Australian Securities & Investments Commission v Lewski & Anor; Wooldridge & Anor; Butler & Anor; Jaques & Anor; Clarke & Anor

[2018] HCATrans 213

[2018] HCATrans 213

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne  No M79 of 2018

B e t w e e n -

AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

Appellant

and

WILLIAM LIONEL LEWSKI

First Respondent

AUSTRALIAN PROPERTY CUSTODIAN HOLDINGS LIMITED ACN 095 474 436 (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (CONTROLLERS APPOINTED)

Second Respondent

Office of the Registry

Melbourne  No M80 of 2018

B e t w e e n -

AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

Appellant

and

MICHAEL RICHARD LEWIS WOOLDRIDGE

First Respondent

AUSTRALIAN PROPERTY CUSTODIAN HOLDINGS LIMITED ACN 095 474 436 (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (CONTROLLERS APPOINTED)

Second Respondent

Office of the Registry

Melbourne  No M81 of 2018

B e t w e e n -

AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

Appellant

and

MARK FREDERICK BUTLER

First Respondent

AUSTRALIAN PROPERTY CUSTODIAN HOLDINGS LIMITED ACN 095 474 436 (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (CONTROLLERS APPOINTED)

Second Respondent

Office of the Registry

Melbourne  No M82 of 2018

B e t w e e n -

AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

Appellant

and

KIM SAMUEL JAQUES

First Respondent

AUSTRALIAN PROPERTY CUSTODIAN HOLDINGS LIMITED ACN 095 474 436 (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (CONTROLLERS APPOINTED)

Second Respondent

Office of the Registry

Melbourne  No M83 of 2018

B e t w e e n -

AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

Appellant

and

PETER CLARKE

First Respondent

AUSTRALIAN PROPERTY CUSTODIAN HOLDINGS LIMITED ACN 095 474 436 (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (CONTROLLERS APPOINTED)

Second Respondent

KIEFEL CJ
BELL J
GAGELER J
KEANE J
EDELMAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 17 OCTOBER 2018, AT 10.04 AM

Copyright in the High Court of Australia

____________________

MR J.T. GLEESON, SC:   May it please the Court, I appear with MR R.D. STRONG and MS C. VAN PROCTOR for the appellant in each matter.  (instructed by Australian Securities and Investments Commission)

MR B.W. WALKER, SC:   May it please the Court, in M79 of 2018, I appear with my learned friends, MR M.S. OSBORNE, QC and MR J.P. TOMLINSON, for the first respondent, Mr Lewski.  (instructed by SBA Law)

MR N.C. HUTLEY SC:   If the Court please, I appear with my learned friend, MR R.G. CRAIG, in M80 for Dr Wooldridge, in M81 for Mr Butler and in M82 for Mr Jacques.  (instructed by SBA Law; Millens and DLA Piper Australia)

KIEFEL CJ:   In M83, there is a submitting appearance for the first and second respondents.  Yes, Mr Gleeson.

MR GLEESON:   Your Honours, there are four issues before the Court.  They include the notice of contention.  In our view, the notice of contention is the logically anterior issue to the matter before you, and I propose to deal with it first if that is convenient.  It concerns section 601GC(1)(b) of the Corporations Act which, inter alia, is at page 106 of volume 1 of the joint authorities. 

Under section 601GC(1)(a) the members are given a plenary power to amend the constitution by special resolution which might be thought to be the ordinary case.  Under paragraph (b), the responsible entity, which I will refer to as the RE, is given a special power which arises only if a particular precondition is met, namely that the RE has formed a relevant opinion, namely that the change will not adversely affect members’ rights and that that opinion has been formed reasonably.

The critical question then is:  what is the scope of the expression “members’ rights” in this provision.  In the present case, we would first refer to section 601GA(2), which establishes a basal rule that an RE is not entitled to any fees unless they are specified in the constitution and they are available only in relation to proper performance of duty.  So, the basal rule means the RE cannot get anything unless it is in the constitution and that, we submit, reflects a correlative right in the members, a right not to have the RE deplete the fund by taking fees unless they are in the constitution.  So that is one source for the relevant right that we contend for. 

The second source, if your Honours have the book of further material at page 202, in clause 25.1 the RE had a power to vary the deed subject to a proviso that it could not vary it in its own favour ‑ that is in (a)(i).  In addition, it had to comply with the Corporations Act – that is paragraph (b).  So members had a right from the outset that the RE would not be using this contractual power to amend to benefit itself.

Your Honours, the pre‑existing position in respect to fees is summarised by the trial judge at page 45 of volume 1 of the core appeal book in paragraph 65.

EDELMAN J:   Sorry, what page was that?

MR GLEESON:   Page 45 of volume 1.  This is the ex ante position.  There was one general fee and four special fees.  The general fee, the annual management fee, was paid on a particular percentage of the gross asset value and the gross income and then there were four special fees which might arise if particular circumstances existed.  Several aspects of the special fees are worthy of note.  The first is that the takeover fee was linked to the – that is paragraph (d) ‑ was linked to a percentage of the gross price paid by the acquirer, so if, for instance, the inquirer went to 21 per cent of the shares they would pay 2.5 per cent of the gross price of that acquisition.

A second feature is that there is no fee payable in the event the scheme is listed, and a third feature is there is no fee payable in the event the members exercise their right to remove the trustee.  That right of removal is enshrined in the Act itself in section 601FM.

It is a statutory right and it is further enshrined in the constitution in clause 22.4.  I will just give the reference; it is page 190 of the joint materials.  The point being that that right in the pre‑existing world was available for exercise without any fee attached to it.  Against that background, your Honours, in terms of our outline of propositions, our core case which is paragraphs 1, 2 and 3, is that there were at least two specific members’ rights which were affected by these amendments.

The first right is the right to ensure the RE takes the fees stipulated in the constitution and no more, or as we have expressed that slightly more generally, a right not to have the trust fund diminished by payments which are not authorised by the existing constitution.  The second more specific right is the right under 601FM to vote by majority to remove the RE without facing the prospect of having to pay a fee.

If they were relevant rights, within section 601GC(1)(b), then it is common ground that neither the RE nor the directors ever gave consideration to whether the amendment would be adverse to those rights.  One place where you can see that that is clear as a matter of fact, in volume 1 of the core book at page 210, paragraph 663, when the matter was raised with the manager by ASIC, the manager admitted that it had taken the view that there was no member’s right affected and therefore logically there could not be any adverse effect.

So, assuming they are relevant members’ rights, the RE never formed an opinion that there was no adverse effect and, therefore, did not form a reasonable opinion.  Your Honours, that is the core case on the notice of contention.  The only other matter really is a matter of elaboration which is paragraphs 4 and 5 of our outline which is the divergence which has opened up, in some of the authorities, on the concept of members’ rights. 

Our primary submission on that divergence is that ASIC can identify very specific members’ rights – the ones I have just been to – and on any view of the dispute between the authorities they will be members’ rights under 601GC(1)(b).  However, in order that the Court has ASIC’s submissions on that issue raised by the authorities, could I go to the cases - and there are some four or five cases I need to go to. 

Could your Honours, in the joint book of authorities at volume 2, start with the decision in Premium Income Fund, tab 18 – (2011) 84 ACR 600 – Justice Gordon’s decision. You will see in that case at paragraph [33], her Honour set out the steps which are involved in a 601GC(1)(b) case and we submit there is no dispute in any of the authorities about those steps at a level of generality. They are the same steps I have identified this morning.

What her Honour then did in paragraph [34] was to identify the rights before the modification and she was seeking to identify contractual and equitable rights under the deed following the decision in Smith.  At the end of paragraph [34], she identified the specific right and the right involved in that case was that each unit holder had the right to have new units issued in the scheme only on the terms fixed by the scheme. 

So that if their interest in the scheme was to be diluted, they had a right not to have it diluted except in accordance with the scheme.  Your Honours can see there the type of change being dealt with, namely, an amendment to the scheme to allow new units to be issued at a different price to that currently provided for in the scheme.

Her Honour, in the balance of the reasoning, at [35] through to [40], was very careful to identify that these were rights she was identifying and not merely effects on value.  If new units can be issued to other people, at a price not currently specified in the constitution, that is an effect on your current right to have the constitution administered under the rules that are in it.  Now, once it was a relevant member’s right – you will see paragraph [42] that the right was simply not considered, like the present case and because it was not considered it fell foul of 601GC(1)(b).

I might just note, your Honours, in paragraph [42] you will see the seeds of an argument which may be the type of argument that appealed to Justice Barrett in the rival line of authority.  You see in argument that the list was limited to:

rights of members regarding votes, distributions, information access, interests in scheme property etc”.

What I will call the rival argument is that the only members’ rights which are relevant under GC(1)(b) are those which fall into that narrow, what might be described as member‑facing category where they are things you actually do as a member – you vote, you receive a distribution, you receive information, et cetera, as opposed to the broader type of right that Justice Gordon was dealing with, which was a right to have the provision of the constitution upheld such that new units were not issued at a different price to the one that was in the constitution.

Now, the last observation about this case is you will see that Justice Gordon at paragraph [30] set out Justice Barrett’s decision in ING Funds Management at length including [98] of Justice Barrett which is at the top of page 609 of the report.  That is the paragraph that in the later cases has caused the problem.  But if one was freezing the frame simply at premium income, it is fair to say that Justice Gordon considered that she was identifying a right consistently with the principles espoused by Justice Barrett, not that she was opening up some radical dispute in the legal principle.  So, our submission is that everything in Premium Income Fund is correct.

Could I next go to that first decision of Justice Barrett which is ING Funds Management which is at the previous tab.  The nature of the change in this case is important.  The change was essentially a freezing or a deferral of the right to redeem units in cash and, in terms of what Justice Barrett held, he held that was a relevant member’s right and it was adversely affected if you pushed back the period at which members can get their money, you are affecting their rights. 

So, his ultimate reasoning on this point, on the particular change before him, we again submit is correct and that is the reasoning which you will find particularly at paragraphs 121 to 126.  Indeed, at the end of 121 in a manner which is fairly similar to our case, his Honour has identified a composite right of the members

to be paid money, in return for surrender of units, within the specified period. 

That is the position before.  In 123 he says, if you extend the time for payment, that is an effect on the right and 126, it is adverse – can only be adverse. 

Now, in that part of the reasoning, we submit Justice Barrett has got it 100 per cent correct because he is indicating that when you identify a member’s right, you may have to look at the various aspects of it including, for instance, who can get paid, when they can get paid, and so on, so no problem with any of that. 

Everything that Justice Barrett said in the case is obiter.  That is clear from paragraph 84.  So, where then does the problem arise, if a problem arises in this case?  It arises between 92 and 98 – paragraphs 92 and 98 and where, with respect, Justice Barrett has started to go wrong in this judgment and gone further wrong in the next judgment is you will see at 92 that he has started the frame by looking at cases about rights attached to shares.

He is there dealing with a very different part of the Corporations Act which is shares being property or choses in action:  what are the provisions of the law which give the holders of shares the right to have a special vote if the rights attached to the shares are varied?  For reference, those provisions go back a long way.

They are currently found in section 246B to 246G of the Corporations Act and, for instance, in the simplest provision, which is 246B, if a company does not have a procedure for varying rights attached to shares, then they can be varied only by special resolution.  So it is a protection arising in cases where rights are attached to shares.

Where his Honour, with respect, has started to go wrong between paragraphs 92 to 95, is looking at these company law cases and he is importing the concept of members’ rights in terms of rights attached to shares into the radically different concept of a registered scheme where, as the Court has elucidated in a number of cases, the members are pooling their interests in a trust arrangement and one of their central rights as beneficiaries, both under the statute and at a trust law, is to have the trust performed in accordance with its specified terms.

So paragraphs 92 to 95 are heading in the wrong direction.  There is nothing wrong with 96 because his Honour there is simply setting out the general task, which is fine.  In 97 he raises a question and says he does not need to answer it and then the real problem starts with paragraph 98.

If your Honours would read paragraph 98, it seems to have either a logical difficulty at its heart or his Honour is in fact postulating a right so general as to be meaningless.  What his Honour said is, if you the member’s right as a right to have the scheme:

operated and administered according to the constitution as it stands.  If that is so, any modification –

that invaded that right – that is, any change – would arguably be adverse and then you could never make a change and that would deny GC(1)(b) of its work to do.

Now, either his Honour has made a logical error, which was then pointed out in 360 Capital in the Full Court here, that this is not so because you can still have changes to that right which may be adverse or non‑adverse, and the example given was a change which brings forward the redemption date as opposed to extending the redemption date, that would be a change to the right but it would not be adverse and so it could be permitted; or, if his Honour is not making a logical error, he seems to be postulating a right at a level so general as to be of no use.  He seems to be postulating a right ‑ and Mr Hutley has referred to this in his written submissions – to have the perpetual maintenance of the constitutional status quo.

If that is the sort of right his Honour had in mind, then it may be the logical difficulty disappears because any change to the status quo is an invasion of that right.  However, that is not the right obviously that is relevant.  It is not the right that Justice Gordon was contemplating.  It is not the right the 360 Capital contemplated.  So, it is that simple paragraph 98 which is the source of the later problems, your Honours.

If you could go to the next decision of Justice Barrett’s, which is at tab 20, Re Centro Retail (2011) 255 FLR 28, you will see at paragraph 22 that the change was broadly similar to the type of change that was considered in Premium Income.  It was a change to the price at which new units would be issued.

At paragraph 27 ‑ this is a very difficult paragraph.  Mr Santamaria is making a submission that is trying to build off paragraph 98 of ING and he says that a member cannot have:

a “right” today to insist that new units not be issued at any time in the future except at the issue price –

and then says in parentheses:

(there can be no doubt, of course, that there is a right today to insist that units issued today be issued only in accordance with the constitution as it stands today).

Now, what was Mr Santamaria putting there?  Whatever it was, it seems that Justice Barrett accepted it and you can see that from paragraph 35, last sentence where he says:

For the reason stated at [27] –

there is no relevant members’ right.  Now, the best we can make of it is Mr Santamaria was contrasting, without being too ad hominem, Mr Hutley’s right to the perpetual maintenance of the constitutional status quo, which he says is not a right, with on the other hand a narrower right that of course the constitution as it exists today, you have a right to have it honoured today.

Now, somehow as between those two rights, one said not to be a members’ right and the other said to be a members’ right, Justice Barrett has got to the conclusion in paragraph 35, contrary to Premium Income, that somehow you can amend a central provision of the constitution which tells you no new units will be issued except at a certain price, put in a different price and somehow not be affecting a members’ right.

Now, the best we can make it is if your Honours read the first sentence of 35, Justice Barrett describes the relevant provision as one which “qualifies the power” of the RE “to issue new units”.  And it may be what he is saying is that any provision which is expressed as a restriction upon what the RE can do, can never create a member’s right.  If that is what he is saying, it is clearly wrong because it is a restriction upon the RE which creates a correlative right in the members to have the restriction honoured. 

EDELMAN J:   In the lower level of particularity, what examples could there be of an amendment to the constitution that would not, in your submission, amount to an amendment that would affect members’ rights?

MR GLEESON:   It is difficult to think of many examples.  One we have come up with is you could have a provision which introduces a wholly new right on a subject that is not previously covered.  So a provision which said, for instance, the RE now has a duty to provide monthly reports on subject X, Y and Z.  It simply does not traverse any territory that is covered by an existing provision.  But any provision which is of this character which qualifies the power of the RE, we would submit creates a correlative right to have the restriction on it. 

Your Honours will see in paragraph 36, and it is the last thing that I will say about the case, that when his Honour brought together his reasons, they involve, firstly, this proposition, the paragraph 35 proposition, and the distinction in the company law cases.  And the company law cases, his Honour had gone into at considerable length in this judgment, you will see between paragraphs 28 through to 33, particularly 33, where his Honour is carrying over company law concepts of what are or are not rights of members.  So, our submission would be that the two reasons drawn together in 36 are both insufficient to justify his Honour’s conclusion. 

The final case in the saga is in volume 1 of the materials.  The Court of Appeal in Victoria in 360 Capital, it is at tab 6, reported at (2012) 36 VR 507. It commences at paragraph 36. The court says in a summary way, they agree with the decision in Premium Income in preference to Centro.  I might just note in that second sentence of paragraph 26, Justice Gordon’s decision in Premium Income is described in perhaps overly compendious terms as holding:

that a member’s rights to have a managed fund managed and administered in accordance with the constitution –

are members’ rights within a provision.  Her Honour may not have expressed it in that compendious term.  As I showed you, she was dealing with the right in its specificity, in that case a right not to have new units issued other than at the price in the constitution.

But, what probably follows from that 26, is that this is the Court of Appeal correctly telling us this is how we are to understand this right to have the constitution managed and administered in accordance with its terms.  It is a right – a foundational right – which then sees more particular effect in particular rights in the deed.  It is certainly not the unhelpful right to have the perpetual maintenance of the constitutional status quo that the Court of Appeal is attributing to Justice Gordon or commending. 

All of the reasoning of the Court we embrace all the way through to paragraph 45 as explaining why Justice Barrett’s approach should be rejected, particularly paragraphs 40 and 41 which explain this right in the manner I have indicated, namely, it is the foundational right which then gives rise to all the more specific rights in the scheme.  We embrace 41 which is pointing out what, on one view, is a logical fallacy in Justice Barrett’s view and we embrace 43 which rejects the analogy with the company law cases. 

For completeness, there is one slip that we need to point out in paragraph 39 where the Court says:

In holding that the change would not adversely affect members’ rights –

Of course, Justice Barrett in that first case, ING, ultimately held it would adversely affect their rights.  So, the word “not” could be struck through.

In the present case, the decision of both the trial judge and the Full Court on this issue is correct.  If I can just give two references, firstly, in the trial judge, volume 1, at pages 209 to 211.  You will see at 209, at the very foot of the page, his Honour is identifying the right at the more specific level, as per paragraph 1 of our outline.  And at 211, at the end of paragraph 665, he is describing it at the more general level.  Then, at 667, he brings the focus back to the more specific level and he gives some of the reasons why the right was in play and was adversely affected.

So, it is an illustration that it is possible to look at the right at what the Court of Appeal calls the “foundational level” or at the more specific level, either will lead to the same result.  In the Full Court’s judgment here, which is at volume 2, the matter is dealt with at 577 to 581, particularly 581, paragraphs 232 to 235.  The “logical fallacy” is pointed out in 233 and it is probably fair to say the Full Court has placed more emphasis in its reasoning on the foundational right as opposed to the more specific rights but they both lead to the same result. 

GAGELER J:   Does the “specific right” that you refer to in paragraph 2 of your outline fit with the “foundational right”?  You seem to be referring there to an unfettered statutory right.

MR GLEESON:   It is a statutory right which is unfettered, in fact, in the ex ante world and it becomes fettered in the post‑world and that right is a members’ right.  Whether it traces back to the foundation or whether it sits next to it, either would be sufficient for the way we are putting it.  But the statute has said one of the things you can do as members is remove the RE.  Under the constitution you are signed up to, you can do it without pain.  Under the new constitution you have to suffer a pain if you do it.  That is a fetter on a right.  Your Honours, that was all I was going to say on the notice of contention, unless there are other matters at this stage?

EDELMAN J:   Would it be right to say that the foundational right and the specific right, in one sense, not really different rights just that the specific right is an example of where the – or is the application of the power to compel the responsible entity or trustee to do its duty?

MR GLEESON:   Yes, we would agree with that.  That explains, perhaps, the reasoning in Premium Income which has focused on the specific as an illustration of the general.  Your Honours, could I explain where the appeal then goes?  If we were wrong on the notice of contention, grounds 1 and 3 disappear and ground 2 is the only territory left.  If we are right on the notice of contention, all three grounds arise.

So could I then go to ground 1 and ask your Honours to return to section 601GC.  There is a radical difference between the trial judge and the Full Court on what happens if the RE does not form the necessary opinion.  The trial judge, who thought the matter was pretty straightforward and only needed a few sentences said that the power given to the RE to amend the scheme has an essential precondition attached to it, which is that you must reasonably form a certain opinion.

If the precondition does not exist, the RE has no power to amend and therefore everything that you did was a nullity.  The constitution remained, the constitution that was previously there, and every provision of the Act operating upon the constitution operated on that pre‑existing unchanged instrument.  And, specifically, to take an example, if one looks at section 601FC and 601FD for the duties of the RE and the directors, under FC(1)(k) one of the central duties is to:

ensure that all payments out of the scheme property are made in accordance with the scheme’s constitution and this Act –

and the constitution means the constitution unamended because the power to amend never arose.

And, similarly, in respect of 601FD(1)(f), one of the duties on the directors to do the things a reasonable person would do to ensure the RE complies with the constitution relates to that unamended constitution.  There are many, many other provisions which refer to the constitution and, every time, it means the unamended constitution.

The Full Court approached the matter, it seems, from the opposite end, which is to say, going back to 601GC(2), because there is a duty to lodge the amendment – and the amendment cannot take effect until it is lodged – that evinces a statutory intention that whatever you lodge, howsoever you lodge it, becomes the constitution upon which the Act operates for a period of time.  The period of time is indeterminate.  It exists until someone finds out there is a problem, gets to court, and gets an order striking down the amendment.

Now, the full implications of this radical argument are only partly teased out in the respondent’s submissions but they seem to include these effects, if I could just identify them.  The first effect seems to be that if and when you get to court and you persuade a court, as it is said, to strike it down, the court cannot do so retroactively.  All the court can do is prospectively say, for the future the constitution reverts to the form it should always have been in.

The reason that is critical to the respondent’s argument is that what they want to achieve is that for the whole of the period until the court intervenes, the duties of the RE and the directors become duties to uphold the constitution as lodged, not the constitution in law and, therefore, they will not be guilty of contraventions by paying away moneys on the faith of the lodged document as opposed to the constitution in law.  What this is all about is saying it is up until the court intervenes, the RE and the directors are immunised from what would otherwise be contraventions.  So, that is one consequence of it.

The next consequence is that within the statutory scheme all provisions for damages which hang off contraventions will also be deprived of any work because the contravention cannot be made out.  Can I give your Honours an example of two provisions in that category?  The first is section 1317H.  That is a power to order a person to compensate a corporation or the scheme for damage suffered if the person has contravened a relevant provision. 

So, on our view, where the RE or the directors wrongly allow the document to be lodged without power, exposing themselves to contraventions, there are damages remedies that can hang off those contraventions.  On the respondent’s view there will never be a contravention in that period until you get to court so this provision has no work to do.  Another provision in a similar category is section 601MA which is a very powerful remedy allowing a member who has suffered loss or damage because of conduct that contravenes the law to recover that loss or damage.

Now, can I show your Honours in the orders made by the trial judge how this point matters.  The orders are found in volume 1 of the core book at pages 380 to 381 and it is particularly orders 5 and 7 and to a lesser extent order 3 that hang off this ground of appeal.  What happens under orders 5 and then 7 which is the same effect, is there is a finding of contravention of 601FC(5) by reason of contravening 601FC(1)(k) in that the RE failed to ensure the payments were made out of scheme property in accordance with the constitution.

So, that order is good, on the trial judge’s reasoning, because the constitution in law was never amended because of the lack of power and the result of it being amended was the RE breached that duty under 601FC(1)(k) to uphold the constitution.  On the argument the respondents are putting to the Court, unless someone has got to the Court and struck the thing down there is no contravention because you are entitled to act on the constitution as lodged. 

What that means in the facts of the present case is, on the Full Court’s view, orders 5 and 7 must go because they are based on a wrong conception of the constitution.  In another case where people sued in time for damages, they could have relied upon these contraventions to get relief under the provisions I have shown the Court.  So, that is what we would say is one large implication of the respondent’s approach.

A second implication is that if you return to 601GC(1)(b), most of the respondent’s argument focuses on (b), which is what happens if the RE acts without power.  But one must immediately contemplate that there could equally be cases under (1)(a) where there is a lack of power.  A special resolution may appear to have been passed but may be invalid for want of a quorum, want of a proper vote and so on. 

The immediate question thrown up by the respondent’s argument is, does their concept, which we call “interim validity”, apply only in the (b) category or does it apply in the (a) category?  For logical consistency, you would think it must apply in the (a) category also because their primary justification is so‑called certainty.  If something is lodged that is what people think is the constitution.  It would be terribly uncertain if the RE, in fact, had to uphold the constitution in law.  If that is the justification it must also apply to (a). 

So we are creating, on the respondent’s case, a universe that, whatever is lodged, whatever be the lack of power behind the lodgement, lodgement equals the constitution until the Court tells us otherwise. 

A further implication of the respondent’s case, which is not teased out, is is this a special rule for registered, managed investment schemes or is this rule meant to apply to all corporations.  If the Court looks at the equivalent provisions for corporations which are 136 to 140 of the Corporations Act, one can see there are some similarities and some differences to the provision in 601GC. 

A difference is that there is only one route to amendment which is subsection (2), that is special resolution of the members, so there is no equivalent of 1(b).   There is a requirement for lodgement in subsection (5), within 14 days after it is passed and a difference is that the members can bring it into effect prior to the 14 day period. 

So the critical similarity is with corporations and, perhaps unsurprisingly and going back a long, long way, there is also a mechanism for public lodgement of the constitution, so the same issues arise.  What happens if an amendment without power, wrongly finds its way onto the record. 

Now, the respondents do not say whether they contend that interim validity applies with corporations as well.  If the purpose is certainty, one might think perhaps it should.  ASIC’s searches of the cases, which are reasonably thorough, have never found any case in the area of ordinary corporations where this concept has been embraced namely, whatever gets on the public register is treated as valid until it is set aside.  So that is a further aspect of it that has to be contemplated. 

The next aspect, and perhaps the killer blow to this proposition, is a textual one, where – where in the Corporations Act do you find the definition or the language saying whenever you see constitution read that as the thing lodged unless and until the court strikes it down.  It is an extraordinarily large implication, very difficult to square with any of the text.

Your Honours, the next matter it has to grapple with, and the Full Court really has not given this attention with respect, is the role of sections 1322 and 1324 – sorry, 1322.  Probably the reason why there are no cases that have embraced the notion of interim validity is that the corporations law through long history has had its own internal procedure for dealing with this type of problem.  It is the procedure which the court dealt with in Beck v Weinstock rather recently, which is in the authorities, so the Court will be familiar with it. 

But the critical thing is this is the section that deals with this type of problem and it deals with it in two ways.  Firstly, under subsection (2) there is a statement that proceedings are not invalidated for procedural irregularity unless the Court forms a positive opinion.  Now, that is the automatic denial of invalidation to many, many things that might otherwise go wrong in a process.  So in a case where a special resolution of members is passed but the quorum is not met, or the votes are incorrectly counted, and it can be said the irregularity was merely procedural, you look to 1322(2). 

Mr Walker’s submission say, but the whole of 1322 is about matters that are procedural irregularities, the failure to form the opinion under GC(1)(b) could never be a mere procedural error.  That is wrong because when one goes to 1322(4), which is the positive need to seek an order declaring the matter not invalid by reason of a contravention, and when one looks at the preconditions to the orders under (6), under (6)(a) there are three alternative first preconditions.  One is it is procedural but the alternative is honesty or that it is just and equitable and then there is the additional requirement of no substantial injustice. 

So, it is possible - it certainly would never have been this case and it was never argued in this case quite rightly - it is possible to conceive of a case where some failure in the formation of the reasonable opinion might justify the Court under subsections (4) and (6) relieving against it.  It is possible to contemplate such a case.  There is a mechanism for it in the Act.

But what this shows is one of the real vices in the Full Court’s decision is that instead of forcing a party who wants relief for failure to comply with restrictions on power to go through these hurdles and prove it is justified in all the circumstances, instead you simply say whatever is lodged is the constitution.

Now, the thing lodged may be there for any range of reasons from the most minor deficiency through to incompetence through to conscious wrongdoing.  On the argument the respondents are making, as long as it is lodged, that is the constitution and everyone must act on it, including most bizarrely, as per the present case, the people who have brought about the problem, that is, the RE and the directors.  They are somehow told that they are entitled to act on the document which reflects their own failure to comply with power. 

So, your Honours, there is a little more to say about ground 1 but in broad terms, they are the types of themes which we submit show that the Full Court has gone very wrong on this point and that declarations 5 and 7 ought to be reinstated.

What I was then proposing to do was just to show your Honours in the reasons of the Full Court there are two sets of reasons where the more specific errors occur, if that is convenient.  In volume 2, commencing at page 581, at paragraph 236 you see the argument put by the respondents.  This seems to be the stark version of the argument:  whatever is lodged is lodged.  People will look to that thing as the constitution.  At 237:  otherwise the purpose would be undermined if the scheme had to be administered in accordance with the constitution in law.

Your Honours will note, at about line 20, in arguing for the statutory purpose case, the argument is certainty will become illusory if there is any possibility of a court making a determination that has retrospective effect.  That seems to indicate that this is at the core of the argument the Full Court is considering and ultimately adopting that, when the court gets to have its say, it can never make an order that retrospectively or, perhaps more correctly, retroactively adjudicates that the constitution has always been in its true form and that there have been contraventions by the RE and the director.  You will see in 238 another version of the contention:

until struck down by a court, the Constitution as lodged . . . was the Constitution of the Trust. It followed that when resolutions were passed and other steps taken in 2007 and 2008 to pay fees to APCHL, in accordance with the Amended Constitution, those resolutions and other steps were valid and authorised.

Now, your Honours will know that in Mr Walker’s submissions he is trying to step back a little from interim validity.  He says that is not quite what is going on here; there is something a little more subtle than that.  But it is pretty clear that the argument the Full Court was being asked to consider and adopted was an argument about validity and authorisation.  The thing lodged, by reason of the Act, gives validity and authorisation to all the steps you take.

So at that point the argument seems to be put at a fairly general level.  If you then go to paragraph 246, the Full Court suggests that perhaps the frame of the question is narrower.  It is about the directors.

It is the Directors’ conduct that is in question in this proceeding, not any entitlement of APCHL or member.

Now, in one sense, that proposition is correct because this case is like the case the Court considered in ASIC v Wellington where the question was whether there was a breach of a legal norm by the RE of the scheme worthy of a declaration but it did not determine the rights between the scheme on the one hand and any person on the other hand.  This case is like that in the sense that obviously there were no members in this action so their rights were not in question.

KIEFEL CJ:   Implicit in this paragraph is that things have moved on from the question that the directors had to address.  Is that right?  The question to which they were required to turn their mind, the moment for that has passed or is it still lingering in the Full Court’s reasoning?  I cannot quite tell.

MR GLEESON:   There is probably elements of both in it, your Honour, because the – and I will have to come to that, obviously, on ground 2 but on this aspect of ground 1 the Full Court seems to be saying something has been lodged, it does not matter why it is lodged, it is lodged.  I am looking at your position as directors, did you contravene the Act on the second and the third occasion?  In one sense, I am saying that may be okay because we are not dealing with rights of members and, equally, this was not a claim to recover from the RE the fees.  It was not a claim for damages or restitution.  It was a claim for a declaration that the law was contravened by paying the fees out. 

Now, in different circumstances, depending on the statute of limitations, obviously, that would have been the next claim.  Not only did you contravene, you should now repay your ill‑gotten gains but that was not the issue.  So, your Honours, just moving through - at 247, the first sentence, seems no difficulty, this is an invalid resolution and no decision at all.  Then, there seemed to be some qualifications - 248, 249, 250 and 251 including two extracts from your Honour Justice Gageler in Kable (No 2) and in Wellington Capital.

It is not clear what support the Full Court is drawing from those cases but perhaps it is leading to an idea that the lodgement of the document was a fact, it was something that happened.  Well, that is obviously true.  But it seems to be leading towards a further idea that somehow the Corporations Act on its proper construction gives a legal effect to that fact, namely, that will be treated as the constitution which must be upheld until the Court tells us otherwise. 

Now, our submission would be nothing in the extracts in 247 to 250 supports the results reached by the Full Court here.  In 251 when the Full Court is dealing with the plurality in Wellington they seem to be slightly mixing up that the issue that was not before Wellington was, as I have said, what were the rights of members or third parties.  The issue was simply was there a breach of a legal norm.  So, nothing in that supports what is happening here.

In any event, after all that preface, if one is to say where is the key reasoning, or ratio, in the first judgment, it appears to be 253 to 257 – particularly 253, where it is said to be “the structure of the Act” which suggests that amendments “once lodged” are “valid until set aside”.  That seems to be the proposition at its most broad and general – valid until set aside.  Then, there is some material in 254, 255 and 256, which is unexceptional, it just sets out, in summary, how the law works.  Then, 257 is, potentially, a narrower view:

in considering the position of the Directors –

in that period:

in the context of the contraventions as alleged, the Court should proceed on the basis that the resolutions made on 19 July 2006 and 22 August 2006 –

coming back to your Honour the Chief Justice’s question, it is both resolutions – 19 July and 22 August – that they are feeding into the frame as things made in existence and forming a basis for subsequent decision‑making. 

So, it seems to be – if on 19 July you resolve to amend but you do not determine when it will be lodged and in August you look at it again and you decide, I will lodge to make it effective – if you pass those two resolutions, even though you have not formed the opinion required by the law and you have no power, the fact that you have done it – and it is then lodged – is the basis for the law to say that thereafter you can treat that as the constitution until a court tells you otherwise.

EDELMAN J:   Is the argument anything more than saying that 601GC(2) creates or embodies, really, a concept of voidability so that an act which is contrary to 601GC(1) is a voidable but not a void act with the effect that a voidance does not make an authorised act unauthorised?

MR GLEESON:   It is probably in that territory.  Then, immediately, one looks at the text of GC(1)(a) and (b) and it is very hard to get voidability out of it because it is saying you can do an amendment in only one of two ways and for the first way it must be done by X.  For the second way, it must be done by Y and Y can only be done if a certain opinion is formed.  Where the parties differ is that, on our view, if you do not form the opinion, or if you do not have a special resolution, then it is void, it is a nullity, and so there is no duty to lodge under subsection (2).  There is nothing to lodge.  So, the fact that you lodge it does not give it any higher status than it otherwise had.

