The Australian Securities and Investments Commission (ASIC) has applied successfully to the High Court of Australia for special leave to appeal the whole of the appeal judgment of the Full Court of the Federal Court in Lewski v Australian Security & Investments Commission [2016] FCAFC 96 and Lewski v Australian Security & Investments Commission (No 2) [2017] FCAFC 171.

We have previously reported in our ProFiles eNewsletter on the first of these two decisions.[1] It overturned the first instance decision that the directors (including William Lewski (Lewski)) of Australian Property Custodian Holdings Ltd (APCH), as the Responsible Entity (RE) of the Prime Retirement and Aged Care Property Trust (Trust) managed investment scheme, had breached their duties under the Corporations Act 2001 (Cth) (Act) in the course of resolving to amend the Trust constitution (Constitution) and by making subsequent decisions pursuant to the Constitution that enabled fee payments to APCH (in its personal capacity)[2] amounting to $33 million from scheme property upon the Trust’s listing on the Australian Stock Exchange (Listing Fee). Central to this outcome was the Full Court’s finding that ASIC had not commenced proceedings for a declaration of contravention before expiry of the limitation period provided for under section 1317K of the Act.

Argument was then re-opened on the question of whether APCH itself may have similarly contravened the Act.[3] Noting that “the position of the parties, APCH and the Court (both at trial and on appeal) was to regard the position of the Directors (acting as a Board) and APCH as effectively the same”[4] the Full Court found that “none of the Directors breached the Act as alleged by ASIC, and accordingly APCH should not be subject to the declarations which related (as pleaded) to the conduct of the Directors”.[5]

The Full Court of the High Court will hear ASIC’s appeal on 17 October 2018.

Questions for the Appeal

The principal questions raised on the appeal are:

  1. Is an amendment to a scheme constitution made under Part 5C of the Act, which is prohibited by the constitution and/or is not authorised, by either a special resolution of scheme members or because the RE reasonably considers the amendment will not adversely affect scheme members’ rights (Act, section 601GC(1)), nevertheless effective if lodged with ASIC (Act, section 601GC(2)) until set aside by court order?
  2. If the RE and directors respectively have formed an honest belief that they have validly amended the constitution but have not fulfilled their various duties under section 601FC(1) and section 601FD(1) when resolving to amend the constitution and execute an amending deed, are the RE or directors exculpated from so doing at all before they subsequently take, or authorise the taking of, steps necessary for lodgement of the amended constitution with ASIC (Act, section 601GC(2))?
  3. Does section 208(3) of the Act as modified by section 601LC (which provides that section 208(1) does not prevent an RE paying itself or a related party fees provided for in its constitution under section 601GA(2)) operate, as a matter of proper construction, as an element of a breach of section 208 by an RE (in which event ASIC will bear the onus of proving, amongst other things, the APCH directors had actual knowledge the Constitution did not provide for the payment of the Listing Fee), or as an exception to liability (and therefore a matter for the directors to prove)?

Implications

In circumstances such as occurred in the APCH example, where payments from scheme property are proposed to be made to the RE, scheme members clearly require protection against what amounts to a conflict of the members’ interests and the RE’s interests.

The High Court’s decision will have significance for not only REs seeking direction and confirmation on how to validly amend scheme constitutions, but also for scheme members wanting protection of their legally enforceable right to not have a constitution amendment made that adversely affects their rights (unless they vote for it by special resolution). Should the High Court find that an RE must first reasonably consider a proposed constitution change will not adversely affect scheme members’ rights as a pre-condition of its power to amend, section 601GC(1)(b) will apply to constrain that amendment power.

More generally, the appeal decision will ideally confirm, clarify, and/or allow a proper understanding of the duties of REs and their directors and how they must be discharged to ensure constitution amendments are validly made, and managed investment schemes are operated effectively for the benefit of their members.

The High Court’s decision will also have particular currency given the sharp focus on corporate governance failures in the financial services sector through the extant Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry.