FEDERAL COURT OF AUSTRALIA
Trilogy Funds Management Limited v Sullivan (No 2)
[2015] FCA 1452
SUMMARY
In accordance with the practice of the Federal Court in cases of public interest, importance or complexity, the following summary has been prepared to accompany the orders made today. This summary is intended to assist in understanding the outcome of this proceeding and is not a complete statement of the conclusions reached by the Court. The only authoritative statement of the Court’s reasons is that contained in the published reasons for judgment which will be available on the internet at the Court’s website. This summary is also available there.
In these proceedings, Trilogy Funds Management Ltd (Trilogy), the responsible entity of a registered managed investment scheme formerly known as the Pacific First Mortgage Fund (Fund), claimed that directors and officers of the former responsible entity, City Pacific Limited (City Pacific) breached their statutory duties as officers of a responsible entity under s 601FD of the Corporations Act 2001 (Cth) (Corporations Act). Those officers were: Mr Philip Sullivan, Mr Thomas Swan, Mr Ian Donaldson and Mr Stephen McCormick.
The alleged contraventions related to a loan facility with a company called Atkinson Gore Agricultural Pty Ltd (AGA). The Fund loaned money to AGA to enable it to purchase land in an area known as “Saddleback” in the Gold Coast hinterland near the township of Canungra. Money was first loaned to AGA under that loan facility in 2004. The loan facility was extended and increased during 2005. In October 2005, the approved facility limit was approximately $17 million.
Trilogy alleged that from late April 2006, Mr Sullivan, who was the chief executive officer of City Pacific, and Mr McCormick, who was the lending manager, permitted advances to be made to AGA under the loan facility in circumstances where the approved facility limit of approximately $17 million was exceeded. Then, in about July or August 2006, Mr Sullivan and Mr McCormick purported to approve an increase to the loan facility limit to $26 million. They did so without putting that proposal to City Pacific’s Credit Committee as required by the Fund’s mandated compliance policies and procedures. They also did so in circumstances where the increase to the loan facility limit was not supported by an appropriate valuation of the Saddleback land which was held as security for the loan.
Trilogy alleged that in so doing, Mr Sullivan and Mr McCormick contravened s 601FD(1)(b), (c) and (f) of the Corporations Act because they did not exercise the appropriate care and diligence, did not act in the best interests of the members of the Fund and did not take appropriate steps to ensure compliance with the Fund’s constitution and compliance plan.
The Court has found that Mr Sullivan and Mr McCormick did contravene s 601FD(1)(b), (c) and (f) of the Corporations Act in purporting to approve that increase to the AGA loan facility.
Trilogy also alleged that in failing to prevent advances being made to AGA in the period from late April 2006 to August 2006, in circumstances where the approved facility limit was exceeded, each of Messrs Sullivan, Swan, Donaldson and McCormick failed to exercise appropriate care and diligence and therefore contravened s 601FD(1)(b) of the Corporations Act.
The Court has found that Mr Sullivan and Mr McCormick, but not Mr Swan and Mr Donaldson, contravened s 601FD(1)(b) of the Corporations Act in respect of advances made to AGA during that period.
In the period from late August 2006 to late December 2006, the Fund continued to advance money to AGA pursuant to the loan facility. Those advances were made in circumstances where the approved facility limit was exceeded. By late December 2006, the balance of the AGA facility was about $44 million. The facility limit approved by the Credit Committee remained at just over $17 million.
Trilogy alleged that, in failing to prevent the Fund from making those advances to AGA between August and December 2006, each of Messrs Sullivan, Swan, Donaldson and McCormick failed to exercise appropriate care and diligence as officers of the responsible entity, City Pacific. They therefore contravened s 601FD(1)(b) of the Corporations Act.
The Court has found that Mr Sullivan and Mr McCormick, but not Mr Swan and Mr Donaldson, failed to exercise appropriate care and diligence in respect of the advances made to AGA during the period late August to late December 2006. They therefore contravened s 601FD(1)(b) of the Corporations Act.
In late December 2006, a proposal was put to the City Pacific Credit Committee to increase the AGA facility limit to $55 million, but limited to about $44 million until a proposed development of the Saddleback land was declared a State Significant development. Messrs Sullivan, Swan, Donaldson and McCormick were members of the Credit Committee.
Messrs Sullivan, Swan, Donaldson and McCormick approved that proposed increase to the AGA facility. That increased loan facility was offered to and accepted by AGA in January 2007. Both the loan proposal and the letter of offer were backdated to give the appearance that the facility was approved by the Credit Committee and offered to AGA in August 2006.
Trilogy alleged that each of Messrs Sullivan, Swan, Donaldson and McCormick breached their duties as officers of the responsible entity in approving that facility. Trilogy alleged that there were a number of problems with the proposed increase to the AGA facility. The main problem, however, was that it was not supported by an appropriate valuation of the Saddleback land.
The valuation that had been secured from Mr Chris Kogler of PRP Valuers and Consultants Gold Coast Pty Ltd were, in Trilogy’s submission, deficient or defective.
The Court has found that each of Messrs Sullivan, Swan, Donaldson and McCormick contravened s 601FD(1)(b), (c) and (f) of the Corporations Act in approving this increase to the AGA facility. Each of them failed to act with appropriate care and diligence. Each of them failed to act in the best interest of the members of the Fund. Each of them failed to take steps to ensure that the loan facility complied with the Fund’s constitution and compliance plan.
From January 2007 to the 1st of July 2007, the Fund continued to advance money to AGA. Those advances again occurred in circumstances where the facility limit approved by the Credit Committee was exceeded. The facility limit remained at about $44 million because the Saddleback project had not been declared State Significant. By July 2007, the balance outstanding on the AGA facility was approximately $54 million.
Trilogy alleged that in failing to prevent those advances being made in the period January to July 2007, each of Messrs Sullivan, Swan, Donaldson and McCormick contravened s 601FD(1)(b) of the Corporations Act. Trilogy alleged that Messrs Sullivan, Swan, Donaldson and McCormick failed to exercise the appropriate degree of care and diligence.
The Court has found that each of Messrs Sullivan, Swan, Donaldson and McCormick did breach s 601FD(1)(b) of the Corporations Act in failing to prevent the advances during the period January to July 2007. They failed to exercise the appropriate degree of care and diligence.
Trilogy alleged that the Fund suffered loss and damage as a result of the contraventions by Messrs Sullivan, Swan, Donaldson and McCormick. It sought compensation orders under s 1317H of the Corporations Act.
The Court has found that the Fund did suffer loss and damage resulting from the contravention.
The Court has found that compensations orders should be made against Mr Sullivan and Mr McCormick in the sum of $37,214,088.28 together with interest under s 51A of the Federal Court of Australia Act 1976 (Cth) (Federal Court of Australia Act).
The Court has found that compensation orders should be made against Mr Swan and Mr Donaldson in the sum of $6,245,974.93 together with interest under s 51A of the Federal Court of Australia Act.
The Court has adjourned the proceedings to 15 February 2016 for the making of orders in accordance with the judgment.
JUSTICE M A WIGNEY
18 December 2015