KIEFEL CJ:   That might be a convenient time to adjourn.

AT 11.14 AM SHORT ADJOURNMENT

UPON RESUMING AT 11.30 AM:

KIEFEL CJ:   Yes, Mr Gleeson.

MR GLEESON:   Your Honour, Mr Hutley asked me to ‑ ‑ ‑

MR HUTLEY:   Your Honour, my learned friend, Mr Walker, and I have split the argument.  I will deal with the notice of contention and the 208 point and he will deal with the other two points.  Having regard to my learned friend suggesting that the notice of contention point is logically antecedent, would it be convenient for the Court that I deal with that first then my learned friend deal with the other two arguments, and then I deal with the 208 argument, which is really the ending?

KIEFEL CJ:   Yes, that would be convenient.  Could I ask the parties then is there any revision of the time estimate arising out of this allocation?

MR HUTLEY:   Yes.  I think we will comfortably do it.

KIEFEL CJ:   Will we go on tomorrow is really what I am asking?

MR HUTLEY:   My learned friend thought we would.

MR GLEESON:   I think we still will, your Honour.

KIEFEL CJ:   Yes, very well, thank you.

MR HUTLEY:   And with that in mind, your Honour, would it be convenient if we arranged to have handed up to your Honours our outline now because I may come to it?  I do not know how long my learned friend is going to be.

KIEFEL CJ:   Do not feel rushed, Mr Gleeson.

MR GLEESON:   I feel it is coming from the right.  Mr Hutley is telling me to speed up.  Your Honours, what I have to do at the moment is to complete ground 1 and that is by reviewing the balance of what the Full Court did.  I had got to page 586 of volume 2, paragraph 257.  There is one other paragraph on this topic in the first judgment which is at page 606 and it is paragraph 324.

This is in a different section.  This is in the 208(3) section but the Court is coming back to this same idea of what is the constitution once it is lodged and they refer to certainty again:

certainty (created for the RE, the members and third parties) ‑

So front and centre seems to be an RE, who has acted without power to lodge an amendment, is entitled under the Act to have the certainty that they just blindly act on the lodged document rather than the one in law.  Your Honours will see the last sentence, which we submit is a difficult one because the Court says:

On our view, the consideration in this proceeding is to be based upon the assumption that there was in place the Lodgement Resolution and Deed, which were entitled to be regarded as objective facts that existed as a basis for decision making by the Directors.

So that is the lodgement resolution of 22 August, the deed signed earlier and now dated and lodged, and the directors were entitled to regard them as:

objective facts that existed as a basis for [their] decision making –

One asks:  why?  Is that some proposition of construction of the Corporations Act?  Is it almost some presumption of regularity?  What really seems to be underlying this is some notion because certainty is so critical you must be able to presume what you have done is regular until a court tells you it is not.  Where does that come from?

Now, in the second judgment the relevant part is at page 701 and following, and it commences at paragraph 186, where the court says that they rely upon the reasoning and they identify specific paragraphs [253] to [256] and [324], the one I just went to:

in support of our conclusion that amendments to a scheme constitution, once lodged with ASIC –

we now see an element of doubt creep in:

are ordinarily bound until set aside. 

So, to come back to your Honour Justice Edelman’s question, this is a particular species of avoidability, ordinarily voidable but not always necessarily voidable. 

One asks, where is this coming from, and the answer we are now given is that this is Project Blue Sky and Forrest & Forrest in this Court ‑ dictate this conclusion and two passages from Forrest are there set out.  And then at 187, which we submit, contains a raft of errors, this is said to be the Project Blue Sky application.

The first is that 601GC(1)(b) is read as regulating the exercise of a function already conferred on the RE rather than imposing an essential preliminary exercise to the function.  You just cannot get that out of the text, we submit, of GC(1)(b).  Where has the function been conferred anywhere other than in GC(1)(b) itself? 

Secondly, it is said it does not have a rule‑like quality.  Presumably that is because it says reasonably considers not adverse.  Now, a test based on an opinion being formed on a subject matter on a reasonable basis is, of course, widespread throughout the law, clearly has a rule‑like quality, is capable of adjudication by a court.  It is completely remote from the sort of facts that were in Project Blue Sky where there were very generally worded criteria which, it was said, should be taken into account by the body.  And the third is the public inconvenience that would result of invalidity especially if those affected by non‑compliance were either not responsible for, or not aware of the non‑compliance.

Well, first of all, what about the poor members?  The poor members of the scheme who, in this case, have $30 million paid away when the RE did not have power.  The result of this interim validity argument is that the contravention is washed away because no one got to court in time.  And then what about the RE and the directors?  They are the persons responsible for, and they are aware of all of the facts which concern a non‑compliance and yet they have their contravention washed away as well by this rule.

BELL J:   In relation to subparagraph (b) amendment, a new member who relies on the strength of the lodged constitution, finds to their happiness that they are, in fact, entitled to greater rights under the true constitution. 

MR GLEESON:   Yes.  Yes, and it is the new member who in the – flipped suffers the detriment that they have all these extra fees paid out which should never have been paid out.  Now – which leads to this point.  There could possibly be cases, it is not this one, where a new member might suffer harm because a document was lodged which should not have been lodged.

If there is any such harm, there are a raft of remedies in the Act for the person in that situation. One need only start with misleading and deceptive conduct under the ASIC Act and under the consumer and competition law if someone has been misled. I took your Honours, this morning, to 601MA which is a right for compensation against an RE or a director who has contravened.

If there is a contravention by the RE, that will be the damages remedy you will get.  So, your protection is there through this raft of provisions in the law.  If, for instance, take the extreme case, someone has purchased new units under a constitution wrongly lodged and under the true constitution such units cannot exist, that person would have a claim for restitution in mistaken payment.  So, there is a whole raft of remedies for the category of people the Full Court seem to be worried about, the person who, on the faith of a lodged document, has suffered harm and yet that has not been brought to account.

Your Honours, the balance of this reasoning, at 189, this is the most the Court does to grapple with the other provisions in the Act that might pull in the opposite direction and they refer to 1375 and 1318.  1318 is the provision for relief for a person who has breached duty.  They do not actually refer to 1322, the most critical one and they actually say at line 49:

The provisions allowing for relief are in this way limited in nature. 

We would say deliberately so and what has happened is, by adopting interim validity or voidability, the Court has circumvented the conditions attached to those relief.  190 is important because the first sentence is correct and the second sentence is also correct which is an acceptance that:

the obligations of trustees outside this statutory context would not authorise a trustee to act in accordance with a purportedly amended trust deed if it was invalidly amended.

Now, that is a true statement of trust law so what is happening here is, although this scheme is infused with trust principles as well as additional statutory protections, members it seems are deprived of what would have been one of the most central protections of a trust; namely, the trustee must uphold the deed and one asks why it can only be this notion, well, lodgement certainty and so on.

If your Honours look at 191, this perhaps gives a clue to the notion of the word “ordinarily” back in 186 and this is where the court seems to be weaving in a qualification, well, this is not a case where it is alleged that the RE knew it was acting improperly.  So, it now seems to have in it a concept that perhaps it has to be honest behaviour by the RE in lodgement that generates interim validity but it is not entirely clear but we start to see the court recognising that there may be problems with the breadth of the principle it has stated, and then at 195 which seems to be the wrap‑up, prior to 196.  We seem to come back to this notion:

our initial view . . . would be valid until set aside.

So, it is interim validity.  Why?  Because:

The acts of the Directors as a Board and of lodgement were historical facts.

Then, the court says:

This is not to say the act of lodgement itself gives validity to the document once lodged with ASIC; it just recognises that the document has in fact been lodged.

Now, what is the court saying there?  It is almost impossible to fathom what the court is saying.  The next paragraph, 196, which is the denouement, is as a matter of statutory construct, the reference to the constitution in FC(1)(k) is the constitution as purportedly amended and lodged and acted upon by the directors.

Now, that is the high point of the entire argument, that when you see any reference to the constitution you do not read it as the constitution which exists in accordance with law, you read it as the document purportedly beyond power, amended and lodged and we now have this new element, acted upon.

So, the directors who act without power, who fail to form the necessary opinion, who lodge the document, they act on it, they have self‑levitated the lodged document into the statutory constitution they are bound to uphold, contrary to any principle of trust law, contrary to any indication in the Corporations Act. 

Your Honours, it should be clear from what we have said that the so‑called “certainty” justification just does not come out of the text or the context.  It seems to float in the ether but even the certainty will very readily unpacked.  What happens when someone finds out and goes to court and seeks an interlocutory injunction to restrain the RE behaving in accordance with the arguably invalid constitution?  There is an undertaking that damages have to be given.  Can the RE say, well, I am free to keep paying away until the court grants final relief against me.  Everything would seem to depend upon how soon and when people find out something has gone wrong, particularly when it is the RE that is the cause of the problem.

Your Honours, the final matter upon that first ground of the appeal, there are perhaps two.  The first is that there are, of course, many provisions in the corporations law which expressly preserved the validity of transactions, notwithstanding non‑compliances; they are littered throughout the law but to give you one example, section 260D, which is the financial assistance prohibition, is in a longstanding form where it is the contravention but the transaction is not invalidated.  The same is true of the related party provision, 209.  So, where the Parliament has wanted to preserve validity, notwithstanding non‑compliance, the language is there to be used.

Your Honours, the final matter is in terms of relief on ground 1.  I have explained declarations 5 and 7.  The other declaration which, incidentally, hangs off ground 1 is declaration 3, and that is on page 379.  That is a contravention of FC(5) by reason of a contravention of FC(1)(m) by failing to comply with a duty in the existing constitution – that was the duty under clause 25 – not to amend the constitution in the RE’s favour.

The Full Court went to some discussion as to how clause 25 sat with GC(1)(b).  But, in the present case, once it is established that there was no power under GC(1)(b) there was a straightforward contravention of clause 25, and this declaration becomes appropriate.

Your Honours, at that point I was proposing to leave ground 1 and go to ground 2.  Your Honours will see from our outline that we propose to deal with this in the following stages.  Firstly, under paragraph 8, we seek to identify what was the relevant question which was before the RE and the directors on the critical date, which was 22 August and then, in paragraphs 9 and 10, to identify the duties which were imposed in respect to that decision and to make some submissions that the duties in 601FD on the directors are, in important respects, even stricter than the duties on an ordinary director of a company and that is because of the trust nature of the scheme.

Your Honours in some of the earlier cases have discussed the background of this whole part of the law and of course in earlier days there was a separate trustee and manager of an investment scheme.  One of the changes that was made under this part was to combine those two functions into the one person but to give that person, effectively, the duties of a trustee in respect to everything done as a manager. 

So one of the key features of this case which impressed the trial judge was that the duties in FD, when one looks at them closely, are duties drawn from trust law and are, in important respects, stricter and more objective than the duties on an ordinary director of a corporation.  So I want to deal with those topics.

I then want to, in paragraphs 11 to 14, just briefly survey how the trial judge found breach of duty on 22 August and on the payment date in respect to the four duties which are in issue and then come to the critical difference with the Full Court and exactly why it was that the Full Court said all of those breaches of duty should be overturned and that is paragraph 16.

When I come to paragraph 16, I will be making submissions that some of the Full Court’s reasons for overturning the breach of duty finding seem to be informed by the sorts of reasons that drove the ground 1 interim validity finding.  There seems to be a very strong element in the Full Court’s reasons that if you are directors of an RE and you look at a matter on a given day and you approve it – even though your decision is inchoate because there is something left that you have to do on a later occasion – when you come back to it on the later occasion, the law entitles you to assume that, if I looked at all the questions of power and propriety last time, I do not look at them again and I can treat the second occasion as just an administrative exercise of finishing off the job.

That seems to have in it, also, as I say, the flavour of interim validity from the passages I took you to, including paragraph 324, that somehow because the directors have done it and they have done their best and they are not dishonest, when they come to either complete their decision or to implement it on a later date, the law permits them to act as if they have answered all the relevant questions on the first date. 

The essential difference in principle with the trial judge is to say because of the nature of the duties and their trustee‑like flavour the duties remain for performance until they have been properly performed.  If you, on the first occasion, have not properly thought about the conflict of interest that arises, you cannot on the second occasion say whatever I thought of last time was good enough.  So, that is going to be part of paragraph 16.  Then, finally, I have to separately deal with the payment resolutions where there are separate breaches of duties. 

Your Honours, at the outset of this part of the appeal, there are two issues in Mr Walker’s submissions that I should respond to in‑chief.  The first is his reliance upon the limitation point and the second is his pleading point.  As to the limitation point, it is common ground that ASIC was out of time to allege a contravention in respect to the amendment resolution on 19 July.  However, it was in time to allege contraventions in respect to lodgement on 22 August and a fortiori later payment.

ASIC’s case, logically, was that there were contraventions on each of the three occasions.  The first could not be sued upon.  The second and the third could.  The logic of ASIC’s case was that, if it is correct, when it came to declarations and penalty, that would relate to the second and third occasions but, of course, not the first. 

At the heart of Mr Walker’s case – although it is called a limitations point – seems to be this that, in these circumstances, there could only ever have been one set of contraventions, namely, on 19 July.  The whole of ASIC’s case fails because the only day that it can sue on, which is 19 July, is the one day that it was out of time on.

So, while it is called a limitation point, it has a point of substance between it, which is that, on Mr Walker’s case, the law did not impose any relevant separate duty on the directors or the RE on the second or third occasion.  If one asks why that is, one starts to get back to the interim validity‑type notion – well, because you looked at it on the first occasion, you were entitled to assume everything was okay on the second and the third.  

The second point is the pleading point.  There are numerous references in Mr Walker’s submissions and in Mr Hutley’s written submissions that the case found by the trial judge and supported by us here is somehow outside the pleading.  That is not so. 

Could your Honours go to the book of materials.  The pleading commenced at page 256 – I will try and do this shortly.  Perhaps like most pleadings it was not perfect but it was serviceable for the task at hand.  This is how it operated.  At page 259 at paragraph 13 there was a plea about the 19 July meeting and at 14 a plea about the 22 August meeting and critically at paragraphs 20, 21 and 22 there was an identification of several features of an amendment to the constitution of the sort in question which would attract duties on the RE and the directors. 

So the critical plea is in 20, whether the amendments gave a benefit to the RE, which is pretty obvious, they disadvantaged the members, which is tolerably obvious, and they were not in their best interests, which was tolerably obvious, and 21 pleaded by reason of those facts:

consideration of . . . whether or not to lodge –

So that is a plea directed to 22 August, a date that is in time:

involved a conflict between the interests of the members . . . and the interests of –

the RE.  So that is an assertion that a conflict existed on 22 August.  Why?  Because all the matters in paragraph 20 still existed and then 22 is a plea that each of the resolutions in 13 and 14 were adopted without the directors first considering or sufficiently considering all the matters they had to consider.

So the case was that the conflict existed at all times up to and including 22 August.  You had two occasions to think about it and on neither occasion did you do any of the things which the law required of a director of an RE.  That led to paragraph 23, which also relates to both resolutions, and paragraph 25, which is the conclusion of this part of the pleading, is that the:

lodgement . . . was not effective to amend -

Inter alia, that relies upon GC.  So this is part of the case saying in all those circumstances there was no power.  But then to make the point clearer when it comes to contraventions, 26 pleads the contraventions against the RE and it attacks the decision to lodge and it asserts four breaches.  To take, for instance, the first one, which is the diligence duty, the plea is that a reasonable person in your position:

would not have attempted to cause the . . . Amendments to take effect ‑

or would not have done so without making the necessary inquiries, considering the conflict, getting legal advice, judicial advice and so on.

The case was squarely attacking 22 August but saying the law imposed duties upon you as reasonable directors of an RE by reason of everything that had gone before including the fact you had not yet turned your mind to any of the relevant questions.  So, that is the RE and then the directors, 26(a) and following, it is the same type of case. 

Your Honours might note in 28, while some particulars are given there, those particulars were improved upon at pages 285 to 288 where there was a more precise identification consistent perhaps with some of the criminal cases that the plea ought to identify exactly what it was the person needed to do but failed to do in order to discharge the relevant duty.  For instance, in relation to Mr Lewski on 287 at line 30, the particular plea as to why he made an improper use of his position was that the August amendments were his idea, he wanted to amend without going to unit holders and so on with Madgwicks.

That, we would submit, tolerably put before the Court the ASIC case and then just to show how the issue was joined in the defence, if one takes Mr Lewski’s defence at page 296, paragraph 26, he was running a number of ideas - 26(b) was that once you passed the earlier resolutions you were bound to lodge irrespective of anything else.  In 26(c)(i) was a plea that:

a reasonable person exercising care and diligence would in the circumstances of the passage of the 19 July 2006 Resolution, have passed the 22 August 2006 Resolution –

So each side was putting in play 19 July and raising two radically different legal arguments.  Mr Lewski’s argument, which succeeded in the Full Court was, because you looked at matters on 19 July, whether it was good, bad or indifferent, that confined the scope of the business on 22 August, so you did not have to think about any of the relevant questions.  ASIC’s case was as a director with quasi‑trust duties, you must ask yourself the relevant questions and if you have not done it on the previous occasion, you must do it on the present occasion.  So, your Honours, leaving the pleading and moving to the substance, could I just ask your Honours to look again at the duties in 601FD.

