Court examines AFCA determination involving SMSFs

Background

Around March 2015, Christian De Lloyd, a private client advisor who had previously undertaken property development projects became aware of land that was for sale at Bulimba in Brisbane, which he considered to have good potential for property development.

1 McConnell borrowed an amount of $1.1 million from JSKS Enterprises Pty Ltd (JSKS), a family trust entity in order to settle the land acquisition.

The company also entered into a joint venture agreement with Omicron Investment Holdings (Omicron) on 12 August 2016. Benjamin Godfrey was the sole director of Omicron.

Omicron was a special purpose entity established for the purpose of providing $5,100,000 in equity to the joint venture in return for 55 per cent of the total profits. Mr Godfrey ran a funds management business, ISG Funds Management which was responsible for the equity raise of $5,100,000. ISG prepared an information memorandum offering the shares. The JSKS loan was not disclosed in the Information Memorandum. Omicron failed to raise the total equity required for the property development. Equity of approximately $2,492,519.47 was raised by Omicron. Of the equity raised, $950,000 was provided by clients or persons introduced by De Lloyd Private Wealth, Mr De Lloyd’s financial services firm.

 In May 2018, 1 McConnell granted a second mortgage over the land to JSKS to secure repayment of the JSKS loan.

JSKS sold the land as second mortgagee. The proceeds of sale paid out the NAB loan and paid some, but not all, of the monies owing to JSKS. The shares the complainants in the case had bought were valueless.

1 McConnell and Mr De Lloyd were not involved in the land sale. Mr De Lloyd, on behalf of 1 McConnell issued Omicron with a notice of dispute relating to the non-performance of providing equity for the joint venture.

Omicron was sent a request for reimbursement for the remaining joint venture costs in the sum of $1,493,059.49 owed to the company. In May 2019, Omicron registered a deed of cross charge as security interest against the company on the personal property and securities register.

On behalf of Omicron, Mr Godfrey appointed administrators James Imray and David Hambleton to 1 McConnell as joint liquidators.

The action of the company being placed into voluntary administration prevented Mr De Lloyd from filing proceedings in the Supreme Court for the debt owed by Omicron for $1,493,059.49.

AFCA complaint

The corporate trustees of the SMSFs that had invested in the development lodged a complaint to AFCA stating that if they had known about the JSKS loan, they would not have invested.

The directors of the corporate trustees said they had been misled because the information memorandum was silent in relation to the JSKS loan.

Mr De Lloyd assisted solicitor Tony Anamourlis with the complaint made to AFCA on behalf of the investors.

In the evidence he provided, Mr De Lloyd stated that the responsible manager of the licence at that time, Grant Harrison and the compliance officer, Michele Jackson, along with Mr Godfrey, were aware of the JSKS loan and agreed to the terms of the agreement before the information memorandum was finalised.

The AFCA decision maker found that Mr Godfrey had known about the JSKS loan prior to issuing the Information Memorandum.

 Justice Jean Dalton noted in her decision that there was no satisfactory explanation as to why the loan was not mentioned in the information memorandum and why Mr Godfrey did not investigate the terms of this funding in order to provide proper details in it so that investors could make an informed decision.

Complaints by ISG about the AFCA determinations

ISG made nine complaints about the proceedings and decisions by AFCA, outlining that there were issues with the way that four of the SMSFs lodged their complaints with AFCA.

Unfortunately, on the part of the AFCA form which enquired after ‘complainant details’, the name of the individuals was inserted rather than the name of the super fund’s corporate trustee.

ISG submitted that this raised a considerable difficulty having regard to the AFCA rules. Justice Jean Dalton noted that with all four cases, the text and the reasons for the decision confused the identity of the complainants.

However, Justice Dalton stated that despite the mixture of information provided to AFCA, it “was sufficiently plain” that the complainant in each case was the corporate trustee of the super fund.

ISG also claimed that AFCA had not accorded it procedural fairness by failing to provide access to relevant information before each of the complaints were determined.

In relation to one of the SMSF corporate trustees, A & P Jha Pty Ltd, the court considered three documents which were not disclosed to ISG.

One of these documents was a note which the preliminary decision maker engaged by AFCA,

Mr Moura, had made of a telephone conversation he had with Dr Jha, the director of the corporate trustee.

In the note Mr Moura explains that Dr Jha said that he moved to Brisbane in 2012 and met Christian De Lloyd who became his accountant. Christian De Lloyd helped Dr Jha and other doctors set up their SMSFs.

AFCA argued that as the note was a document prepared by AFCA staff, it was not required to be provided to ISG. Rule 10.3 gives AFCA discretion as to whether or not to exchange documents prepared by its staff.

Justice Dalton stated that a note such as this which is the complainant’s record of events should have been disclosed.

 “The file note itself records that Dr Jha was too busy to email Mr Moura, so Mr Moura rang to obtain his version of events and made a note. In substance, the note was a statement from Dr Jha and ought to have been disclosed,” she stated.

 “I find that ISG was denied procedural fairness because AFCA did not disclose the documents. With the benefit of submissions as to what to make of [these documents], the decision maker could have reached a different outcome, including because he may have been persuaded to seek clarification from Dr Jha before determining the matter.

“My concerns about lack of procedural fairness are amplified because the logic of the reasons for determination as to reliance, causation, and apportionment of liability for A & P Jha Pty Ltd’s loss is poor […]. In my view, this non-disclosure is a sufficient infraction of AFCA’s contractual requirement to provide procedural fairness that the determination is invalidated.”

In terms of the other four corporate trustees, Justice Dalton determined that the failure of AFCA to disclose documents to ISG was not material.

Justice Dalton stated that ISG had failed to make out its case in respect of all of the complaints except for the complaint made by A & P Jha Pty Ltd.

“In relation to that complaint only, I am convinced that AFCA breached the tripartite contract by failing to provide procedural fairness to ISG and that as a result the determination is one which is not binding on ISG,” she stated.

“ISG seeks a declaration that in those circumstances the document dated 29 June 2020 purporting to be a determination on the complaint made by A & P Jha Pty Ltd against ISG is not a determination within the meaning of that term as used in the AFCA rules. I will make that declaration.”

The Court ordered ISG to pay $53,420 to AFCA. It also ordered ISG to reimburse the other four SMSFs, aside from A & P Jha Pty Ltd, for their initial investment in the property development.

Justice Dalton said interest on the initial investment amounts would be dealt with in a subsequent order.

 ******Editor's note: Amendments were made to the original version of this article published 29 June 2022.******