Personal Liability of Directors for Misleading and Deceptive Conduct in Property Transactions
The Property Mentors Australia Pty Ltd v Touch for Health Pty Ltd as Trustee for Knight Superannuation Fund [2026] FCAFC 21, saw the Full Court of the Federal Court confirm that misleading or deceptive conduct engaged in by directors may trigger personal liability, even if the conduct also amounts to acts of a corporation.
This case examines the conduct of two directors who made misleading and deceptive future representations about the timeframe and expected profits of an investment project to potential investors and illustrates the standards of evidence and documentation needed to demonstrate a reasonable basis for such representations.
Background
The Property Mentors Australia Pty Ltd (TPM)was established by Messrs Bateman and Harris (the Developers), who both served as directors of TPM during the preparation and promotion of the Secret Harbour Development.
TPM’s business model was to generate revenue through its paid members, including by offering opportunities to invest in developments.
In June 2015, TPM sought expressions of interest from its members to invest in the Secret Harbour Unit Trust (SHUT), for the purpose of financing the Secret Harbour Development.
The Information Memorandum that was provided to prospective investors promised a ‘hands-off vehicle for investors with expected returns on investment of greater than 30% over the life of the project which is expected to be 12-15 months in duration’. This document was drafted by Mr Bateman and approved for distribution by Mr Harris. In addition, Mr Bateman made a series of oral representations to individual investors to a similar effect to those contained in the Information Memorandum. Notably, an oral representation was made that there would be an expected return of at least 20%.
The development was troubled and the land on which it was to be built was used to secure a mortgage over an unrelated loan. The land became subject to an order for possession and was sold by mortgagees in December 2019, effectively killing the project.
Several unit holders of SHUT (the Investors)commenced proceedings against the Developers for misleading and deceptive conduct under the Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act’) arising from the contents of the Information Memorandum .
The trial judge found that the Developers made two misleading or deceptive statements in the Information Memorandum:
That the investment in SHUT would have a term of 12 to 15 months (Expected Timeframe Representation); and
That the expected return to the unitholders would be more than 20% (Expected Profit Representation).
The Developers appealed this decision to the Full Court of the Federal Court. The grounds for the appeal were that:
the trial judge erred in finding the Expected Timeframe Representation was misleading;
the trial judge erred in finding the Expected Profit Representation was misleading;
the trial judge erred in finding that Mr Harris was knowingly involved in TPM’s breach of the ASIC Act;
the trial judge erred in finding that TPM had breached its duty of care to investors in making the above representations; and
if any of the above grounds succeeds, the trial judge’s costs orders should be modified.
No separate submissions were made on grounds 3-5 by the Developers. It was therefore noted by the Full Court that the success of these grounds was contingent on the outcome of grounds 1 and 2.
The Investors also filed a Cross-Appeal contesting the orders of the trial judge.
The grounds for Cross-Appeal were that:
the trial judge erred in finding that Mr Bateman and/or Mr Harris were not personally liable for the breaches of the ASIC Act;
in the alternative, Mr Bateman and/or Mr Harris was accessorily liable for the Investors’ losses; and
the trial judge erred in declining to order pre-judgment interest due to the Investors’ delay in bringing the claim.
Issues
Did the Developers adduce evidence to demonstrate a reasonable basis to make the:
Expected Timeframe Representation; and
Expected Profit Representation?
Regarding the Cross-Appeal:
Were the Developers personally liable for the contraventions of the ASIC Act; and
For the purposes of determining an order for pre-judgment interest, when did the Investors’ cause of action accrue?
The Expected Timeframe Representation
A representation regarding future matters will be misleading unless there were reasonable grounds for making it (ASIC Act s 12BB(1)). It is the burden of the party that made the representation to provide evidence proving that they had reasonable grounds to do so. (ASIC Act s 12BB(2)).
The Developers alleged that they had reasonable grounds to make the written and oral representations to the Investors that the project would finish in 12-15 months. This was based on verbal assurances given by Mr Polak, a builder and business associate of the Developers, to Mr Bateman that the project could be completed within 9 months.
However, the Full Court gave little weight to this evidence, as did the trial judge.
The conversation with Mr Polak was not mentioned in the filed Concise Statement responses or affidavits and came out only after Mr Harris was being cross-examined. The only evidence of this discussion came from Mr Bateman, as Mr Polak was not called to give evidence nor was there any written corroboration of the conversation.