KIEFEL CJ:   Just before we do, was it the view of the Full Court, in terms of pleading, that it was incumbent upon ASIC to plead directly that the directors were under a duty to reconsider their earlier decision?

MR GLEESON:   I think the answer is yes, your Honour.  The Full Court seemed to say the only way you could run this case was either plead an express duty to reconsider or plead an express continuing duty or plead a case that ASIC was never running, which was conscious impropriety – you knew that you had done the wrong thing and therefore you had reason to start the whole thing again.

KIEFEL CJ:   Do you say that the case that was mounted was one of continuing duty, expressly or impliedly?

MR GLEESON:   Well, it was a duty targeted at 22 August, as I have shown you in the pleading, but what it said was that what was called for from you on that date necessarily took into account everything that had gone up to that date.  So it was not continuing in the sense that ‑ ‑ ‑

KIEFEL CJ:   It carried over from the resolution on 19 July.  It starts at 22 August?

MR GLEESON:   The relevant one starts at 22 August.  Why?  Because, on that date, the business you have before you is completely binary.  On that date you have before you a deed, which is inchoate.  Yes, it has been approved and signed but it has not been dated and it has not been lodged and it cannot have any legal effect in law until it is lodged.  We all agree on that, at least.  So the critical question for a director is:  “If I lodge this document, I will set in train a new set of legal rights and obligations which will allow $10, $20, $30 million extra to be paid to Mr Lewski’s company.”  That is one way to go.

The second way to go is if I resolve against lodgement, the members will receive the benefits of the existing constitution and of course if Mr Lewski wants to pursue his idea, this thing ought to be put to a special resolution with full disclosure and the members can have their say.  Now, that choice in law and in fact is there before the directors on 22 August.  The ASIC case was simply each of these duties, which are real substantive duties, have to be applied to that business.

The respondents’ case was:  but you have looked at the questions, even though in breach of the law on the earlier occasion, and once you have looked at them then you are entitled to close your mind and say 22 August is just a tick‑a‑box exercise.  That is why, although ground 2 takes us a lot further into the facts than any of the other grounds of appeal, in the end they were starkly competing legal propositions as to what are the duties of a director?

So, your Honours, in 601FD - and perhaps if your Honours could also have handy the ordinary director’s duties in 180 to 184, the first duty in FD is one of honesty.  It can hardly be gainsaid but important to note that it is not the only duty and the following duties cannot be subsumed simply into honesty, they have further work to do.  The second duty in (b):

exercise the degree of care and diligence that a reasonable person would exercise if they were in the officer’s position -

is tolerably similar to the ordinary duty of care and diligence of a director.  The third is where the critical difference starts.  It is a positive duty to:

act in the best interests of the members and, if there is a conflict between the members’ interests and the interests of the responsible entity, give priority to the members’ interests -

You will not find that duty on a director of a corporation.  It is a duty, a trustee duty of undivided loyalty and it is what particularly marks out the registered scheme - because there is no separate trustee and manager, the RE has a trustee‑like duty which you see in 601FC(1)(c) and the directors have the identical duty.

So, all of the old law in the corporations context as to whether directors and ordinary corporation are treated as trustees or quasi trustees and the answer is no is done away with here because this is a trustee duty and what follows from paragraph (c) is that it is not concerned only with conflicts which the directors recognise.  It is concerned with conflicts which exist and in the present case a conflict existed certainly at all times up until lodgement and the fact the directors did not see it on the 19 July just did not excuse them from their duties on 22 August.

The duties in (d) and (e) are tolerably similar to the ordinary director’s duties.  In respect to (e) which is invoked in this case, the trial judge correctly relied upon the authority of this Court in the criminal context, particular Byrnes, Chew and the more recent cases, discussing what is meant by the notion of improper use and in the present case the impropriety was that the directors were using their power to lodge, to gain advantages for Mr Lewski’s company, thereby causing detriment to the members.  Finally, (f) is a special duty to:

take all steps that a reasonable person would take . . . to ensure that the responsible entity complies with -

the Act, the constitution and so on.  Now, it is clear from that language in (f) of the “reasonable person” and also in (b) of the “reasonable person” and perhaps implicit in every one of these provisions, that the law takes the particular officer with everything the officer knows and understands, and then implies the objective standard over the top of it, of what would be the reasonable person’s response to that situation.  Subsection (2) emphasises the overriding power of these duties.

Your Honours next could I move to paragraph 11 of the outline which is to say something more about the FD(1)(c) case which is the breach of the duty of undivided loyalty and just show your Honours how the trial judge applied that duty.  Perhaps to give your Honours the context for this there are – the Court should perhaps see again the primary resolutions that underpin the case so if your Honours could go to the joint book of further material.

The Madgwicks letter commences at page 4.  The advice about the power to amend, which on our view is wrong, is found on page 6.  Page 7, section (d) is the part of the advice that the judge said raised a red flag – the primary judge said raised a red flag because you go to your lawyer for advice and your lawyer says clause 25 could be interpreted in either way.  If it is done one way you have no power, over to you how to interpret it.  Not much of an advice.  The primary judge correctly said that was a red flag indicating judicial advice should have been sought if this scheme was to be pursued. 

What you will see nowhere in the Madgwicks advice is any discussion of whether or how this is in the best interest of members.  There is no discussion of conflict of interest.  Part of what impressed the primary judge was that a reasonable director reading this advice would have said, well, it may tell me something about power but it simply does not address how on earth it could possibly be in the interest of members for Mr Lewski’s company to take all these extra fees for no extra work and that was the core of the problem.  So that was Madgwicks.

Then, at page 9 you have the minutes of 19 July.  The section dealing with what is called the “19 July Resolution” is on page 10 between lines 20 to 40.  It is not pellucidly clear what resolution they were, in fact, passing although the trial judge has found that they were resolving to amend the deed.  There are a number of aspects of this which also have red flags attached to it.  The heading is “‘Poison Pills” and RE Protection”.

So what the directors are being told is why does Mr Lewski want these fees.  Well, partly he wants a poison pill.  In other words, if someone comes along and wants to take over the company he wants to make it harder for someone to do so. 

Now, it is well known from the cases, even with ordinary directors’ duties in corporations, that that sort of transaction raises absolute suspicion.  And the next bit of it, “RE Protection” – that is the responsible entity protection – that seems to be the removal fee.  The purpose of this is to protect Mr Lewski’s company.  Then, when you read the body of that paragraph, it says in the middle:

At the required change of Constitution –

that is a change they are going to make to introduce partly‑paid shares:

we can also change the fee to the RE at a take‑over from a fee based on Net Asset Value to one based on Gross Asset value.

That is not actually an accurate description of it.  It was changing it from a fee based on a percentage of the price paid by the acquirer to the gross asset value.  But, you can see that the fee might be paid on 100 per cent of the assets as opposed to being paid merely on the price.  So, that is the poison pill:

We could also include into the Constitution a fee for the RE as part of the fees for listing.

One begs to ask why – other than to help Mr Lewski’s company – given that it was always the intention that the trust would be considered for listing.  Then:

Bill Lewski moved that the Board approve the variations to the Constitution to reflect the above changes, and this was seconded by Kim Jaques.

Mr Wooldridge made a suggestion about the partly‑paid and:

The motion was passed unanimously ‑

Then, a little further down, it says:

The above process will be reviewed by the Trust’s corporate Advisors to the proposed listing on the ASX.  This review should be done as expeditiously as possible because of the proposed new PDS.

So, part of the reason that this was inchoate was that they did not want to lodge this deed until they had the whole of the new PDS.  Why?  Because one of the things in the PDS would have to be the disclosure of this vast raft of new fees.

So, that is partly why it is inchoate.  But, your Honours can see, just looking at that page – and the directors were not able to give any evidence that improved the position – the primary judge was perfectly justified in saying, on this 19 July, you obviously did not consider a conflict, you did not consider the interests of the members and you were lending yourself to an improper scheme by Mr Lewski to protect his own company.

Then one goes forward to page 12, and this is what the directors get immediately before the critical meeting.  And you can see in paragraph 1 they are now given the attached proposed supplementary PDS.  That document is not in the materials.  We have given a copy of it to your Honours’ associates and the other parties.  I will not go to it now, but you can see from it that the fees are disclosed as well as all the other changes, but the critical part is paragraph 3, about line 30:

I confirm that the Supplemental Deed of Variation . . . was approved at the last Board meeting and executed.  It will take effect upon the date of its lodgement with ASIC.  I propose that the Deed be dated 22 August and lodged with ASIC on that date together with a Consolidated Constitution . . . This will then coincide with the issue of the new Supplementary PDS.

So directors are being told whatever the position following 19 July, at the moment this deed is not effective.  It has not been lodged.  The question is lodge or no lodge.  And the directors know, as a matter of fact, that they have not yet given consideration to any of the matters required by the law.

To be precise in the submission I just put, they know exactly what they did and did not think about on the earlier occasion, the law comes on top of that and says, you are bound to think about those matters when you exercise powers of this great import.

And then at page 15 we have the minutes of the meeting.  The trial judge found the minutes were an accurate record of the meeting and we see under item 3 exactly what the board resolved:

At the last Board meeting, the Directors approved Deed of Variation (No. 7) to the Constitution which had not yet taken effect as it had not been lodged with ASIC because a Supplementary PDS had not yet been prepared.

So the basis upon which they were coming to this matter was, whatever we did on the last occasion it has not yet taken effect.  And as a director, the question which then arises is, have I turned my mind to all the relevant conflicts and to the best interests of the members, given that I am now being asked to take an inchoate document and turn it into a legally binding document.  That is the essence of what the trial judge thought was a breach of duty and you see at the end of the sentence, the resolution is to lodge it “to become effective”.  So an incomplete, inchoate document of no legal power is being turned into an effective document. 

Your Honours, with that background then looking at the best interests duty, could I ask the Court first to go to volume 1 of the core book.  First to page 31, paragraph 16, because although there is a degree of perhaps necessary repetition in the lengthy judgment of the primary judge, paragraph 16 are the five key factors about the transaction which he considered were in existence at 19 July and 22 August, and those are the factors which generate the duties on the directors and lead to the breach of duties. 

It is difficult to argue with any of those five factors and, indeed, the Full Court did not argue with them and said, well, they are all well and good but the question we pose is, assuming you did not address them on 19 July, were you required to address them on 22 August.  The Full Court says no.  The trial judge says yes. 

In terms of the best interests in particular, if your Honours could go to page 145, I want to draw attention to paragraph 450, for this purpose, to show that the primary judge squarely brought into the frame all of the key arguments being put by the directors.  There was no failure to address the key arguments and you will see, for instance, 450, paragraph (b).  That was one of Mr Lewski’s arguments – we were already bound to lodge.  At 450(c), there was no conflict because we were merely complying:

with its pre‑existing obligation to lodge . . . any conflict . . . arose and had been resolved on 19 July ‑

Could I pause on that because that is at the heart of the legal issue between the parties.  The Lewski argument was there was a conflict.  Yes, we have to admit that.  It was on 19 July.  We did something on 19 July.  What we in fact did was we ignored it; we failed to appreciate it.  Having done that, conflict was resolved.  So that is the concept of resolving a conflict.  It is failing to see it on the first occasion and thereby ignoring it on the second occasion.

Paragraph (d), no conflict because it was just a procedural matter.  Paragraph (e), nothing wrong with Madgwicks.  And paragraph (f) – this comes back to your Honour the Chief Justice’s question – there is no duty to revisit in the absence of changed circumstances and, were it otherwise, you would cripple the management of an RE. 

That is at the core of the case, Mr Lewski saying you could only ever have a duty to open your mind to the relevant questions if there was something which told you there was a problem with your earlier decision and because you were obtuse about the breaches of duty which you had committed you thereby had no duty to think about the relevant matters.

Your Honours, I then want to draw attention, without reading it, at page 147 all the way through to 154, there is a discussion by the primary judge of the nature of the best interests duty, including at 468 the concept of undivided loyalty and this should now be supplemented by the Court’s recent decision on 10 October. 

There is an interesting reference at page 151, paragraph 475, to what Professor Thomas says, that the best interests duty is a foundational duty which underpins a series of further more specific duties.  So it is that conceptual framework for the best interests duty drawn heavily from trust law which leads the judge to the conclusion at 484.  That conclusion, we would submit, is an appropriate one. 

Then, having outlined the legal duty, you will see at page 155 his Honour discussed the objective nature of the duty, and particularly at paragraph 489 to 490 identified the more precise question that needed to be answered:

Was . . . as RE . . . acting with undivided loyalty solely in the interests of the members?

. . . 

Was there a conflict –

and did it prefer:

the interests of the members to its own interests?

Now, at 491 you will see a series of findings which flesh out the five principal factors that I started with and it is difficult, if not impossible, to argue that those circumstances generated a conflict and meant that the amendment was not in the best interests of the members.  So, the only question left over was did this duty somehow shrink to the point of disappearance on 22 August by reason of what had happened on 19 July.

The balance of the findings on “best interests” is at page 192 and following.  We would emphasise at paragraph 610 that his Honour correctly rejected the director’s contention that the best interests duty could be reduced to the content of an ordinary director’s duties and he quite correctly looked at but put to one side the cases on ordinary directors because the duty here was a high one.  At 613, we would submit correctly, said because of the objective nature of the duty it:

is not an obligation to act in a way the Directors honestly believed to be in the members’ interests, but an obligation to act in what are objectively their interests.

Leading him in 614, the fact that they subjectively made a best effort and were honest does not relieve them of a breach of duty, and the concluding paragraphs 615 to 619, we would submit, is unimpeachable.  At 617, he has tied the breach of duty to the very question raised by the minute:

No reasonable director in the position of each of the Directors would have seen it as in the members’ interests to lodge the Amendments so as to make them effective.  None of the Directors could have reasonably believed that it was in the best interests of the members to bring the Amendments into effect –

Your Honours, I have taken one of the four duties there to flesh out how the trial judge did it.  I was proposing to save some time, not to go through each of the other three duties at this stage unless they throw up a particular issue in questions or in argument, if that is convenient, but it is sufficient to see the way the judge dealt with “best interest” to understand his approach.  So, then one asks what did the Full Court do and your Honours can pick that up at volume 2, at page 549.

We would construe paragraphs 141 and 142, the first and second sentences, as the Full Court saying everything which the trial judge found about the “five principal factors”, both in paragraph 16 and in the various ways he kept coming back to them, is unimpeachable, as a matter of law in fact, had the focus only been on 19 July.

The real issue, as they say in 142, is whether you had to think about any of those matters, as a matter of law, on 22 August.  In 143, the first sentence is correct and, indeed, the second sentence is correct because it recognises that:

19 July 2006 was an important event in the consideration of the responsibilities that were to be placed upon the Directors –

at 22 August.  Both parties are in agreement that 19 July is critical context for identifying the duties on 22 August.  And we have a Full Court, we submit, not interfering with the findings that things went badly wrong on 19 July.

There is then some discussion ‑ can I briefly mention on 553 at paragraph 151, the Full Court says there are a whole lot issues which are distractions but nevertheless will deal with them.  Our approach on this appeal would be anything that is identified as a distraction should be left without requiring much further attention.  The distraction the court had particularly in mind is page 555, paragraph 162, did the deed become effective or when did it become effective.  Now, the court says it is a distraction.  We agree because the critical question is one of the Corporations Act.  There is no power to amend unless you form the opinion. 

They did not form the opinion and it does not get any better that they draw up a deed and they sign a deed saying they have formed the opinion.  That piece of paper for all purposes under the Corporations Act is a nullity and the reasoning that the court strains to come to over the ensuing pages, which is that somehow the deed took effect as a contractual obligation, even though it could not take effect under the Corporations Act ‑ see for instance, paragraph 177 on page 561 ‑ we submit, is entirely a distraction and wrong.

You see in 177, first sentence, there seems to be some idea that, without forming the necessary opinion, because you create a deed poll, you leverage yourself into:

a positive mandatory obligation –

to lodge it.   Whether that extraordinary proposition is true, as a matter of contract, is by the bye.  It cannot, in any way, affect the duties imposed on the directors under the Corporations Act.

However, you will see at 181 on that page, this finding on the point of distraction which is whether it is binding as a contractual instrument is somehow used by the court as part of the reasoning to narrow and contract the duties and the business on 22 August.  So, 181 has entered a problem in terms of construing the duties under the Corporations Act.  You can, apparently, not form the necessary opinion.  You can record it in a deed.  You can, thereby, create a contractual instrument which is said to be valid and binding.  You can, thereby, confine the duties which the Corporations Act imposes on you when you look at this matter on the next occasion.  That, we submit, is riddled with error.

Moving past that section, if you come to page 564, at 189, the Full Court accepts the trial judges applied the correct test to the best interest duty and sets out much of his reasoning.  Then when it comes back to this duty, which is page 569, it sets out the arguments and then I will come directly to the conclusions on this duty.  I perhaps need to explain this about the judgment.  If your Honours would go to page 586, what commences at 258 is an analysis of the duties as of 22 August and part of the discussion is general but much of the discussion is tailored to the duty of care and diligence.

