Financial Services Provider Guilty of Unconscionable Conduct: 80-year-old farmer wins back his $6.6 million investment

Date: August 31, 2018
Author: admin
Posted in: Insights

In Messer v Lotus Securities Ltd [2018] FCA 1147, the Australian Federal Court upheld and applied the unconscionability principles established in Commercial Bank of Australia v Amadio (1983) 151 CLR 447. Justice Jennifer Davies found that financial services provider, AMMA Private Equity, acted “unconscionably” when it induced an elderly man suffering from a cognitive impairment to invest $6.6 million in tech start-up, Guvera.

The conduct of AMMA was found to be “unconscionable in the Amadio sense of knowing exploitation of a special disadvantage” and within the statutory terms of section 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (‘ASIC Act’). Section 12CB provides that, “A person must not, in trade or commerce, in connection with (a) the supply or possible supply of financial services to a person; or (b) the acquisition or possible acquisition of financial services from a person engage in conduct that is, in all the circumstances, unconscionable.”

AMMA Private Equity and its representative, James Forrestel were found to have contravened section 12CB of the ASIC Act because of the following facts:

  1. Evidence led by geriatric medical specialist, Dr Samantha Hutson, established that Mr Messer had advanced dementia by 2014. According to Dr Hutson, “Mr Messer’s cognitive impairment would have been overt even to people without any healthcare related experience or any knowledge about cognitive impairment disorders”.  The Court held that it must have been apparent to AMMA that Mr Messer had a significant cognitive impairment and therefore, no capacity to enter into agreements.
  1. Mr Forrestel misled Mr Messer about Guvera’s poor financial position. Mr Forrestel did not disclose the independent auditors report which stated that there was significant uncertainty about the company’s ability to continue as a going concern. Nor, did he disclose that the company had recorded a loss of $9 million in the year prior to Mr Messer’s investment.
  2. As soon as Mr Messer’s daughter became aware of her father’s investment in Guvera, she told James Forrestel that her father had already invested $1.5 million and he should not invest further. The Court was told that Mr Forrestel ignored her advice, and instead accompanied Mr Messer to his local bank on two occasions so that Mr Messer could invest more.
  3. The shares in Guvera were “at all times worthless” and Mr Messer could never have re-sold them for any value. The evidence showed that for the year ended 28 February 2014, Guvera and its controlled entities recorded:
    a. a loss of $9,013,472 and accumulated losses of $46,289,235 and
    b. that its liability exceeded its assets by $10,920,316 despite capital of $4,921,294 being raised by the issue of shares.

Justice Jennifer Davies ordered AMMA to pay back Mr Messer his total investment ($6.6 million) into the tech start-up. AMMA was also ordered to pay Mr Messer’s costs of the proceedings. This decision has sparked a debate about how Australia should fund highly speculative ventures, including technology start-ups.

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