360 Capital Re Ltd v Watts
[2012] VSCA 234
•4 October 2012
SUPREME COURT OF VICTORIA
COURT OF APPEAL
| S APCI 2012 0151 | |
| 360 CAPITAL RE LIMITED (ACN 090 939 192) | Appellant |
| v | |
| JAMES WATTS AND KAY WATTS AS TRUSTEES FOR THE WATTS FAMILY SUPERANNUATION FUND & ORS | First Respondents |
| THE TRUST COMPANY (AUSTRALIA) LIMITED (ABN 21 000 000 993) | Second Respondent |
---
| JUDGES | WARREN CJ, BUCHANAN and NETTLE JJA |
| WHERE HELD | MELBOURNE |
| DATE OF HEARING | 2 October 2012 |
| DATE OF JUDGMENT | 4 October 2012 |
| MEDIUM NEUTRAL CITATION | [2012] VSCA 234 |
| JUDGMENT APPEALED FROM | [2012] VSC 320 (Sifris J) |
---
CORPORATIONS – Managed investment scheme – Constitution – Changes to constitution – Proposed changes to remove or alter provisions precluding issue of units at less than $1.00 per unit and the issue of options, and to restrict ability of members to convene and conduct meetings – Whether proposed changes adversely affecting members’ rights as opposed to commercial interests – Whether board of responsible entity gave consideration to whether proposed changes would adversely affect members’ rights – Relevance of board acting on basis of legal advice – Premium Income Fund Action Group Inc v Wellington Capital Ltd (2011) 84 ACSR 600, followed; Re Centro Retail Ltd (2011) 255 FLR 28; ING Funds Management Ltd v ANZ Nominees Ltd (2009) 228 FLR 444, doubted – Appeal dismissed – Corporations Act 2001 (Cth), s 601GC.
---
| Appearances: | Counsel | Solicitors |
| For the Appellant | Mr A J Myers QC with Mr P Zappia and Mr O Bigos | Clayton Utz |
| For the First Respondents | Mr G T Bigmore QC with Mr D C Gration | Clarendon Lawyers |
| For the Second Respondent | Mr P Fox | Minter Ellison |
WARREN CJ
BUCHANAN JA
NETTLE JA:
This is an appeal from a judgment given in the Commercial and Equity Division. The judge held that a number of modifications to the 360 Capital Industrial Fund Constitution purportedly made by Supplemental Deed Poll dated 31 May 2012 (‘the May amendments’) and a further Supplemental Deed Poll dated 5 July 2012 (‘the July amendments’) were invalid for want of compliance with s 601GC(1)(b) of the Corporations Act 2001 (Cth) (‘the Corporations Act’).
Section 601GC of the Corporations Act provides that:
Changing the constitution
(1) The constitution of a registered scheme may be modified, or repealed and replaced with a new constitution:
(a) by special resolution of the members of the scheme; or
(b)by the responsible entity if the responsible entity reasonably considers the change will not adversely affect members' rights.
(2) The responsible entity must lodge with ASIC a copy of the modification or the new constitution. The modification, or repeal and replacement, cannot take effect until the copy has been lodged.
(3) The responsible entity must lodge with ASIC a consolidated copy of the scheme's constitution if ASIC directs it to do so.
(4) The responsible entity must send a copy of the scheme's constitution to a member of the scheme within 7 days if the member:
(a) asks the responsible entity, in writing, for the copy; and
(b)pays any fee (up to the prescribed amount) required by the responsible entity.
The facts
The 360 Capital Industrial Fund (‘the Fund’) is a managed investment scheme under Chapter 5C of the Corporations Act 2001 (Cth). It is a domestic fund holding industrial properties in several Australian states. There are approximately 180.6
million issued units in the Fund. The appellant (‘360 Capital’) is the responsible entity of the Fund and the first respondents (‘the Watts’) are members of it.
At all relevant times until 31 May 2012, the Constitution of the Fund provided, inter alia, as follows:
1) Clause 5.1(a): The Trustee could only issue units in accordance with clause 5 and subject to the Constitution.
2) Clause 5.2(a): The Trustee could not grant Options unless the Trust were Listed.
3) Clause 5.4: New Units were required to be issued at a price determined in accordance with clause 5.4.
4) Clause 13.5(a): An Option did not confer on the Optionholder any interest in the Fund.
