and Macarthur Cook Real Estate Funds Ltd (ACN 126 766 167) in its capacity as responsible entity of the Macarthur Cook Office Property Trust (ARSN 114 263 688) v APN Funds Management Limited(ACN 080 674 479) Acting..
[2013] VSCA 240
•26 September 2013
SUPREME COURT OF VICTORIA
COURT OF APPEAL
| S APCI 2012 0182 | |
| MACARTHUR COOK REAL ESTATE FUNDS LTD (ACN 126 766 167) In its capacity as responsible entity of the Macarthur Cook Office Property Trust (ARSN 114 263 688) | Appellant |
| v | |
| APN FUNDS MANAGEMENT LIMITED (ACN 080 674 479) Acting in its capacity as the responsible entity for the APN Property For Income Fund No 2 (ARSN 113 296 110) | Respondent |
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| JUDGES | NETTLE, REDLICH JJA and HARGRAVE AJA |
| WHERE HELD | MELBOURNE |
| DATE OF HEARING | 8 August 2013 |
| DATE OF JUDGMENT | 26 September 2013 |
| MEDIUM NEUTRAL CITATION | [2013] VSCA 240 |
| JUDGMENT APPEALED FROM | [2012] VSC 262 (Sifris J) |
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TRUSTS AND TRUSTEES — Unit trust — Validity of Units — Whether issue of Units at price less than Issue Price specified by trust constitution pro tanto invalid — In re Turner, Hudson v Turner [1932] 1 Ch 31; Thames Water Authority v Elmbridge BC [1983] 1 QB 570; Mandurah Enterprises Pty Ltd v Western Australian Planning Commission (2010) 240 CLR 409, applied.
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| Appearances: | Counsel | Solicitors |
| For the Appellant | Mr P H Solomon SC with Mr T Clarke | Shanahan Tudhope Lawyers |
| For the Respondent | Mr M D Wyles SC with Mr P D Corbett SC | Hall & Wilcox |
NETTLE JA:
This is the second of two appeals from a judgment given in the Commercial and Equity Division. It concerns the construction of the operative provisions of a Unit Subscription and Put Option Deed (‘the Deed’) made between Macarthur Cook Fund Management Ltd (‘MCFM’), its holding company, McArthur Cook Limited (‘MCL’), and the respondent, APN Funds Management Limited (’APN FM’). One of the questions which the judge below was required to decide was whether MCFM was entitled unilaterally to cancel and extinguish some of the Units in the Macarthur Cook Office Property Trust (‘The Trust’) issued to APN FM pursuant to the Deed. Other issues before the judge are dealt with in my reasons in APN FM’S appeal in Proceeding S APCI 2012 0177. These reasons and those should be read together.
The facts
Between 26 May 2005 and 12 October 2008, MCFM was the responsible entity of the Macarthur Cook Office Property Trust (‘The Trust’). On 12 October 2008, the appellant (‘MCREF’) became the responsible entity of the Trust.
The Trust was established by a deed poll (‘the Constitution’) dated 20 April 2005 and was registered by the Australian Securities and Investment Commission on 26 May 2005 as a managed investment scheme under Chapter 5C of the Corporations Act2001 (Cth).
The Constitution
The Constitution provided that:
2.2 Declaration of trust
The Responsible Entity declares that it will hold the Fund upon trust for the Unit Holders on, and subject to, the terms and conditions of this constitution.
3.1 Beneficial interest divided into Units
The beneficial interest in the Fund is divided into 6 separate classes of Units as follows:
3.1.1 Underwriter Units;
3.1.2 Vendor Units;
3.1.3 Retail Units;
3.1.4 Wholesale Units;
3.1.5 Convertible Units; and
3.1.6. Income Units.
3.7 Interest and rights conferred by Wholesale Units
A Wholesale Unit confers on its registered holder in the Register the following rights and entitlements:
3.7.1 subject to sufficient income of the Fund being available for distribution after payment of all preferential income distributions (if any) to the holders of Underwriter Units, Vendor Units, Convertible Units and Income Units (if any) in accordance with the terms of this constitution and a Product Disclosure Statement, to receive distributions from the Fund ranking equally with the holders of Retail Units, in accordance with the terms of clause 10.2; and
3.7.2subject to clause 3.7.3, Wholesale Units have no special rights to distributions from the Fund either during the term of the Trust or on a winding up;
3.7.3the Responsible Entity may receive a different management fee in respect of the Current Value of Wholesale Units to management fees received in respect of other Units, in accordance with the terms of clause 15.1; and
3.7.4each holder of a Wholesale Unit will, except in respect of the special rights set out in this clause 3.7, have the same rights as the holders of Retail Units including the right to redeem Wholesale Units in accordance with clauses 3.6.4 and 3.6.5 and to receive notices of, and attend in person or by proxy and vote at meetings of Unit Holders in accordance with the terms of clause 17.
3.8 Interest conferred by Units
A Unit:
3.8.1confers on its registered holder in the Register an equal undivided interest in the Fund and Assets as a whole; and
3.8.2does not confer any interest in any particular part of the Fund or in any Asset but only such interest in the Fund and Assets as a whole subject to the Liabilities.
4.1 Application for Units
An Applicant must complete an Application and pay the Issue Price for the Units by way of subscription to the Responsible Entity.
4.3 Issue of Units
Units are created and issued on the later to occur of the Responsible Entity:
4.3.1receiving in respect of fully paid Units the Issue Price for the Units and, in respect of partly-paid Units, the initial instalment for the Units; and
4.3.2accepting the Application.
