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LM Investment Management Ltd (receiver apptd)(in liq) v Drake & Ors

Unreported Citation: [2019] QSC 281

In this case, Jackson J considered the parameters of duties owed by officers of responsible entities of registered schemes to act in the best interests of the scheme’s members. In particular, his Honour examined s 601FD(1)(c) of the Corporations Act 2001 (Cth) and the contents of the duties it provided for.

Jackson J

22 November 2019

LM Investment Management Ltd (“LMIM”), the plaintiff, was the responsible entity for several registered managed investment schemes, notably here the LM First Mortgage Income Fund (“FMIF”), and of an unregistered scheme, the LM Managed Performance Fund (“MPF”). [2], [6]. In these proceedings, it alleged that the defendants, who were its directors before it commenced a creditors’ voluntary winding up, contravened the corporations/scheme civil penalty provisions contained in s 601FD(1)(b) and (c) in the Corporations Act 2001 (Cth) (“CA”). [2]–[4]. It argued that these contraventions arose out of the defendants’ acceptance of a settlement in separate proceedings of $45.5 million, and its decision to apportion those proceeds in the ratio of 65:35 between the FMIF and the MPF. [13]–[18]. Accordingly, it sought an order to compensate the FMIF for damage to it that resulted from the alleged contraventions. [3].

Section 601FD(1)(c) of the CA provides:

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

(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; …”

In determining whether any compensation order would be appropriate, Jackson J first turned to s 601FD(1)(c). [74]. After stepping through the legislative history of this provision, his Honour noted that the duties under s 601FD(1)(c) are “owed directly by a director to the members of the registered scheme”, and therefore go further than the duties owed by directors of corporate trustees. [83]. Further, s 601FD(1)(c) actually imposes two duties upon directors: first, a duty to “act in the best interests of the members”, and secondly a duty to give priority to members’ interests over those of the responsible entity. [85].

As to the second duty, the plaintiff submitted that, “in giving effect to the interests of the MPF, the defendants preferred the “interests of the responsible entity”, LMIM, to the interests of the members”. [87]. Jackson J disagreed for four reasons

(1) The plaintiffs’ construction is not supported by the ordinary meaning of the words “interests of the responsible entity”. [88].

(2) Contextually, the corresponding duty of a responsible entity itself, s 601FC(1)(c), focuses on a conflict between the interests of the members and the responsible entity’s own interests. [89].

(3) As the CA does not prohibit a company from being the responsible entity of multiple schemes, adopting the plaintiff’s preferred interpretation would lead to an absurdity wherein the directors would simultaneously owe a duty to each scheme’s members to act in their best interests, despite any conflict between those interests. [90].

(4) While the plaintiff’s interpretation is unsupported by any authority, the contrary construction is supported by Allco Funds Management Ltd v Trust Co (Re Services) Ltd [2014] NSWSC 1251. [91].

Accordingly, Jackson J was satisfied that the second duty contained in s 601FD(1)(c) is of no application in the instant case because LMIM’s duties to MPF were not the “interests of the responsible entity”. [92].

Jackson J then proceeded to examine the first duty contained in s 601FD(1)(c): the duty to act in the best interests of the members. His Honour did not consider it necessary to consider whether this duty was proscriptive or prescriptive as, in this case, the defendants did take a positive action, in deciding to divide the settlement proceedings. [100]. Rather, the starting point for his Honour’s analysis was that it did not necessarily follow from LMIM having possibly conflicting duties to the members of the FMIF and those of the MPF that its former directors had breached their duties under s 601FD(1)(c). [111].

This point, was reinforced by the terms of FMIF’s constitution, which provided at cl 29 that the responsible entity could act in the same capacity in relation to other trusts or management investment schemes, and to self-deal. [112]. In his Honour’s view, it “is permissible to reduce the fiduciary obligations of a trustee in some situations”, namely where it is expressly provided for in the trust instrument, and where the beneficiaries give fully informed consent. [113]. In light of this, his Honour noted that the defendants’ obligation to act in the FMIF’s best interests was coloured by the express words of the FMIF’s constitution. [116].

Turning then to the scope of the duty itself, Jackson J noted that there is a “comparator duty to act in the best interests of the beneficiaries of a trust.” [118]. Although there has been scant judicial consideration of this point outside Megarry V-C’s judgment in Cowan v Scargill [1985] Ch 270, his Honour noted that the presence of a duty for trustees to “act in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between different classes of beneficiaries” has been subject to much debate. [118]–[120].

Putting this debate to one side, his Honour turned first to the statutory context, noting that “under s 601FC(1)(d)… a responsible entity is subject to a duty to “treat… fairly” members of a scheme who hold interests of different classes”. [123]. In such circumstances, the best interests “obligations to each class would conflict”. [123]. Secondly, his Honour looked to trustees’ obligations to “beneficiaries who take in succession”. [124]. That is, trustees have an obligation to act “fairly” as between the conflicting interests of beneficiaries who take first in time, and those who take subsequent in time. [124]. This has also been phrased as the trustee acting “impartially” as between the interests, although that has been subject to some judicial disapproval. [124]–[125].

Justice Jackson therefore concluded that it is neither the case that the duty to act in members’ best interests requires an officer of a responsible entity to prefer the interests of members of one scheme to those of another in the case of conflict, nor that the duty never applies where there is such a conflict. [126]. In the event, the plaintiff’s case was “primarily based on a positive duty of the defendants to act in [a] postulated hypothetical or counterfactual way”. [153]. Jackson J was not satisfied that any of the ways postulated were sufficient to prove causation between any damage suffered and any breaches alleged.

Justice Jackson also considered whether the plaintiffs had established a breach of the defendants’ duty of care and diligence to the members, but found none had been made out. [283]. In the event, the claim was dismissed. [284].

M Paterson