The high point of the Court’s reasoning is on page 597, paragraphs 293 to 296.  That reasoning is all tailored to the duty of diligence.  Then what the Full Court says more briefly in 297 is same errors in respect of the other duties:

the duty to act honestly –

That is a mistake.  The Court presumably means the duty to act for a proper purpose and:

in the best interests of the members.

So if one asks where is the specific finding on best interests it is paragraph 298 but the reasoning is informed by what has gone earlier.  But if I start at 298 as the core of it:

The Directors had already considered the Amendments on –

the earlier date, that is true:

The same consideration was not necessary on –

the later date:

The standard to be applied to the conduct of a director, even if equated to a trustee depends on the function . . . The relevant enquiry is not entirely objective, but looks to the circumstances confronting the director –

Now, that word “confronting” seems to be used in the sense of the circumstances of which you have appreciation as opposed to all of the circumstances of your earlier conduct.  They then say:

This is not the same as looking at the director’s subjective state of mind, but involves looking at the matter objectively taking into account the surrounding circumstances . . . On 22 August 2006, the circumstances surrounding the decision to be made were very different –

One asks why and the answer is:

Significantly, the Deed had been purportedly amended, giving APCHL the mandate to pay the relevant fees.  On this basis, provided APCHL acted in accordance with the purported Amended Constitution . . . it was entitled to act in the way it did –

Now, what seems to have happened there is that interim validity has come back and has driven the entire breach of duty exercise.  Because you purported to amend it, that was the constitution that you were entitled to act upon, therefore, nothing to think about, just go ahead and lodge.  So what has happened in that is two things:  firstly, interim validity is driving the entire breach of duty exercise; and secondly, it has swallowed up the content of the duty.

GAGELER J:   This is a different sort of interim validity, is it not?

MR GLEESON:   It is what we have called somewhere an analogue.  This is director’s interim validity and it is more like a presumption of regularity.  If I have done something on the previous occasion and I now have something that looks like the constitution, when I come to identify my duty I am entitled to proceed as if everything is proper.

KEANE J:   Well, not just entitled to proceed, bound to.

MR GLEESON:   Bound to, bound to and so, when I ask the question, had the chair done it in a very formal fashion and said we are now resolving whether to lodge to make it effective and because this is an important matter I propose to remind you of your duties, our first duty is to think about the best interest of members, the answer to this would have been there is nothing to think about.  Because we resolve to create that amendment we are entitled and bound to lodge.  So it can only be in the best interest of members to lodge because that is what we are bound to do.

So the whole consideration of, is it actually in their best interest to have these vast fees stripped out for Mr Lewski’s benefit, is apparently as a matter of law something they are entitled and bound to disregard, shut out of their mind.  It sounds deceptively simple, 22 August it was just a ministerial occasion.  The trial judge got carried away and imposed all these vigorous duties on the directors but what is in it is this notion and that paragraph, although it is repeated in different ways in other parts of the court’s reasoning is the heart of the thinking.  Then I need to address 301.  The first line and a half is correct: 

No case was put by ASIC that the Directors needed to proceed other than on the basis that the breaches only occurred on 22 August –

The next part of the sentence is wrong when it says that no case was put that:

proper consideration only needed to be given to the Lodgement Resolution on the basis that the previous actions were (and were able) to be treated by the Directors as valid.

That is contrary to the entire case that ASIC pleaded and ran which was that you have to think about these matters; if you have not done it earlier, you must do it now.  The next sentence – this comes back to your Honour Justice Gageler’s question – this is what I call the analogue:

In any event, a reasonable director, honestly believing the previous decisions to be adequate, would not normally re‑visit such decisions.

That is a standard of law that is being applied across every duty in FD, which is if I honestly believe that what I did previously was adequate, normally I have no duty to think about the matter again.  That is the duty imputed to the reasonable director.  That has completely collapsed the objective nature of these duties into subjective honest belief.

KIEFEL CJ:   That might be a convenient time.  We will adjourn until 2.15.

AT 12.44 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.15 PM:

KIEFEL CJ:   Yes, Mr Gleeson.

MR GLEESON:   Your Honours, these are the only points we wish to add on ground 2 - if I could just do it by reference to the outline?  I have been addressing paragraph 11, which is the duty under 601FD(1)(c).  Could we add reference to one authority of this Court in which a failure by the director subjectively to appreciate the conflict of interest did not excuse him from breach of duty?  It is the classic decision in Furs v Tomkies (1936) 54 CLR 583.

As to paragraph 12, which deals with the duty of care and diligence, as I have indicated that is the duty around which the Full Court constructed most of its reasoning.  Could I go to three places?  Firstly, at pages 590 to 591 of volume 2, the Full Court extracts at length from this Court’s decision in Richard Brady Franks (1937) 58 CLR 112 apparently as support for its conclusions.

We would make two submissions.  Firstly, Richard Brady was a case where there were two successive resolutions of directors, the first of which was inchoate and its invalidity did not affect the second resolution which was the critical one.  The present case had some similarities in that the 19 July resolution was inchoate for the reasons I have mentioned but, secondly, more fundamentally, Richard Brady was not a case where the first resolution was infected by lack of power and lack of propriety as in the present case.

Your Honours, I do not need to address orally on the third and the fourth duties at this stage.  In terms of paragraphs 15 and 16 I have made most of those submissions about the Full Court’s errors as we would see them.  The one I wish to emphasise which I have not to date is the proposition about sections 1317S and 1318. 

Your Honours, those provisions which are at page 125 of the book are, of course, the two classic provisions for relieving directors, including directors of responsible entities of breach of duty but, importantly, the director has to establish not only honesty but that relief is appropriate in all the circumstances of the case.  A problem with the Full Court’s decision is effectively it has circumvented the role of these provisions because all the director needs to establish is honesty.  If I could show you where “honesty” is ‑ ‑ ‑

KIEFEL CJ:   Does it matter for the purpose of section 1317S that directors have not sought judicial advice?

MR GLEESON:   It can be a relevant factor in deciding whether it would be appropriate in all the circumstances of the case.  In a case like the present where there was clear doubt, if not red flags raised by the facts before the directors, the failure to seek the advice, as the trial judge found, was an important factor.  In the present case, the directors sought relief under these provisions at trial and failed and there was no appeal on that decision to the Full Court. 

So there is nothing left over to be considered by any court on that question but the legal significance of it of course is that honesty is not enough and yet, when one compares that with, for instance, the Full Court’s reasoning say at page 591, paragraph 291, they seem to be excused as a matter of liability from breach of duty ‑ ‑ ‑

KIEFEL CJ:   Did you say 291, Mr Gleeson?

MR GLEESON:   Paragraph 281, I am sorry, on page 591.  The entire reason they are found not to be liable for breach of duty of care and diligence is over the page.  They honestly believed what they did on 19 July was valid.  So a factor – honesty - which would be part of the question on relief from liability has been elevated to exclude liability altogether.  You see the same reference to subjective belief at page 597, paragraph 293.  So in terms of coherence of the Corporations Act the duties should be read in accordance with their text but consistent with relief coming through these other provisions, not through a reading down of the duties.

Your Honours, the final matter that leaves me with is paragraph 17 which is the payment resolutions.  Could I ask you to compare what the trial judge did with the Full Court.  The trial judge is volume 1, pages 237 to 241.  The case in respect to the payment resolutions was a narrower case.  Only two duties were invoked:  the best interests, conflict duty on the one hand and the failure to ensure compliance with the constitution on the other.

Your Honours will see the trial judge effectively had three main strands to his reasoning.  The first is at 749 that there was a failure to adhere to the terms of the trust, being the true constitution in law.  The second at 752, that mere honest belief invalidity is not enough to deal with the larger issues of conflict and best interests given that, over the page, all of the correct matters have never been taken into account at any point in time. 

Finally, the third set of facts is at 755.  These are looking at the position as at payment resolution date.  Most of them are now familiar facts but I would draw attention to paragraph (c), which is the fee stood to be between one‑third and two‑thirds of the entire raising on the listing of $50 to $100 million.  So the fee stood to consume a vast proportion of the money being raised on the listing being one of the matters which should have pointed the directors to a proper consideration of all the circumstances.

I should have mentioned there is a fourth matter in 756, which perhaps is just additional matters for concern, that it seems that with three of the directors there was a good argument that they should not have even been participating in the meeting by reason of personal interest or association, raising issues under section 195.

That package of matters led the primary judge over the page to say that a reasonable director would have considered the conflict of interest and duty and would have taken it into account in favour of the members and particularly at 760 the directors knew how the amendments had been made and they knew or should have known they had not given proper consideration to the conflicts and they needed to resolve them in favour of the members.  So that is that package of reasons.  To see why that has been overturned, you need to go simply to volume 2, to a single page, page 613, and it is overturned for the reason found in the second sentence of paragraph 341:

The Directors were entitled to act in accordance with the Constitution which they honestly believed existed, and make decisions accordingly.

So everything has been collapsed back into whatever they believe to be the constitution provided they are not dishonest.  That seems to eviscerate the duties and you see the same proposition in the last sentence of 346.

Unless your Honours have questions, that is what I propose to put on ground 2.  I am going to ask Mr Strong in a moment to deal with ground 3, but could I just indicate in terms of orders, should the Court reach that point, the primary orders that we seek are set out at page 800 of volume 2 – 801 to 802. 

If the appellant was successful, the effect of those orders, apart from any appeal, would be to set aside the Full Court’s orders and dismiss the appeal to the Full Court.  The effect of that dismissal would be that the trial judge’s declarations would spring back up so this Court does not need to make declarations.  They will revive.  As we analyse the issues, the only remaining matter in the case for remittal is a cross‑appeal which ASIC had brought below in terms of certain penalty issues.  There will be no other matters which are alive between the parties. 

Those will be the appropriate orders in every appeal except for Mr Clarke.  For Mr Clarke there are bespoke orders which are suitable to him, at pages 892 to 893 – the effect of which is he retains the current victory he has, in substance.  But the slight problem of the way the Full Court worded its orders is overcome and his interests are otherwise fully protected.  If it is convenient, your Honours, I will ask Mr Strong to deal with ground 3? 

EDELMAN J:   Just before you do, you mentioned in relation to ground 1, that the particular declarations to which it was directed are 3, 5 and 7.

MR GLEESON:   Yes.

EDELMAN J:   What about ground 2? 

MR GLEESON:   Yes.  In our written submissions we have identified – at page 15, in paragraph 56 we have identified separately they are the declarations which arise under ground 2 and we have divided them up into the lodgement resolution and the payment resolutions. 

EDELMAN J:   Yes.

MR GLEESON:   Any other ones we have not mentioned are the ones that relate to what Mr Strong is going to deal with.  May it please the Court.

KIEFEL CJ:   Yes, Mr Strong.

MR STRONG:   Thank you, your Honours.  Your Honours, ground 3 arises from what the Full Federal Court called the second group of contraventions.  These consisted of ASIC’s allegation that the RE had contravened section 208 of the Act, which deals with related party benefits, by making the payments of the listing fee that were made in 2007 and 2008 and that by authorising those payments, the directors were knowingly concerned in that breach.

I will come back in more detail to the way the Full Court dealt with it, but the references for the trial judge’s consideration of this are at AB 1, 215 to 232 and in the Full Court, at AB 599 to 606.  There was really only one live issue on this claim and that turned on the place of section 208(3) in the scheme of the legislation.  I will go briefly to that – and come back to it if I may, your Honours – at the joint book of authorities, volume 1, tab 3, page 109. 

Your Honours will see there, perhaps starting on page 108, a version of section 208 appropriate to managed investment schemes is set out - on page 108 – and then, on page 109, subsection (3) appears as:

Subsection (1) does not prevent the responsible entity from paying itself fees, and exercising rights to an indemnity, as provided for in the scheme’s constitution –

The issue in the context of the second group of contraventions was when ASIC alleges that the directors were knowingly concerned in the RE’s contravention, does ASIC have to plead and prove that they knew that the constitution did not provide for the fee. 

By reference to our outline, your Honours, I propose to address the matter by first going to the authorities in this Court, particularly Chugg v Pacific Dunlop Ltd which established the principles which have been developed and are not really contentious about the way in which the Court will approach determining whether a provision is part of the overall statement of the offence or operates as a proviso or exception or something outside that. 

Then we say at 19 and 20 that the unmodified 208, that is, the provisions that apply to corporations operate to implement a policy that all related party benefits need approval from members and then identify a series of cases which take the benefit outside that general rule such that the onus lies on the defendant who seeks to rely on them. 

We then move to the special version of section 208 applicable to managed investment schemes and say that subsection (3) is really of exactly the same nature.  It does the same sort of work in substantively the same way and for that reason ought to be treated as an exception as sections 210 and 216 are. 

We conclude, therefore, in saying that it was not necessary for ASIC to prove the element of knowledge of the absence of a constitutional authority on the part of the directors by proving the necessary elements of section 208.  It was up to them to make out the defence.

Your Honours, the principles that have been established by Court are quite thoroughly summarised in Chugg v Pacific Dunlop, if I could take your Honours to that case.  It is at tab 10 of the joint book of authorities, volume 1, page 250.  Your Honours will see there at page 258, point 4, Justices Dawson, Toohey and Gaudron say that:

For the purpose of assigning the onus of proof, a distinction is made between a requirement which forms part of the statement of a general rule and a statement of some matter of answer, whether by way of exception –

and they refer to Vines v Djordjevitch as the authority for that proposition.  Then at page 259, there is a passage relying on Dowling v Bowie which says in the middle of the page:

the form of language may provide assistance, ultimately the question whether some particular matter is a matter of exception is to be determined “upon considerations of substance and not of form” -

and then further down the page, relying on the decision in Darling Island Stevedoring, their Honours indicate:

that a matter may be a matter of exception rather than part of the statement of a general rule is that it sets up some new or different matter from the subject matter of the rule.

They make a reference to R v Edwards which talks about the:

prohibition on the doing of an act “save in specified circumstances or by persons of specified classes or with specified qualifications –

and so on and Edwards was a case - we have provided your Honours with copies of Djordjevitch and Darling Island Stevedoring but I do not need to take you to those, I think, having regard to what is fed in it in Chugg. 

In Edwards, which is a case referred to there in Chugg, the provision said that a person should not sell intoxicating liquor without holding a justices licence authorising the sale of the liquor and the UK Court of Appeal held that it was sufficient to prove the selling of the liquor and the licence was a matter for the defence to prove. 

Now, can I take your Honours to the unmodified provisions of Chapter 2E which are in the joint book of authorities at tab 3, pages 86 to 95 and your Honours will see that the part starts with a statement of a purpose of the chapter which is to protect the interests of the public company’s members by requiring member approval for the giving of financial benefits to related parties that could endanger those interests.

Now, the concepts involved are defined at sections 228 and 229 on pages 93 and 94 and if your Honours go to the definition of “financial benefit”, one sees that it is expressed in very wide terms and the court or party interpreting the provision is directed to:

give a broad interpretation to financial benefits being given, even if criminal or civil penalties may be involved -

look at the substance of:

economic and commercial –

rather than the form and:

disregard any consideration that is or may be given ‑

So, we have within that concept of “financial benefit” and the policy purpose expressed in 207 a very wide concept of related party transactions which are going to be the subject of Chapter 2E.  Then, your Honours, at 208 on page 87, the purpose in 207 is affected by stating a general rule that:

For a public company . . . to give a financial benefit . . . 

(a)       the public company or entity must:

(i)obtain the approval of the public company’s members . . . 

or:

(b)the giving of the benefit must fall within an exception set out in sections 210 to 216 -

implicitly and by necessarily forbidding any provision of a benefit otherwise than by those means.  Then, in sections 210 to 215 your Honours will see from page 89 onwards a series of cases in which for particular people or in particular circumstances or particular amounts a benefit is not required to have member approval.  One can determine that the legislature has here seen that these particular cases are those which, for one reason or another, ought not to be made subject to the general rule but should be carved out of the operation of that rule and given a separate status.

EDELMAN J:   But the general rule in 208 is not concerned with a public company or entity that it controls giving any benefit to itself.

MR STRONG:   Indeed, yes.  When I come to replace 208, your Honour, you will see that the section is restated to cover an RE giving a benefit to itself.  The remainder of Chapter 2E dealt - and it has not been produced - with the procedures for obtaining member approval.  Finally, just noting, section 208 does not create an offence – 209(1) says that, on the part of the public company, but a person involved in the contravention contravenes section 209(2), which is a civil penalty provision and is the relevant provision engaged in this case.

Coming to the modifications, one goes to page 109 of volume 1 of the joint book of authorities to see section 601LE and the technique used here has been that the Chapter 2E that I have just gone to is made applicable to relate to managed investment schemes but with certain modifications.  Those modifications are the replacement of 207 and 208, and the omission of two of the exceptions and a couple of other modifications that are not material for today’s purposes.