4.4Issue of Units at Issue Price determined by Responsible Entity – Wholesale Clients
Units may be issued at a price individually negotiated and agreed between the Responsible Entity and a person who is a Wholesale Client, being a price that differs from the consideration otherwise provided for in this constitution only to the extent that the price is less than that other consideration to the extent of lower fees that are payable to the Responsible Entity in relation to the acquisition (Fee Arrangement) if:
4.4.1the Responsible Entity ensures that if fees may be individually negotiated with certain Wholesale Clients, a statement of that fact is disclosed to all Unit Holders by no later than the date of the first communication the Responsible Entity makes to all Unit Holders which is made after the date the Fee Arrangement is first offered;
4.4.2the Responsible Entity ensures that if fees may be individually negotiated with certain Wholesale Clients, a statement of that fact is disclosed in any Product Disclosure Statement used for an offer of Units in the Trust; and
4.4.3the Fee Arrangement does not adversely affect the fees that are paid or to be paid by any other Unit Holder who is not a party to the Fee Arrangement.
4.6 Number of Units created
Subject to clauses 4.2 and 4.3, the number of additional Units which will be created in respect of an Application is the number calculated by dividing the amount of cleared funds received in respect of an Application by the Issue Price for the Units.
4.9 Deposit Advices
No certificates will be issued for Units. The Responsible Entity may send Unit Holders a Deposit Advice. The Deposit Advice is evidence
of title to Units only to the extent that it is consistent with entries in the Register.Absolute discretion
6.6The Responsible Entity has an absolute discretion as to the manner, mode and time of exercise of the powers, authorities and duties conferred on it under this constitution or the Corporations Act.
8.1 Redemption Price
8.1.1A Retail Unit and a Wholesale Unit must only be redeemed at a Redemption Price calculated as follows:
Redemption Price = Current Unit Value, as applicable to a Class of Units – Transaction Costs.
14.1 Retirement
The Responsible Entity:
14.1.1must retire as the Responsible Entity when required to do so by law; and
14.1.2subject to the Corporations Act, may retire as the Responsible Entity at any time.
14.3 Release
The Responsible Entity is released from all obligations in relation to the Trust arising after it ceases to act in that capacity whether because it retires or is removed.
16.1 Responsible Entity must maintain
The Responsible Entity must maintain and keep or cause to be maintained and kept a Register.
20.1 Constitution enforceable
This constitution is executed for the benefit of the Unit Holders and is legally enforceable as between the Unit Holders and the Responsible Entity.
Relevant definitions were contained in clause 29.1 of the Constitution:
First Product Disclosure Statement means the first product disclosure statement issued by the Responsible Entity relating to the raising of capital from the public for the purposes of enabling the Responsible Entity to acquire the Initial Portfolio to form part of the Fund.
Initial Equity means the amount sought to be raised by the Responsible Entity through the issue of Retail Units and Wholesale Units (and specifically excluding the issue of any Underwriter Units) under the First Product Disclosure Statement (and disclosed in the First Product Disclosure Statement) to enable the Responsible Entity to acquire the Initial Portfolio to form part of the Fund.
Initial Portfolio means the initial portfolio of Real Property identified for acquisition by the Responsible Entity to form part of the Fund and which is specified in the First Product Disclosure Statement.
Issue Price means the issue price for each Unit being:
a) In respect of a Retail Unit and a Wholesale Unit:
i.at the commencement date of the Trust and until the Initial Equity has been raised, an amount of $1.00; and
ii.at all other times, the Current Unit Value plus any Transaction Costs.
b)…
The Product Disclosure Statements
The First Product Disclosure Statement (‘PDS’), dated September 2005, provided that the initial portfolio would comprise of ‘two prominently located office properties with a value in excess of $70 million’ located in Miller Street, North Sydney and Leichhardt Street, Spring Hill, Brisbane. The Initial Equity to be raised was $32.72 million. The Second PDS was issued on 26 September 2006 and applied to a number of funds managed by MCL. Both the First and Second PDS’s stated that:
Pricing will remain at $1.00 per Unit until the initial Equity has been raised. Thereafter, Unit prices will be calculated daily.
The Supplementary PDS to the Second PDS was issued on 4 June 2007. Section 2 recorded that the property in Miller Street, North Sydney had been sold on 26 April 2007 for a price of $69.6 million. It also noted that, as at 4 June 2007, only $18.3 million of the $32.72 million Initial Equity had been raised. Section 3.7 of the Supplementary PDS provided, however, that:
3.7 Unit Pricing
Following the Sale of the North Sydney Property, the unit pricing methodology of the Office Property Trust in respect of retail units and wholesale units will change, with the unit price to be calculated on a daily basis...’
The Deed
On 9 November 2007, APN FM (in its capacity as the responsible entity for the APN Property for Income Fund No. 2), MCFM and MCL entered into the Deed, under which APN FM was issued 5,873,759.26 Wholesale Units in the Trust at a price of $0.87678 per unit (being the then unit price calculated by MCFM on a daily basis).
The issue of the Units to APN FM was provided for in clause 2 of the Deed, as follows:
2 Subscription for Units
2.1 Issue of the Units
MCFM agrees to issue the Units to APN FM (together with the benefits, rights and entitlements attaching to the Units) free from any Encumbrance for the Subscription Price on the terms and conditions of this deed.
2.2 Payment of Subscription Price
The Subscription Price must be paid by APN FM as set out in clause 3.3.
Subscription Price and Units were defined in clause 1 of the Deed, thus:
Subscription Price is $5,150,000.
