FEDERAL COURT OF AUSTRALIA

J&J Richards Super Pty Ltd ATF The J&J Richards Superannuation Fund v Nielsen [2024] FCA 1472

ORDERS

THE COURT ORDERS THAT:

1.    The parties are to submit consent or competing draft declarations and orders to give effect to these reasons for judgment, including with respect to costs and interest, by 4.30 pm on Monday, 3 February 2025.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

HALLEY J:

A.     INTRODUCTION

1    This proceeding is principally concerned with defences relied upon by an insurer to third party claims made by investors under a directors and officers liability insurance policy issued by the insurer to a now insolvent company.

2    The applicant is J&J Richards Super Pty Ltd (Applicant) as the trustee for the J&J Richards Superannuation Fund (Richards Superannuation Fund).

3    The Applicant commenced this proceeding, both on its own behalf and on behalf of group members (Group Members), against the first respondent, Linchpin Capital Group Limited (in liq) (Linchpin), the sixth respondent, Endeavour Securities (Australia) Ltd (in liq) (Endeavour) (a subsidiary of Linchpin), four former directors of Linchpin, the second to fifth respondents (Director Respondents) and the seventh respondent, AIG Australia Limited (AIG). The Applicant had also advanced claims in this proceeding against another insurer, Riverstone Managing Agency Limited (Riverstone), as the relevant entity for Lloyds Syndicate 2014, but those claims were ultimately not pressed.

4    In its third further amended statement of claim, the Applicant alleges that the first to sixth respondents breached various provisions of the Corporations Act 2001 (Cth) (Corporations Act), the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the Trusts Act 1973 (Qld) (Trusts Act) in making improvident loans without adequate security and contrary to representations made to investors. The claims under the Trusts Act have not been pressed and the claims that remain for consideration are otherwise directed at the Director Respondents’ conduct in the period between January 2014 and June 2018 in managing two managed investment schemes (Schemes).

5    The first of the Schemes was an unregistered managed investment scheme known as the “Investport Income Opportunity Fund” (Unregistered Fund). Linchpin was the trustee and Investport Pty Ltd (Investport) was the manager of the Unregistered Fund. Investments in the Unregistered Fund were promoted in an Information Memorandum (IM) issued by Linchpin upon the basis that funds would be invested in a range of assets (but predominantly mortgages in particular commercial and development loans) and would be made progressively to achieve a diversified loan portfolio across property and corporate sectors on a secured basis that was income producing.

6    The second of the Schemes was a registered managed investment scheme, initially named the “Endeavour Hi-Yield Fund”, but later changed to be also known as the “Investport Income Opportunity Fund” (Registered Scheme). Endeavour was the responsible entity and Investport was the investment manager of the Registered Scheme. Investments in the Registered Scheme were promoted in Product Disclosure Statements (PDSs) issued by Endeavour upon the basis that funds would be invested in a range of assets (but predominantly mortgages in particular commercial and development loans) and would be made progressively to achieve a diversified loan portfolio across property and corporate sectors on a secured basis that was income producing.

7    On 14 May 2021, the Applicant was granted leave to join the insurers of Linchpin and Endeavour (AIG and RiverStone, respectively) to the proceeding. It brought claims directly against each under the various policies of insurance which were in place in the period during which the alleged contraventions by the first to sixth respondents took place. The claim which remains pressed by the Applicant is a claim against AIG with respect to its liability to indemnify each of the Director Respondents (each of whom have a separate entitlement to indemnity as third party beneficiaries) under a Directors and Officers Insurance Policy dated 20 December 2017 (Policy). The Applicant seeks to recover from AIG under the Policy alleged losses caused by the conduct of the Director Respondents. The claim is brought against AIG under the Civil Liability (Third Party Claims against Insurers) Act 2017 (NSW) (Third Party Claims Act).

8    On 19 June 2023, the Court approved a partial settlement of the proceeding. The effect of the orders made by the Court was that the Applicant was granted leave to discontinue the proceedings against Linchpin and Endeavour but the Director Respondents were to remain parties to the proceeding. The settlement provided for a release of the claims made by the Applicant, on its own behalf and on behalf of Group Members, against the Director Respondents, but the orders provided that the release was not to become operative until the final determination of the proceeding. The settlement also provided for a release of the claims advanced against Riverstone.

9    On 24 March 2023, orders were made by the Court excusing the Director Respondents from participating in the proceeding. The Director Respondents have all filed submitting appearances.

10    The only active parties remaining in the proceeding are the Applicant and AIG. In order to succeed in its claim for relief against AIG, the Applicant must establish:

(a)    the Director Respondents are liable to the Applicant in respect of one or more of the contraventions alleged in this proceeding;

(b)    one or more of the contraventions by the Director Respondents caused the Applicant’s loss;

(c)    the Director Respondents fall within the definition of an “insured” under the Policy; and

(d)    the claims against the Director Respondents fall within the coverage clause under the Policy.

11    AIG is the only remaining active respondent in the proceeding.

12    AIG resists the claim brought by the Applicant on the basis that (a) Linchpin breached its duty of disclosure under s 21 of the Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act), (b) it is entitled to rely upon a professional services exclusion in the Policy, and (c) by reason of s 7 of the Third Party Claims Act, it is entitled to the benefit of the release granted to the Director Respondents under an order of the Court made in this proceeding on 19 June 2023.

13    The Applicant and AIG have largely agreed 59 common questions for determination in the proceeding (common questions). The only difference between the common questions advanced by the Applicant and AIG is that questions 55, 58 and 59 in AIG’s proposed common questions were not included in the Applicant’s proposed common questions. I am satisfied that it is appropriate and convenient for those three additional common questions to be also answered in these reasons for judgment. Each raises issues that directly arise from the defences sought to be relied upon by AIG.

14    For the reasons that follow, I have concluded that the claims advanced by the Applicant on its own behalf and on behalf of Group Members against the Director Respondents have been established and the defences relied upon by AIG to the third party claims brought by the Applicant have not succeeded. Each of the common questions is answered in Appendix A to these reasons for judgment.

B.     EVIDENTIARY ISSUES

B.1.     Overview

15    The settlement with the Director Respondents and their submitting appearances had a profound effect on the conduct of the hearing. Both the Applicant and AIG had a common interest in establishing that the Director Respondents had breached their statutory duties. The Applicant for the purpose of establishing the predicate liability of the Director Respondents to make good their third party claim against AIG under the Policy and AIG for the purpose of establishing its non-disclosure defence.

16    The Applicant addressed the factual background to the claims it advanced against the Director Respondents and the alleged liability of the Director Respondents to the Applicant, in sections B and C of its 72 page opening outline of submissions (Applicant’s opening outline). With the exception of a very small number of paragraphs that trespassed into AIG specific issues, AIG did not dispute any of the facts or principles stated in sections B and C of the Applicant’s opening outline.

B.2.     Statement of Agreed Facts

17    Prior to the commencement of the hearing of the proceeding the Applicant and AIG agreed a 43 page statement of agreed facts (Statement of Agreed Facts) pursuant to s 191 of the Evidence Act 1995 (Cth) (Evidence Act). The Statement of Agreed Facts was tendered by the Applicant and admitted into evidence. The Applicant sought to rely upon the Statement of Agreed Facts for the purpose of establishing each of the factual propositions advanced in sections B and C of the Applicant’s opening outline.

18    An immediate issue with the Statement of Agreed Facts is that s 191(1) of the Evidence Act provides that an “agreed fact” is a fact that “the parties” to a proceeding have agreed is not disputed for the purposes of the proceeding. Section 191(3) provides that the relief from the requirement to adduce evidence to prove the existence of an agreed fact in s 191(2) only applies if the fact is stated in a document signed by “the parties” or legal representatives. Notwithstanding the settlement reached with the Director Respondents, they remain parties to this proceeding.    

19    Both the Applicant and AIG submitted that although the Director Respondents were not a party to the Statement of Agreed Facts the necessary consequence of their respective submitting appearances was that they were bound by the Statement of Agreed Facts. They submitted that the Statement of Agreed Facts could therefore be relied upon for the purpose of establishing the claims that the Applicant advanced against the Director Respondents and the matters relied upon by AIG as making good the non-disclosure defences.

20    It is well established that the effect of a submitting appearance is that a party is bound by any orders that the Court might make in the proceeding. It does not follow, however, that a submitting appearance carries with it any implied agreement to a statement of agreed facts agreed by the other parties to a proceeding. Neither the Applicant nor AIG could point to any authority that a submitting appearance did carry such an implied agreement. Section 191 provides an exception to the requirement for evidence to be adduced to prove the existence of a fact but only with the express written consent of the parties to the proceeding.

B.3.     Applicant’s evidence

21    Against the likelihood that I would not accept that a submitting appearance carried with it an implied agreement to be bound by the Statement of Agreed Facts, the Applicant tendered a substantial volume of contemporaneous documents including a report of the former receivers of Linchpin to the Court, that it submitted independently established each of the facts alleged in sections B and C of the Applicant’s opening outline. The Applicant also provided the Court with annotated copies of both the Applicant’s opening outline and the Statement of Agreed Facts with references to the documents admitted into evidence and the receivers’ report.

22    The Applicant also relied on affidavits of Julie Marie Richards, a director of the Applicant, and Brian Williams, a financial adviser.

23    Ms Richards gave evidence of the circumstances in which she and her husband, Jeffrey Richards, caused the Applicant to make the investments in the Schemes, in particular the advice they received from Mr Williams. She also gave evidence that she would not have proceeded with the investments in the Schemes had she been informed that the Schemes made loans where security taken was not registered or not properly registered and the investments made by the Schemes were high risk and not diversified. She was not cross examined.