So, one sees then in the modified 207 on page 107 that the purpose of this part of the relevant party transaction provisions is to protect the interests of the scheme’s members as a whole by requiring approval for giving benefits to the responsible entity or its related parties that come out of scheme property.

The general rule in 208 is restated by setting out a series of conditions appropriate to a managed investment scheme structure such that the benefit is given by the responsible entity and given out of scheme property and given to the responsible entity or related party so that the public company relationship is not put to one side and special relationships relevant to managed investment schemes are adopted.  Then, otherwise the structure of the party is the same as the original  Chapter 2E with the exception that a couple of the exclusions have not been extended to cover to operate in this particular field. 

Now, can I just say in relation to subsection (3), it takes out of the operation of the general rule a case where the benefit consists of fees or indemnity payments to a responsible entity provided for under the scheme’s constitution.  In that instance, the field of activity covered by this provision is also covered by section 601FC(1)(k), which says that the responsible entity must ensure that moneys paid out are paid out in accordance with the constitution.  That applies to any such payment which section 208 would apply to, a particular category of such payments being those that are made to the responsible entity itself as a payment of fees.

So the two sets of provisions sit side by side.  There are differences in the burden of proof as to who must show that the fee is or is not in the constitution but otherwise you have related party provisions which focus particularly on the fact of relatedness of the parties and you have a more general provision which deals with any payments by the RE out of the scheme property.

KIEFEL CJ:   Mr Strong, could you remind me:  how does the onus of proof assume particular importance in this connection?

MR STRONG:   An allegation that a defendant is knowingly concerned in a contravention requires the prosecutor or the plaintiff to prove that that party had knowledge of the essential facts constituting the contravention.  That was established by Yorke v Lucas in this Court some time ago.  The issue here is, is the fact dealt with by section 208(3), an essential fact constituting a contravention of section 208 such that in order to establish that the directors were knowingly concerned in a contravention of section 208 it had to be shown that they knew that the constitution did not provide for these fees.

EDELMAN J:   What you really need to do is to elevate subsection (3) to be, as it were, an element of the contravention rather than, in the terms it appears to be expressed, just a delimitation of the area to which the section applies.

MR STRONG:   Yes, your Honour.  We would say that was what the Full Court did.  What we would seek to do is to say that subsection (3) is simply a delimitation of an area which is taken outside the operation of the section, so that it is not one of the essential facts constituting a contravention of section 208.

BELL J:   Such that it is an exception?

MR STRONG:   Yes.

BELL J:   Which raises the textual question of why it is not in (1)(e).

MR STRONG:   Yes, that is so, your Honour, and the answer to that in part is we do not know why it is not there, why it has been done the way it has.  What we can say is that when one looks at the function of it and its substantial operation, it does not in fact operate differently from those provisions. 

So that in the end one can only say that the fact that it has been done in that way is not a matter which really bears on the answer to this question because the answer to this question has to be approached substantively and substantively some work done by this particular proviso or exception is the same as the work done by those things which have been explicitly called exceptions.  We could make the point that if it were the other way, the way the Full Court would have it, rhetorically why is it not in (a), (b) and (c) because that is the effect of where the Full Court would put it. 

So it has been done in this particular fashion, crafted into an adoption of another regime to suit the purposes of managed investment schemes.  The reasons behind the way it has been done are somewhat obscure but our ultimate submission is that they do not bear on the answer to this question. 

Now, your Honours, perhaps I could take you to the reasons why and how this particular proviso exception does the same work as the others.  So we would say first of all, that apart from subsection (3), payments of amounts to an RE for fees and indemnity amounts would clearly be financial benefits paid by the RE to itself, within the broad definitions in section 208, and would fall within the broad purpose of section 207 as expressed if no exception were applicable.  So, the function then, and operation of subsection (3), specifies a specific case by reference to the recipient and character of the benefit in which member approval is not required to permit the benefit to be given. 

In this respect, it has the same operation as one of the exceptions in 210 to 12 or 15 or 16, and they may say member approval is not required, and this one does not say that, but in fact what this one means is that member approval is not required.  So in that way, the work that the section – the provision does is the same work as the work that the exceptions do.  It has the same result. 

EDELMAN J:   If one were to ask the question almost in the opposite way and to ask whether or not absent subsection (3), the payment by a responsible entity – or the authorised payment by a responsible entity of fees to itself, would fall within section 208 as amended by 601LC.

MR STRONG:   Yes. 

EDELMAN J:   Would it be caught, given the definitions of “financial benefit” in 229?

MR STRONG:   The definition of “financial benefit” there is of an inclusory nature rather than ‑ ‑ ‑

EDELMAN J:   Yes.

MR STRONG:   ‑ ‑ ‑ comprehensive definition, so one has the ordinary meaning of the term plus such expansion as it is given by section 229. 

EDELMAN J:   I suppose what I am asking is, if you put subsection (3) to one side, would it be a financial benefit for the responsible entity to pay to itself an amount to which it is entitled, assuming that the constitution entitled it to that particular amount?

MR STRONG:   Yes, your Honour, we would say absolutely that is so, because it is a payment of money to the financial – to the RE – out of scheme property by the RE.

EDELMAN J:   So, subsection (3) is not merely just confirming the scope of the section, it is actually doing positive work then.

MR STRONG:   We would say it does indeed, your Honour, that the payment itself absent subsection (3) would be within – the payment itself is within section 208(1) and subsection (3) is needed to take it out; whether it is an exception or some other characterisation you give it, that is what it does.

So, I made the point, your Honours, that they are financial benefits which fall within the purpose of section 207 and would be caught by 208(1).  Subsection (3) takes them out and we can point to the fact that the character of the benefit that subsection (3) is dealing with has some similarities to section 211 and needs to go back there to page 89 where provision is made as an exception to remuneration and reimbursement for an officer or employee.  We would make the point, your Honour Justice Edelman, that that could well be under a contract which requires the RE to make such payments to the officer employee, in any event.

So in the scheme of a managed investment scheme you have an investor layer equal to the shareholders of the company and you have a management layer which is a combination – which is, in effect, the management of the company.  The RE occupies a position in the scheme which is rather like that of the directors of the company.  I do not mean that in a legal sense but in a functional way so that the remuneration to the RE has some resemblance to the remuneration of the officers and employees of the company.  In that way, the nature of the payments that subsection (3) does deal with has a relationship and is somewhat similar to one of the existing exceptions in section 211. 

Now, Mr Walker and Mr Hutley, in their written submissions, suggested that the policy of subsection (3) is aligned with the requirement for member approval in paragraph (d), if one goes to the substituted 208 on page 108.  As it is put by Mr Hutley in his three‑page outline, the fact that the benefit is approved by the – is concluded in the constitution is effectively another way of having it be approved so that we have approval by means of a member resolution under the procedures provided for here and we have another kind of approval which is approval arising from the fact that the fee is provided for in the constitution.

Now, clearly enough, we accept that the benefit is a fee which ‑ if it is provided in the constitution, then the members are bound by it ‑ they are bound to allow it to be paid.  But, it is no different from a benefit payable under any other contract.  And, your Honours will see at subsection (2) on page 108, that the situation of benefits being provided for under a contract is specifically covered and what is required there is that the contract – the making of the contract – be approved by the members. 

EDELMAN J:   Your submission is that the contract itself provides a financial benefit because it provides the rights to whatever it is that is promised.

MR STRONG:   Yes, yes.

EDELMAN J:   Then, the payment of whatever it is that is promised under contract is also a financial benefit.

MR STRONG:   It is a payment – it is the financial benefit.  Your Honour will see that in 208(2), the legislation refers to:

the giving of the benefit is required by a contract –

So, you have a contract that says this amount of money will be paid and the legislation contemplates that the payment of that money will be the giving of a benefit and, perhaps, not necessarily the contract itself.  We do not need to determine the answer to that question but, it would seem, on one view of subsection (2), that it is not so much the contract that requires approval, it is the benefit.  But, if you get the contract approved, you are taken to have got the benefit approved.

The point we wanted to make about subsection (2) is that it shows a constitution – which is simply a legally binding set of provisions operating between the RE and the members and has a contractual aspect to it – is one example, only, of a contract which could provide for the payment of a benefit being fees or other payments paid to the RE.  So, there is nothing special about the fact that the members are bound by this constitution to pay the benefit.

But, the other point to make about this is that there is a very special kind of approval required under these provisions.  The benefit has to be given – as shown in subsection (d)(i) – in the way set out in sections 217 to 227.  And, that is a series of provisions which set out a set of procedures for how you go about getting a benefit, what information has to be given, what voting has to take place at the meeting, and so on.

Subsection (3) has nothing to do with any of that.  Subsection (3) is not even about approval.  It is about whether the constitution contains the fee.  So, the circumstances in which the constitution might make those provisions will vary from a possibility that it has been inserted by a vote of the members to the possibility – emerging in this case – that it was inserted by the unilateral action of the RE or it may have been there from the very beginning but, in any event, it would not involve the sort of explicit consent that these provisions require.

These provisions set up a kind of statutory version of informed consent in the equitable sense.  You are dealing with related parties who have control of other people’s money.  You have got to get their approval – their consent – to a self‑dealing of the kind referred to in these provisions.  And, again, subsection (3), does not really go anywhere near that territory.  So we would say, your Honours, that in the language of the authorities that we started with subsection (3), as with these other provisions, sets up new and special facts which avoid the consequence that these benefits need member approval.

The position of sections 210 to 216 in this respect – that is, whether they are exceptions or part of the overall statement of the contravention – was considered in Waters v Mercedes Holdings, which is in the joint book of authorities at tab 24.  Nobody is suggesting that Waters decided that sections 210 to 215 were true exceptions which needed to be proved by the defendant and not part of the overall statement.  That is not questioned by the defendants but it is important, we would say, to go to Mercedes for one purpose, which is to see how they related the statement of purpose in section 207 to their conclusion.  That reasoning can be seen at paragraphs 36 to 38 of the decision, which is at 772 and 773.

The central point that comes out of that statement of their reasoning is that it is section 207 which is most influential in selecting paragraph (d) – that is, the requirement for member approval – as the key provision which defines the statement of the overall prohibition because there is such an alignment between what is provided for in 208 up to paragraph (d) and the purpose in 207, that it can be seen clearly that what is intended is that the general rule is the rule foreshadowed by 207 and expressed solely in 208 up to paragraph (d) and not including paragraph (e).  That reasoning is equally applicable, we would submit, to how you would approach the same question in relation to subsection (3).

The other which raises or brings us back to the question that Justice Bell asked me, which was that there was a secondary consideration they took into account, which was the difference in language between the language of exception in (e) and the language in (d) and the fact that the exception provisions talked about member approval is not quoted.  We do not have that; that is so.  But as I have submitted before, we would say ultimately, when one considers the substance of the matter, that does not determine the answer to the question.

Could I now take your Honours to the Full Court’s decision on this which can be found at 599 to 606 on volume 2 of the appeal book?  After the Full Court has considered the various authorities and the decision in Waters and the trial judge’s reasoning, their approach to the matter comes down to a couple of paragraphs on page 606. 

Essentially it is that because of the words “does not prevent” rather than the language of “must fall within an exception”, they discern a distinction in the intention such that 208(3) is not an exception, it is an indication that section 208(1) is not engaged at all if the fees are provided for in the constitution.  So, their analysis of the problem and the answer was confined to that textual consideration. 

The Full Court also made a passing observation at 320 on page 605 which relates again to this question of whether the inclusion of a fee in the constitution is equivalent to approval.  What they said there was to the effect that there is something “disharmonious” in thinking that on the one part the plaintiff has to prove that member approval was not given but then a defendant would bear the onus of establishing a constitutional entitlement to a fee which the defendant contends was approved.  They say they did not necessarily impact on the construction but they made the observation as relevant to the operation as a whole.  We would say, your Honours, that that observation miscarries at the point where it refers to:

a fee which the defendant contends was approved by the members.

No contention of approval by the members is actually required to establish subsection 208(3).  It is nothing to do with intention.  The contention that the fee was approved by the members is a different kind of a contention, an assertion of an argument about equivalence but it is not a legal contention that is relevant to the operation of the section.  So, we would say that whilst the Full Court said it may be disharmonious in reality, with respect, it is not. 

Now, we identify, your Honours, these problems with the Full Court’s approach.  The first is that they did not refer to section 207 at all or at least in the context of interpreting 208(3) and they did not notice or refer to the alignment between that purpose and the content of subparagraphs 208(8)(d).  So, they really did not take any account of what the Full Court in Waters said was a factor that considerably assisted in arriving at the correct construction of section 208.

Then, by saying that section 208 is simply not engaged as the fees are provided for in the scheme constitution, the court did not pay any attention, we would submit, to the unusual features of section 208 which prescribes the circumstances in which the financial benefit may be lawfully given and thus prohibiting other ways of giving it.  There are a number, probably six, total lawful pathways and the function of subsection (3) is to add another one.  But to say that the section as a whole is not engaged, if a fee or indemnity is provided in the constitution, elevates subsection(3) to a position which, in effect, is among the conditions which must be met as specified in paragraphs (a) to (c).

One, in the end, will be reading the provisions, saying if all of the following conditions are satisfied – (a), (b), (c) – and the fee is not specified in the constitution, then for the person referred to to give the benefit either -and we would say that there is no warrant in the mere use of the words “does not prohibit” or “does not prevent” for in fact elevating the limited exception in subsection (3) to being part of the statement of the overall prohibition on which the whole of section 208 depends, when the number of cases in which section 208(3) would be relevant are miniscule or a likely miniscule number of cases in which section 208 would be engaged.

So it is the tail wagging the dog in that sense, that a tiny little subset of the overall scheme of things becomes one of the main conditions on which the entire structure of the chapter is erected.

GAGELER J:   If you win on grounds 1 and 2 but lose on ground 3, what is the consequence for the orders you seek?

MR STRONG:   There will be a number of declarations which would not survive and they are declarations 13, 21, 29 and 37.

KIEFEL CJ:   I am sorry, 13 ‑ ‑ ‑

MR STRONG:   Yes, 13, 21, 29 and 37.

GAGELER J:   That makes the orders rather messy.  The simple orders Mr Gleeson was suggesting could be made on the appeal become a little bit more complicated.

MR STRONG:   Your Honour, yes, of course.  If we are only partially successful – assuming we are at least that far successful – then some of the declarations will go.  There is no doubt about that and orders would have to be crafted that reflected the Court’s decision.  But in answering the specific question that you raise, it is those four declarations of the trial judge that stand or fall on this point.

Finally, on that point, your Honour – or perhaps I will do this first.  We provided the Court with a case - I do not need to take your Honours to it - Pye v Metropolitan Coal Company (1934) 50 CLR 614, and we direct the Court’s attention to what was said by Justice Rich at 622 and Justice McTiernan at ‑ I am sorry, I will give you that reference in a moment - and there are two things about that that we would say are of assistance to the Court.

One is it provides a very good example of an exception which has been built into the statement of the offence, but the court has seen that in reality it is an exception.  The relevant provision said a worker can apply for compensation for any injury other than an injury caused by silica dust.  This Court held that other than an injury caused by silica dust, whilst an exception, is not part of the statement of the rule. 

The second aspect of it which is of interest is that there was a separate scheme for compensation of workers who were damaged by silica dust in which they would have had to prove that the silica dust caused their injury.  But in applying for the general workers’ compensation, it would be for the employer to prove that their particular injury was caused by silica dust.  So there were different burdens of proof but they arose out of the different schemes of the pieces of legislation and are not necessarily inharmonious simply because of that reason. 

The last point I wish to make arises out of paragraph 14 of Mr Hutley’s outline in which he says that ASIC would have the court require the directors to go beyond the constitution as lodged so that they would not only have to establish that the fee was in the constitution but it was in the constitution by lawful and effective means.

Now, we would just say about that that the practicalities at first instance would be the directors would have to produce admissible evidence of the contents of the constitution and if nobody disputed that, that would be the end of it.  It would only be if the other party then said well, that is not really the constitution because that clause was not properly put in, that this issue would arise.  But it is not some general burden on the directors to go into the history of the constitution proactively and approve everything in advance of any dispute.  If the Court pleases, those are the submissions on ground 3. 

KIEFEL CJ:   Yes, thank you.  Yes, Mr Hutley.

MR HUTLEY:   Thank you, your Honour.  Your Honours, we have filed materials in each appeal seeking leave to file a notice of contention because ‑ ‑ ‑

KIEFEL CJ:   Is that in dispute?

MR HUTLEY:   No, and, your Honour, an example your Honour will find ‑ ‑ ‑

KIEFEL CJ:   Yes, leave is granted.

MR HUTLEY:   Thank you.  As your Honours appreciate, the heart of the case put by the – against the directors is the proposition that the supplemental deed dated 22 August 2006 but made on 19 July 2006, pursuant to the resolution of that date was ineffective to amend the constitution of the trust.  The supplemental deed and the constitution in the form it took to reflect the supplemental deed are at pages 16 and 26 respectively of the book of further materials.  Your Honours, if I can take your Honours shortly to them.

To use a neutral term, the “alterations” are at page 198 of the book of further materials.  That is the constitution in its current form.  At page 198, your Honours will see the relevant clause in its current form – that is, after the alterations.  The form of the alterations, your Honours will see at page 21 of the book which is the Schedule 1 to the amending deed. 

