Court gives LM administrators the boot for 'not putting unit holder interests first'

by AB12 Aug 2013

The future for investors in LM First Mortgage Income Fund (FMIF) is more certain after a court yesterday appointed David Whyte of BDO as receiver to it, according to an ASIC statement.

The move effectively takes control for the winding up out of the hands of the liquidators appointed to FMIF’s responsible entity, LM Investment Management Limited (LM). Until their appointment as liquidators, John Park and Ginette Muller of FTI consulting had been acting as voluntary administrators of LM since March, 2013.

“The appointment will see the winding up proceed in the most efficient and cost-effective way. We want to see the maximum returned for investors,” says ASIC commissioner, Greg Tanzer.

The move follows ASIC’s intervention in May this year, in a court case about the future of the FMIF. ASIC sought orders to wind up the FMIF and to appoint registered liquidators as receivers to the FMIF. Park and Muller had been resisting any attempt to remove them from control of the FMIF.

ASIC’s intervention followed a concern that Park and Muller were not putting the interests of unit-holders of the FMIF before their own when they called a meeting of unit-holders in April this year to change the responsible entity of the fund.

The regulator was concerned the meeting had not been validly called and that, after Park and Muller had recommended strongly against the changing of the responsible entity, the outcome of the meeting (held on 13 June) would be largely pointless and not in the broader interests of unit-holders.

In dealing with the conduct of Park and Muller, Justice Dalton says the two administrators demonstrated a preparedness to act in a way that was ‘inconsistent’ with those owing duties as responsible entity and trustee under the Corporations Act.

“My view is that they have preferred their own commercial interests to the interests of the fund. This is demonstrated in the conduct ... in relation to the June 13, 2013 meeting; their dealings with ASIC, and their conduct with this litigation. It extends to the point where both administrators have sworn to matters which they either conceded were wrong on cross-examination ... or in my view are not consonant with reality ... In a winding-up where conflicts may well arise, and may involve questions of some complexity, I feel no assurance that the current administration would act properly in the interests of members of the fund in identifying those issues or dealing with them. In my view, that makes it necessary that someone independent have charge of winding-up FMIF.”

Trilogy Funds Management Limited (Trilogy) also applied to be appointed by the court as a temporary responsible entity for the FMIF. However, the court ruled Trilogy’s application to be incompetent and further found that, for a number of reasons, including potential conflicts of interest, it did not regard the appointment of Trilogy as responsible entity as being in the interests of members of the FMIF.

Prior to the proceedings, Deutsche Bank, a secured creditor of the FMIF, appointed McGrath Nicol as receiver of the FMIF. ASIC believes that orders will be made for the incoming receiver to work in conjunction with Deutsche Bank’s receiver for an orderly realisation of the assets of the FMIF.

ASIC’s inquiries into the collapsed Gold Coast-based fund manager LM Investment Management, which controls FMIF, are continuing.