24    Mr Williams gave evidence of representations made to him by directors of Beacon Financial Group Pty Ltd (Beacon), a wholly owned subsidiary of Linchpin, in relation to investments in the Schemes and his discussions with Mr and Ms Richards that led to the investments made by the Applicant in the Schemes. He was not cross examined.

25    I accept the evidence given by Ms Richards and Mr Williams. They largely corroborated each other’s evidence of the communications between them and their evidence was otherwise not challenged and was consistent with contemporaneous documents and the objective logic of events.

26    In addition, the Applicant tendered an expert report of Bruce Francis Debenham. Mr Debenham is a senior risk management professional with more than 25 years’ experience in banking, insolvency and management consulting with a particular focus on credit risk assessment and management.

27    Mr Debenham gave evidence that in his opinion, (a) Endeavour’s lending manual clearly set out the responsibilities, duties and work that a diligent and prudent lender would undertake in determining whether to lend to a prospective borrower, (b) the portfolio of loans advanced by the Schemes were not made consistently with the lending principles and guidelines specified in the IM and the PDSs and (c) Linchpin did not act with the degree of care and diligence of an ordinary lender in making each of those loans. Mr Debenham was not cross examined.

28    I am satisfied that Mr Debenham, by reason of his training, study and experience, had the requisite expertise to express these opinions and that his report provided a sufficient explanation of his reasoning and an articulation of the assumptions that he made in arriving at those opinions to render his expert report both admissible and persuasive. I accepted his evidence.

29    Next, the Applicant tendered a number of affidavits that had been filed in the proceedings brought by the Australian Securities and Investments Commission (ASIC) against Linchpin and Endeavour in this Court, QUD 439 of 2018, and by ASIC against the Director Respondents in this Court, QUD 269 of 2020 (together, ASIC proceedings). Most significantly, the affidavits included an affidavit of Jason Mark Tracy, a registered liquidator, that annexed a copy of an expert report of Mr Tracy and David Orr of Deloitte Financial Advisory Pty Ltd to the Court in the QUD 439 of 2018 proceeding (Receivers’ Report). Mr Tracy and Mr Orr were appointed as joint and several receivers and managers over the property of Linchpin and the scheme property of Endeavour, pursuant to orders made by Derrington J on 7 August 2018.

30    The other affidavits in the ASIC proceedings tendered by the Applicant comprised a further affidavit of Mr Tracy, three affidavits of Anne Elizabeth Gubbins, a solicitor employed by ASIC, and two affidavits of Tegan Harris, a solicitor employed by Gadens Lawyers, the solicitors for ASIC (together, Tendered Affidavits).

31    AIG did not object to the tender of the Receivers’ Report or the Tendered Affidavits. The Applicant relied on the Receivers’ Report and the Tendered Affidavits to establish that all potentially relevant material has been requested (document requests), documents responsive to those requests were produced where available and the documents were then considered to permit the drawing of inferences, in particular, as to the absence of any proper due diligence of borrowers and relevant or adequate security to support the loans made by the Schemes. I am satisfied that the Receivers’ Report and the Tendered Affidavits establish that all reasonable steps have been taken to procure production of all documents potentially relevant to the alleged contraventions of the Director Respondents and to the extent that documents have not been produced in response to those requests I am satisfied, in the absence of any evidence to the contrary, that such documents do not exist.

B.4.     AIG’s evidence

32    AIG relied on an affidavit of Roslyn Samuel, a Financial Institutions Practice Lead of AIG. Ms Samuel was a Senior Underwriter of AIG at the time the Policy was issued and was responsible for the underwriting of financial lines risks in Australia, including directors and officers liability policies. She gave evidence of the AIG underwriting guidelines, her receipt and review of the proposal form for directors and officers liability cover for Linchpin, subsequent enquiries and communications with Linchpin’s broker in relation to Linchpin’s proposal and the impact on her decision to agree to extend cover to Linchpin had she been informed of the matters that AIG has alleged that Linchpin failed to disclose.

33    Ms Samuel was cross examined. It was readily apparent from both her affidavit evidence and her cross examination that Ms Samuel had a very limited recollection of the circumstances in which she agreed that AIG would extend directors and officers liability insurance to Linchpin and was largely giving evidence by reference to what she contended was her usual practice. I am satisfied that Ms Samuel’s evidence of her usual practice and her evidence of the significance of the matters not disclosed to her decision to extend cover to Linchpin should be accepted. Her evidence on these matters was consistent with the evidence adduced of AIG’s underwriting guidelines and the objective logic of events. My confidence in accepting her evidence on these matters was materially increased by her acceptance, although after some prevarication, that the objective evidence would suggest that she had significantly departed from her usual practice in her assessment of Linchpin’s application for directors and officers liability insurance.

C.     SALIENT FACTS

C.1.     Linchpin and Endeavour

34    Linchpin was a company incorporated on 28 May 2013. It was relevantly the trustee with responsibility for administering the Unregistered Fund. In the IM, Linchpin claimed to operate the Unregistered Fund as an authorised representative operating under an existing Australian Financial Services Licence (AFSL) of another entity.

35    In the period from at least 23 January 2014 to 7 August 2018 (Relevant Period), each of Paul Nielsen, the second respondent, Ian Comrie Williams, the third respondent, Paul Anthony Raftery, the fourth respondent and Peter Eugene Daly, the fifth respondent, were directors of Linchpin.

36    During the Relevant Period, Linchpin carried on the business of a professional trustee.

37    Linchpin was either the direct or ultimate holding company of Endeavour, Investport, ISARF Pty Ltd (ISARF), Beacon, The Financiallink Group Pty Ltd (FLG), CPG Research & Advisory Pty Ltd (CPG), Libertas Financial Planning Pty Ltd (Libertas), and Risk and Investment Advisors Australia Pty Ltd (RIAA) (together, Linchpin Group).

38    The Linchpin Group provided a range of financial products, funds management, investment advisory and consulting services.

39    As at August 2018, the Linchpin Group comprised 413 authorised representatives under s 761A of the Corporations Act. Each of Endeavour, RIAA, CPG and Libertas held an AFSL. In addition, FLG was recorded as the principal business address of an AFSL issued to NextGen Financial Group Pty Ltd.

40    Endeavour was a subsidiary of Linchpin and which operated as the responsible entity of the Registered Scheme.

41    On 7 August 2018, in the ASIC proceedings against Linchpin and Endeavour (QUD 439 of 2018), Derrington J made orders under s 1323 of the Corporations Act appointing Mr Tracy and Mr Orr as receivers and managers of certain property of Linchpin and certain property of Endeavour and requiring the Receivers to provide a report to the Court in relation to various matters relating to the Unregistered Fund and the Registered Scheme. Those orders were made on the basis that, from the information available to ASIC at that time, it was apparent that the investments into the Unregistered Fund and Registered Scheme had been used to finance loans to Linchpin itself and entities within the Linchpin Group.

42    On 15 March 2019, Linchpin was placed into liquidation and Mr Tracy and Mr Orr were appointed as liquidators, by an order of this Court.

C.2.     Richards Superannuation Fund

43    The Richards Superannuation Fund was established in 2008 by Ms Richards and her husband. The Richards Superannuation Fund made an investment of $50,000 in the Unregistered Fund in March 2015 on the advice of its financial planner, Mr Williams. Mr Williams had reviewed the IM and formed the view, that the matters conveyed in the IM, were broadly similar to the representations made to him by Mr Daly and Andrew Blanchette at a meeting in January 2014 to the effect that the Unregistered Fund was a secured unregistered managed investment scheme with robust lending requirements that would lend pooled investors’ funds to qualified or approved borrowers in a mixed diversified portfolio, secured by registered mortgages or would be invested in cash.

44    In or about May 2016, the Richards Superannuation Fund invested $25,000 in the Registered Scheme. The investment was again made on the advice of Mr Williams who had reviewed one of the PDSs issued by Endeavour with respect to investments in the scheme and was satisfied that the terms of the PDS were broadly similar to the investment strategy undertaken by Linchpin with respect to the Unregistered Fund and recorded in the IM.

C.3.     Group Members

45    The Applicant brings its claims also on behalf of Group Members, being persons who:

(a)    on or after 23 January 2014 purchased units in the Unregistered Fund; and/or

(b)    on or after 25 March 2015, purchased units in the Registered Scheme; and

(c)    have entered into a representative proceeding funding agreement with LCM Funding Pty Ltd.

46    There are approximately 176 persons or entities who are Group Members in this proceeding. Their investments in the Schemes are stated to total $16,158,830.64. The Applicant estimates that pre-judgment interest on their claims as at 30 June 2023 was approximately $3,372,592.05.

C.4.     Unregistered Fund

47    On or about 22 January 2014, the Unregistered Fund was established pursuant to a trust deed poll entitled “Investport Income Opportunity Fund Constitution” and operated by Linchpin as an unregistered managed investment scheme called the “Investport Income Opportunity Fund”.

48    Linchpin was described as the “Responsible Entity” of the Unregistered Fund and acted as the trustee of the Unregistered Fund.

49    Investport was appointed as the manager of the Unregistered Fund pursuant to the terms of a management agreement dated 22 January 2014.

C.5.     Registered Scheme

50    In December 2014, Endeavour was acquired by Linchpin (Endeavour Acquisition). At that time the Registered Scheme was called the “Endeavour Hi-Yield Fund”. On or about 25 March 2015, the name of the Registered Scheme was changed to the “Investport Income Opportunity Fund”.

51    Investport was appointed as the manager of the Registered Scheme by Endeavour pursuant to a management agreement dated 2 April 2015. Endeavour had a Conflict of Interest and Related Party Transactions Policy (Conflict Policy). I infer, in the absence of any qualification or suggestion to the contrary, that the Conflict Policy applied to all investments made by the Registered Scheme. The only version of the Conflict Policy in evidence was published in May 2017 with the footer on each page describing it as “Final Version 2017”.

