Case Note
ASIC v
Managed Investments Ltd & Ors (No.10) [2017] QSC 96
June 2017
Nathan Buckley | Partner |
G&B Lawyers
Executive
summary
1.
In
2016, the Queensland Supreme Court (QSC)
found officers of MFS Investment Management Ltd to have contravened statutory
duties in the Corporations Act 2001 (NSW)
in that they had misappropriated $147.5 million from Premium Income Fund (PIF) for the purposes of paying other
debts owed by the MFS Group. The officers were also found to have falsified and
backdated company documents to justify their use of the misappropriated funds.
2.
In
2017, the QSC imposed significant penalties on the officers, including the
requirement that they pay $615 million in compensation to PIF, individual
penalties up to $650,000 as well as bans from managing corporations from 5
years to permanently.
3.
The significant penalties imposed by the QSC
are a reminder to directors and executives to ensure compliance with their
statutory duties under the Corporations
Act 2001 (Cth) including acting in the best interests of investors at all
times.
2016
judgment – Breach of statutory duties
On 23 May 2016, Douglas J delivered his
reasons in ASIC v Managed Investments Ltd
and Ors (No 9) [2016] QSC 109. This case was related to the 2008 collapse
of MFS Group.
MFS Investment Management Ltd (MFSIM) a wholly owned subsidiary of MFS
Limited which was a publicly listed holding company of MFS Group. MFSIM was the
responsible entity for a managed investment fund holding millions of dollars
for investors and known as the “Premium Income Fund” (PIF). Being the responsible entity, MFSIM was required to comply
with its duties under the Corporations
Act 2001 (Cth). In particular, section 601FC of the Corporations Act 2001 (Cth) sets out the duties of a responsible
entity of a registered scheme which includes the requirement to; act honestly,
exercise the degree of care and diligence that a reasonable person would
exercise if they were in the responsible entity's position, 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
ensure that all payments out of the scheme property are made in accordance with
the scheme's constitution and this Act.
In May 2016, the Court found that four
officers and the funds manager of MFSIM did not act honestly in carrying out
their duties in managing PIF. ASIC, which was the plaintiff in the matter
alleged the defendants had misappropriated $147.5 million of funds from PIF,
created and used false documents in relation to the use of the PIF funds and that
the PIF funds were not used for the benefit of the PIF resulting in PIF
suffering a loss.
The defendants were found to have
misappropriated the funds to pay debts owed by other entities in the MFS Group.
Further, the defendants were found to have falsified and backdated company
documents in an attempt to justify the use of the misappropriated funds.
2017
judgment - Penalties imposed
Just over one year after Douglas J
passed judgment against the defendants, their penalties are now known. On 26
May 2017, the former officers who oversaw the collapse of MFS Group were
ordered to pay an extraordinary $615 million in compensation to the PIF.
In addition to the compensation, the
officers were also banned from being company directors for varying lengths of
time ranging from 5 to permanently and each received individual financial
penalties between $90,000 and $650,000.
As it was put by Douglas J, “[t]his
remains a sorry tale of the misuse of other people’s money by those who should
have known better”. The false documents
were examples “lending credence to the perception that PIF was a “slush fund”
run in the group’s interests rather than the interests of its investors.”
At paragraph 233 of the 2017 judgment,
Douglas J found that ASIC’s submissions were justified in that the “periods of
disqualification and the pecuniary penalties involved should reflect the
complete disregard which these defendants had to their duties under the Corporations Act; (except for Ms Watts)
the loss of many millions of dollars to PIF; and (except for Mr King) the
defendants’ various roles in the cover up.” Further, “the imposition of
substantial periods of disqualification and pecuniary penalties will ultimately
have the effect which the statutory scheme seeks: recognition on the part of
those controlling responsible entities that they must act with honesty and
competence and remember at all times that they are dealing with other people’s
money.”
This judgment should act as a reminder
to directors and executives to ensure compliance with their statutory duties
under the Corporations Act 2001 (Cth).
It is imperative that the interests of investor’s are considered at all times
and that an entity’s funds are used for the investor’s benefit.
References:
ASIC
v Managed Investments Ltd and Ors (No 9) [2016] QSC 109
ASIC
v Managed Investments Ltd and Ors (No 10) [2017] QSC 96
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