Your Honours can infer what was the form of the constitution prior to the amendments because your Honours will see that there is only one deletion affected by the amendments, that is a deletion of some words at the end of clause 24.5(f) which is at 200, line 20, in the book.  Other than that, the amendments added provisions which, obviously – and there was no corresponding provision there before.

It is convenient at the outset to consider the way in which the trial judge approached the issue on the facts.  That is set out in the joint appeal book, volume 1, page 208, paragraph 654, and following, which deals with both his Honour’s analysis and the facts.  But, at paragraph 660, on page 209, if your Honours please, his Honour set out – and we say in a way which is uncontroversial – the exercise to be undertaken by directors in evaluating the amendments.  At paragraph 661, he set out the advice that the directors had received from Madgwicks on 19 July.  Your Honours will see – find the advice in its totality in the further material volume, pages 426 to 428.   

KIEFEL CJ:   Is it your submission that the advice was clear or equivocal?

MR HUTLEY:   In my submission, in this respect, the advice was correct.

KIEFEL CJ:   Was it qualified, though, in relation to the directors, perhaps, having to form an opinion?

MR HUTLEY:   Your Honour, in our respectful submission, if the advice was correct and there was no right impacted, which is the predicate to the argument, then there was no necessity for the opinion to be formed because, by hypothesis, there could be no adverse effect on the rights of the members.

KIEFEL CJ:   It is odd, then, that it was thought necessary to go on to consider that if the threshold question was so clear.

MR HUTLEY:   Yes.  Your Honour, his Honour found – and it is not contested – that the directors acted on the basis that that was the position.  I am about to take your Honours to the findings in that regard.  That is either right or it is wrong.  If the directors were right in point of fact that these amendments had no adverse effect on rights of the members, which is the proposition I am seeking to advance, then the directors were correct to act in the way they did.  They had the power to make the amendment under 601GC(1)(b) and that is the predicate, your Honour.

But, if your Honours uphold the findings of the Full Court – which upheld the findings of his Honour that the right impacted was the right to the administration of the trust in accordance with the constitution, and not as our learned friends now advance here, as it were, what they call correlative bespoke rights with respect to each and every position – which I will come to in due course – and I will develop that in due course – and we say that they do not exist and for good reason.

But what we submit is the way it was treated by the court below was as it was treated in 360 Capital and 360 Capital worked on the basis that the right, which was adversely affected, was the general right of members to have the trust managed in accordance with the constitution.  That was the right which was adversely affected and that is what we say his Honour at trial found, the Full Court found and the Full Court made it perfectly clear that they were relying upon the approach of the Court of Appeal in Victoria in 360 Capital.  We submit that that is wrong and properly analysed ‑ ‑ ‑

BELL J:   Wrong for the reason that Justice Barrett identified that if viewed in that very broad way it might never be open to amend the constitution.  Is that the ‑ ‑ ‑

MR HUTLEY:   We say yes, that bespeaks why it is wrong but also, properly analysed that right is a right which speaks to the form of the constitution as it is from time to time.  In the situation where a constitution is by hypothesis amendable, it is no – the true expression of the right is that one is entitled to the management of the trust by reference to the form of the constitution as it is from time to time.  Under an amendable constitution that right is not embarrassed, adversely affected in any way by amendment.

BELL J:   What work does GC(1)(b) do?

MR HUTLEY:   Your Honour, when a right in point of fact is given, and I am going to take your Honours to the constitution, this constitution is replete with rights conferred upon the unit holders - the right, for example, to distribution of the fund at the end of – at the vesting date.  Now, that may be a contingent right but it is a right today and if one changed that, that would have to satisfy the requirements of – can I just call it subclause (b) instead of going 601GC ‑ ‑ ‑

BELL J:   That contingent right as it stood in the constitution unamended would, in events such as occurred, namely, the listing on the ASX, have meant that there was no – have resulted in no payment to the RE by way of a listing fee but that is not a right, you say?

MR HUTLEY:   That is an obligation.  That is a right of the RE.  It is not even an obligation in Hohfeldian terms upon the beneficiaries because there is no right of recoupment against them if the fund is inadequate and I will have to take your Honours through the constitution in a little detail to show you what the rights are and how one properly approaches this.

We say this analytically has gone wrong with respect to the Court of Appeal in 360 Capital by in effect raising an undoubted right to beneficiaries in a trust, and I will come to it, established by the highest of authority but, with respect, failing to address the nature of that right in respect of a constitution which by definition was alterable.

EDELMAN J:   Mr Hutley, does that mean that if you are talking about the right being effectively a right of due administration of a trust, that that right or power of beneficiaries would not include a power to compel the trustee to act in an authorised way when amending a trust deed?

MR HUTLEY:   Well, one becomes involved in a circularity, with respect, your Honour.  One assumes ones conclusion.  Certainly, they can get an order that he or she comply with the constitution.  If there is a threat they are not going to.  If they were threatening to act contrary to the constitution, you could be restrained.  I accept that.

EDELMAN J:   But why would it not also be a power to compel the trustee not just to comply with the particular terms of the constitution from time to time but also the manner in which any of those terms might be altered as required by the trustee or external duties upon the trustee?

MR HUTLEY:   With respect, they could but then one, in effect, with respect, gets back to the fundamental question, what is the correct manner and we would say the correct manner was, in this circumstance, subclause (b) of 601GC.  No doubt one could get an injunction but one would then have to address the very question with which I am putting to your Honour – take one of the amendments here – there was no right of any person to have this trust listed.  It was a possibility which could take place.  No member had a right to it.  It was a possibility, it was an aim, if it occurred, it occurred and they got benefits of it.

The trust deed did not confer any benefit upon the RE upon that eventuality occurring.  We say that properly analysed the right of a member today, assuming this is all looking forward from today, to deal with administration of the trust, is a right which is truly ambulatory and it is ambulatory in the sense of dealing with the form of the trust as it finds itself from time to time and that right is by definition not adversely affected by an alteration of the trust, as long as that alteration is not seeking to affect that right and an example of an alteration which might affect that right would be one that limited the liability of a trustee for breach of trust.

BELL J:   As things stood prior to the amendment, there was a right to remove the RE.

MR HUTLEY:   Yes.

BELL J:   That did not come with any consequential depletion of the fund.  After the amendment it did because of the removal fee, but there was no alteration to the right to choose to remove the RE at no fee.

MR HUTLEY:   Your Honour, can I address that specifically.  That has never been dealt with at trial or on appeal.  I will have to take your Honour to the section, if I could, but my learned friend seeks to deploy – I always forget these ones – 601FM, I think.  Your Honours will find that at page 103 in the book.

That is a statutory right that cannot be truncated, altered, limited, even if there had been a resolution by the members seeking to do so.  That is a statutory right.  It is unchangeable.  That right simply has not, in any meaningful sense, been adversely affected by an alteration of a fee.  Otherwise, there could not have been such a fee, even if it had been in there from the beginning.  If it cut down or adversely impacted upon that right it is a statutory right. 

The members have exactly the same right today as they did afterwards.  It may be that they are commercially not so interested in exercising it, but that is the economic effect which all the cases say are not sufficient.  So that point my learned friend – which is one of his central points, which he advances now, that he had an express right, because of FM, is simply wrong.

That is why – and I will come to them all in due course – it is necessary to go to the constitution in a little detail to deal with how this case was dealt with and take your Honours through in a little detail ‑ I know my learned friend has done them – to make the point good.

These are the propositions:  one, Justice Gordon, in the decision in Premium Income was making it clear that she was not dissenting from the view, in our respectful submission, that Justice Barrett adverted to.  Had she intended to do so, it would be incredible that her Honour did not advert to it because she sets out the relevant passages in extenso and says she is actually following the course that Justice Barrett adverted to.

She came to the perfectly correct conclusion that members had a current right – that is, an entitlement – in respect of future issues of capital (to them) to have it at a certain price determined.  That was a contingent right.  That was a question of construction of the instrument and her Honour came to a view.  We do not say her Honour is in any way wrong.  Then her Honour’s analysis said that contingent right, in effect, is impacted upon.

Your Honours will notice that there are no references by her Honour to collateral or corresponding rights or however my learned friend ultimately put it – that is, entailed rights from the constitution.  Her Honour turned to the constitution and came to a positive conclusion which we say in point of fact is undoubtedly right, that there was a right.

What the Full Court said is her Honour did not do that – that is, in the Court of Appeal in 360 Capital.  The Court of Appeal in 360 Capital said what one was dealing there was with the general right to the due administration of the constitution.  We say that is wrong.  We say their Honours’ approach to that, with respect, is wrong and that was the reproach - following that approach took place at first instance in this case and in the Full Court. 

Our learned friends’ approach, as it were, to the case now, to say there was a series of particular rights was not the way it was conducted at trial.  It was certainly not the way in which the court at first instance or on appeal dealt with it.  That is why, can I say, my three‑page summary has not dealt with these correlative rights, as my learned friend has them, because it is a new way of putting it.  Now, we are in the High Court.  I cannot say that any evidence would be required ‑ ‑ ‑

BELL J:   It is in ASIC’s filed submissions.

MR HUTLEY:   I understand that, your Honour, but it was adverted to.  If your Honours go to the three‑page thing – I think it has moved on a little.  But, anyway, I make no complaint about that.  But that is the circumstance.  The Full Court dealt with it on a very specific basis.  Now, that is where I am going to go, your Honours.  Can I start ‑ ‑ ‑

GAGELER J:   Mr Hutley, could I just ask at a general conceptual level:  does an obligation on the part of the RE, imposed by the trust deed, equal a right on the part of members?

MR HUTLEY:   Not necessarily.  Can I take your Honours – and what right it is is quite complex.  That is why your Honour should, for example, go to the constitution.  Can I take your Honour, for example, to provisions of the constitution to make good this point.

GAGELER J:   Yes.

MR HUTLEY:   If your Honours go to – I think it is 2.16 of the constitution – 2.3.  If your Honours go to the joint further materials book at page 62.  I was going to take your Honour through it in detail but, to answer your Honour’s question directly, if your Honour goes to clause 2.3.  Clause 2.3 says:

Each person who becomes registered as a Unitholder shall be deemed to have agreed to become a party to this Deed and any supplementary deed of variation of this Deed and shall be entitled to the benefit of and shall be bound by the terms and conditions of this Deed and of any supplementary deed of variation of this Deed.

So, in other words, the right that the members get is purely ambulatory and it is contemplated from the beginning their rights will be subject to any valid amendment.

GAGELER J:   These are specific rights – are all ambulatory, in your ‑ ‑ ‑

MR HUTLEY:   No, no, no.  I accept that if a right is there, even though the fact that it is liable to be amended, if there is an amendment which is adverse to that right then one has to follow subclause (a) - in other words, the right to participate in vesting, which I will take your Honour to.

But, non constat, that there is some implied negative so‑called correlative right in the situation where there are entitlements by the RE or there are no entitlements by the RE, there are just absences, that is, for example, there was no fee upon listing.  Our learned friend says that leads to some form of correlative right to achieve listing without a fee.  We say that is just a form of words.  That is not a contractual right at all.  That is just a conclusion asserted for the purposes of the analysis.  We do not say it does not arise by way of implications.  It is not necessary for what might be called – for the proper running of the trust.  No one has sought to, as it were, analyse it in terms of implied terms, or the like.  All it is is an assertion of a conclusion.

EDELMAN J:   If there were a term that provided that the RE must pay a certain amount of money to a third party in various circumstances and the amendment were purported to vastly increase that amount, you would accept that that would be an amendment which would affect members’ rights.

MR HUTLEY:   No, I would not, with respect.  It might aff­ect the value of their other rights but it would not affect their rights unless the person who is being paid was a member.  The cases have drawn the distinction between adverse effect on a, quote, “right” – that is, a legal chose in action – and things affecting, quote, “its economic worth”.  Thus, that led – and the way that that, as it were, is moved around by 360 Capital is by getting this overall right and saying, because you have the right to due administration of the trust, effectively – and my learned friend, other than the odd example – has to say, virtually any amendment to any right because that affects what he describes as, quote, “the due administration must be an adverse effect on the right”.  We just say that is analytically incorrect.

The right with which we are talking about is a right which has been determined by authority and we say, in effect, is necessarily ambulatory.  But, that is where I am going, your Honours.  If your Honours would let me quietly walk there, I will ‑ ‑ ‑

KIEFEL CJ:   Just before you do take that amble, you talk about the value of the members’ rights, but is not the right to receive moneys with respect to the units affected by actions by the responsible entity which, in effect, remove the moneys?  I mean, we can talk semantics, in a way – talk about value – but the right to receive, if you take the money away, becomes meaningless.

MR HUTLEY:   If your Honours come to the conclusion that any act which could result in a change in the net assets of the fund by a dollar is a change which adversely affects the rights of members – the rights – then, of course, that is the answer to the question.  I accept that, your Honour.  But, we say, that is not how the cases have approached it.  And, in fact, even 360 Capital accepted that the concept of enjoyment or value is something different to the rights, therefore, you had to have an adverse effect on “the rights” by change.  And, you do not get an adverse effect on rights just because some money is spent which may make the ultimate rights have a different value to what they would have had but for that effect.  If that is the view the Court takes that that is sufficient ‑ ‑ ‑

KEANE J:   What if it makes the amount of money under administration less?  It diminishes the equity.  It diminishes – I mean, there is a right to due administration and that right relates to funds under management, if you like. 

MR HUTLEY:   Yes, your Honour, but only duly administered.

KEANE J:   Why is not that equity a right?

MR HUTLEY:   Your Honour, we say the proper analysis is today I do not have a right because I do not know what the content of the right is as to what the state of the equity would be in two years’ time.  What I do is have certain rights in a trust and certain rights in a trust which are an amalgam of rights and obligations and opportunities to change those rights.

KEANE J:   But if someone takes a lump of money out that means that my equity has been reduced, what I get in the future will be different and less as a result but today my equity and my entitlement to have these funds administered has been reduced.  Why are my rights ‑ ‑ ‑

MR HUTLEY:   Your Honour, then we are dealing with a different right there.  We are not dealing with a right then to due administration.  We are not even dealing with the correlative rights.  We are dealing with a different analytical basis, your Honour, which I may have to take on but nobody has actually advanced as a case to date that any change which has the potential or in fact or could conceivably lead to an alteration in the net assets compared to what it is without that change is an adverse effect on my rights, your Honour, with respect, is a very broad proposition and we would submit when I have a little time to think about the full implications of it ‑ ‑ ‑

KEANE J:   Anybody who has funds under management would probably understand it pretty well.

MR HUTLEY:   With respect, your Honour, we would say that is not an – the question is, what right is that an adverse effect on?  That is, a right to be paid out at the end, what would have occurred but for that change?

EDELMAN J:   The effect of your submission really is that something that has a minimal but adverse effect on what you might call a Hohfeldian right will fall within the protection of paragraph (b) or paragraphs (a) and (b) but something that has a massive effect on value does not?

MR HUTLEY:   Can we say that makes perfect sense in the – one goes back to what one is dealing with here, one is dealing with schemes of arrangement – not schemes of arrangement, managed investment schemes.  Managed investment schemes can be about every conceivable speculative investment in the world and powers were given to the ‑ very broad powers are given to the managers, extremely broad powers.  Limitations on those powers are actually quite small when one goes through this scheme.  They have duties but limitations on their powers in respect of a scheme which is put in place is quite small.

BELL J:   Coming back to Justice Gageler’s question ‑ ‑ ‑

MR HUTLEY:   I am sorry, I was just trying to ‑ ‑ ‑

BELL J:   ‑ ‑ ‑ about whether there is a correlative right on the part of the member in respect of a duty or limitation if you like, placed on the RE, when you go to 25.1 of the constitution dealing with amendment, which under (a)(i) does not permit an amendment in favour of or resulting in any benefit to the RE, that does not give rise to any right on the part of a member to the administration of the scheme upon the basis that the RE, whilst it might amend the deed from time to time, is precluded from doing so by an amendment in its favour or resulting in a benefit to it.

MR HUTLEY:   The Full Court held that the power under 601GC(1) was freestanding, unconstrainable.

BELL J:   Putting that to one side at the moment, I am asking ‑ ‑ ‑

MR HUTLEY:   But I am just saying, the difficulty with that is this, like some other provisions I will come to in this constitution, when I take your Honours through them, is clearly invalid, not effective.  The constitution in effect deals with, for example, freeing the RE from liabilities, clearly in breach of the Act and I will take your Honours to them.  25.1, insofar as it has those limitations in them, are invalid, they are of no legal effect because you cannot cut down – you will notice that 25 does not confer any power upon the general meeting of members to amend the constitution. 

BELL J:   It limits the power of the RE ‑ ‑ ‑

MR HUTLEY:   But it cannot because the statute tells us when the RE can do it and you cannot, in effect, limit the power of them to do it to vary beyond the statute which this purports to do and that is what the Full Court held, with respect, and that is not challenged in this Court.

GAGELER J:   Mr Hutley, do you have any affirmative definition or description of a right for this purpose?  As I understand it, you do not confine it to vested rights.  There can be a contingent right.