52    In the period between about 26 May 2015 and 26 May 2017, Mr Daly sought to procure investments into the Registered Scheme by engaging with and encouraging financial advisors to consider investments in the Registered Scheme and through them to their clients and/or potential clients, as a term deposit alternative.

53    On or about 27 April 2015, Endeavour lodged an amended compliance plan for the Registered Scheme with ASIC (Compliance Plan) and issued a Product Disclosure Statement for the Registered Scheme (First PDS). It was expressly stated in the First PDS that each of the directors of Endeavour (that is, Mr Nielsen, Mr Raftery and Mr Williams) consented to and authorised the issue of the First PDS. Mr Daly was provided with a final version of the First PDS pending legal sign off and before it was lodged with ASIC.

54    On or about 1 October 2015, Endeavour issued a second Product Disclosure Statement for the Registered Scheme (Second PDS). It was expressly stated in the Second PDS that each of the directors of Endeavour (that is, Mr Nielsen, Mr Raftery and Mr Williams) consented to and authorised the issue of the Second PDS.

55    On or about 24 June 2016, Endeavour issued a third Product Disclosure Statement for the Registered Scheme (Third PDS). It was expressly stated in the Third PDS that each of the directors of Endeavour (that is, Mr Nielsen, Mr Raftery and Mr Williams) consented to and authorised the issue of the Third PDS. Mr Daly also approved the Third PDS in an email exchange with Mr Williams, Mr Nielsen and Mr Raftery on 28 June 2016.

56    In or about January 2018, Endeavour issued a fourth Product Disclosure Statement for the Registered Scheme (Fourth PDS). It was expressly stated in the Fourth PDS that each of the directors of Endeavour (that is, Mr Nielsen, Mr Raftery and Mr Williams) consented to and authorised the issue of the Fourth PDS.

57    Each of the First PDS, the Second PDS, the Third PDS and the Fourth PDS (together, PDSs) was in materially the same terms.

58    Mr Nielsen commenced acting as Endeavour’s Responsible Manager at some point during the financial year ending 30 June 2015 before the First PDS was issued by Endeavour on 27 April 2015.

C.6.     Investment Committee

59    A single investment committee (Investment Committee) acted as the decision making body for investments made by the Registered Scheme in the period from about April 2015 until 7 August 2018 and investments made by the Unregistered Fund in the period from about 23 January 2014 until 7 August 2018. The Investment Committee undertook the role of the “Credit Committee” that was referred to in the IM and in each of the PDSs. The terms “Credit Committee”, “Investment Committee” and “Lending Committee” were used interchangeably in the operation of the Unregistered Fund and Registered Scheme to refer to the Investment Committee.

60    Mr Williams, Mr Raftery, Mr Nielsen and Mr Daly were, from time to time and in different combinations, the members of the Investment Committee.

61    On 1 April 2015, the Investment Committee approved an overarching investment strategy by circular resolution for both the Unregistered Fund and the Registered Scheme (1 April 2015 Resolution). The 1 April 2015 Resolution was signed by Mr Nielsen, Mr Daly, Mr Williams and Mr Blanchette. The strategy approved in the 1 April 2015 Resolution provided that the Registered Scheme would invest in the Unregistered Fund and the funds invested in the Unregistered Fund by the Registered Scheme would then be lent by the Unregistered Fund in accordance with the investment mandate of the Registered Scheme.

C.7.     Inter Fund Investment

62    Following the 1 April 2015 Resolution, funds were raised through the Registered Scheme and then invested in the Unregistered Fund (Inter Fund Investment). A net total of approximately $16.5 million was transferred by Endeavour on behalf of the Registered Scheme to Linchpin as trustee of the Unregistered Fund or to third parties on behalf of Linchpin as trustee for the Unregistered Fund.

63    The Inter Fund Investment was purportedly provided in exchange for units in the Unregistered Scheme. No units, however, were actually allotted to the Registered Scheme. None of the books or records of the companies contained any agreement between them for the subscription by Endeavour for units in the Unregistered Scheme nor unit certificates in favour of Endeavour. Nor was Endeavour recorded in the Unregistered Scheme’s register of unitholders. No security was given with respect to the Inter Fund Investment and there was no document recording the transaction.

64    The Inter Fund Investment comprised about 95% of the approximately $17.3 million total funds raised in the Registered Scheme and was thus the primary asset of the Registered Scheme.

65    The Inter Fund Investment was the only investment in the Unregistered Scheme after 11 June 2015.

66    Of the approximately $16.5 million transferred by Endeavour to Linchpin as trustee of the Unregistered Fund, approximately:

(a)    $11.1 million was by direct transfer by Endeavour to Linchpin;

(b)    $3.1 million was disbursed by the Registered Scheme on behalf of the Unregistered Fund; and

(c)    $2.4 million was recorded as being interest on Endeavour’s interest in the Unregistered Fund said to be reinvested in the Unregistered Fund.

67    The Receivers could not locate and there is otherwise no evidence that Endeavour made any written record of any election to reinvest interest in the Unregistered Fund.

68    Of the approximately $3.1 million in funds disbursed by the Registered Scheme on behalf of the Unregistered Fund, approximately $3 million was paid directly from the Registered Scheme to borrowers pursuant to unregistered loans.

69    No loan agreement nor any other document recording agreed terms between Endeavour and Linchpin for the Inter Fund Investment or between Endeavour and any other person or entity was produced to ASIC in answer to a request for such documents in a s 912C(1) notice addressed to Endeavour.

C.8.     Loans

C.8.1.     Overview

70    Endeavour had a Lending Manual, which was amended from time to time during the Relevant Period, that applied to investments made by the Registered Scheme.

71    The Lending Manual contained the following guidelines in cl 8 for investments made by the Registered Scheme in other managed investment schemes, such as the Unregistered Fund:

8.    Investment in Other Managed Investment Schemes

Under the Compliance Plan of [Endeavour] the Manager has the ability to invest funds in another Managed Investment Scheme, provided that the other scheme is registered under Chapter 5C of the Corporations Law. It is at the discretion of ES how it wishes to invest the funds received from investors, so to this end, if it is seen fit to invest funds with another registered scheme the following requirements must be satisfied.

8.1    Procedure for Investing Funds in another Managed Investment Scheme

The following procedure is to be followed:

1.    [Endeavour] must be satisfied that the proposed Managed Investment Scheme is registered under Chapter 5C of the Corporations Law.

2.    [Endeavour] must satisfy itself that the scheme is a Mortgage Investment Scheme dealing only in first mortgages over property of the nature detailed in [Endeavour]’s disclosure document.

3.    The term of any investment in the other Scheme must not exceed two years

4.    [Endeavour] must obtain a copy of the Scheme disclosure document and complete the required application form which must be accepted by the Manager of that Scheme.

5.    [Endeavour] Credit Committee will minute the decision stating that the investment is in the best interests of investors.

8.2    Procedure for providing Finance to other Income or Mortgage Fund Managers

These loan [sic] would be secured by a First Mortgage or [sic] some, or all, of the operator’s fund loan book.

Before lending to an operator, [Endeavour]:-

-    Assesses the operator’s management and lending team (including their track record).

-    Obtains a first ranking equitable mortgage over the assets of the relevant fund.

-    Assesses the credit history of the fund.

-    Ensures that total debt drawn is not to exceed 40% of eligible loan assets plus cash.

8.3    Related Parties

[Endeavour] may lend Fund money to provide loans to, or make investments in, any related party subject to normal banking covenants and full disclosure in the Conflicts of Interest Register.

…

72    The requirements of the Lending Manual applied at all times for loans made by the Unregistered Fund and, from 1 April 2015, for loans made by the Registered Scheme.

73    The total amount invested in the Unregistered Fund and the Registered Scheme was $22,731,140.

74    The funds that passed from Endeavour and the Registered Scheme to Linchpin and the Unregistered Fund as part of the Inter Fund Investment were then applied principally by Linchpin to the making of loans to itself and to others. These comprised loans to related entities (Related Entity Loans), loans to financial advisors (Advisor Loans) and loans to directors (Director Loans).

75    The Registered Scheme did not make any loans (although it did advance funds to borrowers in the Unregistered Scheme, as addressed below). Nor did Endeavour enter into any loan deeds or security agreements.

76    The total value of the Related Entity Loans, Advisor Loans and Director Loans (together, Loans) made by the Unregistered Fund was $19,015,584.

C.8.2.     The Related Entity Loans

77    The Related Entity Loans comprised the following loans.

Beacon Loan

78    By a circular resolution dated 10 February 2014 signed by Mr Daly, Mr Nielsen, Mr Williams and Mr Blanchette, the Investment Committee approved the entry by Linchpin into a loan facility of $3 million for Beacon (Beacon Loan). The loan deed dated 10 February 2014 for the Beacon Loan was executed by Mr Nielsen and Mr Williams on behalf of Linchpin as lender. The stated purpose of the Beacon Loan was for Beacon to finance the acquisition of additional books of financial planning clients and the general expansion of its business.

79    In the period between 4 February 2014 and 1 April 2015, advances were made from the Unregistered Fund to or on behalf of Beacon pursuant to the Beacon Loan. On or about 20 April 2016, the Beacon Loan was increased from $3 million to $4 million by way of a deed of variation. On or about 30 September 2016, the Beacon Loan was increased from $4 million to $5 million by way of a further deed of variation.

Linchpin Loan

80    By a circular resolution dated 10 February 2014, signed by Mr Daly, Mr Nielsen, Mr Williams and Mr Blanchette, the Investment Committee approved entry by Linchpin (as trustee of the Unregistered Fund) into a loan facility of $3 million for Linchpin (Linchpin Loan). The loan deed dated 1 August 2014 for the Linchpin Loan was executed by Mr Nielsen and Mr Williams on behalf of Linchpin as lender and as borrower. The stated purpose of the Linchpin Loan was for Linchpin to fund the expansion of its business.