Units means those units in the Trust issued to APN FM in exchange for payment of the Subscription Price with the number of Units to be issued to APN FM to be calculated by dividing the Subscription Price by the issue price of the Units to wholesale investors on the Completion Date for Subscription. Where units in the Trust are exchanged for or stapled with securities in another entity, Units includes the securities exchanged for or stapled with the securities of the other entity.
Completion of the Subscription was provided for in clause 3 of the Deed, as follows:
3 Completion of Subscription
3.1 Time and place of Completion of Subscription
Completion of Subscription will take place at the registered office of MCFM on the Completion Date for Subscription at 10.00 am or any other time or place agreed in writing by the parties.
3.2 Obligations of MCFM at Completion of Subscription
At Completion of Subscription, MCFM must:
(a) (unit issue) issue the Units to APN FM;
(b)(deliver documents) deliver the unit certificates for the Units to APN FM;
(c) (registration) register APN FM in the Trust’s register of unit holders as the holder of the Units;
(d) (reimbursement) reimburse APN FM for its legal costs in negotiating, preparing and executing this deed; and
(e)(further steps) do all other acts and execute all documents that are necessary to issue the Units to APN FM and to complete any other transaction contemplated by this deed.
3.3 Obligations of APN FM at Completion of Subscription
At Completion of Subscription, APN FM must:
(a) (payment) pay the Subscription Price to MCFM; and
(b)(further steps) do all other acts and execute all documents that are necessary to issue the Units to APN FM and to complete any other transaction contemplated by this deed.
3.4 Simultaneous actions at Completion of Subscription
At Completion of Subscription:
(a)the obligations of the parties under this deed are interdependent; and
(b)all actions that must be performed are taken to have occurred simultaneously on the Completion Date for Subscription but no delivery or payment is taken to have been made until all deliveries and payments have been made.
The Put Option was dealt with in clauses 5 and 6 of the Deed, thus:
5 Put Option
5.1 Grant of Put Option
In consideration for APN FM subscribing for the Units at the request of MCL, MCL grants a Put Option to APN FM on the terms and conditions set out in this deed.
5.2 Exercise
(a) APN FM may exercise the Put Option at any time during the Exercise Period by delivering an Exercise Notice to MCL
(b)If the Put Option is not exercised on or before the Expiry Date, the rights of APN FM to put the Units to MCL under this deed will immediately cease.
5.3 Sale and purchase of Units
On receipt of the Exercise Notice, MCL aggress to purchase from APN FM and APN FM agrees to sell and transfer to MCL the Units (not otherwise purchased by MCL pursuant to this deed) on the terms and conditions set out in this deed.
…
6 Completion of Exercise
Completion of sale and purchase of Units
6.1On the date of a valid exercise of the Put Option pursuant to this deed, MCL and APN FM will for all purposes to be deemed to have entered into a binding and enforceable agreement for the sale and purchase of the Units (not otherwise purchased by MCL pursuant to this deed) which must be completed on the Completion Date for Exercise.
…
The issue for determination
The issue in this appeal is whether the change in unit price from $1.00 per unit to a daily price calculated by MCFM, and therefore the issue of Units to APN FM at the price of $0.87678 per unit, was contrary to the Constitution and therefore invalid.
Before the judge below, MCREF claimed that, despite the sale of the North Sydney Property for $69.6 million, the initial capital raised from Retail and Wholesale Units remained at less than $32.72 million and, accordingly, that the change of issue price from $1.00 per unit to a daily unit price calculated by MCFM was contrary to the Constitution. It followed that the issue of the Units to APN FM at less that $1.00 per unit was ‘invalid’ and that MCREF was entitled to cancel and extinguish what it characterised as the excess units. In turn, it was said, it followed that MCL was not bound under clause 6 of the Deed to repurchase from APN FM any more than 5.15 million Wholesale Units at $1.00 per Unit, as opposed to the 5,873,759.26 Wholesale Units in the Trust at a price of $0.87678 per unit which MCFM had purportedly issued to APN FM.
The judge’s reasoning
The judge rejected those contentions. His Honour reasoned that:
The critical point is whether and, if so, to what extent APN is affected by the issue as to whether the units should have been issued at $1.00 and not $0.87678. APN received units at a price of $0.87678 per unit after careful consideration by the responsible entity at the time. The evidence does not establish that it was aware, or ought to have been aware that the units could only be issued at $1.00 per unit, if indeed that was the case. In fact, the contrary is clearly the position.
As pointed out, the Supplementary PDS to the Second PDS was issued on 4 June 2007. After recording the sale of the Miller Street Property for $69.6 million (see paragraph 12 hereof), the Supplementary PDS specifically stated that the unit pricing methodology would change and that ‘the unit price [was] to be calculated on a daily basis...’ (clause 3.7 of Supplementary PDS). This was well before the prescribed application form was executed on behalf of APN.
Another significant factor is that Mr Dunstan, the Managing Director of MCFM, specifically authorised the change, that is, the methodology in relation to unit pricing and emphatically denied that the units were not validly issued or that there was any breach of trust.
Accordingly, so far as APN was concerned, as at the date of subscription, the unit pricing policy had changed as specifically represented by MCFM in the Supplementary PDS and as endorsed by its Managing Director. On this basis, APN subscribed for units.
To require APN, given the above, to engage in a detailed legal consideration as to whether, given the various definitions and matters referred to in the Constitution, the move to unit pricing on a daily basis was permitted and justified would be to require it to intrude into the internal workings of the responsible entity, something that it is clearly not required, or indeed able, to be done. APN no doubt assumed the validity of the transaction and in particular, the ability on the part of MCFM to issue units at the lower price.
