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Directors Duties civil penalty proceedings: Lessons from MFS

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This article was written by Greg Golding and ​Shabarika Ajitkumar.

In May 2017 the Queensland Supreme Court imposed significant financial penalties on former directors and officers of MFS Group. So what lessons are there for directors coming out of this long running litigation?

MFS Group was a Gold Coast based travel and hospitality group that had grown rapidly during the 2000's only to collapse under its $2.5 billion debt load at the height of the GFC in early 2008. ASIC commenced civil penalty proceedings against the MFS officers in 2009. The proceedings related to a transfer of $147.5 million in late 2007 from a retail managed investment scheme managed by MFS Group (Premier Income Fund or PIF) that was used to satisfy maturing debt of MFS Group.

Following a lengthy trial heard over 2013 and 2014 the Court made findings of liability against the MFS officers in May 2016. Following the penalty decision of May 2017 at least one of the officers (Michael King, ex CEO) has indicated an intention to appeal the decision.

An impressive ASIC prosecution record: Since ASIC was given the power to pursue breach of directors duties through a civil penalty proceedings regime in the mid 1990's ASIC has now demonstrated a strong track record of successful prosecutions against directors for alleged wrongdoing. While much public attention has been paid to ASIC's high profile failures (most notably Fortescue and Rich) the reality is that ASIC has been successful in the vast majority of the civil penalty proceedings it has run against officers. In that sense MFS is typical of the enforcement outcomes ASIC has achieved.

Penalties can be significant: The MFS case is noteworthy for the significant penalties that were imposed. The banning orders ranged from 5 years to a permanent ban from managing corporations (against the CFO). The pecuniary penalties imposed were up to $650,000 per individual. Of particular note is that compensation orders in favour of PIF were made of up to $206 million against each officer.

The current maximum pecuniary penalties of $200,000 for an individual and $1 million for a corporation have been unchanged for many years and there is general consensus that they should be significantly increased.

That being said the MFS financial penalties imposed clearly demonstrate that the existing penalty regime can have real impact in achieving strong enforcement outcomes.

Proceedings are still taking way too long to resolve: For the MFS proceedings to take almost 10 years from the events in question to get to this point is unacceptable from the perspective of the administration of justice. Many of the earlier uncertainties as at how the civil penalty regime operates have now been cleared up (although the recent Gore case uncertainty as to the application of criminal capability requirement in civil penalty proceedings again illustrates some of the continuing uncertainties).

From the perspective of a director dragged into a dispute with ASIC it is unacceptable that civil penalty proceedings can drag on for years while the reputation of the director is trashed.

To be sure, many of these cases are prolonged by the aggressive defensive tactics engaged in by director defendants. However, thought needs to be given as to how the system can be improved to deliver more timely outcomes.

Some high profile civil penalty proceedings against directors over the years

FAI

2001-2003

ASIC success

GIO

2002-2007

ASIC success

OneTel

2004-2009

ASIC failure (against Rich)

James Hardie

2007-2012

ASIC success

Fortescue

2006-2012

ASIC failure

Citrofresh

2006-2010

ASIC success

Centro

2009-2011

ASIC success

MFS

2009-

ASIC success

Storm Financial

2010-

ASIC success

Sino Exploration

2014-2016

ASIC success

Padbury Mining

2015-2016

ASIC success

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