81    In the period between 4 February 2014 and 1 April 2015, advances were made from the Unregistered Fund to or on behalf of Linchpin pursuant to the Linchpin Loan. On or about 1 July 2015, the Linchpin Loan was increased from $3 million to $6 million by way of a deed of variation.

RIAA Loan

82    By a circular resolution dated 1 July 2016 signed by Mr Daly, Mr Nielsen, Mr Raftery and Mr Williams, the Investment Committee approved entry by Linchpin into a loan facility of $2,500,000 for RIAA (RIAA Loan). The undated loan deed for the RIAA Loan was executed by Mr Nielsen and Mr Williams on behalf of Linchpin as lender. The purpose of the RIAA Loan was not specified in the undated loan deed for the RIAA Loan.

83    Advances were made from the Unregistered Fund to or on behalf of RIAA pursuant to the RIAA Loan. On or about 1 July 2016, the RIAA Loan was increased from $2,500,000 to $2,750,000 by way of a deed of variation.

CPG Loan

84    By a circular resolution dated 15 November 2016 signed by Mr Daly, Mr Nielsen, Mr Raftery and Mr Williams, the Investment Committee approved entry by Linchpin into a loan facility of $500,000 for CPG (CPG Loan). The loan deed dated 21 November 2016 for the CPG Loan was executed by Mr Nielsen and Mr Williams on behalf of Linchpin as lender.

85    Advances were made from the Unregistered Fund to or on behalf of CPG pursuant to the CPG Loan. The stated purpose of the CPG Loan was for CPG to fund the expansion of its business.

ISARF Loan

86    On or about 30 June 2017, a loan deed for a loan to ISARF in the sum of $250,000 was executed by Mr Nielsen and Mr Williams on behalf of Linchpin (ISARF Loan). There was no circular resolution in evidence recording any approval by the Investment Committee of the entry by Linchpin into the ISARF Loan. The stated purpose of the ISARF Loan was the allocation of funding costs.

87    Advances were made from the Unregistered Fund to or on behalf of the ISARF pursuant to the ISARF Loan.

C.8.3.    The Advisor Loans

88    The Advisor Loans comprised the following loans, most of which were advanced for the stated purpose of allowing the borrowers to expand their financial planning businesses, including by acquiring client books from other financial advisors.

ALPS Loan

89    By a circular resolution of the Investment Committee dated 10 December 2014 signed by Mr Daly, Mr Nielsen and Mr Williams, the Investment Committee approved entry by Linchpin into a loan facility of $220,000 for ALPS Network Pty Ltd (ALPS), Peter Larkin and Lance Meikle (together, ALPS Parties) (ALPS Loan). The undated loan deed for the ALPS Loan was executed by Mr Nielsen and Mr Williams on behalf of Linchpin. The stated purpose of the ALPS Loan was to finance the acquisition of additional books of clients.

90    Advances were made from the Unregistered Fund to or on behalf of the ALPS Parties pursuant to the ALPS Loan. The ALPS Loan was increased from $220,000 to $550,000 by way of an undated deed of variation. In or around May 2016, the ALPS Loan was increased from $550,000 to $760,000 by way of a deed of variation.

Pyrah Loan

91    On or about 26 April 2015, the loan deed for a loan to Derek Pyrah in the sum of $225,000 (Pyrah Loan) was executed by Mr Nielsen and Mr Williams on behalf of Linchpin. There was no circular resolution produced in response to the document requests recording any approval by the Investment Committee of the entry by Linchpin into the Pyrah Loan. The stated purpose of the Pyrah Loan was for Mr Pyrah to finance the acquisition of additional books of clients.

92    Advances were made from the Unregistered Fund to or on behalf of Mr Pyrah pursuant to the Pyrah Loan.

Venture Loan

93    By a circular resolution dated 8 July 2015, signed by Mr Daly, Mr Nielsen, Mr Williams and Mr Blanchette, the Investment Committee approved entry by Linchpin into a loan facility of $150,000 for Venture Finance & Advisory Pty Ltd (Venture) and David Ruthenberg (Venture Loan). The undated loan deed for the Venture Loan was executed by Mr Nielsen and Mr Williams on behalf of Linchpin as lender. The stated purpose of the Venture Loan was for Mr Ruthenberg and an unspecified director of Venture (described jointly as the “Borrower”) to finance the acquisition of additional books of clients by Venture. Venture has only ever had one director, being Mr Ruthenberg.

94    Advances were made from the Unregistered Fund to or on behalf of Mr Ruthenberg pursuant to the Venture Loan.

French Loan

95    By a circular resolution dated 31 July 2015 signed by Mr Daly, Mr Nielsen, Mr Williams and Mr Blanchette, the Investment Committee approved entry by Linchpin into a loan facility of $150,000 for Brian French (French Loan). The loan deed dated July 2015 for the French Loan was executed by Mr Nielsen and Mr Daly on behalf of Linchpin as lender. The stated purpose of the French Loan was for Mr French to finance the acquisition of additional books of clients.

96    Advances were made from the Unregistered Fund to or on behalf of Mr French pursuant to the French Loan. The French Loan was increased from $300,000 to $532,000 on or around 2 April 2017 by way of a deed of variation.

Goudie Loan

97    By a circular resolution dated 29 October 2015 signed by Mr Daly, Mr Nielsen and Mr Williams, the Investment Committee approved entry by Linchpin into a loan facility of $150,000 for Peter Goudie Financial Services Pty Ltd (PGFS) (Goudie Loan). The loan deed dated 29 October 2015 for the Goudie Loan, with PGFS and Peter Goudie (together, Goudie Parties) as borrower, was executed by Mr Nielsen and Mr Williams on behalf of Linchpin as lender. The stated purpose of the Goudie Loan was for the Goudie Parties to finance statutory Australian Tax Office obligations.

98    Advances were made from the Unregistered Fund to or on behalf of the Goudie Parties pursuant to the Goudie Loan.

Fortuna Loan

99    By a circular resolution dated 2 December 2015 signed by Mr Daly, Mr Nielsen and Mr Williams, the Investment Committee approved entry by Linchpin into a loan facility of $419,000 for Fortuna Financial Group Pty Ltd (Fortuna), Paul Ellenberg and Southwide Holdings Pty Ltd (Southwide) (together, Fortuna Parties) (Fortuna Loan). The loan deed dated 8 January 2016 for the Fortuna Loan was executed by Mr Nielsen and Mr Williams on behalf of Linchpin as lender. The stated purpose of the Fortuna Loan was for the Fortuna Parties to finance the restructuring and expansion of their financial planning interests.

100    Advances were made from the Unregistered Fund to or on behalf of the Fortuna Parties pursuant to the Fortuna Loan. The Fortuna Loan was increased from $419,000 to $659,000 on or around 12 December 2016 by way of deed of variation.

Ramshead Loan

101    By a circular resolution dated 21 December 2015, signed by Mr Daly, Mr Nielsen and Mr Williams, the Investment Committee approved entry by Linchpin into a loan facility of $431,000 to Ramshead Investors Pty Ltd in its own capacity and as trustee for the Ramshead Unit Trust (Ramshead Investors), The Wealth Partnership Pty Ltd (Wealth Partnership) and Ramshead Capital Pty Ltd (Ramshead Capital) (together, Ramshead Parties) (Ramshead Loan). The loan deed dated 22 December 2015 for the Ramshead Loan was executed by the Ramshead Parties but not by Mr Nielsen and Mr Williams, who were recorded on the deed as the relevant signatories on behalf of Linchpin as lender.

102    The loan deed was said to join and take precedence in all matters with loan document of 17 September 2015 to the “Previous Borrower”, identified as Anthony John Rumble, Paul Joseph Manka and Ramshead Investors. The stated purpose of the Ramshead Loan was for the Ramshead Parties to finance the acquisition of Wealth Partnership.

103    Advances were made from the Unregistered Fund to or on behalf of the Ramshead Parties pursuant to the Ramshead Loan.

TWP Loan

104    On or about 19 May 2017, the loan deed for a loan to TWP Client Services Pty Ltd (TWP), Ramshead Investors and Wealth Partnership (together, TWP Parties) in the sum of $700,000 (TWP Loan) was executed by the TWP Parties but not by Mr Nielsen and Mr Williams, who were recorded on the deed as the relevant signatories on behalf of Linchpin as lender. There was no circular resolution produced in response to the document requests recording any approval by the Investment Committee of the entry by Linchpin into the TWP Loan. The stated purpose of the TWP Loan was for the TWP Parties to finance the acquisition of the Jones Freeman business as outlined in the Jones Freeman Sale and Purchase Deed.

105    Advances were made from the Unregistered Fund to or on behalf of the TWP Parties pursuant to the TWP Loan.

Anderson Loan

106    By a circular resolution dated 10 October 2016 signed by Mr Daly, Mr Nielsen and Mr Williams, the Investment Committee approved entry by Linchpin into a loan facility of $60,000 for Anderson Lutgens & Co Pty Ltd (Anderson) trading as Beyond iWealth (Anderson Loan). The loan deed dated 10 October 2016 for the Anderson Loan, with Anderson, Pamela Margaret Anderson and Pierre Lutgens (together, Anderson Parties) as borrowers, was executed by Mr Nielsen and Mr Williams on behalf of Linchpin as lender. The stated purpose of the Anderson Loan was for the Anderson Parties to finance the acquisition of additional books of clients by the Anderson Parties together with working capital.

107    Advances were made from the Unregistered Fund to or on behalf of the Anderson Parties pursuant to the Anderson Loan.