On 30 May 2012, the directors of 360 Capital resolved that it would execute a Supplemental Deed Poll pursuant to s 601GC(1)(b) of the Corporations Act to amend the Constitution of the Fund to provide for the issue of redeemable unsecured convertible notes (‘360 Notes’). The minutes of meeting of directors of 30 May 2012 recorded, inter alia, that:
The Directors CONFIRMED that they :
a) had considered:
i) the current rights of unitholders in the Fund pursuant to the Constitution of the Fund; and
ii)the amendments which are proposed to be made to those rights by the Supplemental Deed;
b)having regard to the matters considered by the Board, the CU[1] Opinion and the Counsels’ Opinion, believe that the amendments which are proposed to be made by the Supplemental Deed do not adversely affect the rights of unitholders of the Fund; …
[1]Clayton Utz, solicitors.
On 31 May 2012, 360 Capital executed a Supplemental Deed Poll which purported to amend the Fund Constitution pursuant to s 601GC(1)(b) of the Act to provide for the issue of 360 Notes. The terms of the 360 Notes, were set out in Schedule 1 to a Note Trust Deed dated 31 May 2012 between 360 Capital and the second respondent, the Trust Company (Australia) Ltd (‘the Note Trustee’). They included the following:
a) The 360 Notes have a face value of $0.40 per Note (representing a 23% discount to the Fund’s pro forma 31 December 2011 NTA).
b) The 360 Notes have a maturity date of three years from the date of issue unless previously converted or redeemed.
c) The 360 Notes entitle the holder to coupon payments at various interest rates payable quarterly (essentially, 12% per annum from the date of Issue until the Maturity Date at the date of the Fund Listing (if any)).
d) The 360 Notes are convertible at the election of the Note holder upon listing of the Fund on the Australian Stock Exchange and at specified six monthly periods thereafter.
e) The 360 Notes are convertible on the basis of a conversion price of $0.40 per unit in the Fund, adjusted for certain capital transactions of the Fund.
Broadly speaking, therefore, the purported effect of the May amendments was to remove or change the provisions of the Constitution which would have precluded the issue of the 360 Notes.
On 6 June 2012, 360 Capital entered into a contract to purchase what it described as a ‘high quality portfolio of four industrial properties’ for a total acquisition cost of $87.4 million (‘the Additional Portfolio’).
In a Prospectus and Product Disclosure Statement (‘PDS’) issued the same day, 360 Capital disclosed that the acquisition of the Additional Portfolio would be ‘funded with secured bank debt and via the proceeds of [a] $27.0 million placement of 360 Notes to Institutional Investors (‘the Institutional Offer’)’. The PDS also contained an invitation to investors to ‘invest in the Fund by participating in an offer [of 360 Notes] to raise up to $40.0 million (‘the Retail Offer’)’.
In a letter from the Chairman and Managing Director of 360 Capital to investors dated 6 June 2012, it was stated that 360 Capital:
… intends to convene a meeting of Members of the Fund to consider a resolution to list the Fund and make all necessary amendments to the Constitution of the Fund to facilitate listing …
The letter also asseverated that holders of 360 Notes would be members of the Fund entitled to vote at the meeting.
On 3 July 2012, Chris Rylands of Garnaut Private Wealth Pty Ltd, a member of the Fund, wrote to 360 Capital seeking a copy of the register of members for the purposes of convening a meeting of members.
Presumably, to prevent that meeting being held, or at least to restrict and control the outcome of it and any others like it, on 5 July 2012, 360 Capital executed a further Supplemental Deed Poll which purported further to amend the Fund Constitution pursuant to s 601GC(1)(b) of the Act, as follows:
a) Clause 17A.2: Meetings of members could only be held in Sydney
b) Clause 17A.5: Proxies must be sent directly to [360 Capital] and would be invalid if sent to a third person to on-forward to [360 Capital]
c) Clause 17A.6: [360 Capital] must appoint the returning officer for any meeting
d) Clause 17A.7: A nominee of [360 Capital] must call the meeting to order and be responsible for providing instructions to the meeting and to the returning officer in relation to the election and appointment of the chair and declaring the results of the election.
In substance, the effect of those purported amendments was to place very considerable restrictions on the convening and conduct of meetings of members of the Fund.
The minutes of meeting of directors of 5 July 2012 recorded, inter alia, that:
The Directors CONSIDERED:
· the effect of the proposed amendments to the Constitution;
· the current rights of members of the Fund pursuant to the Constitution of the Fund; and
· the amendments which are proposed to be made to those rights by the Supplemental Deed,
and, having regard to the matters considered by the Board and the CU Opinion, believed that the amendments which are proposed to be made by the Supplemental Deed:
· do not adversely affect the rights of members of the Fund; and
· are in the best interests of members of the Fund.
