In Lewski v Australian Securities & Investments Commission [2016] FCAFC 96 the Federal Court of Australia Full Court upheld an appeal by the former directors of the responsible entity of The Prime Retirement and Aged Care Property Trust (Prime Trust), against the finding of the trial judge that they breached their duties as officers under the Corporations Act. The previous disqualifications and pecuniary penalties imposed on the directors were set aside. The decision reinforces the importance of board minutes.

UPDATE November 2017: final orders.

UPDATE December 2017: ASIC appeals to High Court.

UPDATE May 2018: High Court gives ASIC leave to appeal.

UPDATE December 2018: High Court partly allows ASIC appeal.

ASIC’s case against the former directors (Mr William Lewski, Dr Michael Wooldridge (Chair), Mr Mark Butler, Mr Kim Jaques and Mr Peter Clarke) alleged that the directors had breached their duties owed to members of Prime Trust by approving amendments to the Trust’s Constitution as well as the prohibition on involvement in related party transactions by permitting a $33 million fee to director Mr Lewski.

The Full Court observed that:

The pleaded case of ASIC was relatively straight forward, based as it was on the conduct of the Directors between 22 August 2006 and 27 June 2008. It is important to appreciate that the pleading did not allege any form of dishonesty or fraud, nor any form of knowledge by the Directors that their conduct prior to this period of time was in any way wrongful, unlawful or illegal. It was not pleaded, nor part of ASIC’s case, that a reasonable director in the position of the Directors would have been conscious of the failings on 19 July 2006 found by the trial judge, and so needed to re-visit the 19 July 2006 decision to amend the Trust’s Constitution. It is also important to appreciate that the trial judge specifically found that the Directors had an honest belief as to the validity of the Amendments. This is significant in determining the characterisation to give to the conduct of the Directors on and from 22 August 2006, including in the Directors deciding to pay, and paying the Listing Fee.

Background: trial decision; penalties decision.

The importance of minutes

The evidence focussed on two board meetings in July and August 2006. Critically, no relevant party had a recollection of the meetings.

Also critical was that ASIC was out of time to bring an action based solely on the July 2006 meeting.

The Full Court decided that “the importance of failing to distinguish the purpose of the two meetings led the trial judge into error by failing to consider each breach alleged in proper context”.

The trial evidence focussed on the minutes of the relevant board meetings and whether silence by directors could be taken as their assent to resolutions.

Nothing in the Full Court decision changes “best practice” recommendations that individual directors be given an opportunity to express their view on resolutions and that a director indicate if they are abstaining. It reinforces the need for accurate minute-taking practices.

Such practices would have prevented the unfortunate position of Mr Clarke who was appointed as a director between the 2 relevant board meetings.

The Full Court’s interpretation of his position was as follows:

The most significant matter is that the trial judge accepted and made a finding that Mr Clarke sat passively in the [August]meeting and said nothing. The trial judge accepted that Mr Clarke was silent… There is no doubt that Mr Clarke failed to expressly indicate clearly that he was not voting. However, the finding of the trial judge was that Mr Clarke ‘sat passively in the meeting and said nothing’. The trial judge accepted Mr Clarke’s evidence on that issue. There was no other basis to then conclude that Mr Clarke’s conduct conveyed or amounted to a vote in favour of the Lodgement Resolution. The other matters relied upon by the trial judge … including that Mr Clarke did not consider carefully the Lodgement Resolution, did not read the Board papers, and did not ask questions about the Lodgement Resolution, would tend to support the position taken by Mr Clarke that he felt in no position other than to sit passively and say nothing. Whatever other criticisms can be made of Mr Clarke, his overall conduct and the circumstances of the meeting on 22 August 2006, do not demonstrate on the balance of probabilities … that Mr Clarke voted or assented to the vote in favour of the Lodgement Resolution, or (if relevant) that he can be taken to have conveyed that position…. Mr Clarke also submitted that the trial judge was in error in his finding … that a reasonable director in Mr Clarke’s position would have seen the decision on 19 July 2006 as ‘clearly wrong’, and then should have engaged further at the 22 August 2006 meeting.

As the conclusion that is reached is that Mr Clarke did not vote for or assent to the vote for the Lodgement Resolution, it is unnecessary to deal with this issue. Nevertheless, part of our reasoning for concluding that Mr Clarke did not participate in the meeting on 22 August 2006 was based upon the objective circumstances of Mr Clarke’s position. It is almost inconceivable that a reasonable director in Mr Clarke’s position (having just been appointed to the Board), could have read and understood the documents on all the issues identified by the trial judge …. Mr Clarke realised he could not properly participate in the meeting on 22 August 2006 (because of his inability to properly prepare for the meeting), and so abstained.

Of course, the decision made on 19 July 2006 approving the Deed was a decision made by the then constituted Board (which did not include Mr Clarke). The addition to the Board of another member (such as in this case, Mr Clarke at the meeting of 22 August 2006) is not in itself a reason for the Board needing to re-consider an earlier resolution made by the Board, or for that resolution not being treated as part of the history of events relevant to the making of the Lodgement Resolution. After all, one of the reasons for having comprehensive minutes is to ensure there is corporate memory and the ability to rely upon earlier decisions.