Kordamentha v LM Investment Management Ltd (in liq) [2015] QSC 4

LM Investment Management Limited was:

  1. As responsible entity, the licensed trustee of a registered managed investment scheme known as LM Australian Income Fund.
  2. Trustee of a Unit Trust called the LM Managed Performance Fund.

Essentially, these were two investment schemes created for the purpose of investing in mortgages and property operated by the same company. The Unit Trust did not need to be a registered managed investment scheme because the investors all came from overseas. 

After the collapse of LM, different liquidators were appointed to administer the two funds. One of them in this case was seeking leave to sue the other and the other, was seeking leave to defend the claim.

The essence of the complaint is that at a time when the Unit Trust had already entered into a loan transaction on first mortgage security with Peregian Beach the outstanding balance of which was about $3.2m, the managed investment scheme loaned about $1.7m on terms which entirely subordinated the new loan to the $3.2m loan.

The allegation it was not in the benefit of the members of the Unit Trust to be subordinated to the managed investment scheme. Accordingly, there was a breach of the core duty of the trustee as to perform the trust honestly and in good faith for the benefit of the members of the Unit Trust.

The court noted in relation to both of the applications:

Where a trustee is in doubt as to the course of action to be adopted, the trustee is entitled to seek the opinion of the Court as to what it should do. In considering such an application, it is not the function of the Court to investigate the evidence and make a finding whether or not the trustees will be successful in the litigation. The Court has merely to determine whether or not the proceedings should be taken. 

This is a complex matter and it certainly cannot be said, on the material before me and the arguments raised, that the claim by Kordamentha is without foundation. Mr Barlow QC, for the managed investment scheme accepted that there was “a real issue as to whether it was acting in accordance with its duties and whether it was being benefited”. He went on to say that the major issue was that, even if there had been a breach, the applicant was mistaken as to the relief it could obtain.

After consideration of the matters contained within counsels’ opinions, I have come to the view that it is appropriate to make the orders sought by the applicant.

 Click here to read the full judgement.

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