Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd
[2009] FCAFC 147
•20 OCTOBER 2009 (CORRIGENDUM 4 NOVEMBER 2009)
FEDERAL COURT OF AUSTRALIA
Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147
CORRIGENDUM
BROOKFIELD MULTIPLEX LIMITED (ACN 008 687 063) and BROOKFIELD MULTIPLEX FUNDS MANAGEMENT LIMITED (ACN 105 371 917) v INTERNATIONAL LITIGATION FUNDING PARTNERS PTE LTD, 2117980 ONTARIO INC, MAURICE BLACKBURN PTY LIMITED (ACN 105 657 949), P DAWSON NOMINEES PTY LIMITED (ACN 004 743 408) and FREDERICK HENRY HART
VID 374 of 2009
SUNDBERG, DOWSETT AND JACOBSON JJ
20 OCTOBER 2009 (CORRIGENDUM 4 NOVEMBER 2009)
SYDNEY (HEARD IN MELBOURNE)
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 374 of 2009
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: BROOKFIELD MULTIPLEX LIMITED (ACN 008 687 063)
First AppellantBROOKFIELD MULTIPLEX FUNDS MANAGEMENT LIMITED (ACN 105 371 917)
Second Appellant
AND: INTERNATIONAL LITIGATION FUNDING PARTNERS PTE LTD
First Respondent2117980 ONTARIO INC
Second RespondentMAURICE BLACKBURN PTY LIMITED (ACN 105 657 949)
Third RespondentP DAWSON NOMINEES PTY LIMITED (ACN 004 743 408)
Fourth RespondentFREDERICK HENRY HART
Fifth Respondent
JUDGES:
SUNDBERG, DOWSETT AND JACOBSON JJ
DATE:
20 OCTOBER 2009 (CORRIGENDUM 4 NOVEMBER 2009)
PLACE:
SYDNEY (HEARD IN MELBOURNE)
CORRIGENDUM
In para 17, line 2 of the Reasons for Judgment of Sundberg and Dowsett JJ delivered on 20 October 2009, delete the word “Management” and in lieu thereof insert the word “Managed”.
I certify that the preceding one (1) numbered paragraph is a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justices Sundberg and Dowsett. Associate:
Dated: 4 November 2009
FEDERAL COURT OF AUSTRALIA
Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147
CORPORATIONS – Managed Investment Schemes – whether a funded class action constitutes a Managed Investment Scheme – definition of Managed Investment Scheme – meaning of “interest”, “contribution”, “money’s worth”, “pooled”, “capable of being paid or supplied”, “common enterprise” and “benefit”
CORPORATIONS – injunctive relief – standing – proper construction of s 1324(1) – whether interest sufficient
Held: appeal allowed – arrangement constitutes a Managed Investment Scheme
Acts Interpretation Act 1901 (Cth), ss 15AB, 18A
Australian Securities Commission Act 1989 (Cth)
Companies Act 1961 (NSW), s 76
Companies Act 1961 (Qld), s 76
Corporations Act 1989 (Cth)
Corporations Act 2001 (Cth), Ch 5C, Pts 5C.4, 5C.11, ss 9, 601ED, 601FC, 601FD, 601FE, 601FF, 601GA, 601GB, 601HA, 1324(1)
Corporations Law
Corporations Legislation Amendment Act 1990 (Cth)
Federal Court of Australia Act 1976 (Cth)
Law Reform Commission Act 1973 (Cth)
Managed Investment Bill 1997 (Cth)
Managed Investments Act 1998 (Cth)Australian Securities and Investments Commission v Emu Brewery Mezzanise Ltd (2004) 52 ACSR 168 cited
Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403 distinguished
Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (2000) 35 ACSR 620 cited
Australian Securities and Investments Commission v FUELbanc Australia Ltd (2007) 162 FCR 174 referred to
Australian Securities and Investments Commission v HLP Financial Planning (Aust) Pty Ltd (2007) 164 FCR 487 referred to
Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 329 distinguished
Australian Securities and Investments Commission v Takaran Pty Ltd (2002) 170 FLR 388 not followed
Australian Softwood Forests Pty Ltd v Attorney-General for the State of New South Wales; Ex relataione Corporate Affairs Commission (1981) 148 CLR 121 followed
Broken Hill Proprietary Company Limited v Bell Resources Limited (1984) 2 ACLC 157 applied
Burton v Arcus (2006) 32 WAR 366 not followed
CIC Insurance Limited v Bankstown Football Club Limited (1997) 187 CLR 384 referred to
Crocombe v Pine Forests of Australia Pty Ltd (2005) 219 ALR692 not followed
FCR 174 referred to
Hance v Commissioner of Taxation [2008] ATC ¶20-085 referred to
IMF (Australia) Ltd (ACN 067 298 088) v Meadow Springs Fairway Resort Ltd (In Liq) (ACN 084 358 592) (2009) 253 ALR 240 followed
Kennon v Spry (2009) 251 ALR 257 referred to
Mier v F N Management Pty Ltd (2005) 56 ACSR 93 referred to
Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd (2007) 164 FCR 275 referred to
P Dawson Nominees Pty Ltd v Multiplex Ltd (2007) 242 ALR 111 referred to
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 referred to
Secretan v Hart(Inspector of Taxes) (1969) 1 WLR 1599 referred toAustralian Law Reform Commission and the Companies and Securities Advisory Committee, Discussion Paper 53: Collective Investment Schemes (Australian Law Reform Commission, 1992)
Australian Law Reform Commission and the Companies and Securities Advisory Committee, Discussion Paper 65: Collective Investment: Other People’s Money (Australian Law Reform Commission, 1993)
Chitty on Contracts (30th ed, Thomson Reuters, 2008) Vol 1
Explanatory Memorandum Managed Investments Bill 1997 (Cth)
Ford’s Principles of Corporations Law (LexisNexis Butterworths, subscription service) (service 34: 8/2002)
Oxford English Dictionary (2nd ed, Oxford University Press, 1989) Vol XII
Parliamentary Joint Committee on Corporations and Financial Services, Managed Investments Bill 1997 (Department of the Parliament Library, 1997)
Patterson and Ednie, Australian Company Law, (Butterworths, looseleaf service) (update 27 September 1976)
The Macquarie Dictionary (4th ed, The Macquarie Library, 2005)
The New Shorter Oxford English Dictionary (4thed, Oxford University Press, 1993) Vol 1
Wallace and Young, Australian Company Law and Practice (1965, Law Book Company Ltd)BROOKFIELD MULTIPLEX LIMITED (ACN 008 687 063) and BROOKFIELD MULTIPLEX FUNDS MANAGEMENT LIMITED (ACN 105 371 917) v INTERNATIONAL LITIGATION FUNDING PARTNERS PTE LTD, 2117980 ONTARIO INC, MAURICE BLACKBURN PTY LIMITED (ACN 105 657 949), P DAWSON NOMINEES PTY LIMITED (ACN 004 743 408) and FREDERICK HENRY HART
VID 374 of 2009
SUNDBERG, DOWSETT AND JACOBSON JJ
20 OCTOBER 2009
SYDNEY (HEARD IN MELBOURNE)
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 374 of 2009
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: BROOKFIELD MULTIPLEX LIMITED (ACN 008 687 063)
First AppellantBROOKFIELD MULTIPLEX FUNDS MANAGEMENT LIMITED (ACN 105 371 917)
Second Appellant
AND: INTERNATIONAL LITIGATION FUNDING PARTNERS PTE LTD
First Respondent2117980 ONTARIO INC
Second RespondentMAURICE BLACKBURN PTY LIMITED (ACN 105 657 949)
Third RespondentP DAWSON NOMINEES PTY LIMITED (ACN 004 743 408)
Fourth RespondentFREDERICK HENRY HART
Fifth Respondent
JUDGES:
SUNDBERG, DOWSETT AND JACOBSON JJ
DATE OF ORDER:
20 OCTOBER 2009
WHERE MADE:
SYDNEY (HEARD IN MELBOURNE)
THE COURT ORDERS THAT:
1.Within seven days of publication of these reasons, Multiplex file and serve written submissions concerning proposed forms of order;
2.Within 14 days of such publication, the respondents file and serve their submissions concerning all outstanding matters;
3.Within 21 days of such publication, Multiplex file and serve its reply to the respondents’ submissions; and
4.The parties have liberty to apply.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using the Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 374 of 2009
ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: BROOKFIELD MULTIPLEX LIMITED (ACN 008 687 063)
First AppellantBROOKFIELD MULTIPLEX FUNDS MANAGEMENT LIMITED (ACN 105 371 917)
Second Appellant
