1. This is consistent with the recollection of IAC members.[325]
  2. By email at 11:58 am on 14 December 2007 to Ms Malipaard, Ms Howard attached the related party register for PIF as at 30 November 2007.  The register does not show any investment by PIF in MYF, nor any participation by PIF in PacFin loans.[326] 
  3. The implementation of the restructure of MYF with a March 2008 launch date proceeds through the period of the creation of the alleged transactions including the drafting of a term sheet and product proposal:
  4. By email at 8:35 am EST on 3 January 2008 to Ms Cole and Ms Howard regarding MYF restructure, Ms Watts says that she has been working on MYF’s new term sheet and product proposal.  At 8:42 am Ms Cole replies saying she has not done a lot of work on it either.[327]
  5. By email at 4:08 pm on 4 January 2008 to Ms Cole and Ms Howard, Ms Watts attaches a proposed product proposal and term sheet both dated January 2008 both proposing a re-launched MYF on 3 March 2008.[328]
  6. At 8:00 am on 11 January 2008 there was a MFSIM management team meeting consisting of Ms Cole, Mr Hart, Ms Howard, Mr Hutchings, Ms Molesworth and Ms Watts.  It notes that the proposed re-launch date for the MYF schedule was 30 March 2008.  There is no reference to the alleged transactions.[329]
  7. By email at 8:45 am on Thursday, 17 January 2008 to Ms Watts and Ms Howard - Ms Cole says “Here is what I propose to send to [Mr Hutchings]” and attaches the draft product proposal for the relaunch of MYF with a March 2008 launch date.[330]
  8. ASIC submitted that neither that approved restructure of MYF nor any of the alternatives considered by the IAC involved the creation of a new class of units in MYF, or the issue of a further 100 million new units.  The contemporaneous documents and events are irreconcilable with the alleged transactions and in particular the following documents which form part of them:
  • IAC (MYF) submission dated 20 November 2007.  Submission to IAC of MFSIM as responsible entity for MYF recommending that MYF issue up to 100 million class A units at $1.00 per unit.  (Statement of claim, para 110.)  [WIM.0002.0004.0201]
  • IAC (MYF) minute of meeting dated 21 November 2007.  Minutes of IAC for MFSIM as responsible entity for MYF, purporting to record that IAC approves the issue of 100 million class A units in MYF.  (Statement of claim, para 112.)  [WIM.0002.0004.0199]
  • Information memorandum dated 23 November 2007.  Memorandum offers information to potential investors in respect of class A units in MYF (100 million at $1.00 each).  (Statement of claim, para 113.)  [OCA.0002.0004.0108]
  • IAC (MYF) submission dated 27 November 2007.  Submission to the IAC of MFSIM as responsible entity for MYF recommending that MYF enter into a loan participation agreement with PacFin, involving MFSIM advancing $55 million to PacFin.  (Statement of claim, para 115.)  [WIM.0002.0004.0077]
  • IAC (MYF) memorandum dated 28 November 2007.  Memorandum to the IAC of MFSIM as responsible entity for MYF recommending that MYF lend Sunleisure $30 million to allow it to repay MFS.  (Statement of claim, para 116.)  [OCA.0002.0004.0284]
  • IAC (MYF) minute of meeting dated 28 November 2007.  Minutes of a meeting of the IAC for MFSIM as responsible entity for MYF approving MFSIM as responsible entity for MYF advancing $55 million to PacFin by way of loan participation agreements and lending Sunleisure $30 million (subject to the sale of $85 million in class A units).  (Statement of claim, para 117.)  [WIM.0002.0004.0075]

The alleged transactions were inconsistent with contemporaneous Sunleisure decisions

  1. On 16 November 2007 a proposal was made to the PIF IAC that PIF would lend Sunleisure $30 million for the purpose of repaying $30 million to MFS Limited.[331]
  2. But on 19 November 2007 the Minutes of the PIF IAC show that the proposal was declined because “Sunleisure Group Ltd is a wholly owned subsidiary of MFS, therefore PIF is unable to invest in (as per the current PDS)”.[332]  This is supported by IAC members.[333]
  3. As part of the alleged transactions it is alleged that:
  • by memorandum to the IAC of MFSIM as responsible entity for MYF on 28 November 2007 Ms Watts recommended that MYF lend Sunleisure $30 million to allow it to repay MFS Limited;[334] and
  • on 28 November 2007 the PIF IAC approved MYF lending $30 million to Sunleisure.[335]
  1. ASIC submitted that it is inherently unlikely that the IAC would decline a loan by PIF to Sunleisure of $30 million for the purpose of repaying MFS because PIF and Sunleisure were related parties; and then nine days later approve a loan by MYF to Sunleisure of the same amount for the same purpose.[336]  Moreover, it submitted it was inconsistent with the recollection of IAC members.[337]

The $17.5 million payment

  1. ASIC’s case was that in late 2007, funding flowing from investors and other income into PacFin had diminished because of the generally poor state of the New Zealand debenture finance market brought about by global financial instability at that time.[338]  For at least the last three months of 2007, monthly redemptions exceeded money flowing into PacFin.  However, Mr King assured Mr Maywald that the money would always be there for PacFin to meet its obligations.[339] 
  2. By the end of December 2007, PacFin had an urgent need for funds to enable it to pay requests for redemptions from its debenture holders by the end of the month.[340]  On 27 December 2007, PIF made the $17.5 million payment.[341]  The $17.5 million payment was made at the direction of Mr White[342] and with the knowledge and approval of Mr Hutchings[343] and Mr Anderson.[344]  The $17.5 million was spent by PacFin in ways that did not benefit PIF.[345] 
  3. In fact, the payment of $17.5 million was not an authorised investment within the meaning of cl 15.1 of PIF’s constitution.  PacFin was at the relevant time a related party to PIF.  There was no approval given by the members of PIF to the $17.5 million payment. The payment of $17.5 million was of money belonging to PIF and was thus a payment out of scheme property to a related party within the meaning of s 208(1) as modified by s 601LC of the Act.

MFSIM’s alleged contraventions concerning the $17.5 million payment

  1. In para 71 of the statement of claim, ASIC alleges that MFSIM as responsible entity for PIF contravened s 601FC(5) of the Act because, with respect to the $17.5 million payment, MFSIM as responsible entity for PIF:
  • did not act honestly in contravention of s 601FC(1)(a);
  • did not act in the best interests of the members of PIF, in contravention of s 601FC(1)(c);
  • did not ensure that the transactions were in accordance with PIF’s constitution, in contravention of s 601FC(1)(k).
  1. ASIC submitted that I should find that the $17.5 million payment was not in the best interests of the members of PIF for the following reasons:
  • it was effected for the purpose of allowing PacFin to access funds to enable it to, inter alia, pay redemptions;
  • it was effected without any consideration being provided to PIF.

MFSIM’s alleged misconduct concerning the $17.5 million payment

Chronology of events relevant to the $17.5 million payment

  1. Set out below is a chronology of events relevant to the $17.5 million payment.

Date/Time

Event

Reference

24.12.07

 

 

1:26 pm

Email Mr Anderson to Mr White to this effect: To enable funds in time for payments we [ie PacFin] need clear funds by 11.00 am Friday 28.12 in MFS PacFin acc CBA Southport.  Best if funds go directly there.

DEL.2003.0001.1187

27.12.07

 

 

 

Bank statement PacFin shows $17.5 million paid in by Perpetual Nominees Ltd

CBA.0001.0001.0051

 

Bank statement Perpetual Nominees shows $17.5 million paid to PacFin

CBA.0001.0001.0089

 

Payment direction signed by Mr Hutchings and  Mr Kennedy to pay the $17.5 million

OCA.0002.0007.0003

12:31 pm

Email Mr White to Mr Anderson saying “$17.5m”

DEL.0009.0001.0171

2:33 pm

Email Mr Hutchings to Ms Ring. Mr Hutchings agrees that his electronic signature can be put on the proper instruction for payment of $17.5

OCA.0002.0007.0004

DEL.2003.0001.0860

2:33 pm

Fax to Perpetual with payment direction for $17.5 million signed by Mr Hutchings and Mr Kennedy

OCA.0002.0007.0002

4:21 pm

Email Mr Anderson to Ms Ring, Ms Watts and Ms Howard. It is necessary to push Perpetual to get action on the $17.5 transfer. “Need money urgently to enable urgent NZ transactions”

DEL.2003.0001.0805

4:43 pm

Email Ms Ring to Mr Anderson and Ms Watts: “Funds have left our account”

DEL.2003.0001.0805

DEL.2003.0001.0146

4:44 pm

Email Mr Anderson to Ms Ring “Excellent news”

DEL.2003.0001.0805

28.12.07

 

 

10:47 am

Email Ms Howard to Ms Watts and Mr Hutchings.  MFS has confirmed receipt of $17.5 million

DEL.2003.0001.1330

The improper purpose

  1. The allegation was that the $17.5 million payment was made for the purpose of allowing PacFin to access funds to enable it to, inter alia, pay redemptions, rather than for some benefit to PIF.  ASIC argued that this purpose was apparent from the following evidence:
  • MFSIM had no intention to make significant acquisitions in late December 2007, and certainly had no intention to make acquisitions from PacFin;
  • the transaction was effected without approvals from the IAC or the CRPC of MFSIM; and
  • the timing of the payment coincided with PacFin’s need for funds to pay redemptions.
  1. The payment was effected without consideration flowing to PIF as evidenced by the following matters:
  • the payment was not the subject of any approvals by the IAC or the CRPC;
  • the payment was not the subject of any contemporaneous consideration;
  • there was no understanding by officers of MFSIM as to the reason for the $17.5 million payment;
  • the final formulation of the alleged transactions did not occur until late in January or early February 2008; and
  • the alleged transactions were inconsistent with contemporaneous accounts of PIF and MYF.

MFSIM had no intention to make any significant acquisitions

  1. As at late December 2007, ASIC argued that PIF was not intending to make any acquisitions or acquire any interests in participation loans, before the end of 2007.  No consideration was given to PIF acquiring any interests from PacFin at that time. 
  2. MYF did, however, consider, and ultimately proceed, with paying the $2.1 million it had available to invest (the proceeds of the Adelaide Bank investment) and it was paid to PacFin.
  3. The following evidence is of particular relevance:
  • The minutes of MFSIM management team meetings in December 2007 do not disclose any proposed acquisitions by PIF of any interests in participation loans or other investments that would explain the $17.5 million payment.  For example, the minutes of the meeting on 17 December 2007 record no consideration being given to such matters.[346]  The only reference to investment management is to Ms Watts and Ms Howard “working on” MYF - an apparent reference to the consideration being given at that time to a possible relaunch of MYF at some time in the first quarter of 2008.
  • The cash flow forecasts that existed during December 2007 did not make any provision for payment out by PIF to PacFin of $17.5 million in late December 2007.  Other anticipated transactions were set out in the cash flow forecasts. Examples of relevant cash flow forecasts during this period are:

(a)DEL.2002.0002.3670, which was circulated by Mr Chan to Mr White on 17 December 2007 by email DEL.2002.0002.3669;

(b)DEL.2006.0006.6058, which was circulated by Mr Hutchings to Mr White  on 18 December 2007 by email DEL.2006.0006.6057;

(c)DEL.2006.0004.1788, which was circulated by Mr Hutchings to Mr White  on 19 December 2007 by email DEL.2006.0004.1787.

  • The cash flow forecasts for PacFin before 19 December 2007 did not contain any anticipated funds being received from PIF, eg the cash flow forecast for PacFin provided by Yvette Brown to Mr Anderson by email on 18 December 2007.[347]  There is no evidence in that document of any anticipated payment from PIF approaching $17.5 million.  Rather, as at 18 December 2007, there is an anticipated shortfall in funds for PacFin as at 31 December 2007 exceeding $15.3 million.  From 19 December 2008, there was provision for receipt of $20 million by PacFin from MFS Administration - as to which, see below.
  • There is no mention of any consideration given to any transactions in respect of the $17.5 million payment by the IAC of PIF.[348]
  • There is no mention of any consideration given to any transaction in respect of the $17.5 million payment by the CRPC of MFSIM.[349]

The timing for the $17.5 million payment coincided with PacFin’s need for money

  1. The timing of the $17.5 million payment coincided with the requirement of funds by PacFin, primarily for the purpose of allowing PacFin to meet redemption requests.  This also coincided with a time when cash was very tight for MFS generally.  This was said to have been demonstrated by the following evidence:
  • On 13 December 2007, PIF draws down a further $15 million from the RBS Facility.[350]
  • By email at 12:10 pm on 14 December 2007, Mr Anderson tells Mr White about his concerns about the cash flow position, which showed a shortfall of $100 million by the end of December 2007 not dealing with the $130 million “payable” of last month.[351]
  • By email at 11:13 am on 17 December 2007, Mr Anderson again emailed Mr White about his concerns about the cash flow position, saying “No changes for the better”, noting the cash flow deficit at $100 million and that “there is no fat/contingency built in here and we all know that unexpected outflows are likely to exceed unexpected inflows”.[352]
  • By email at 12:03 pm on 17 December 2007 to Ms Howard copied to Mr Hutchings, Ms Watts states that PIF needs to make a further drawdown of $25 million to meet next week’s settlements; bringing total drawdowns to $190 million.[353]
  • By email at 4:12 pm on 17 December 2007, Mr Anderson says to Mr White, “never did get the extra $20m you spoke of - only $130m received”; to which Mr White promptly responds at 4:14 pm “hang on, great point”.[354]
  • By email at 4:15 pm EST on 17 December 2007 Mr White makes inquiries of Mr Hutchings as to what became of the balance of the $150 million drawn down “from gearing” recently (which is a clear reference to the RBS draw down of $150 million at the end of November) after the $130 million was paid.  At 4:50 pm Mr Hutchings responds advising that $15 million went to fund a deal and $5 million “went to general funding”.[355]  At 5:01 pm Mr White then asked for a copy of the PIF cash flow.[356]
  • By email at 4:20 pm on 18 December 2007 to Mr Martin and Mr Davis[357] copying Mr Hutchings, Mr White says that they did not receive the email about Mr King’s “decision not to fund deals/and/or lending at this time”.[358]  ASIC submitted that this is a reference to the direction of Mr King not to settle any property lending/invest transactions, referred to in his earlier email.[359]  One minute later Mr White forwards this email to Mr Anderson saying “this will give me the $20m”.
  • By email at 4:31 pm on 18 December 2008 to Mr Chan and Ms Howard, Mr Parker advises that PIF has the cash to allow a drawdown by Causeway but “We are going to have none at the end of this week if we don’t see some of the $130m back though”.[360]
  • On 18 December 2007 a further drawdown of $25 million is received from the RBS into Perpetual’s PIF account.[361]
  • By email at 2:22 pm on 19 December 2007 to Ms Howard copied to Mr White, Mr Parker and Mr Hutchings, Ms Watts states that PIF needs to make the final drawdown of $10 million.  She anticipates funds will be required for less than a month.[362]
  • By email at 4:25 pm on 19 December 2007, Mr Anderson inquires about redemptions from Mr Maywald who replies that redemptions for the month (for PacFin) stood at $14.2 million.  Mr Anderson replied with “Thanks for the info”.[363]
  • By email at 5:34 pm on 19 December 2007 to Mr White, Mr Anderson confirms that Mr White is organising “$20m going into NZ”.  He also notes “the figures do not include the $2.1m investment Max Yield are making in Pac Fin Notes”.[364]
  1. PacFin’s cash flow forecast as at 18 December 2007 was provided by Ms Brown to Mr Anderson by email on that date.[365]  It shows:
  • on 31 December 2007, the following outflows from PacFin:

(a)a sum exceeding NZ$8.8 million for “Investor Redemptions - Actual”;

(b)a sum exceeding NZ$3.4 million for “Investor Interest - Debentures/Notes”;

(c)a sum exceeding NZ$4.8 million for “AUD Investor Redemptions - Estimated”; and

(d)a sum exceeding $1.2 million for “AUD Investor Interest - Debentures/Notes”;

  • on 31 December 2007, a closing balance exceeding - $15.3 million, that is a cash deficiency of that sum on that date; and
  • nothing was contained in the cash flow forecast which showed anticipated funds to be received from PIF during late December 2007.
  1. PacFin’s cash flow forecast as at 20 December 2007 was sent by Ms Brown to Mr White (and others) on that date.[366]  That forecast revealed the same need for cash, but provided for a $20 million inflow on 28 December 2007 being for “Loans Maturing - MFSA”.  Ms Brown explained:

“The fact that $20m appeared as ‘Loan Maturing’ did not mean that MFS Administration had a loan outstanding from PacFin that was about to mature.  In this context it meant that PacFin was looking at MFS Administration to provide $20 million in funds on 28 December for whatever reason.”[367]

  1. The covering email referred to $20 million coming from “MFS” on 28 December 2007.  The same situation flows through to the 24 December PacFin cash flow forecast which was forwarded by email by Ms Brown to Mr Anderson on 24 December 2007.[368]  On 24 December 2007, Mr Anderson told Ms Brown that $20 million would be paid to PacFin by MFS and it would come direct from PIF.[369]
  2. At 12:15 pm on the same day Mr Anderson emails Mr White  regarding “Cash Flow” saying:[370]

“Craig - the payment you outlined this morning is fine and is currently being processed - I will wait your call to discuss logistics re inflows for Thursday/Friday.”

  1. At 12:53 pm on the same day Mr Anderson emails Mr White regarding “Keen to talk” saying, “Craig keen to discuss logistics re the remaining A$17.5m to be provided”.[371]
  2. At 1:26 pm on the same day Mr Anderson advised Mr White by email that clear funds would be required in the PacFin account by 11:00 am on Friday, 28 December.  Mr Anderson advised “best if funds go directly there”, which demonstrates the urgency with which the funds were required.[372]
  3. At 1:53 pm on 27 December 2007, Ms Howard emails Mr Anderson copying Ms Watts stating, “Have had discussions with Guy and we are making payment to you… Our latest delivery time is approx 10am tomorrow”.  At 2:42 pm Mr Anderson replies saying “Thanks.  Keen to get funds so we can move them around.  10am is our latest limit to acheive [sic] desired outcome”.[373]
  4. At 2:47 pm on the same day, Ms Ring emails Ms Watts, Ms Howard, and Mr Anderson saying “I have sent through the authorised proper instruction for Real Time payment”.  Mr Anderson replies at 3:24 pm thanking her for the update.  Ms Easton replies to Mr Anderson at 3:48 pm saying, “Someone needs to hassle Perpetual or it may not be actioned urgently.  We needed to push hard with the last PIF payment as it was stalled.”[374]
  5. At 4:21 pm on the same day Mr Anderson emails Ms Ring, Ms Watts, and Ms Howard:

“I understand that in recent transactions it has been necessary to push Perpetual hard to actually get them to action your requesting a reasonable time.

We have checked the bank account this afternoon and nothing has arrived so anything you can do to push hard and early would be appreciated to get the funds to us in a timely manner to enable urgent transactions in NZ which of course are many hours ahead of us.”

  1. Ms Ring replies saying the funds have left the account and Mr Anderson replies saying “Excellent news - thanks”.[375]
  2. On 28 December 2007 Mr Anderson emailed Ms Brown and Ms Easton seeking confirmation that the $17.5 million had been received and Ms Easton replied confirming that it had been received.[376]
  3. On 2 January 2008 at 4:36 pm, Leia Wilson (an MFS assistant accountant) emailed Ms Brown regarding “PIF Investment” saying “[Ms James] wants to know what the terms etc are for the investment of $17.5m which was paid into PF on 27/12, I notice I didn’t get the applications account, do I need to notify CS about this?”.  Ms Brown forwards the email to Ms James suggesting to check with Ms Malipaard.  Ms James replies saying that Ms Brown is confusing the MYF investment with the PIF “new investment”.  Ms Brown replies saying: “Yes your [sic] right I was.  I don’t know anything further.  I was just told I would be getting money from MFS A … I will speak with [Mr Anderson] in our meeting some time today because I think [Mr White] must have organised it.”[377]
  4. The urgency for PacFin to receive the funds is again underscored by the events of 27 December 2007, including:  the exchange of emails between Mr Anderson, Ms Easton and PIF employees Ms Watts and Ms Ring about the need to push Perpetual to get action.

The $17.5 million payment was made without any consideration flowing to PIF - there was no consideration or approval by the IAC or the CRPC

  1. ASIC’s case was that the evidence shows that, in relation to the $17.5 million payment, there was no consideration of any relevant transactions by the IAC or the CRPC.  The following evidence demonstrates this:
  • The IAC minutes do not include any consideration being given to the investment of funds from the $17.5 million payment [ASIC.1000.0003.0012].
  • The CRPC minutes do not include any consideration being given by the CRPC to what related party transactions might be approved by the CRPC [ASIC.1000.0003.0010].
  • The MFSIM Board minutes and papers do not record any consideration of any related party matters arising from the $17.5 million payment [ASIC.1000.0003.0007].
  1. There were later documented transactions involving the $17.5 million paid on 27 December and which purported to give consideration for this payment to PIF, but as with the $130 million payment, the alleged consideration was not formulated or documented until later in January 2008.
  2. ASIC submitted that I should find that the alleged consideration was not formulated or documented until the second half of January 2008 for the same reasons as set out with respect to the $130 million payment above and that I should reject the purported minutes of the PIF IAC dated 23 November 2007 as representing some sort of approval for this transaction. 
  3. The evidence demonstrates that:
  • the IAC proposal and minute were not documented before late January 2008;
  • Mr Kyling, who purportedly attended the meeting, gave evidence that he was not informed of the meeting, did not consider the transactions and did not attend any meeting;[378] and
  • Mr Kyling’s invoiced IAC meeting list did not show any IAC meeting at the relevant date.[379]

There was no contemporaneous consideration or approval given to the alleged transactions

  1. As with the $130 million payment, ASIC submitted there was:
  • no contemporaneous consideration undertaken in relation to the transactions which would ultimately be recorded as accruing for the benefit of PIF;
  • no reference in the minutes of MFSIM management team meetings to any transaction arising from the payment; and
  • no approval of any transaction involving the $17.5 million payment by the IAC or the CRPC of MFSIM.

There was no understanding by officers of MFSIM of what consideration existed for the $17.5 million payment

  1. ASIC submitted that the officers and employees of MFSIM and MFS Limited demonstrated no understanding of the consideration for the $17.5 million payment at any time before the second half of January 2008 and, despite requests, were not informed about the purported transactions.
  2. The payment of the $17.5 million is linked to the $130 million Payment and ASIC submitted that, clearly, the staff of MFSIM came to consider those two payments together when attempting to explain the payments.  The relevant evidence is considered in the submissions relating to the $130 million payment. Specifically in relation to the 28 December payment, the following is relevant:
  • On 28 December 2007, Ms Howard advised Ms James that $17.5 million was paid to PacFin the previous day and that “details of the transactions will be coming from [Mr Hutchings] and [Mr White] shortly”.[380]  Ms James followed up on that request on 3 January 2008 and Ms Howard responded that she did not have any details and would chase up Mr Hutchings and Mr White.[381]
  • On 4 January 2008, the PIF holding report noted “other loans” of $17.5 million still to be confirmed by Mr White (tab “All Assets Current”, rows 66-67, items 14-15 under “Asset Backed Investments”).[382]
  • On 4 January 2008, the attempts to document transactions involve transactions to a value of $147.5 million, which includes both the $130 Million payment and the $17.5 million payment.[383]  However, those transactions involved some unidentified “loan” in which PIF was investing.  That figure of $147.5 million was then reflected in the later documented transactions.
  1. Ms Watts asked Mr Hutchings and Mr White on numerous occasions from the end of December 2007 until 23 January 2008 to tell her what investments had been acquired with the $17.5 million payment.  That information was not forthcoming, despite it being Ms Watts’ job, as PIF’s fund manager, to be kept abreast of PIF’s investments.[384]
  2. Until the listing of loans documents were circulated on 23 January 2008 (and indeed, for some time after whilst the purported transactions were refined and documented) the evidence demonstrates that the staff of MFSIM did not know what PIF had purportedly received for its total payments of $147.5 million.  The relevant evidence is dealt with at those paragraphs dealing with the development of the false documents.

The alleged transactions were not finally formulated until the second half of January 2008

  1. ASIC repeated and relied on its submissions set out above in relation to the $130 million payment.
  2. The evidence demonstrates that:
  • before 23 January 2008, the staff of MFSIM did not know what transactions might be used to explain the $130 million payment and $17.5 million payment;
  • before 23 January 2008, a number of possible scenarios were considered, but ultimately none of them could be progressed until Mr White had provided some sort of explanation for those payments;
  • from 23 January 2008 when the listing of loans was first provided by Mr White and Mr Anderson, various efforts were made to refine and explain and ultimately document the transactions on or about 6 February 2008; and
  • those efforts to explain and document the transactions were given particular impetus because of the pending audit of PIF and requests by RBS for explanations about precisely what PIF had acquired for the money drawn down under the RBS Loan Agreement.

The alleged transactions were inconsistent with contemporaneous accounts of PIF and MYF

  1. As to this issue, see the comments in relation to the accounts of PIF and MYF in relation to the $130 million payment.  The $17.5 million payment ultimately came also to be reflected in the PIF accounts in very broad terms until after 23 January 2008 when guidance was given as to what purported transactions had been entered into.

MFSIM’s alleged contraventions in relation to the $17.5 million payment: summary

  1. In summary, ASIC submitted the above evidence led to the following conclusions in respect of the $17.5 million payment:
  • The payment was made because PacFin had an urgent need for funds.
  • The payment was made without any consideration being given by the IAC of MFSIM to what PIF would receive in return for the payment.
  • There was no consideration given on the PIF side of the payment as to what PIF would receive for the payment of $17.5 million.
  • There was no consideration given on the PIF side of the payment as to whether it was genuinely in PIF’s interests to make the payment to PacFin.
  • None of the staff of MFSIM had any appreciation of what, if anything, PIF received for the payment.
  • To the extent that the payment later came to be explained by the creation of documents in late January and early February 2008, those transactions were not devised or agreed before about 23 January 2008.
  1. Accordingly, the evidence leads to a conclusion that in making the $17.5 million payment:
  • MFSIM failed to act honestly in breach of s 601FC(1)(a).  Instead, it acted without proper regard for the interests of PIF’s members and paid the money away in order to support another part of the corporate group financially.
  • MFSIM failed to act in the best interests of the members of PIF in breach of s 601FC(1)(c).
  • MFSIM failed to ensure that all payments out of scheme property were made in accordance with PIF’s constitution in breach of s 601FC(1)(k). 
  • MFSIM and PacFin were related parties in respect of the $17.5 million payment for the purposes of s 208 of the Act.
  1. ASIC submitted that MFSIM, in making the $17.5 million payment, contravened s 208(1) as modified by s 601LC on the basis that the evidence demonstrates that:
  • PacFin was a related party of MFSIM; and
  • PacFin received a financial benefit given by MFSIM as responsible entity for PIF.  It received the $17.5 million.  Although it later purported to provide some consideration for that payment, in fact, it received the payment without any consideration at the time and the later purported transactions were never ratified in any event. 
  1. The case against MFSIM was said to be established by admissions made by MFSIM.  Further, ASIC alleges that Mr White and Mr Anderson were each “involved” in the contravention within the meaning of s 79(c), which requires proof of their being directly or indirectly knowingly concerned in the contravention.
  2. ASIC submits that Mr White and Mr Anderson were each knowingly concerned in each of the elements of the contravention for the following reasons.
  3. MFSIM gave a financial benefit to PacFin out of scheme property being the $17.5 million payment made from PIF to PacFin.  The $17.5 million payment is admitted in the defences of Mr White and Mr Anderson. 
  4. PacFin and MFSIM were said to be related parties because MFS Limited controlled both MFSIM and MFS Administration and MFS Administration controlled PacFin.  The control arises from the fact that:
  • MFSIM was a subsidiary of MFS Limited;
  • MFS Administration was a subsidiary of MFS Limited;
  • MFS Administration controlled PacFin through:

(a)the Management Agreement dated 24 July 2006 under which, by its terms, PacFin was managed exclusively by MFS Administration; and

(b)Mr White and Mr Anderson were directors of MFS Administration and two of the three directors of PacFin.

  1. The fact of the $17.5 million payment, that MFSIM and MFS Administration were subsidiaries of MFS Limited, and that Mr White and Mr Anderson were directors of MFS Administration and PacFin are all admitted in the defence of Mr White and his knowledge was said to be inferred from his positions as executive director of MFSIM, director of MFS Administration, Deputy CEO of MFS Limited from 23 May 2007 to 21 January 2008 and director of PacFin.
  2. The fact of the $17.5 million payment, that MFSIM and MFS Administration were subsidiaries of MFS, and that Mr White and Mr Anderson were directors of MFS Administration and PacFin are all admitted in the defence of Mr Anderson and his knowledge of Mr Anderson was said to be inferred from his positions as company secretary and CFO of MFSIM, director and company secretary of MFS Administration,  CFO of MFS Limited, director and local agent of PacFin.
  3. The involvement of Mr White arises out of his knowledge pleaded in para 73 of the statement of claim and, in particular, is to be inferred from his knowledge that there was no transaction effected, and thus nothing that could have been approved.
  4. The involvement of Mr Anderson arises out of his knowledge pleaded in para 77 of the statement of claim and in particular is to be inferred from his knowledge that there was no transaction effected, and thus nothing that could have been approved.

False documents case against MFSIM

False documents relating to PIF acquiring class A MYF units

  1. ASIC’s case was that documents were created in January and February 2008 purporting to show that the following events took place in November 2007 before the $130 million payment and the $103 million payment:[385]
  • On 20 November 2007 a paper was written by Ms Watts recommending to the MYF IAC that MYF issue a new class of units (class A) in MYF, so that MYF could use the proceeds of the issue to participate “in a number of quality investment opportunities [that] have been presented to [MYF]”:  IAC submission dated 20 November 2007 signed by Ms Watts [WIM.0002.0004.0201].
  • On 20 or 21 November, that paper was submitted to the MYF IAC for its consideration.
  • On 21 November 2007, a meeting of the IAC for MYF was held via circular.  The meeting considered and approved a “circular submission”, being Ms Watts’ paper dated 20 November 2007.  That it was the Watts paper that was, according to the minutes, physically before and considered by the members of the MYF IAC on 21 November 2007, is clear from the fact that the minutes use much of the same language as the Watts paper.  The meeting of the MYF IAC was recorded in minutes dated 21 November 2007 signed by Mr Hutchings [WIM.0002.0004.0199].
  • On 23 November 2007, the decision of the IAC for MYF to approve the offer of class A units to new investors was implemented, by preparing an information memorandum dated 23 November 2007, which made an offer of class A units in MYF opening on 23 November 2007 and closing on 31 January 2008:  information memorandum dated 23 November 2007 [OCA.0002.0004.0108].
  • On 23 November 2007, a meeting of the IAC for PIF was held via circular.  The IAC decided on that day that PIF should acquire $85 million of class A units in MYF: minutes of the PIF IAC dated 23 November 2007 [WIM.0002.0004.0137].
  • On 30 November 2007, Mr Hutchings and Mr White made an application on behalf of PIF for $67.5 million worth of class A units in MYF: application form dated 30 November signed by Mr Hutchings and Mr White [WIM.0006.0001.0138].
  • On 30 November 2007, MYF issued a unit certificate recording that Perpetual Nominees on behalf of PIF was the registered holder of 67.5 million fully paid class A units in MYF:  unit certificate dated 30 November 2007 signed by Mr White and Mr Hutchings [WIM.0006.0001.0140].
  1. The documents were plainly calculated to suggest that each of the above events had taken place on the above dates.  In fact, those events did not take place.
  2. Similarly, the documents were plainly calculated to show that they were written before the drawdown and payment away of the RBS money at the end of November.  In fact, as explained below, the evidence makes clear that the documents were written well after the event.
  3. Each of the documents, taken both individually and collectively, was false in a number of respects.  The evidence referred to below, ASIC argued, establishes the following matters unequivocally:
  • The Watts paper dated 20 November 2007 [WIM.0002.0004.0201] was in fact not created on that day.  It was created in February 2008.
  • The Watts paper dated 20 November 2007 was not considered by the MYF IAC on 21 November 2007, the paper not then being in existence.  The suggestion to the contrary in the minutes of the meeting of the MYF IAC dated 21 November 2007 is false [WIM.0002.0004.0199].
  • There was no meeting of the MYF IAC on 21 November 2007 that considered the matters recorded in the minutes bearing that date.  Mr Hutchings, a member of the IAC who is recorded as having participated in that meeting, admitted that it did not occur.  No notice of the meeting was given to the members of the IAC, and there is no contemporaneous record suggesting that such a meeting took place.
  • No information memorandum was prepared on or before 23 November 2007, contrary to the date stated in the document [OCA.0002.0004.0108].  Nor was there an offer of class A MYF units that was open on 23 November 2007 stated in that document.  No such offer could be made without an information memorandum, and that document did not exist until a draft was first created in late January 2008.
  • There was no meeting of the PIF IAC on 23 November 2007 that considered whether PIF should accept the offer of MYF class A units made in the information memorandum, and there was no decision of the PIF IAC on that day approving that investment, contrary to the PIF IAC minutes dated 27 November 2007 [WIM.0002.0004.0137].  Mr Hutchings, a member of the IAC who is recorded as having participated in that meeting, admitted that it did not occur.
  • Mr Hutchings and Mr White did not make an application on 30 November 2007 on behalf of PIF for class A MYF units, contrary to the date inserted - by hand - on the application form they each signed [WIM.0006.0001.0138].  The document was not signed on that date, because it did not exist even in draft until about 31 January 2008.
  • PIF was not issued with class A MYF units on 30 November 2007, contrary to the date inserted - again, by hand - on the unit certificate signed by Mr White and Mr Hutchings [WIM.0006.0001.0140].  The document could not possibly have been signed on that date, because the document did not exist even in draft until about 5 February 2008.