On 11 July 2012, 360 Capital issued a Notice of meeting of Members of the Fund to be held on 8 August 2012 to consider and if thought fit pass the following resolution:
That, in accordance with Section 601GC(1)(a) of the Corporations Act and the Constitution, the Constitution be modified by replacing the provisions of the Constitution with the same provisions as contained in the form of Constitution lodged with ASIC (as amended) and as tabled at the meeting with such changes as the ASX requires or the Responsible Entity reasonably believes are necessary to facilitate the listing of the Fund and that the Responsible Entity take such action as it believes is reasonably necessary to list the Fund on the ASX.
On 18 July 2012, the Watts instituted this proceeding in the Commercial and Equity Division. They allege that the directors of 360 Capital could not reasonably have considered that the purported changes of 31 May and 5 July 2012 did not adversely affect members’ rights; and, therefore, that 360 Capital had no power under s 601GC(1)(b) of the Corporations Act to effect the purported amendments. In their originating motion the Watts claimed:
a) declarations that changes to the constitution of the Fund purportedly made on 31 May 2012 and 5 July 2012 by Supplemental Deeds Poll executed by the first defendant are of no force or effect;
b) a declaration that 360 Noteholders are not members of the Fund; and
c) an injunction restraining the first [respondent] from putting to members of the Fund the resolution contained in the notice of meeting issued on 12 July 2012.
The judgment below
The judge below held that members of the Fund had ‘members rights’ within the meaning of s 601GC(1)(b) of the Corporations Act to require that New Units in the Fund be issued only in accordance with clause 5 of the Constitution ‘at a price determined in accordance with Clause 5.4’; and, under clause 5.2(a), that 360 Capital not issue any Options ‘unless the Trust was Listed’; and, under clause 13.5(a), that no option ‘would confer on the Option holder any interest in the Fund’.
The judge considered that the amendments to the Constitution purportedly made by the Supplemental Deed Poll of 31 May 2012 would, if effective, modify those rights in a manner which went well beyond the mere enjoyment or value of the rights and would affect the characteristics and nature of the rights.
The judge also held that the minutes of meeting of directors of 30 May 2012 and 5 July 2012 did not show that the directors undertook the kind of reasonable consideration of the effect of the purported amendments on members’ rights that was required by s 601GC(1)(b); and thus that, in the absence of an affidavit of any of the directors of 360 Capital, it was to be inferred that the directors did not reasonably consider that the proposed changes would not adversely affect members’ rights.
His Honour concluded that, given the purported changes would have removed, curtailed or impaired the existing rights of members, and so been unfavourable and disadvantageous, the directors’ failure to consider the adverse effects of the purported changes on members’ rights was ‘sufficient to deny the responsible entity the modification power’. If followed, his Honour held, that the 360 Noteholders were not members of the Fund because the modifications of the Constitution which ‘underpinned’ the issue of the 360 Notes were ineffective.
The judge further held that, to the extent it was proposed that the resolution set out in the notice of meeting of 12 July 2012 be put to members as a special resolution under s 601GC(1)(a) of the Corporations Act, the notice, proposed resolution and the Explanatory Memorandum were all self-evidently inadequate; and, in those circumstances, that the meeting would have no utility – because it could not effect any modifications to the Constitution – and, so far as it sought to go to the next stage of listing, it was underpinned by invalid modifications to the Constitution which could not be cured by the resolution itself.
On that basis, the judge:
a) declared that the modification of the Constitution of the Fund which 360 Capital purported to make by the Supplemental Deed Poll dated 31 May 2012 was and is contrary to s 601GC(1)(b) of the Corporations Act 2001 and thus not effective to modify the Constitution;
b) further declared that the modification of the Constitution of the Fund which the first 360 Capital purported to make by the Supplemental Deed Poll dated 5 July 2012 was and is contrary to s 601GC(1)(b) of the Corporations Act and thus not effective to modify the Constitution; and
c) restrained 360 Capital from putting to members of the Fund at the meeting proposed to take place on 8 August 2012, the special resolution proposed in the Notice of Meeting dated 11 July 2012.
The appellant’s contentions
Initially, 360 Capital advanced seven principal contentions in support of this appeal:
1) First, it said that the judge was wrong to hold that the rights of members to have the Fund operated and administered according to the Constitution as it stands are ‘members’ rights’ within the meaning of s 601GC(1)(b) of the Corporations Act.
2) Secondly, it contended that the judge was wrong to hold that the changes purportedly made by the 31 May 2012 Supplemental Deed Poll adversely affected members’ rights.