AND: INTERNATIONAL LITIGATION FUNDING PARTNERS PTE LTD
First Respondent2117980 ONTARIO INC
Second RespondentMAURICE BLACKBURN PTY LIMITED (ACN 105 657 949)
Third RespondentP DAWSON NOMINEES PTY LIMITED (ACN 004 743 408)
Fourth RespondentFREDERICK HENRY HART
Fifth Respondent
JUDGES:
SUNDBERG, DOWSETT AND JACOBSON JJ
DATE:
20 OCTOBER 2009
PLACE:
SYDNEY (HEARD IN MELBOURNE)
REASONS FOR JUDGMENT
SUNDBERG AND DOWSETT JJ:
INTRODUCTION AND HISTORY
We have had the benefit of reading the reasons prepared by Jacobson J and gratefully adopt his Honour’s summary of the facts. As far as is practicable, we will also adopt his Honour’s terminology. For the sake of clarity, we should point out that we use the term “group member” to describe any one of the claimants on whose behalf proceedings against Multiplex are brought. We use the term “scheme member” to identify each of those persons who is participating in the scheme as identified in the pleadings. It includes the group members and the Funder. MBC may also be a scheme member, but that possibility seems not to be relevant for present purposes, having regard to the way in which the case has been conducted.
Both Jacobson J and the primary Judge have referred extensively to the history of the corporations legislation as it concerns “interests” other than shares and debentures, which matter is now dealt with in Ch 5C of the Corporations Act 2001 (Cth) (the “Corporations Act”). We should like to say a little more about that history.
The public offering of such interests has been regulated for many years. Prior to the enactment of the Corporations Act 1989 (Cth) (the “1989 Act”), regulation had taken the form of a prohibition upon the offering of such interests unless:
·they were issued by a company;
·there was a deed which complied with the relevant legislation and had been approved by the Registrar of Companies;
·a Crown Law Officer (the Attorney-General, Minister for Justice or Solicitor-General) had approved the trustee or representative to act as such for the purposes of the deed; and
·there was a prospectus.
The deed was to be made between the management company (the company issuing the interests) and the trustee/representative, so that the latter could enforce it on behalf of interest-holders. The Companies Act 1961 (Qld) is an indicative example. As enacted, the term “interest” was defined in s 76 to mean:
… any right to participate, or interest, whether enforceable or not and whether actual prospective or contingent –
(a)in any profits, assets or realisation of any financial or business undertaking or scheme whether in the State or elsewhere;
(b)in any common enterprise whether in the State or elsewhere in which the holder of the right or interest is led to expect profits rent or interest from the efforts of the promoter of the enterprise or a third party; or
(c)in any investment contract,
whether or not the right or interest is evidenced by a formal document and whether or not the right or interest relates to a physical asset, but does not include–
(d)any share in or debenture of a corporation;
(e)any interest in or arising out of a policy of life insurance;
(f)any interest in a partnership agreement;
(g)any interests in a common fund established and kept under [various statutes]; or
(h)any prescribed right or interest or any right or interest of a prescribed class or kind declared by regulation to be an exempt right or interest for the purposes of this Division;
…
For an early history of the Uniform Companies Acts see Wallace and Young, Australian Company Law and Practice (1965, Law Book Company Ltd) at 300, and Patterson and Ednie, Australian Company Law, (Butterworths, looseleaf service) (update 27 September 1976) at 5129.
A similar definition of “interest” (or, after 1981, “prescribed interest”) appeared in corporations legislation until enactment of the 1989 Act which, by operation of the Corporations Legislation Amendment Act 1990 (Cth) became the Corporations Law. The Corporations Law defined the term “participation interest” in the terms previously used to define the terms “prescribed interest” and “interest”, and defined the term “prescribed interest” to mean:
(a)a participation interest; or
(b)a right, whether enforceable or not, whether actual, prospective or contingent and whether or not evidenced by a formal document, to participate in a time-sharing scheme;
but does not include a right or interest, or a right or interest included in a class or kind of rights or interests, declared by the regulations to be an exempt right or interest, or a class or kind of exempt rights or interests, for the purposes of Chapter 7 … .
Under the Corporations Law the regulation of the issue of prescribed interests was largely in accordance with that prescribed for company securities. It is not necessary that we say any more about that legislation.
On 24 May 1991 the Attorney-General issued a reference under the Law Reform Commission Act 1973 (Cth) and the Australian Securities Commission Act 1989 (Cth). It referred to the need to ensure that there was a proper legal framework for “prescribed interests and like collective investment schemes”. The term “collective investment schemes” was thereafter used to describe the subject matter of the reference, apparently including all schemes which involved the issue of prescribed interests as then defined. The reference was undertaken by the Australian Law Reform Commission and the Companies and Securities Advisory Committee. We shall refer to both bodies collectively as the “Commission”.
It seems that the Commission encountered difficulties in developing one regulatory system for all schemes involving the issue of prescribed interests. In October 1992 it issued Discussion Paper 53 Collective Investment Schemes (Australian Law Reform Commission, 1992) (“DP53”), seeking submissions. At paras 3.30-3.35 it set out a number of options for the regulation of such schemes as follows:
3.30Five options. There are several ways in which the collective investments regulatory regime could deal with the need for differential regulation of collective investment schemes. It could
•develop different rules for different functions and apply to each collective investment scheme the appropriate set of rules
•restrict collective investment schemes to a single legal structure
•exempt collective investment schemes that can demonstrate that they are adequately regulated elsewhere by the law (the residual regulation approach)
•develop a consistent and thorough regime that is appropriate for a particular kind of collective investment scheme and permit other collective investment schemes to seek exemption from any of its provisions
•develop a single consistent set of rules based on a particular kind or class of scheme and permit all schemes to seek exemptions from the regime (the discretionary regulation approach).
3.31Different rules for different functions. It has been suggested that the regulation required for the different functions performed by collective investment schemes cannot be provided by a single set of rules and that different rules should be devised to deal with each function. It is not apparent to the Review that this is so. If only a few of the rules are found to be inappropriate, and only for some schemes, it would be more cost effective to permit exemptions from inappropriate requirements than to create different regimes in which many of the rules are duplicated.
