Prime Trust Action Group Unitholder Update No. 26 – 23 December 2014
Following the recent Federal Court judgment, we thought it would be timely to update investors on each of the various legal proceedings currently in progress.
Federal Court Proceedings Against Prime Trust Directors
Investors may recall that in December 2013, the Federal Court found various Prime Trust directors had breached the Corporations Act in relation to the $33m listing fee paid from the Trust without investor approval.
Further hearings were conducted in July 2014 for the parties to be heard in relation to penalties. ASIC sought disqualification orders and financial penalties against the directors. The directors resisted these penalties on various bases.
On 2 December 2014, the Federal Court handed down the following penalties:
A number of investors have contacted us voicing their concern in relation to the quantum of the financial penalties that were issued. The financial penalties appear modest given the loss resulting from the directors’ breaches, however in other similar cases in recent years, the penalties imposed by the Courts have been similar. There has been significant disquiet about this situation.
There is a broad acknowledgement by the community, enforcement agencies and other parties that the penalties available in cases like this need to be overhauled. Contraventions of the civil penalty provisions of the Corporations Act currently carry a maximum penalty of only $200,000. Recently, ASIC publicly campaigned for tougher penalties and the Financial System Inquiry, headed by Mr David Murray, released a report recommending much tougher penalties. We have made a number of submissions on this point and have requested that penalties be brought into line with the much harsher penalties which apply in jurisdictions such as the US and UK.
It is also worth noting that the Federal Court has ordered the directors to pay ASIC’s legal costs on top of the financial penalties. We would not be surprised if the amount required to be paid by each director towards ASIC’s costs vastly exceeds the financial penalty imposed.
The Court allowed the above disqualification orders and penalties to be stayed (ie. postponed) until 23 December 2014, the date by which any appeal process must be commenced.
At present, two directors (Mr Lewski and Mr Wooldridge) have lodged appeals in relation to the Federal Court judgment and we expect to know shortly whether other directors will also be filing appeals. We would hope that any appeals that are allowed can be expedited by the Federal Court, and will update our website with further news as it comes to hand.
We find it particularly interesting that some directors claimed that they did not gain any personal benefit from the introduction of the $33m listing fee and argued that they should therefore not be subject to any penalties.
While two directors have openly acknowledged that they stood to receive a substantial benefit as a result of the listing fee, our view is that each of the directors clearly had a personal conflict in assessing whether to approve the $33m listing fee.
We note that up to and including the 2007 financial year, each director was remunerated not from the Trust itself or by APCH, but directly by other interests associated with Mr Lewski, and the amounts paid to each director were not disclosed to investors.
Each Prime Trust director had a statutory obligation to act in the best interests of the investors, and to prioritise the interests of the investors in the event of any conflict between the investors’ interests and the interests of APCH (as Responsible Entity for the Trust). We believe that each director breached this statutory obligation by allowing the listing fee to be introduced, and in doing so preferred the interests of APCH (a Lewski entity) to those of investors, despite the conflict which arises from the fact that the directors were being remunerated by Lewski entities.
We also believe that by pursuing the listing of the Trust, rather than allowing the Trust to vest, which could have likely resulted in investors receiving close to $1.00 per unit, each director had advanced their own personal interest rather than the investors’ interests. Our reasoning is that the listing enabled the directors to continue receiving remuneration for serving on the board whereas, if they had allowed the Trust to vest, their Board appointments and associated directors’ fees would have come to an end.
Listing Fee Compensation Proceedings
These proceedings are being conducted by KordaMentha, the Receivers and Managers on behalf of secured creditors (Receivers), in the Supreme Court of Victoria. In these proceedings, the Receivers are seeking compensation for losses suffered by the Trust as a result of the payment of the $33m listing fee.
Defendants to these proceedings include the Prime Trust Directors, various entities associated with Mr Lewski, Madgwicks (APCH’s legal advisers) and Kidder Williams (APCH’s corporate advisers).
We expect the Receivers to seek compensation of around $50m, comprising the listing fee plus interest.
These proceedings have currently been put on hold pending the outcome of the Federal Court proceedings given that both proceedings relate to the same subject matter, being the allegedly unauthorised payment of the $33m listing fee.