Kings Loan

108    By a circular resolution dated 16 December 2016, signed by Mr Daly, Mr Raftery and Mr Williams, the Investment Committee approved entry by Linchpin into a loan facility of $1,300,000 for Kings Lance Enterprises Pty Ltd (Kings) and Graham Kinder (together, Kings Parties) (Kings Loan). The undated loan deed for the Kings Loan was executed by Mr Nielsen and Mr Williams on behalf of Linchpin as lender. The stated purpose of the Kings Loan was for Kings to finance the acquisition of Pecuniary Planners Pty Ltd ABN 56 153 678 589 and its books of clients.

109    Advances were made from the Unregistered Fund to or on behalf of the Kings Parties pursuant to the Kings Loan.

Market St Loan

110    By a circular resolution dated 16 February 2017 signed by Mr Daly, Mr Raftery and Mr Williams, the Investment Committee approved entry by Linchpin into a loan facility of $210,000 for Market St Holdings Pty Ltd (Market St) and Stefanie Seco (together, Market St Parties) (Market St Loan). The loan deed dated 9 February 2017 for the Market St Loan was executed by Mr Nielsen and Mr Williams on behalf of Linchpin as lender. The stated purpose of the Market St Loan was for the Market St Parties to finance the acquisition of additional books of clients.

111    Advances were made from the Unregistered Fund to or on behalf of the Market St Parties pursuant to the Market St Loan.

Macquarie Loan

112    By a circular resolution dated 8 March 2017 signed by Mr Daly, Mr Raftery and Mr Williams, the Investment Committee approved entry by Linchpin into a loan facility of $100,000 for Macquarie Partners Financial Advisory Pty Ltd (Macquarie) (Macquarie Loan). The loan deed dated 3 March 2017 for the Macquarie Loan, with Macquarie and Sunhee Hres (together, Macquarie Parties) as borrowers, was executed by Mr Nielsen and Mr Williams on behalf of Linchpin as lender. The stated purpose of the Macquarie Loan was for the Macquarie Parties to refinance an existing loan to enable the transfer from the Macquarie Parties’ existing dealership to Beacon.

113    Advances were made from the Unregistered Fund to or on behalf of the Macquarie Parties pursuant to the Macquarie Loan.

SBE Loan

114    On or about 24 March 2017, the loan deed for a loan to Secured Business Equity Pty Ltd (SBE) and Brian David Perrin (together, SBE Parties) in the sum of $400,000 (SBE Loan) was executed by Mr Nielsen and Mr Williams on behalf of Linchpin. There was no circular resolution produced in response to the document requests recording any approval by the Investment Committee of the entry by Linchpin into the SBE Loan although the Investment Committee approved an increase in the loan limit of the SBE Loan by circular resolution dated 13 May 2017 signed by Mr Raftery, Mr Williams and Mr Daly.

115    Advances were made from the Unregistered Fund to or on behalf of the SBE Parties pursuant to the SBE Loan.

Wilshire Loan

116    By a circular resolution dated 5 March 2017 signed by Mr Daly, Mr Raftery and Mr Williams, the Investment Committee approved entry by Linchpin into a loan facility of $38,000 for B and S Wilshire Pty Ltd (Wilshire) and Ben Wilshire (together, Wilshire Parties) (Wilshire Loan). The loan deed dated 25 May 2017 for the Wilshire Loan was executed by Mr Nielsen and Mr Williams on behalf of Linchpin as lender. The stated purpose of the Wilshire Loan was for the Wilshire Parties to access working capital.

117    Advances were made from the Unregistered Fund to or on behalf of the Wilshire Parties pursuant to the Wilshire Loan.

SWG Loan

118    By a circular resolution dated 26 September 2017 signed by Mr Daly, Mr Raftery and Mr Williams, the Investment Committee approved entry by Linchpin into a loan facility of $459,075 for Strategic Wealth Group Pty Ltd (SWG) (SWG Loan). The loan deed dated 29 September 2017 for the SWG Loan, with SWG and Neville Ortega (together, SWG Parties) as borrowers, was executed by Mr Nielsen and Mr Williams on behalf of Linchpin as lender. The stated purpose of the SWG Loan was for the SWG Parties to finance the acquisition of additional books of clients.

119    Advances were made from the Unregistered Fund to or on behalf of the SWG Parties pursuant to the SWG Loan.

NFA Loan

120    On or about 28 September 2017, the loan deed for a loan to National Financial Advice Alliance Pty Ltd (NFA) and EP and K Financial Pty Ltd (EP&K) (together, NFA Parties) in the sum of $1,700,000 (NFA Loan) was executed by the NFA Parties but not by Mr Nielsen and Mr Williams, who were recorded on the deed as the relevant signatories on behalf of Linchpin as lender. There was no circular resolution in evidence recording any approval by the Investment Committee of the entry by Linchpin into the NFA Loan. The stated purpose of the NFA Loan was for the NFA Parties to finance the acquisition of additional books of clients.

121    Advances were made from the Unregistered Fund to or on behalf of the NFA Parties pursuant to the NFA Loan.

Dale Loan

122    By a circular resolution dated 1 November 2017 signed by Mr Daly, Mr Raftery and Mr Williams, the Investment Committee approved entry by Linchpin into a loan facility of $80,000 for Dale Financial Planning Pty Ltd (Dale) (Dale Loan). The loan deed dated 2 November 2017 for the Dale Loan, with Dale and Ian William Dale (together, Dale Parties) as borrower was executed by the Dale Parties but not by Mr Nielsen and Mr Williams, who were recorded on the deed as the relevant signatories on behalf of Linchpin as lender. The stated purpose of the Dale Loan was for the Dale Parties to finance the acquisition of additional books of clients.

123    Advances were made from the Unregistered Fund to or on behalf of the Dale Parties pursuant to the Dale Loan.

C.8.4.     The Director Loans

124    During the Relevant Period, the Unregistered Fund made loans to Mr Daly and Mr Raftery (Director Loans).

125    In the period between about September 2015 and July 2017, the Unregistered Fund and the Registered Scheme advanced an aggregate amount of $125,580 to Mr Daly pursuant to deeds of loan dated 14 September 2015 and 5 January 2017 and variations dated 11 November 2015 and 25 July 2017, none of which stated the purpose for which those loans were being advanced.

126    In the period up to 31 July 2018, Mr Daly repaid $67,458 of the money lent to him. The deed of loan dated September 2015 and the two variations were signed on behalf of Linchpin by Mr Nielsen and Mr Williams. The deed of loan purportedly entered into in January 2017 was not signed on behalf of Linchpin or by Mr Daly.

127    Prior to obtaining the first advance of money pursuant to the loans, Mr Daly provided a “Personal Loan Application” dated 28 August 2015 to the Investment Committee. In his application Mr Daly stated that he required a personal line of credit to support his family and himself through some financial difficulties they were experiencing and, further, that the line of credit would allow him to address his family’s financial difficulties and “remain focussed on the company”.

128    In March 2016, Mr Raftery provided a “Loan application – UP TO $40,000” to the Investment Committee dated 15 March 2016 in which he stated that he required the money due to “a cash flow hurdle” caused by relocation costs and other personal expenses.

129    In the period between about April 2016 and December 2016, the Unregistered Fund advanced a total of $40,000 to Mr Raftery pursuant to a deed of loan dated 1 April 2016 and a variation dated 1 December 2016. The deed of loan did not state the purpose for which the money was advanced. The variation described the purpose as being “to fund personal matters pertaining”. The loan deed was signed on behalf of Linchpin (as lender) by Mr Nielsen and Mr Williams, and by Mr Raftery (as borrower).

130    Prior to the entry into the loan deed, the Unregistered Fund had advanced an earlier amount of $30,000 to Mr Raftery. This advance was not documented.

131    In the period to 31 July 2018, Mr Raftery repaid $37,733 of the money lent to him by the Unregistered Fund.

C.8.5.     Security for the Loans

132    Linchpin did not obtain any form of security over the business assets that were to be acquired for any of the Related Entity Loans or Advisor Loans.

133    Although the loan deeds for each of the CPG Loan, the ISARF Loan and the TWP Loan provided that security was to be provided over shares, no security was ultimately obtained by Linchpin to support those Loans.

134    Each of the other Related Entity Loans and Advisor Loans (SSA Loans) was purported to be secured pursuant to a document entitled “Specific Security Agreement (Shares)” or in the case of the NFA Loan it was entitled “Specific Security Agreement (Shares & Income)” (each an SSA). A draft SSA had been prepared for the TWP Loan but it was not executed by Linchpin and no security for the TWP Loan was registered on the Personal Properties Securities Register (PPSR) during the Relevant Period.

135    The SSA for each of the SSA Loans purported to provide for a grant a security over shares in the borrower either shares held by the borrower itself or shares held by related parties of the borrower. None of the corporate borrowers, however, other than Linchpin, held shares in themselves.

136    Linchpin did not obtain a valuation of any of the shares that had been provided as security for any of the SSA Loans by the related parties of borrowers.

137    None of the SSAs entered into with borrowers and related parties purportedly securing the SSA Loans was registered on the PPSR during the Relevant Period, other than the SSAs securing (a) the Beacon Loan and the Linchpin Loan between 26 September 2016 and 30 June 2017, and (b) the security given by Mr Larkin in respect of the ALPS Loan.

138    Further, notwithstanding that the loan deeds for the loans to Mr Daly and Mr Raftery provided that each was to provide security over all shares they held in Linchpin, both legally and beneficially, and the variation to the loan to Mr Daly entered into in November 2015 contained a Recital that Mr Daly purportedly “confirm[ed] the security of his entire holding in Linchpin Capital Group Limited also applies to this Deed”, no security documents were executed by either Mr Daly or Mr Raftery.