3.32Permit one structure only. Discussions with the ASC indicate that many of the difficulties experienced with the prescribed interest provisions arise because they can apply to an infinite variety of legal structures, not because of the different function performed by collective investment schemes. Clearly, it would be easier to design a set of rules for collective investment schemes if they all had the same legal structure (even though they may perform different functions). All companies limited by shares, for example, have the same basic structure, which is set out in the Corporations Law, yet they perform many different functions. An option for the Review, therefore, is to require all collective investment schemes, whatever function they perform, to be established under a single legislative structure.
3.33The residual regulation approach. A more flexible way of dealing with the difficulty of applying a single set of rules to all collective investment schemes would be to allow any scheme to seek an exemption from any rule on the basis that investors are adequately protected by the provisions of another regulatory regime to which the scheme is subject. The collective investment regulations would, in this approach, become the residual regulations which apply only to those schemes in which there is a gap in the other regulatory regime to which it is subject.
3.34No exemption for managed funds. The fourth option is to develop a single set of rules with the type of scheme that comprises the largest part of the collective investments industry … in mind, that is, collective investment schemes that provide a funds management function. The Review refers to these schemes as managed funds. The current prescribed interest provisions of the Corporations Law suggest that this approach was taken when they were developed. Collective investment schemes, other than those providing a funds management function, would be permitted to approach the regulator to seek an exemption from the rules. A clear definition of ‘managed fund’ is of central importance in this option. If ‘managed funds’ cannot seek exemption from any rule, operators of managed funds may seek to structure their schemes so that they appear to be collective investment schemes other than managed funds so they could apply for exemption from particular requirements. If the difficulties involved in defining managed funds could be overcome, this approach would have the advantage of certainty for both the regulator and operators of managed funds. At the same time it would provide the regulator with the flexibility to grant the exemptions necessary for the efficient operation of other collective investment schemes.
3.35The discretionary approach. This option takes into account the difficulty in developing a sufficiently robust definition of ‘managed fund’. By basing the regulatory framework on one function, namely the funds management function, this option retains the advantage of internal consistency inherent in the previous option. However, by allowing any scheme to seek an exemption, it seeks to overcome the rigidity which could be said to be present in the previous option. While it may be the intention of the proponents of this option to provide flexibility, it may be argued that a regulatory framework developed on the basis of its relevance and applicability to managed funds should not be able to be avoided by a managed fund. This option relies more heavily than the previous option on the integrity of the decisions of the regulator to provide a framework that will work efficiently and effectively.
This discussion recognized the very broad reach of the existing definition of the term “prescribed interest” and raised the possibility of regulating only some of those schemes. It also recognized the difficulty of defining any such narrower category. The category of interest to the Commission seems to have been managed funds. At para 3.37-3.40, the Commission identified a managed fund as having the following attributes:
• professional funds management;
• pooling of smaller amounts of money;
• a public offer … .
It observed that:
This description does not appear to be sufficiently accurate to constitute a definition of the ‘managed fund’ subset of collective investment schemes. For example, it does not exclude collective investment schemes whose function is to operate a recreational venture on behalf of scheme members.
At 3.40 the Commission observed:
Perhaps the only way to define a managed fund is to describe it. Managed funds could be described as collective investment schemes that meet the following criteria:
•the participants pool their investments (that is, all investors share proportionately in the increase and decrease in the value of the portfolio) with an operator who is responsible for the purchase and management of a portfolio or asset
•the investors have no effective day to day control of the management of the scheme
•the amount of money invested in the scheme can be increased or decreased as the result of investors entering into, and exiting from, the scheme (that is, the scheme is not fixed in size)
•participants have the right to have their investment redeemed on demand (subject to any notice period) or repaid at its market value on the expiry of a fixed term without the approval of the operator or of other scheme members.
These criteria were not adopted in the Commission’s Report (No 65, “Collective Investments: Other People’s Money”) (the “Report”) which is discussed below. However elements of the first and second criteria were to re-appear in the Managed Investments Act 1998 (Cth) (the “Managed Investments Act”). In the Report the Commission observed at para 1.2:
The term ‘collective investment’ covers a wide variety of investment schemes. Most involve a number of investors handing over their money or some assets to a professional manager who manages the total fund or collection of assets to produce a return which is shared by investors. A common form of collective investment is the unit trust, but there are many others. Most are subject to regulation under the Corporations Law as ‘prescribed interests’.
At para 3.1 of the Report the Commission, treating the expression “collective investment schemes” as exhaustively describing the subject matter of its inquiry, proceeded to identify such subject matter. It said:
All schemes that raise funds from investors and invest the funds could be called collective investment schemes in the broader sense of the term. This chapter considers which of them should be a ‘collective investment scheme’ for the purposes of the Corporations Law. It considers each of these kinds of scheme in turn to see if any of them should be excluded from regulation as a collective investment scheme under the Corporations Law.
At paras 3.4 and 3.5 the Commission referred to the definition of “prescribed interest” in the Corporations Law and pointed out that in DP53 it had “expressed concern at some apparent anomalies arising from the current definition of ‘prescribed interest’”. It then considered whether an alternative definition could be developed which, unlike the existing definition, would not require the exclusion of many different types of scheme. At 3.5 it suggested that identifying features of a prescribed interest in future legislation might:
… focus on schemes that provide investors with a funds management function. Suggested identifying features included
•pooling of resources by investors
•an absence of day to day control of the management of a scheme by investors
•investors having the right to redeem their investments … .
However the Commission noted that in DP53 it had “acknowledged that not all collective investment schemes provide a funds management function, referring particularly to ‘enterprise’ schemes such as yabby or ostrich farms and recreational or ‘lifestyle’ schemes.” It concluded that it was not possible to develop a more precise definition of the relevant subject matter of the reference. It recommended that there should be regulation of schemes described as “collective investment schemes”, the definition of which term was to be based upon the existing definition of “prescribed interests”, and that the latter term be abandoned.
We have given detailed attention to DP53 and the Report lest it be thought that the Management Investments Act simply gave effect to that Report. It did not do so, at least insofar as concerns the question of definition. In particular it is significant that the Report did not recommend any substantial change to the relevant definition, but highlighted the difficulties in developing a new, and narrower, definition.