Further, not only was APN entitled to take this approach, it was entitled to rely on significant warranties and representations to the effect that MCFM had the power to issue the units and that by doing so – at the price of below $1.00 – it was not in breach of trust and that the Unit Subscription Deed created valid, legal and binding obligations that did not conflict with any constituent documents.[1]
MCREF contends the issue of units at below $1.00 was not valid. The only valid issue was units at $1.00 and accordingly the unilateral action was merely undertaken to regularise an obvious mistake. The word or concept of mistake is not used or pleaded, nor is any breach of trust admitted. There are a number of difficulties with this submission and I do not accept it.
Although it is alleged that the issue of units at a lower price was not valid, the units were issued at such price after careful consideration and a revised Holding Statement recording the price per unit was provided. It is this action that needs to be considered. Invalidity is too general and imprecise a basis on which relief can be based in this context.
It is important to identify the precise legal basis of the defence [to APN FM’s claim that MCFM had no right to cancel the units or alter the register]. The approach taken by MCREF focuses entirely on its own position and the interests of unit holders, which indeed it must, but not in isolation and to the exclusion of a proper consideration of the precise legal relationship between the responsible entity and APN.
Ultimately, it is a contractual relationship. Accordingly, it is necessary to assess how the law of contract deals with the matter given the undisputed facts set out above.
The contract is valid and performance has taken place. Everyone has acted for many years on the basis that APN acquired the units at the lower price. On what basis then can the subject matter of the contract – the units – be adjusted or varied. The only suggested basis is invalidity. Although this may be the explanation and accord with an internal analysis, it is not sufficient as a basis for vitiating or amending a partly performed contract. It may be that the true basis is that the issue of units at less than $1 per unit was a mistake. As pointed out, this has not been pleaded and, in any event, a defence based on mistake has a number of difficulties.
It is not contended that the issue of units at below $1 was illegal or without power in the traditional sense. There was clearly power to issue units at the lower price. In fact this was specifically contemplated if circumstances permitted. If the responsible entity (MCFM) was wrong about whether the circumstances had occurred, certain consequences may follow but it is not as if there were no units to issue because they were unavailable. This is not a case where a subscriber subscribes for D class shares in a company and there are no D class shares and the subscriber is purportedly issued with non existent D class shares.
Rather, in this case, the issue of units was valid, the units existed and there was power to issue them. If the price was wrong, and the units could not be issued at less than $1.00 at the relevant time, there was, in my opinion, a failure by MCFM to adhere strictly to the terms of the Trust in carrying out its duties. This failure constitutes a breach of trust. MCFM should not have issued the units at this price. By using the word invalid, MCFM has elided the real issue, namely that it was in breach of trust.[2]
Unless APN was aware of the breach of trust or participated in it (which the evidence does not establish if indeed there was a breach), it is not liable and is entitled, as an innocent third party, to insist on the bargain that it struck. It stands outside and is unaffected by any breach of trust.
If indeed there was a breach of trust[3] as the Blake Dawson advice suggests, such breach does need to be remedied. However the remedy does not involve unilaterally reducing[4] the units of an innocent third party without its knowledge or involvement. Usually a trustee is required to make good any breach, not an innocent third party.[5] [6]
[1]Clauses 7.1(d), 7.3(c) and 7.3(e) of each of the Put Option and the First Amendment. Clauses 8.1(d), 8.3(c) and 8.3 (e) of the Second Amendment.
[2]In its letter to Unit holders dated 4 November 2010, MCREF refers to alleged breaches of trust. Given the purported remedial action taken, the word ‘alleged’ is meaningless. Further, [MCL’s solicitors’] advice also refers to a breach of trust.
[3]I have proceeded on the basis most favourable to MCL and MCREF, namely that the Units should not have been issued at the lower price. It is not necessary or desirable to assess the matter any further or deal with the accuracy of [MCL’s solicitors’] advice. For the reasons given, any breach of trust or failure to comply with the constitution does not affect APN.
[4]I have not dealt with the decision and approach to the implementation of the reduction in Units held by APN and generally. There was not inconsiderable argument directed to the approach and methodology. It is neither necessary nor desirable to deal with these matters and I do not propose to do so. However, I very much doubt that clauses 6.2.2 and 6.6 of the Constitution authorises the unilateral reduction in the circumstances of this case.
[5]Re Dawson [1996] 2 NSWLR 211; Bartlett v Barclays Bank Trust Co Ltd [1980] 1 Ch 515; Target Holdings v Redfern [1996] 1 AC 421.
[6]Reasons [75]-[89].
The appellant’s contentions
Counsel for MCREF attacked the judge’s reasoning at several levels. He submitted that his Honour was in error in holding that the issue was ultimately a contractual question; erred in not deciding whether the Deed imported the terms of the Constitution; and was wrong in concluding that MCFM had ‘power’ to issue the Units to APN FM at a price of $0.87678 per unit. In counsel’s submission, it followed from clause 4.6 of the Constitution and the definition of Issue Price in clause 29.1 of the Constitution that the purported issue of the Units at less than $1.00 per unit was a nullity.
By and large I accept those submissions. Beginning with the first, although it is true that the relationship between APN FM and MCFM was contractual, it does not follow that the issue of Units at less than the Issue Price was valid. Plainly, when the Deed referred to Units it was referring to Units created in accordance with the Constitution and, axiomatically, the only power to issue Units to APN FM was the power conferred by the Constitution. Hence, it is to the Constitution that one must look to determine whether the Units purportedly issued to APN FM were valid.
