Wallace (Liquidator), in the matter of Avestra Asset Management Ltd (In Liq) v Dempsey

Background 1 On 19 February 2016, this Court appointed Simon Alexander Wallace-Smith and Richard Hughes as joint and several liquidators of Avestra Asset Management Ltd (the "Company"). The liquidators had previously been appointed joint and several provisional liquidators of the Company. 2 The Company was incorporated on 11 April 2006. In the period between 20 March 2013 and 1 February 2015, the first defendant, Mr Clayton Dempsey, was a director of the Company. In the period between 20 March 2013 and 6 January 2015, the second defendant, Mr Paul Rowles, was a director of the Company. The Company held an Australian Financial Services Licence ("AFSL") and each of Mr Dempsey and Mr Rowles were "responsible managers" under the AFSL. The Company at all material times on and from 30 January 2014 was the responsible entity for the purposes of Part 5C.2 of the Corporations Act 2001 (Cth) (the "Act") of the following registered managed investment schemes: Excela Australian Equity Income Accelerator Fund ARSN 139 641 946 known as the "AG Accelerator Fund" (the "Accelerator Fund"); GeneratorTM ARSN 127 699 754 (the "Generator Fund"); and Excela Maximiser ARSN 130 533 685 (the "Maximiser Fund"). For the purposes of these reasons, I will describe these Funds collectively as the "Funds" and individually as the "Fund" or a "Fund". 3 The matters described at [2] of these reasons concerning the Company are matters of contended fact set out in a Statement of Claim filed in these proceedings on 4 February 2020. They were also matters of fact set out in a draft Statement of Claim enclosed with a letter sent to Mr Dempsey by Mr Hughes on 3 June 2019 and in a letter dated 3 June 2019 sent by Mr Hughes to Mr Rowles. 4 In those letters, Mr Hughes said this after having referred to his appointment with Mr Wallace-Smith as joint and several liquidators of the Company: Based on my investigations, I consider the Company has a claim against you including for breach of director's duties. I have enclosed a draft statement of claim in respect of the proceeding which is intended to be issued in the Supreme Court of Queensland. The statement of claim has been provided to you in draft to give you notice of the claim, including for the purposes of the [relevant policy of insurance] issued by Dual Australia Pty Limited for the period 31 January 2015 to 31 January 2016. The draft statement of claim is not intended to set out the final position of the Company and we reserve the rights of the Company in their entirety, including the right to amend the statement of claim prior to it being filed and served. There is presently no need for you to respond to this letter or the statement of claim. [emphasis added] 5 It is apparent from each letter that the liquidators had in mind a claim to be made by the Company against each of the directors for breach of duty. 6 As to that claim, the draft Statement of Claim as sent to each director and the Statement of Claim as filed on 4 February 2020 involves these contended material facts. Each of the Funds being administered by the Company as responsible entity had a product disclosure statement which described an investment mandate for each Fund setting out the types of securities in which each Fund may invest. It is not necessary to recite the elements of the investment mandate for each Fund. In the period between 17 March 2014 and 27 October 2015, transactions occurred which the liquidators contend were outside the investment mandate for the relevant Fund. The liquidators have identified those transactions which were completed prior to their appointment and those which were not. The completed transactions are said to have given rise to a loss (called the "trade loss") in each Fund which in total amounts to $2,138,292.28. The incomplete trade loss in respect of two of the Funds amounts to $1,983,427.58. Apart from these losses, the liquidators contend, by the Statement of Claim, that each Fund suffered a loss described as a "loss of opportunity" as a result of investments not having been made in the securities authorised by the investment mandate for the relevant Fund. The loss of opportunity claim concerns the Accelerator Fund and the Maximiser Fund. The claim amounts to a loss in the range of $1,926,327.08 and $1,982,528.04. The total loss the liquidators say the Company suffered is in the range of $6,048,046.90 and $6,104,247.86. 7 Thus, the loss is said to be not less than $6,048,046.90. 8 The basis upon which a claim for the recovery of that loss is framed by the Statement of Claim is this. The defendants authorised and approved each of the transactions falling outside the investment mandate. Those transactions, as so authorised, materially increased the risk of a loss to each Fund and were not notified to the members of the Funds. Prior to undertaking the transactions, the Company did not inform the members of each Fund of any change in the nature of the investment risk associated with the purchase of units in the Funds: para 43. Neither Mr Dempsey nor Mr Rowles took any steps to cause the Company to inform the members of the Funds of particular pleaded matters: para 44. By reason of the material facts pleaded in the Statement of Claim, Mr Dempsey and Mr Rowles failed to exercise the degree of care and