3) Thirdly, it contended that the judge erred in finding that the directors of 360 Capital failed to undertake the reasonable consideration, required by s 601GC(1)(b), of whether the purported amendments of 31 May 2012 would adversely affect members’ rights.
4) Fourthly, it said that the judge erred in holding that the amendments purportedly made by the Supplemental Deed Poll of 5 July 2012 affected ‘members’ rights’ within the meaning of s 601GC(1)(b).
5) Fifthly, it contended that the judge erred in finding that the directors of 360 Capital failed to undertake the reasonable consideration, required by s 601GC(1)(b), of whether the purported amendments of 5 July 2012 would adversely affect members’ rights.
6) Sixthly, it contended that the judge erred in holding that, because of the invalidity of the purported amendments of 31 May 2012, the 360 Noteholders are not members of the Fund.
7) Finally, it said that, inasmuch as the judge erred in holding that the purported amendments of 31 May 2012 and 5 July 2012 were invalid, his Honour also erred in holding that Notice of Meeting of 8 August 2012 was invalid.
In the course of oral argument, however, counsel for 360 Capital stated that, because the 360 Noteholders were not parties to the proceeding below and have not been joined as parties to the appeal, the judge’s observations as to whether they are members of the Fund are not binding on them and, therefore, that it would be inappropriate for this court to express a view upon the subject; especially as his Honour’s observations were not reflected in any of the declarations or orders which he made. Counsel submitted that, if this court concluded that the May amendments and the July amendments were not invalid, the question of whether the 360 Noteholders are members of the Fund would thereby be decided in favour of the 360 Noteholders and, if this court concluded that the May amendments and the July amendments were invalid, the preferable course would be to remit the proceeding to the Commercial and Equity Division to enable the 360 Noteholders to be joined and thereafter for further trial of the question of whether they are members of the Fund. Counsel for the Watts and the Note Trustee supported that submission.
Members’ rights
Under the heading of the first, third and fourth contentions, counsel for 360 Capital argued that the judge erred in his interpretation of ‘members’ rights’ in s 601GC(1)(b) by following the reasoning of Gordon J in Premium Income Fund Action Group Inc v Wellington Capital Ltd[2] in preference to the approach of Barrett J in Re Centro Retail Ltd.[3]
[2](2011) 84 ACSR 600.
[3](2011) 255 FLR 28.
We do not accept the argument. In Premium Income, Gordon J held that a members’ rights to have a managed fund managed and administered in accordance with the constitution of the fund are ‘members’ rights’ within the meaning of s 601GC(1)(b). With respect, we agree. In Re Centro, Barrett J held that a members’ rights to have a managed fund managed and administered in accordance with the constitution of the fund are not ‘members’ rights’ within the meaning of s 601GC(1)(b). For the reasons which follow, we respectfully disagree.
In Premium Income, clause 3.2 of the PIF Scheme constitution provided that the issue price of a unit would be $1.00 per unit unless the responsible entity considered that the total value of all scheme property divided by the number of issued units (‘the variable price’) was less that $1.00, and the responsible entity was unable to access further funds under the MFS support mechanism to increase total net value of scheme property, in which case the price would be the variable price.
Gordon J held that unless and until the constitution were amended in accordance with s 601GC of the Corporations Act, each unit holder had a contractual right, by reason of the PIF Scheme constitution, to require that any new units in the PIF scheme be issued only on the terms fixed by clause 3.2 and that those rights were members’ rights within the meaning of s 601GC(1)(b) of the Corporations Act.
The purported changes to the constitution would have had the effect that new units in the PIF scheme would no longer be issued at $1.00 or the variable price but instead, as at 9 May 2011, could be issued at an issue price of no less than the 90-day volume weighted average price on the NSX; and, as at 16 May 2011, while the PIF scheme was listed on the NSX, the responsible entity could determine an issue price more or less than the current trading price on NSX, provided that any discount did not exceed a maximum of five per cent to the 30-day volume weighted average price of units traded on the NSX. Gordon J held that:
This is not a case where a responsible entity has simply, consistent with an existing power in a constitution, issued shares of the same class where such a power is not limited by terms about the issue price. I accept that the exercise of a general power in those circumstances could not, absent other facts and matters, contravene s 601GC(1) because no right was modified — the power to issue units was simply exercised. As is apparent, that is not this case. As the defendants conceded, the changes affected the circumstances and price at which the units could be issued. As Young J identified in Smith,[4] at least in some, if not most contexts, the incidents or character of a legal right is to be distinguished from the value of that right in any monetary sense. Here, the incident or character of the legal right that was changed was the right conferred on unitholders that the issue price of a unit would be determined by reference to cl 3.2…[5]
[4]Smith v Permanent Trustee Australia Ltd (1992) 10 ACLC 906.