Secondly, although as a matter of principle it may not follow from the fact that Units are invalid that a contractual obligation to buy the Units is unenforceable, in this case it is necessary to bear in mind that MCL’s obligation under the Deed was not in terms an obligation to purchase all of the Units purportedly issued to APN FM but rather to purchase the ‘Units’ as defined by the Deed. And the Units as defined by the Deed were the number of Units obtained by dividing the sum of $5.15 million by the Issue Price as defined by the Deed; not the number of Units obtained by dividing $5.15 million by some other amount which MCFM might have thought was the Issue Price as defined by the Deed. More specifically:
1) As may be seen from the terms of the Deed and the Constitution earlier set out, the agreement constituted by the exercise of the put option was in terms for APN FM to sell to MCL and MCL to buy the ‘Units’ at the ‘Exercise Price’.
2) The ‘Units’ were defined in the Deed as those Units in the Trust which were issued to APN FM in exchange for payment of the subscription price of $5.15 million ‘with the number of units to be calculated by dividing the Subscription Price [of $5.15 million] by the issue price of the Units to wholesale investors on the Completion Date for Subscription’.
3) The ‘issue price of the Units to wholesale investors on the Completion Date for Subscription’ was defined in clause 29.1 of the Constitution as follows:
(i)at the commencement date of the Trust until the Initial Equity has been raised, an amount of $1.00; and
(ii)at all other times, the Current Unit Value plus any Transaction Costs …
4) According to the same clause, ‘Initial Equity’ meant the amount sought to be raised by the Responsible Entity through the issue of Retail Units and Wholesale Units … under the First PDS (and disclosed in the First PDS) to enable the Responsible Entity to acquire the Initial Portfolio to form part of the Fund. And the ‘Initial Portfolio’ was defined to mean the initial portfolio of Real Property identified for acquisition by the Responsible Entity to form part of the Fund and which is specified in the First PDS.
5) The First PDS identified the ‘Initial Portfolio’ as ‘two prominently located properties in New South Wales and Queensland’ with ‘a value in excess of $70 million’ and identified the ‘Initial Equity to be Raised’ as $37.72 million. It also stated that:
Under this PDS, the Initial Equity will be utilised to settle the Properties and redeem Borrower Units (if any), with excess funds being utilized to reducing the Trust’s gearing to 60% and, thereafter, to the purchase of additional properties’. [sic]
6) It is not disputed that the amount of $32.72 million had not been raised by the Completion Date for Subscription – at that stage a little more than $18 million had been raised – and nothing like $32.72 million was ever subsequently raised. The management of MCFM seem to have taken the view that the sale of the New South Wales property at a very favourable price was as good as raising $32.72 million through the issue of Retail and Wholesale Units, or at least rendered the initial raising of $32.72 million by the issue of Units no longer necessary or desirable. So it was that MCFM began to publish a Current Unit Value which was less than $1.00 per Unit, and consequently set the price of $0.87678 per unit at which MCFM purported to issue Units to APN FM.
7) It remains, however, that since the initial equity of $32.72 million was not raised by the issue of Retail and Wholesale Units, and since there was no power in MCFM to vary the Constitution (and it did not purport to do so), the ‘issue price of the Units to a Wholesale investor on the Completion Date for Subscription’ remained at $1.00 per Unit.
8) According to the terms of the Deed, it follows that the number of Units which MCL was obligated to purchase from APN FM upon exercise of the put option was the number of Units obtained by dividing the Subscription amount of $5.15 million by $1.00, namely, 5.15 million Units; not the number obtained by dividing $5.15 million by the supposed Current Unit Value of $0.87678 which the management of MCL adopted following the sale of the New South Wales property.
Thirdly, while the evidence leaves no doubt that ‘everyone … acted for many years on the basis that APN FM acquired the units at the lower price’, that is essentially beside the point for the purposes of assessing validity of the Units issued to APN FM. Granted that conduct or an assumed conventional basis of dealing may found an estoppel,[7] and an estoppel may prove significant inter partes in the respects identified later in these reasons, MCFM could not by conduct or otherwise confer on itself a power to issue Units beyond the power to issue Units conferred by the Constitution.
[7]The Commonwealth v Verwayen (1990) 170 CLR 394, 444 (Deane J).
Counsel for APN FM argued that, upon the proper construction of clause 4.3 of the Constitution, the raising of $32.72 million was capable of achievement either by the issue of Retail and Wholesale Units or by profits realised upon the sale of Trust investments. Alternatively, he contended that, according to the proper construction of the clause, the management of MCFM was entitled to take the view that, by reason of the favourable sale of the New South Wales property, it was no longer necessary to have regard to clause 4.3.1.
I reject both submissions. Taken in conjunction with the definition of ‘Initial Equity’, clause 4.3 is clear that the initial equity of $32.72 million is to be raised by the issue of Retail and Wholesale Units and, because of the expressed intention that excess funds should be used to reduce ‘the Trust’s gearing to 60% and, thereafter, to the purchase of additional properties’, the First PDS to which the definition of ‘Initial Equity’ refers is clear that the requirement so to raise $32.72 million continues to be relevant despite the raising of capital by other sources such as capital sales. To hold otherwise would circumvent the rights of existing unit holders to require that Units not be issued at less than $1.00 per Unit until the $32.72 million had been raised by the issue of Units.[8] That must be avoided.[9]
[8]Target Holdings Ltd v Redferns [1996] AC 421, 434; Premium Income Fund Action Group Inc v Wellington Capital Ltd (2011) 84 ACSR 600, [38] (Gordon J); 360 Capital Ltd v Watts (2012) 91 ACSR 328, 335 [29].