False documents relating to PIF participation agreement with PacFin

  1. In relation to the purported participation agreement between PIF and PacFin, ASIC’s case was that documents were created in January and February 2008 that purported to show, and were plainly calculated to represent, that the following events took place in November 2007, before the $130 million payment and $103 million payment:
  • On 20 November 2007 a paper was written and signed by Ms Watts [WIM.0002.0004.0139] recommending to the PIF IAC that PIF enter into a participation agreement with PacFin, in relation to the following loans:

(a)Sagacious Opportunity Trust:$ 5,174,356.55

(b)Copperfield No 1 Ltd (and others)$10,000,000.00

(c)Investment Enterprises Ltd$10,102,271.36

(d)Southport Holdings Ltd$10,091,499.08

(e)Young Village Estates Ltd$25,358,806.95

(f)SPV 1 Pty Ltd$ 2,773,066.06.

  • On 20, 21, 22 or 23 November, that paper was submitted to the PIF IAC for its consideration.
  • On 23 November 2007, a meeting of the IAC for PIF was held via circular, which considered a “circular submission”, being the Watts paper dated 20 November 2007 referred to above.  That it was the Watts paper that was, according to the minutes, physically before and considered by the members of the PIF IAC on 23 November 2007 is suggested by the fact that the minutes use much of the same language as the Watts paper.  The meeting of the PIF IAC was recorded in minutes dated 23 November 2007 signed by Mr Hutchings [WIM.0002.0004.0137].  The PIF IAC approved the submission, and considered and approved a “proposed use” of the RBS facility “in order to fund” the investment.
  • Between 23 and 30 November 2007, the decision of the IAC for PIF to enter into the participation agreement and draw down the RBS facility to fund that agreement was implemented by Mr White and Mr Hutchings executing the participation agreement [OPI.0002.0001.0126], after which the RBS facility was drawn down.  That suggestion is made when the terms of the participation agreement are read in the context of the Watts paper and the PIF IAC minutes referred to above.
  1. Again, the documents were plainly calculated to show that each of the above events had taken place on the above dates, before the RBS draw down.  In fact, as explained below, the evidence makes clear that those events did not take place on those dates.
  2. The participation agreement itself was couched in language that referred to a future flow of funds.  So, for example, cl 1 said that PIF “must advance to” PacFin the relevant amounts, and that those payments “must be made on the Commencement Date”.  The “Commencement Date” was defined to mean “the date of execution of the agreement” (unless some other date was agreed).
  3. The evidence establishes the following matters:
  • Ms Watts did not write a paper on 20 November 2007 recommending that PIF enter into a participation agreement with PacFin, and she made no such recommendation at that time or at any time thereabouts.  The document [WIM.0002.0004.0077] did not exist, even in draft form, until more than two months later, in late January 2008.  The loans and amounts specified in that paper were not determined until 23 January 2008.  Given those facts, the Watts paper could not possibly have been submitted to the IAC in November 2007.
  • There was no meeting of the PIF IAC on 23 November 2007 to consider the matter referred to in Ms Watts’ paper.
  • The PIF IAC did not approve PIF entering into a loan participation agreement with PacFin on 23 November 2007.
  • The loan participation agreement [OPI.0002.0001.0126] was not signed between 23 and 30 November 2007, but in fact was signed on about 5 February 2008; and
  • At the time the RBS moneys were drawn down and paid away on 30 November 2007, none of the things listed above had taken place.

False documents relating to MYF participation agreement with PacFin

  1. In relation to the purported participation agreement between MYF and PacFin, documents were created in January and February 2008 which purported to show, and were plainly intended to represent, that before the payments made by PIF in November 2007 the following events took place:
  • On 27 November 2007, a paper was written and signed by Ms Watts [WIM.0002.0004.0077] recommending that MYF enter into a participation agreement with PacFin, in relation to the following loans:

(a)GIPL Holdings No 2 Pty Ltd:$  9,902,470.91

(b)Blue Sky Development Trust:$45,097,529.09.

  • On 27 or 28 November 2007, the second Watts paper above was submitted to the MYF IAC.
  • On 28 November 2007, a meeting of the MYF IAC was held which considered the second Watts paper.  Again, that it was that Watts paper that was, according to the minutes [WIM.0002.0004.0075], physically before and considered by the members of the MYF IAC on 28 November 2007 is suggested by the fact that the minutes use much of the same language as that Watts paper.  The MYF IAC approved the recommendation made by Ms Watts, and noted that it “would be reliant on MYF raising at least $55m from the issue of Class A units”.
  1. In fact, the second Watts paper was not written on 27 November 2007, and Ms Watts made no such recommendation at that time or at any time thereabouts.  The paper [WIM.0002.0004.0077] was not written, even in draft, until 5 February 2008.  Given that fact, the paper could not possibly have been presented to the MYF IAC in November 2007.
  2. There was no meeting of the MYF IAC on 28 November 2007 that considered and approved a participation agreement between MYF and PacFin.

False documents relating to MYF refinance of Sunleisure loan

  1. In relation to the purported refinance by MYF of a loan to Sunleisure, documents were created in January and February 2008 which purported to show, and were plainly intended to represent, that the following events took place in November 2007, before all of the impugned payments:
  • On 28 November 2007, a paper was written and signed by Ms Watts recommending that MYF provide a loan to Sunleisure of $30 million [OCA.0002.0004.0284].
  • On 28 November 2007, the third Watts paper was submitted to the MYF IAC.
  • On 28 November 2007, a meeting of the MYF IAC was held which considered the third Watts paper.  The MYF IAC approved the recommendation made by Ms Watts, and noted that it “would be reliant on MYF raising at least a further $30 million from the issue of Class A units”, and that “as a result of these two transactions, MYF will need to raise at least $85m from the issue of Class A units”.
  1. In fact, the third Watts paper was not written on 28 November 2007, and Ms Watts made no such recommendation at that time or at any time thereabouts.  The paper [OCA.0002.0004.0284] was not written, even in draft, until 5 February 2008.  Given that fact, the paper could not possibly have been presented to the MYF IAC in November 2007.
  2. There was no meeting of the MYF IAC on 28 November 2007 that considered and approved a loan to Sunleisure.

Use of false documents - the false documents were kept as though genuine records

  1. Each of the false documents was intended to be, and was, kept by MFSIM as a genuine and accurate record of information.  That was a contravention by MFSIM of both its obligation to act honestly (s 601FC(1)(a)), and the obligation imposed on all companies to keep written financial records that correctly record and explain their transactions and financial position, and enable true financial statements to be prepared (s 286).

Use of false documents - false asset reports were sent to RBS

  1. On 21 January 2008, RBS sought a list of all assets and their values held by PIF.  The listing of loans produced by Mr White and Mr Anderson on 23 January 2008 was then used as the basis for changes to the accounts of PIF which showed that PIF had made loans in accordance with those lists.  Asset reports were provided to RBS on the afternoon of 23 January 2008 and again on 24 January 2008 that showed the purported transactions as loan assets held by PIF.
  2. On 30 January 2008, RBS sought information as to how the moneys drawn down under the RBS facility had been used.  In response, information was given to RBS on 31 January 2008 suggesting that particular loans had been acquired by PIF in 2007 with the $200 million from the RBS facility.  That information was false.  No loans had been acquired by PIF in 2007, or (even on the defendants’ case) at any time before 31 January 2008.
  3. On 31 January 2008 RBS sought copies of the loan documents underlying the purported transactions.  The participation agreements (being part of the false documents) were subsequently provided to RBS to evidence the purported loan transactions.

Use of false documents - the false documents were provided to the auditors and were reflected in PIF’s half-yearly report

  1. PwC’s review of PIF’s accounts for the half-year ended 31 December 2007 took place in February 2008.  For the purposes of that review, PwC was given access to PIF’s accounting records.  Those records included the false documents, and other documents that reflected the transactions purportedly recorded therein.  Given the falsity of those documents and the information they contained, PwC did not discover that, in fact, PIF did not acquire $85 million worth of units in MYF in November 2007, and did not enter into a $62.5 million loan participation agreement with PacFin in that half-year.
  2. The net result of this was that PIF published reports for the half-year ended 31 December 2007 that showed that, as at 31 December 2007:
  • PIF held $85 million worth of units in MYF;
  • PIF held rights in relation to the loans referred to in the PIF-PacFin participation agreement,

when in fact PIF did not hold those things.

  1. Providing documents and information to auditors known to be false was a contravention by MFSIM of its obligation to act honestly (s 601FC(1)(a)).
  2. Lodging accounts that were false in material respects, and known to be so, was also a breach of that obligation, as well as of the obligations to keep accurate financial records (s 286) and to ensure that MFSIM’s financial statements for a half-year were true and fair (s 305).
  3. Like the other contraventions alleged in the case, ASIC submitted that it makes no difference to these contraventions if (contrary to ASIC’s submission) the documents executed in February 2008 gave rise to enforceable rights.  If effective, the documents meant that PIF acquired $85 million worth of units in MYF and $62.5 million worth of rights under the loan participation agreement with PacFin in February 2008.  The fact that the documents were backdated does not, of course, mean that the transactions actually occurred during the half-year ended 31 December 2007.  They did not.  The PIF accounts, in purporting to suggest that the transactions had occurred during that half-year, were false, and known by MFSIM to be so.

Summary of contraventions relating to the false documents

MFSIM

  1. ASIC’s case was that the creation and keeping of documents that are false in material respects, and known to be false by the individuals who caused the documents to be created and kept, is axiomatically dishonest conduct in contravention of the obligation imposed on responsible entities by s 601FC to act honestly.  MFSIM contravened that obligation in relation to each of 15 of the 17 false documents.
  2. For the purposes of those contraventions by MFSIM, ASIC’s case was that the knowledge of one or more of Mr White, Mr Hutchings, Mr Anderson, and Ms Watts was to be attributed to MFSIM.
  3. The use that MFSIM made of the false documents and the information in them, through the provision of the documents and information to RBS, MFSIM’s auditors and Mallesons, and incorporating the information in MFSIM’s published accounts for the half-year ended 31 December 2007, was equally in contravention of s 601FC.

Mr White, Mr Anderson, Mr Hutchings and Ms Watts

  1. ASIC’s case against Mr White, Mr Anderson, Mr Hutchings and Ms Watts was that their conduct in relation to the creation of the false documents, and the use that was made of the information contained in the documents, constituted both:
  • primary contraventions by Mr White, Mr Anderson, and Mr Hutchings of their duties and obligations:

(a)as officers of MFSIM to act honestly (s 601FD(1)(a)); and

(b)as officers of MFSIM to take all reasonable steps that a person in their position would take to secure compliance by MFSIM with the Act (s 601FD(1)(f));

  • primary contraventions by Mr White and Mr Hutchings as directors of MFSIM to take all reasonable steps to ensure compliance by MFSIM with its obligations in parts 2M.2 and 2M.3 of the Act to keep accurate financial records and produce accurate financial reports (s 344); and
  • involvement by Mr White, Mr Anderson, Mr Hutchings and Ms Watts in MFSIM’s contraventions.
  1. The contraventions said to have been committed by each individual were dealt with in separate parts of ASIC’s submissions and I shall come to them later.

Chronology of relevant events concerning the false documents

  1. The following is a summary of relevant events relating to the development and documentation of the purported transactions the subject of the false documents derived principally from ASIC’s final written submissions.  Some of the comments reflect those submissions but they were supported by the evidence.

December 2007

  1. In early December 2007, there was uncertainty amongst the senior staff of the MFS Group as to the nature of the $130 million payment at the end of November 2007 and what, if any, assets were acquired with the payments.  It was unclear whether the payment represented a short term loan that would be repaid within a matter of weeks, or some other investment.
  2. There was growing concern amongst the senior staff over December about the lack of any information about what the $130 million payment was for, and pressure from staff for Mr Hutchings and Mr White to tell them what the funds were for so that the accounts of PIF (including its list of assets) could be amended to reflect what it was that PIF had.  This concern (indeed, building frustration) was demonstrated by Ms Howard’s curt request to Mr White in the week before Christmas 2007 to “Give me back my money”.
  3. During December, the holdings reports of PIF varied slightly but were in general terms only.  They often reflected the payment as relating to “other loans”.
  4. Separately, on 6 December 2007 the IAC for MYF accepted a proposal to restructure MYF in the first three months of 2008 and, in the meantime, to invest the $2.1 million of assets in MYF in PacFin.  This agreement was radically inconsistent with what later came to be recorded: the creation of a new class of units in MYF, and the issue of 85 million class A units to PIF in November 2007.[386]

2 to 7 January 2008

  1. During the first week of January 2008, various attempts were made, primarily by Mr Hutchings, Ms Watts and Ms Howard, to develop documents that would record transactions purportedly entered into with the $130 million payment and the $17.5 million payment.  Various drafts of IAC papers were circulated, but those drafting them were hamstrung because they simply did not know what assets (if any) were to be recorded as having been acquired by PIF, nor did they know the structure of any such transactions.
  2. In effect, during this period Mr Hutchings, Ms Watts and Ms Howard were tossing around ideas that might form the basis for transactions to explain the $130 million payment and the $17.5 million payment.
  3. After this process had been undertaken for a few days, a draft IAC paper approving possible transactions was sent by Mr Hutchings to Mr White on 7 January 2008.  Mr White was asked to review the paper and insert relevant details about what investments were acquired by PIF. 
  4. It is clear that by this point, none of Mr Hutchings, Ms Watts, or Ms Howard had any idea what assets had been, or were to be, acquired by PIF.  Mr White and Mr Anderson were not forthcoming with information about the payment, despite increasingly urgent requests.
  5. Ultimately, information about the assets purportedly acquired by PIF was not forthcoming from Mr White and Mr Anderson until 23 January 2008.
  6. During this time, the PIF holdings reports still recorded only general information under the heading “other loans”.[387]

8 to 22 January 2008

  1. During this period, the pressure was building for information about what was done with the $130 million payment and the $17.5 million payment.  Staff who ought to have been involved in that transaction were not and had not been informed about what the payments were for.  They were becoming increasingly frustrated that they were unable to find out what the payments were for and how they ought to be accounted for in PIF’s accounts.  By mid-January, the fact that PIF’s accounts and holdings reports did not record what the payments were for (other than in broad terms such as “other loan”) was becoming increasingly problematic for a number of MFS staff.
  2. The pressure to obtain this information was multiplied because:
  • PwC were due to commence a mid-year review of the accounts of MFSIM on 21 January 2008, and the presence of a $147.5 million hole in the accounts, without any detail as to what it was for, was sure to cause immediate and serious problems with the auditors; and
  • by 21 January 2008, RBS was pressing for details of what assets had been acquired with the money drawn down under PIF’s RBS facility.
  1. Despite promises, no information was given by Mr White or Mr Anderson as to what assets they said had been acquired by PIF during this period.  However, Mr White and Mr Anderson did discuss the matter by email during this period with a view to trying to develop some explanation for the payments made. 
  2. On 15 January 2008, Mr White asked Mr Anderson to apply his “creative brain” to “work out what the $147.5 million went to”.  That email is consistent with a conclusion that, at least by 15 January 2008, neither Mr White nor Mr Anderson in fact knew what transactions would be used to explain the combined $147.5 million in payments.  A degree of “creativity” was therefore required to develop some explanation for the payments, ex post facto.
  3. The holdings reports continued to record the payments as simply “other loans” or “new loans”, without any detail whatsoever.
  4. Mr Hutchings was deep in the midst of this ever building pressure.  As CEO of MFSIM, he was the person who, the staff expected, ought to have known what the $147.5 million was used for and how it benefited PIF.  In fact, he was waiting for this information from Mr White and/or Mr Anderson, and was getting nowhere with them.  His growing frustration levels are evident in his emails.
  5. On 21 January 2008, Mr Hutchings’ building frustrations and anxiety erupted in an email that he sent to Mr White and Mr Anderson stating that he understood that the majority of the moneys drawn down on the RBS facility were not used to purchase assets to replace a similar amount of facilities maturing in the next month or so (which is what the board of MFSIM had been informed) or for seeding MYF.  Instead, he said that he understood that the money had been used in breach of PIF’s PDS and related party requirements.
  6. Mr Hutchings was then referred to by Mr Anderson in the “escalation” email to Mr White in these terms: “I know the last thing you want to do is talk to Guy H but it could be the bomb that needs diffusing [sic]”.[388]  It is legitimate to infer from it that Mr Anderson and Mr White saw Mr Hutchings and the views that he expressed about the way in which the money was used as very serious indeed and potentially devastating for the future of the corporate group.  By then, it was apparent that Mr White and Mr Anderson would have to act quickly to ensure that they developed some sort of explanation for the payments made in November and December 2007.[389]

23 January to 6 February 2008

  1. On the morning of 23 January 2008, both Mr White and Mr Anderson, for the first time, provided lists of loans which they said were acquired by PIF with the $147.5 million.  However, the lists were not identical.
  2. Over the course of the next two weeks, the loans said to have been acquired by PIF, and the manner in which PIF was said to have acquired an interest, were developed, changed, refined and ultimately documented.  For example, both emails from Mr White and Mr Anderson on the morning of 23 January 2008 apparently envisaged that PIF would take a direct interest in the loans set out in the listings they prepared.  There was no mention of MYF taking any interest in the loans, or in PIF acquiring any interest in MYF, which is how the transactions ultimately came to be documented a fortnight later.
  3. The manner in which the purported transactions were developed and ultimately came to be documented is detailed in the many emails passing between the various actors over this period.  Likewise, the manner in which the transactions were recorded in the asset reports of PIF during this period reveal that, initially, PIF’s investment in MYF was $30 million (that is, the value of the Sunleisure loan), but that later increased substantially.
  4. RBS was given information about the assets purportedly acquired by PIF during this period, based on the listings of loans provided by Mr White and Mr Anderson.
  5. The board of MFSIM was informed at a board meeting on 23 January 2008 that the full $200 million RBS facility had been drawn down to fund loans in the asset backed sector ahead of the impending maturity of other loans in that sector in January 2008.  It was stated that most if not all of the $200 million would be repaid by the end of January 2008.  Mr Hutchings did not inform the board of the concerns that he had expressed to Mr White and Mr Anderson on 21 January 2008 about the apparent misuse of the moneys drawn down under the RBS facility.
  6. On 24 January 2008, Mr White and Mr Anderson instructed Mr Stride (an MFS in-house counsel) to prepare documents that recorded the transactions that Mr White and Mr Anderson had developed in late January 2008.  In turn, Mr Stride and Ms Platts instructed Mr Gavras-Moffat on 27 January 2008 to draw documents which showed that the $130 million payment and the $17.5 million payment had been invested by MFSIM on behalf of PIF.
  7. During this period, the false documents described in the statement of claim were developed and finalised.  The creation of the particular false documents is considered separately below.  This period culminates with exchanges of emails on 6 February 2008 between Mr Hutchings, Ms Watts, and Ms Platts, where the final form of the false documents is agreed between all parties.
  8. In late January, RBS advised that its facility had been breached because the borrowing had breached the 20 per cent limit of gearing. PIF repaid $16 million to RBS to ensure that the gearing on the RBS facility was brought back within the 20 per cent limit.[390]

7 February to end February 2008

  1. During this period, the documentation recording the purported transactions had been largely finalised.  The finishing touches were put to the documents.  The completed and executed documents were kept and distributed both internally to the MFS Group and externally as if they were genuine documents that accurately recorded transactions that had occurred in 2007.
  2. On 11 February 2008, the board was asked by Mr Hutchings to ratify the prior issue of units in MYF, saying it should have been presented to the board in November 2007 for approval but was not, due to an “oversight”.  In fact, it could not have been an “oversight” at all, as the possibility of the transactions that ultimately came to be documented was not contemplated in November 2007 and was, in fact, contrary to what the IAC agreed on 6 December 2007 were the plans for the restructure of MYF in early 2008.
  3. During this period, the internal Compliance section of MFS became increasingly active in seeking information about the purported transactions.  However, much of the information sought by that section was either not forthcoming, or only able to be obtained after lengthy delays.  An internal audit of the transactions was commenced by Mr Fitzgerald, culminating in a draft report prepared by him in mid-March 2008.[391]

Pleaded issues - the MFSIM contraventions relating to the creation of false documents

  1. The contraventions alleged arising out of the false documents case relate particularly to the creation, keeping and use of the false documents and false accounting.  I shall set out ASIC’s approach to these aspects of the case based on its written submissions without addressing, at this stage in any detail, the responses from the defendants.

Creating false documents: s 601FC(1)(a)

  1. Under this heading fall the contraventions pleaded against MFSIM in paras 187A-187Q of the statement of claim. 
  2. Section 601FC(1)(a) of the Act provides:

“(1)In exercising its powers and carrying out its duties, the responsible entity of a registered scheme must:

(a)act honestly[.]”

  1. A responsible entity, like any other company, has the power and a duty to create records that explain the transactions it has entered into.
  2. There are many provisions in the Act that require bodies corporate to keep or retain documents of one kind or another.  For example, s 251A obliges a company to keep minute books in which it records (inter alia) proceedings and resolutions of directors’ meetings (including meetings of a committee of directors).  Section 286 provides as follows:

286 Obligation to keep financial records

(1)A company, registered scheme or disclosing entity must keep written financial records that:

(a)correctly record and explain its transactions and financial position and performance; and

(b)would enable true and fair financial statements to be prepared and audited.

The obligation to keep financial records of transactions extends to transactions undertaken as trustee.”

  1. A responsible entity holds scheme property on trust for the members of the scheme: s 601FC(2).  Thus, s 286(1) obliges a responsible entity to keep written financial records that correctly record and explain its transactions and financial position and performance, and would enable true and fair financial statements to be prepared and audited, both of itself and of the managed investment schemes of which it is responsible entity.
  2. A responsible entity plainly acts dishonestly if it backdates documents so that they state or suggest that important events took place when, to the knowledge of the person creating the document on the responsible entity’s behalf, that event did not take place either at all or at anywhere near the day on which the document suggests the event took place.  A key aspect of the dishonesty is the fact that the backdating is such that it is intended or likely to trick or mislead others reviewing the documents.

The particular false documents

  1. ASIC did not press the allegations it made in respect of two of the 17 documents pleaded in the statement of claim, being:
  • the proposal to the MFSIM board dated 31 October 2007 recommending MYF offer to a select group of investors the opportunity to purchase 100 million class A units, referred to in the statement of claim para 109 [OCT.0001.0001.0038]; and
  • the undated request to the CRPC for approval for PIF to purchase 85 million class A units in MYF referred to in the statement of claim para 118 [OCA.0002.0009.0002].
  1. ASIC contended that MFSIM acted dishonestly in creating the following documents:
  • The submission to the IAC for MYF dated 20 November 2007 recommending that MYF issue up to 100 million class A units at $1.00 per unit (statement of claim para 110) [WIM.0002.0004.0201].
  • The submission to the IAC for PIF dated 20 November 2007 recommending PIF enter into a $62.5 million loan participation agreement with PacFin (statement of claim para 111) [WIM.0002.0004.0139].
  • The IAC (MYF) minute of meeting dated 21 November 2007 purporting to record that IAC approves the issue of 100 million class A units in MYF (statement of claim para 112) [WIM.0002.0004.0199].
  • The MYF class A units information memorandum dated 23 November 2007 (statement of claim para 113) [OCA.0002.0004.0108].
  • The IAC (PIF) minute of meeting dated 23 November 2007 purporting to record PIF (1) entering into a $62.5 million loan participation agreement with PacFin; and (2) acquiring 85 million class A units in MYF (statement of claim para 114) [WIM.0002.0004.0137].
  • The submission to the IAC for MYF dated 27 November 2007 recommending MYF enter into a $55 million loan participation agreement with PacFin (statement of claim para 115) [WIM.0002.0004.0077].
  • The submission to the IAC for MYF dated 28 November 2007 recommending MYF lend Sunleisure $30 million (statement of claim para 116) [OCA.0002.0004.0284].
  • The IAC (MYF) minute of meeting dated 28 November 2007 approving MYF (1) entering into a $55 million loan participation agreement with PacFin and (2) lending Sunleisure $30 million (statement of claim para 117) [WIM.0002.0004.0075].
  • The loan participation agreement between MYF and PacFin (statement of claim para 119) [OPI.0002.0001.0079].
  • The loan participation agreement between PIF and PacFin (statement of claim para 120) [OPI.0002.0001.0126].
  • The application by PIF for 67.5 million class A units in MYF (statement of claim para 121) [WIM.0006.0001.0138].
  • The PIF certificate of unitholding in MYF for 67.5 million units (statement of claim para 122) [WIM.0006.0001.0140].
  • The application by PIF for 17.5 million class A units in MYF (statement of claim para 123) [WIM.0006.0001.0135].
  • The PIF certificate of unitholding in MYF for 17.5 million units (statement of claim para 124) [WIM.0006.0001.0137].
  • The new loan notice dated 31 December 2007 (statement of claim para 125) [OIM.0001.0001.0324].
  1. Each document is dealt with in turn below.  The claimed dishonesty of MFSIM, on account of the conduct and knowledge of the defendants directly involved with the documents, is summarised in relation to each document.  Attribution of the conduct and knowledge of the individual defendants, in ASIC’s submissions, is said to explain why MFSIM acted dishonestly in contravention of s 601FC(1)(a) in creating each of the documents.  It will be necessary to return to the position of those defendants when the contraventions alleged against each of them are dealt with and their arguments are considered.  I also examine the legal issue whether their conduct can be attributed to MFSIM later.

MYF IAC submission regarding class A units dated 20 November 2007 (the statement of claim para 110)

  1. This document [WIM.0002.0004.0201] was dated 20 November 2007.  It contains a submission from Ms Watts recommending that MYF create a new class of units, class A, and offer them “to a select group of sophisticated investors”.  According to the document, the aim was to “raise enough equity”, up to $100 million, “for MYF to participate in the investment opportunities that are currently on offer”.
  2. This document was, on ASIC’s case, obviously and intentionally backdated.  It was not prepared on the day it was dated, 20 November 2007, but more than two months later.  The evidence shows that the document was created on about 31 January 2008 and finalised on about 6 February 2008.[392]
  3. ASIC’s case was that those emails also make clear that there was no submission made by Ms Watts or anyone on or about 20 November 2007 recommending that MYF issue class A units.
  4. The language of Ms Watts’ document was obviously intended to suggest that it was written in advance of a flow of funds that had not yet occurred.  As noted above, the submission referred to a proposal to make an offer of MYF units “to a select group of sophisticated investors”.  The aim was to “raise enough equity”, up to $100 million, “for MYF to participate in the investment opportunities that are currently on offer”.  The submission also said that MYF’s only existing investment was money “currently invested in the Adelaide Bank’s AAA Saver account”.  That would be true if the submission really had been written back on 20 November 2007.  But the statement was quite false, and known by Ms Watts to be so, at the time the document was written, in late January and early February 2008.  By then, MYF’s cash had actually been invested in PacFin’s notes.  That fact, and Ms Watts’ knowledge of it, was said to be clear from, for example, the following documents:[393]

“6.12.07

Minutes IAC for ‘PIF’ [scil, MYF]

Hutchings, Kennedy, Snowden, Kyling, White, Kercher, Hogarth & Wendy Bennett. Approves interim 3 month investment. Signed Hutchings

It is recommended MYF existing funds be invested in MFS Pacific funds for a period of 3 months during which time a proposal to reorganise and relaunch the Maximum Yield Fund will be approved and implemented … The submission was unanimously approved in support of Option 3 as well as the proposed interim investment in MFS Pacific [DEL.2004.0001.8274]

19.12.07

5:39 pmEmail from Ms Howard to Brown cc Watts, Hutchings - MYF will be investing $2.1m in PacFin as approved by IAC               [DEL.2004.0006.0334]

20.12.07

9 25 amEmail from Ms Howard to Watts ‘Max Yield is today investing into MFS Pacific finance’              [DEL.2004.0006.0320]

9:27 amEmail from Ms Watts to Ms Howard ‘Many thanks’              [DEL.2004.0006.0320]”

  1. Ms Watts played a significant role in finalising the submission, and she approved her signature appearing on the document when she sent it to Ms Platts on 6 February 2008 with hand-written ticks all over it [DEL.2004.0001.7439, attaching DEL.2004.0001.7440], including a tick next to the date “20 November 2007”. A little later that day, Ms Watts provided approval, by saying that the documents including the submission were “all okay” [DEL.2004.0001.7256].  That was at least an implicit, if not express, approval of the documents, and the use of Ms Watts’ signature on them.  When she did these things, Ms Watts knew that the document was backdated, that she had not made a submission to the MYF IAC on or anywhere near 20 November 2007.
  2. ASIC submitted that there was no honest justification for the backdating of the document.  If no submission had in fact been made to the MYF IAC on or around 20 November 2007 recommending that MYF issue 100 million class A units, then there was no legitimate reason for a document containing such a recommendation to be dated 20 November 2007.
  3. Why, then, was the document dated 20 November 2007? ASIC submitted that the answer was obvious.  The document was dated 20 November 2007 to make it appear that it existed on that date and had been submitted to the IAC on that day or thereabouts.  It was part of a suite of documents prepared concurrently, all of which were backdated, to make it appear that the relevant events took place in November 2007 before the $130 million payment and as if $67.5 million of that money was used by PIF in November 2007 to purchase MYF units as discussed earlier. 
  4. Ms Watts made the following statement in relation to another document she backdated:

“I cannot remember why I re-dated the paper 28 November 2007. However, as the paperwork was recording investments that had already occurred, the paperwork needed to be dated a few days prior to the investments.”[394]

  1. Contrary to the suggestion in that statement, ASIC submitted I should find that at the time she participated in the drafting and finalising of the submission, Ms Watts:
  • did not hold a belief that there was some legitimate reason why it should be dated 20 November 2007;
  • knew that the dating of the submission as 20 November 2007 would suggest to a reader that the document had existed on 20 November 2007 and that the recommendation recorded in it had been made to the MYF IAC on about that day; and
  • knew that the document did not exist on 20 November 2007 and that there had been no recommendation made by her to the MYF IAC as recorded in the submission at all, let alone on about that day.
  1. ASIC also submitted that I should find that, at the time, Ms Watts knew that the backdating of the document was wrong.  Ms Watts stated in her s 19 examination that, when she asked why the document had to be backdated to 20 November 2007, she was told:[395]

“Obviously, it wouldn’t be good form to have a transaction on one date and the paperwork following a couple of days later[.]”