MANAGED INVESTMENTS ACT
The Managed Investments Act inserted a definition of the term “managed investment scheme” into s 9 of the Corporations Law (now the Corporations Act) (the “s 9 definition”) and also added Ch 5C. When the Managed Investments Bill 1997 (Cth) was introduced, the explanatory memorandum stated that it represented the Government’s response to the recommendations in the Report. Although the Bill reflected many of the recommendations concerning the regulation of investment schemes, it did not adopt the Commission’s recommendation that relevant schemes be described as “collective investment schemes”, nor the recommendation that the definition of that term reflect the previous definition of “interest”. The Managed Investments Act requires the registration of some schemes which satisfy the s 9 definition (s 601ED(1)) and prohibits the operation of unregistered schemes which are required to be registered (s 601ED(5)). The s 9 definition as enacted in 1998 defines a managed investment scheme as:
(a) a scheme that has the following features:
(i)people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not)
(ii)any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders)
(iii)the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or
(b) a time-sharing scheme;
but does not include the following:
(c)a partnership covered by an application order made for the purposes of section 115
(d)a body corporate (other than a body corporate that operates as a time sharing scheme)
(e)a scheme in which all the members are bodies corporate that are related to each other and to the body corporate that promotes the scheme
(f)a franchise
(g)a statutory fund maintained under the Life Insurance Act 1995
(h)a regulated superannuation fund, an approved deposit fund, a pooled superannuation trust, or a public sector superannuation scheme, within the meaning of the Superannuation Industry (Supervision) Act 1993
(i)a scheme operated by an Australian bank in the ordinary course of its banking business
(j)the issue of debentures or convertible notes by a body corporate
(k)a barter scheme under which each participant may obtain goods or services from another participant for consideration that is wholly or substantially in kind rather than in cash
(l)a retirement village scheme operating within or outside Australia:
(i)under which the participants, or a majority of them, are provided, or are to be provided, with residential accommodation within a retirement village (whether or not the entitlement of a participant to be provided with accommodation derives from a proprietary interest held by the participant in the premises where the accommodation is, or is to be, provided); and
(ii) which is not a time-sharing scheme
(m)a scheme that is operated by a co-operative company registered under Part VI of the Companies (Co-operative) Act 1943 of Western Australia or under a previous law of Western Australia that correspondents to that Part
(n)a scheme of a kind declared by the regulations not to be a managed investment scheme.
There have been some amendments to exemption provisions in the definition of a managed investment scheme since it was first enacted. Those amendments are not material for present purposes.
Section 9 also contains the following definition:
interest in a managed investment scheme means a right to benefits produced by the scheme (whether the right is actual, prospective or contingent and whether it is enforceable or not).
In the Second Reading Speech, Mr Miles (the Parliamentary Secretary to the Prime Minister) said:
Managed investment schemes are any type of scheme where an investor purchases an interest from a professional manager who manages the funds received to produce a return. Schemes encompass a wide range of investment products and services including property, equities and cash management trusts as well as smaller schemes such as ostrich farms and pine plantations.
…One factor which has made these schemes popular with investors is that they allow them to diversify their investments into areas which, traditionally, have required large sums to participate. Another is that they also allow investors, who might otherwise lack the skill or confidence to participate in direct investment opportunities, to rely on the expertise of professional investment managers.
This bill is not concerned with the superannuation segment of the managed funds industry, which includes products provided by superannuation funds and approved deposit funds. … The segment of the managed funds industry with which the bill is concerned is non-superannuation managed investments, which are at present regulated as prescribed interests under the corporations law.
The Bill was referred to a Joint Parliamentary Committee. In its report dated 1 April 1998, the Committee reproduced some elements of those remarks as follows:
1.1Managed investment schemes are schemes where an investor purchases an interest in a fund which is managed by a professional manager to produce a return for the investor. They encompass a wide range of investment products and services including property, equities and cash management trusts, as well as smaller schemes such as ostrich farms and pine plantations. Approximately $85 billion is invested in managed investment schemes at present and the amount continues to grow by about $20 billion a year.
1.2These schemes allow investors to diversify their investments over a wider range of investment types than might otherwise be available and allow them to have their funds professionally managed.
1.3The Bill is not concerned with superannuation funds which are dealt with under the Superannuation Industry (Supervision) Act 1993.
At a superficial level, these statements might suggest that Ch 5C of the Corporations Act deals with a relatively narrow range of investment schemes. However the process of identifying the schemes to which Ch 5C applies must still commence with an inquiry as to whether a particular scheme satisfies para (a) (or para (b)) of the s 9 definition. In Australian Softwood Forests Pty Ltd v Attorney-General for New South Wales; Ex relatione Corporate Affairs Commission (1981) 148 CLR 121, the Court considered the definition of “interest” in the Uniform Companies Acts. At 129-130 Mason J said (Gibbs CJ and Stephen J concurring):
Apart from any considerations which may be derived from the general context in which the statutory definition appears, there is no very good reason for reading the words down. The context is that of prohibitions against issuing or offering to the public for subscription or purchase or inviting the public to subscribe for or purchase “interests” unless there is in force in relation to them an approved deed and unless there is provided information similar to that which is prescribed in connection with an offer to the public of shares. Indeed the prospectus provisions of the Act are applied to offers to the public of “interests” as if they were shares … . This context supplies no reason for denying that the proposed activities constitute a “financial or business undertaking or scheme” within the meaning of the statutory definition.
That a very wide meaning should be given to “interest” is attested by the exclusion from the statutory definition of shares and debentures … , interests in life assurance policies … and, subject to some qualifications, interests in partnership agreements … . The presence of the power to exempt by regulation other rights or interests from the definition … is also of telling significance.
There are real difficulties in the suggestion that the Court can read down the very comprehensive definition of “interest” by reference to the supposedly unintended consequences of a literal reading on everyday commercial transactions. The definition is so general and all-embracing that it is impossible to say that it necessarily excludes particular transactions which appear to be covered by the general words. The hazards of adopting such a course are not dispelled by the absence of a supporting context. It would be different if we could glean from the legislative provisions an overall purpose which, being limited in scope, justified a reading down of the definition. Unfortunately in this case the search for a legislative purpose takes us back to the very words of the definition for the intended scope of the operative provisions depends so heavily on the comprehensive language of that definition. As Young C.J. observed … in discussing the meaning of “interest” as defined in s.76(1): “If it were said that we should give effect to the purpose Parliament wished to achieve, we must first ascertain the purpose and that can only be ascertained from the language used”.
The passage, or parts of it, have been applied to the definition of “managed investment scheme”. See Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (2000) 35 ACSR 620 at [17]; Burton v Arcus (2006) 32 WAR 366 at [51]; and Australian Securities and Investments Commission v Emu Brewery Mezzanise Ltd (2004) 52 ACSR 168 at [80]. We also note the observation by the learned authors of Ford’s Principles of Corporations Law (LexisNexis Butterworths, subscription service) (service 34: 8/2002) at [22.470]:
Managed investment schemes are residual investment opportunities remaining after shares and debentures are considered. The concept of investment opportunity is elusive. In the present context the legislation is concerned only with those offerings of investment opportunities which are so similar to offerings of shares and debentures that regulation about them calls for regulatory techniques that developed in relation to offerings of shares and debentures.
Apart from requiring the registration of certain managed investment schemes, Ch 5C regulates the constitution and conduct of registered schemes and imposes duties upon the responsible entities which manage them. For example, there must be a written constitution which is legally enforceable as between members and the responsible entity. See s 601GA. There must also be a compliance plan to ensure compliance with the provisions of the Corporations Act and the scheme constitution. See Pt 5C.4. There are many other requirements.
Clearly, many schemes which satisfy the requirements of para (a) of the s 9 definition will not require registration. The s 9 definition includes 13 categories of exclusion, plus the power to exclude other kinds of scheme. Section 601ED further narrows the range of schemes which must be registered. Part 5C.11 provides for exemption and modification orders. When it was said in the Second Reading Speech and in the Joint Parliamentary Report that the Managed Investments Act was not concerned with superannuation funds, the statement was correct to the extent that superannuation arrangements are not regulated by that Act. Such funds are expressly excluded from the s 9 definition by para (h), suggesting that it was thought that they might otherwise have fallen within para (a) of that definition. The references in those statements to a professional manager, to purchasing interests (as opposed to contributing money or money’s worth) and managing funds do not refer to express elements of the s 9 definition. It is likely that the statements were generalizations concerning the way in which Ch 5C was expected to operate rather than indications as to the proper construction of the s 9 definition.