C.8.6.    Conclusion

139    I am satisfied, given the extent of the requests for documents, the production of documents in response to those requests and the consideration of those documents outlined in the Tendered Affidavits and, more specifically, from the inquiries and investigations summarised in the Receivers’ Report, that:

(a)    the Unregistered Fund and the Registered Scheme were operated as a single entity given the large number of transactions between the Schemes and adjustments to the Inter Fund Investment to balance these inter-fund transactions;

(b)    the only documentation supporting the making of the Loans were minutes of the Investment Committee recording that the Loans had been approved;

(c)    the loans were evidenced by deeds of loan which were executed by the borrowers and in many, but not all cases, also executed by Linchpin;

(d)    the majority of the Loans were made to authorised representatives of entities within the Linchpin Group and involved no credit assessment, no requirement for borrowers to provide any information to support their creditworthiness and borrowers were not required to provide any or meaningful security to support the Loans made to them;

(e)    the Investment Committee had no formal loan monitoring process, no formal processes for the review and rollover of the Loans and only investigated the financial position of borrowers who indicated an inability to meet their loan commitments or failed to make monthly repayments;

(f)    Linchpin did not maintain any loan files or obtain other documents that a prudent lender would procure prior to making the Loans, such as credit assessments, valuations or certificates of independent legal advice; and

(g)    interest payments from the Unregistered Scheme were made to the Registered Scheme but re-invested in the Unregistered Scheme but there are no documents which indicate that the re-investment of interest was at the Registered Scheme’s election, nor is there any document recording the process by which that election had been made.

D.     CLAIMS AGAINST LINCHPIN, ENDEAVOUR AND THE DIRECTOR RESPONDENTS

D.1.     Overview

140    Prior to considering the third party claims brought by the Applicant against AIG, it is necessary to address the claims that the Applicant advances against Linchpin, Endeavour and the Director Respondents in this proceeding as those claims provide the foundation for the third party claims. Broadly speaking those claims fall into five categories, each of which is considered below. It is necessary to address the claims advanced against Linchpin and Endeavour because these alleged contraventions provide the necessary basis for the “involved in” category of contraventions alleged against the Director Respondents.

D.2.     Care and diligence contraventions

D.2.1.     Overview

141    The first category of claims advanced by the Applicant are claims that Endeavour and the Director Respondents contravened s 601FC(1)(b) and s 601FD(1)(b) of the Corporations Act by not acting in accordance with the care and diligence that a responsible entity and an officer of that entity in their position would have acted.

D.2.2.     Statutory provisions and legal principles

142    Section 601FC(1)(b) of the Corporations Act provides:

601FC  Duties of responsible entity

 (1)     In exercising its powers and carrying out its duties, the responsible entity of a registered scheme must:

…

(b)     exercise the degree of care and diligence that a reasonable person would exercise if they were in the responsible entity’s position; …

143    The scope of the duty of care and diligence pursuant to s 601FC(1)(b) was distilled by Barrett AJA in Re Macquarie Investment Management (2016) 115 ACSR 368; [2016] NSWSC 1184 at [70]-[86], which distillation I respectfully adopt. For present purposes, it is sufficient to provide the following summary of that distillation.

144    First, the responsible entity of a registered scheme must exercise the degree of care and diligence that a reasonable person would exercise if they were in the position of the responsible entity.

145    Second, the powers and duties of a responsible entity include the power to invest the scheme property and the responsibility to comply with the provisions of the scheme, subject to the Corporations Act.

146    Third, in objectively determining the scope of the duty of care and diligence and whether that duty has been breached, it is important to have regard to the particular circumstances of the responsible entity, including the type of scheme, the provisions of its constitution, the size and nature of its operations, the specific functions to be performed by the responsible entity, the experience and skills of the responsible entity and the circumstances of the particular case.

147    Fourth, the scope and content of the duties of the responsible entity are heavily influenced by the purpose of the particular power being exercised or duty being fulfilled and the known reliance and vulnerability of those dependent on the responsible entity complying with its duty of care and diligence.

148    Fifth, the requirement imposed on a trustee to exercise a “degree of restraint” rather than “entrepreneurial flair” and to be subject to a “requirement of caution” are equally applicable to a responsible entity.

149    Sixth, where a trustee who is managing investments for others is a professional, the duty of prudence and skill that is to be assessed is by reference to professional, not lay standards.

150    Seventh, while a responsible entity may place reliance on others in performing its functions there is “a core and irreducible requirement of diligence”.

151    Section 601FD(1)(b) of the Corporations Act provides:

601FD Duties of officers of responsible entity

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

…

(b)     exercise the degree of care and diligence that a reasonable person would exercise if they were in the officer’s position; …

152    For present purposes, the principles governing the scope of the duty of care and diligence of an officer of a responsible entity can be distilled in the following terms.

153    First, the duties of care and diligence of an officer of a responsible entity encompasses and corresponds with, the duties of care and diligence owed by officers of all corporations pursuant to s 180(1) of the Corporations Act, however, there are apparent differences: Trilogy Funds Management Ltd v Sullivan (No 2) (2015) 331 ALR 185; [2015] FCA 1452 at [199] (Wigney J); Australian Securities and Investments Commission v Healey (2011) 196 FCR 291; [2011] FCA 717 at [191] (Middleton J).

154    Second, the standard of care and diligence required from an officer of a responsible entity will often be higher than the duty imposed by s 180(1) on a director of a corporation.

155    In Australian Securities Commission v AS Nominees Ltd (1995) 62 FCR 504, Finn J stated at 517-518:

There is, in my view, a substantial question now to be answered as to whether a higher standard is not to be exacted from at least corporate or professional trustees (a) which hold themselves out as having a special or particular knowledge, skill and experience, and (b) which, directly or indirectly, invite reliance upon themselves by members of the public in virtue of the knowledge, etc, they appear so to have.

In Bartlett v Barclays Trust Co Ltd (No 1) [1980] Ch 515 at 534 Brightman J was prepared to impose such a higher duty of care on a trust corporation:

“a professional corporate trustee is liable for breach of trust if loss is caused to the fund because it neglects to exercise the special care and skill which it professes to have.”

This decision has been cited with apparent approval, though not in terms relied upon, by Gleeson CJ in Gill v Eagle Star Nominees Ltd (unreported, Supreme Court, NSW Gleeson CJ, 22 September 1993). It is, in its own way, consistent with observations of the Privy Council in the Australian appeal National Trustees Co of Australasia Ltd v General Finance Co of Australasia Ltd [1905] AC 373 at 381, when refusing to excuse a trust company from a breach of trust. There is extensive United States case-law affirming such a higher standard. It is conveniently explained and exemplified in Scott on Trusts, par 174.1; see also Fales v Canada Permanent Trust Co [1977] 2 SCR 302 where the question is recognised but not answered by the Supreme Court of Canada; and see G G Bogert, Law of Trusts and Trustees (2nd revd ed 1977), para 541.

If it were in fact necessary for me so to do (which it is not), I would be prepared to apply to the trustee companies in these proceedings a standard of care higher than that of the ordinary prudent businessperson.

156    In Trilogy, Wigney J stated at [212]:

… In determining the degree of care and diligence required of an officer under s 601FD(1)(b), consideration should be given to the fact that s 601FD is concerned with the duties of officers and directors of very specific companies. Responsible entities are not only required to be public companies, they are also required to hold AFSLs and effectively act as professional trustees. Regard must also be had to the potential for conflicting duties as recognised in ss 601FC(3) and 601FD(2). Those considerations are likely to lead to the need for officers of responsible entities to exercise a higher degree of care and diligence than the standard required of an officer or director under s 180 in respect of a company that does not have the specific features of a responsible entity.

157    Third, and relatedly, the standard of care and caution expected of a corporate trustee flows through to its directors: Australian Securities and Investments Commission v Australian Property Custodian Holdings Ltd (recs and mgrs apptd) (in liq) (controllers apptd) (No 3) [2013] FCA 1342 at [541] (Murphy J). As Finn J stated in AS Nominees at 517:

Where the trustee is itself a company the requirements of care and caution are in no way diminished. And here, unlike with companies in general, these requirements have a flow-on effect into the duties and liabilities of the directors of such a company. It was established early … that at least when, and to the extent that, directors of a trustee company are themselves “concerned in” the breaches of trust of their company, they are liable to the company according to the same standard of care and caution as is expected of the company itself.

158    Directors of a corporate trustee may also contravene s 601FC(1)(b) if they are “involved” in the alleged contravention within the meaning of s 79 and s 601FC(5) of the Corporations Act.

159    Section 79 of the Corporations Act provides:

79 Involvement in contraventions

A person is involved in a contravention if, and only if, the person:

(a)     has aided, abetted, counselled or procured the contravention; or

(b)     has induced, whether by threats or promises or otherwise, the contravention; or

(c)     has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or

(d)     has conspired with others to effect the contravention.

160    Section 601FC(5) of the Corporations Act provides:

601FC Duties of responsible entity

…

(5)     A responsible entity who contravenes subsection (1), and any person who is involved in a responsible entity’s contravention of that subsection, contravenes this subsection.

D.2.3.     Consideration

161    I am satisfied that Endeavour, as the responsible entity of the Registered Scheme, breached its respective statutory duties of care and diligence in s 601FC(1)(b) of the Corporations Act.

162    I am also satisfied that each of the Director Respondents breached their duties of care and diligence in s 601FD(1)(b) of the Corporations Act and was involved in Endeavour’s contravention of s 601FC(1)(b), within the meaning of s 79 and s 601FC(5).

163    Each of the Director Respondents, other than Mr Daly, was a director of Endeavour, the responsible entity of the Registered Scheme.