  1. Importantly, Ms Watts there admitted:[396]

“I wasn’t comfortable with it.”

  1. Similarly, Ms Watts was asked this question and gave the following answer:[397]

“Q.  So you didn’t think drafting a document in January, dating it 20 November, because I think your words were something along the lines of, ‘It wouldn’t be a good look to have documents dated after the transaction,’ you didn’t think that there was anything -

A.  I definitely was not happy about that at all, and in hindsight I certainly should have said, ‘No, I don’t want my name on this paper at all.’  But I did.”

  1. ASIC submitted that the reason why Ms Watts was not comfortable, and was “definitely not happy” with her name and signature being on a backdated document was that she knew it was wrong to do so, the effect being to make the document deceptive.  Her conduct in approving the documents was dishonest.
  2. ASIC also submitted that, in relation to this particular document, Ms Watts’ acts and knowledge were to be attributed to MFSIM.  She was, for this purpose, MFSIM’s directing mind and will.  The document was, on its face, her document.  It contained her signature.  She participated in its drafting. And she approved its contents.
  3. Accordingly, ASIC submitted that, on its proper construction, s 601FC(1)(a) must be read so that, in this context, the dishonest conduct of Ms Watts was to be treated as the dishonest conduct of MFSIM.

PIF IAC submission dated 20 November 2007 regarding PacFin participation agreement (the statement of claim para 111)

  1. This document [WIM.0002.0004.0139] contains another submission made by Ms Watts, this time to PIF’s IAC.  It is dated 20 November 2007 and contains a recommendation that PIF enter into a $62.5 million loan participation agreement with PacFin. 
  2. ASIC made similar submissions that the PIF IAC submission dated 20 November 2007 was deliberately backdated to make it appear that it existed, and was provided to the members of the PIF IAC, on about 20 November 2007, and thus before PIF drew down funds from RBS. 
  3. Again, the PIF IAC submission was couched in language referable to a future investment proposed to be made by PIF.  In fact, the document was first drafted on 31 January 2008 and revised over the course of 5 and 6 February 2008 by Ms Watts and Ms Platts.[398]
  4. As those documents show, Ms Watts played a significant role in finalising the submission.  She approved her signature appearing on the document when she sent it to Ms Platts on 6 February 2008 with both hand-written ticks all over it and additional text to add to the document [DEL.2004.0001.7430 attaching DEL.2004.0001.7431].  Approval was also given when Ms Watts said a little later that day that the documents including the submission were “all okay” [DEL.2005.0001.9737].
  5. When Ms Watts did these things, she knew that the document was backdated and that she had not made a submission to the PIF IAC on or anywhere near 20 November 2007 as was recorded in the document.
  6. Mr Hutchings’ role in relation to this document is described below. ASIC submitted that the conduct of Ms Watts and Mr Hutchings (or, if it matters, either of them) is to be attributed to MFSIM, such that MFSIM itself acted dishonestly in relation to the preparation of the document.

MYF IAC minutes regarding class A units dated 21 November 2007 (the statement of claim para 112)

  1. This document [WIM.0002.0004.0199] purports to record a meeting “held on 21 November 2007” that did not happen.  Mr Hutchings, one of the persons who is recorded as having participated in the meeting, admitted that it did not occur.
  2. The document suggests that, on 21 November 2007, MYF’s IAC approved MYF issuing 100 million units in a new class, class A.  The language of the minutes, like all the other back-dated documents, speaks of future events that had not yet occurred, but which will result in a flow of money.  The minutes refer to MYF having been “presented” with investment opportunities which it could take up if MYF were to create 100 million class A units and offer them “to a select group of sophisticated investors”.
  3. This fiction that MYF considered, approved and implemented on 21 November 2007 the raising of funds from the issue of a new class of MYF units to PIF, and that MYF made investments with the money PIF paid it to acquire class A units from MYF, was part of the retrospective justification for the use of PIF’s money in November and December 2007.  In truth, nothing of the sort occurred in that time period.  The true restructure of MYF did not take place in 2007.
  4. The use of PIF’s money obtained from RBS took place more than two months before the creation of class A units and their issue to PIF was first thought of.  If there truly had been an issue of class A MYF units at the end of November 2007, that issue would have been referred to in the contemporaneous documents.  There was no such reference in any of the documents.[399]

The creation and backdating of the MYF IAC minutes dated 21 November 2007 (the statement of claim para 112)

  1. The MYF IAC minutes dated 21 November 2007 were created in January and February 2008.  They were backdated to make it appear that there had been such an issue of units, contrary to reality and to the knowledge of Ms Watts and Mr Hutchings.
  2. The minutes of the MYF IAC dated 21 November 2007 regarding the class A units were first drafted on 5 February 2008 [DEL.2004.0001.7462 attaching DEL.2004.0001.7472].[400]
  3. Ms Watts reviewed the minutes twice on 6 February 2008, as shown in:
  • an email from her to Ms Platts at 7:40 am [DEL.2004.0001.7439] attaching a document with handwritten ticks throughout the document [DEL.2004.0001.7440]; and
  • then at 6:43 pm in an email that said that the document and others were “all okay” [DEL.2004.0001.7256].
  1. Mr Hutchings also approved the document, in an email sent at 6:35 pm on 6 February 2008, which confirmed that his position in relation to the PIF suite of false documents finalised on the same day (“no changes from me” [DEL.2005.0001.9739]) applied also in relation to the MYF suite of documents [DEL.2005.0001.9738].  That approval encompassed the display of Mr Hutchings’ signature after the statement “confirmed as a true record”.
  2. The minutes falsely record that, on 21 November 2007, a “circular submission” relating to the issue of 100 million class A units in MYF was considered at the meeting.  There was no such document in existence on 21 November 2007.  Ms Watts and Mr Hutchings knew that, because they knew that the “circular submission” referred to in the minutes was Ms Watts’ paper referred to above, and they knew that that paper did not exist until 6 February 2008.  Ms Watts and Mr Hutchings thus both knew that the document recorded an event that did not take place.
  3. The allegations about Mr Hutchings’ and Ms Watts’ dishonesty in relation to this document is described further later in these reasons.  ASIC’s case was that the conduct and dishonesty of Ms Watts and Mr Hutchings (or, if it matters, either of them) is to be attributed to MFSIM, such that MFSIM itself acted dishonestly in relation to the preparation of the document.

MYF class A units information memorandum dated 23 November 2007 (the statement of claim para 113)

  1. This document [OCA.0002.0004.0108] was also intentionally backdated to make it appear as if it existed in November 2007, when in fact it did not exist until late January 2008 and was finalised on 6 February 2008.  In between, drafts were circulated, reviewed and changed by Mr Hutchings and Ms Watts (as well as Ms Platts).[401]
  2. The information memorandum was dated 23 November 2007 on page ii.  And on page 1 it noted under the heading “Summary of Important Dates” that the Class A Units offer opened on 23 November 2007 and closed on 31 January 2008.  That period was entirely in the past.
  3. That document had been backdated to appear as if it had in fact been issued on 23 November 2007.  Ms Watts and Mr Hutchings both knew that in truth, the document had not been issued on that date, but was made to appear as if it had.

PIF IAC minutes dated 23 November 2007 regarding PacFin participation agreement and $85 million MYF class A units (the statement of claim para 114)

  1. Again, this document [WIM.0002.0004.0137] purports to record a meeting, this time, of the PIF IAC “held on 23 November 2007”, that did not happen.  Mr Hutchings, one of the persons who is recorded as having participated in the meeting, admitted that it did not occur.
  2. The minutes of the PIF IAC meeting said to have been held on 23 November 2007 were created on 31 January 2008, more than two months after the date they bear.  The minutes were circulated between Ms Watts, Mr Hutchings, and Ms Platts on 31 January 2008, 1 February 2008 and 6 February 2008, during which time they were changed by Ms Watts and Ms Platts.[402] 
  3. Mr Hutchings approved the final form of the minutes, including the display of his signature after the statement “confirmed as a true record”.  Mr Hutchings’ approval of this document was dishonest, because he knew that it falsely recorded a meeting that did not occur.
  4. Ms Watts also approved the minutes when she sent an email to Ms Platts and Mr Hutchings at 6:43 pm on 6 February 2008 [DEL.2005.0001.9737] saying:  “All okay”.
  5. Ms Watts’ conduct was also dishonest, for she too knew that the minutes were backdated to reflect a meeting that did not occur and to suggest that two specific decisions had been made on behalf of PIF on 23 November 2007 to invest $147.5 million of PIF’s money when, in fact, there had been no such decisions.
  6. ASIC’s case was that, as Mr Hutchings and Ms Watts had acted dishonestly in these respects, so too had MFSIM, in contravention of s 601FC(1)(a).

MYF IAC submission dated 27 November 2007 regarding PacFin participation agreement (the statement of claim para 115)

  1. This document [WIM.0002.0004.0077] purported to contain a submission from Ms Watts to the MYF IAC recommending that MYF enter into a $55 million loan participation agreement with PacFin.  The submission was dated 27 November 2007, thereby suggesting that the document existed as at that date.  It did not.  The document was created on about 5 February 2008, backdated from the outset and finalised the next day.[403]
  2. The document was drafted in language plainly intended to suggest that it sought approval for MYF to invest $55 million in the future, conditional on MYF raising “at least $55m from the issue of class A units in order to fund the above transactions”.  In reality, the cash that was to “fund” the transaction had already been paid in November and December 2007, with no submission made to MYF’s IAC at that time, and no consideration or approval by that committee, in relation to any such investment as that contained in the document.  The submission document dated 27 November 2007 was obviously intended to seek to hide that fact. 
  3. At the time they approved the submission, Ms Watts and Mr Hutchings knew that the document was backdated, and that the purpose of so doing was to disguise the fact that PIF’s money had been paid in November and December 2007 without there being transactions at that time pursuant to which PIF would receive a benefit in return.  To backdate documents in this way and for this purpose was dishonest.  The acts of Ms Watts and Mr Hutchings in this respect, acting as they were on behalf of MFSIM, are to be attributed to MFSIM.  MFSIM thereby contravened s 601FC(1)(a) of the Act.

MYF IAC memorandum dated 28 November 2007 regarding Sunleisure loan (the statement of claim para 116)

  1. This document [OCA.0002.0004.0284] was another backdated submission from Ms Watts recommending a $30 million investment by MYF.  The document was dated 28 November 2007, thereby suggesting that it had existed on that date, when in fact it had not.  The memorandum was created on or shortly before 5 February 2008.[404] 
  2. Again, the language of the memorandum was calculated to suggest that approval was sought from the MYF IAC on 28 November 2007 for MYF to lend $30 million to Sunleisure to enable that company to repay, in the future, $30 million to MFS Limited.  That $30 million was thus proffered as part of the transactions funded by PIF’s $130 million drawdown on 30 November 2007.  In fact, the transfer of money from PIF to MFS Administration (and then to Fortress) took place on 30 November 2007, but like the other alleged transactions, there was no $30 million Sunleisure loan from MYF at all on that day.  Instead, the documentation relating to a $30 million MYF-Sunleisure loan (of which the MYF IAC memorandum dated 28 November 2007 was the first step) was backdated to suggest that the transaction came first, and the money flowed thereafter, when in fact there was no transaction at all at the time the money was paid.
  3. To participate in the creation of such a subterfuge, knowing that it does not reflect reality, is to act dishonestly.  Both Ms Watts and Mr Hutchings knew the document was false, and that it was part of a suite of backdated documents.  ASIC’s case was that the inference is irresistible that they knew the backdating would lead a reader to infer, wrongly, that MYF had made a $30 million loan to Sunleisure in November 2007 when in fact it had not. 

MYF IAC minutes dated 28 November 2007 regarding $55 million PacFin participation agreement and Sunleisure loan (the statement of claim para 117)

  1. According to this document [WIM.0002.0004.0075], a meeting of the MYF IAC was “held on 28 November 2007” via circular sent to Mr White and Mr Hutchings, who approved MYF entering into two transactions in the future:
  • entering into a $55 million loan participation agreements with PacFin, “reliant on MYF raising at least $55M from the issue of Class A units as per its information memorandum dated 23 November”; and
  • lending Sunleisure $30 million.
  1. Again, this document purports to record a meeting that did not happen.  Mr Hutchings, one of the people who is recorded as having participated in the meeting, admitted that it did not occur.  The document was, like the others, created in February 2008 and backdated to 28 November 2007.[405]
  2. The document containing the minutes dated 28 November 2007 was part of the string of documents calculated to suggest that, in November 2007, before PIF drew down and paid away $130 million of trust money, transactions were recommended, considered, approved and then documented, when in fact none of those things occurred.
  3. Mr Hutchings’ approval of minutes of a committee meeting that he knew did not occur, and his self-evident intention that the document would be read as suggesting (contrary to the truth) that specific transactions funded by PIF’s money were approved in November 2007, was dishonest. That dishonesty is attributable to MFSIM.

Participation agreement between MYF and PacFin (the statement of claim para 119) and participation agreement between PIF and PacFin (the statement of claim para 120)

  1. The two loan participation agreements [OPI.0002.0001.0079, OPI.0002.0001.0126] may be dealt with together.  Two of the transactions referred to in the suite of PIF and MYF backdated documents discussed above were loan participation agreements: one between MYF and PacFin and the other between PIF and PacFin.  Those agreements formed part of the purported explanation of what happened to the $147.5 million paid by PIF on 30 November 2007 and 27 December 2007.
  2. The explanation suggested by the documents was as follows:
  • of $147.5 million paid by PIF to MFS Administration and PacFin:

(a)$85 million of it was invested by PIF in MYF, by way of two subscriptions for MYF’s class A units; and

(b)$62.5 million of it was invested by PIF in a loan participation agreement with PacFin; and

  • of the $85 million purportedly payable by PIF to MYF, MYF invested $55 million of it in a loan participation agreement with PacFin.
  1. Although the loan participation agreement between MYF and PacFin is not dated, it was plainly calculated to suggest that the document was signed before the funds were drawn down by PIF from RBS in November and December 2007.  So much is clear from the following facts:
  • The agreement is referred to in:

(a)the submission to the MYF IAC dated 27 November 2007; and

(b)the MYF IAC minutes dated 28 November 2007.

  • The agreement is couched in language that refers to a future flow of funds.  For example:

(a)cl 1.1 provides that “the Participant” (being MYF or PIF) “must advance to the Financier an amount”;

(b)cl 1.2 provides that “Payments under this clause must be made on the Commencement Date”; and

(c)cl 15.1 defines “Commencement Date” as “The date of execution of this Agreement” (unless some other date was agreed between the parties).

  1. At least taken together with the suite of backdated documents, the loan participation agreements were intended to disguise the fact that no transactions were entered into in November and December 2007, making up the $147.5 million paid by PIF.
  2. The loan participation agreement between PIF and PacFin was, in fact, held out by MFSIM as having been “dated November 2007”.  Ms Watts told PwC in her email of 15 February 2008 [DEL.2009.0001.6625] that she was attaching (emphasis added):

“documentation relating to submission and approval of the $62.5m of loans which are contained within the Loan Participation Agreement between PIF and Pacific Finance dated November 2007.”

  1. Attached to that email were:
  • the board proposal dated 1 February 2008 to ratify the loan participation agreement and PIF’s purchase of class A units [DEL.2009.0001.6626].  That board paper falsely stated in relation to both transactions, “The IAC approved the transaction in November 2007”;
  • the IAC submission dated 20 November 2007 from Ms Watts to the PIF IAC relating to the PIF/PacFin participation agreement [DEL.2009.0001.6627]; and
  • the PIF IAC minutes dated 23 November 2007 [DEL.2009.0001.6629].
  1. Whether taken individually, or collectively as part of the suite of backdated documents, the loan participation agreements were false in suggesting that they had been executed in 2007 and reflected transactions that had been undertaken in November and December 2007.  The loan participation agreements did not exist in 2007, but were created and executed in 2008.[406]
  2. Mr Maywald, the CEO of PacFin who, ASIC submitted, would have learnt of the loan participation agreements had they truly existed in 2007, knew nothing of them until February 2008.
  3. At the time of the above events, Mr White, Mr Anderson, Mr Hutchings, and Ms Watts knew that the participation agreements would be considered as having been executed before the flow of funds from RBS, as recording transactions entered into at that time.  In fact, as all of those persons well knew, the participation agreements were not executed before the drawdown of funds from RBS, but instead were executed months later.  And as all of those persons well knew, the participation agreements did not record transactions entered into at the time of the drawdown.
  4. For the purpose of affixing liability on the part of MFSIM in the present respect, it is not necessary to find each of Mr White, Mr Anderson, Mr Hutchings and Ms Watts knew that the documents were false in these respects.  Instead, the submission went, the knowledge of any of those persons is attributable to MFSIM so that on this basis, the creation by MFSIM of the loan participation agreements was dishonest.

Application by PIF for 67.5 million class A units in MYF dated 30 November 2007 (the statement of claim para 121) and application by PIF for 17.5 million class A units in MYF dated 27 December 2007 (the statement of claim para 123)

  1. These two documents [WIM.0006.0001.0138, WIM.0006.0001.0135] can be dealt with together.
  2. The application forms for MYF class A units both have a typed date of 23 November 2007 on the front page. They were each signed by Mr White and Mr Hutchings.  The first application was dated by hand “30/11/07” immediately below each of those signatures.  The second application form was dated by hand “27/12/07” immediately below each signature.
  3. On their face, therefore, the documents suggest that they existed in November 2007. The first suggests that it was signed on 30 November 2007.  The second suggests that it was signed on 27 December 2007.  In fact, none of those things was true.  The application form did not exist until 31 January 2008 and the documents were not signed until some time between that day and 6 February 2008.[407]
  4. The dating, by hand, of the application forms “30 November 2007” and “27 December 2007”, when the documents were in fact signed in February 2008, was in the circumstances quite dishonest.  Ms Platts said that, though she filled out the earlier parts of the application form, she did not handwrite the dates in.  ASIC submitted I should find that the dates were written in by either or both of Mr White and Mr Hutchings on the day they signed the forms in or around the first week of February 2008.
  5. Again, it is plain that these documents formed part of a dishonest scheme intended to suggest that specific investments had been made in 2007 with funds drawn down by PIF from the RBS facility when in fact no such specific investments had been made.  The creation of these documents was a dishonest act by MFSIM.

PIF Certificate of unitholding in MYF for 67.5 million units dated 30 November 2007 (the statement of claim para 122) and PIF Certificate of unitholding in MYF for 17.5 million units dated 27 December 2007 (the statement of claim para 124)

  1. These two documents [WIM.0006.0001.0140, WIM.0006.0001.0137] can also be dealt with together.  Like the application forms, the two certificates were dated by hand.  The first unit certificate was dated 30 November 2007.  The second unit certificate was dated 27 December 2007.
  2. Again, no class A unit certificate existed in 2007.  Such a document was created in February 2008.[408]
  3. It is plain from those documents, as well as the documents described above concerning the discussion in 2007 of a possible restructure of MYF to take place in 2008, that the two unit certificates were created and signed in 2008 and backdated to November and December 2007 to coincide with PIF’s drawdowns from the RBS facility. 
  4. There can be no doubt that when Mr White and Mr Hutchings signed the unit certificates, they knew that the documents were being backdated to reflect a transaction in 2007 that did not occur then.
  5. The dating of the unit certificates was done dishonestly to disguise the fact that there was no transaction in 2007 pursuant to which PIF acquired class A units in MYF.

New loan notice dated 31 December 2007 (the statement of claim para 125)

  1. The new loan notice dated 31 December 2007 [OIM.0001.0001.0324] had the purported effect of amending the loan participation agreement between PIF and PacFin “as and from the Effective Date”.  The “Effective Date” was written as 31 December 2007, immediately above the signatures of Mr White and Mr Hutchings.  
  2. The new loan notice thereby represented that, as at 31 December 2007, the PIF-PacFin loan participation agreement had already been entered into.  Logically, it is impossible to amend an agreement as at a particular date if the agreement was not in existence on that date.
  3. In this respect, the new loan notice was false.  As discussed above, the loan participation agreement between PIF and PacFin did not exist at any time in 2007.
  4. This purported change in the underlying loans was the result of the suggestion made by Ms Platts on 27 January 2008, at a time when it was still being worked out what investments were going to be said to have been acquired by PIF with the RBS funds.  At 2:15 pm on that day, Ms Platts sent an email to Ms Watts and Mr Hutchings [DEL.2004.0001.7587] attaching (inter alia) an “updated list of investments” [DEL.2004.0001.7593] and a draft IAC submission dated 28 November 2007 from Mr Hutchings to the IAC for PIF titled “Investment in Loan Participation Agreement for Asset Backed Securities Asset Class (‘ABS’)” [DEL.2004.0001.7588].
  5. Ms Platts’ email of 27 January 2008 stated:

“Attached is the final version of the split of investments in relation to funds out of PIF on 30 November and 27 December.

I have attached the relevant IAC papers for your review documentation matches to outflows.  You will note that one of the papers involves a further Related Party submission which has to be drafted.

I can confirm that by splitting the investments as per the attached IAC papers we are within all Asset Allocation Thresholds and Related Party 20% Threshold 

Please note I would suggest to replace Sagacious Opp Trust listing with MFS RAP Limited amount in December,

(This will make more sense once you have reviewed the IAC papers as to how to do this)

Marilyn I am happy to review final asset listings etc that you would like to provide to RBS to ensure we are providing a consistent message” 

  1. The evidence does not reveal precisely why Ms Platts or anyone else thought that it was necessary to change the list of loans “in December”.  But the reason is not important.  What is important is the fact that the loan notice was drafted in such a way as to suggest that there was a loan participation agreement in existence on 31 December 2007, when in fact there was not.
  2. The new loan notice was attached to certain emails.[409]  When Mr Hutchings and Mr White signed the new loan notice at some time in 2008, they knew that there was no loan participation agreement in existence on 31 December 2007.  They knew that because, as shown above, they also signed the loan participation agreement itself in or about the first week of February 2008.  Mr Hutchings and Mr White therefore acted dishonestly in signing the new loan notice, and their dishonesty is attributable to MFSIM.

Keeping false documents: s 601FC(1)(a) and s 286

  1. This section deals with the contraventions pleaded against MFSIM in paras 188A-188Q of the statement of claim.
  2. The false documents, once created:
  • were kept by MFSIM as though they were a genuine part of the financial books and records of MFSIM; and
  • formed part of the financial books and records provided to MFSIM’s auditors for the purpose of the July-December 2007 half year review.
  1. MFSIM accepts that in relation to the creation and keeping of the false documents, a declaration ought to be made against it that it contravened s 601FC(1)(a).  The contravention is, in any event, made out.
  2. Schedule A to ASIC’s final written submissions contains details of the various ways in which the false documents were retained by MFSIM and treated as genuine records of the business. 
  3. A responsible entity that keeps a business record of an important event or transaction that is false in a material respect and known to be false engages in conduct in contravention of the:
  • duty to act honestly imposed by s 601FC(1)(a); and
  • the duty imposed by s 286 on all companies, including those acting as a trustee, to keep written financial records that correctly record and explain its transactions and would enable true and fair financial statements to be prepared and audited.

Providing false documents to auditors: s 601FC(1)(a)

  1. This section deals with the contravention pleaded against MFSIM in para 189 of the statement of claim.  MFSIM provided its auditors with access to the false documents discussed above.  That fact is proven by a number of emails listed at para 514 of ASIC’s final written submissions.
  2. The evidence establishing the provision of the false documents to auditors was principally in the affidavits of Ms James, Tim Allman of PwC, and Ben Woodbridge of PwC.

Lodging false accounts: s 601FC(1)(a) and s 286

  1. This contravention by MFSIM is alleged in para 190 of the statement of claim.
  2. On 18 March 2008, PIF lodged the half-yearly reports with ASIC for July-December 2007.  The report was signed by Mr Hutchings.  It falsely purported to show that:
  • PIF owned $85 million worth of Class A shares in MYF, when it did not; and
  • PIF owned $62.5 million worth of participation loans pursuant to an agreement with PacFin, when this was not the case.
  1. There was no evidence suggesting that this was the case. Even if one assumes, as the defendants (or at least some of them) asserted, that the false documents reflect effective transactions, they were completed and executed in February 2008 and the transactions occurred at that time. 
  2. Mr Moore SC for ASIC submitted orally that, although Mr O’Donnell QC’s submission for Mr Anderson that the parties could treat themselves as being bound to an agreement from an earlier date than that on which it was executed was valid, it was fallacious to leap from that proposition to say that the accounts lodged by PIF for the half year ending 31 December 2007 were accurate.  At that stage, PIF did not own MYF units and did not have rights in relation to the PacFin loans.  Even if the transactions in 2008 were effective as between the parties at that later date, that did not have the consequence that the accounts for the earlier period could be presented as if the transactions had already occurred.  Mr O’Donnell’s counter to that was to argue that post balance date transactions could be reflected in the company’s accounts.  He conceded that it would have been preferable to do so by adding a note to the accounts.[410]
  3. Mr Moore submitted that the argument was legally and factually impossible and, if it were possible, would permit the restating of accounts, for example, after auditors had audited them where the company wished to enter into a transaction after the balance date to increase the assets of the company to a level greater than they actually were at the balance date. 
  4. In my view ASIC’s submissions on this point were correct.  The accounts were false in representing that a transaction had occurred before 31 December 2007 that simply did not occur then. 

Sending false information to RBS: s 601FC(1)(a)

  1. These related contraventions by MFSIM are alleged in paras 192-194 of the statement of claim.
  2. MFSIM provided RBS with asset reports, listings of loans and the participation agreements, all of which falsely represented that transactions had been effected by PIF with the money it drew down under the RBS Loan Agreement and at the time of those drawdowns.
  3. MFSIM’s relevant dealings with RBS in which this false information was provided were detailed in ASIC’s final written submissions.[411]
  4. Those documents and false information plainly suggested that specific assets had been acquired by PIF in November and December 2007, when in fact they had not.  The provision of documents to RBS that were known to be false was dishonest conduct by MFSIM in contravention of s 601FC(1)(a).

Misinforming and failing to inform Compliance: s 601FC(1)(a)

  1. This contravention is alleged in para 195 of the statement of claim.
  2. In February 2008, MFSIM’s internal compliance unit raised a concern that s 1017E of the Act may have been breached because MYF did not receive any funds into its application account, despite there having been a purported investment in MYF by PIF of $85 million.
  3. Mr Hutchings raised the matter with Mr Anderson.  In response, Mr Anderson prepared a memorandum dated 17 February 2008, which expressed a view that there had been no statutory breach.  Mr Anderson emailed the memorandum to Mr Hutchings on 18 February 2008 at 12:32 pm [DEL.2006.0002.4098, attaching DEL.2006.0002.4099].  The memorandum was provided to MFS’s compliance section by Mr Hutchings by email on 18 February 2008 copied to Mr Anderson and Mr White [DEL.2005.0001.7233, attaching DEL.2005.0001.7234].  Mr Hutchings’ email said that the memorandum from Mr Anderson contained “further background”.  The email forwarding Mr Anderson’s memorandum thus implied that it could be relied on as factually accurate.
  4. Though PIF was not named in the memorandum, it plainly related to PIF’s acquisition of MYF class A units.  That class of units was referred to on page 3 of the memorandum.  Only PIF was said to have acquired class A units in MYF at any relevant time.  And the memorandum says that the applicant and MYF:

“sought to achieve the following outcome:

the applicant would be issued units in the fund, and

the fund would procure certain investments/assets and the applicant would procure those investments/assets for the fund”

  1. Again, that was clearly a reference to the suite of transactions that was purportedly undertaken at the time PIF drew down the RBS money in November and December 2007.
  2. The first paragraph of Mr Anderson’s memorandum falsely suggested that the issue of units took place in 2007.  That paragraph read (emphasis added):

“Guy as requested by you on the afternoon of Friday 15 February 2008 I have considered the issues I understand may have been raised by Compliance late last week regarding an issue of units in the MFS Max Yield Fund a few months ago.” 

  1. In fact, there was no issue of class A units in MYF “a few months” before 18 February 2008.  Assuming that the application forms and unit certificates signed by Mr Hutchings and Mr White in February 2008 were legally effective, the units were issued no earlier than 6 February 2008.
  2. At the time that Mr Anderson’s memorandum was sent to MFS’s compliance section, Mr Hutchings, Mr White and Mr Anderson knew that there had been no investment by PIF in MYF at all “a few months ago”.
  3. In making false statements to MFS’s compliance team on an important matter relating to a fund held on trust by MFSIM, and in failing to inform Compliance of the true circumstances surrounding that matter, MFSIM acted dishonestly, in contravention of s 601FC(1)(a).  In this respect, the dishonesty of Mr Hutchings, Mr White and/or Mr Anderson is attributable to MFSIM.

Providing false information to Compliance and Mallesons: s 601FC(1)(a)

  1. This contravention is alleged in para 196 of the statement of claim.
  2. MFSIM’s solicitors, Mallesons Stephen Jaques (MSJ or Mallesons), were asked to provide advice about the matter discussed in Mr Anderson’s memorandum of 17 February 2008.  Mr Colley, another member of MFS’s compliance team, sent an email to MSJ on 20 February 2008 [DEL.2004.0001.4179].  The email, which was copied to Mr Hutchings, asked for advice as to whether MFSIM had breached any provision of the Act or other applicable law.  The request for advice was based on certain factual matters.  The email requesting the advice falsely represented that:
  • on 23 November 2007, MYF released an information memorandum, when it did not;
  • on 30 November 2007, PIF applied for 67.5 million units for $1.00 per unit pursuant to the 23 November 2007 information memorandum, when it did not;
  • on 30 November 2007, PIF drew $150 million from RBS to fund the purchase of the 67.5 million units in MYF, when that was not the purpose of PIF’s drawdown of 30 November 2007; and
  • on 30 November 2007, PIF was issued with 67.5 million class A units in MYF, when that did not occur.
  1. Those factual statements were all false, not to Mr Colley’s knowledge, but they were known to Mr Hutchings.
  2. Because of the false factual information, MSJ gave advice on 20 and 26 February 2008 that there had been no breach of the Act:  [DEL.2004.0001.4146, DEL.2004.0001.4149, DEL.2004.0001.4151 and DEL.2008.0002.3184].
  3. In making false statements to MSJ on an important matter relating to a fund held on trust by MFSIM, MFSIM acted dishonestly in contravention of s 601FC(1)(a).  In this respect, Mr Hutchings knew that the above statements were false and failed to correct them, and his dishonesty is attributable to MFSIM.