MR HUTLEY:   No, a right which on its true construction ‑ that is, a right granted in this constitution which I will come to in due course, on its true construction confers an entitlement to something upon a beneficiary, like an entitlement to vote, like an entitlement to participate in income, an entitlement to distributions, thousands of entitlements.  The constitution is full of them.

GAGELER J:   In certain events occurring in the future.

MR HUTLEY:   Certain events, precisely.  Yes, they are.  I do not say that the right has to be, in effect, a right exercisable today to be a right.  No, it is any right.  But one has got to analyse, with respect, the constitution and say, what is the right, and we say an obligation ‑ a right of a RE to be paid money is not a right of the member.  So, it is not even an obligation of the member strictly.  It is an exposure of the member to the fund being reduced by reason of exercise of that right by the RE because the member does not have any obligation to the RE with respect to the RE’s fees.  That is also set in the constitution.

KEANE J:   The member has a right to have the fund administered in accordance with the deed, under arrangements whereby money can only be extracted on certain – from the fund by the RE for certain purposes and for certain reasons.

MR HUTLEY:   In accordance with the constitution from time to time we say. 

KEANE J:   So, the member…..have a right to the administration of the fund on the footing that certain amounts, but not others, may be deducted.

MR HUTLEY:   Well, your Honour, at a particular moment in time you may be able to say to the member at that time, yes the constitution says X now, and that is it, but ‑ ‑ ‑

KEANE J:   It is not just what the constitution says.  It is what the constitution says in relation to the fund that exists and in relation to which the members, as beneficiaries under any trust, have a right to its due administration in accordance with the terms of the trust. 

MR HUTLEY:   Yes, and your Honour, that is – the point is ‑ ‑ ‑

KEANE J:   Part of the due administration is having imposts on the trust fund that are not authorised.

MR HUTLEY:   Your Honour, I accept that.  Obviously, your Honour; for example, if the RE had sought to take out these funds ‑ or they had been paid these funds upon listing without an amendment to the trust, it would have been a clear breach of the trust.  The trust would not have been conducted in accordance with the constitution.

It is a different question, in our respectful submission ‑ that is what I have to develop – a different question to ask of this right to due administration, which is the right acknowledged by the law and the right – whether it is other than an ambulatory right.  And we say clearly it is in a constitution which is contemplated to be amendable, and it is that right, properly understood, which is not adversely affected because it is ever speaking.  That is the right which has been identified in the cases as the one that is adversely affected, and it is not because it is ever speaking. 

EDELMAN J:   What is the statutory purpose that would treat as a member’s right, which I think you would accept, a right to monthly provision of reports, but not treat as a member’s right the ability to prevent unauthorised payment of the entirety of the scheme’s assets to a belated party?

MR HUTLEY:   Well, you could not, your Honour.  Can I address what I think is the substance of your Honour’s questions if I might.  The legislature has chosen, for good or ill, adverse affects rights.  It did not just say, adversely affects the interests, which would obviously include the rights.  It could have said, adversely or it cannot make any change at all unless it is satisfied that it is beneficial to the interests of the trustees or does not affect their interest.  They have chosen a form of words and they have chosen a form of words expressed in terms of rights and, in our respectful submission, that is the matter.

Now, the way it has oddly come about, ironically, is that the use of the word “plural rights” is almost otiose if the law is, as it has now been determined, because you will always affect one right.  In other words, every amendment will be about one right.  And with respect to the Full Court, and I will come to it, just about every amendment to any right can be viewed from one member’s – one member’s view or another, as being adverse.  If you contract, to take the example that 360 Capital have, the time within which one can redeem, that is a disaster for the people who are late.  The longer the time to redeem, the more the position of the people who have not sought to redeem to get in and get their money exists. 

So just about any benefit to one unit holder or one member has the potential to be disadvantage to someone else, even a reduction ‑ we were playing around trying to find one which, you would think would be beneficial.  Even a reduction in fees could be viewed as non‑beneficial because you do not want a commercial, responsible entity acting for a figure which is not commercial.

BELL J:   That might be addressed by the fact that (1)(b) is posited upon the RE reasonably considering that the change will not adversely affect members’ rights.  So if rights are not limited in the way you propose, none the less the fear that one could never exercise the amendment power under (1)(b), which seemed to partly inform Justice Barrett’s analysis, does not perhaps give full effect to that.

MR HUTLEY:   I am not saying it is not conceivable but it is a passing strange way of addressing this problem if really what one is talking ‑ to take up your Honour Justice Keane’s observation ‑ is any change to the economic position brought about by amendment as an adverse effect, one would really just say the adverse effect on the economic interests or the interests of members, but they have chosen what they have chosen.

KEANE J:    Alternatively, it might be said that, if your approach were correct, the language of the statute would have been altering adversely the rights rather than adverse effect on the rights.

MR HUTLEY:   Yes, a change that has an adverse effect on rights ‑ that is what we say.  So there has to be a change, a modification, of the constitution, either its replacement or modification, which has an adverse effect.

KEANE J:   Which alters adversely because it cannot just be about the effect.  You have told us that.

MR HUTLEY:   Yes.  We say, if it effectively alters the situation – so let us assume one has a right to call a meeting and then a term is put in and you have to send a notice 45 days beforehand ‑ we would say that is an adverse effect upon the right.  It does not have to be a strict amendment of the right in terms but in substance it has altered the right.  That is an adverse effect on the rights.

I was just dealing with the facts and I have taken your Honours to Madgwick’s advice.  If your Honours go to his Honour the trial judge’s judgment at paragraph 665, his Honour made a finding at page 211 of the core appeal book that:

having received advice that the Amendments would not affect any relevant members’ right, each of the Directors . . . did not consider the members’ right to have the Scheme administered according to its existing terms.

So, in other words, having been advised that it would not affect a right in the relevant sense they considered they were empowered to proceed.  If that is right we say the directors did validly alter the constitution because the only attack which is made is that they did not satisfy the predicate of 601GC(1)(b). 

Now, can I take you shortly to the constitution which your Honours will find in the further materials.  It is described as a unit trust deed.  In the further materials it starts formerly at 1401 but the recitals are at – not 1401, sorry, I do apologise, I was looking at the bottom – at 26, but the recitals appear at 38.  The recitals set out the general aims of the trust, and D, your Honours:

This Deed is made with the Intention that the Responsible Entity and the Unitholders will be bound by this Deed and the Unitholders shall be entitled to the benefits of the Trust to the extent set out below. 

It is intended by the parties that the benefits of the Trust shall enure for the benefit of every Unitholder who shall hold Units and that every such Unitholder shall be bound by the provisions of this Deed.

Your Honours can then – if your Honours go to clause 1.5 at page 58.  If your Honours go down to 1.5 which sets out the “Unitholder Liability” and it is a rather lengthy clause but if your Honours go towards the bottom of the clause and over on to the top of the next page, your Honours will see it frees the unit holders of any liability to the responsible entity in respect of any entitlement of the responsibility under the terms of the deed.  Now, clause 2 generally ‑ if your Honours go over to page 60 at 2.2 deals with the “Beneficial Interest”:

The beneficial interest in the Trust Fund as originally constituted and as existing from time to time shall be divided into Units and held . . . for the time being in proportion to the Units registered in their respective names.

Clause 2.3, I have taken your Honours to, so the unit holders agree to be bound by the form of the document from time to time and to take the benefit from time to time.  “Entitlement to Trust Fund”, it says:

Subject to the rights, obligations or restrictions attaching to any particular Unit, each Unit shall entitle the registered Unitholder equally with the registered Unitholders of all other Units to the beneficial interest in the Trust Fund as an entirety but shall not entitle any Unitholder to any particular Asset, security or investment comprised –

Now, that may be to take your Honour’s observation - Justice Keane’s observation.  That deals with that aspect of it.  What we say from that is it is clear that the rights and liabilities are variable depending upon the state of the constitution from time to time and all people acquired interests upon that basis.  That is part of the terms of their agreement.

I will now just give your Honours a few notes about some parts.  Part 3 which commences at 64 deals with units and their issue.  Part 4 at 66 deals with the issue of further units.  There follows a series of parts dealing with different matters, as broadly as registers in Part 5; calls about members in Part 7 which essentially produces obligations on members; forfeiture – Part 8 - which really deals with obligations on the whole; transfer – Part 9 – that confers a range of rights upon members to the disposal of their units.  I do not want to go through, your Honours, in detail.  I am just giving your Honours the conspectus.  Part 9A deals with redemption and one’s entitlements in that regard.

Part 12 – if I can go to that shortly – deals with the termination of the trust.  It says the term of the trust is the “Vesting Day”.  The “Vesting Day” is a defined term, your Honours.  I will just give your Honours the defined term – I will just have that turned up.  I have lost my note of it, for the moment.  It is a long way out – put it that way.  Yes, on page 54:

“Vesting Day” means the first to occur of –

a series of dates.  Over to 56:

if the Responsible Entity has not passed a resolution on or before 31 July 2007 to seek and apply for a listing of the Units –

That was a vesting date and:

such date being earlier or later than the date specified in clause 1.1(uu)(i) as the Responsible Entity may with the consent –

I wanted to give your Honours a note of the other ones.  Then, 12.2 there was a power to terminate.  Then, 12.4 says:

The Responsible Entity shall on the Vesting Day deal with all or any part of the Trust Fund in accordance with the plan consented to by the Unitholders.

So, the unit holders will get rights, no doubt, under that plan.  Then there is termination powers and then 12.6 deals with distribution.  Upon the distribution:

and subject to this clause . . . shall as soon as practical sell, call in and convert into money –

and divide it amongst unit holders.  We would say they are clear rights which are given by this constitution on unit holders.  An attempt to vary those – you do not need the right to due administration of the trust – that would be a right – a change which you would have to assess whether it adversely affected that right.  If it in any way impacted upon that distribution contemplated that would be a right which would – a variation which would have to run the gamut of (1)(b) and they are the sorts of rights we say one is dealing with.

Now, Part 12, as I said, deals with determination.  Part 13 at 104 deals with the income of the trust funds.  Your Honours will see that; that is Part 13.  Then there are a range of rights conferred on unit holders, dependent upon the state of performance of the fund from time to time to participation in the income.  Now, it deals with a broader set of rights than that.

If your Honours note, for example, clause 13.13, that deals with the management of the trust which gives extraordinarily broad powers to the trustee in managing the trust – the sorts of things one sees all the time in respect of these sorts of managed investments because they are commercial ventures, often having to be flexible to rapidly‑changing economic circumstances, the sort of thing which might require alterations to the trust to deal with, perhaps without the leisure – to go through calling meetings, which can often be of hundreds of thousands of people.

We say that the language was chosen in 601GC of “adverse effects on rights” for a very good reason – to maximise flexibility.  But if you were impacting upon the rights of the beneficiaries, that is, adversely affecting their rights, as appeared in the constitution, then you have to speak to them because that is the basis upon which they dealt with you, but not as our learned friends would have it, anything which might affect the management of the constitution – anything – would have to lead to a meeting, which is the logic of their position.

That is why we say that one has to address this with that focus in mind and that takes one back, of course, to the definition of “scheme” which - your Honours have dealt with many cases of schemes.  They can deal with just about anything under the sun.  Yes, then, if your Honours go to1318 to identify the sorts of – 1317 at page 120 sets out very specific powers that the trustee has.  Our learned friends would say that any one of any amendment of those that would be contemplated, any amendment, no matter how minor, would have to go through the crucible of a meeting if it could have ‑ ‑ ‑

BELL J:   One comes back to the words of (1)(b), the responsible entity with a very minor amendment might reasonably consider the change would not adversely affect.

MR HUTLEY:   But these things, often change in powers have the capacity, depending upon how business - one works out in exercising those powers.  To give someone a ‑ ‑ ‑

BELL J:   One comes back, on your analysis, to any right conferred on the member in the way you defined it a little time ago, no matter how minor, requires the (1)(b) exercise to be considered and in many instances would call for the many thousands of members to have the right to attend a meeting.

MR HUTLEY:   Precisely, your Honour, and a compromise has been struck.

BELL J:   The provision under the existing constitution conferring on members the right on the vesting date to participate according to the number of units in the fund might be affected by the provision for the RE to take a vesting‑date fee amounting to 80 per cent of the fund.  There would be no difficulty with that and it would not attract (1)(b).

MR HUTLEY:   Well, your Honour, can I say if one tests these things at the extreme, firstly, it does not affect until it is registered.  If it is registered it has to be available to members.  If that sort of extremity occurred, members have an absolute right to then call a meeting and then reverse it.  Now, you put it at that extreme, one would imagine – and there was evidence here that the members, because your Honours will recall, because these are public funds they have to have instruments out in the marketplace explaining their position.  That instrument had to be amended to reflect the amendments.  That means it was publicised widely what had been done.  That is another aspect of the structure in relation to these schemes.  If they are going to conduct business as commercial entities they really have to advise these sorts of matters.

BELL J:   That was a PDS in connection with the listing, was it not?

MR HUTLEY:   No, no, that was a PDS in connection with the ongoing running of the fund because you have to have a PDS out if you are ever going to raise any money.  That was not a prospectus.  I think, your Honour – I will have that checked – but that was just the average.  You would have to have a PDS out there.

BELL J:   I understand.

MR HUTLEY:   One of these schemes has to.  So, there is going to be publication of what is done and anyway – now, let me just deal with one or two other things.  Now, clause 13.18 permits the RE to deal with itself in its varying capacities.  That is at 124, I am sorry, your Honours. 

Then to give you an example of clauses which would affect the overarching right, if your Honours go to 13.32 there is a limitation of liability clause there and a relatively broad one.  That actually is then supplemented, if it needed supplementation, by an extremely broad one which is in Chapter 14.  If your Honours go to clause 14.10 at 150, this provides a limitation of liability for:

any breach of duty or trust whatsoever unless it shall be proved to have been committed made or omitted in personal conscious fraudulent bad faith by the Responsible Entity - 

Now, that clause is probably invalid having regard to the requirements of 601FC(1)(k), and particularly 601MA which provides that if you fail – if you distribute money other than in accordance with the constitution, you have committed an infringement of 601FC(1)(k).  If that causes loss, you have a right over 601MA to compensation.  Just an example, I have not gone through them all, but these constitutions are very broadly expressed often and they do intersect sometimes unfavourably with the legislation and that is an example. 

But I would accept an attempt to alter the right to deal with administration by limiting liability would be something which you would have to go through the 601(1)(b) satisfaction of “no adverse effect” analysis.

The only other clause I wanted to draw your Honours’ attention to was clause 25, which was – before 25, 24.  Clause 24 deals with the entitlement to fees and your Honours know the clauses with which we are concerned.  I will come to those in a little detail in due course.

Coming now to the reasons of the trial judge in the Full Court, if I can take your Honours to paragraph 667 in the trial judge’s reasons which your Honours will find at page 211 - my learned friend took you to it.  He said the trial judge identified why it was that he considered the amendments did affect the members’ rights but it is important to understand the analytical basis where he got to that and that your Honours take up from 654 and onwards.

He then at 654 and following refers to the various decisions including the judgments of Justices Barrett and Gordon that you have been taken to.  He then refers at 658 to 360 Capital.  He then explains at 659 at [40]:

…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 . . . 

I respectfully agree.

In the present case, the Directors were required as a first step to ascertain the rights of members created by the existing Constitution. Next, they were required to decide whether those rights, as distinct from the enjoyment of them or their value . . . If they were changed or impinged upon, then the Directors were required . . .

When the Amendments were before them –

There is a reference to the opinion which I took your Honours to – were advised they did not need to consider.  Then that goes on through it.  Then 664, his Honour makes a finding as how it was dealt with and following.  At 667 and then 668:

The Directors contended that 360 Capital was wrongly decided –

then it refers to that:

With great respect, I prefer the reasoning in Premium Income and 360 Capital.

The Directors argued that the approach taken to the meaning of members’ rights . . . was consistent with the prevailing case law –

et cetera, and then he goes on and deals with them.  So, concluding at 673:

The Amendments were not authorised . . . Having been made outside power, the Amendments were never effective –

and then refers to the relevant analysis particularly at 46 to 48 in 360 Capital which I will come to which is squarely and solely based on the general overarching right analysis.  We say his Honour did that and we say that then his – the Full Court which your Honours will find in the next volume at paragraphs 226 to 235.  At 225 they set out his Honour’s reasons in the way I have taken your Honours to.  Your Honours, I see the time, before I go to it.

KIEFEL CJ:   Yes.  Are the parties in a position to advise how much of tomorrow is likely to be taken up?

MR HUTLEY:   I would hope, your Honour, on this point I would not have any more than half an hour to 40 minutes tomorrow morning.

KIEFEL CJ:   Is it likely that we will proceed beyond the luncheon adjournment?  Yes, all right.  We will start at 9.30 tomorrow and we might shorten the luncheon adjournment if we do proceed that way, but of course you will have time overnight to refine your arguments.  We will adjourn to 9.30.

AT 4.16 PM THE MATTER WAS ADJOURNED
UNTIL THURSDAY, 18 OCTOBER 2018