Jacobson J has set out paras 19.3 to 19.7 of the Explanatory Memorandum relating to the Managed Investments Bill 1997. Although that passage demonstrates an intention to clarify the definition which was to engage the proposed regulatory regime, it says little or nothing about the approach to be taken to construing the s 9 definition.
The primary Judge concluded that for present purposes the requirements of para (a) of that definition were not satisfied. We will consider the correctness of that conclusion at a later stage. However we will first consider some more general remarks made by his Honour. At [37] he said:
The upshot of this reasoning is that the arrangements with the funder and [MBC] do not create a managed investment scheme. This should not come as a surprise. First, with the evident purpose of the legislation in mind, the essence of a managed investment scheme, stripped of all its technicalities, is a scheme in which people invest money (or money’s worth) in a common venture with the expectation of profit that will result from the efforts of others. That is not what has happened here.
In our view, that statement as to the “essence of a managed investment scheme” is of little assistance in construing the Act and may be misleading. We have referred to the difficulties experienced by the Commission in seeking to identify with precision the subject matter of such a generalization. It abandoned the task as too difficult. With all respect, his Honour’s approach seems not to recognize those difficulties. Further, it is difficult to infer an intention to exclude an undefined category of schemes which would otherwise be within para (a) of the s 9 definition in light of the extensive list of express exclusions contained in the definition and the power to exclude or exempt others administratively.
His Honour continued:
Second, the obligations that would come into existence if this were a managed investment scheme, assuming they could be put into effect, would afford group members little protection of the kind envisaged.
In the Report at 2.5 the Commission identified the risks against which any regulatory system would guard. They were:
•investment or market risk – the risk that the investment will decline in value, either because the market as a whole declines in value or because the particular investments of the scheme decline in value
•institution risk – the risk that the institution which operates the scheme will collapse
•compliance risk – the risk that the operator of a scheme will not follow the rules set out in the scheme’s constitution or the laws governing the scheme, or will act fraudulently or dishonestly.
We consider that to be a fair summary of the risks likely to be encountered by investors. Although the risk of a decline in value of the investment may not be particularly relevant to a scheme of the present kind, one can imagine a situation in which such a risk could arise. There may be a risk that claims will be devalued by a decline in the fortunes or asset position of Multiplex, the Funder or MBC or by the likely incurrence of previously unexpected costs, necessitating some action to protect the group members’ interests. It is not difficult to imagine circumstances in which there could be institutional or compliance risk. Many of the provisions of Ch 5C are designed to minimize such risks. We refer particularly to ss 601FC, 601FD, 601FE, 601FF, 601GA, 601GB, 601HA and subsequent sections dealing with compliance plans. It is no answer to say that a solicitor’s duty would sufficiently safeguard the interests of group members against professional misconduct by MBC. However such a matter may be relevant in connection with any contemplated exercise of the power conferred by para (n) of the s 9 definition or that conferred by Pt 5C.11.
For present purposes, the proper approach to the application of the s 9 definition is to identify whether or not para (a) is fairly satisfied. If so, and assuming that there is no exemption pursuant to paras (c) to (n), then the question is whether or not the scheme must be registered pursuant to s 601ED. It is not helpful or possible to limit the operation of para (a) of the s 9 definition by reference to some implied limitation to be derived from the Ch 5C regulatory scheme itself. In that respect, the remarks by Mason J in Australian Softwood Forests 148 CLR at 129-130 are apposite for present purposes.
APPLICATION OF THE S 9 DEFINITION
As Jacobson J has pointed out, Barrett J, in Australian Securities and Investments Commission v Takaran Pty Ltd (2002) 170 FLR 388 at [12], identified five elements in para (a) of the s 9 definition. They were:
… first, the act of contribution of money or money’s worth by several persons; secondly, the accruing to those persons in return (as consideration) of certain rights to benefits produced by the scheme; thirdly, pooling of the contribution or other use of them in a common enterprise; fourthly, an objective or expectation of accrual of benefits to persons for the time being holding the rights generated by contributions; and, fifthly, absence of day-to-day control over the operation of the scheme by those persons.
Whilst such an approach to the section may have been appropriate for the task undertaken by Barrett J, in the present case, it may lead to confusion. Firstly, the approach does not sufficiently recognize that the requirements of subparas (a)(i) and (a)(ii) are discrete, and that each must be satisfied. Secondly, it describes the relationship between contributions and rights to benefits in language which does not quite reflect that of subpara (a)(i) of the s 9 definition. Thirdly, the description of the relationship between pooling or use in a common enterprise and benefits differs from the language used in subpara (a)(ii). We prefer to approach the problem by addressing the sub-paragraphs separately and in accordance with their terms. Of course, as Jacobson J has pointed out, there is now no dispute as to compliance with subpara (a)(iii). Before considering subparas (a)(i) and (a)(ii), it is necessary to consider the meaning of the word “scheme” in the introductory part of the s 9 definition.
“A scheme that has the following features …”
In Australian SoftwoodForests 148 CLR at 129, Mason J said that “… all that the word ‘scheme’ requires is that there should be ‘some programme, or plan of action’ …”. His Honour then continued:
The next step is that, … the statutory definition [of “interest”] is not concerned with the identity of the person or persons who carry it [the scheme] on. It is not material that the person who offers the “interests” to the public does not himself carry on the undertaking or scheme. Nor does it matter that by subscribing for an interest a member of the public will constitute himself as one who is engaging in carrying on the enterprise.
Nor again does it matter that the subscriber by accepting the offer constitutes himself as one who executes some elements of the scheme and derives from so doing a financial advantage which is not earned by other participants whose activities relate to other elements of the scheme. It is not an objection to an enterprise qualifying as an undertaking or scheme that it consists of a number of parts or elements, the participation of individual parties being limited to one to one of these or elements, their profit or remuneration being derived from the particular activities in which they engage. There is nothing in the notion of an undertaking or scheme that requires or implies that there is joint participation in everything comprised in a plan or that there must be a sharing or pooling of profits or receipts.
Although these observations concern the definition of “interest” in earlier legislation, they are helpful in closing off unnecessary lines of enquiry concerning the s 9 definition. For present purposes, there is no reason to doubt that there was, and is, a programme or plan of action. The primary Judge observed at [12]:
It is hard to avoid the conclusion that the agreements brought into existence a plan of action. In essence the plan involves: (a) putting in place a group of persons willing to participate in proceedings against Multiplex; (b) ensuring that those persons would not be exposed to costs; (c) retaining a firm of solicitors that would act on the group’s behalf; and (d) making sure that the legal fees would be paid.
This approach overlooks some aspects of the scheme, particularly:
·the deferred payment of up to 25% of MBC’s fees, and the possibility that such amount and interest thereon might not be paid at all;
·the arrangements for reimbursing and remunerating the Funder; and
·the consequential interests of MBC and the Funder, as well as the group members, in the successful resolution of the proposed litigation.
