Judge throws out ASIC case against Dixon Advisory director Paul Ryan, rules he acted in good faith

After facing the prospect of penalties and a ban on managing corporations, Dixon Advisory & Superannuation Services (DASS) director Paul Ryan has been vindicated by a Federal Court judge over his handling of an intercompany debt matter with a sister company during a period of upheaval in 2021.

Following the 2017 merger between Evans and Partners and Dixon Advisory, and their subsequent listing on the ASX as E&P Financial Group (EP1) in May 2018, the group suffered the consequences of Dixon Advisory's past advice to clients that they invest in its US Masters Residential Property Fund (URF) which eventually collapsed.

Ryan joined the group well after the URF debacle took place, becoming company secretary of EP1 in February 2020, and then taking on concurrent directorship roles at its subsidiaries E&P Operations (EPO) in March 2020 and DASS from March 2021.

It was a baptism of fire for the director as from 2020 DASS faced several claims in relation to its financial advise to clients, including a proceeding from the corporate watchdog, 90 complaints made by clients to the Australian Financial Complaints Authority (AFCA), and two class actions, with a potential liability of around $500 million.

It was against this backdrop that DASS was facing insolvency, with annual revenue almost halving between FY19 and FY21. 

Ordinarily EPO would have charged DASS a management fee, as it took care of its expenses ranging from advisors and support staff to office leasing. Such fees were generally around 90 per cent of DASS's gross revenue, but in FY21 it would have been greater than what DASS had made.

To keep DASS in a net positive asset position, and to ensure it did not breach a term of its Australian Financial Services Licence (AFSL), in July 2021 EPO agreed to waive the fee, calculated at $11.6 million, thus disrupting a historical relationship of cash sweeping.

Because the fee was waived, DASS still had an intercompany receivable worth $19 million, and how it approached that outstanding sum - and on what grounds - would form the basis of the allegations against Ryan.

The Australian Securities and Investments Commission (ASIC) alleged that Ryan breached his duties as a director through involvement in relation to the intercompany debt, including a change to the DASS constitution authorising directors to act in the best interests of E&P Operations (EPO).

In December 2021, MinterEllison sent Ryan a draft advice and a draft Deed of Acknowledgement of Debt (DOAD), with the law firm advising that DASS directors were justified and acting reasonably in taking the view that the execution of the deed was appropriate and in the best interests of DASS or EP1 or both, provided that the constitution was changed.

ASIC alleged that the board's decisions were to the advantage of Dixon Advisory's parent company, where Ryan was also a director, and that he failed to properly consider the interests of Dixon Advisory’s creditors by not calling on the $19 million intercompany receivable.

The corporate regulator had argued that Ryan's decisions were in breach of the Corporations Act because the resolutions materially prejudiced the ability of DASS to pay its creditors.

It contended in the trial that the advice given by MinterEllison was founded on a number of assumptions that influenced its advice, alleging that parties - contrary to what the law firm was told - did not make certain agreements around the intercompany debt and how it would accrue and be payable.

As summarised by Justice O'Callaghan, ASIC alleged that Ryan was wilfully blind to the fact that the parties did not so agree and did not engage in such negotiations as stated in MinterEllison's advice, and that he did not discharge his duties in good faith.

However, the judge was unconvinced, and concluded that Ryan "did in fact rely on the MinterEllison advice", and that certain clauses of the legal advice were "not materially inaccurate".

"Mr Ryan’s reliance was reasonable and in good faith and it did justify him holding the view, as he did, that the execution of the DOAD was appropriate and in the best interests of DASS," he said.

"ASIC has therefore not established that Mr Ryan contravened ss 180, 181(1)(a) or 182 of the Act in his capacity as a director of DASS."

The proceeding was dismissed with cost.

ASIC is now considering the judgment.

"We took this case because directors have responsibilities under the law to act in the best interests of their company, and this includes considering the interests of creditors when the company is facing insolvency," says ASIC Deputy Chair Sarah Court.

"ASIC remains committed to taking enforcement action where appropriate and expects directors to meet their governance obligations, including where they serve on the boards of multiple companies in a corporate group."