Overall view of the evidence

  1. These allegations raise a number of matters related to ASIC’s pleaded case and several legal issues that I need to resolve.  It is convenient at this stage, therefore, to set out my overall view of the evidence.
  2. One thing that is crystal clear from this recitation of the facts is that PIF’s investors received nothing immediately in return for their payment out of $147.5 million in November and December 2007.  To that extent they were left exposed to the risk that MFS would go into liquidation in circumstances where their funds had been paid out without even an explicit written promise of repayment let alone one secured on tangible property or where the money had been used to purchase valuable assets.  That was hardly consistent with the duties owed to them by MFSIM and its relevant officers. 
  3. Especially in the absence of evidence from Mr White, it is difficult to know what was actually planned during the period from late November 2007 to early February 2008 to be the nature of any “investment”, if indeed there was a plan.  One view is that there was some inchoate idea similar to the scheme proposed from 23 January by Mr White and Mr Anderson in the “listing of loans” document, stemming perhaps from the “recyclable capital” proposals that were in existence at the time.  The decision to take steps towards the drawdown from about 19 November, before it became quite clear that a significant part of the Fortress loan at least needed to be repaid, may have reflected such an approach.  That reflects Mr Jackson’s submission that the drawdown was set in train before the decision not to sell Stella was made and before the negotiations with Fortress began.  By the same token, the difficulties with the sale of Stella had been evident for some time before 19 November as had the need to repay the Fortress loan.[412] 
  4. The email from Mr Anderson on 19 December may have prefigured some such approach also, although he later said that he was confusing the transaction referred to there with another transaction.[413]  That may or may not have been consistent with the evidence about the proposed restructure of MYF advanced by the defendants but that proposal did not resemble closely what was proposed eventually by the end of January 2008.  Some of the emails from Ms Watts in early January suggest that she was thinking along the lines that the money should have been allocated to the purchase of loans.  She had real difficulties, however, in obtaining information about that possibility from Mr White and others. 
  5. Separately, on 6 December 2007, the IAC for MYF accepted a proposal to restructure MYF in the first three months of 2008 and, in the meantime, to invest the $2.1 million of MYF assets in PacFin.  This agreement was radically inconsistent with what later came to be recorded: the creation of a new class of units in MYF and the issue of 85 million class A units to PIF in November 2007.
  6. It is also clear that the ideas developed at the end of January were still a work in progress at that time until some time in early February.
  7. Another analysis, that may have been a likely explanation for the events, is that the payment out from PIF’s funds was conceived originally as a loan, perhaps to be repaid on the sale of Stella.  Many of the contemporaneous emails are consistent with such an idea as well as some of the earlier accounting entries.  That plan, if it were one, was likely to have become impossible, at least in the short term, by “Black Friday”, 18 January 2008, when MFS Limited’s share price fell significantly.[414]  The imminent arrival of the auditors and the queries from RBS would have necessitated some other approach.  The need to have some other explanation in place was precipitated by those pressures and then by Mr Hutchings’ “escalation” email of 21 January 2008. 
  8. Some of the best evidence for this understanding of the events is the email of 22 January 2008 from Mr White to Mr Hutchings advising him that the $200 million drawn down from RBS would be paid back in the next 12 to 30 days.[415]  
  9. The false documents then produced into early February 2008 were, in my view, a product of that pressure rather than any genuine reflection of transactions that had either been made or were proposed to be made and then ratified.  As will become clearer when I consider some of the legal issues, I also regard them as false in failing to record and explain the transactions correctly, contrary to s 286(1)(a) of the Act.  The main focus of ASIC’s case was, however, on whether the payments were proper uses of PIF’s funds by MFSIM and whether they were paid instead for the purposes of MFS and PacFin. 
  10. Before I discuss the legal issues, however, I shall consider an argument of the defendants that ASIC’s pleading does not cover the case it seeks to make. 

Is ASIC’s case within the pleadings?

  1. On 19 August 2014, well into the hearing of evidence in the case called by some of the defendants, ASIC proposed a sixth further amended statement of claim and combined particulars document seeking leave to make amendments set out in paras 52, 56(h)(ii), 56(n), 58(i)(ii) and (iii) and 60(r).  The effect of each of those proposed amendments was to add the words “at the time of the $130 million payment” to allegations, for example, in para 52 that:

“MFSIM as Responsible Entity for PIF received no benefit or consideration in return for the $130 Million Payment to the extent of the $103 Million Payment.”

  1. Similarly, amendments were sought to paras 67, 73(c), 75(e) and 77(h) so that, for example, para 67 would read:

“MFSIM as Responsible Entity for PIF received no benefit, consideration or reward in return for the $17.5 Million Payment at the time of the $17.5 Million Payment.”

  1. ASIC’s position was that the existing pleading covered its case on this issue, but that the amendments were sought because of argument that ASIC’s case, as articulated by Mr Reardon QC on 15 August 2014, was inconsistent with its pleading.  The defendants’ argument was, essentially, that the focus on ASIC’s case was that the later transactions associated with the false documents were shams rather than on the failure to provide consideration at the time of the payments. 
  2. It seems to me that the pleading as it stood covered the period immediately after the payment as well as the later period when the false documents were prepared up to the end of the “material times” defined in para 1A of the pleading concluding on 31 March 2008.  Paragraph 52 alleged that MFSIM received no benefit or consideration in return for the $130 million payment in reliance partly on allegations in para 50D that no documents were prepared in November or December 2007 which recorded any transaction for the benefit of MFSIM or which provided for the payment of any consideration or reward for the making of the $130 Million Payment; see also paras 54(c) and 54(h).  Those latter paragraphs of the statement of claim allege that, in making the $130 million payment, MFSIM failed to act in the best interests of the members of PIF.  Reliance was also placed on paras 56(h), 58(r) and 60(r).
  3. Paragraphs 56A, 56B, 58A and 58B also made it clear that ASIC’s case included allegations that reasonable persons in the positions of Mr King and Mr White would have prevented the making of the $130 million payment and the $103 million payment until they were satisfied that they were for investments authorised under PIF’s constitution and for PIF’s benefit and that of its members.  See also, for example, in the context of the allegations about the $17.5 million payment, the allegations in paras 73A, 73B, 75A, 75B, 77A and 77B against the other defendants.
  4. A similar issue about the failure to provide consideration at the time of the payments was raised in a reply to the amended defence of the fourth defendant, Mr King, to the statement of claim.  That reply, which had been filed out of time, also pleaded that subsequent to the $130 million payment, MFSIM as the responsible entity for PIF, did not acquire anything for that payment because the alleged transactions subsequently documented were not authorised or subsequently ratified by MFSIM.
  5. During oral argument in the hearing, I refused leave to file and serve the proposed sixth further amended statement of claim but gave leave to the plaintiff to file and serve a reply to the amended defence to the fourth defendant to the existing statement of claim for the reasons set out there.[416]  I refused leave to amend the statement of claim for a number of reasons.  One was the fear that the allegations may have required the recalling of witnesses for further cross-examination.  Another reason was that the defendants’ insurance for their costs of the defence was close to exhaustion. A further reason was that ASIC’s submission was that the amendments were, in any event, strictly unnecessary. 
  6. Also, replies had been filed in time to the defences of most other defendants raising the issue of non-receipt of any benefit, consideration or reward at the time of the payments.  In the case of Mr King, I gave leave to file the reply out of time.  The issue of the lack of consideration flowing at the time of the payments was put to Mr King.[417] There was no re-examination on that point. In my view it could not be said that there was any surprise as to ASIC’s position.
  7. The replies, in my view, covered the issue which worried ASIC and did not detract from arguments that, for example, Mr King or Mr White may have been able to make against the allegations in paras 56(n) and 58(i)(iii) of the statement of claim that those defendants “knew of no benefit, consideration or reward which MFSIM … could, or would in fact, gain from the … Payment” (emphasis added). 
  8. Mr Jackson and Mr Andreatidis for Mr White, for example, made detailed submissions on those issues which they summarised at para 109 of their written submissions.  They submitted that ASIC’s case was quite clearly that PIF never received any benefit in return for the $103 million payment and the $17.5 million payment and that the allegedly false documents were shams, with the consequence that, if ASIC failed to discharge its onus of proving those documents to be shams and that PIF never received any consideration, benefit or reward, its claim must be dismissed. 
  9. For the reasons I have just expressed, however, it is my view that the issue whether any consideration was received for the payments at the time was also alive and covered by the pleadings, including the replies.  The further question whether any inchoate hope or expectation the defendants had that some consideration would eventually be paid for the funds taken from PIF met their fiduciary obligations was available on the pleadings. 
  10. As I have said, my understanding of the primary focus of ASIC’s case was that the payments, when made, were not made for a legitimate purpose of MFSIM as responsible entity for PIF but for the purposes of MFS and PacFin.  The false documents case was also based on that premise and allegations that they had been created to obscure the illegitimacy of the two payments totalling $147.5 million. 
  11. Although the pleading was complex, I did not perceive it as having the problems described in Forrest v ASIC.[418]

Relevant statutory provisions

  1. Before I proceed to discuss the significant legal issues raised in the case it is convenient to set out some of the major sections of the Act relevant to those issues. 
  2. The submissions for some defendants raised issues whether they were officers of particular companies within the MFS Group.  Section 9 contains a definition of “officer of a corporation” in these terms:

“officer of a corporation means:

(a)a director or secretary of the corporation; or  

(b)a person:

(i)who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or

(ii)who has the capacity to affect significantly the corporation's financial standing; or

(iii)in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation); or

(c)a receiver, or receiver and manager, of the property of the corporation; or

(d)an administrator of the corporation; or

(e)an administrator of a deed of company arrangement executed by the corporation; or

(f)a liquidator of the corporation; or

(g)a trustee or other person administering a compromise or arrangement made between the corporation and someone else.

Note:   Section 201B contains rules about who is a director of a corporation.”

  1. Whether some of the relevant companies were related parties was also a relevant issue.  In that context s 50AA provided:

50AA  Control

(1)For the purposes of this Act, an entity controls a second entity if the first entity has the capacity to determine the outcome of decisions about the second entity’s financial and operating policies. 

(2)In determining whether the first entity has this capacity: 

(a)the practical influence the first entity can exert (rather than the rights it can enforce) is the issue to be considered; and 

(b)any practice or pattern of behaviour affecting the second entity’s financial or operating policies is to be taken into account (even if it involves a breach of an agreement or a breach of trust).

(3)The first entity does not control the second entity merely because the first entity and a third entity jointly have the capacity to determine the outcome of decisions about the second entity’s financial and operating policies. 

(4)If the first entity:

(a)has the capacity to influence decisions about the second entity’s financial and operating policies; and

(b)is under a legal obligation to exercise that capacity for the benefit of someone other than the first entity’s members;

the first entity is taken not to control the second entity.

  1. Section 208 deals with related parties.  With managed investment schemes it applied in the following form by virtue of s 601LC:

208Need for member approval for financial benefit

(1)If all the following conditions are satisfied in relation to a financial benefit:

(a)the benefit is given by:

(i)the responsible entity of a registered scheme; or

(ii)an entity that the responsible entity controls; or

(iii)an agent of, or person engaged by, the responsible entity

(b)the benefit either:

(i)is given out of the scheme property; or

(ii)could endanger the scheme property

(c)the benefit is given to:

(i)the person or a related party; or

(ii)another person referred to in paragraph (a) or a related party of that person; then, for the person referred to in paragraph (a) to give the benefit, either:

(d)the person referred to in paragraph (a) must:

(i)obtain the approval of the scheme’s members in the way set out in sections 217 to 227; and

(ii)give the benefit within 15 months after the approval; or

(e)the giving of the benefit must fall within an exception set out in sections 210 to 216.

Note: Section 228 defines related party, section 191 defines entity, section 191 defines control and section 229 affects the meaning of giving a financial benefit.

(2)If:

(a)the giving of the benefit is required by a contract; and

(b)the making of the contract was approved in accordance with subparagraph (1)(d)

(i)as a financial benefit given to the entity or related party; and

(c)the contract was made:

(i)within 15 months after that approval; or

(ii)before that approval, if the contract was conditional on the approval being obtained; member approval for the giving of the benefit is taken to have been given and the benefit need not be given within the 15 months.

(3)Subsection (1) does not prevent the responsible entity from paying itself fees, and exercising rights to an indemnity, as provided for in the scheme’s constitution under subsection 601GA(2).”

  1. Part 5C.2 of the Act regulates responsible entities of registered managed investment schemes and sets out their duties and those of their officers in s 601FC and s 601FD.
  2. Section 601FC provides, relevantly for current purposes:

601FCDuties of responsible entity

(1)In exercising its powers and carrying out its duties, the responsible entity of a registered scheme must:

(a)act honestly; and

(b)exercise the degree of care and diligence that a reasonable person would exercise if they were in the responsible entity’s position; and

(c)act in the best interests of the members and, if there is a conflict between the members’ interests and its own interests, give priority to the members’ interests; and

(i)ensure that scheme property is:

(i)clearly identified as scheme property; and

(ii)held separately from property of the responsible entity and property of any other scheme; and

(k)ensure that all payments out of the scheme property are made in accordance with the scheme’s constitution and this Act; and

(l)report to ASIC any breach of this Act that:

(i)relates to the scheme; and

(ii)has had, or is likely to have, a materially adverse effect on the interests of members;

as soon as practicable after it becomes aware of the breach; and

(2)The responsible entity holds scheme property on trust for scheme members.

Note: Under subsection 601FB(2), the responsible entity may appoint an agent to hold scheme property separately from other property.

(5)A responsible entity who contravenes subsection (1), and any person who is involved in a responsible entity’s contravention of that subsection, contravenes this subsection.

…”

  1. Section 601FD provides:

601FDDuties of officers of responsible entity

(1)An officer of the responsible entity of a registered scheme must:

(a)act honestly; and

(b)exercise the degree of care and diligence that a reasonable person would exercise if they were in the officer’s position; and

(c)act in the best interests of the members and, if there is a conflict between the members’ interests and the interests of the responsible entity, give priority to the members’ interests; and

(d)not make use of information acquired through being an officer of the responsible entity in order to:

(i)gain an improper advantage for the officer or another person; or

(ii)cause detriment to the members of the scheme; and

(e)not make improper use of their position as an officer to gain, directly or indirectly, an advantage for themselves or for any other person or to cause detriment to the members of the scheme; and

(f)take all steps that a reasonable person would take, if they were in the officer’s position, to ensure that the responsible entity complies with:

(i)this Act; and

(ii)any conditions imposed on the responsible entity’s Australian financial services licence; and

(iii)the scheme’s constitution; and

(iv)the scheme’s compliance plan.

(2)A duty of an officer of the responsible entity under subsection (1) overrides any conflicting duty the officer has under Part 2D.1.

(3)A person who contravenes, or is involved in a contravention of, subsection (1) contravenes this subsection.

Note 1: Section 79 defines involved.

Note 2: Subsection (3) is a civil penalty provision (see section 1317E).”

  1. The contraventions created by s 601FC(5) and s 601FD(3) are, by virtue of s 1317E(1)(f) and s 1317E(1)(g) civil penalty provisions.
  2. Section 79 deals with the issue whether a person is involved in a contravention.  It provides:

79Involvement in contraventions

A person is involved in a contravention if, and only if, the person:

(a)has aided, abetted, counselled or procured the contravention; or

(b)has induced, whether by threats or promises or otherwise, the contravention; or

(c)has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or

(d)has conspired with others to effect the contravention.”

  1. Section 79(c) is the subsection relevant to the allegations of knowing involvement here.

Legal issues

Attribution of conduct

  1. One of the major legal issues in the case is the extent to which the conduct of individual defendants is attributable to MFSIM to establish whether it, as a responsible entity, has infringed the relevant provisions of the Act.  A corporation acts through living persons who are commonly described as the “directing mind and will of a company” and whose identity may vary from transaction to transaction.[419] 
  2. It is their conduct and position in the company that has to be analysed to determine whether the company is directly or only vicariously liable for their behaviour.  If their behaviour is not able to be treated as part of the directing mind and will of the company, it may yet be attributed to the company by primary rules of attribution found in the company’s constitution or the principles of company law as well as by general rules, the rules of agency and vicarious liability, or, if appropriate, by special rules of attribution in particular cases used to determine whose acts, knowledge or state of mind were, for a particular purpose, intended to be attributed to the company.[420]  Thus, in Meridian Global Funds Management Asia Ltd v Securities Commission was the knowledge of corrupt employees attributable to their employer company to avoid frustrating the policy of the relevant statute examined in that decision.[421]
  3. ASIC’s submission here was that the conduct and intentions of Mr White, Mr King and Mr Anderson should be attributed to MFSIM in respect of the $130 million payment.  Similarly the conduct and intentions of Mr White, Mr Anderson, Mr Hutchings and Ms Watts should be attributed to MFSIM in respect of the $17.5 million payment.  They were the people closely and relevantly connected with the company.  The company would not be protected from being bound by their actions even if, for example, certain of their conduct was contrary to instructions from superiors.[422]  Similarly:

“If the director is guilty of fraudulent conduct which is not totally in fraud of the corporation, and by design or result the fraud party benefits the company, the knowledge of a director in the transaction will be attributed to the company.”[423]

  1. ASIC described the conduct of Mr White, Mr King and Mr Anderson, when discussing whether or not the transfers of money from PIF were within the class of acts which were normally carried out for MFSIM, by noting the following:
  • Mr White, the deputy CEO of MFS Limited in charge of the managed funds arm and director of MFSIM, arranged for a drawdown of $150 million from RBS.  Mr King, as CEO of the MFS Group, approved the use of those funds for the purpose of paying Fortress.  Ms Howard and Mr Corolis (two of the persons authorised to execute payment of authorities to Perpetual) executed the direction to Perpetual, the custodian of PIF.  Mr Anderson, as CFO of the Group, gave instructions for the payment from Perpetual to MFS Administration and then directed the payment to Fortress by signing the Diamond form. 
  • It is the case of Mr Anderson and Mr King that these events were so unremarkable that they did not think that it was untoward.
  • It was submitted on behalf of Mr Anderson that the acts were unauthorised because Mr White did not have the authority to approve investments above $50 million.  In respect of this contention ASIC submitted:

(a)Mr White did not (nor did Mr Anderson or Mr King) approve any investment. There was no investment. What Mr White did was approve a transfer of funds. In any event, it is the defendants’ case that it was not unusual for transactions to be effected and then subsequently ratified by the relevant committees.

(b)Further, on the basis of the above authorities, if Mr White was acting in breach of the $50 million limit, this did not make this transfer out of the class of acts that he undertook within the scope of his authority.

  1. Mr O’Donnell’s contention was that the correct test is:  did Mr White’s action in causing PIF to transfer away $130 million for no purpose of PIF and for no benefit to PIF fall within a class of acts that the responsible entity for PIF had authorised Mr White to perform on behalf of the responsible entity?  His submissions were, generally speaking, adopted by the other defendants. 
  2. Addressing ASIC’s contention that the minds of Mr King, Mr White and Mr Anderson should be imputed to MFSIM as responsible entity for PIF, it was likewise necessary to show that each was acting within the scope of his authority on behalf of the responsible entity for PIF, in order for his state of mind to be taken to be the state of mind of the responsible entity.  For Mr White, the correct test was as stated in the preceding paragraph.  For Mr King, the correct test was:  did Mr King’s involvement in causing PIF to transfer away $130 million for no purpose of PIF and for no benefit to PIF fall within a class of acts that the responsible entity for PIF had authorised Mr King to perform on its behalf?
  3. As regards attributing the state of mind of Mr Anderson, the correct test was:  did Mr Anderson’s involvement in causing PIF to transfer away $130 million for no purpose of PIF and for no benefit to PIF fall within a class of acts that the responsible entity for PIF had authorised Mr Anderson to perform on its behalf?
  4. In arguing that ASIC had misstated his submission for Mr Anderson on this point Mr O’Donnell summarised it as follows:
  • The evidence did not establish that Mr White, as an individual director, had been given any authority to transfer scheme money.
  • The evidence established that the board had delegated a limited form of authority to the CEO to apply scheme money in making investments.  The limitations on the authority included that the transaction be for less than $50 million, that the transaction complied with the approved investment mandate, and that the transaction had been considered by the IAC.
  • Transferring $130 million was outside even that limited form of authority (in that it involved transferring more than $50 million without board approval and not for the purpose of making an authorised investment).
  • The evidence did not establish that either Mr King or Mr Anderson had been given any authority by the responsible entity for PIF to be involved in transferring $130 million of scheme money for no purpose of PIF and for no benefit to PIF.
  • As regards the $17.5 million, while that amount was within the monetary limit of the authority conferred by the board on the CEO, it was outside the limitations that the application of the money must comply with the approved investment mandate, and must receive prior consideration by the IAC.  Mr Hutchings’ actions in causing PIF to transfer the $17.5 million for no purpose of PIF and for no benefit to PIF, was therefore not an act within a class of acts that he had been authorised by the board to perform on behalf of the responsible entity.
  • The evidence did not establish that Mr White or Mr Anderson had been given any authority by the responsible entity for PIF to be involved in causing PIF to transfer $17.5 million for no purpose of PIF and for no benefit to PIF.
  1. Mr O’Donnell’s submission was also that the conduct of those defendants should not be attributed to MFSIM because their alleged conduct was against its interests and it was the victim.  The “fraud exception” contended for by Mr O’Donnell was said not to be applicable by ASIC for the following reasons:
  • The rule is not applicable to statutes where the rules of attribution are determined in accordance with the principles set out in Meridian.
  • The rule is applied by the courts as required in the interests of justice and common sense.  In particular it is frequently applied to ensure that a guilty party does not avoid liability.
  • It should not be applied to exculpate a company holding money on trust.
  • The misappropriation in this case was not “totally in fraud of the company” because by “design or result” the fraud was intended to benefit MFSIM (at least partly).
  1. Mr O’Donnell’s argument dealing with the case where the directing mind of the company was acting against its interests was that ASIC’s submissions confused two lines of authority, which it is important to keep separate.  The two lines were, he submitted:
  • cases concerned with civil proceedings against a company in which it is necessary to prove knowledge in the company.  Principles drawn from the law of principal and agent determine what knowledge is to be treated as knowledge of the company.  Normally any knowledge acquired by an officer, acting within the scope of his authority, is taken to be knowledge of the company.  But, there is an exception where the officer is acting fraudulently towards the company.  In that situation, the presumption against information being passed on by the officer to the company is nullified by the consideration that the agent could not be expected to pass on knowledge of his own fraud.[424]  Where the agent is acting partially in fraud of the principal, and partially in a way that benefits the principal, however, a hybrid result has been arrived at: knowledge will be treated as knowledge of the principal unless the agent is acting totally in fraud of the principal (ie the principal receives no material benefit);[425] and
  • cases concerned with determining whether a corporation has contravened a statutory provision in criminal or quasi-criminal proceedings. In that context it becomes necessary to identify an individual whose state of mind is to be taken as the mind of the company (for the purpose of determining mens rea[426]).  The principle has developed that even if the mind of a person would otherwise be taken to be the mind of the company, that will not be so if the person was acting in the matter against the interests of the company, rather than for the purposes of the company.[427]
  1. The first line of authority was drawn from the law of principal and agent and applies in civil proceedings.  The second was drawn from corporations law and applies to determine whether the corporation has contravened a statute, usually in criminal or quasi-criminal proceedings.  It was the second line that was relevant here, not the first.  He submitted that the distinction between them was recognised by von Doussa J in Beach Petroleum v Johnson:[428]

“The Tesco rule was developed as a limitation on the application of principles of agency to impose criminal liability. This was recognised in Tesco.

22.28It is understandable that where the subject matter of a civil claim is conduct that also amounts to a criminal offence as in Entwells Pty Ltd v National and General Insurance Co Ltd (Supra) and in claims based on a conspiracy, that there may be reference to the Tesco principle, but it should be recognised that principles of agency are the principles which ultimately determine civil liability. It is not without significance that in the chapter on vicarious liability, Professor Fleming in The Law of Torts, 8th ed, pp 366 and following, makes no reference to the decisions in Lennard, Bolton and Tesco.

22.29The Tesco principle is one appropriate to be applied to determine criminal responsibility of a company, but the wider notions of the principles of agency should be applied where the issue is civil responsibility arising under the general law. Cases on the Tesco principle may nevertheless give helpful guidance, as where corporate responsibility attaches under Tesco, it will also attach under ordinary agency principles.”

  1. ASIC also relied on s 12.3 of the Criminal Code (Cth) as applied by s 1308A of the Corporations Act to offences against that Act.  It includes the following subsections:

“(1)If intention, knowledge or recklessness is a fault element in relation to a physical element of an offence, that fault element must be attributed to a body corporate that expressly, tacitly or impliedly authorised or permitted the commission of the offence.

(2)The means by which such an authorisation or permission may be established include:

(a)proving that the body corporate’s board of directors intentionally, knowingly or recklessly carried out the relevant conduct, or expressly, tacitly or impliedly authorised or permitted the commission of the offence; or

(b)proving that a high managerial agent of the body corporate intentionally, knowingly or recklessly engaged in the relevant conduct, or expressly, tacitly or impliedly authorised or permitted the commission of the offence...”

  1. In addressing the relevance of s 601FC of the Corporations Act to this issue, ASIC argued that the conduct of those officers should be attributable to MFSIM because of its provisions that, in exercising its powers and carrying out its duties, the responsible entity of a registered scheme must act honestly, exercise the degree of care and diligence that a reasonable person would exercise if they were in the responsible entity’s position, and act in the best interests of the members.  If there is a conflict between the members’ interests and its own interests, the responsible entity must give priority to the members’ interests.  ASIC also relied on the Explanatory Memorandum to the Managed Investments Bill 1997,[429] which noted that the responsible entity would be subject to “extensive” statutory duties, which were said to “… reflect the special nature of the relationship between the responsible entity and the members of the scheme.”[430]
  2. ASIC, therefore, urged me to find that the acts and intention of those defendants should be attributed to MFSIM for the purposes of determining whether it has contravened the section for the following reasons:
  • The legislation was introduced for the purposes of protecting members of the public who invested in schemes administered by responsible entities.  It recognises the “special nature” of the relationship, which is effectively that of trustee and beneficiary.[431]
  • The Act contemplates that a contravention of the section will give rise to liability to pay compensation and it also gives standing to members of the fund to recover loss suffered as a result of a contravention.[432]
  • The Bill identifies the concern of misappropriation and provides that the “… duties are designed to ensure that scheme assets are not applied, either unintentionally or fraudulently, to the responsible entity’s own purposes rather than those of the scheme.”[433]  If the fact that officers and employees acted dishonestly and not in the interests of the scheme members was a basis for not attributing such conduct to the responsible entities, it would have the effect of rendering the provision effectively useless against the responsible entity in the most serious of cases when the members need the most protection.
  • Mr O’Donnell’s submission for Mr Anderson that the imposition of liability on the responsible entity for the failure of employees to take reasonable care would be harsh is not a basis for reading down the legislation.  ASIC submitted that, for the same reasons as in ABC Developmental Learning Centre v Wallace,[434] the policy of the Act was to protect the members who are vulnerable to the failures of the responsible entity, which must act through its officers and employees.  It submitted that the Explanatory Memorandum to the Bill, by identifying the special relationship, and the Act, by requiring that priority be given to the interests of the members and other provisions to protect members, demonstrated the consumer protection nature of the Chapter.
  • Further, ASIC noted that, unlike in the ABC case, the Act included provisions under which a defendant can seek to be excused from liability for the contravention.[435]
  1. Mr O’Donnell’s submissions sought to distinguish ABC Developmental Learning Centres Pty Ltd v Wallace[436] by reference to what he described as significant differences between the two statutory provisions.  Section 26 of the Children’s Services Act 1996 (Vic) provided that (emphasis added) “the proprietor of a children’s service must ensure that every reasonable precaution is taken to protect children being cared for or educated by the service from any hazard likely to cause injury”, while s 601FC(1)(b) provided that (emphasis added), in “exercising its powers and carrying out its duties, the responsible entity of a registered scheme must … exercise the degree of care and diligence that a reasonable person would exercise if they were in the responsible entity’s position.”[437]
  2. He submitted that the duty imposed by s 26 was to “ensure”, which means to make certain, so that, if the standard of behaviour is not met, then the company has contravened the section, whether the failure to achieve the standard is due to accident, inadvertence or otherwise.  Consequently, there was no guilty mind.
  3. By contrast, s 601FC imposes a duty to “exercise” care and diligence, rather than to “ensure” that care and diligence is exercised.  Further, the extent of the duty is confined to that which a reasonable person would do in the responsible entity’s position.  It is therefore a duty that does not extend beyond performance of the role of responsible entity.  It does not extend to negligence by employees, of whatever level, of the responsible entity.
  4. If parliament had intended that the actions and state of mind of all employees of the responsible entity should count as the actions and mind of the responsible entity in determining contravention of s 601FC, parliament could have used language suited to that object, such as “The responsible entity shall ensure that the care and diligence of a reasonable person is exercised in performing all functions of the responsible entity”.  Likewise, he submitted, in respect of the obligation to act honestly in s 601FC(1)(a), if it was intended that any dishonesty by any employee, at whatever level, should count as a contravention by the responsible entity, then it might have been expected that language would have been used such as:  “The responsible entity shall ensure that honesty is observed in the performance of all functions of the responsible entity”.
  5. The decision of the High Court in MacLeod v The Queen[438] was submitted by Mr O’Donnell to be contrary to such an approach.  That was a case where the sole director and shareholder of a company was charged with fraudulently taking or applying property of a body corporate for his own use or benefit.  It was held that his own conduct did not amount to the consent of the company so as to negate the allegation of fraud. 
  6. Mr MacLeod had taken about $2 million from the trust account of the company which held the funds on trust for investors in a film production scheme.  The High Court did not attribute the conduct of the misappropriating director to the corporation, relying on the following statement by Lord Browne-Wilkinson in DPP v Gomez:[439]

“Where a company is accused of a crime the acts and intentions of those who are the directing minds and will of the company are to be attributed to the company.  That is not the law where the charge is that those who are the directing minds and will have themselves committed a crime against the company.”[440]

  1. ASIC submitted that that decision provided no support for the proposition that a company whose trust fund is misappropriated can avoid liability on the basis that it is the victim of the fraud.  Mr Reardon submitted that the true victims were the beneficiaries and it was contrary to justice and common sense for the company to be able to avoid the consequences of its breach of trust.  Nor did the decision directly address the issue whether the company itself would have committed an offence.  Rather, the issue was whether the shareholder’s personal fraud could be negated by his own consent, said to be on behalf of the company.  It does not seem to me that this decision is one that dictates any conclusion that MFSIM would not itself have committed an offence.  This seems to follow particularly from the range of duties of a responsible entity under s 601FC and the duties of its officers pursuant to s 601FD.
  2. ASIC’s submissions on the proper application of the legislation in a case like this are persuasive.  It would be problematic if a company, which holds a trust fund for others that is misappropriated by the action of its officers, can avoid liability on the basis that it is the victim of the fraud.  As ASIC submitted, the true victims are the beneficiaries, and it is contrary to justice and common sense for the company to be able to avoid the consequences of its breach of trust on the basis that the acts were fraudulent acts of its employees. 
  3. Further, as ASIC submitted, the misappropriation in this case was not “totally in fraud of the company” because, on the evidence, it was intended to reimburse MFSIM to some extent for the misappropriation; and on the defendants’ case MFSIM was, to some extent, reimbursed for the misappropriation.  Also, in my view, where a related company stands to gain from the actions of the MFSIM directors and officers, as here by having its debts paid or obligations met, there are further reasons why those directors' and officers’ actions should be attributed to the company.
  4. When one asks Lord Hoffmann’s question in Meridian Global Funds Management Asia Ltd v Securities Commission:[441]  “Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company?”, the conduct and intentions of Mr White, Mr King and Mr Anderson should be attributed to MFSIM in respect of the $130 million payment.  Similarly the conduct and intentions of Mr White, Mr Anderson, Mr Hutchings and Ms Watts should be attributed to MFSIM in respect of the $17.5 million payment. 
  5. They were the people closely and relevantly connected with the company and its actions.  Their significant roles in the company also seem to me to qualify them as its “high managerial agents”.  The terms of s 12.3(2)(b) in particular of the Criminal Code (Cth) reinforce my conclusion that their conduct and intentions should be attributed to MFSIM in respect of the two payments. 