[9]See and compare Westfield Management Ltd v AMP Capital Property Nominees Ltd (2012) 247 CLR 129, 143-144 [46] (French CJ, Crennan, Kiefel and Bell JJ).
Fourthly, I consider that the judge was in error in saying that it was not contended that the issue of the Units to APN FM at a price of below $1.00 per Unit was without power ‘in the traditional sense’. As has been observed, his Honour gave as an example of what he meant by the expression ‘in the traditional sense’ the sort of invalidity which results from directors of a company purporting to allot and issue D class shares when there are no such shares in the authorised capital of the company. Plainly, MCREF did contend that the issue of Units to APN FM at a price of less than $1.00 per share was invalid ‘in the traditional sense’. Its case was and is that there was no power under the Constitution or otherwise for the Responsible Entity to issue Units at less than the Issue price of $1.00 per Unit and, accordingly, that the purported issue of Units to MCFM at a price of less than $1.00 was invalid.[10]
[10]Cloutte v Storey [1911] 1 Ch 18, 30; Pitt v Holt [2012] Ch 132, 171 (Lloyd LJ); aff’d on appeal, Pitt v Holt [2013] 3 All ER 429.
Fifthly, although it is true that the issue of Units at less than the Issue Price was ‘specifically contemplated if circumstances permitted’, namely, those prescribed by clause 4.4 of the Constitution, it does not follow that there was power to issue Units at a discount in circumstances other than those prescribed in clause 4.4 of the Constitution. APN FM pleaded that the circumstances of this case fell within that category. But that claim is untenable. There were no fees payable by APN FM to MCFM in relation to the acquisition of the Units.
Sixthly, while the judge recognised that the circumstances of this case might not fall within the category prescribed by clause 4.4, and accordingly that ‘certain consequences may follow’, his Honour concluded that the fact that MCFM may have been mistaken as to the Issue Price would not affect the validity of the issue of Units to APN FM. More precisely, his Honour considered that, while the issue of Units at less than the Issue Price may have been a breach of trust, the issue was nonetheless valid. For the reasons which follow I respectfully disagree.
Invalidity of Units
Clause 4.3 provides that Units ‘are issued’ upon the later to occur of receipt of the Issue Price and acceptance of the Application. Counsel for MCFM submitted that the word ‘are’ implies that Units are created and issued automatically upon the later to occur of the two events mentioned, without need of further action on the part of MCFM. Correlatively, whatever MCFM might purport to do by way of creating and issuing Units pursuant to clause 4.3 is beside the point. According to the natural and ordinary meaning of clause 4.3, the only way in which Units can be created is by the occurrence of the two events specified in paragraphs 4.3.1 and 4.3.2 and, therefore, in this case, the only Units which were created upon completion of the Deed were the number of Units calculated by dividing the amount of $5.15 million paid by APN FM by the Issue Price. To the extent that MCFM might have purported to create and issue, or at least to recognise the creation and issue of, a greater number of Units, its actions were ineffective.
There is force in that submission. Although it was not quite the way in which the matter was argued below, it presents as one of the two possibly correct approaches to the construction of clause 4.3. The other is to read ‘are’ as ‘are to be’ or as authorising the Responsible Entity to issue Units where the two requirements of paragraphs 4.3.1 and 4.3.2 are satisfied. That is supported by the fact that all of the surrounding clauses of the Deed are drafted in terms of the Responsible Entity issuing units, as opposed to Units issuing automatically. As such, they reflect the general conception of ‘issue’ (as it is used in relation to shares and kindred interests) as an act of putting the share or interest holder in control of the allotted share or interest as by the entry of the share or interest holder’s name on the register or by some other step by which title is completed.[11] It is unlikely that clause 4.3 was intended to operate in any other way. Possibly, the difference in language between clause 4.3 and surrounding clauses implies the need for an expressio unius construction of the former. But, as Toohey and Gummow JJ said in PMT Partners Pty Ltd (In Liq) v Australian National Parks & Wildlife Service,[12] that is a maxim of construction which must be applied with care. In my view, ‘are issued’ in clause 4.3 should be construed in context[13] as a short hand descriptor of ‘are to be issued’.
[11]Central Piggery Co Ltd v McNicoll (1949) 78 CLR 594, 599 (Dixon J); HAJ Ford, Principles of Company Law, 1st Ed, [806].
[12](1995) 184 CLR 301, 320; Lewison & Hughes, The Interpretation of Contracts in Australia, 4th Ed, [7.06].
[13]Metropolitan Gas Co v Federated Gas Employees’ Industrial Union (1925) 35 CLR 449, 455 (Isaacs and Rich JJ); Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290, 299.
The result according to either of those constructions, however, is the same. Depending on which is adopted, Units are either not created or issued, or alternatively are forbidden to be created and issued, unless both of the events specified in paragraphs 4.3.1 and 4.3.2 have occurred. Either way, if and to the extent that the two events have not occurred in relation to a purported issue of Units, the issue is beyond power. Here, the two conditions of issue were satisfied in respect of so many of the Units purportedly issued to APN FM as was to be calculated by dividing the consideration of $5.15 million by the Issue Price of $1.00 per Unit, namely, 5.15 million Units. Beyond that, the issue was without authority.