We would prefer to describe the scheme as having the following purpose:
·To facilitate the realization of claims by group members against Multiplex, using legal services to be provided by MBC at the expense of the Funder;
·which company also undertakes to meet any order for costs made against group members or any order for security for Multiplex’s costs;
·with the intention that the Funder be reimbursed from, and derive a profit from, the proceeds of such realization; and
·that the group members be otherwise protected from any liability for their own costs, any order that they pay Multiplex’s costs, or any order that they give security for costs in the relevant proceedings.
Steps in the scheme include:
·the Funder offering to undertake the payment of group members’ costs, to meet any order for costs made against group members, and to provide security for costs if necessary;
·MBC offering to accept instructions on the basis that it will look to the Funder for its costs and outlays in accordance with the terms of the scheme;
·the group members accepting the Funder’s offers and instructing MBC accordingly;
·the subsequent conduct of the matter; and
·the distribution of the Resolution Sums.
Performance of the scheme involves the observance by each party of its obligations thereunder.
The s 9 definition focusses upon contributions to the scheme by the group members and the Funder, and benefits to be derived from the scheme by those parties. As to the group members, Multiplex pleads in para 40 of the further amended statement of claim that they contributed as follows:
Dawson Nominees, Frederick Hart, and the Group Members are required to pay money’s worth as consideration for the benefits under the Brookfield Multiplex Group Funding Agreement and the Brookfield Multiplex Group Retainer pleaded in paragraph 39 above, being the obligations undertaken by those persons pursuant to the Brookfield Multiplex Group Funding Agreement and the Brookfield Multiplex Group Retainer, which include:
(a)Dawson Nominees, Frederick Hart and each of the group members irrevocably authorises and directs Maurice Blackburn to receive any Resolution Sum in respect of its claim against the Brookfield Multiplex Group and to immediately pay any Resolution Sum into an account kept for that purpose;
…
(b)if Dawson Nominees, Frederick Hart or any Group Member obtains any settlement or judgment in respect of its claims against the Brookfield Multiplex Group, it will treat any such moneys received as the Resolution Sum, and will call such moneys to be delivered to Maurice Blackburn to be dealt with as part of the Resolution Sum, this being a continuing obligation that survives any termination of the Brookfield Multiplex Group Funding Agreement other than termination for serious breach by the Funder;
…
(c)Dawson Nominees, Frederick Hart and each of the Group Members irrevocably authorises and directs Maurice Blackburn to pay out of the account referred to in paragraph (a) above all of the payments to the fund referred to in clause 10.1 of the Brookfield Multiplex Group Funding Agreement; …
Pursuant to each funding agreement any moneys received in connection with a group member’s claim (other than by way of costs) are described as the “Resolution Sum”. This includes amounts so derived other than by way of participation in the scheme. See the definition of “Resolution Sum” in cl 1.1 and cl 8.3 of the Funding Agreement. All Resolution Sums are to be held by MBC in order to meet the group members’ obligations to the Funder and then for distribution to the group members.
The benefits or rights to benefits to be derived by the group members are pleaded in para 39 as follows:
…
(a)Dawson Nominees, Frederick Hart and the Group Members are able to pursue claims against the Brookfield Multiplex Group, and to participate in any successful resolution by settlement or judgment of the Dawson Nominees Proceeding, without having to provide any security for costs and without any liability to the Brookfield Multiplex Group or to Maurice Blackburn or to the funders in the event that there is judgment for Brookfield Multiplex in the Dawson Nominees Proceeding;
…
(b)The Funders agree to pay all invoices issued by Maurice Blackburn during the Dawson Nominees Proceeding, and Dawson Nominees, Frederick Hart and the Group Members have no obligation to pay any legal costs or disbursements in respect of services provided by Maurice Blackburn in relation to the prosecution of their claims against the Brookfield Multiplex Group unless and until there is a successful resolution of those claims either by way of judgment or settlement;
…
(c)If there is a successful resolution of their claims against the Brookfield Multiplex Group, Dawson Nominees, Frederick Hart and the Group Members do not have any liability to pay any legal costs or disbursements in respect of services provided by Maurice Blackburn until such Resolution Sum has been paid;
…
(d)If there is a successful resolution of their claims against the Brookfield Multiplex Group, Dawson Nominees, Frederick Hart and the Group Members are entitled to a pro rata share in the balance of any resolution sum, after payment of certain amounts to the Funders;
…
(e)The amount payable by Dawson Nominees, Frederick Hart and the Group Members for legal costs or disbursements in respect of services provided by Maurice Blackburn in relation to the prosecution of their claims against the Brookfield Multiplex Group cannot exceed the total of any amount received by way of judgment or settlement together with any amount received by way of a costs order in any relevant proceeding;
…
(f)The costs involved in the prosecution of their claims against the Brookfield Multiplex Group are spread amongst Dawson Nominees, Frederick Hart and the Group Members;
…
(g)The Funders undertake to bear any adverse costs order in any proceeding regarding the claims of Dawson Nominees, Frederick Hart and the Group Members against the Brookfield Multiplex Group;
…
(h)The Funders agree, as soon as reasonably practicable upon any request from Maurice Blackburn, to provide a written undertaken to the respondents in the proceeding to pay any costs order made against Dawson Nominees, Frederick Hart or any Group Member in the proceedings brought against the Brookfield Multiplex Group, insofar as such costs were incurred during the term of the Brookfield Multiplex Group Funding Agreement; and
(i)the Funders undertake to provide any security for costs ordered in any proceeding regarding the claims of Dawson Nominees, Frederick Hart and the Group Members against the Brookfield Multiplex Group;
…
In para 41 Multiplex pleads that the benefits pleaded in para 39 are produced by the scheme:
… in that only those persons who acquired an interest in securities issued by Brookfield Multiplex Group between 2 August 2004 and 30 May 2005 and who entered into a Brookfield Multiplex Group funding agreements are entitled to such benefits, including the right to share in any sum achieved by way of settlement of or judgment in the Dawson Nominees Proceedings.
Multiplex also pleads that the Funder made contributions to, and is to derive benefits from, the scheme. In para 41B it pleads that:
The Funders are required to pay money, or money’s worth, as consideration for the benefits under the Brookfield Multiplex Group Funding Agreement pleaded in paragraph 41A above:
(a)the Funders are required to pay, and have paid, all legal costs and disbursements of Dawson Nominees, Frederick Hart and Group Members incurred by Maurice Blackburn and which have been invoiced by Maurice Blackburn to the Funders;
(b)the Funders are required to procure, and have procured (or have had procured on their behalf), one or more irrevocable Standby Letters of Credit in favour of Maurice Blackburn in a form and for such an amount as required by Maurice Blackburn, as security for the obligations imposed upon the Funder by … the Brookfield Multiplex Group Funding Agreement; and
(c)the Funders are required to procure (where ordered to do so), and have procured (or have had procured on their behalf), security for Brookfield Multiplex’s costs of the Dawson Nominees Proceedings. The security has been provided by way of a bank guarantee having been requested of the Commonwealth Bank of Australia by the Bank of Montreal, Toronto, Canada on the account of Siskinds, in favour of the District Registrar of the Victorian District Registry of the Federal Court of Australia, such security being provided in discharge of the obligations owed by the Funders under … the Brookfield Multiplex Group Funding Agreement.