Onus of proof

  1. The defendants’ submission was that, while ASIC’s case must be proved on the civil standard of proof, this is a case where the principles expressed in Briginshaw v Briginshaw[442] are significant in applying that standard.  I did not understand that proposition to be in doubt.  The argument seems clear when one bears in mind that the facts alleged by ASIC could also constitute criminal offences pursuant to s 1311(3) of the Corporations Act or s 408C of the Criminal Code (Qld).
  2. There was some discussion about the extent to which I could rely on inferences where ASIC’s case could be described as a circumstantial one. In that context I was referred to ASIC v Fortescue Metals Group Ltd (No 5)[443] where Gilmour J said:

“In conclusion, the standard of proof that I must apply is the balance of probabilities as prescribed by s 1332, and I accept that in deciding whether ASIC’s allegations are made out on the balance of probabilities I am required to take into account the causes of action and the gravity of the matters alleged and their consequences: s 140(2) Evidence Act; Briginshaw 60 CLR 336. If inferences are to be drawn, ASIC has to establish that the circumstances appearing from the evidence give rise to a reasonable and definite inference and not merely to conflicting inferences of equal degrees of probability: Australian Securities and Investments Commission v Macdonald (No 11) (2009) 256 ALR 199 ; [2009] NSWSC 287 at [186]; Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Australian Competition and Consumer Commission (2007) 162 FCR 466; 242 ALR 643 ; [2007] FCAFC 132 at [38].”

  1. That approach seems to be appropriate in these circumstances also. 

Officer of the responsible entity - s 601FD

  1. The submissions for Mr Anderson and Mr King raised this issue: whether they were officers of MFSIM. 

Mr Anderson: an officer of MFSIM

  1. As will be recalled, s 601FD requires an officer of the responsible entity of a registered scheme to adhere to certain standards in acting in that role.  Mr O’Donnell’s submissions for Mr Anderson commenced with the observation that there is no definition of “an officer of the responsible entity of a registered scheme” in the Act.  There is a definition of “officer of a corporation” in s 9.  That definition, subject to the contrary intention appearing, covers, among other persons, a director or secretary of the corporation; or a person who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or who has the capacity to affect significantly the corporation’s financial standing; or in accordance with whose instructions or wishes the directors of the corporation are accustomed to act or a receiver, or receiver and manager, of the property of the corporation; or an administrator.
  2. By s 601FA, only a corporation can be a responsible entity.  But, Mr O’Donnell submitted, it does not follow that anyone who is an officer of the corporation, that also happens to be the responsible entity of the scheme, is an officer of the responsible entity of the scheme.  The reason is that the corporation may have a life separate from its role as responsible entity, and a person may be an officer of the corporation, but have nothing to do with the corporation’s role as responsible entity of the scheme.  He illustrated that submission by the further observation that, where a corporation is the responsible entity of multiple schemes, it does not follow that a person who is an officer of the responsible entity for Scheme A is necessarily also an officer of the responsible entity for Scheme B.  A person may be an officer of a responsible entity for Scheme A, but have nothing to do with Scheme B. 
  3. He relied on the decision of Finkelstein J in Norman v FEA Plantations,[444] dealing with a receiver, accepted as correct by Logan J in Owen v Madden (No 3),[445] in respect of an administrator, both cases which ASIC’s counsel sought to distinguish.  Norman was a case where Finkelstein J held that a receiver of a corporation that was also the responsible entity of a scheme, was not covered by the duties in s 601FD.  His Honour summarised his approach to the question by stating that the object of s 601FD was to complement the duties owed by the responsible entity.  He went on:[446]

“That is achieved by imposing duties on persons who control the responsible entity’s activities in the administration of a managed investment scheme and its dealings with scheme assets.  A receiver, particularly a receiver who is not also a manager, plays no part in the administration of a scheme nor in the decisions regarding the investment of scheme assets.

A party appointed receiver has different functions. They are, as I have said, to take possession of the charged assets (which in this case do not include scheme assets) and realise them to pay out the debt due to the chargee. There is no reason to bring such a person under the operation of s 601FD(1). A fortiori in the case of court appointed receivers and liquidators who, being court officers, owe their duties to the court that appointed them. Indeed those duties may be in conflict with the duties set out in s 601FD(1).

… Another problem is … the proposition that the duties imposed on officers of a responsible entity are transported to actions they may take in some other capacity (eg as officers of another corporation). That is not the effect of s 601FD(1). Its operation is simple enough. The section establishes a norm of conduct for officers of a responsible entity. That standard applies to that officer only when he/she is acting in that capacity: ie when the officer’s action or non-action can be attributed to the responsible entity by operation of law or can bind the responsible entity under principles of agency. There is no basis for reading into s 601FD(1) an intention to regulate the conduct of an officer when acting in some other capacity.”

  1. Mr O’Donnell’s submission was that it followed that a person who comes within the definition of an officer of a corporation, where a corporation is also the responsible entity of a scheme, but who takes no part in the affairs of the scheme or in dealings with scheme assets, ought not to be regarded as “an officer of the responsible entity of a registered scheme” for the purpose of attracting s 601FD duties. 
  2. ASIC’s submissions pointed out, however, that in Norman and Owen, it was held that the legislative history of s 601FD gave rise to a “contrary intention” (from the opening words of s 9), such that the s 9 definition of “officer” did not apply so as to make a receiver (in the case of Norman) and an administrator (in the case of Owen) an officer of a responsible entity for the purposes of s 601FD.  ASIC submitted that neither case suggested that there was anything in the history of s 601FD tending to support a legislative intent to exclude directors, secretaries, or executive officers from the effect of s 601FD.  Its submission was that the legislative history explained in those cases positively supported the conclusion that a secretary and what used to be called an “executive officer” were intended to be officers of a responsible entity for the purposes of s 601FD.
  3. The submission was developed by the argument that, since the enactment of Ch 5C, dealing with managed investment schemes, in the 1998 Commonwealth legislation, a director, secretary or executive officer of a responsible entity has been, by virtue of that fact alone, an officer of the responsible entity for the purpose of s 601FD.  Chapter 5C was first introduced by the Managed Investments Act 1998 (Cth) into the Corporations Law.  Relevantly the new Chapter imposed the current s 601FD duties upon officers of the responsible entity.  The Managed Investments Act 1998 amended the definition of “officer”.  Before then, the definition of “officer” was contained entirely in s 82A and relevantly provided:

“82AOfficers of bodies corporate and other entities

(1)Subject to subsection (2), officer, in relation to:

(a)a body corporate; or

(b)an entity within the meaning of Parts 3.6 and 3.7;

includes:

(c)a director, secretary, executive officer or employee of the body or entity; and

(d)a receiver and manager, appointed under a power contained in an instrument, of property of the body or entity; and

(e)an administrator of the body or entity …”

  1. The Managed Investments Act inserted the following definition of “officer” into s 9 of the Corporations Law in place of the above definition:

“officer -

(a)in relation to the responsible entity of a registered scheme - means a person who is a director, secretary or executive officer of the responsible entity; or

(b)in any other case - has the meaning given by section 82A.”

  1. At the same time, the definition of “executive officer” of a body corporate was amended by the Company Law Review Act 1998 (Cth) to mean:

“a person who is concerned in, or takes part in, the management of the body (regardless of the person’s designation and whether or not the person is a director of the body).”

  1. The s 9 definition of “officer” above was repealed by the Corporate Law Economic Reform Program Act 1999 (Cth) (CLERP) and replaced with the current definition set out earlier.
  2. ASIC’s submission continued by reference to the fact that, in Norman,[447] Finkelstein J identified the question for decision as being whether each of the additional persons referred to in (c) to (f) of the current definition of “officer of a corporation”, namely, a receiver, or receiver and manager, or an administrator of the corporation; or an administrator of a deed of company arrangement executed by the corporation; or a liquidator of the corporation, was an officer for the purpose of s 601FD(1).  In particular, the issue was whether a receiver (not a receiver who is also a manager) of the property of a responsible entity was an officer and hence bound by the duties imposed by s 601FD(1).  His Honour held that the answer was found in the legislative history of the provision of which the new definition formed a part. 
  3. In particular his Honour said:[448]

“Against this background, it is, in my view, clear that the new legislation did not intend to bring about a change in the regulation of managed investment schemes.  Moreover, neither the CLERP reviews nor the recommendations which were adopted by the amendments introduced in the Corporate Law Economic Reform Program Act, concerned the effectiveness of the operation of managed investment schemes.  Indeed, neither these schemes nor Ch 5C were mentioned in any review. For that reason I do not accept that such an important change as is here suggested would be made to Ch 5C effectively by a sidewind.”

  1. Therefore, ASIC submitted, Finkelstein J concluded, having regard to the historical background of the legislation, that the new legislation did not intend to bring about a change in the regulation of managed investment schemes.  Immediately before the amendment, as observed by Finkelstein J,[449] an officer of a responsible entity included a director, secretary or executive officer of the responsible entity.  The approach for which Mr Anderson contended, that the officer had to be involved in the responsible entity’s administration of the scheme and dealings with the scheme assets, was not the position before the CLERP amendments, and his Honour’s reasons supported the argument that it was not the position since the CLERP amendments.
  2. ASIC argued further that it cannot be said that a director, company secretary or executive officer plays no part in the administration of a scheme.  It may be true of a receiver with a limited appointment, but it could not apply to directors, company secretaries and officers.  By virtue of the very office they hold, directors, company secretaries and officers have a role to play in the administration of a scheme of which the company is a responsible entity.  That legislatively intended result cannot be altered by an office holder choosing (or complying with a direction) to have nothing to do with the scheme.  It submitted that any interpretation that required consideration in each case as to whether an officer had a role to play in the administration of the scheme would result in difficulty in such persons knowing, and courts determining, whether they played a part, or a sufficient part, to justify the imposition of the duties. This was similar to the submission made in Shafron v ASIC[450] where the Court said:

“… Mr Shafron’s submissions ignored the evident difficulty in defining, for the purposes of limiting the conduct considered, the content of ‘the office held’ where a person is an officer by virtue of para (b)(i), (ii) or (iii) of the definition of ‘officer’ in s 9. A construction which avoids that difficulty, and avoids a more limited operation of s 180(1) in relation to some officers than in relation to others, is to be preferred.”

No contrary intention

  1. ASIC’s next submission was that there was no contrary intention displayed by the statute.  Its argument was that the application of the plain meaning of the definition of “officer” in s 9 to s 601FD worked in context and achieved a result consistent with the legislative intention.[451]  The reasons it advanced were that:
  • A director, secretary or executive officer of the responsible entity was always intended to be an officer for the purpose of s 601FD.
  • The term defined in s 9 is “officer”.  The defined term is not “officer of a corporation”.  This is confirmed by two things. First, the Act bolds and italicises the words that are being defined.  In this instance, only the word “officer” is bolded and italicised.  Secondly, s 179(2) expressly confirms that the defined term is “officer”.
  • There was no relevant distinction drawn by the Act between the use of the term “officer” in relation to a corporation and the use of the term “officer” in relation to a responsible entity.  A responsible entity is always a corporation: s 601FA of the Act.
  • There are two definitions of “officer” contained in s 9.  The first is intended to apply to corporations.  The second reads “officer of an entity that is neither an individual nor a corporation means...”.  The second definition is clearly intended to apply to entities other than corporations or individuals.  The second definition does not apply to a responsible entity which is a corporation.
  • To fail to apply the s 9 definition of “officer” to a responsible entity would leave a significant gap.  There would be no definition at all of the persons who are “officers” of a responsible entity.  Parliament cannot have intended to leave such a gap.  The legislature should not be taken to have deleted an express definition of “officer” “in relation to the responsible entity of a registered scheme” (s 9 of the Corporations Act), and insert nothing in its place.
  • Chapter 5C refers to “directors of the responsible entity” in a number of provisions:  see eg ss 601EA(4), 601HC, 601JA(2).  There is no mechanism in the Act for a director to be appointed to a responsible entity other than by being appointed as an officer of the corporation that acts as the responsible entity.  A person cannot be a director of one, but not the other.  In other words, a person cannot be a director only in the responsible entity’s “personal” capacity and not in its responsible entity capacity.
  1. Accordingly, it submitted that it was clear that there was no distinction to be drawn between a director of a corporation that acts as a responsible entity and a director of the responsible entity.  Equally, there is no distinction to be drawn between a company secretary or executive officer, both of whom are officers of a corporation and such officers of a responsible entity.
  2. ASIC also submitted that the objectives of Ch 5C are far better met if all individuals who are officers of a corporation are subject to the duties in s 601FD for the following reasons:
  • Section 601FD provides that all officers are required to act honestly and not improperly make use of their position as an officer of the responsible entity or improperly use information acquired through being an officer of the responsible entity.  There is no reason why those obligations should not be imposed on all directors, secretaries and executive officers of a corporation that acts as a responsible entity.  Why, it asked rhetorically, should all directors, secretaries and executive officers of a company that acts as a responsible entity not be subject to the duty to act honestly?
  • Section 601FD(1)(c) provides that officers of responsible entities must act in the best interests of scheme members and, if there is a conflict between the members’ interests and the interests of the responsible entity, give priority to the members’ interests.  There is no good reason not to impose this obligation on officers, even if they are not involved in the responsible entity functions of the corporation.
  • The remaining obligations under s 601FD(1), namely exercising care and diligence and taking reasonable steps to ensure the responsible entity complies with, for example, the Act, are qualified in that the obligation is to take the steps that a reasonable person in the officer’s position would take.  Thus, the duty is referable to the officer’s position and cannot therefore be said to be onerous.
  • Further, to distinguish between officers of a corporation in its “personal” capacity as distinct from its responsible entity capacity creates unnecessary uncertainty.
  1. In any event, it submitted, Mr Anderson was company secretary and his evidence that he did not have an involvement in the administration of the scheme and in dealings with scheme assets, should be rejected for the following reasons:
  • He was authorised with Perpetual to sign on behalf of MFSIM in dealing with the moneys held on behalf of MFSIM’s registered managed investment schemes, including PIF.[452]
  • He signed documents as company secretary with respect to MFSIM including amendments to the custody agreement with Perpetual to include MYF.[453]
  • He was a responsible officer for MFSIM for the purposes of its Australian Financial Services Licence.[454]
  • In his email of 16 March 2008, he maintained that he had influence over both the assets and the funds as he held positions with MFSIM of “... Company Secretary, Public Officer, CFO, and ... Responsible Officer. It is not as if some third party has influence over the assets/funds”.[455]
  • His influence over scheme assets was demonstrated by his positive role in arranging:

(a)The $17.5 million transfer from PIF to PacFin.

(b)The $2.1 million investment by MYF in PacFin.  Although his initial push to invest the funds was resisted by Ms Watts on the basis that it did not meet the requirements of PIF as set out in the information memorandum but:

  1. the response of Ms Howard was “Does Anderson know?”[456]
  2. the investment went ahead in December 2007.

(c)In September 2007 he arranged the payment of $108 million as a deposit.

  • Mr Anderson was the person who monitored the fund accountant  and was the person to whom the fund accountant reported.
  • Ms Easton, who reported directly to Mr Anderson, provided the reports to the MFSIM board about the regulatory requirements with respect to assets and cash flow.
  • Mr Anderson provided at least a supervisory role with respect to the audit process.
  • Mr Anderson provided advice with respect to regulatory requirements of the funds as demonstrated by:

(a)The letter from him to Standard & Poor of 12 October 2007 describing accounting methodology used for PIF.[457]  The fact that he saw this work as squarely within the area of his responsibility was demonstrated by his reply to Ms Watts thanking her:

“Marilyn I appreciate your comments but the truth is (1) GH and the team has been unnecessarily put under additional pressure as a result of me being slow to deal with this my apologies. And (2) Senior MFS staff are for better or worse never on holidays in that sense.”

(b)Mr Anderson’s advice concerning a possible breach of s 1017E on 18 February 2008.[458]

  1. It submitted that these actions not only related directly to the administration of the funds but also, in most instances, a company secretary with accounting experience would be expected to undertake such tasks.[459]  ASIC’s reliance on Mr Anderson’s self-description as a “responsible officer” was criticised for Mr Anderson as an allegation that was not pleaded and that arose partly from a document that was not disclosed and not placed into evidence.  In the overall scheme of things, however, that evidence was of little significance in assisting me to form a conclusion about Mr Anderson’s role with MFSIM.

Mr Anderson’s duties when acting in the “capacity” of an officer of a responsible entity

  1. Mr Anderson contended that even if he was an officer of the responsible entity, and did come under the obligations of s 601FD, those obligations did not extend to actions undertaken by him in some other capacity. He relied on one of the passages from Finkelstein J’s decision in Norman v FEA Plantations,[460] referred to earlier, asserting that there was no basis for reading into s 601FD(1) an intention to regulate the conduct of an officer when acting in some other capacity.
  2. ASIC submitted, as I have noted already, that those remarks were made in the context of a case involving a receiver appointed to a responsible entity.  They ought not be read as applying generally to all directors, secretaries and executive officers of a responsible entity so as to relieve officers of the responsible entity from the obligation not to allow their personal interests (conflict of interest and duty) or their duties to other persons or entities (conflict of duty and duty) to conflict with their duties under s601FD.  To so read this paragraph would be to suggest that Finkelstein J was, by an obiter dictum, disregarding the established law with respect to the separate duties of officers of companies, even within a group, without reference to authority.[461]  So to conclude, ASIC submitted, would be inconsistent with the objects of s 601FD.
  3. ASIC also submitted that the proposition contended for by Mr Anderson and Mr King provides a ready excuse for officers of a responsible entity whose conduct or inaction causes the responsible entity to misconduct itself.  Officers could, in many such circumstances, say that they were not acting in their “capacity” as officers in the responsible entity, and thus that the duties did not apply. The law has long recognised that multiple directorships can lead to conflicting fiduciary duties.[462]  If a duty could be avoided simply by saying that the defendant was acting in another capacity, this would render meaningless the concept of conflict of duty and duty.  The real challenge and responsibility faced by persons holding multiple directorships or having multiple interests is to deal properly with conflicts between duty and duty or between duty and interest as and when they arise.[463]  However, ASIC submitted, the proposition for which Mr Anderson contended seemed to sanction that an officer of a responsible entity can act without regard to the duties set out in s 601FD if it can be said they are acting in some other capacity.
  4. Mr Anderson’s proposition that Finkelstein J was suggesting such a sweeping change is, according to ASIC’s submission, contra-indicated by reference to Finkelstein J’s reasoning, which demonstrated that he was dealing with the special position of receivers acting under an appointment, which would conflict with the interests of the growers. This submission seems to me to be compelling.  I see no reason to apply such an approach to persons who were officers of the company in its normal meaning.[464]

Inconsistent with the law of fiduciary duties

  1. ASIC next argued that the suggested distinction between being an officer of a corporation, but not an officer of a corporation in its capacity as a responsible entity is not consistent with the law of trusts, including the law of fiduciary duties. Directors owe fiduciary duties to their companies.  They do not owe those duties only in relation to the company acting in its “personal” capacity, rather than in its capacity as a trustee.
  2. It illustrated the argument by referring to Agricultural Land Management v Jackson (No 2)[465] where the defendants contended that they were not under a fiduciary duty to the plaintiff company (a responsible entity) in respect of property held by the company as trustee.  Edelman J rejected that argument, saying:[466]

“... it is nonsense to speak of fiduciary duties owed to a company in a particular capacity as a trustee or as a beneficial owner.  Fiduciary duties are owed to the company.  The company may, in turn, owe duties to beneficiaries in relation to trust assets.  But if fiduciary duties are owed to the company it does not alter the character of those duties if the company also holds assets on trust.”

  1. The submission, which I accept, was that a director of a company that is a responsible  entity owes the duties imposed by s 601FD.  If the company is the responsible entity of multiple schemes, that director owes duties to act in the best interests of the members of all the schemes.  Neither the responsible entity nor the officer can escape their statutory duties by asserting they “have nothing to do with scheme B”.

Inconsistent with Shafron

  1. ASIC went on to submit that the submissions for Mr Anderson were inconsistent with the decision in Shafron v ASIC[467] where the High Court considered a similar submission for Mr Shafron that his obligations as an officer were “... limited to performance of those responsibilities that attached to the office held or the circumstances that made him an “officer’” (ie company secretary).[468]
  2. The Court rejected the contention stating:[469]

“... what responsibilities any officer of a company has in the company concerned will be a question of fact.  It by no means follows, therefore, that the tasks Mr Cameron performed at JHIL are properly to be understood as a complete identification of the work that could be or was undertaken by Mr Shafron because he too held the office of company secretary.  That is, it cannot be assumed that Mr Cameron’s responsibilities were identical (in whole or in part) to Mr Shafron’s responsibilities.  It follows that, contrary to Mr Shafron’s submissions, the “scope” of his role as company secretary could not be identified as limited to the responsibilities Mr Cameron had.”

  1. However the Court went on to hold that, even if there could be some division of the roles performed within the corporation, it would be of no relevance because:[470]

“... the responsibilities referred to in s 180(1) are not confined to statutory responsibilities; they include whatever responsibilities the officer concerned had within the corporation, regardless of how or why those responsibilities came to be imposed on that officer.” 

  1. Similarly, ASIC submitted, s 601FD is not limited to officers carrying out the duties that they have as officers.  Rather it provides that “An officer of the responsible entity of a registered scheme must” act, for example, honestly and in the best interests of members.
  2. Accordingly ASIC submitted that Mr Anderson, as an officer, owed the statutory duties to MFSIM whatever specific responsibilities he had within the corporation.  He could not pick and choose the capacities in which he was carrying out acts by saying that he was acting for MFS and not MFSIM, or that he was acting for MFSIM, but not in the capacity of company secretary.  It was important to note in this respect that the conduct in question can, and here did, include a failure to act.  An officer of a responsible entity who knows that trust funds are being misapplied, and who fails to prevent that misapplication, cannot be relieved of the consequences of his inaction by asserting that he was only acting in his capacity as an officer of the beneficiary of the misapplication.  In reality, such conduct overlaps with the work that was done, or ought to have been done, as an officer of the responsible entity.
  3. ASIC submitted that Mr Anderson was not simply acting in his capacity as an officer of the “receiving” corporation (MFS Administration), but also in his capacity as an officer of MFSIM.  The evidence does not demonstrate that the conduct of Mr Anderson (and Mr King, for that matter), including their failure to prevent the misapplication of trust funds, was only done in a non-MFSIM capacity.

Conclusions in respect of whether Mr Anderson was an officer of MFSIM

  1. In my view, for the reasons advanced by ASIC, Mr Anderson was an officer of MFSIM at the relevant times.  The statutory history and the cases support the conclusion that, as an officer of MFSIM, the company, he was also an officer of it as the responsible entity for a management investment scheme.  It would be quite impractical and artificial to invent some notional separation between those two roles. 
  2. He was also its company secretary and CFO in formal terms and the evidence reveals that he performed significant duties in those roles for MFSIM.  I shall refer to that evidence later when examining the individual case against Mr Anderson. 

Mr King:  an officer of MFSIM

  1. Mr King was a director of MFSIM, the responsible entity, from 8 August 2002 until 27 February 2007. 
  2. ASIC also alleges that, from 28 February 2007 until 21 January 2008, he was an officer of MFSIM within the meaning of s 9(b) of the Act.  The allegation is that he had overall responsibility for MFSIM’s operations, participating in making decisions that affected the whole or a substantial part of MFSIM’s business, that Mr White customarily acted in accordance with his wishes, therefore giving him the capacity to affect significantly the financial standing of MFSIM.[471] 
  3. Mr King also pleaded in para 5(e)(i) of his amended defence dated 5 May 2014 that:  “the definition of officer in section 9(b)(ii) of the Corporations Act 2001 (Cth) does not apply to companies in so far as they are acting as responsible entities of managed investment schemes”.  His counsel adopted Mr O’Donnell’s submissions on that issue. 
  4. In this context ASIC’s submission was that the same legislative history it relied on to show that company secretaries were always intended to be officers of responsible entities, also showed that “executive officers” were always intended to be officers of responsible entities.
  5. An “executive officer” was defined relevantly as a person, whether or not a director, who was concerned or took part in the management of the company.  In Commissioner for Corporate Affairs v Bracht,[472] Ormiston J discussed what was encompassed within the notion of “management” of the activities of a corporation which would make a person an “executive officer” and subject to the statutory duties. His Honour said:

“It may be difficult to draw the line in particular cases, but in my opinion the concept of ‘management’ for present purposes comprehends activities which involve policy and decision-making, related to the business affairs of a corporation, affecting the corporation as a whole or a substantial part of that corporation, to the extent that the consequences of the formation of those policies or the making of those decisions may have some significant bearing on the financial standing of the corporation or the conduct of its affairs...”

  1. The submission continued that the definition of “officer” in s 9(b)(i) and s 9(b)(ii) inserted by the CLERP was intended to do no more than codify Ormiston J’s decision in Commissioner for Corporate Affairs v Bracht.[473]  Thus, the legislative history evidenced no intention that s 9(b)(ii) not apply to s 601FD.  Again, ASIC submitted, the contrary was the true position.  From the commencement of Ch 5C it was intended that executive officers be officers for the purpose of s 601FD.  As Finkelstein J observed in Norman v FEA, the new legislation introduced in the CLERP legislation in 1999 did not intend to bring about a change in the regulation of managed investment schemes.  If s 9(b)(ii) was held not to apply to s 601FD, it could be seen that there was, in fact, a very significant change in the regulation of managed investment schemes brought about by that legislation.  In truth, such a change was never intended, and was not brought about.
  2. ASIC also submitted that it would be contrary to the purposes of s 601FD if persons who had the capacity to affect significantly the financial standing of the responsible entity were not subject to the duties prescribed by the section.  It was the plain intention of the legislature that persons who were executives of the responsible entity would fall into the definition of “officer”.  In the Explanatory Memorandum to the Managed Investments Bill 1997 under “Duties of officer responsible entity” it was noted (in [8.17]):

“The term ‘officer’ in relation to the responsible entity of a registered scheme will be defined in section 9 to mean a person who is a director, secretary or executive officer of the company that is the responsible entity.”

  1. ASIC’s contention was that the purpose of this chapter of the Act was the protection of members of managed investment schemes.  To remove from the officers, who are obliged to act honestly and in the interests of the members, those persons who have the capacity to affect significantly the financial standing of the responsible entity, would be to remove a substantial protection provided by the Act.  It submitted that the persons, who have the relevant capacity, would include those who could affect the proprietary side of the responsible entity as well as the managed funds side. In the case of a responsible entity an effect on the managed funds must also affect its financial standing.

Contention that section 601FD will not work appropriately

  1. Further, ASIC submitted, to provide proper protection for members, it was essential that the persons exercising significant executive power be subject to the duties imposed under s 601FD. Mr King’s submissions, which referred to the “financial capacity of the corporation” as opposed to “financial capacity of the scheme”,[474] misconstrued the definition of “officer” in s 9, which refers only to the corporation’s financial standing. It was in the interests of members that, if the responsible entity was making decisions about its own interests, the person making that decision be required, if there was a conflict between the members’ interests and its interests, to give priority to the members’ interests in accordance with s 601FD(1)(c).
  2. On the submissions made on behalf of Mr King, ASIC submitted that a responsible entity could completely avoid its duty to give priority to the members by employing executives only responsible for the responsible entity’s interests.  Similarly, a responsible entity for two or more funds could allow conduct by one fund to the prejudice of another fund on the basis that the decision makers were kept in separate silos and if one fund undermined the other so be it.

The contention that it places duties on others

  1. ASIC also submitted that the fact that the definition of “officer” relates to capacity was to ensure that, to the extent that a responsible entity allows an executive to have “capacity” to affect significantly its financial standing, then the executive has the prescribed duties. If executives want to avoid the duties, they should ensure they are not placed in a position where they have the capacity. Likewise, if the responsible entity does not want such persons to have such duties, it should similarly ensure they are not placed in a position where they have that capacity.

The contention that it will cause fearful confusion

  1. In ASIC’s submission, the further proposition advanced for Mr King, that third parties dealing with companies such as custodians, auditors and financiers would be subjected to the duties under s 601FD, has been specifically rejected by the Courts.  This proposition referred to the interpretation of the definition’s reference to “the capacity to affect significantly a corporation’s financial standing”. 
  2. In Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd,[475] White J found that, although Apple had the capacity to affect significantly Buzzle’s financial standing, it was not an officer of Buzzle because:

“When read in the context of the provisions imposing duties on an ‘officer’ of a corporation, and read in the light of the legislative history and the apparent intention of the Parliamentary draftsman to codify what was formerly a definition of an ‘executive officer’, it can be seen that para (b)(ii) should be taken as referring to a person who, in his or her management of the affairs of the corporation, has the capacity to affect significantly the corporation’s financial standing.  It does not refer to a person who has that capacity as a third party but is not involved in the management of the corporation’s affairs.

Therefore, the fact that Apple had the capacity to affect significantly Buzzle’s financial standing is not sufficient to make it an ‘officer’ of Buzzle, notwithstanding the apparently plain words of the definition if the definition were read without context and without an understanding of how the current definition came to be adopted.  If a context is supplied, it is obvious that the definition cannot be applied literally.”

  1. Finally, ASIC submitted, if the literal meaning were to be applied, it would affect all corporations not just responsible entities.

Does the definition of “officer” apply to Mr King on the evidence here?

  1. ASIC submitted that Mr King, as the CEO of MFS Limited and the MFS Group, had the capacity to significantly affect the financial standing of MFSIM.  Mr King was the co-founder of the MFS business and in 2007 received the highest remuneration paid by the MFS Group.  He said in his s 19 examination that, as the CEO of the MFS Group, he had overall responsibility for MFSIM.[476]  Mr King said Mr White was in charge of PIF and that Mr White, together with the group around him, were responsible for the “day to day operational decisions”.[477]  Mr White reported to Mr King and would take instructions from him. Mr King would talk to Mr White at least daily “in some way, shape or form”.[478] 
  2. Mr King conceded that Mr White took instructions from him with respect to the proprietary matters of the business.[479]  However, Mr King was unable to recall any instance where Mr White refused to take a direction from him with respect to the funds management side of the business.  On 8 May 2014, Mr King gave evidence that Mr White had refused to get Mr Kennedy off the IAC.  However, when taken to the relevant emails in cross-examination on 4 August 2014 he withdrew that contention and was unable to recall any example of a refusal.[480]
  3. ASIC submitted that the evidence confirmed, within the MFS Group, Mr King was the single most powerful person such that Mr White would describe him as the “charismatic leader” and “the puppet master”.[481] 
  4. Counsel for Mr King also made submissions about whether there was any significant evidence that Mr White acted in accordance with Mr King’s instructions and wishes in his role at MFSIM.  They criticised the particulars pleaded against Mr King as insufficient to comply with statements in Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd[482] and Ultraframe (UK) Ltd v Fielding[483] that to be a “shadow director”, the directors of the relevant company must have been “accustomed to act” in accordance with the shadow director’s instructions or wishes requiring habitual compliance over a period of time.
  5. ASIC relied on an assertion that Mr King took overall responsibility for the major decisions of MFSIM and as between the two men, “was the boss”, relying on Mr King’s evidence in his s 19 examination.  Mr King’s counsel submitted that such a pleaded particular did not meet the requirements of decisions such as Buzzle and Ultraframe.  They also argued that specific unpleaded examples relied on by ASIC did not justify the conclusion that Mr White customarily acted in accordance with Mr King’s instruction.[484]
  6. Nor, they submitted, did he have the capacity to affect MFSIM’s financial standing within the meaning of that phrase in s 9(b)(ii) of the Act.  They submitted that he did not act in an office or position of MFSIM for the purposes of the Act.[485] 
  7. They argued that those submissions were not inconsistent with the approach expressed particularly at [25] in this part of the decision of the High Court in Shafron v ASIC:[486]

“[23]Several points should be made about the proper construction and application of para (b)(i) of the definition of “officer”. First, the inquiry required by this paragraph of the definition must be directed to what role the person in question plays in the corporation. It is not an inquiry that is confined to the role that the person played in relation to the particular issue in respect of which it is alleged that there was a breach of duty. Thus in this case the inquiry to be made about Mr Shafron’s role was not confined to what he did in connection with the separation proposal. Of course, the role he played in connection with the separation proposal may itself demonstrate that he made or participated in making decisions of the requisite character, but that need not be the only material to which attention may be directed.