164    The definition of an officer in s 9AD of the Corporations Act includes a person who “participates in making, decisions that affect the whole, or a substantial part, of the business of a corporation”.

165    The concept of “participation” is directed at the role that a person may perform in the making of a decision and is not limited to persons who ultimately make the decision: Shafron v Australian Securities and Investments Commission (2012) 247 CLR 465; [2012] HCA 18 at [26] (French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ). The definition does not extend to persons who merely give advice, but rather is directed at persons who are involved in determining whether the advice should be acted upon and where a corporation is a subsidiary, the definition is sufficiently wide to extend to an officer of a holding company if the person has the capacity to affect significantly the financial standing of the subsidiary: Australian Securities and Investments Commission v King (2020) 270 CLR 1; [2020] HCA 4 at [42], [46]-[47] (Kiefel CJ, Gageler and Keane JJ), [73] (Nettle and Gordon JJ).

166    I am satisfied that Mr Daly was relevantly an “officer” of Endeavour for the purposes of the Corporations Act because he was in a position to affect the whole or a substantial part of the core business of the company of managing and maintaining the Registered Scheme. Mr Daly was an active member of the Investment Committee. He signed the 1 April 2015 Resolution that established the overall investment strategy for both Funds and circular resolutions for the Loans. As a director of Linchpin, he was involved in approving the accounts of Endeavour as the accounts for all entities in the Linchpin Group were generally circulated to directors of Linchpin for approval. Further he approved the issue by Endeavour of the Third PDS and as noted at [53] above, he was provided with a final version of the First PDS pending legal sign off and before it was lodged with ASIC. Mr Daly was also involved in promoting the Schemes to authorised representatives of FLG and RIAA.

167    The breaches by Endeavour and each of the Director Respondents of their respective statutory duties of care and diligence are principally established by their involvement in the making of the Inter Fund Investment and the making of the Loans as members of the Investment Committee.

168    Mr Nielsen signed the 1 April 2015 Resolution providing for the making of the Inter Fund Investment, signed circular resolutions as a member of the Investment Committee approving the entry by Linchpin into 11 of the Loans, signed the loan deed on behalf of Linchpin for 18 Loans and consented to and authorised the issue of each of the PDSs.

169    Mr Williams signed the 1 April 2015 Resolution providing for the making of the Inter Fund Investment, signed circular resolutions as a member of the Investment Committee approving the entry by Linchpin into 17 of the Loans, signed the loan deed on behalf of Linchpin for 17 Loans and consented to and authorised the issue of each of the PDSs.

170    Mr Raftery signed circular resolutions as a member of the Investment Committee approving the entry by Linchpin into 8 of the Loans and consented to and authorised the issue of each of the PDSs.

171    Mr Daly signed the 1 April 2015 Resolution providing for the making of the Inter Fund Investment, signed circular resolutions as a member of the Investment Committee approving the entry by Linchpin into 17 of the Loans and approved the Third PDS.

172    The Inter Fund Investment enabled Linchpin to make the Loans. Approximately 95% of the total investments in the Registered Scheme in the period between 29 June 2015 and 31 July 2018, in aggregate $16,461,805 was advanced to Linchpin to fund the Loans.

173    A single concentrated investment in the Unregistered Scheme was contrary to the investment mandate in each of the PDSs that represented that funds would be invested in progressive investments in a diversified loan portfolio across property and corporate sectors. In turn, the Unregistered Fund, that had a similar stated investment strategy to the Registered Scheme, also acted contrary to its investment mandate by investing only in financial advisory businesses within the Linchpin Group or authorised representatives of related entities to Linchpin. I accept Mr Debenham’s expert evidence that such a pool of loans would not be classified as a “diversified loan portfolio” given that if a related borrower entity encountered financial difficulties this could have a “knock on effect” to other entities within the borrowing group.

174    Mr Debenham also gave evidence, that I accept, that the Lending Manual sets out the responsibilities, duties and work that a diligent and prudent lender ought to complete where a prospective borrower was requesting a loan facility.

175    Endeavour, however, failed to comply with the terms of each of the PDSs and the Lending Manual. The Inter Fund Investment was made in an unregistered managed investment scheme contrary to the Lending Manual and it failed to take an equitable mortgage over the assets of the Unregistered Fund. Endeavour also failed to ensure prior to making the Inter Fund Investment that the Unregistered Fund was a “Mortgage Investment Scheme dealing only in first mortgages over property of the nature described in [Endeavour’s] disclosure document”.

D.3.     Failing to act in best interests contraventions

D.3.1.     Overview

176    The second category of claims advanced by the Applicant are claims that the Director Respondents failed to act in the best interests of the members of the Registered Scheme.

D.3.2.     Statutory provisions and legal principles

177    Section 601FD(1)(c) of the Corporations Act provides:

601FD Duties of officers of responsible entity

(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; …

178    The best interests of members for the purposes of s 601FD(1)(c) are to be determined objectively and not by reference to the subjective beliefs of directors or officers: Australian Securities and Investments Commission v Daly (Liability Hearing) [2023] FCA 290 at [366] (Cheeseman J), citing Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3) [2013] FCA 1342 at [613] (Murphy J) and Australian Securities and Investments Commission v Lewski (2018) 266 CLR 173; [2018] HCA 63 at [73] (Kiefel CJ, Bell, Gageler, Keane and Edelman JJ).

179    As the High Court explained in Lewski at [71]:

Although the duty is not satisfied merely by honesty, it is a duty to act in the best interests of members rather than a duty to secure the best outcome for members. Key factors in ascertaining the best interests of the members are the purpose and terms of the scheme, rather than “the success or otherwise of a transaction or other course of action”. The purpose and terms of the Trust are the existing legal purposes and terms of the Constitution, not the purpose or terms that are honestly believed to exist.

(Emphasis in original, footnotes omitted.)

180    In Australian Prudential Regulation Authority v Kelaher (2019) 138 ACSR 459; [2019] FCA 1521, Jagot J accepted at [49] the applicant’s characterisation of the “best interests” covenant in the following terms:

[T]he application of the requirement that the trustee “do the best they can for the benefit of their beneficiaries and not merely avoid harming them” …The “best interests” are those of present and future beneficiaries, and the trustee is required to hold “the scales impartially between different classes of beneficiaries”: Cowan v Scargill at Ch 286–7; All ER 760. As Megarry V-C observed, “When the purpose of the trust is to provide financial benefits for the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests”: at Ch 287; All ER 760. Consequently, applied to a power of investment (which was the subject matter of Cowan v Scargill), the power was required to be “exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the investments in question; and the prospects of the yield of income and capital appreciation both have to be considered in judging the return from the investment”.

D.3.3.     Consideration

181    I am satisfied that the matters referred to at [167]-[175] above that gave rise to the contraventions of s 601FD(1)(b) are also sufficient to establish contraventions by each of the Director Respondents of s 601FD(1)(c). By their conduct in approving the Loans by circular resolution and causing or otherwise permitting Linchpin, as members of the Investment Committee, to make loans, (a) to related-parties and two of the Director Respondents, Mr Daly and Mr Raftery, (b) that were not adequately, or at all, secured, loans, (c) that were made without any substantive assessment of the recoverability of the loans, and (d) inconsistently with statements in the IM, the PDSs and Endeavour’s Conflict Policy each of the Director Respondents failed to act in the best interests of unitholders and thereby breached their duties pursuant to s 601FD(1)(c).

D.4.     Misleading and deceptive conduct contraventions

D.4.1.     Overview

182    On and from 23 January 2014, Linchpin issued the IM offering for investors to purchase units in the Unregistered Fund. It was expressly stated in the IM that the directors of Linchpin had consented to and authorised the issue of the IM.

183    The Applicant contends that it relied upon false and thereby misleading and deceptive representations made by Linchpin in the IM in deciding to acquire units in the Unregistered Fund and neither it, nor any reasonable person, in the position of an investor, would have invested in the Unregistered Fund if the representations had not been made.

184    Further, the Applicant contends that it relied upon false and thereby misleading and deceptive representations made by Endeavour in the PDSs before acquiring units in the Registered Scheme and neither it, nor any reasonable person, in the position of an investor, would have invested in the Registered Scheme if the representations had not been made.

D.4.2.     Statutory provisions and legal principles

185    Section 1041H(1) of the Corporations Act provides:

1041H Misleading or deceptive conduct (civil liability only)

(1)     A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive.

Note 1:     Failure to comply with this subsection is not an offence.

Note 2:     Failure to comply with this subsection may lead to civil liability under section 1041I. For limits on, and relief from, liability under that section, see Division 4

186    Section 12DA(1) of the ASIC Act provides:

12DA Misleading or deceptive conduct

(1)     A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.

187    Conduct will be misleading or deceptive for the purposes of s 1041H of the Corporations Act and s 12DA of the ASIC Act if it caused, or was likely to cause, a reasonable person in the position of a member of the class to whom the representation was directed to be “[led] astray in action or conduct; to [be led] into error; to cause to err”: Weitmann v Katies Ltd (1977) 29 FLR 336 at 343 (Franki J), or has a tendency to lead into error: Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640; [2013] HCA 54 at [39] (French CJ, Crennan, Bell and Keane JJ). It is necessary to make that assessment in the light of all the relevant surrounding facts and circumstances: Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) (2018) 266 FCR 147; [2018] FCA 751 at [2278] (Beach J).

D.4.3.     Consideration

Linchpin Representations

188    The manner in which investors’ funds were to be invested by the Unregistered Fund was described in the following terms in section 5 of the IM:

5.1    The Fund is an Unregistered Managed Investment Scheme that pools investors’ monies together.

5.2    The Fund will lend part or all of those pooled monies to qualified and approved borrowers that fulfil the Funds investment criteria.