In para 41A, Multiplex pleads the benefits to be derived by the Funder as follows:
(a)if there is a successful resolution of the claim brought by Dawson Nominees, Frederick Hart and the Group Members, the Funders are entitled to an amount from the Resolution Sum equivalent to that paid by the funders to Maurice Blackburn in respect of legal costs and disbursements incurred in relation to the prosecution of the claims of Dawson Nominees, Frederick Hart and the Group Members against Brookfield Multiplex …; and
(b)if there is a successful resolution of the claim brought by Dawson Nominees, Frederick Hart and the Group Members, the Funders are entitled to a percentage of the balance of the Resolution Sum, which percentage is calculated in accordance with … the Brookfield Multiplex Funding Agreement … .
In para 41C Multiplex pleads that the benefits pleaded in para 41B are produced by the scheme and that they are derived from, and depend upon execution by Dawson Nominees, Frederick Hart and group members of the Brookfield Multiplex Group Funding Agreement and Brookfield Multiplex Group Retainer and the performance by the parties of their respective obligations thereunder.
As we have observed, we would have thought that MBC was also to make contributions to the scheme by foregoing payment of one quarter of its professional fees until such time as the proceedings are successfully resolved. In that event, it will receive the remaining 25% of its fees plus interest. However Multiplex seems not to have relied upon this aspect of the matter.
Subparagraph (a)(i) - “… people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not) …”
The requirements of the subparagraph are:
·that people contribute money or money’s worth;
·as consideration to acquire rights to benefits;
·such benefits being produced by the scheme.
“contribute money or money’s worth”
In connection with subpara (a)(i) of the s 9 definition, the primary Judge found that group members contributed money or money’s worth, but that such contributions were not made in consideration of the acquisition of rights to benefits. Multiplex appeals against the latter aspect of the finding. By notice of contention, the respondents plead that his Honour erred in finding that there were any contributions, and in finding that the contributions constituted money or money’s worth. As to the latter point we consider that the promises given by the group members and by the Funder may properly be described as “money’s worth”. We respectfully adopt the reasons given by Jacobson J for so concluding.
The primary Judge considered that the word “contribute” means “make available”, “pay” or “supply”, referring to the decisions in Crocombe v Pine Forests of Australia Pty Ltd (2005) 219 ALR 692 at [52]-[53] and Burton v Arcus (2006) 32 WAR 366 at [56]-[57]. In our view, the word “contribute” has a somewhat more specific meaning. The New Shorter Oxford English Dictionary (4th ed, Oxford University Press, 1993) Vol 1 gives, as its primary meaning:
Supply or pay along with others to a common fund or stock.
The Macquarie Dictionary (4th ed, The Macquarie Library, 2005) gives the primary meaning as:
To give in common with others; give to a common stock or for a common purpose.
In other words, the requirement for contribution foreshadows the requirement for pooling or use in a common enterprise to produce financial benefits identified in subpara (a)(ii) of the s 9 definition. The respondents submit that subparas (a)(i) and (ii) of the s 9 definition and ss 601FC and 601GA of the Corporations Act demonstrate that, for the purposes of subpara (i) any contribution must be:
(a) capable of being “paid” or “supplied”;
(b)capable of being “pooled” or “used” in a “common enterprise” to produce benefits;
(c)apt to be held separately from the property of the responsible entity, to be valued, and held in trust for the member (i.e., in this case, for the person making the contribution);
(d) apt to be “invested” or “dealt with”.
The respondents submit that the group members’ promises are not capable of being so characterized. It is not clear whether the respondents also submit that the contributions allegedly made by the Funder suffer from the same deficiencies. Point (a) depends upon the meaning of the word “contribute” in subpara (a)(i) of the s 9 definition. Point (b) is derived from para (a)(ii) of that definition. Point (c) is derived from s 601FC(1)(i) and (j). Point (d) is derived from s 601GA(1)(b).
Whilst it is appropriate, in construing the s 9 definition, to consider the interaction of its parts, it may not be appropriate to look to the operative provisions of Ch 5C in that process. When, in Australian Softwood Forests 148 CLR 121, Mason J spoke of “unintended consequences of a literal meaning”, he was warning against such an approach. If, in construing a definition which identifies the subject matter to be regulated by a regulatory regime, it is clear that a key regulatory provision cannot apply to a particular arrangement or situation which prima facie falls within the definition, then there may be justification for a narrower reading of the definition. However, if other regulatory provisions are capable of application, then it may be inappropriate to adopt that approach. In that situation, it cannot be said that there is a clear intention that the regulatory regime should not apply to the particular arrangement or situation. Further, it will often be difficult to determine whether, or how, a particular provision may operate in all future circumstances. It may be unwise to construe the definition narrowly merely because there may be difficulties in applying part of the regulatory regime.
The scheme of the Corporations Act is to define the term “managed investment scheme” in s 9 and to regulate some of those schemes pursuant to Ch 5C. Many of the regulatory provisions will affect the constitution and conduct of any scheme which must be registered. In other words, if a scheme falls within the s 9 definition, and if it is required to be registered, then it must be constituted and conducted so as to comply with Ch 5C. It follows that one cannot hold that a particular scheme is not within the s 9 definition simply because its structure does not comply with the requirements of Ch 5C. If the scheme must be registered then it must be constituted and conducted so as to permit registration.
Before considering the respondents’ submissions we should point out that ss 601FC and 601GA speak of “scheme property”, which term is defined in s 9 as follows:
scheme property of a registered scheme means:
(a) contributions of money or money’s worth to the scheme; and
(b)money that forms part of the scheme property under provisions of this Act or the ASIC Act; and
(c)money borrowed or raised by the responsible entity for the purposes of the scheme; and
(d)property acquired directly or indirectly, with, or with the proceeds of, contributions of money referred to in paragraph (a), (b) or (c); and
(e)income and property derived, directly or indirectly, from contributions, money or property referred to in paragraph (a), (b), (c) or (d).
We turn to the particular points made by the respondents as identified above.
Point (a) – capable of being paid or supplied
The group members promise to allow the Funder a financial benefit in the event of a successful resolution of their claims. The Funder, in effect, promises to pay for legal services, to meet any order for costs made against group members, and to meet any order for security for costs. It also agrees that each group member will become contractually entitled to the balance of his or her Resolution Sum after the Funder’s claims have been met. As we have said, we consider that these various promises are to provide money’s worth. The question is whether they are contributed. It may not be correct to say that in giving such promises the relevant parties “pay” money’s worth. However we have no difficulty in concluding that they “give” or “supply” it. We have previously observed that the word “contribute” generally involves the concept of giving for a common purpose. Perhaps unfortunately, the s 9 definition does not identify to whom, to what or for what purpose such contributions are to be made. Although a scheme may be treated as an identifiable entity for the purposes of Ch 5C, it is, of course, not a legal person. We consider that the intention is that the contributions be for the purposes of the scheme, regardless of the identity of the person to whom they are to be paid, given or supplied.
At [3] the primary Judge found that the group members’ instructions to MBC included instructions to perform work for the common benefit of persons who had entered into funding agreements with the Funder as well as work in connection with specific claims. In other words the promises by the group members were given for the purpose of securing legal services for the group as a whole, and so each promise was a contribution in the sense to which we have referred. That collection of promises is the Funder’s inducement to accept and fulfil its obligations. The Funder’s promises were given for the purpose of advancing its own interests and those of the group. In our view, its promises to individual group members were to be used collectively to provide legal services to individual group members, the whole group and itself. The group members’ promises and the Funder’s promises were contributed for the purposes of the scheme.