[24]Secondly, in a case like the present, where the breaches of duty alleged were omissions to provide advice, it is evident that determining how a reasonable person occupying the same office and having the same responsibilities would exercise the powers and discharge the duties of that office may be assisted by consideration of how the officer in question acted on occasions other than the one which is alleged to give rise to a breach of the duties imposed by s 180(1). It was, therefore, relevant for the Court of Appeal to noticewhat Mr Shafron had done at JHIL in connection with matters other than the separation proposal and, contrary to Mr Shafron’s submission, there was no denial of natural justice in its doing so.

[25]Thirdly, each of the three classes of persons described in para (b) of the definition of “officer” is evidently different from (and a wider class than) the persons identified in the other paragraphs of the definition. Persons identified in the other paragraphs of the definition all hold a named office in or in relation to the company; those identified in para (b) do not. Persons identified in the other paragraphs all hold offices for which the legislation prescribes certain duties and functions; those identified in para (b) do not. Persons identified in the other paragraphs of the definition are bound by the legislation to make certain decisions and do certain acts for or on behalf of the corporation; those identified in para (b) are identified by what they do (subpara (i)), what capacity they have (subpara (ii)) or what influence on the directors they have had and continue to have (subpara (iii)). There being these differences between para (b) of the definition and the other paragraphs (especially para (a)), it is not to be supposed that persons falling within para (b)(i) must be in substantially the same position as directors: those to whom the management and direction of the business of the company is usually, and in relation to JHIL was, given.”

  1. Mr Piggott’s oral submissions for Mr King were directed to the “officer” case.  He summarised some of his submissions by pointing out that to find someone to be an officer of a corporation required the court to characterise their actions, or their capacity, as one arising from the performance of some kind of office of the corporation.  It was not enough if the person acted or had a capacity arising from their status outside the corporation, referring to ASIC v Vines.[487]  In that context, he pointed to the terms of the pleading as recognising that ASIC needed to prove that Mr King was an officer of MFSIM at the relevant time, essentially performing Mr White’s role.  That role included his position as CEO of the funds management group and MFSIM but that was only one of the tasks he was required to perform.  He argued that the examples relied upon by ASIC did not permit the conclusion that Mr White reported to Mr King daily or near daily in the performance of his role in MFSIM. 
  2. Counsel for Mr King also submitted that it had not been established that Mr White, in reporting “daily or near daily” to Mr King, did so in the performance of his role in MFSIM rather than as the Deputy CEO of the MFS Group as a whole.  They pointed out that it was a large group of companies with varied operations divided into “silos” where there was a push, at least since late in 2006, partly because of Mr King’s health, to reduce the central importance of his role, a process implemented from the beginning of 2007 by increasing the independence of those officers below him in the hierarchy.  They gave as examples, the reconstitution of the MFSIM board to include three independent, non-executive directors, Mr Diamond, Mr Whateley and Ms Beale.  They were appointed on 27 February 2007.  There were also two executive directors, Mr White and Mr Hutchings.
  3. It seems to me, however, that the High Court’s decision in Shafron justifies a broader application of the section than was contended for by counsel for Mr King.  The cases about shadow directors focus on the meaning to be given to the definition of “officer” in para 9(b)(iii) and whether the directors are accustomed to act in accordance with the instructions or wishes of the shadow director.  But the decision in Shafron discusses the other definitions in para 9(b)(i) and para 9(b)(ii) as relating to what the persons do (subpara (i)), and what capacity they have (subpara (ii)), in determining whether they are officers.
  4. In that context, counsel for Mr King emphasised the detailed governance, organisational and management structure established within MFSIM to argue that responsibility for decisions about the management of its schemes and the use of scheme property was entirely a matter for its board.  In conclusion on this matter, they submitted:[488]

“543.The evidence supports the conclusions that Mr King’s responsibility as CEO of the MFS Group:

(a)was a responsibility owed to the Board of MFS Limited and not to the Board of MFSIM. Mr King had delegated authority from the Board of MFS Limited, but no delegated authority from the Board of MFSIM;

(b)was subject to limits and scrutiny by the Board of MFS Limited and its committees;

(c)did not extend to scheme transactions involving scheme funds. Such transactions were treated by the Board of MFS Limited as being beyond its authority, and within the authority of the independent Board of MFSIM. The Board of MFSIM took the same view, and had at its disposal its own committees, its own executive team, and its own procedural regimes;

(d)was, in respect of MFSIM, reflective of the responsibility of the Board of MFS Limited. That is confined to receiving information about MFSIM’s proprietary (or non-scheme) affairs and to ensuring that MFSIM had in place proper governance and risk management frameworks;

(e)did not result in Mr King playing any role in management decisions of MFSIM.

  1. Consequently, ASIC has not established an evidentiary basis for characterising Mr King’s management responsibility as CEO of the MFS Group as being one of ‘overall management responsibility for the operations of MFSIM’.”
  1. The submissions for Mr King then went on to deal with whether he had the capacity to affect significantly the financial standing of MFSIM, the issue raised by para (b)(ii) of the definition of “officer”.  His counsel argued that there was no evidence that he had a capacity to affect the proprietary side of MFSIM’s financial affairs substantially, namely the decisions about its investments.  Mr King himself drew attention to the fact that, even with the financial affairs of MFS Ltd, his delegated authority was limited to $25 million when the company was worth about $2 billion.  Nor had ASIC established that he had any capacity to affect MFSIM’s financial status by setting the service fee payable by it to the group. 

Conclusions in respect of whether Mr King was an officer of MFSIM

  1. I have formed the view, for similar reasons to those discussed by me in respect of Mr Anderson, that the statutory definition of “officer of a corporation” also applies to a person who can properly be described as an executive officer of the responsible entity of a managed investment scheme.  The statutory history and the cases support such a conclusion and the converse would be impractical and artificial. 
  2. Was Mr King covered by that meaning in respect of his activities with MFSIM?  Mr King’s counsel submitted that ASIC had not pleaded or proven facts that could establish that Mr White customarily acted in accordance with Mr King’s instructions and wishes nor had it established a proper evidentiary basis for characterising Mr White’s conduct in reporting to Mr King, or in acting in accordance with Mr King’s instructions and wishes, as being “in the performance of his role in MFSIM”.  Nor had they established that he had the capacity to affect MFSIM’s financial standing significantly. 
  3. On my analysis of the evidence of the frequent interactions between Mr King and Mr White, including Mr King’s admissions about the nature of his role as the overall boss of the MFS group, I have concluded that the evidence is sufficient to establish at least that he participated in the making of decisions that affected the whole or a substantial part of MFSIM’s business and had the capacity to affect significantly its financial standing.  ASIC also assembled a significant number of examples in its written submissions showing his capacity to affect decisions within MFSIM in particular or as part of the MFS Group.[489]  Therefore he was an officer of MFSIM.

Validity and ratification of agreements

  1. A number of the defendants contended that the PIF/PacFin loan participation agreement and the acquisition of 67,500,000 units in MYF were valid agreements or, alternatively, that MFSIM as responsible entity for PIF ratified entry into them. 

Validity

  1. The argument that the agreements were valid was based partly on the submission that it was open to the parties to an agreement to agree that an instrument should take effect as between themselves from an earlier date.[490]  ASIC did not disagree with that submission as a general proposition but countered it by the assertion that the transactions that were documented required board approval; there was a $50 million limit on the delegated authority but no board approval for them. The relevant transactions exceeded $50 million. Thus, those entering into them on behalf of MFSIM did so without authority. 
  2. The submissions for Mr Anderson, in particular, addressed these issues.  The first argument was that the allegation of “no authority” in para 3(b)(i) of the reply was inconsistent with the assertion in para 185 of the statement of claim that the actions of Mr White and Mr Hutchings in entering the responsible entity into the loan participation agreement and in applying for units in MYF (paras 120, 121 and 123 of the statement of claim) were the actions of MFSIM as responsible entity for PIF.  Consequently, pursuant to the Uniform Civil Procedure Rules 1999 (Qld) (UCPR) r 154, it was not open to ASIC to take an inconsistent position in its reply, namely that it was beyond the authority of Mr White and Mr Hutchings to enter the responsible entity for PIF into the loan participation agreement and to make the applications for units on behalf of the responsible entity.
  3. The second argument was that a contract entered into by an agent in exercise of the agent’s authority is voidable at the option of the principal.[491]  There was no pleaded allegation, and no evidence, that the responsible entity for PIF has ever elected to avoid the loan participation agreement or the acquisition of units in MYF.
  4. The third argument was:
  • In respect of the MYF units:
  1. The pleading of no authority in para 3(b)(i) of the reply was only made with respect to investments acquired with the $130 million, ie the 67.5 million units in MYF and the $62.5 million loan participation agreement.  It was not pleaded in respect of the acquisition of the 17.5 million units in MYF, which was below the $50 million threshold in any event.
  1. The $50 million limit was a limitation on the delegated authority to the CEO to make investments.  There was no evidence of any monetary limitation in respect of MYF issuing units to unitholders.  Consequently, the action of the responsible entity for MYF in issuing the 67.5 million units to PIF was not constrained by any limitation of authority.  The most ASIC could argue was that the making of the application by PIF for the units was unauthorised (because there was no prior board approval to the making of the application).
  2. Even if the application was unauthorised, MYF nevertheless issued the units.  MFSIM issued the 67.5 million units to PIF, and they thereby became an asset owned by PIF and the only legal consequence of the application being unauthorised was that MFSIM could have informed MYF that the application was unauthorised, could have asked MYF to cancel the units and to return the application money.  But there is no evidence that it did that so the legal consequence was that the responsible entity for PIF has owned the 67.5 million units from the time the unit certificate issued.
  • In respect of the PIF/PacFin loan participation agreement:
  1. The absence of board approval did not mean that the agreement was not legally binding as between the two contracting parties: MFSIM as the responsible entity for PIF and PacFin.  The real question was whether the written agreement did or did not become an enforceable contract as between PIF and PacFin.  That turned on broader considerations than just whether, internally to PIF, the actions of its directors in signing the contract were properly authorised.  It also turns on whether PacFin could, notwithstanding any lack of authority within PIF, have enforced the agreement against PIF.
  1. PacFin could rely on the application of the indoor management rule, that “… persons dealing with a company in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been regular”,[492] to contend that the agreement was legally binding, despite the absence of board approval.
  2. Mr White’s knowledge (of the absence of board approval) in his role as an officer of MFSIM as the responsible entity for PIF should not be imputed to PacFin.
  1. ASIC’s arguments to the contrary were that I should find that Mr Anderson and the other defendants had failed to prove the acquisition of the 67.5 million fully paid A Class units in MYF and $62.5 million in rights in the loans pursuant to the participation agreement with PacFin.  It relied on its submissions that the evidence establishes that the $130 million was applied on 30 November 2007 for the purpose of the part repayment of the Fortress loan; and that the purported acquisitions were not identified and documented until in or about February 2008.  It also argued that there was no pleading that the purported acquisitions were effective without ratification, the only basis pleaded by Mr Anderson being that in para 50C of his amended defence which raised the issue whether the acquisitions were ratified by the board of MFSIM. 
  2. In any event, ASIC submitted, Mr Anderson had failed to prove that any such agreement was executed within the actual authority of Mr White and Mr Hutchings, who were the persons who executed the participation agreements and the application for 85 million class A units in MYF1.  Those units did not exist at the time that the application was signed and the purported acceptance of the transfer of the units by MYF to PIF was by the issue of unit certificates before the MFSIM board ever purported to ratify the issue of the 100 million units.  In fact, when MFSIM ratified the issue by MYF of 100 million units it did not purport to authorise any subsequent acquisition of assets.[493]  Accordingly, the purchase by MYF of the $55 million interest in loans under the participation agreement (and the $30 million loan to Sunleisure) was specifically not ratified.  Further, there was no ratification by MYF of the acceptance of PIF’s application for 85 million class A units in MYF.
  3. The submission continued that I could not be satisfied that Mr White and Mr Hutchings were acting within any actual authority because the onus lay on Mr Anderson to prove that the contract was made, and, if the contract was made by an agent, the authority of the agent to make it.  He had failed to prove that they had such actual authority to enter into participation agreements for $62.5 million and/or $85 million as  even the CEO’s authority was limited to $50 million.  Nor could there be any authority by MYF (without ratification) to accept an application for 85 million units before the units were issued.
  4. Nor, ASIC submitted, could apparent or ostensible authority operate when the other party knows of the lack of authority.  That submission was based on the fact that Mr White and Mr Hutchings had no actual authority to enter the alleged contracts. However, they conceded that Mr White and Mr Anderson did have apparent/ostensible authority to enter into such contracts on behalf of PIF.  They submitted that was consistent with their submissions concerning the attribution of Mr White’s, Mr King’s and Mr Anderson’s conduct to MFSIM in November 2007. 
  5. It seems to me that that approach also provides the answer to the pleading argument raised on behalf of Mr Anderson to which I referred earlier.  In other words, para 3(b)(i) of the reply is explicable as referring to actual authority where para 185 of the statement of claim deals explicitly with actual or apparent authority. 
  6. In this context, however, ASIC’s principal submission was that a contract is not enforceable, without ratification, on the basis of conduct within the apparent or ostensible authority of an agent, outside actual authority, if the other party is aware of the absence of actual authority.[494]  It summarised its argument against the submissions on behalf of Mr Anderson with respect to authority to enter into the agreements by pointing out that Mr White, as the agent for PacFin, knew that he, as the agent for MFSIM, did not have authority to enter into the purported acquisitions. Accordingly, Mr White as agent for PacFin cannot assert that there is an enforceable contract against MFSIM because:

“No act done by an agent in excess of his actual authority is binding on the principal with respect to persons having notice that in doing the act the agent is exceeding his authority.”[495]

  1. The absence of actual authority to make the investments purportedly acquired with the $130 million, ie the 67.5 million units in MYF and the $62.5 million loan participation agreement, to the knowledge of both parties to the purported transaction, establishes to my satisfaction that they were ineffective, including the issue of the units in MYF.  I do not see how that issuing of units can stand when both parties to the transaction must be taken to have known that the payment purportedly made for them was unauthorised. 
  2. The submissions for Mr Anderson that Mr White was under no duty to MFSIM to communicate the limits on his authority to PacFin nor under a duty to receive such information on behalf of PacFin is implausible.  It was in PacFin’s interests to know whether the agreement it was entering into was enforceable.  That has the effect that it was incumbent on Mr White to receive the relevant information on its behalf.  The indoor management rule does not apply in a case like this.
  3. ASIC did not address submissions concerning actual authority to enter into the $17.5 million transaction with PacFin, apparently contenting itself to rely on its primary case that no consideration was provided at the time of the payment and whether there were later genuine transactions entered into was irrelevant.[496] 

Ratification

  1. The written submissions for Mr Anderson summarised the conduct relied on as amounting to ratification as follows:[497]

“(a)the RE’s adoption of the 31 December 2007 half-year accounts for PIF (which the board of directors in a meeting on 19 March 2008 resolved to adopt, which were then signed by the RE and made public by lodging with ASIC). Those accounts recorded:

(i)the fund holding 85m $1 units in the MYF (internal p.11);

(ii)the fund having an asset of $62.5m, being rights acquired under a participation agreement the fund had entered into with PacFin on 30 November 2007 whereby the fund participates in loans originated by PacFin, and that the participation agreement covers 6 corporate loans with varying maturities (internal p.12);

(b)the RE’s adoption of the 30 June 2008 and 30 June 2009 PIF accounts, which likewise record the units in MYF and the rights under the loan participation agreement as assets of the fund;

(c)the RE’s assertion of its legal rights arising under the loan participation agreement in correspondence between MFSIM and PacFin (and between their solicitors) as follows:

(i)a letter dated 10 March 2008. By this letter, MFSIM amongst other things called upon PacFin to confirm whether it would honour its obligations under the loan participation agreement and reserved its rights in respect of the agreement in respect of any repudiation of it;

(ii)a letter dated 28 March 2008. By this letter, PacFin amongst other things confirmed that it did not repudiate the loan participation agreement;

(iii)a letter dated 31 March 2008. By this letter, MFSIM (through its lawyers) called upon PacFin to provide an explanation for its reasons for failing to comply with its obligations under the loan participation agreements together with details of all monies received from the borrowers under the various agreements; and again reserving all its rights;

(iv)a letter dated 14 April 2008. By this letter, PacFin confirmed (at pp.3, 4) its entry in the participation agreements; and that it had received legal advice about the rights that were created by the agreements; and that it was not in a position to repay PIF and MYF; and proposing a moratorium arrangement that amongst other things included a proposal to pay amounts owing to PIF and MYF under the participation agreements;

(v)an e-mail dated 10 April 2008. By that e-mail, PacFin (through its lawyers) sent a letter to MFSIM (through its lawyers) referring to PIF’s claim against PacFin under the loan participation agreement;

(vi)a letter dated 10 April 2008. By this letter, PacFin (through its lawyers) confirmed its view that MFSIM’s rights against PacFin would amount to an unsecured claim in damages for breach of the loan participation agreement amongst other things.

(d)on or about 24 June 2008, the RE commenced proceedings against MFS Limited, MFSA and PacFin in which it asserts rights arising from entry into the loan participation agreement and the acquisition of the units in MYF;

(e)Wellington Capital Limited (the replacement RE for PIF) adopted the financial accounts for PIF as at 31 December 2008, 30 June 2009 and 31 December 2009, each of which recorded PIF’s ownership of units in MYF and rights under its loan participation agreement with PacFin;

(f)the RE for PIF received and kept a return on capital of $425,000 as a unitholder in MYF (see 30 June 2010 annual accounts of MYF: WIT.ALLM.0007 at internal page 16 and WIT.ALLM.0004 at internal page 13).”

  1. Mr O’Donnell submitted that these actions of the responsible entity amounted to an unequivocal adoption of the loan participation agreement and the acquisition of the units in MYF.
  2. In discussing whether MFSIM was aware of material circumstances attending any unauthorised acts, Mr O’Donnell identified the critical question as what information was known to the independent directors, Mr Whateley and Mr Diamond, and what was known to MFSIM through papers provided to the directors.  He pointed to:
  • the papers provided to the directors’ meeting to be held on 20 February 2008 and for the conflicts committee meeting to be held on the same date;
  • emails from Mr Hutchings on 11 and 25 February seeking board ratification to the issue of 100,000,000 units in MYF;
  • a loan book presented to the board meeting on 20 February 2008 recording each of the loans making up the loan participation agreement with PacFin;
  • a document circulated by Mr Korda on 20 February 2008 containing a summary of each of the loans making up the loan participation agreement;
  • PIF’s unit holding in MYF;
  • MYF’s loan to Sunleisure;
  • the loans making up the MYF participation agreement together with the minutes of the 20 February 2008 board meeting; and
  • interim status reports by Price Waterhouse Coopers (PwC) on their audit as at 27 February 2008 and 5 March 2008. 
  1. From that, he submitted, that the key pieces of information that had become known to the directors before the 19 March 2008 board meeting at which the directors approved the accounts for PIF were:[498]

“(a)Diamond and Whateley knew that the RBS facility had been drawn down by at least $150m by 28 December 2007;

(b)Whateley and Diamond had each received and read the board papers for the 20 February 2008 board of directors and conflicts committee meetings (and Whateley had made handwritten markings on them). They had further received and read the 333 loan book and loan analysis document;

(c)if not before, then at least by the 20 February 2008 board and conflicts committee meetings, both knew:

(i)MYF had issued 100m class A units;

(ii)PIF had paid $85m for 85m of those units;

(iii)PIF had entered into a loan participation agreement with PacFin, pursuant to which PIF had paid $62.5m;

(d)the transactions (entry into the loan participation agreement and the acquisition of 85m units in MYF) exceeded the $50m limit on the CEO’s delegated authority;

(e)the transactions had not been brought to the board for approval. In Diamond’s words, the transactions were “unauthorised and unapproved”;

(f)Whateley and Diamond on 27 February 2008 ratified MYF’s issue of the 100m units;

(g)MYF had used the $85m from PIF as follows:

(i)MYF entered into its own loan participation agreement with PacFin, pursuant to which MYF outlaid $55m to acquire participation rights in respect of loans of PacFin;

(ii)MYF entered into a loan agreement with Sunleisure Group, pursuant to which it had lent Sunleisure $30m;

(h)the directors had received and read the 333 loan book, which they appreciated contained an analysis of (amongst other things) each loan the subject of the PIF and MYF loan participation agreements with PacFin. At the directors’ meeting on 20 February 2008 the circumstances of each loan was addressed in detail in discussion with Korda, including prospect of repayment;

(i)Whateley was closely involved in the audit (which was occurring at the same time), including meetings and discussions with the auditors, reading the auditor’s interim reports and reading the draft six monthly accounts for PIF, and appreciated that areas of the auditor’s concern included the acquisition of units in MYF and the loan participation agreement with PIF.”

  1. His submission went on that, by 19 March 2008, the board had to choose either to recognise the acquisition of the units and the participation agreement as transactions of the fund or disavow them.  That had to be done then because, if the board was to adopt the transactions, they had to be recorded in the half-yearly accounts for PIF whose lodgement was then due.  Mr O’Donnell submitted that the approval of the accounts was unequivocal and only logically explicable as an adoption of what Mr Whateley and Mr Diamond both knew to be “unauthorised and unapproved” transactions.  He argued that that conclusion was reinforced by the subsequent conduct of the responsible entity, MFSIM, asserting legal rights of PIF arising from the loan participation agreement.  He also referred again to the receipt of the benefit by Wellington Capital Ltd of $425,000 in the financial year ending 30 June 2010.  Wellington Capital Ltd had replaced MFSIM as the responsible entity for PIF after these events.  
  2. ASIC’s submissions were that the issue of ratification was not relevant on its primary case and that, in any event, no consideration was given at the time of, or in exchange for, these payments and that PIF did not acquire anything for its payments because the subsequently documented transactions were not entered into by persons having authority to enter into them and MFSIM did not subsequently ratify them.  The argument about the lack of authority arose because of the $50 million limit on delegated authority to enter into the transaction so that those entering into them on behalf of MFSIM did so without authority.
  3. ASIC also denies that the transactions were ratified, pointing out that the independent directors, Mr Whateley and Mr Diamond, expressly declined to ratify any subsequent acquisition of assets by PIF.  Mr Whateley said in an email of 27 February 2008 at 12:48 pm that although he agreed with the issue of the units, “… that agreement to the issue of these units does not indicate my endorsement or otherwise of any subsequent acquisition of assets”.[499]  A similar approach was taken by Mr Diamond in an email of 27 February 2008 at 7:17 pm.  So the non-executive directors expressly declined to adopt the transactions beyond MYF issuing a new class of 100,000,000 units. 
  4. ASIC characterised the question that arose, therefore, as whether, despite this express lack of endorsement of the underlying transactions, MFSIM could be said to have ratified those transactions.  The focus of its submissions was that, at the time of the alleged ratification or adoption, the principal, MFSIM, did not have full knowledge of the material facts and circumstances pertaining to its agents’ unauthorised act,[500] arguing that it will be a rare case in which a principal will be found to have adopted an agent’s act where the principal lacked full knowledge.[501]  It is only where the evidence very clearly shows that the principal intended to ratify whatever the circumstances that such a result could be justified.  That occurred in McHugh v Eastern Star Gas Ltd[502] where the New South Wales Court of Appeal expressed the view that the principal in that case, in sanctioning the agent’s retainer, was prepared to “take the risk”, even if the principal did not have full knowledge of all material circumstances.  The court there concluded that there was certainly enough knowledge in the principal to decide whether or not to adopt the unauthorised act.
  5. In addressing the facts relied upon by the defendants to argue that ratification had occurred, ASIC argued that the conduct, if proved, must be considered in the context that the non-executive directors had expressly declined to approve the transactions on 27 February 2008.  The directors of MFSIM and, later, Wellington Capital Ltd, had not been shown by the defendants to have had full knowledge of the essential facts concerning the transactions and the conduct was not consistent only with an intention to ratify the transactions because the conduct, if proven, was at least as consistent with there being a lack of full information about the essential aspects of the transactions on the part of the responsible entity.
  6. In this context, ASIC submitted that the board of MFSIM was given clearly false information about the transactions when it was asked to ratify them.  It submitted that the papers that were provided to the board[503] revealed that it was informed of the following matters on or about 20 February 2008:[504]

“(a)at pages 1165-6, in relation to PIF’s purchase of 85 million units in MYF:

(i)that there had been consultation with the IAC about the investment, when there had not;

(ii)that the IAC had reviewed the proposed transactions, when they had not;

(iii)that the IAC had confirmed that the transactions were on an arms length basis, when the IAC had not done that;

(iv)that the IAC had confirmed that the transactions were consistent with the Scheme’s investment parameters, when the IAC had not done that;

(v)that the IAC had reviewed and approved these facilities on 23 November 2007, which it had not;

(vi)that the facility was at arms length and on commercial terms and in the best interest of the unitholders and therefore did not require unitholder approval, when it did not answer those descriptions;

(vii)that key documents were available on request including IAC submission and IAC minutes (approvals) when such documents as had been prepared were backdated and purported to record events that did not occur;

(b)at pages 1169-1170, the Board was given a copy of the false minutes of a meeting of the IAC of MYF on 28 November 2007 purportedly approving the PacFin participation agreement and the Sunleisure loan and that document stated:

(i)the proposal meets all of the MYF authorised investments;

(ii)the underlying assets meet the investment guidelines of the MYF;

(iii)the intention was for MYF to ‘claw back’ the participation amount provided by MYF within the next six months;

(c)at pages 1171-2, the Board was given a copy of the false paper for the IAC of MYF dated 20 November 2007;

(d)at pages 1173-4, the Board was given a copy of the false minutes of the IAC of MYF dated 21 November 2007;

(e)at pages 1224-1225, the Board was falsely informed about the transaction involving MYF entering into a loan participation agreement with PacFin and MYF making a loan to Sunleisure that:

(i)there was consultation with the IAC about the transactions, when there was not;

(ii)the IAC had reviewed the proposed transactions, when they had not;

(iii)the IAC had confirmed the transactions were on an arms’ length basis, when it were not;

(iv)the IAC had confirmed that the transactions were consistent with the scheme’s investment parameter, when it had not;

(v)the IAC reviewed and approved these facilities on 28 November 2008, when they had not;

(vi)that the facility was at arms’ length and on commercial terms and that unitholder approval was not required, when it did not answer those descriptions;

(vii)that key documents were available upon request including IAC submission and IAC minutes, which were documents that had been prepared long after the dates they bore and which purported to record events that did not occur;

(f)at pages 1227-8, the Board was given a copy of the false minutes of a meeting of the IAC of MYF on 28 November 2007;

(g)at pages 1229-1230, the Board was given a copy of the false submission to the IAC dated 28 November 2007 concerning the Sunleisure loan;

(h)at pages 1232-3, the Board was given a copy of the false submission to the IAC dated 27 November 2007 concerning the PacFin loan participation agreement.”

  1. In particular, it submitted that the board was informed that IAC consideration had occurred, that the transactions were at arm’s length and that they met the investment parameters of the scheme.  The board was also informed that the transactions had occurred in November and December 2007, rather than at some later date, when all of these things were untrue.
  2. Accordingly, it submitted that the board was misinformed about fundamental matters so that it cannot have been that it ratified the transactions with full knowledge of all material circumstances.  It submitted that the board was then being actively misled about the nature of the transactions and whether anyone within the organisation had given consideration to whether they were arm’s length and legitimate transactions for PIF to undertake. 
  3. Mr O’Donnell objected to these arguments for ASIC in his oral submissions[505] as being outside the terms of the reply, particularly in para 4(c) which provided that there was no ratification because the MFSIM board was not made aware of the circumstances of the alleged transactions, rather than that they were actively misled.[506]  There is some substance in that submission.  As Mr O’Donnell pointed out, if the reply asserted that the directors had been misled he may have needed to recall the directors to cross-examine them as to whether they had been misled and as to whether these matters really affected their decision. 
  4. When one considers the pleading, however, the matters that are alleged as not having been revealed to the board are highly significant.  They are:
  • that the purpose of the $150 million drawdown, the $130 million payment and the $103 million payment were, as pleaded in para 44 of the statement of claim, namely as a benefit to a related party for the repayment of the Fortress loan; 
  • that the payments were not made for the benefit of PIF;
  • that the IAC never approved the transactions; and
  • that the payments were made without consideration passing to PIF at the time of the payments.
  1. I do not understand that the independent board members were given that information. 
  2. ASIC also submitted that the later institution of proceedings by MFSIM, rather than evidencing an intention to ratify the transactions, demonstrated the lack of knowledge in the then responsible entity.  ASIC pointed out that the pleader of the statement of claim in those proceedings relied upon various of the false documents as accurately recording events at the time of the payments including minutes of meetings that did not occur such as the one on 21 November 2007 alleged in para 35 of the relevant statement of claim.
  3. It made similar submissions about the entries in PIF’s accounts as being more consistent with MFSIM’s board not having full knowledge of all material circumstances in proceeding in the false belief, encouraged by Mr Hutchings, that there had been proper consideration given to the transactions at the time of the payments and that the transactions had in fact been entered into in 2007. 
  4. ASIC submitted that the defendants had failed to discharge their onus of demonstrating that the inclusion of those entries in PIF’s accounts, overcame the false information that had been provided to the board about material matters and the board’s express refusal to ratify the transactions on 27 February 2008.  It submitted that there was no evidence presented, for example that Mr Whateley, Mr Diamond or the directors of MFSIM, after its acquisition by Wellington Capital Ltd, knew that the IAC had not approved the transactions and had not considered whether the transactions were at arm’s length and in accordance with PIF’s investments parameters.  Further, ASIC submitted that there was no evidence that anyone had considered those questions.  It submitted that the board had been actively misled into the belief that the transactions had been considered and approved by the IAC at the time of the payments.  Nor had it been told that no consideration had then passed to PIF or that the payments were not made for PIF’s  benefit but rather for the purposes of the wider MFS Group.
  5. It also submitted that the correspondence relied upon by Mr Anderson was entered into during March and April 2008 and undertaken at a time when the board was not informed of the facts material to whether it should ratify the transactions where some of the defendants were actively misleading it about events.
  6. As to the evidence of PIF keeping the $425,000 repaid to it from MYF, it submitted that, again, the defendants had failed to demonstrate that Wellington Capital Ltd, at the time it received that sum, had full knowledge of all of the material facts where the evidence also demonstrated that MYF had invested $2.1 million in PacFin in late December 2007 so that the defendants had failed to discharge their onus of demonstrating that the $425,000 did not relate to a return of some part of that money from PacFin and the distribution of that return to PIF.  Therefore they had not proved that Wellington Capital Ltd knew that the benefits flowed from an unauthorised act.
  7. The submissions for Mr Anderson argued that the lack of IAC approval was not material because only the board could approve transactions for more than $50 million.  Counsel for Mr Anderson also argued that the purpose and intended benefit of the payments was, at best, a collateral matter as, once the board knew of the two transactions, knew that they were unauthorised and knew that a decision had to be made by it whether to acknowledge them as transactions of the fund or not, that was sufficient for the board to make a decision.  They submitted that it was not necessary for the board to go into further detail regarding the circumstances leading up to the transactions. 
  8. They also pointed to the lack of any later disavowal of the transactions by, for example, Mr Whateley and Mr Diamond, to argue that the board had “taken the risk” in respect of any unknown circumstances associated with the transactions.
  9. My view is, however, that the failure to inform the board about the true purpose and nature of the transaction, including the use of the funds to pay the Fortress loan without consideration then passing to PIF and failure to inform it of the lack of consultation with the IAC were highly material to the board’s consideration of the matters, even if IAC approval was not required.  Any assumption that the IAC had considered the matter was capable of going a long way to allay any concerns of the board and the failure to inform the board that that consideration had not occurred made that a material misrepresentation.  The failure to provide the true information about the purpose and use of the funds at the time also has the effect, in my view, that the transactions cannot be regarded as ones that have been ratified by the board because it has been shown by ASIC that the responsible entity did not have full knowledge of all of the material circumstances surrounding the transactions.

