Federal Court disqualifies former directors of responsible entity

The Australian Securities and Investments Commission (ASIC) announced that former directors of Avestra Asset Management Ltd (Avestra), Paul Rowles and Clayton Dempsey, have each been disqualified from managing corporations and restrained from providing financial services for a period of 10 years following orders made by the Federal Court.

Avestra was a Queensland-based responsible entity and holder of an Australian financial services (AFS) licence that operated a number of registered and wholesale managed investment schemes (Schemes).

ASIC had earlier obtained orders to wind up Avestra due to concerns it had contravened its duties in relation to a number of the Schemes.

In a judgment delivered on 12 May 2017, the Federal Court held that Avestra, Mr Rowles and Mr Dempsey had engaged in numerous contraventions of the Corporations Act 2001, including contraventions arising from:

  • related party transactions being undertaken without member approval;
  • failing to act in the best interests of Scheme members;
  • failing to do all things necessary to ensure that the financial services covered by Avestra's AFS licence were provided efficiently, honestly and fairly;
  • failing to notify Scheme members of a material change in investment risk;
  • failing to exercise the degree of care and diligence that a reasonable person would exercise if they were in Avestra's position as responsible entity;
  • failing to put in place adequate arrangements for the management of conflicts of interest arising wholly, or partially, in the provision of financial services; and
  • in the case of Mr Rowles and Mr Dempsey, failing to comply with duties owed by them as officers of the responsible entity, and as directors of Avestra.
The misconduct by Avestra, Mr Rowles and Mr Dempsey that gave rise to ASIC's action included:
  • the use of property of the Schemes to acquire substantial shareholdings in an entity related to Avestra without member approval;
  • investment of the property of the Schemes into a wholesale fund which then made loans to related parties without member approval;
  • the investment of property of the Schemes into offshore schemes (the Bridge Global CMC Fund and Hanhong High-Yield Fund) without member approval.
Mr Rowles and Mr Dempsey agreed to the contraventions of the Corporations Act alleged by ASIC and found by the Court, as well as the disqualification and injunction ordered by the Court.

In its judgment, the Court said, "...if Avestra had observed effective compliance and conflict-management practices, it is likely that the episodes of misconduct described ... would not have unfolded, or not to the same extent. Dempsey's and Rowles's omissions ... were not merely procedural or technical contraventions. They were shortcomings that created or reflected a significantly deficient corporate culture, which enabled Avestra to act with a systematic and serious disregard of its fiduciary and regulatory obligations."

ASIC Commissioner John Price said, "The findings of the Federal Court in this matter make very clear that responsible entities are required to act in the interests of members. ASIC will ensure that responsible entities and their directors who fail in these duties are held to account."
Findlaw

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