27 November 2024
6 min read
#Dispute Resolution & Litigation, #Corporate Restructuring and Insolvency
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On 6 November 2024, the Federal Court dismissed the Australian Securities and Investments Commission’s (ASIC) case against Paul Ryan, a director of Dixon Advisory & Superannuation Services Pty Limited (DASS). The case alleged that Mr Ryan had breached his directors’ duties by failing to consider the interests of DASS’ creditors when the company was approaching insolvency.
The findings from this case demonstrate that a director who acts in good faith, reasonably relies on professional advice, and independently assesses the assumptions behind that advice may be able to successfully defend against claims of breaching their duties as a director when making decisions when facing a potential insolvency.
DASS and E&P Operations Pty Ltd (EPO) were wholly owned subsidiaries of E&P Financial Group Ltd (EP1). EPO was the parent and employing entity of DASS and provided various services to DASS for a management fee.
DASS operated a financial services business and held an Australian Financial Services Licence (AFSL), which required it to maintain a net positive asset position at all times. However, from 2020, DASS’s revenues declined following proceedings issued by ASIC and various complaints made to the Australian Financial Complaints Authority (AFCA).
To ensure DASS maintained a net positive asset position and satisfied the conditions of its AFSL, EPO agreed to waive the management fee DASS owed for the 2021 financial year. This reduced the balance of the intercompany loan account between DASS and EPO.
In December 2021, Mr Ryan obtained advice from, the group’s legal advisors, which stated that the directors of DASS were justified in believing that the execution of a deed of acknowledgment of debt (DOAD) regarding the intercompany loan was in the best interests of DASS, EPO or both, provided DASS’s constitution was amended to authorise the directors to act in the best interests of the parent company, EPO. The DOAD provided that the balance of the intercompany loan would only be repayable by EPO to DASS under particular circumstances.
Mr Ryan and the DASS board approved a resolution to amend the DASS constitution and approved its entry into the DOAD.
ASIC alleged that in voting for the resolutions, Mr Ryan contravened sections 180, 181(1)(a) and 182 of the Corporations Act 2001 (Cth) (Corporations Act) as the resolutions materially prejudiced DASS’s ability to pay its creditors. This was because the effect of the DOAD was to prevent a voluntary administrator of DASS from accessing the $19 million intercompany receivable that ASIC argued would have otherwise been available for its creditors. DASS was placed into voluntary administration on 19 January 2022.
In defending the proceeding, Mr Ryan contended that he did not contravene section 180(1) of the Corporations Act as he reasonably relied on MinterEllison’s advice (as well as advice from McGrathNicol and Peter Anderson, who was then the CEO of EP1) in making a business judgement under section 180(2). He also invoked section 189 of the Corporations Act and contended that by reasonably relying on expert advice in good faith, he also satisfied the business judgement rule (under section 180(2)) and therefore discharged his duties under section 180(1) of the Corporations Act.
The main issue in the proceeding was whether Mr Ryan honestly and reasonably relied on professional legal and restructuring advice. Mr Ryan contented that this case raised important questions about:
Mr Ryan submitted that ASIC’s case against him sought to impose an unrealistically high standard of behaviour on a company director who at all times acted honestly, with no personal gain, and in accordance with what a reasonable person in his position would have understood to be the advice of his CEO, experienced legal advisors and external corporate restructuring advisors, in a complex and difficult set of circumstances with which he had no prior experience.
ASIC contended that the discussions between Mr Ryan and the group CEO about the need to document the arrangements for the waiver on the intercompany loan did not amount to an agreement that the intercompany receivable would only be repayable by EPO if the ASIC penalty and AFCA claims actually became payable by DASS. Further, ASIC contended that there was no negotiation at all between DASS and EPO regarding the waiver of the management fee at the time it was waived.
These contentions are relevant as MinterEllison’s advice was founded on two assumptions:
ASIC argued that Mr Ryan understood that MinterEllison’s advice was based on the accuracy of these assumptions and that he knew, or was wilfully blind to the possibility, that these assumptions were inaccurate. On this basis, ASIC contended that any reliance by Mr Ryan on MinterEllison’s advice was unreasonable.
Mr Ryan, who had been with Evans & Partners prior to its merger with DASS, decided to waive penalty privilege in the case, giving a full historical recount of his involvement with DASS. He gave detailed evidence spanning his entire directorhip of DASS, providing important background and context for the decisions which were the source of ASIC’s concern. The Court found Mr Ryan to be a “sophisticated, thoughtful and exceptionally well-prepared witness” who reasonably relied on the advice of MinterEllison “in good faith and after making an independent assessment of the advice, which involved him reading the advice carefully and satisfying himself that the background assumptions on which it was based were accurate and complete”.
The Court accepted Mr Ryan’s sworn evidence and found that the discussions between him and the group CEO were capable of being described as ‘negotiations’ and that there was agreement regarding the limitations on the repayment of the intercompany debt. Further, the Court found that Mr Ryan properly relied on the expertise of the group CEO and McGrathNicol on how to deal with potential corporate insolvency. Nothing in Mr Ryan’s evidence led the Court to believe that his evidence was untrue, embellished or unreliable.
The Court also declined to find that Mr Ryan did not consider the interests of DASS’ creditors after considering and accepting Mr Ryan’s detailed affidavit evidence on this matter.
After addressing all 16 issues raised by ASIC in the case, the Court ruled in favour of Mr Ryan and dismissed the case, ordering ASIC to pay for Mr Ryan’s costs of the proceeding.
We acted for Mr Ryan in the proceeding. If you have any questions about your duties as a company director, please contact our team below.
Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.
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