5.3    The Manager [Investport Company] is assisted in its selection and managerial duties by its Credit Committee. This committee comprises a team of qualified and experienced experts, which utilise their pooled knowledge and expertise to review the prospects of the likelihood of the financial success of the typical and preferred projects such as:

•    Construction and development and sub-division of residential, commercial, industrial and retail property

•    Purchase of residential / retail / commercial / industrial premises that are primarily serviced by rental income generated by the property.

•    Short term funding for businesses supported by appropriate real property security or security interest.

•    Lease finance arrangements for business equipment

•    Corporate debt

•    Business acquisition finance

•    Managed Investments

•    Corporate lending,

•    Margin lending, and

•    Leasing.

The Fund will invest in a range of diversified assets. The Fund will invest in predominantly mortgages in particular commercial and development loans, secured by registered mortgages, commercial and corporate loans secured by registered fixed and floating charges and / all economic contractual interests. The Fund may also make loans to or invest in similar Managed Investment Schemes and in cash held on deposit with Banks or other financial institutions.

5.4    Those loans will be:

•    Secured by either registered mortgages and / or security interest and,

•    Any other additional securities required by the Credit Committee. Those additional securities may be in the nature of floating and / or fixed debenture charges, guarantees and / or the provision of collateral securities.

•    Invested in cash.

(IM Purpose).    

189    I am satisfied, as alleged by the Applicant, that the following representations were made in the IM:

(a)    Linchpin was a corporate authorised representative under AFSL 240938 held by FLG, the responsible entity and trustee of the Unregistered Fund and, at least impliedly, that it was duly authorised to act in those capacities;

(b)    the investment strategy of the Unregistered Fund was to invest funds progressively to achieve a diversified loan portfolio, across property and corporate sectors on a secured basis that are income producing;

(c)    the Unregistered Fund would invest in a range of diversified assets, predominantly mortgages in particular commercial and development loans, secured by registered mortgages, commercial and corporate loans secured by registered fixed and floating charges; and

(d)    the Unregistered Fund would seek investment opportunities across a range of loans and assets that would provide investors with premium income returns and capital stability,

(together, Linchpin Representations).

190    Each of the Linchpin Representations was false and thereby misleading or deceptive or to the extent that the representation was concerned with a future matter, Linchpin did not have reasonable grounds for making it. As to the first representation, it was false at least with respect to the claim that it was a corporate authorised representative under AFSL 240938 held by FLG at any time after 27 October 2016. As to the balance of the representations, the Loans (a) did not constitute an investment in a range of diversified assets predominantly by way of commercial and development loans, secured by registered mortgages and commercial and corporate loans secured by registered fixed and floating charges, (b) were only made to related entities and financial advisors and were almost entirely unsecured, and (c) did not constitute a diversified income producing portfolio across property and corporate sectors nor did Linchpin seek investment opportunities over a range of loans and assets.

Endeavour Representations

191    The investment strategy of the Registered Scheme was described in section 3 of the First PDS in the following terms:

To invest funds progressively that achieves a diversified loan portfolio across property and corporate sectors on a secured basis that are income producing. These loans may be held directly by the Fund or held through another fund in which the Fund has invested.

The Fund also seeks to hold cash and cash equivalents to generate income and provide liquidity to the Fund.

192    It was also stated in section 3 of the First PDS that Endeavour would lend money that had been invested in the Registered Scheme to “Primary Target Borrowers” on the following basis:

[Endeavour] and Investment Manager [Investport Company] will amongst other types of lending target loans to assist financial planners to buy books to expand their businesses. These planners will always be part of the Linchpin Capital/Beacon Financial dealer universe when we approve a loan and must remain with the Group during the term of the loan.

We will take security over the client books of the planner’s existing business as well as the new client book alongside usual Director’s guarantees and corporate fixed and floating charges.

193    Sections 5.3 and 5.4 of the First PDS contained the following further explanations of the loans to be made by the Registered Scheme, in similar terms to the explanation provided in the IM:

5.3    The RE [Endeavour] is assisted in its selection and managerial duties by its Credit Committee. This Committee comprises a team of qualified and experienced lending professionals, which utilise their pooled knowledge and expertise to review the prospects of the financial success of a typical and preferred projects …

The Fund will invest in a diversified range of loans. The Fund will invest in predominantly commercial and corporate loans able to be secured by registered fixed and floating charges, non-residential mortgages such as commercial and development loans, secured by registered mortgages; and other types of economic contractual interests. The Fund may also make loans to, or invest in similar Managed Investment Schemes and in cash held on deposit with Banks or other financial institutions.

5.4    Those loans will be:

•    Capable of being secured by either registered mortgages or security interests and, any other additional securities required by the Credit Committee. Those additional securities may be in the nature of fixed and floating charges, debenture charges, business, director and personal guarantees and the provision of collateral securities.

•    Invested in cash, cash equivalents, bank and term deposits, bonds.

194    I am satisfied, as alleged by the Applicant, that the following representations were made in each of the PDSs:

(a)    the investment strategy of the Registered Scheme was to invest funds progressively to achieve a diversified loan portfolio across property and corporate sectors on a secured basis that are income producing;

(b)    the Registered Scheme would invest in a range of diversified assets, predominately in commercial and development loans, secured by registered mortgages, commercial and corporate loans secured by registered fixed and floating charges and might also be invested in similar managed investment schemes and in cash;

(c)    the Registered Scheme would seek investment opportunities across a range of loans and assets that would provide investors with premium income returns and, at least for the First PDS and the Second PDS, capital stability; and

(d)    the primary goal of any investment in another managed investment scheme would be to invest in schemes that would provide stable income returns (for all PDSs) and capital stability (at least for the First PDS and the Second PDS) and Endeavour and Investport, as manager, would observe strict guidelines in selecting managed investment schemes based on demonstrated management experience in sectors in which they invest, strong investment track record in particular asset classes and vigorous investment processes and guidelines,

(together, Endeavour Representations).

195    Each of the Endeavour Representations was false and thereby misleading or deceptive or to the extent that the representation was concerned with a future matter, Endeavour did not have reasonable grounds for making it. Endeavour did not invest funds progressively to achieve a diversified loan portfolio across property and corporate sectors on a secured basis that were income producing nor did it invest predominately in commercial and development loans, secured by registered mortgages and commercial and corporate loans secured by registered fixed and floating charges. Further, on no view for the reasons advanced at [172]-[175] above was the Inter Fund Investment an investment in a managed investment scheme that had a strong track record in investment management in any relevant asset class or a fund with vigorous processes and guidelines. The loans made by the Unregistered Fund from the funds advanced by the Inter Fund Investment, were to the knowledge of Endeavour, loans that were almost entirely unsecured and advanced only to related entities, financial advisors and directors of Linchpin.

D.5.     Dissemination of defective PDSs contraventions

D.5.1.     Overview

196    The Applicant contends that the PDSs and IM were defective within the meaning of s 1022A of the Corporations Act. It submits that the PDSs and IM contained the Endeavour Representations, each of which was false or inaccurate, or alternatively, made without any reasonable basis. It also submits that the PDSs failed to disclose that loans had not been made to a diversified range of borrowers, no proper due diligence had been undertaken of borrowers and no meaningful security had been obtained to support the loans.

D.5.2.     Statutory provisions and legal principles

197    Section 1022A of the Corporations Act relevantly provides that a product disclosure statement will be defective for the purposes of Pt 7.9 if:

(a)    there is a misleading or deceptive statement in the product disclosure statement; or

(b)    there is an omission from the product disclosure statement of material required by s 1013C, other than material required by s 1013B or s 1013G.

198    Section 1013C provides that a product disclosure statement must include the statements and information required by s 1013D and the information required by s 1013E. Section 1013D(1)(c) relevantly provides that a product disclosure statement must include information about any significant risks associated with holding the financial product.

199    The issue of whether there are “significant risks” in holding a financial product is to be determined having regard, amongst other matters, to the probability of the risk occurring, the degree of impact if it occurred on investors, the nature of the particular product and the profile of investors: Australian Securities and Investments Commission v Avestra Asset Management Ltd (in liq) (2017) 348 ALR 525; [2017] FCA 497 at [198] (Beach J).

200    Section 1013E provides that a product disclosure statement must include any other information that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the financial product.

201    The disclosure requirements in s 1013D and s 1013E are subject to s 1013F(1) that provides that information is not required to be included in a product disclosure statement if it would not be reasonable for a person, as a retail client, in deciding whether to acquire the financial product, to expect to find that information in the product disclosure statement. The matters that can be taken into account in making that assessment include the nature of the financial product, including its risk profile (s 1013F(2)(a)) and the kinds of things persons who commonly acquire the product might reasonably be expected to know (s 1013F(2)(c)).

202    Section 1017B(1) of the Corporations Act provides that an issuer of a financial product must notify the holders of the financial product of changes and events referred to in s 1017B(1A), which in turn include a material change to a matter, or significant event, being a matter that would be required to have been included in a product disclosure statement prepared on the day before the change or event occurs.

D.5.3.     Consideration

203    I am satisfied that Endeavour contravened s 1022B of the Corporations Act by disseminating the PDSs which were defective within the meaning of that section for reasons that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the units in the Registered Scheme.

204    First, as I have concluded at [191] to [195] above, each of the PDSs contained misleading and deceptive statements.

205    Second, each of the Second PDS, Third PDS and Fourth PDS omitted information about significant risks and significant characteristics or features associated with holding the financial product, as I have concluded at [139] above, in particular, the Loans made by Linchpin from the Inter Fund Investment to related entities, including two of the Director Respondents, the lack of diversification in the loan portfolio, the absence of any proper due diligence of borrowers’ capacities to repay the Loans, no or inadequate security to support the Loans and no or inadequate procedures to monitor risk and the ongoing ability of borrowers to meet their commitments under the Loans.