Related parties

  1. I have set out earlier ASIC’s submissions about MFSIM and MFS Administration being related parties and MFSIM and PacFin being related parties.  Section 208 of the Act requires the approval of a public company’s members for it, or an entity controlled by it, to give a financial benefit to a related party of the public company.  ASIC’s case was that each of MFS Administration, MFS Castle, MFS Limited and MFS Financial Services were related parties of MFSIM.  That followed because of their membership within the overall MFS Group of companies. 
  2. The issue of control raised under s 50AA was satisfied because MFS controlled both MFSIM and MFS Administration.  The control arose from the fact that MFSIM was a subsidiary of MFS and MFS Administration was also a subsidiary of MFS.  Mr King was also said to control Mr White based on the evidence traversed earlier about the influence that he had over Mr White causing him to be an officer of MFSIM. 
  3. The question of control between MFSIM and PacFin was resolved by the evidence that MFS controlled MFSIM and MFS Administration and MFS Administration controlled PacFin.  That control arose from the fact that MFSIM was a subsidiary of MFS.  MFS Administration was also a subsidiary of MFS and controlled PacFin through a Management Agreement dated 24 July 2006 under which, by its terms, PacFin was managed exclusively by MFS Administration.[507]  Mr White and Mr Anderson were directors of MFS Administration and two of the three directors of PacFin.
  4. Mr Riordan, in his oral submissions, illustrated the capacity of Mr King, Mr White and Mr Anderson to exercise influence by referring to the speed with which they were able to overcome the safeguards meant to control the investment of MFSIM’s funds in November and December 2007 “without anybody raising more than a whimper”.[508] 
  5. ASIC’s submission went on to argue that the payment of the $130 million was a payment to MFS Administration while the payment of the $103 million to Fortress constituted a benefit to MFS Castle (the holder of the Fortress debt) and to MFS Limited and MFS Financial Services as guarantors of the Fortress debt.  In making those payments out of scheme property to benefit related parties, without obtaining the approval required by s 208, ASIC’s counsel argued that MFSIM as responsible entity for PIF contravened s 208(1) as modified by s 601LC dealing with managed investment schemes.
  6. Mr George for Mr Anderson submitted also that, applying the test for related parties under s 228 of the Act as modified by s 601LA and read with s 50AA of the Act, it had not been established that MFS Limited had the capacity to determine the outcome of decisions by MFSIM as responsible entity for PIF about PIF’s financial and operating policies. 
  7. The submission was that MFSIM’s board was independent and, even if it could have been removed, while it was in place, the practical influence that the first entity, MFS Limited, could exert over MFSIM was limited and not such as to determine the outcome of decisions by MFSIM.  It functioned independently at the relevant time. 
  8. Although MFS could determine who became the directors of MFSIM, it chose to appoint to its board a majority of directors who were independent of the MFSIM Group.  It also chose to adopt a policy that MFSIM as responsible entity would operate independently.  In this he relied upon the evidence of Mr Cronin, Mr Diamond, Mr Whateley, Ms Beale and Ms Kercher.  There were no common directors in the latter half of 2007 between MFS and MFSIM and a lack of evidence of actual influence on the operating or financial policies of PIF by MFS.
  9. He rejected ASIC’s arguments that Mr King had the capacity to control MFSIM by reference to several emails involving Mr King.  He argued that, at best, the emails showed Mr King was able to exert some influence in some of Mr White’s activities relating to PIF.  He submitted that the capacity to influence Mr White’s activities did not rise to the capacity in Mr King to determine the outcome of decisions about PIF’s financial and operating policies as he was only one of five directors of MFSIM. 
  10. That approach to the issue ignores the effect of the reference to the “capacity to determine the outcome of decisions about the second entity’s financial or operating policies” in s 50AA(1) (emphasis added).  Mr George’s submissions really focussed on the meaning of the “practical influence the first entity can exert (rather than the rights it can enforce)” in s 50AA(2)(a). 
  11. One must not ignore the question of capacity, however.  As Brereton J said recently in Hancock v Rinehart:[509]

“152.The concept of ‘control’ of an entity is concerned with the ability to determine the outcome of decisions of the entity [cf Corporations Act, s 50AA; Glencore International AG v Takeovers Panel [2006] FCA 274; (2006) 151 FCR 77, [83] (Emmett J)].  In the context of a company, this ordinarily means the ability to carry a resolution by majority at the general meeting - and thus to determine the composition of the board of directors [Mendes v Commissioner of Probate Duties (Vic) [1967] HCA 23; (1967) 122 CLR 152, 161 (Kitto J, with whom Taylor J agreed), 169 (Windeyer J); Fraser v NRMA Holdings Limited [1994] FCA 1397; (1994) 52 FCR 1, 24 (Gummow J); Canwest Global Communications Corp v Australian Broadcasting Authority (1997) 71 FCR 485, 506; (1997) 147 ALR 539, 559; (1997) 24 ACSR 405 (Hill J); see also W P Keighery Pty Ltd v Commissioner of Taxation [1957] HCA 2; (1957) 100 CLR 66; Commissioner of Taxation v Sidney Williams (Holdings) Ltd [1957] HCA 1; (1957) 100 CLR 95; Kolotex Hosiery (Australia) Pty Ltd v Commissioner of Taxation (Cth) [1973] HCA 28; (1973) 130 CLR 64, 77-78 (Mason J); Kolotex Hosiery (Australia) Pty Ltd v Commissioner of Taxation (Cth) [1975] HCA 5; (1975) 132 CLR 535, 572-573 (Gibbs J)].  At an earlier stage of the present litigation, in Welker v Rinehart (No 2) [2011] NSWSC 1238 (at [47]-[48]), I had to consider a reference - in clause 8 of the Hope Downs Deed - to Mrs Rinehart’s ‘full ongoing control and management of HPPL’.  In a conclusion that was not disturbed in Rinehart v Welker [2012] NSWCA 95 (at [146(d)]), I said that ‘control’ normally means the ability to control the board of directors through a majority of the general meeting (at [48]).

  1. Control is concerned with decision making, rather than proprietorship, and control, like ownership, can be indirect: there are circumstances in which those who have the ability to carry a resolution may become bound to act on the direction of another (for example, a mortgagee).  The ‘control’ requirement is directed to the ultimate power to decide how an entity acts, as distinct from beneficial ownership, and also as distinct from the delegated power of directors or officers.  Although typically those who wholly own a company will control it, that is not necessarily so: it is not unknown for those entitled to exercise voting power to become bound or accustomed to exercise their voting rights in accordance with the direction of another … In such a case, that other person will ‘control’ the company if he or she has a sufficient accumulation, directly or indirectly, of voting power to carry the general meeting.”
  1. The application of that test leaves no room for doubt that MFS Administration and MFSIM were related parties.  They were both controlled by MFS as its wholly owned subsidiaries.  In any event the evidence was quite persuasive that, in spite of the existence of the independent MFSIM board, Mr White and Mr King wielded a lot of practical influence over the company’s operations. 
  2. Mr George also submitted that MFS did not control PacFin.  MFS had divested about 61.6 per cent of its interest in PacFin in about 2006, so that by about late 2006, MFS owned about 38.4 per cent of PacFin.  PacFin made its own decisions about its operating and financial policies through Mr Maywald, Mr Gaylard and Mr Oliver and through the board of directors of its parent company, MFS New Zealand Limited.
  3. On Mr Anderson’s evidence, he was not aware of any influence by Mr King on PacFin’s financial or operating policies after he resigned as one of its directors in about July 2007.  His view, as an accountant for the group, was that, after MFS divested itself of its interests in PacFin in 2006, PacFin had ceased to be a related party and did not need to be included in MFS Limited’s consolidated accounts.
  4. Mr Maywald’s affidavit evidence, on which he was not cross-examined because of his claim for privilege, was that he would consult Mr King on strategic and policy matters and on major decisions.  It was criticised as not directed to the specific relationship between MFS and PacFin and the submission made was that his evidence did not rise much above him keeping Mr King informed, rather than Mr King making decisions as to the financial and operating policies of PacFin.  Mr King’s evidence was that in the latter period of 2007, he had no capacity to give directions to Mr Maywald regarding the affairs of PacFin.  He rejected the proposition that Mr Maywald always consulted him on strategic or policy matters after he ceased to be a director of PacFin. 
  5. In supplementary written submissions, counsel for Mr Anderson rejected ASIC’s submission that MFS Administration controlled PacFin through the management agreement dated 24 July 2006 under which PacFin was said to be managed exclusively by MFS Administration.  The only evidence ASIC pointed to in support of this submission was the management agreement itself.[510]  No particular term of the agreement was referred to by ASIC.  The services to be provided by MFS Administration were set out in schedule 4 of the agreement.  It was bound to comply with instructions from PacFin under cl 3.3 of the agreement. Counsel submitted that nothing in the agreement gave MFS Administration any capacity to determine the outcome of decisions about PacFin’s financial and operating policies. ASIC had not shown that, by the agreement, the control test in s 50AA of the Corporations Act had been satisfied.
  6. Clause 2.1 provided, however, that PacFin appointed MFS Administration as its exclusive agent to manage PacFin on the terms contained in the agreement.  Clause 3.3 then provided that MFS Administration agreed to comply with any reasonable and lawful instruction that PacFin may, at any time, give to it, in which circumstances PacFin had the sole responsibility for the consequences of that instruction. However, MFS Administration was entitled to complete any transaction already commenced prior to receiving such an instruction from PacFin.  
  7. When one brings the focus back to the question of capacity to control, however, the roles of Mr White and Mr Anderson as directors of MFS Administration and two of the three directors of PacFin are highly important.  The management agreement also satisfies me that MFS Administration had significant practical influence over PacFin.  I am persuaded that they were related parties. 

False documents

  1. The false documents case as pleaded by ASIC alleged, typically, that the defendants said to have been involved in creating those documents, such as Mr Hutchings, Ms Watts, Mr Anderson and Mr White, created or assisted in the creation of a relevant document.  They did so, knowing, for example, that no such recommendation as was recorded in it had ever been made, intending that it would form an apparently genuine part of the financial books and records of MFSIM with the consequences flowing from that.  They also knew that the $130 million payment and the $17.5 million payment had not been invested in accordance with PIF’s constitution but intended that the document would disguise that fact.  They also knew that PIF did not invest in MYF on or about 30 November 2007 and intended that the document would disguise that fact.[511] 
  2. The use of the false documents was pleaded as relevant to the MFSIM contraventions pleaded in paras 185-198A of the statement of claim.  The balance of the pleading then made allegations tying the individual defendants into contraventions alleged against them of involvement in MFSIM’s contraventions, and of allegations of themselves contravening s 601FD of the Act and other provisions of the Act.  Allegations relating to the false documents were made of contravening s 344(1) of the Act by, typically, failing to take all reasonable steps to comply with, or to secure compliance with, the obligation to keep written and financial records that correctly recorded and explained the transactions of MFSIM as required by s 286(1) of the Act.[512] 
  3. Some of the defendants argued that those allegations raised for consideration whether the documents were “shams”.[513] 
  4. Lord Diplock, in Snook v London and West Riding Investments Ltd,[514] addressed the meaning of that “popular and pejorative word” in these terms:

“I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.  But one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co v Maclure  and Stoneleigh Finance Ltd v Phillips), that for acts or documents to be a ‘sham’, with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.”

  1. Similarly in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd,[515] the High Court said:

“‘Sham’ is an expression which has a well-understood legal meaning. It refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences.”

  1. Mr Withers for Mr Hutchings submitted that Snook was authority for the proposition that a sham would exist where the parties intended that the transaction documents would not create the legal rights or obligations they appear to create and that it was intended that the documents would mislead a third party into believing the parties had created those rights and obligations.  Mr O’Donnell for Mr Anderson made similar submissions.  He submitted that it had not been shown that PIF, MYF and PacFin intended that the loan participation agreements, or the acquisition of units in MYF, would not have the legal effect that they provided for. 
  2. He sought to distinguish on the one hand, between minutes of meetings and submissions to committees which did not occur, and on the other hand, the loan participation agreements and the acquisition of units.  His argument was that the minutes of meetings and submissions only went to internal procedures in PIF but that the loan participation agreements and acquisition of units went to contractual relationships between two different entities and it was those contractual arrangements that ASIC must show to be a sham.  It did not follow that those agreements were not legally binding.  He also submitted that while backdating of documents was a relevant consideration, it did not of itself establish a sham.[516] 
  3. One should bear in mind, however, what was said by the majority of the Court in Raftland Pty Ltd as trustee of the Raftland Trust v Commissioner of Taxation:[517]

“The term ‘sham’ may be employed here, but as Lockhart J emphasised in Sharrment Pty Ltd v Offıcial Trustee in Bankruptcy the term is ambiguous and uncertainty surrounds its meaning and application. With reference to remarks of Diplock LJ in Snook v London and West Riding Investments Ltd, Mustill LJ later identified as one of several situations where an agreement may be taken otherwise than at its face value, that where there was a ‘sham’; the term, when ‘[c]orrectly employed’, denoted an objective of deliberate deception of third parties.”

  1. What is more relevant here is whether there has been a correct record and explanation of MFSIM’s transactions, to use the language of s 286(1)(a).  Mr Moore for ASIC dealt orally with some aspects of the false documents case.  He pointed out that the documents the subject of the case were false in two main respects.  One was that they reflected transactions in 2007 that did not occur in that year.  Secondly, the documents reflected other events, again in 2007, that simply did not occur, such as the making of submissions to the IAC and meetings of that body. 
  2. He agreed with the submissions for Mr Hutchings that it was not necessary to establish a subjective dishonest intent in order for a finding to be made that a person or a company did not act honestly.[518]  The authorities to which he referred support the proposition that the test for dishonesty is wholly objective and does not require proof that the accused was aware that “ordinary, decent people” would view his or her conduct as dishonest.
  3. He submitted that Ms Watts, Mr Hutchings, Mr Anderson and Mr White all acted dishonestly in relation to the false documents, applying that objective test.  If it mattered, he also submitted that they subjectively knew that the documents were false and that the purpose of their being backdated was to deceive a reader into the view that a transaction had occurred at an earlier date when it was known that no such transaction occurred. 
  4. He also submitted that it was important to treat the documents collectively as they were intended to be read.  The intention was that they be part of a picture to paint a version of events that simply did not happen.  The pretence was to create the impression that a number of steps occurred in sequence, such as the writing of a paper recommending the acquisition of class A MYF units and its submission to the IAC in November on a pretended date such as 20 November 2007.  There was then the pretence of a meeting held by a circular by which the paper was considered by Mr Hutchings and Mr White, for example, and then the making of a decision to approve PIF acquiring MYF units.  The next step in the pretence was the decision to approve the offer of units apparently implemented by the issue of an information memorandum.  Then there was the purported meeting of the PIF IAC and its decision to acquire $85 million of units followed, finally, by the issuing of units apparently, in the example, on 30 November 2007. 
  5. Because of my conclusions about the lack of authority and the ineffectiveness of the purported ratification of these documents, the conclusion I draw is that they provided no consideration for the payments that were made from PIF. 
  6. Further, the proper view of the evidence, in my view, is that they were documents created to try to explain the payments but were ones that did not reflect real transactions.  That was certainly the case in respect of the time they were said to have occurred.  Nor is there any convincing case that they were real transactions when created.  They were not authorised by the companies party to them, not ratified effectively and put together hurriedly and deceptively probably to portray to RBS and the auditors a scenario that had not occurred actually but was truly false or deceptive.[519] 
  7. In my view, even if the individuals involved in their creation may have wanted to create documents that apparently had legal consequences, the likely intentions were that the apparent transactions should be put in place to hide what had actually occurred, namely the payment of moneys without the provision of proper consideration at the time.[520]  In that sense there was an objective failure to record correctly and explain the transactions and financial position of MFSIM contrary to s 286(1).  I do not believe that decision requires a conclusion that the documents were “shams” in the sense referred to in Snook.  That issue is a red herring. 

Knowingly involved

  1. ASIC relies on s 79(c) alone in the allegations of contraventions it makes against each defendant as being knowingly involved in the MFSIM contraventions.[521] 
  2. To establish that a defendant was involved in MFSIM’s contraventions, ASIC must establish that the defendant had knowledge of the essential facts constituting the contravention.[522]  In elaborating that principle, White J in ASIC v ActiveSuper Pty Ltd (in liq) has usefully collected many of the principles relating to accessorial liability:[523]

“398.In order for a person to be knowingly concerned in a statutory contravention, that person must have been an intentional participant, with knowledge of the essential elements constituting the contravention:  Yorke v Lucas (1985) 158 CLR 661 at 670. It is not, however, necessary that a person with knowledge of the essential elements making up the contravention also know that those elements do amount to a contravention:  Yorke v Lucas at 667; Australian Competition and Consumer Commission v Giraffe World Australia Pty Ltd (No 2) [1999] FCA 1161; (1999) 95 FCR 302 at [186]; Medical Benefits Fund of Australia Ltd v Cassidy [2003] FCAFC 289; (2003) 135 FCR 1 at [8][13]. An accessory does not have to have appreciated that the conduct was unlawful: Giraffe World at [186].

  1. Actual knowledge of the essential elements constituting the contravention is required.  Imputed or constructive knowledge is insufficient:  Young Investments Group Pty Ltd v Mann [2012] FCAFC 107; (2012) 293 ALR 537 at [11].
  1. Proof that a person had actual knowledge of each of the essential elements making up the contravention may be derived from direct evidence but more commonly will be a matter of inference from all the circumstances found to be proved.  In some cases, actual knowledge can be inferred from the combination of a defendant’s knowledge of suspicious circumstances and the decision by the defendant not to make inquiries to remove those suspicions.  The High Court referred to knowledge in these circumstances in Pereira v Director of Public Prosecutions (1988) 82 ALR 217 at 220:

‘[A] combination of suspicious circumstances and failure to make inquiry may sustain an inference of knowledge of the actual or likely existence of the relevant matter.  In a case where a jury is invited to draw such an inference, a failure to make inquiry may sometimes, as a matter of lawyer’s shorthand, be referred to as ‘wilful blindness’.  Where that expression is used, care should be taken to ensure that a jury is not distracted by it from a consideration of the matter in issue as a matter of fact to be proved beyond reasonable doubt.’

  1. The caution enjoined by the last sentence in this passage is emphasised by the observations of Wilson, Deane and Dawson JJ in Giorgianni v The Queen (1985) 156 CLR 473 at 505:

‘[A]lthough it may be a proper inference from the fact that a person has deliberately abstained from making an inquiry about some matter that he knew of it and, perhaps, that he refrained from inquiry so that he could deny knowledge, it is nevertheless actual knowledge which must be proved and not knowledge which is imputed or presumed.’

And later (at 507-8):

‘The fact of exposure to the obvious may warrant the inference of knowledge.  The shutting of one’s eyes to the obvious is not, however, an alternative to the actual knowledge which is required as the basis of intent to aid, abet, counsel or procure.’

Their Honours appear in this passage to have been giving a different emphasis to that given by Gibbs CJ in Giorgianni when he said (at 482) that one qualification to the proposition that actual knowledge of the essential matters is necessary is that ‘wilful blindness, the deliberate shutting of one’s eyes to what is going on, is equivalent to knowledge’, and to that given by Mason J (at 495) that ‘it is enough if the defendant has deliberately shut his eyes to a relevant fact or has deliberately abstained from obtaining knowledge by making an inquiry for fear that he may learn the truth’.

  1. Any difference in approach in Giorgianni in these passages appears to have been resolved by the unanimous judgment in Pereira in the passage quoted above. It means that only actual knowledge of the essential matters will be sufficient but that that knowledge may be able to be inferred from a defendant’s knowledge of matters raising suspicion, together with a deliberate failure to make the enquiries which may have confirmed those suspicions.
  1. The determination that a person has actual knowledge in this manner is not always easy.  Amongst other things, it requires consideration of the defendant’s knowledge of matters giving rise to suspicion, the circumstances in which the defendant did not make the obvious enquiry, and the defendant’s reasons, to the extent that they are known, for not making the enquiry.  It is necessary to keep in mind that it may not be every deliberate failure to make enquiry which will support the inference of actual knowledge.  In several cases, including Official Trustee in Bankruptcy v Mitchell (1992) 38 FCR 364 at 371; Richardson & Wrench (Holdings) Pty Ltd v Ligon No 174 Pty Ltd (1994) 123 ALR 681 at 693-4; Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 168 FLR 253 at [209], this Court has referred with approval to a passage from the advice of Lord Sumner in The Zamora (No 2) [1921] 1 AC 801 at 812-3, in which his Lordship noted two senses in which persons may be said not to know something because they do not wish to know it:

‘A thing may be troublesome to learn, and the knowledge of it, when acquired, may be uninteresting or distasteful.  To refuse to know any more about the subject or anything at all is then a wilful but a real ignorance.  On the other hand, a man is said not to know because he does not want to know, where the substance of a thing is borne in upon his mind with a conviction that full details or precise proofs may be dangerous, because they may embarrass his denials or compromise his protests.  In such a case he flatters himself that where ignorance is safe, ‘tis folly to be wise, but there he is wrong, for he has been put upon notice and his further ignorance, even though actual and complete, is a mere affectation and disguise.’

In the former circumstance described by Lord Sumner, the person will not have actual knowledge of the matter.  In the latter circumstance, the person does have that knowledge but deliberately refrains from asking questions or seeking further information in order to maintain a state of apparent ignorance.  That is not a circumstance of constructive or imputed knowledge, but of actual knowledge reduced to a minimum by the person’s wilful conduct: Richardson & Wrench at 694 (Burchett J).  It stands in contrast to the circumstance of ‘honest ignorance’ to which Brennan J referred in Yorke v Lucas at 677.

  1. Although courts have held on several occasions that actual knowledge by a person of the essential elements of a contravention may be able to be inferred from proof that the person had knowledge of suspicious circumstances but deliberately refrained from making enquiry (Richardson & Wrench at 693-4; Cassidy at [71]; Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1 at 5; Australian Securities and Investments Commission v PFS Business Development Group Pty Ltd [2006] VSC 192, (2006) 57 ACSR 553 at [390]; Forge v Australian Securities and Investments Commission [2004] NSWCA 448, (2004) 213 ALR 574 at [202], there are few instances of actual knowledge being found to exist in those circumstances. This has the consequence that there is relatively little practical analysis in the authorities of the way in which actual knowledge can be inferred on the basis of knowledge of suspicious circumstances and a failure to make enquiry.
  1. The requisite actual knowledge must be present at the time of the contravention.  A later acquisition of knowledge of the essential matters is not sufficient: Australian Investors Forum at [113][118].”
  1. Mr Withers for Mr Hutchings submitted that knowledge in this context means the actual knowledge of the defendant or a situation where knowledge is the only rational inference available in the circumstances surrounding the contravention.[524]
  2. I am not convinced that in a civil penalty case such as this, as opposed to a criminal charge, that actual knowledge must be the only rational inference available; if the circumstances appearing from the evidence give rise to a reasonable and definite inference, and not merely to conflicting inferences of equal degrees of probability that actual knowledge exists, it seems to me that should be enough.  The approach to a finding of guilt where the criminal standard of proof applies, as in Pereira v Director of Public Prosecutions,[525] would require that actual knowledge be the only rational inference available, but the onus in a case such as this is, as discussed earlier, on the Briginshaw standard
  3. Mr Moore submitted that for ASIC to establish knowing involvement in the contravention it needed to show two things: first, some form of conduct and second, knowledge of the essential factual elements of the contravention.  In response to some of the submissions for the defendants to the effect that there could be no knowing involvement in a contravention unless the conduct in issue, such as the keeping of a document, was participated in by the actual defendant, he submitted that what was required was a practical connection with at least one of the essential elements of a contravention, not all of them. 
  4. To establish that proposition, he referred to Agricultural Land Management Ltd v Jackson (No 2),[526] where Edelman J said:

“I accept that … an event will only demonstrate that a person has a single ‘concern in’ the contravention if there is a single ‘practical connection’ between that person’s act or omission and the contravention.  This must require a practical connection with at least one of the essential elements of the contravention.”

  1. That proposition was developed by Logan J in Australian Communications and Media Authority v Mobilegate Ltd (No 8).[527]  It was a case where the method of operation of relevant corporate entities centred around the practice of deception in relation to dating profiles on various websites and the procuration of affirmative responses from deceived third parties in communications which facilitated the relevant company’s derivation of income. In practising that deception, it engaged in misleading and deceptive conduct. It was held to be sufficient to prove accessorial liability in respect of corporate contraventions if the prosecuting authority proved that the accessory charged was aware that the company was employing a system of deception.  His Honour said:

“[172]There was debate before me in submissions as to the level of detail of knowledge of contravening conduct which the Authority must prove.  As I understood it, the submission made on behalf of Mr Phillips was that the Authority needed to go so far as to prove that he was aware that particular profiles were fictitious and that particular deceptive messages were being sent using that particular fictitious profile.  That would involve proof of detailed knowledge of the deceptive quality attending each and every of many thousands of messages.  I reject this submission. It is not, in my opinion, supported by Yorke. It will be sufficient to prove accessorial liability in respect of the corporate contraventions if the Authority proves that Mr Phillips was aware that IMP and on its behalf Jobspy were employing a system of operations whereby fictitious profiles were being created to the end that each third party consent to the use of the premium shortcode would be procured by a message which was deceptive because of the employment of a fictitious profile. Proof of knowledge at a more detailed level of abstraction is not, in my opinion, essential.”

  1. These decisions provide useful guidance to the answer to the question whether an individual defendant has been knowingly involved in a contravention by MFSIM but need to be considered in the particular circumstances applicable to that defendant. 

Have the MFSIM contraventions been established?

  1. My overall view of the evidence and the conclusions I have reached about these legal issues have led me to conclude that the MFSIM contraventions alleged have been established as accurate in the cases against the other defendants.  In other words I am satisfied that MFSIM as the responsible entity for PIF has contravened its pleaded obligations in respect of the $130 million payment, the $17.5 million payment and the false documents. 
  2. The main MFSIM contraventions established were:
  • A reasonable person in MFSIM’s position would have prevented the making of the $130 million payment and the $103 million payment until satisfied that they were for investments which were authorised under PIF's constitution and for the benefit of PIF and its members.  MFSIM did not do that.
  • In permitting $103 million of PIF’s money to be paid to Fortress, MFSIM as responsible entity for PIF, contravened s 601FC(5) of the Act:

(a)by not acting honestly in breach of s 601FC(1)(a) of the Act;

(b)by failing to exercise the degree of care and diligence that a reasonable person would exercise if they were in MFSIM’s position in breach of s 601FC(1)(b) of the Act;

(c)by not acting in the best interests of the members of PIF in breach of s 601FC(1)(c) of the Act; and

(d)by failing to ensure that the $130 million payment, to the extent of the $103 million payment, was made in accordance with PIF’s constitution in breach of s 601FC(1)(k) of the Act.

  • In making the $130 million payment to the extent of the $103 million payment and in permitting $103 million of PIF's money to be paid to Fortress, MFSIM contravened s 208(1) of the Act, as modified by s 601LC of the Act, because there was a financial benefit given by MFSIM, as responsible entity for PIF, out of scheme property to MFS Administration, a related party of MFSIM.
  • In making the $17.5 million payment to PacFin, MFSIM as responsible entity for PIF contravened s 601FC(5) of the Act:

(a)by failing to act honestly in breach of s 601FC(1)(a).  Instead, it acted without proper regard for the interests of PIF’s members and paid the money away in order to support another part of the corporate group financially;

(b)by failing to act in the best interests of the members of PIF in breach of s 601FC(1)(c); and

(c)by failing to ensure that all payments out of scheme property were made in accordance with PIF’s constitution in breach of s 601FC(1)(k).

  • MFSIM and PacFin were related parties in respect of the $17.5 million payment for the purposes of s 208 of the Act.
  • The creation and keeping of documents that were false in material respects, and known to be false by the individuals who caused the documents to be created and kept, was dishonest conduct in contravention of the obligation imposed on responsible entities by s 601FC to act honestly.  MFSIM contravened that obligation in relation to each of 15 of the 17 false documents.
  1. I shall now proceed to consider the cases against the individual defendants.  To some extent, of course, the evidence against each overlaps.  One of the principal issues in respect of each defendant is whether he or she was knowingly concerned in MFSIM’s contraventions. 

ASIC’s case against the fourth defendant, Mr King

Submissions for ASIC

  1. Mr King resigned from his position in the MFS Group in early 2008 and he had no connection with the creation of the allegedly false documents.  ASIC’s case against him, therefore, is limited to the conduct it alleges against him with respect to the $150 million drawdown, the $130 million payment and the $103 million payment.  It argues that he was involved in contraventions by MFSIM of ss 601FC(1)(a), 601FC(1)(c) and 601FC(1)(k) and therefore s 601FC(5) of the Act and s 208(1) of the Act thus contravening s 601FC(5) and s 209(2) of the Act.  It alleges that, apart from those breaches of s 601FC(5) and s 209(2), he also therefore breached ss 601FD(3)(a), (b), (c), (e) and (f) of the Act.
  2. The basic evidence on which ASIC relied is summarised in its written submissions.  It is clear that Mr King was aware of the need for money to pay off Fortress, at least by 20 November 2007.[528] 
  3. At para [720] of its written submissions, ASIC’s counsel pointed out that by:

“email at 7.06am on Saturday 24 November 2007 to David Kelleher of Fortress copied to White and Anderson, King requested an extension of the Fortress loan agreement to 1 March 2008 with a principal reduction payment of $25 million. He said that if Fortress required payment by the end of the month ‘we would seek to repay you off the back of an equity and hybrid raising to be launched off our announcements on Wednesday this week. We do NOT want to do such raising on such short notice and before we have had a chance for the market to understand the Stella numbers ... BUT if you insist then that it was we will do all be it costly, inconvenient and undesirable’.”

  1. Shortly afterwards, at 8:26 am, Mr King sent an email to the directors copied to Mr Anderson informing them of the action he had taken.
  2. Later on Saturday, 24 November 2007, there was a telephone conversation between Mr Kelleher and Mr White in which Mr Kelleher said that he could not accept $25 million “but he would run with $100 if we could agree 100”.  Mr Kelleher’s evidence was that Mr King “quickly agreed in principle to the counter-offer of $100 million part repayment of the loan facility without any hesitation”.  Mr King conceded that he had “quickly agreed”.[529]
  3. From that, ASIC submitted that I should infer that Mr King was able to accept Mr Kelleher’s proposal in principle immediately because Mr White had informed him that there was $155 million available in the RBS facility through PIF.  The reasons that ASIC submitted I should make that conclusion were:[530]

“(a)As referred to in para 719 above, on the day after the conference call with Kelleher, White had initiated enquiries to be made of the amount that was available from the RBS facilities and those enquiries had disclosed that $155 million was available on two days’ notice.

(b)King said that the $25 million offer that he made was ‘the start of negotiation’, which suggests he had, or would have to get, more money.

(c)King says he had been told by somebody, prior to his email on Saturday 24 November 2007 to Kelleher, that there was money available, which allowed him to offer the $25 million. King said he could not recall whether it was White, Anderson, or Krecklenberg who told him that money was available or how much money was available and could not deny that he could have been told that $155 million was available.

(d)It is submitted that the Court should conclude it was White who offered the money, for the following reasons:

(i)White had been involved in the discussions with Kelleher including the conference call.

(ii)On 19 November 2007, the same day as White had a conversation with Kelleher, White had, through Watts, initiated enquiries about the possibility of drawing down under PIF’s RBS Loan Agreement.

(iii)After receipt of the information about the $155m being available, the request was made to ‘start the process for drawdown’ and the amount and period ‘has not yet finalised’.

(iv)As it is known that White arranged the $130m from PIF, there is no suggestion that it was a different person who offered the amount which allowed King to make the $25m offer on Saturday 24 November 2007.”