[5](2011) 84 ACSR 600, 611 [40].
Her Honour added, exegetically:
it cannot be said that the change would not adversely affect members’ rights. It removed or impaired existing rights in a way that was disadvantageous to unitholders. The affectation was adverse to them and, accordingly, that adverse affectation was sufficient to deny [the responsible entity] the modification power absent a special resolution of the members of the PIF scheme.[6]
[6]Ibid 612 [42].
In Re Centro Retail Ltd, Barrett J said that he disagreed with that reasoning. Based on observations of Young J (as his Honour then was) in Smith v Permanent Trustee Australia Ltd,[7] and upon Barrett J’s own judgment in ING Funds Management Ltd v ANZ Nominees Ltd,[8] his Honour concluded that ‘members’ rights’ in s 601GC(1)(b) do not include members’ rights to have a managed investment scheme administered according to the constitution as it stands because, if they did, that would deny all efficacy to s 601GC(1)(b).
[7](1992) 10 ACLC 906.
[8](2009) 228 FLR 444.
With respect, there are several problems with that. The first arises out of Young J’s observations in Smith.
In Smith, clause 55 of a property fund trust deed provided that amendments to the trust deed could only be effected ‘Where in the opinion of the Trustee, the rights of the Unitholders or any Class of Unitholders may be adversely affected … with the consent of a special resolution of the Unitholders or such Class of Unitholders’.
Clauses 10 and 11 of the schedule to the deed provided for the retirement of the Manager, under clause 10, on giving six months’ notice and, under clause 11:
If so required by the Trustee on the grounds that:
(1) A special resolution and otherwise as provided in para 32(2) of this Schedule to that effect has been passed by the Unitholders of each Class of Units at meetings of Unitholders of each Class called for that purpose and at which neither the Manager or any Associate of the Manager shall have any voting entitlement:
(1) …
(2) It is acknowledged agreed and confirmed that any proposal to replace the Manager put forward at a meeting of Unitholders convened for that purpose in the manner specified in sub-para (1) of this paragraph must be approved by a separate resolution approved by a majority of at least 75% (by value) …
It was proposed to change clause 11. The question which arose was whether the proposed change might adversely affect the rights of Unitholders within the meaning of clause 55.
Young J accepted a submission that the ‘rights of the Unitholders’ in clause 55 meant ‘the contractual and equitable rights conferred upon the Unitholders by the deed’. His Honour then went on to hold that, because the Unitholders’ only equitable right was to have the Trustee perform its equitable obligations under the deed, and because the proposed change to clause 11 did not affect the Trustees’ equitable obligations under the deed, the proposed change did not affect the Unitholders equitable rights under the deed. Thus:
Although cl 1 to cl 9 and cl 13 to cl 15 of the first schedule are expressly set out as contractual rights, because they are said to be covenants, there is a significant omission of the word ‘covenant’ in cl 10 and 11. I cannot see how cl 10 and cl 11 confer contractual rights on the members.
Accordingly, I do not consider that the scenario referred to in cl 11 of the first schedule, that is the right to participate in a meeting and vote on a resolution which may trigger trustees to remove a manager, is a Unitholder’s right’ within cl 55.
With respect, we take leave to doubt that. Given, as Young J said, that clause 11 conferred a right on members to require the Trustee to remove the Manager, the change to clause 11 surely affected the equitable obligation of the Trustee to remove the Manager upon the resolution of members passed in accordance with clause 11. Moreover, whether or not clause 11 bore the appellation of a covenant, it unquestionably imposed a legal obligation, ex contractu, on the Trustee to act in accordance with a resolution passed by members in accordance with the clause. For either or both of those reasons, Smith does not appear to us to provide a sound basis for the proper construction of ‘members’ rights’ in s 601GC(1)(b) of the Corporations Act.
The next difficulty arises out of Barrett J’s own decision in ING Funds Management Ltd v ANZ Nominees Ltd. That case concerned the effectiveness of actions taken by ING Funds Management to suspend the rights of members of two managed investments schemes to require redemption of their units. Clause 7 of the deeds provided that any member could at any time request redemption of the member’s units and, provided the fund was liquid, the responsible entity was required to give effect to the request within 30 days (subject to a minor exception). It was proposed to add a new clause 7.7A, pursuant to s 601GC(1)(b) of the Corporations Act, of which the effect would be to make any redemption request inoperative for a period described as the ‘Suspension Period’, and that, during the Suspension period, a meeting would be called to consider a resolution to modify the constitution to impose a further embargo on redemptions.