diligence which a reasonable person in their position would have exercised as required by s 601FD(1)(b) of the Act and failed to act in the best interests of members of each Fund as required by s 601FD(1)(c) of the Act. In the draft Statement of Claim and in the Statement of Claim, as filed on 4 February 2020, the liquidators also contended that each of the defendants failed to act honestly as required by s 601FD(1)(a) of the Act. However, that last allegation has been abandoned by the liquidators and the breach of duty relied upon now rests upon contended contraventions of ss 601FD(1)(b) and (c). By reason of the contravention of those provisions, Mr Dempsey and Mr Rowles are said to have contravened s 601FD(3) of the Act. 9 At para 46 of the Statement of Claim, it is said that by reason of the matters pleaded in the various paragraphs of the Statement of Claim and the contraventions of s 601FD(3) of the Act by the defendants, the Company is said to have suffered the losses identified at para 46(b)(i) to (v), giving rise to a loss of not less than $6,048,046.93 in the Funds. 10 In the letters sent to Mr Dempsey and Mr Rowles on 3 June 2019 (in identical terms), there is a reference to an insurance policy issued by Dual Australia Pty Limited ("Dual"). The liquidators apparently took the view that that policy responded in a way relevant to the claims being made by the liquidators. In their letter to Dual on 18 January 2016, the liquidators observed that the letter was written on behalf of the "Policy Holder" which was the Company. 11 On 4 February 2020, the solicitors for the liquidators filed an Originating Application ("OA") and the Statement of Claim ("SOC") earlier described. The OA recites the document as having been prepared by Mr David O'Farrell of HWL Ebsworth Lawyers. The OA says that on the grounds stated in the SOC, the "Applicant" claims, "[p]ursuant to s 1317H(1) of the [Act], compensation in the amount of not less than $6,048,046.93, being the total loss of value of the Funds". The OA also claims interest pursuant to ss 51A and 52 of the Federal Court of Australia Act 1976 (Cth) (the "FCA Act") and costs. 12 The OA describes the "Applicants" (described in these reasons alternatively as the "plaintiff" or the "applicants") in respect of the claims described at [11] of these reasons, in these terms: Simon Alexander Wallace and Richard Hughes in their capacity as liquidators of Avestra Asset Management Ltd (ACN 119 227 440) (in liq) as Responsible Entity for "AG Accelerator Fund" ARSN 139 641 946, "Excela Maximiser" ARSN 130 533 685 and "GeneratorTM" ARSN 127 699 754. 13 Section 477 of the Act sets out the powers of a liquidator of a company and s 477(2) provides (among other things) that, subject to the section, a liquidator of a company may "bring or defend any legal proceeding in the name and on behalf of the company". This proceeding, however, is brought in the name of the liquidators in their capacity as liquidators. 14 As already mentioned, by the proceeding, the liquidators claim compensation in the amount described pursuant to s 1317H(1) of the Act. 15 Section 1317H(1) relevantly provides that a court may order a person to compensate a corporation or a registered scheme for damage suffered by the corporation or scheme if the person has contravened a corporation/scheme civil penalty provision in relation to the corporation or scheme and the damage resulted from the contravention. A contravention of s 601FD(1)(b) or (c) (or both) gives rise to a contravention of s 601FD(3) which is a civil penalty provision. Section 1317H(1) confers power on the Court to order a person to compensate a corporation in the terms of the section. 16 The question of who has standing to apply for an order under s 1317H(1) is determined by s 1317J. Section 1317J(1) confers standing on ASIC to apply for a compensation order. Section 1317J(2) confers, relevantly, standing on the "corporation" or the "responsible entity for the registered scheme" to apply for a compensation order. Section 1317J(4) provides, relevantly, that no person may apply for a compensation order "unless permitted by this section". 17 The short point is that although the liquidators could have brought the proceeding in the name and on behalf of the Company, and the Company (and only, relevantly for present purposes, the Company) had standing under s 1317J to apply for a compensation order under s 1317H, the proceeding was commenced in the name of the liquidators in their capacity as liquidators rather than in the name of the Company. 18 Apart from describing the "Applicants" in the manner described at [12] of these reasons, the OA also recites that the proceeding is: In the matter of Avestra Asset Management Ltd (ACN 119 227 440) (in liq) as Responsible Entity for "AG Accelerator Fund" ARSN 139 641 946, "Excela Maximiser" ARSN 130 533 685 and "GeneratorTM" ARSN 127 699 754. [emphasis added] 19 These proceedings are concerned with an interlocutory application made by the liquidators as applicants originally filed on 11 December 2020. At the hearing of the application on 7 July 2021, the applicants sought and were granted leave to file and rely upon an amended interlocutory application (as exhibited at KCP-30 to the affidavit of Katrina Christine Pagey sworn on 1 April 2021). By the amended interlocutory application, the applicants seek leave under r 8.21(1)(c) or, in the alternative, r 8.21(1)(d) of the Federal Court Rules 2011 (Cth) (the "Rules") to amend the Originating Application by correcting the name of the plaintiff to: Avestra Asset Management Ltd (ACN 119 227 440) (in liquidation) as Responsible Entity for "AG Accelerator Fund" ARSN 139 641 946, "Excela Maximiser" ARSN 130 533 685 and "GeneratorTM" ARSN 127 699 754. 