Federal Court imposes significant financial penalties on individual directors for breach of duties

By Suzie Leask and Madeline Tait

In what is a stark reminder of the importance of directors and officers properly discharging their duties and acting in the best interests of the company and members, significant penalties and disqualification orders have been handed down by the Federal Court in January 2024. ASIC secured a $390,000 financial penalty along with disqualification orders following findings of serious breaches of duties by directors and officers.

Facts and judgement

Endeavour Securities (Australia) Ltd (Endeavour) was the responsible entity of a registered managed investment scheme called the Investport Income Opportunity Fund. Linchpin Capital Group Ltd (Linchpin) operated an unregistered managed investment scheme, which was also called the Investport Income Opportunity Fund. Both funds were placed into liquidation in 2019. In 2023, judgement was obtained by ASIC against current and former directors of Endeavour and Linchpin for the following breaches of the Corporations Act 2001 (Cth):

• failing to exercise care and diligence: section 601FD(1)(b);
• failing to act in the best interests of the members of the scheme: section 601FD(1)(c);
• making improper use of the respondents’ position as an officer: section 601FD(1)(e); and
• failing to take all steps to ensure that the responsible entity complied with the Corporations Act 2001 (Cth) and the scheme’s constitution and compliance plan: section 601FD(1)(f).

The court also found that directors Ian Williams, Paul Raftery and Paul Nielsen, as well as officer Peter Daly (former CEO of Linchpin):

• did not take all reasonable steps to ensure that Endeavour complied with its compliance plan;
• did not obtain member approval for related party loans;
• failed to exercise care and diligence; and
• did not act in the best interests of members of the managed investment scheme.

All four respondents were part of the Investment Committee when $17 million from scheme members was transferred to an unregistered scheme. This money was then lent without proper documentation or security to various parties, including Linchpin group companies and two of the respondents, Mr. Raftery and Mr. Daly. The court found Mr Daly and Mr Raftery improperly used their positions by receiving unsecured personal loans from the unregistered managed investment scheme for their personal use. The court also determined that Mr Daly, being a member of the Investment Committee and a director of Linchpin, was considered an officer of Endeavour as he participated in decisions affecting the whole or a substantial part of the business.

Penalties

In January 2024, the Federal Court handed down its sentencing judgement and issued penalties totalling $390,000 against the directors:

• Mr Nielson and Mr Williams were each ordered to pay a $100,000 penalty and were banned from managing corporations for four years; and
• Mr Raftery was ordered to pay a $40,000 penalty and was banned from managing a corporation for three years.

The relatively lenient penalties against the above respondents was due to their acknowledgment of liability, albeit delayed, and their agreement with ASIC on appropriate remedies. This contrasts former CEO Mr Daly, who did not repay the improperly received loans, refused to accept his responsibility, and was found lacking remorse. Considering his difficult financial position and the need for fair consistency in penalties among directors, a higher penalty and ban was deemed necessary for deterrence and and to prevent future violations.

Mr Daly, who contested ASIC’s case, was ordered to pay a $150,000 penalty, and was banned from managing corporations for five years.

This case is an important reminder of the significant financial penalties facing directors and officers who breach their duties and fail to act in the best interests of the company and its members. It further demonstrates ASIC’s proactive commitment to holding individual directors and officers to account. Additionally, the sentencing by the courts indicates a willingness to order substantial penalties and disqualify directors from managing corporations for significant periods of time to protect the public, which can have career ending consequences for individual directors and officers.