In addition, several factors made it difficult to imagine there was any reasonable basis that could be established for making the Expected Timeframe Representation:
the Developers knew that building works could not commence until three to six months after settlement given the need to obtain finance, execute the building contract, and commence construction;
the building contract had not been executed at the time, despite representations that it had in the Information Memorandum;
the contract provided the builders 378 days (about 18 calendar months) to complete the construction; and
there was no evidence to suggest the builders would have backed up Mr Polak’s assurance by shortening the timeframe in the Schedule of Particulars, and they clearly had no incentive to do so.
Given the above factors, the trial judge concluded that the earliest possible completion time would have been 15 months after the representations were made, and that Messrs Bateman and Harris knew they had no reasonable basis to make representations to the contrary.
The Full Court accepted the reasoning of the trial judge on this issue, rejecting this ground of appeal.
The Expected Profit Representation
While representations contained in the Information Memorandum and reinforced in Mr Bateman’s oral statements conveyed that each investor would gain returns of at least 20%, the trial judge noted that the terms of the SHUT Deed made this mathematically impossible.
The Deed required a return of capital to each unit holder, regardless of whether the unit holder actually provided any capital. PM Asset Holdings held a large number of units in SHUT without having contributed cash in exchange for them. This meant that a portion of the pool of capital that was contributed by the Investors would have been returned to PM Asset Holdings despite that entity not contributing any capital themselves.
The fact that a percentage of the cash that the Investors had contributed was effectively being funnelled to PM Asset Holdings made it impossible for them to experience a positive return, let alone the 20% promised by the developers.
The Developers argued that this was merely a ‘misunderstanding’ as to the terms of the Deed, and that their subjective intention was always to ensure that unit holders who had contributed cash would be paid before those who had not. This was said to involve PM Asset Holdings forgoing any profit to the extent necessary.
The Full Court found that the fact that the Information Memorandum was plainly inconsistent with the terms of the SHUT Deed could not be cured by the purported subjective intention of the developers.
It was additionally noteworthy that evidence of such intention was only adduced at trial, and no evidence was adduced to demonstrate such a subjective intention was held at the time the representations were made.
Personal Liability of Messrs Bateman and Harris
The trial judge considered that the developers were not personally liable for the established contraventions of the ASIC Act as they were acting ‘as a corporate organ of TPM ’.
The Full Court unanimously overturned this finding, concluding that each of the developers were personally liable. They emphasised that the acts of an individual can be both a corporate act and personal act.
The question was not whether the developers engaged in the conduct for themselves, or as director or agent, but simply whether they engaged in the conduct (citing Pave Wealth Services Pty Ltd v Jones [2021] WASC 7 at [46]).
in Mr Bateman’s case, the misleading conduct was the drafting and dissemination of the Information Memorandum.
in Mr Harris’s case, the misleading conduct was the approval of Information Memorandum to be sent out.
Given that the developers had personally engaged in the relevant acts, they could be held personally liable regardless of whether or not it was additionally an act of TPM.
The first ground for Cross-Appeal was allowed unanimously, it was unnecessary for the Full Court to consider the second ground which was pleaded in the alternative.
Pre-Judgment Interest
The trial judge declined to award pre-judgment interest to the investors given what was considered to be an unreasonable six-year delay between the initiation of the claim in 2021, and the cause of action accruing in 2015 when the investors invested in the SHUT.
The investors appealed on the ground that the cause of action did not accrue until 2019 when the land the project was to be built on was sold by the mortgagee, crystalising their losses.
This argument was rejected by Jackson and Anderson JJ (Needham J dissenting), who concluded that the losses were suffered were real and immediate upon investing in the SHUT.
This was because the invest did not merely enter a contract that had a chance of proving disadvantageous but, as discussed above in paragraph [4], they were guaranteed to lose money under the terms of the SHUT.
Key Lessons
Ensure that any future representations being made have a reasonable basis prior to their inclusion in documents that will be provided to others to rely on.
Make reasonable enquires and document the responses to them in order to collect support for any representations being made on behalf of a company or individual.
Consider changing documentary or oral representations if known facts mean it is misleading or difficult to establish a reasonable basis for.
Cross-check that your legal documents are actually drafted to deliver the outcomes that are said to be achieved.
Remember that the fact that the acts of a director or employee are being done for a company does not necessarily extinguish personal liability for misleading or deceptive conduct.
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au
This article was prepared with the assistance of Tony Huang, Law Clerk.