  1. Mr Kelleher confirmed that he had “the go ahead” by email at 12:31 am on Sunday, 25 November 2007 to Mr King which was copied to Mr White and Mr Anderson.  Mr King then reported to Mr Krecklenberg at 7:06 am on the same day that he was getting “somewhere workable” with Fortress by an email which he forwarded at 7:07 am to Mr Anderson saying that he needed to discuss it with him also. 
  2. On Monday, 26 November 2007, there was a meeting of the MFSIM investment management committee at which Ms Watts reported that she was facilitating several large settlements which were to drain the liquidity position in PIF.  She also mentioned a “drawdown on RBS facility to fund”.[531] 
  3. By email at 11:44 am on Monday, 26 November 2007 to Mr Hutchings, Mr White gave the instruction to draw down the $150 million from RBS and ASIC submitted that, no later than this time, Mr White and Mr King had agreed that PIF’s RBS facility should be drawn down to provide the funds to the MFS Group to pay the Fortress loan.  Mr King’s recollection on that point was unclear but he conceded that it was likely Mr White had by this time on Monday morning told him that he had the $100 million payment covered and that Mr White may have told him that he was going to draw the money down from RBS and get it to MFS through PIF.[532]
  4. There were further emails related to the proposed transaction emanating from or copied to Mr King.  They led ASIC to the submission that Mr King conceded that by the morning of Wednesday, 28 November 2007 he probably would have known that PIF was drawing down $150 million from RBS for the purpose of transferring the money to the MFS Group for the purpose of repaying Fortress.[533] 
  5. When Mr White reported to Mr King that he had the $150 million “in our account ready to transfer to MFSA tomorrow if need be”, Mr King replied, two minutes later, at 4:18 pm on Wednesday, 28 November 2007:

“You the man.  Definately [sic] the man.  Thank you very much.  Let’s talk tomorrow.”[534]

  1. He later congratulated Mr White and Mr Anderson for their work.[535]
  2. ASIC’s submission as to the elements of the contraventions it alleges was that Mr King’s involvement in the contraventions of MFSIM and his contraventions as an officer were constituted by the following:[536]

“(a)In late November 2007, Mr King approved and authorized the use of the money drawn down under the RBS Loan Agreement to make the $130 Million Payment and the $103 Million Payment.

(b)At the time of the approval and authorization of the draw down and $103 Million Payment, King knew that:

(i)the $130 Million Payment was made from funds managed by MFSIM as responsible entity of PIF;

(ii)the $130 Million Payment was made for purpose of MFS Group repaying $103 Million to Fortress;

(iii)there was no transaction which made the $130 Million Payment to the extent of the $103 Million Payment a proper payment from PIF’s funds.”

  1. ASIC submitted that Mr King’s approval and authorisation was to be inferred from his conversation with Mr White on or about Monday, 26 November 2007 and his failure to prevent the drawdown and transfer from PIF after receiving emails on 27 and 28 November 2007.  It also argued that he admitted that he impliedly gave his approval to the use of the PIF money for the purpose of a payment to Fortress.[537]
  2. Mr King agreed that he was aware the $150 million that was coming across was money that PIF held in trust, effectively, for its investors.[538]  He also conceded that he may have been informed of this by Mr White in the conversation on Monday, 26 November 2007 and that he probably knew it on receipt of the email at 9:00 am on 28 November 2007.[539]
  3. Mr King argued, however, that he genuinely believed that it was proper for PIF’s money to be applied to provide MFS with a “lifeline” by partly repaying MFS Castle’s debt because there would have been a deal in place providing consideration to PIF before the transfer of the money.[540]
  4. ASIC submitted that I should reject Mr King’s evidence because he was responsible for the negotiations with Mr Kelleher of Fortress and was also responsible for the MFS side of the transaction with PIF.  He was unaware of any deal that would provide consideration to PIF as became apparent when I asked him whether he had taken into account which of MFS’s assets might go to the fund.[541]  I found it difficult to square that with his obligations as a director of MFS as well as an officer of MFSIM. 
  5. In response to those concerns, Mr King said that he expected Mr White to negotiate a premium for PIF for coming to the aid of MFS and believed that Mr Anderson or the CFO group were responsible for the negotiation of the consideration to PIF.[542]
  6. ASIC submitted that Mr King’s evidence should be rejected as untruthful because he conceded that he did not request that Mr Anderson undertake such a responsibility and Mr Anderson denied it.  Nor did he identify any basis for an implied delegation to Mr Anderson or the CFO group.  ASIC submitted that, if PIF were to get a premium, whether Mr Anderson would have had authority to enter into a hypothetical contract to sell assets totalling $130 million or more, was problematic at best. 
  7. ASIC also drew attention to the fact that Mr King attended MFS Limited FIC meetings on 29 November and 18 December 2007.  The Fortress loan extensions were approved at those meetings and there was no report about the deal between MFS Limited and PIF that funded the extension.  He also attended MFS Limited board meetings in December 2007 and January 2008 where there was no report of the transaction.  ASIC submitted this was consistent with the proposition that he knew no consideration had been provided for the money. 
  8. Mr King agreed that such a failure to report would be an oversight.[543]
  9. Consequently, ASIC submitted that the proposition that Mr King, during the period from late November 2007 to mid-January 2008, believed that there was a transaction in place for which PIF had received proper consideration but never inquired of Mr White or Mr Anderson about it is implausible.
  10. Mr Riordan developed this submission orally by arguing that it was clear that the participation loans were not agreed to in November 2007.  Before then there had been talk about a revolving credit facility with PIF to justify the November advance.  That became the “creative brain” email after which the detailed participation agreements were developed and substantially established by about 22 January 2008.  Mr Hutchings’ diary notes on the pages referable to late November 2007 did not reflect conversations he had with Mr White at the time because in January 2008 he was still waiting to try to find out from Mr White what the loans were.  He had no recollection one way or the other of when the diary notes or scratch pad were prepared.
  11. It was not so much a matter of theft of property, but that the senior officers of MFSIM took the money for the improper purpose of assisting MFS and left MFSIM, in particular PIF, exposed.  This gave rise then to the problems of using trust money for collateral purposes.  The use of the funds was not in the interests of the members of PIF.  It seems that they did not think about the propriety of using trust funds wrongfully which may explain why Mr King and Mr Anderson would involve themselves in such serious misappropriation when, on the evidence, they had some possibility of going to the market to raise the money.  That alternative was regarded as inconvenient, undesirable and costly, the most expensive form of raising the funds.
  12. The critical issue, Mr Riordan submitted, was to demonstrate that Mr King, Mr Anderson and Mr White were knowingly involved in the $103 million transaction, while Mr Anderson, Mr White and Mr Hutchings were knowingly involved in the $17.5 million transaction.  Mr Riordan also submitted that there was no significance in the changes that took place in the accounting functions in the second half of 2007 in reducing the control or capacity to control by Mr King and Mr Anderson during that time.  He submitted that the $130 million payment was effected for the purpose of allowing MFS to pay $103 million to Fortress.  It was not made in PIF’s interests.  Nor was there anything in the material showing any consideration of why it would be in PIF’s interests.  Nor did PIF have any intention to make acquisitions at that time.  Nor was any proposal pending before the IAC. 
  13. The argument that no investments were being proposed by PIF was buttressed, he submitted, by the email chain starting 21 November 2007 in which Ms Watts said to Ms Howard and Mr Hutchings on 23 November 2007:[544]

“Could you please start the process for a draw-down by PIF next week from the RBS facility.  PIF will have to fund some anticipated investments late next week and the current (and anticipated) cash balance will be insufficient.  The amount of the draw-down and the period for which it will be required has not yet finalised, but I will have a better idea on Monday…”

  1. Mr Riordan submitted she would have a better idea on the Monday because Mr King was talking to Mr Kelleher over the weekend.[545]  This submission was based on the theory that Mr King must have been informed by Mr White that $155 million was available from the RBS funds.
  2. Mr Riordan submitted that what happened unequivocally during this time was that the decision was made to use PIF funds by MFSIM, drawn down from the RBS facility, to repay an MFS debt.  That was an entirely improper purpose which does not get resolved by any general intention to make good the payment out.
  3. ASIC also submitted that Mr King’s conduct constituted the contraventions to which I have already referred.  In advancing that argument, it submitted that Mr King had either not acted honestly, or, alternatively, had failed to exercise the required degree of care and diligence and had not acted in the best interests of the members of PIF.  He had failed to ensure the $130 million payment to the extent of the $103 million payment was made in accordance with the constitution.  It also argued that, as well as participating in the MFSIM contraventions, he had breached s 601FD(3) by not acting honestly, or alternatively failing to exercise the required degree of care and diligence and not acting in the best interests of the members of PIF and by making improper use of his position as an officer of MFSIM and by failing to take steps that a reasonable person would take in his position to ensure MFSIM as responsible entity for PIF complied with its constitution. 
  4. It also submitted that each of the alleged contraventions was of a corporation/scheme civil penalty provision as defined in s 1317DA of the Act, materially prejudiced the interests of PIF and its members within the meaning of s 1317G(b)(i) of the Act for the reasons pleaded and was serious within the meaning of s 1317G(b)(iii) of the Act for the reasons pleaded.
  5. ASIC then developed its argument that Mr King, as CEO of MFS Limited and the MFS Group, had the capacity to affect significantly the financial standing of MFSIM.  It drew attention to his role as co-founder of the MFS business, his evidence that he had overall responsibility for MFSIM in his s 19 examination and Mr King’s evidence that Mr White was in charge of PIF and responsible for “day to day operational decisions”.  It also pointed to the evidence that Mr White reported to Mr King and would take instructions from him in circumstances where they would talk to each other at least daily.  At para 759 of its written submissions, ASIC also drew attention to a number of factual matters demonstrating Mr King’s capacity to affect decisions within MFSIM in particular or as part of the MFS Group.  Although some of the examples post-dated the making of the payment in late November, Mr Riordan submitted that his capacity to control events remained the same around that period.[546]
  6. MFSIM was inextricably part of the structure of the MFS Group.  ASIC drew attention, in particular, to the employment of its staff by MFS Administration, the payment of all management fees to MFS Administration under the control of Mr Anderson’s corporate accounts team and to a number of other matters detailed at para 761 of ASIC’s written submissions.  ASIC conceded that, since February 2007, MFSIM was operating with a board that had three independent directors and its own IAC and CRPC committees, but argued that the countervailing factors to which it referred made it clear that it was still part of the MFS Group.
  7. There was a proposed change of structure by an email from Mr White on 10 October 2007 by which the funds were required to take responsibility for their own accounts.[547]  The essence of that appears to have been that whereas, before, MFS Administration employed a team of accountants responsible for all the schedule’s accounts, after Ms James was appointed as the PIF accountant in early December 2007, she was solely responsible for the PIF accounts and if she needed assistance she would ask for it.  Therefore, ASIC submitted that that change in structure did not remove PIF from the orbit of the MFS Group. 

Submissions for Mr King

  1. Mr King’s counsel submitted that, even if I found that Mr King was an officer of MFSIM during the relevant period, ASIC had not proven to the requisite standard that Mr King acted in breach of duties owed by an officer of a responsible entity of a managed investment scheme.  Any responsibilities MFS Limited and Mr King had in respect of MFSIM were discharged by delegation to Mr White (the Deputy CEO of MFS Limited, the CEO of Funds Management, and the Chairman of the MFSIM board) and Mr Hutchings (the CEO of MFSIM and a director) and the establishment of governance structures and processes, populated with appropriate personnel.
  2. ASIC’s pleaded case, they argued, should be limited to whether Mr King knew that PIF had received any consideration at any time.  The argument was that ASIC’s case as opened and originally pleaded was that there were never any transactions in return for the payments from PIF and that the amendments proposed to the statement of claim sought to widen the allegations away from the initial focus on the alleged transactions as being shams to a new focus on whether there was any consideration provided for the PIF payments at the time they were made.  This was said to have been provoked by the arguments that the alleged transactions were not shams[548] but ones that had later been adopted by PIF’s responsible entity. 
  3. I have previously decided in these reasons that the ASIC pleaded case was not limited in that fashion.  Paragraphs 56 to 57A of the statement of claim provide ample scope to examine his conduct at the time of the payments.  So do the replies. 
  4. Mr King gave evidence that he knew of the availability of assets that could have been transferred to MSFIM.  Mr Hutchings and Mr Anderson were cross-examined consistently with those instructions.  There was no evidence, however, that Mr King was aware of what assets were available to be transferred in return for the PIF payments at the time they were made.  Nor had he turned his mind to the question of the property that would be transferred by MFS in return for the receipt of the PIF funds.[549] 
  5. The submissions went on to argue that Mr King’s degree of knowledge of the $130 million payment had not been proved.  It had not been shown that he knew there were no transactions for the payment or any benefit that MFSIM would receive.  They also submitted that it had not been proven that Mr King’s behaviour was unreasonable in failing to stop the $130 million payment.  He was justified, they argued, in trusting Mr White and MFSIM’s governance structures and ASIC had not succeeded in proving that his trust was held unreasonably. 
  6. The cross-examination by ASIC of the relevant office bearers dealing with that decision did not establish any contrary conclusion, including the signing by Mr Corolis of the payment direction when it seems clear it had not been supported by documents showing it had been properly authorised within MFSIM. 
  7. Mr Corolis’s evidence did vary concerning the reasons for his resignation on 30 January 2007 but it seems likely to be that his “personal” reasons for resigning included the concern he later expressed to Mr Kennedy at being asked to sign backdated documents.  There is no evidence, however, that Mr King was aware of his concerns then.
  8. In addressing the legal arguments as to the degree of knowledge that ASIC needed to prove against Mr King, his counsel drew my attention to discussions in decisions such as Yorke v Lucas[550] and Rural Press Ltd v ACCC[551] dealing with the necessity to establish that persons in Mr King’s position participated in the company’s contraventions with “actual knowledge of the essential elements constituting the contraventions”.
  9. That “actual knowledge” may be “established as a matter of inference from the circumstances surrounding the commission of the alleged offence” but the question remains one of actual knowledge of the defendant, and where knowledge is inferred from the circumstances surrounding the commission of the alleged offence, it must be the only rational inference available, at least in a criminal case.[552]
  10. ASIC was also criticised for failing to plead that Mr King had actual knowledge of the matters pleaded in paras 45, 47, 48, 49, 50, 50A, 50B, 50C, 50D, 52 and 53 of the statement of claim and thus failing to construct a proper case against him under s 79(c) of the Act.  Mr King’s counsel argued that the allegations that he deliberately failed to make inquiries made in paras 56(i) and 56(p) did not overcome that problem because of the need to establish actual knowledge of the matters in the earlier paragraphs of the pleading. 
  11. Mr Riordan addressed orally the submissions by Mr Davis for Mr King that the statement of claim failed to plead that Mr King knew that the purpose of the $130 million payment was to repay a debt from the MFS Group to Fortress.  He argued that para 56(r) of the statement of claim, which alleged that Mr King approved and authorised the use of money drawn under the RBS Loan Agreement to make the $103 million payment in the context of the facts alleged in paras 56(a) to 56(q), would satisfy me that he was put on notice that he knew the $130 million payment was made for the purpose of MFS Group repaying $103 million to Fortress. 
  12. In particular, para 56(k) alleged that Mr King knew, because he was told in an email sent to him by Mr White, that the $150 million drawdown was expected to be paid by RBS into PIF’s operating account on 28 or 29 November 2007.  Paragraph 56(n) alleged that he knew of no benefit, consideration or reward which MFSIM could or would in fact gain from the $103 million payment.  That put Mr King on notice that the $103 million payment was to be made from the funds drawn down for the purpose of paying Fortress, he having been told orally by Mr White, no later than 26 November 2007, that Mr White would be able to effect a transaction which would result in $100 million becoming available to pay Fortress as alleged in para 56(f).  Similarly, para 56(l) referred to him being told by Mr White by email that the $150 million drawdown was expected in PIF’s operating account “imminently” on 28 November 2007.  Para 56(h) was also said to be relevant. 
  13. In attempting to make good the allegations of Mr King’s knowledge made in para 739 of ASIC’s written submissions, Mr Riordan referred in particular to a number of emails on 27 and 28 November and Mr King’s evidence that he implicitly gave his approval to the use of the PIF money for the purpose of the payment to Fortress.[553]
  14. In oral submissions, Mr Davis for Mr King also criticised the reliance by ASIC on certain issues unpleaded by it and advanced as relevant to Mr King’s credit but which, he submitted, had not been able to be litigated properly because they were not pleaded.  One example he gave was of the meeting of 15 November 2007 from which I was asked to infer that Mr King may have been informed then of the ability to draw down money from RBS for PIF to repay Fortress. 
  15. What ASIC said about that meeting in  its written submissions did not strike me as particularly significant in the overall scheme:[554]

“115.On Thursday 15 November, 2007 King, White and Anderson had a lengthy meeting (about six hours). Reporting to MFS Limited directors Barry Cronin and Paul Manka, King said it was ‘good session (most of the day)”.

  1. It is inherently unlikely that such discussion would not have included sources of funds and other financial options to meet the upcoming liabilities in particular Fortress particularly as Anderson had reported the upcoming liability on the previous Monday, and King, White, and Anderson frequently discussed cash flow issues, and as King said he was a person who generally would discuss the need for Plan B and Plan C options for financing.
  1. King originally said that this meeting was about the new template but, when it was put to him that he had reported to the MFS Board on 7 November 2007 that he was meeting with White on that day, he said he did not recall the all day meeting. Anderson said that he recalled that the template was discussed this day and did not believe that the Fortress liability would have been discussed because it was not of concern to him whether there had been discussions with Fortress or not.
  1. Whether there was a discussion at this meeting or not, it is submitted that it is inherently unlikely that, in the circumstances, there would not have been conversations at this time between the CEO, the CFO and White, as Deputy CEO, about the management of the upcoming Fortress liability.”
  1. Mr Davis submitted that this was an attempt by ASIC to seek to overcome the significant problem for it that the pleaded conversation between Mr King and Mr White regarding repayment of Fortress occurred on Monday, 26 November 2007 whereas MFSIM’s documents record that it had begun preparing for a drawdown on the RBS facility on 19 November 2007.  Mr King could not remember the meeting on 15 November 2007 so, he submitted, the attack on his credit in this respect fails.  He was critical of ASIC, however, for not pleading this allegation which led to the failure to cross-examine witnesses about this issue in respect of that meeting.  Nor, he argued, should any conclusions as to credit that I might draw against Mr King in this context be properly used against him as constituting admissions by conduct pursuant to the principles in Edwards v The Queen.[555]
  2. One issue in particular, he submitted, related to the cross-examination of Ms Easton whose evidence could have dealt with the meeting of 15 November 2007 but did not because the significance of it in ASIC’s case, as an occasion on which Mr King could have learnt of the availability of the money from RBS through PIF, did not become clear until he was cross-examined.
  3. It was also inconsistent with ASIC’s pleaded case which suggested that the decision to draw down the money was made between 24 November 2007 and 26 November 2007 while employees of the company were clearly discussing the drawdown at an earlier stage from 21 November 2007.  Consequently he argued that I should not infer on this evidence that Mr King was then aware of the ability to get money from PIF.  He described this theory about the ability of Mr King to have been told this information as a late invention by ASIC which had not been properly tried on the evidence because of these shortcomings in the pleadings.
  4. Mr Riordan explained the relevance of the meeting of 15 November orally in these terms:[556]

“It’s not necessary as part of ASICs case to establish that King knew by the 15th of November or the 19th of November that he was going to be using PIF funds. We suggest to you, in view of our friends leading evidence to say that there were discussions about the drawdown at an earlier time, and Ms Watts saying, ‘Oh, yes, Mr White told me to do that’, that, in fact the gross likelihood is that White - and that he’s having discussions with King, and they were talking about possibilities. Mr King has a plan A, plan B, plan C and plan D man, of his own admission. 

However, our friends say, ‘Well, that's not fair. We might put that case, but you're not allowed to explain it consistent with the fact that it wasn’t related to RBS, and we say it’s nonsense.’ Of course we are. It’s not essential to our case. It actually is pleaded because it was said before the 26th, but it doesn’t need to be. Because the critical part of our case is that he knew in the week commencing the 26th. The critical part is he knew all the things he needed to know before the payment was made. We'll come to that as part of our case.”

  1. Mr King’s recollection of that meeting of 15 November 2007, when reminded of documents associated with it, was that it dealt with financial reporting templates, something supported by Mr Anderson’s evidence.  Mr Anderson also gave evidence to that effect.
  2. Mr King’s counsel also drew attention to Mr King’s focus on the possible sale of Stella at the time, the busyness of his involvement with other activities within the MFS Group and his evidence that the Fortress transaction was not his primary concern in the week commencing Monday, 26 November 2007.  He was also aware of the “recycling” of assets from companies within the group by their sale, either to one of the managed funds or to a third party.  I do not infer anything to his credit or otherwise from his inability to remember whether there was any discussion then about the availability of funds through PIF.
  3. An email from Ms Kercher on 28 November 2007, not originally disclosed by ASIC, with its attached paper, established that Mr King was told of a list of assets available to be immediately recycled by sale to a fund which Mr White was responsible for and which had been discussed by the FIC.  ASIC was criticised for its late disclosure of that document.
  4. Mr King’s counsel also relied on other evidence of the speed with which such transactions could be completed as evidence against any argument that Mr King could not have believed that a transaction could be effected in return for the payment of the money by the necessary date.
  5. Mr King’s evidence was that he was responsible for the MFS side of the transaction, but the evidence indicates he was not overly concerned as to which of its assets were to be used to reimburse PIF.[557]  Nor had he delegated any other person to negotiate with Mr White on his behalf, except implicitly to the CFO group, an assertion not supported by Mr Anderson’s evidence.  Mr Anderson had, however, dealt with what was called the Domain/Guardian transaction only a few weeks earlier.  Mr Davis submitted orally that, therefore, from that point of view, it was reasonable for Mr King to assume that he would be looking after this transaction too.
  6. Nor did the FIC minutes of 29 November 2007 record any consideration provided by MFS Ltd for the payment from MFSIM.  But it was submitted for Mr King that his evidence was truthful having regard to the earlier history of transactions within the MFS Group.[558] 
  7. His counsel submitted that there was nothing unusual about MFSIM receiving $130 million nor about transactions between a fund and a group.  Nor did he have any reason to make inquiries about what was happening within MFSIM or about the propriety of what Mr White was doing.  He had been made aware of the proposal by MFSIM to relaunch MYF, the proposal being that it be seeded by an investment of initial capital of about $100 million to $200 million.  Nor had ASIC proven that transactions of this type would not have been able to have been prepared or settled between 26 November 2007 and 30 November 2007. 
  8. ASIC’s argument that the purpose of the $150 million drawdown was to obtain the $103 million payment to Fortress was also attacked.  The process was started no later than 19 November 2007 when, they submitted, there was no evidence that Mr King was involved and before the decision to withdraw from the sale process had been made.  They submitted that the information provided by Ms Watts to the MFSIM management team on 26 November 2007 that there was to be a drawdown under the RBS Loan Agreement to facilitate several large settlements was likely to have taken place before the conversation between Mr King and Mr White.
  9. They argued also that there was likely to have been a conversation between Mr Hutchings and Mr White on 28 November 2007 whose effect was likely to have been recorded in Mr Hutchings’ diary note on the page for 28 November 2007 in his loose leaf diary.  They submitted that that was either his record of the effect of the conversation or perhaps his preparatory notes for it.  Those notes refer to the  Causeway Private Debt Opportunity Fund, they submitted, in the context of the relaunch of MYF.  It also refers to “five saleable products”.  They referred to Mr Hutchings’ evidence that, in his opinion, the use of funds from PIF to seed the relaunch of MYF was in the interests of PIF’s members and that, at the time, he had thought the use of the RBS funds was for this purpose.  They noted the similarity in the list of property related assets to investments identified earlier of loans in a 23 January 2000 list by Mr White.  With that evidence in mind, they invited me to find that Mr White and Mr Hutchings identified assets that MYF could acquire using the seeded funds and identified the need for there to be related party processes and documentation. 
  10. One of the problems with that submission is that Mr Hutchings was not aware himself when he prepared the diary note.
  11. Mr King’s counsel also submitted that no inference of knowledge of dishonesty could be drawn from Mr King’s response to Mr White’s email of 28 November 2007 that he had the $150 million in their account ready to transfer to MFS Administration the next day.  Mr King’s response was the “you the man” email referred to earlier.  His counsel submitted that that flamboyant tone was typical of Mr King when congratulating a staff member on completing a task.  They pointed out that it was also sent about four hours after Mr King had received the email from Ms Kercher attaching the recyclable capital project list paper for the FIC meeting the following day.
  12. They submitted that ASIC did not plead any allegation of involvement by Mr King in the false documents case or any involvement generally after 30 November 2007 and submit that this is an extraordinary feature of its case.  The argument was that it was unusual to concede that Mr King was knowingly involved in the dishonest misappropriation of $130 million from a managed investment scheme but was completely uninvolved in subsequent attempts by others to legitimise or cover up the alleged misappropriation.
  13. Mr King did later agree that it was appropriate for MFS Ltd to guarantee any loans to MFS related parties without expressly referring to MFSIM or PIF.
  14. Mr King’s counsel concluded this aspect of their submissions by arguing that the more probable inference from the evidence was that Mr King did not agree to authorise or approve a transaction by which $100 million would become available to repay Fortress knowing that PIF would and could receive no benefit, consideration or reward for it.  They argued that the more probable, or at least equally probable, inference was that he was told something about the benefit, consideration or reward that MFSIM was to receive, probably by reference to assets the subject of the recyclable capital project or that he did not turn his mind to the issue of benefit, consideration or reward that MFSIM would receive, it being one for Mr White and others in the MFS Group to address.  They argued that ASIC had not proven that the circumstances known to Mr King were suspicious or that he failed to make inquiries.  In that context, they pointed to the lack of knowledge of the terms of the conversation between Mr King and Mr White on 28 November 2007.
  15. In addressing whether ASIC had established that Mr King acted dishonestly, his counsel submitted that, quoting the pleadings:

“883.The critical questions on the dishonesty case are:

(a)whether “at all times” after 26 November 2007 Mr King:

‘knew there was no transaction or transactions which were in fact undertaken which would make use of monies drawn under the RBS Loan Agreement to repay Fortress in accordance with the Agreement of 26 November 2007, a proper investment on behalf of PIF.’

(a) [sic] whether (with no temporal limitation) Mr King:

‘knew of no benefit, consideration or reward which MFSIM as Responsible Entity for PIF could, or would in fact, gain from the $103 Million Payment.’

  1. Other related issues are:

(a)Did Mr King know of any source of $100 million available to White other than the monies drawn pursuant to the RBS Loan Agreement?

(b)Did Mr King deliberately omit to make enquiries?

(b) [sic] Did Mr King have a motive to act dishonestly?”

  1. They pointed to the lack of direct evidence that Mr King had actual knowledge that no transaction or transactions were undertaken or that there was no benefit, consideration or reward that MFSIM as responsible entity could or would gain in return for the payment of $130 million.  They also relied on Mr King’s denial in his evidence that he “never genuinely believed at the time of the transfer that any consideration had been provided to PIF”.  They also argued that there was no motive for Mr King to act dishonestly. 
  2. ASIC had pleaded, as motive, that Mr King knew that MFS Castle, MFS Ltd and MFS Financial Services had insufficient funds from their own financial resources to repay Fortress without recourse to debt or capital raisings.  Mr King’s counsel submitted that this was not sufficient to establish a plausible motive for dishonesty because Mr King was prepared to do a capital raising to pay some or all of the Fortress debt and was confident such a raising would be successful.  That option had been available since September 2007 and was accepted as feasible by other directors such as Mr Cronin and Mr Krecklenberg.  The MFS Group had been to the market for a capital raising on a number of occasions in the 12 months before November 2007.  Some of those capital raisings had been done speedily.  Mr King’s statement in an email on 24 November 2007 that a capital raising was “costly, inconvenient and undesirable” needed to be looked at relatively, and a fraudulent misappropriation of what were essentially trust moneys should not be seen as a viable alternative to the inconvenience of a capital raising.
  3. There were also other options available to the MFS Group, including the sale of assets or shares, the calling in of debts and the renegotiation of existing liabilities with Fortress or others or the use of some or all of its cash or cash equivalents held as at the end of November 2007.  I was also urged to accept Mr King’s evidence that he had a sanguine view about the likelihood of Fortress putting MFS Castle into formal default under the Fortress Loan Agreement at the time.
  4. Placing those considerations against the regulatory and commercial risks of breach and Mr King’s background as a practising solicitor specialising in commercial and criminal litigation, it was submitted to me that it was unlikely that Mr King would have adopted the dishonest approach alleged against him.
  5. In support of that submission his counsel argued that I should accept Mr King’s evidence, given orally and not contradicted, they submitted, by the documentary evidence.  They pointed out that his evidence in the s 19 examination was given without access to the many thousands of documents available in this proceeding but argued that, nonetheless, his cross-examination did not detract from the credibility of his evidence. 
  6. Mr Davis also argued that ASIC had not pleaded, let alone proved, that Mr King knew the $130 million payment was a financial benefit made to a related party within the meaning of s 208(1) of the Act.  He went on to argue that the fact that they were related parties is an essential element of a breach of s 209(2) that had not been pleaded.  Nor had it been pleaded or proven that Mr King knew that no approval was given by members of PIF for the $130 million payment and the $103 million payment which he submitted was essential to the allegation of breach of s 209(2).  Nor had ASIC pleaded or proven that Mr King knew that there had been no approval from the IAC, CRPC or the board of MFSIM for the $103 million payment.  Again, it had not been pleaded or proven that he knew that that payment was made solely for the benefit of MFS Castle, MFS Ltd and MFS Financial Services and not for the benefit of PIF.  Accordingly, there was a disconnect from what ASIC alleged against MFSIM and what is alleged against Mr King as covering his knowing involvement in MFSIM’s contravention. 
  7. Mr Davis submitted that nothing in the particulars of the knowledge case advanced by ASIC suggested that Mr King had been told by Mr White that Mr White was going to fraudulently misappropriate $130 million.  Rather, Mr King and Mr White were talking about a transaction which would produce the money.
  8. He also criticised the argument in ASIC’s written submissions supporting Mr King’s involvement in the elements of MFSIM’s contraventions.  That argument was that Mr King’s involvement in the contraventions of MFSIM and his contraventions as an officer were constituted by the following:[559]

“(a) In late November 2007, Mr King approved and authorized the use of the money drawn down under the RBS Loan Agreement to make the $130 Million Payment and the $103 Million Payment.

(b) At the time of the approval and authorization of the draw down and $103 Million Payment, King knew that:

(i)the $130 Million Payment was made from funds managed by MFSIM as responsible entity of PIF;

(ii)the $130 Million Payment was made for purpose [sic] of MFS Group repaying $103 Million to Fortress;

(iii)there was no transaction which made the $130 Million Payment to the extent of the $103 Million Payment a proper payment from PIF’s funds.

  1. Mr Davis argued that para 56(n) of the statement of claim which pleaded that Mr King “knew of no benefit, consideration or reward which MFSIM as Responsible Entity for PIF could, or would in fact, gain from the $103 Million Payment” (emphasis added) broadened the focus of the case away from the time of the payment to include future possibilities for reimbursement.[560] 
  2. Mr Davis also submitted that the allegation set out above in para 739(b)(ii) of ASIC’s written submissions, that Mr King knew the $130 million payment was made for the purpose of the MFS Group repaying $103 million to Fortress, had not been pleaded.
  3. Mr Riordan had submitted orally that the argument that Mr King knew of MFSIM’s contraventions was supported by these allegations in para 56 of the statement of claim as well as the allegation in para 56(n):

“(f) He knew because he was orally told by White by no later than 26 November 2007 that White would be able to effect a transaction which would result in $100 million becoming available to pay Fortress.

(h) At all times after receiving the information from White pleaded at sub-paragraph (f), he:

(ii) knew there was no transaction or transactions which were i