In holding that the change would not adversely affect members’ rights within the meaning of s 601GC(1)(b), Barrett J reasoned as follows:
It is possible to argue that ‘members’ rights’ include a right to have the managed investment scheme operated and administered according to the constitution as it stands. If that is so any modification of the constitution involves an invasion of that right that is arguably adverse. I am not persuaded that this is a correct approach. It denies all efficacy to s 601GC(1)(b) and must, for that reason, be rejected. Because the power to modify is concerned with the constitution, the focus is on rights created or secured by the constitution itself.[9]
[9]Ibid [98].
With respect, there several problems with that too. To begin with, the right of a member to have a managed investment scheme administered according to the constitution of the scheme is fundamentally the most important right of membership. Without it, all other rights of membership, as well as the continuance, success and security of the scheme, would be at the whim of the responsible entity. Consequently, according to the natural and ordinary use of language, the expression ‘members’ rights’ in s 601GC(1)(b) is in our view calculated to embrace a members’ right to have a managed investment scheme managed in accordance with its terms.
Next, it logically does not follow from recognition that members’ rights include the rights of members to have a managed investment scheme administered according to the constitution that any change to the constitution will be adverse to members’ rights. As J D Phillips J (as his Honour then was) explained in Eagle Star Trustees Ltd v Heine Management Ltd,[10] amendments can be made to a trust deed which are plainly not adverse to members’ rights; such as, for example the abbreviation of the period for redemption of units from 90 days to 60 days.
[10](1990) 3 ACSR 232.
Thirdly, the focus of s 601GC(1)(b) is upon the rights created or secured by the constitution. So far, however, from implying that the expression ‘members’ rights’ is not directed at members’ rights to have a managed scheme administered according to the constitution, the focus on the constitution bespeaks an intention that ‘members’ rights’ include the rights of members to have a scheme administered according to the constitution.
There are then the two reasons which Barrett J gave in Re Centro Retail for rejecting Gordon J’s reasoning in Re Premium Income. First, his Honour said that to do otherwise would entail acceptance of the argument which he had rejected in ING; and, secondly, he invoked what he described as the distinction drawn in the company cases between something that affects members’ rights as such and something that affects the enjoyment or value of members’ rights or their capacity to turn them to account. As his Honour put it:
The provision prescribing the price at which units may be issued is a provision that qualifies the power of the responsible entity to issue new units. Proper and valid exercise of the power entails issue at the prescribed price and at no other price. The responsible entity has discretion whether to accept an application for units but no discretion as to the issue price. To say that modification of the constitution to change the prescribed issue price affects the ‘rights’ of existing members is therefore to accept the proposition that members have a ‘right’ to see the scheme administered and operated in accordance with the constitution. For the reason stated at [27] above,[11] that, in my opinion, is not a ‘right’ of members in the relevant sense.
The absence of any such ‘right’ to have the scheme administered and operated in accordance with the constitution and the distinction drawn in the company cases between something that ‘affects’ members’ ‘rights’ as such and something that affects enjoyment or value of members’ rights or their capacity to turn them to account leads me to the conclusion that, despite what was said in the Premium case, it is open to the applicant, as responsible entity, to form, on reasonable grounds, the opinion that no ‘right’ of members will be affected by the proposed addition to the constitution of the provision allowing a single issue of units at the particular asset value price and not at the market-based price prescribed by the existing provisions. In fact, the applicant, with the benefit of legal advice given to it, has already formed that opinion. It is recorded in minutes of a meeting of its directors held on 27 September 2011. The corollary is that ‘members’ rights’ will not be ‘adversely affected’ by the modification of the constitution; and the responsible entity has, on reasonable grounds (that is, that no ‘right’ is affected) so decided.[12]
[11]‘Such a characterisation would … entail acceptance of an argument considered but rejected in the ING case’.
[12]Ibid [35]–[36].
With respect, neither reason is persuasive. As to the first, as has been explained, the analysis in ING proceeded from the false premise that, if ‘members’ rights’ included the rights of members to have a scheme administered in accordance with its constitution, every alteration to the constitution would be adverse to members’ rights. As Eagle Star shows, that is not so.
