Investors may be interested to read the attached article by Trevor Sykes, writing in the AFR Smart Investor on 13 December 2013:

Downtown: A Prime Win for Investors

The Australian Securities and Investment Commission's stunning win in the Prime Trust case spells dire trouble for any directors who ignore conflicts of interest and thereby fail to protect investors.

The judgment of Justice Brendan Murphy, handed down in Melbourne's Federal Court on Thursday, should lead to a spate of further cases against the directors involved.

To understand the case, we must consider the background.

The Prime Retirement and Aged Care Property Trust owned a string of retirement villages. It was a managed investment scheme run by Australian Property Custodian Holdings Limited (APCHL) as its responsible entity. APCHL was owned by Bill Lewski and associates. The board of APCHL comprised Lewski and four other directors. The trust was a public unlisted vehicle but in 2006 it was planning to list.

In 2006, the board approved amendments to the Prime Trust constitution which provided substantial new and increased fees to become payable by APCHL. These were a new listing fee if the trust was listed on the ASX, a new removal fee if APCHL were removed as responsible entity and an increased takeover fee if the trust were subject to takeover.

All these fees would have personally benefited Lewski and were introduced although the constitution prohibited any amendment which benefited APCHL.

The approval of unitholders in the trust, which would have to pay the fees, was never sought. Instead, the board went ahead and paid APCHL (Lewski) $33 million after listing - a fee calculated as 2.5 per cent of the trust's gross assets. The payment process was complicated and may well be the subject of further cases.

In my opinion, no listing fee at all should be paid for converting an unlisted entity into a listed entity - only the costs of whatever legal, underwriting and other work is involved. If a fee were paid it would have been better based on net assets than gross, because otherwise Lewski would benefit unduly if the trust expanded by borrowing heavily.

Justice Murphy found that the constitution prohibited APCHL from making the amendments. "The board could not have reasonably considered that the amendments would not adversely affect the members' rights," he said. "The amendments were therefore invalid."

He also pointed out that the fees were gratuitous. "No, or no equivalent, consideration or benefit was provided to the members and there was no corresponding increase in the scope of APCHL's obligations," he said.

Justice Murphy was limited to finding what breaches had occurred. What (if any) penalties should be suffered by directors is a matter for further hearing.

However, his comments on the directors were interesting. He rejected Lewski's evidence as "self-serving, without factual foundation and implausible".

Some directors claimed the company's solicitors, Madgwicks, had endorsed the amendments but the judge found the legal advice had been equivocal. The judge said: "Blind Freddy would have recognised these conflicts, and it was not a matter on which legal advice was necessary."

From the judgment, it appears Lewski wanted the amendments and the directors simply agreed, without considering the impact on unitholders.

"The evidence revealed a complete failure to give priority to the members' interests," the judge said.

The trust's listed life was a disaster for the investors. The $1 shares sold briefly at $1.06 but then slumped. Its assets are now in the hands of receivers and liquidators. APCHL was sold and went into liquidation in October 2010.

Justice Murphy's decision (which may be appealed) gives investors in the trust a glimmer of hope of an eventual return. It's also a welcome win for ASIC. One big victim is APCHL's former chairman Michael Wooldridge, who had an honourable career as federal health minister before getting involved with Prime Trust.

Incidentally, ASIC's slowness nearly wrecked the case. The amendments were approved at a board meeting on July 19 2006, followed by another meeting on August 22 which approved their lodgement.

ASIC did not start its case until August 21 2012, which meant the amendment meeting was out of date and it had to base its case on the August 22 meeting instead.

Justice Murphy said ASIC's failure to plead the July meeting "added an otherwise avoidable complexity to the proceeding".

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