The question then is whether the purported issue of Units was wholly invalid or only invalid pro tanto. In my view, it is the latter. As counsel for MCREF submitted, the position is not dissimilar to the result which occurs where there has been an excessive exercise of a power of appointment.[14] More generally, the underlying principle extends to a variety of private and public powers. As the English Court of Appeal observed in Thames Water Authority v Elmbridge B.C.[15] (with respect to the different but comparable context of a statutory authority acting in excess of power), the question whether an excessive exercise of power is wholly or pro tanto invalid is to be decided in each case by looking at the action purportedly taken in pursuance of the power and, beyond that, to whether there was power to do some part of what was purportedly done. If what is beyond power and so invalid and unenforceable can be isolated and identified with precision from what is within power, the latter should be treated as valid.
[14]In re Turner; Hudson v Turner [1932] 1 Ch 31, 37 (Maugham J); cf Bishop of Bangor v Parry [1891] 2 QB 277, 279; Thomas & Hudson, The Law of Trusts (2nd Ed, 2011) [18.12]; Power v Ekstein [2000] NSWSC 905, [24] (Windeyer J).
[15][1983] 1 QB 570.
The essential point, as Stephenson LJ remarked, is that:
The principle of enforcing the enforceable as far as possible – of making the thing work and not be lost – applies alike in private and public law. In private law it will generally be applied where what is agreed is partly illegal, in public law where what is ordered is partly ultra vires … it may be easier to apply the principle where the contract or resolution intrinsically identifies the illegal or ultra vires matter …[16]
[16]Ibid 585-586 (Stephenson LJ), 580 (Dunn LJ), 583 (Dillon LJ); DPP v Hutchinson [1990] 2 AC 783, 810 (Lord Bridge of Harwich); Mandurah Enterprises Pty Ltd v Western Australian Planning Commission (2010) 240 CLR 409, 426 [48] (French CJ, Gummow, Crennan and Bell JJ), cf 429 [60] (Hayne J).
In this case, there is no difficulty in looking at the number of Units purportedly issued to APN FM and beyond that to what power there was to do some part of what was purportedly done. The number of Units purportedly created and issued was the number obtained by dividing $5.15 million by the supposed issue price of $0.87678 cents, namely, 5,873,759.26 and, looking beyond what was purportedly done, it is apparent that there was power to create and issue the number of Units obtained by dividing $5.15 million by the actual Issue Price of $1.00, namely, 5,150,000. Accordingly, it is possible to identify that the purported issue was ultra vires to the extent of the difference of 723,759 between the 5,873,759.26 Units which was purportedly issued and the 5,150,000 Units which the Responsible Entity was
empowered to issue. Hence, it was only the number of the difference, 723,759,[17] which was and is invalid.
[17]On the reasons below at [71] it is incorrectly shown as 729,759 units.
The consequences of invalidity
In the proceeding below, APN FM sought a declaration that it was entitled to be registered as the holder of 4,733,248.31 Units, orders for the rectification of the register to reflect that entitlement, and specific performance of the unit sale and purchase agreement (constituted by its exercise of the put option) in respect of those 4,733,248.31 Units. That was the number of Units obtained by subtracting from the 5,873,759.26 Units purportedly issued to APN FM under the Deed some 1,140,511 Units subsequently re-sold by APN FM to MCL under the Deed. The judge ordered that the register of the Macarthur Cook Office Property Trust be so amended to record that APN FM’s unit-holding in the Macarthur Cook Office Property Trust is 4,733,248.31 units. But his Honour declined to order specific performance of the unit sale and purchase agreement because he found that APN FM was out of time in completing the agreement and because, time being of the essence of its obligations, MCL was entitled to refuse to complete.
If I am correct about the invalidity of 723,759 of the 5,873,759 Units purportedly issued by MCFM to APN FM under the Deed, and there have been no other relevant changes since the judge handed down his decision, the register should now be amended to record that APN FM’s unit-holding in the Macarthur Cook Office Property Trust is 4,009,489 (5,150,000 minus 1,140,511). For the reasons given in APN FM’s appeal in Proceeding S APCI 2012 0177, I am also of the view that the judge was wrong in holding that APN FM was out of time for completion. Subject to the considerations yet to be considered, it would follow that the sale and purchase agreement is enforceable but only in respect of 4,009,489.26 Units.
Other Issues
As it turns out, the issues are more complex than that. They include that previous re-sales of Units by APN FM were made on the basis of an assumption apparently shared by both sides that all of the 5,873,759 Units purportedly issued by MCFM to APN FM were validly issued, and that the issue price and exercise price was $0.87678 cents rather than $1.00. Similarly, trust distributions were made by MCFM to APN FM on the basis that all of the 5,873,759 Units apparently issued to APN FM were validly issued. In order to place the parties in the position in which they should properly be may well require a complex accounting.
Estoppel and breach of warranty
As I mentioned earlier in these reasons, there is also a question of whether and to what extent MCL is estopped from contending that the number of Units validly issued to APN FM was less than 5,873,759.26. Estoppel cannot affect the validity or invalidity of any of the units, but it might preclude MCL from resisting an order for specific performance of the sale and purchase agreement in respect of invalidly issued units;[18] or, alternatively, MCFM and MCL may be liable in damages for breach of warranty of validity in respect of invalidly issued units.[19]
[18]See and compare Prime Sight Ltd v Lavarello [2013] UKPC 22, [40]-[44] (Lord Toulson) and see Michael Bryan, Unifying Estoppel Doctrine: the Argument for Heresy, MULS 18 Sept 2013.
[19]See for example, In re Bahia and San Francisco Railway Co (1868) LR 3 QB 584, 597; Balkis Consolidated Company v Tomkinson [1893] AC 396, 405 (Lord Herschell).
