The Supreme Court of Queensland has recently decided the long-running case of ASIC v Managed Investments & Ors.1 The Court made findings of dishonesty against the executives in charge of the responsible entity of a managed investment scheme (Managed Investments Pty Ltd, formerly known as MFS Investment Management Pty Ltd or MFSIM). His Honour Mr Justice Douglas found that they breached their statutory obligations as MFSIM’s directors and officers.
The decision is a salient reminder for those in charge of corporations that they have regard at all times for the interests of the holders of shares or units in that entity, and attempts to “save” an entity or a corporate group cannot be achieved at the price of those duties.2
The demise of the MFS Group
MFSIM was a subsidiary of MFS Limited, later renamed Octaviar Limited. Until its collapse in 2008, the MFS Group was an assortment of businesses, including hotels and travel, investment funds and property investment entities in Australia and New Zealand. At its height, it was reported to have $2.5 billion under management. MFSIM was a significant part of the MFS Group’s business.
Soon after the appointment of administrators to MFS in September 2008, ASIC commenced its investigations into related-party transactions between some of MFSIM’s funds.
ASIC commenced proceedings against MFSIM and five of its executives, alleging they had breached their statutory duties under s601FC and s601FD of the Corporations Act 2001(Cth). In issue was legitimacy of transactions which supposedly followed a $147.5 million draw down under a lending agreement with Royal Bank of Scotland. ASIC alleged the defendants had used those funds to pay investors’ redemption requests and prop up MFS, instead of investing on behalf of the funds which MFSIM controlled.
MFSIM, by then in liquidation, admitted its breaches. Each of the individual defendants denied the allegations and the case endured over a 13 week trial, where ASIC alleged that:
- The entity had drawn down from Royal Bank of Scotland facility, ostensibly to continue with its funds’ investment programme;
- In late 2007, payments of $130 million and $17.5 million were improperly made by MFSIM for the benefit of the MFS Group business, putting it in funds to pay off a loan to MFS, and to fund redemption requests in the New Zealand part of the business;
- The transactions were not legitimate, and no benefit accrued to the funds;
- In February 2008, documents were falsely created by the executives, purporting to show that the funds had been used by MFSIM in related-party investments;
- The false documents were used as if genuine, when providing information to MFSIM’s auditors and for inclusion in the fund’s half-yearly report;
- Documents purporting to prove those transactions occurred, and that they had been approved at the relevant times, were created in early 2008 by the individual defendants; and
- The documents were false, as the supposed investments transactions never took place.
Douglas J’s decision
After a lengthy hearing, His Honour decided that each of the individuals had dishonestly breached their statutory duties as directors and officers of MFSIM. Douglas J recited the history of events within MFSIM in November 2007, and found that none of the investments of payments totalling $147.5 million by MFSIM had been approved, there was no consideration, and no contemporaneous documentary evidence.
Douglas J then went on to analyse in painstaking detail the false documents case, noting that there had been a systematic creation, execution and retention of documents by the defendants which purported to approve transactions which had never occurred, and relied upon them as if genuine.
His Honour summarised his overall view of the evidence was that investors received nothing following the drawdown of $147.5 million, without explanation or any prospect of those funds being repaid. “That was hardly consistent with the duties owed to them by MFSIM and its relevant officers”. 3 Douglas J noted that instead there was not even a plan for the supposed investments, never mind the fact that there was no sense of awareness of what the “investments” actually were purported to achieve.
His Honour confirmed that the conduct of the individuals, in making the impugned payments, could be attributed to MFSIM, because “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’.” 4
The individuals said the case against them was circumstantial, and at all times they maintained that the investments had occurred properly, and that the documents were not false. The Court accepted that the Briginshaw standard of proof was required of ASIC in this case.5 Noting the defendants’ arguments that ASIC’s case was circumstantial, His Honour quoted from ASIC v Fortescue Metals Group Ltd (No 5) with approval, where Gilmour J said that “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.“6
Another threshold issue in the case was whether two of the defendants, Michael King and David Anderson, had been officers of MFSIM. Mr Anderson had been company secretary and CFO, but argued that even if he was an officer of MFSIM, it was not in its capacity as responsible entity for the managed investment scheme. His Honour painstakingly reviewed that argument but held that he was an officer and that “It would be quite impractical and artificial to invent some notional separation between those two roles.” 7
As for Mr King, who had been director and CEO of MFS Limited and had been a director of MFSIM some until February 2007, His Honour agreed with ASIC that he had exercised significant executive power and therefore should be subject to the obligations in s601FD. ASIC pointed to evidence that Mr King was responsible for major decisions in MFSIM and the MFS Group and that he directed Craig White, MFSIM’s CEO at the time of the transactions,8 and His Honour agreed, concluding that there was sufficient evidence to establish that he participated in decision-making affecting MFSIM’s business, and had the capacity to affect its financial standing. 9
Douglas J went on to hold that:
- The impugned agreements, which supposedly proved that the transactions did occur as the individuals had asserted, were invalid;10 and
- The transactions were not ratified by the MFSIM board because it had not received true information.11
Douglas J held that the individual defendants were “knowingly involved” in the contraventions by MFSIM, and that each had breached their statutory obligations where they participated in the $130 million or $17.5 million payments, and/or the creation or retention of the false documents.
In finding that each of them had been dishonest, Douglas J rejected the defendants’ requests that they be relieved of their liability under s1317S or s1318 of the Corporations Act, which permits a court to exercise discretion and grant relief from liability for contravention of civil penalty provision, if the wrongdoer was proven to have acted honestly and in the circumstances ought to be excused.
In a salient reminder of the obligation on directors and officers to maintain their obligations to investors, Douglas J concluded with the following:
When all is said and done – and much has been said at least – this remains a sorry tale of the misuse of other people’s money by those who should have known better. All the defendants knew that the money belonged to the investors in PIF and that it should have been used for their purposes. It was drawn down from the RBS loan for the improper purposes of paying off the Fortress debt and, later, the PacFin debenture holders. It was used to pay off the Fortress debt. Whether it was actually used to pay off the PacFin debenture holders may not be established on the evidence, but it is perfectly clear that it was not used for the investors in PIF.12
In October the parties will be heard on pecuniary penalties to be imposed as well as any other orders, with the individual each liable for up to $200,000 in penalties. It remains to be seen whether the matter will be appealed.
This decision is a very salient reminder of the obligations on directors and executives regarding their obligations to act in accordance with their statutory duties, and consider investors’ interests at all times, and use an entity’s funds for them. Any suggestion that these steps were taken for the good of the business as a whole may not be entertained.
This article was written by Ailbhe Kirranne, Partner.
1ASIC v Managed Investments Ltd & Ors (No 9)  QSC 109
2In ASIC v Managed Investments Ltd & Ors (No 9)  QSC 109 at 
3In ASIC v Managed Investments Ltd & Ors (No 9)  QSC 109 at 
4Ibid at 
5Ibid at 
6Ibid at . Emphasis in original.
7In ASIC v Managed Investments Ltd & Ors (No 9)  QSC 109 at 
8Described by His Honour as “the ‘mastermind’ behind the scenes”, at , Mr White did not give evidence in his defence.
9Ibid at 
10Ibid at T
11Ibid at 
12Ibid at