As to the second, the distinction between something which affects members’ rights as such and something which merely affects the value or enjoyment of members’ rights, although plainly a valid distinction, is essentially beside the point. Given that a member has a right to have the scheme conducted according to the scheme’s constitution, a change to the constitution must inevitably change the nature and quality of that right as such, as opposed to the value and enjoyment of the right. It does not detract from that conclusion that if, without altering the constitution, something is done in accordance with the constitution which affects the value and enjoyment of the right, as opposed to the nature and quality of the right as such, one would say that the doing of that thing does not affect the nature and quality of the right as such.
Adversely affected
Contrary to the thrust of 360 Capital’s second contention, the judge did not find that the changes purportedly made on 31 May 2012 and 5 July 2012 were adverse to members’ rights. As was earlier noted, what his Honour held was that, given that the purported changes would unquestionably have removed, curtailed or impaired the existing rights of members and so been unfavourable and disadvantageous, the directors’ failure to consider the adverse effects of the purported changes on members’ rights was ‘sufficient to deny the responsible entity the modification power’.
As his Honour put it:
The entire basis on which the Board concluded that the rights of unitholders would not be adversely affected is the legal advice of Counsel and Clayton Utz. Although para 4.2(b) of the Minutes refers to ‘… the matters considered by the Board’ there is no indication whatsoever what these matters were and no director has deposed to what these matters were.
The advice of Senior and Junior Counsel and Clayton Utz proceeds on the basis that the proposed amendments would not affect members’ rights primarily because unitholders did not have a right to have the scheme administered in accordance with the Constitution and any dilution of the proportionate interest of a unitholder would only affect the value of the unitholder’s interest in the Fund. The advice of Clayton Utz is relevant in two other respects:
(a) In para 2.12 the following is stated:
Prior to making the Amendments, the Responsible Entity and its Board will need to have formed the view and be satisfied that the Amendments will not adversely affect the rights of unitholders and will benefit, and are in the best interests of, unitholders in the Fund. The reasons for this view should be documented.
(b) In para 2.9 the following is stated:
We note that the law in respect of the application of s 601GC(1)(b) of the Corporations Act is not settled and is in a state of flux. This is evidenced by the fact that the Centro Case (which is a decision of the Supreme Court of New South Wales) clearly departs from the case of Premium Income Fund Action Group Inc v Wellington Capital Ltd [2011] FCA 698 (Wellington Case), a recent (albeit earlier) judgment of the Federal Court of Australia. In our opinion, under the reasoning applied in the Wellington Case, the Amendments (as defined in para 2.10 below) would require member approval. There is a risk that a court in a subsequent matter may apply the reasoning in the Centro Case, the Wellington Case or, for that matter, some other reasoning. However, as the Centro Case represents the most recent judicial authority in respect of s 601GC(1)(b) of the Corporations Act, we do not believe it is unreasonable for the Responsible Entity to consider the Amendments in the context of the Centro Case.
The Minutes do not disclose any relevant or adequate consideration of precisely what the rights were before the proposed modification, how the modification would change those rights and in particular, why such change would not be adverse. There is no consideration of cl 5 (the real right) and how and to what extent the 360 Notes would affect members rights under cl 5 and in particular, cl 5.2(a). No cogent reason was given as to why cl 5 and in particular, cl 5.2(a) did not create any rights in favour of members. The basis of the decision and rationale are absent. On the evidence, the Board did not reasonably consider that the change would not adversely affect members’ rights. Rather, the Board appears to have approached the matter mechanically. Legal advice, with important qualifications (see para 60) was accepted without discussion, deliberation or analysis.
The position adopted by the Board was that rights could not be adversely affected because there were no such rights and that because of legal advice to such effect, this was a reasonable consideration of the matter. However as I have endeavoured to explain, this approach does not recognise the rights referred to. It is these rights that have clearly been adversely affected and the power to modify was not enlivened because, in the sense explained in the authorities, there was no proper consideration of the matter.
In this case, members accrued rights[13] are affected unless 360 Capital RE reasonably considered otherwise. It has not done so and consequently the power to modify is not available and the 31 May 2012 Supplemental Deed Poll was not effective to modify the Constitution.[14]
[13]The judge added in a note: In my opinion, it is necessary to consider the rights of members in the context of a trust and a trustee and beneficiary relationship and excessive reliance should not be placed on the suggested comparable rights of shareholders, particularly in relation to the concept of enjoyment of rights being distinguished from the alteration of rights.
[14]Reasons [59]–[63] (citations omitted).
There is no error in that. In the language of Gordon J in Premium Income, the purported changes would have removed or impaired existing rights in a way that was disadvantageous to unit holders.