Management Rights Claim
These proceedings are being conducted by the Liquidators supported by a litigation funder. The purpose is to seek compensation for the damage caused to the Trust by various dealings in the village management rights which resulted in the management rights for various retirement villages being transferred to a company associated with Mr Lewski for no consideration. Mr Lewski subsequently sold those rights for $60m.
The defendants to this claim include several members of the Lewski family, various entities associated with the Lewski family as well as Madgwicks and other parties.
This claim had previously been in the control of the Receivers who, shortly before the claim was to become statute barred, passed the claim back to the Liquidators. With only a few weeks left to prepare and issue the claim, the Liquidators applied to the Court for additional time, which was allowed by the Court.
Various defendants then challenged this extension of time and were successful, with the judge reversing his earlier position and ruling that the claim had not been served within the allowable time frame. As a result of this ruling, the Management Rights Claim has been amended and is now based on breaches of fiduciary duties, which is not subject to the six year statute of limitations period.
We believe that this is a strong claim and eagerly await further developments.
Pitcher Partners Claim
Our previous Update indicated that the Liquidators had reserved their rights to take legal action against Pitcher Partners, the long-time auditor of Prime Trust.
We are now delighted to report that, in October 2014, the Liquidators issued legal proceedings against Pitcher Partners in relation to alleged breaches of their fiduciary duties in relation to the 2007 audit and accounts.
The alleged breaches arise in the context of:
• the $33m listing fee being paid;
• the management rights to the Trust’s villages being transferred to Mr Lewski and then dealt with by him for personal gain;
• alleged breaches of the Trust’s accounting policy involving paying distributions from unrealised capital gains; and
• alleged breaches of the Trust’s investment mandate involving Trust funds being loaned to developers (including developer entities associated with one of the directors).
Given the losses sustained by investors as a result of the above issues, we are expecting the claim against Pitcher Partners to be substantial.
We are delighted to report that litigation funding has been secured in relation to the Pitcher Partners Claim.
Lend Lease Claim
Our previous Update indicated that the Liquidators had reserved their rights to take legal action against Lend Lease. In November 2014, the Liquidators issued legal proceedings against various Lend Lease companies, and various entities associated with Mr Lewski, in relation to the disputed management rights.
These proceedings are being brought under section 588 of the Corporations Act, and the Liquidators claim that various transactions which ultimately resulted in Lend Lease acquiring the management rights to the Trust’s villages from an entity associated with Mr Lewski, were unreasonable director-related transactions, and therefore voidable.
These proceedings may seek to undo or unwind transactions flowing from the sale of the management rights to Lend Lease from 2007 and may result in quite a substantial claim.
As investors will recall, Lend Lease has earned large amounts of revenue from the Trust since 2007 and the dealings in the management rights precipitated a massive decline in the value of the Trust villages.
We are also conscious that Lend Lease acquired nine of the Trust’s villages, in circumstances where other parties were reluctant to bid for the properties due to the ongoing legal dispute with Lend Lease over the village management rights. In light of the failure to resolve the management rights dispute, we remain concerned that the price achieved was not competitive resulting in a poor outcome for the Trust and for investors. We are hopeful that the resultant losses for investors will be fully reflected in the claim against Lend Lease.
We are delighted to report that litigation funding has also been secured in relation to the Lend Lease Claim.
Many investors have contacted us recently to ask about the funds that may potentially flow to investors as a result of the various legal proceedings currently underway.
Although it has been four years since the Trust entered administration, it is unfortunately still too early to calculate potential investor returns. The reason is that there remains a large number of variables which could affect potential returns, including: the success or failure of the various legal proceedings, potential delays in the proceedings and any appeals, the apportionment of any recoveries between the various interests (secured creditors, unsecured creditors, unitholders), the possibility that some claims may be settled out of court for amounts less than those claimed in the relevant proceeding, and the costs involved (including the Liquidators’ costs, legal costs, the litigation funder’s fees etc).
If and when particular claims reach the point where potential recoveries may be broadly estimated, we will certainly pass this information on to investors, and we would expect such matters to be addressed in the Liquidators’ periodic reports to investors.
Following the recent Federal Court judgment, there has been extensive media coverage of Prime Trust and a few selected articles are attached below for your information, with additional articles available on our website:
Thank you once again for your continued support of the Prime Trust Action Group. We would especially like to wish all investors a very happy and safe festive season and we look forward to substantial further progress being made in 2015 in relation to the various claims identified above.