Counsel for APN FM submitted that, if the issue of validity were determined in favour of MCREF, the matter should be remitted to the judge for consideration of whether, for the purposes of giving effect to MCL’s buy-back obligations under the Deed, MCL was estopped from denying the validity of the units; and, further or alternatively, whether MCFM was liable in damages to APN FM for breach of warranty as to the validity of the Units. MCREF countered by pointing out that
APN FM had not pleaded estoppel, or damages for breach of warranty as such, and contended that it was too late now for APN FM to amend its claim.
In my view, justice requires that the issues of estoppel and breach of warranty be remitted to the judge for determination. Although APN FM did not plead estoppel as such, or damages for breach of warranty, it did plead that MCFM represented and warranted to APN FM that it had power under the Constitution to enter into and observe its obligations under the Deed, and that APN FM claimed damages for breach of agreement,[20] and, in the course of closing addresses before the judge, counsel for APN FM relied heavily on the fact that all parties concerned had acted towards each other on the basis that the Units were validly issued and they were bound to each other in terms of the Deed as if the Units were valid. As counsel said:
Whilst post contractual conduct does not aid the construction of the express terms used, the conduct of MCL does allow the court to infer how a reasonable commercial person would objectively interpret the Deed in order to give it effect and bring about the bargain which was the subject matter of the contract. This was a commercial contract concluded between commercial entities the intent of which was to provide a loan to MCFM which was to be repaid by MCL within fifteen months. Commercial negotiated extensions, or any roll over of that facility were agreed but it was not the commercial intent of the parties that contrived technicalities could be utilised by MCL to avoid a liability to repay.
[20]Further Amended Statement of Claim dated 25 November 2011, pars. 10(f) and 36 and Prayer paras D and E.
Evidently, those submissions led the judge to observe that the parties had acted towards each other as if all of the 5,873,759.26 Units purportedly issued to APN FM had been validly issued and, at least in part, caused his Honour to conclude that MCL’s buy-back obligations were enforceable in respect of all of the Units purportedly issued to APN FM. Thus, to require his Honour now formally to decide the issues of estoppel and damages for breach of warranty (on the basis of the evidence adduced below) would not lead to any undue or unjust departure from the way in which the case was conducted below.[21] As Stephen, Mason and Jacobs JJ stated in Leotta v Public Transport Commission:[22]
Now, and for many years past, a plaintiff does not fail by being refused leave to amend or through failure formally to apply for amendment, where the evidence has disclosed a case in the cause of action fit to be determined by the tribunal of fact. Particularly is this so when the action finally determines the rights of the parties in the cause of action.
[21]Dare v Pulham (1982) 148 CLR 658, 665; Maloney v Commissioner for Railways (NSW) (1978) 52 ALJR 292, 294; cf Water Board v Moustakas (1988) 180 CLR 491.
[22](1976) 9 ALR 437, 446.
Certainly, that statement must be read in context. As Mason CJ, Wilson, Brennan and Dawson JJ later observed in Water Board v Moustakas,[23] an opportunity to assert a new case at another trial should only be granted in very exceptional cases, only where the interests of justice require it and only where such a course can be taken without prejudice to the defendant. But in this case it seems to me that the circumstances are very exceptional. For despite APN FM calling all of the evidence which one might suppose could have been called in aid of an estoppel and breach of warranty; and despite counsel for APN FM submitting most if not all of what one might suppose could have been said in support of an estoppel and breach of warranty; and despite the judge seeming to decide the case effectively on the basis of an estoppel, albeit without characterising the issue as such, there was no amendment to the pleadings and the judge did not formally decide on the issue of estoppel or breach of warranty.
[23](1988) 180 CLR 491, 498.
Furthermore, so long as the judge’s further consideration of those issues is confined to the evidence previously adduced below, neither the amendment of the pleadings (to allege the kind of estoppel and breach of warranty which was in effect argued below) nor a formal determination by the judge of the issues of estoppel and breach of warranty (on the basis of the evidence adduced below) would be productive of improper prejudice to MCL. The only effect of it would be potentially to expose MCL to a liability from which it might otherwise have unfairly escaped.
Following the conclusion of oral argument, MCL submitted a written undertaking that it would not contend that any later claim by APN FM based on
estoppel or breach of warranty would be barred by Anshun estoppel.[24] Practically speaking, however, it is distinctly possible that this action will finally determine the rights of the parties with respect to the Deed.
[24]Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589, 602-603 (Gibbs CJ, Mason and Aickin JJ).
Conclusion
In the result, I would be disposed to declare that the number of Units in respect of which APN FM is entitled to be registered as holder is 4,009,489.26 Units and to remit the matter to the judge for further consideration of estoppel, breach of warranty, specific performance of the agreement constituted by APN FM’s exercise of the option and damages for breach of agreement.
Before finally remitting the matter to the judge, however, I would hear counsel further as to the orders which should be made, including any orders for the amendment of pleadings and the form which the amendment should take.
REDLICH JA:
I have had the benefit of reading in draft the reasons of Nettle JA. I agree that the purported issue of wholesale Units in the trust by the appellant was ultra vires the Constitution of the Trust to the extent of 723,759 units, being the difference between the Units which the appellant purported to issue and the Units which as the responsible entity it was empowered to issue. I would therefore allow the appeal and make the declaration which Nettle JA proposes. Subject to further submissions as to the precise terms of any order that is pronounced, I also agree that the matter should be remitted to the judge for further consideration of the issues to which Nettle JA has referred.
HARGRAVE AJA:
I agree.
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