Board’s failure reasonably to consider
Under cover of the 360 Capital’s fifth contention, counsel for 360 Capital contended that the judge was wrong in law in holding that, because the board based its decisions as to adverse effect on legal advice that the proposed changes would not affect members’ rights, the board failed to consider whether the proposed changes would adversely affect members’ rights. In counsel’s submission, the power to amend afforded by s 601GC(1)(b) does not depend whether the board is correct in its view that a proposed change does not adversely affect members’ rights. It is enough that the board has acted reasonably on the basis of legal advice.
Up to a point, we accept that submission. Other things being equal, it is reasonable for a board to act on the basis of legal advice on questions of law and, in this case, it may be accepted that it was not unreasonable for the board to conclude, as they were advised, that the proposed changes would not affect members’ rights. It does not follow from that, however, that the board ought be taken to have considered that the proposed changes did not adversely affect members’ rights. As the judge in effect held, no more follows from it than that, because the board were incorrectly advised that the proposed changes would not affect members’ rights, they did not turn their consideration to the question of whether the effect of the proposed changes would be adverse to members’ rights.
Of course, it was for the board and not the court to determine whether, in the board’s reasonable opinion, the proposed changes would adversely affect members’ rights. But, to adopt and adapt the language of Dixon J from another context,[15] that does not mean that that the board’s determination is unexaminable. If the board did not address itself to the question which s 601GC(1)(b) formulates, if the board’s conclusion were affected by a mistake of law, if the board took some extraneous reason into consideration or excluded from consideration some factor which should affect its determination, its conclusion was liable to review.
[15]Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353, 360.
Dixon J was speaking of review in the context of a statutory right of appeal against an assessment of income tax based on the opinion to which he referred. There is no statutory right of appeal as such from a decision of directors under s 601GC(1)(b) of the Corporations Act. But the court has jurisdiction to grant declaratory relief in relation to both the statutory[16] and contractual rights[17] of members, and equitable jurisdiction to grant injunction in aid of legal rights if not also under s 1324 of the Corporations Act. If the board commits an error of law in making a determination under s 601GC(1)(b), it is open to an aggrieved party to seek declaratory and injunctive relief against the consequences of the error.
[16]Ainsworth v Criminal Justice Commission (1992) 175 CLR 564, 581–2.
[17]Australian Football League v Carlton Football Club Ltd [1982] 2 VR 546, 550 (Tadgell J); Mickovski v Financial Ombudsman Service Pty Ltd & Anor [2012] VSCA 185, [38].
As the judge in this case held, correctly, because the board was wrongly advised that the proposed changes did not affect members’ rights, the board proceeded on the basis of a mistake of law and thereby failed to direct consideration to the question which s 601GC(1)(b) posed of whether the effect on members’ rights would be adverse.
It follows that we reject 360 Capital’s first to fifth contentions.
Invalidity of notice of meeting
Finally, under contention 7, counsel for 360 Capital contended that, because the judge was in error in holding that the purported July amendments to the constitution were invalid, his Honour was in error in holding that the Notice of Meeting, Explanatory Memorandum and resolution were also invalid.
It follows from what we have said already about the invalidity of the purported amendments to the constitution that we reject that contention.
Whether 360 Noteholders members of the fund
We earlier referred to the suggestion supported by all counsel that, if we found that the May amendments and the July amendments were invalid, we should remit the proceeding to the Commercial and Equity Division for further trial of the question of whether the 360 Noteholders are members of the fund.
In view of the conclusions to which we have now come concerning the invalidity of the amendments, we accept that the most convenient course is to remit the matter to the Commercial and Equity Division to enable an application to be made for joinder of the 360 Noteholders, or perhaps for joinder of a representative party if that is thought to be preferable, and then for further consideration of the issue of whether the 360 Noteholders are members of the Fund.
When the idea of remitter was first suggested, we were a little concerned that the judge may have become functus officio. Upon reflection, however, it seems to us that, because the relief sought below included a declaration to the effect that the 360 Noteholders are not members of the Fund, it remains for the judge to decide that part of the case. Of course, his Honour has already expressed views about the issue and, because they were not reflected in a declaration or order, it has not been necessary or desirable for us to consider them on appeal. But we do not think that anything yet said by the judge on the point should be regarded as more than dicta expressed without the benefit of argument on behalf of the 360 Noteholders. Accordingly, it does not appear to us that there is anything which would preclude the judge from reconsidering the question in light of these reasons; and certainly nothing of that kind has been suggested.
Conclusion
For those reasons, the appeal will be dismissed and we shall remit the matter to the Commercial and Equity Division for further consideration of the question of whether the 360 Noteholders are members of the Fund.
- - -
7
0