20 The applicants seek leave to make that amendment so as to either correct a "mistake" in the name of the plaintiff (r 8.21(1)(c)) or to correct the "identity" of the plaintiff (r 8.21(1)(d)). The applicants contend that they are not seeking to substitute a person for an existing party (as contemplated by r 8.21(1)(f)) but rather to correct a mistake in the name of the existing plaintiff (although described as applicants) or to correct the identity of the existing plaintiff. 21 The applicants also note that r 8.21(2) expressly provides that an application may be made under rr 8.21(1)(c) and (d) even though the application is made after the end of any relevant period of limitation applying at the date the originating application was filed which, in this case, was 4 February 2020. As to the leave sought under rr 8.21(1)(b) and (c), the applicants contend that any such amendment by leave ought to take effect from the date of filing of the OA on 4 February 2020. 22 Apart from these matters, the applicants also seek leave under r 8.21(1)(g)(i) to amend the OA to add a claim for relief by the Company for equitable compensation for breaches of fiduciary duty by the defendants as directors of the Company at the material time, and a claim for relief by the Company under s 1325 of the Act for compensation for loss and damage suffered by reason of the conduct of the defendants (in contravention of s 601FD(1)(b) and (c) and s 601FD(3) of the Act). 23 The applicants also seek leave to amend the SOC in the form of the document at KCP-31 to the further affidavit of Ms Pagey filed on 1 April 2021 (the "Proposed Amended Statement of Claim" or "PASOC"), consistent with the leave sought in relation to the OA. 24 As to the matters described at [21] of these reasons, the applicants seek an order (para 4 of the amended interlocutory application) that the proposed amendments "take effect" on 4 February 2020 or alternatively on 9 December 2020. In oral and written submissions, the applicants contend that any dispute as to the date on and from which these amendments ought to take effect (or as to whether a limitation period has elapsed in respect of such claims) should, as a matter of principle, be determined at the trial of the proceeding, not on the present application. 25 The applicants adopt the same position in relation to the PASOC. 26 The orders sought by paras 4, 5 and 6 of the amended interlocutory application are in these terms: 4. Pursuant to rules 1.32 and 1.35 of the Rules the date on which the amendments referred to in paragraph 2 above [the amendments to the OA to add the equitable compensation claim and the s 1325 claim] take effect is 4 February 2020 or, alternatively, 9 December 2020. 5. Pursuant to rules 1.32 and 1.35 of the Rules the date on which the amendments to the Statement of Claim take effect: a. which are consequential to the relief in paragraph 1 [correcting the name] and 2(b) [the s 1325 claim] above, being paragraphs 1, 2, 47(b), 47(c), and 48(a), of the Proposed Amendment Statement of Claim, is 4 February 2020; b. which are not referred to in sub-paragraph 5(a) is 4 February 2020 or, in the alternative 9 December 2020. 6. A direction that the application for the relief sought in paragraph 4, with respect to paragraph 2(a) [the equitable compensation claim], and 5(b) above be determined at trial. 27 In the alternative to all of the above orders (which the applicants describe as the "Primary Relief" they seek by the application), the applicants seek "Alternative Relief" as described at paras 8 to 13 of the amended interlocutory application. That relief is in these terms: 8. Pursuant to Rule 8.21(1)(c), the name of the first named Plaintiff be corrected to Simon Alexander Wallace-Smith. 9. Pursuant to Rule 9.05, Avestra Asset Management Ltd (ACN 119 227 440) (in liquidation) as responsible entity for [the three Funds] be joined as the Second Plaintiff. 10. Pursuant to Rule 8.21(g)(i), leave be granted to amend the [OA] to add: a. a claim for relief by the Company for equitable compensation because of breaches of fiduciary duty by the Defendants; b. a claim for relief by the Company for compensation for loss or damage pursuant to s 1325 of the [Act]; and c. a claim for relief by the Liquidators for compensation or loss or damage pursuant to s 598 of the Act. 11. Pursuant to Rule 16.53 leave be granted to amend the [SOC] in the form being annexure [KCP-32] to the further affidavit of [Ms Pagey] filed 1 April 2021. 12. Pursuant to [R]ules 1.32 and 1.35 of the Rules: a. the date on which the amendments referred to in paragraph 10 and 11 above [the amendments to the OA and SOC] take effect is 4 February 2020 or, alternatively, 9 December 2020; b. the start date of the proceeding for the Company is taken to be 4 February 2020 or, alternatively, 9 December 2002. 13. A direction that the application for the relief sought in paragraph 12 above be determined at trial.

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