Point (b) – capable of being pooled or used in a common enterprise
The respondents submit that the relevant “contributions” for the purposes of subpara (a)(i) are not capable of being pooled and used in a common enterprise as required by subpara (a)(ii), and so cannot be contributions for the purposes of subpara (a)(i). Much of what we have said concerning the meaning of the word “contribute” suggests that this argument is without foundation. Nonetheless, it will be better if we consider it further as part of our consideration of subpara (a)(ii). In any event we see no reason to limit subpara (a)(i) so as only to apply to contributions which are capable of complying with subpara (a)(ii).
Point (c) – held separately, valued and held in trust for scheme members
It is said that the promises cannot be held separately from the property of the responsible entity, valued or held in trust for scheme members. It is also submitted that each promise must be held for the benefit of the group member making it. That submission misconceives the effect of s 601FC(2). The benefit of each promise is to be held on trust for the benefit of all scheme members.
These propositions rely upon s 601FC(1)(i) and s 601FC(2). We see no difficulty in holding the promises by group members and the Funder separately from other property. Indeed, it is difficult to see how they could be mixed. We also see no difficulty in valuing them. The respondents, in fact, said very little about these matters. As to the requirement that scheme property be held on trust by the responsible entity, the respondents submit that it is difficult to see how the burden of group members’ promises may be held on trust for them. They accept that the benefit of such promises may be so held.
As we have previously observed it may be inappropriate to base a construction of the s 9 definition upon perceived difficulties in applying one aspect of the Ch 5 regulatory regime. If a particular arrangement is within the s 9 definition, and if it is required to be registered, then by force of the legislation, scheme property is to be held on trust by the responsible entity. It may be that this requirement necessitates some degree of adjustment to traditional views as to the appearance and functions of a trust, but Parliament may take such a step. The mere fact that there may be difficulty in giving effect to s 601FC(2) does not justify a narrowing of the clear meaning of the s 9 definition.
In any event, we see no real difficulty in the present case. Firstly, we cannot see that the burden of the group members’ promises is of any relevance. We are rather concerned with the benefits. The promises are primarily for the ultimate benefit of the Funder but, in the interim, they provide the basis upon which the Funder is willing to meet its obligations under the scheme. The Funder may not enforce the promises absent a favourable realization of the claims. Further, it may lose any potential benefit if it breaches the Funding Agreements so as to entitle the group members to determine them. See cl 15 of the Funding Agreement. There is no difficulty with the concept of a contractual promisee holding the promise on trust for another. See Chitty on Contracts (30th ed, Thomson Reuters, 2008) Vol 1 at 1-191 and 18-078 et seq although, in general, there must be an intention to create a trust. Regardless of whether the Funder had such an intention, its absence cannot prevent the statutory imposition of a trust relationship. Given the role that the promises play in fulfilling the aim of the scheme, there is nothing curious about the fact that the group members should be treated as having an interest in them.
As to the Funder’s promises, the benefit of each is vested in the individual group member to whom it is made. However it is clear that all parties intend that the benefit of the Funder’s promises concerning legal services be enjoyed by the scheme members collectively. Such services are for common legal work as well as for work on individual claims. Similarly, the promises to meet any order for security for costs will provide a common benefit. Superficially, there may be a difficulty in asserting that the responsible entity (presumably the Funder) holds the benefits of such promises on trust for scheme members as it does not hold any title to them. A possible answer is that each scheme member has impliedly promised to hold the benefit of the Funder’s individual promise upon trust for the scheme members generally, and that s 601FC(2) vests the benefit of that promise in the responsible entity.
In any event, we do not see these difficulties as relevant to the task of construing the s 9 definition.
Point (d) – investing or otherwise dealing with scheme property
Finally, it is submitted that the promises are not “apt to be invested or dealt with” as contemplated by s 601GA(1)(b). That section requires that a scheme constitution make provision for the responsible entity having power to invest or otherwise deal with, scheme property. Once again, the respondents did not really develop this submission. The requirement is only that the constitution provide for such power. It does not require that all scheme property be capable of investment. As to “dealing with” the promises, the expression is very wide, and may include assignment, by way of security or otherwise, enforcement of the promises or protection of their value. Again, we see no basis in s 601GA(1) for reading down the s 9 definition.
We should say something about one other matter. The respondents submit that Multiplex relies upon the finding by the primary Judge that the group members’ undertakings constituted equitable assignments of future property. It is said that this matter was not the subject of pleading. Reference was made to a passage in the transcript of the proceedings at first instance (at TS 60 ll 10-20), which passage the transcript and the respondents attribute to Mr Bathurst QC, counsel for Multiplex. It is said that in that passage, counsel effectively eschewed reliance on such assignments. Multiplex submits that the relevant statement was actually made by counsel for the first and second respondents, Mr Sheahan SC. Mr Sheahan said that he had no recollection concerning the matter. Multiplex’s submission may be correct. There is no apparent reason why Mr Bathurst would have interrupted Mr Sheahan at that point in his submissions. His Honour obviously did not understand Multiplex to have eschewed such reliance. In any event it does not matter. The relevant facts were pleaded. Whether or not they could be characterized as evidencing an equitable assignment seems to be of little significance.
“as consideration to acquire rights to benefits”
The fourth and fifth respondents submit that the benefits of the various promises were not acquired in consideration of the contribution of money’s worth, but rather upon entry into the relevant agreements. This submission seems to distinguish between entering into a contract and receiving the benefit of it. However, in the present case, the promises made by each of the group members and the Funder were made in consideration of their acquiring rights to share in the relevant Resolution Sum or Sums and the benefit of the Funder’s promises concerning legal services, costs orders and security for costs. It may be true that the benefits for group members and the Funder were derived pursuant to their contracts, but that is the way in which the scheme works. It involves the exchange of contractual obligations. We suspect, although we are not entirely sure, that this submission, if accepted, would effectively exclude from the s 9 definition many, perhaps all, schemes in which the promoter enters into individual contracts with members. That is clearly not the purpose of the legislation.
“benefits produced by the scheme”
The remaining question in connection with para (a)(i) of the s 9 definition is whether or not the relevant benefits were produced by the scheme. The benefits derived by group members were, subject to the Funder’s rights to participate in any Resolution Sums:
·the provision of legal services at no cost to the group members;
·absence of exposure to any adverse costs order;
·the benefit of the Funder’s promises to provide security for costs; and
·the benefit of contractual rights to participate in the distribution of the Resolution Sums in accordance with the terms of the scheme.
The Funder derived the benefit of the right to participate in the distribution of the Resolution Sums in accordance with the terms of the scheme.
The primary Judge considered that it was necessary that the relevant benefit have been acquired by the contributors and produced by the scheme. At [20] his Honour observed that:
The principal object of the scheme is to recover in litigation the loss which each group member says he or she has suffered as a result of the alleged wrong-doing by Multiplex. The recovery of damages or compensation is not, by any meaning, a “benefit” a group member has acquired. If any group member is entitled to recover damages or compensation from Multiplex it is because there is in existence a justiciable cause of action against Multiplex, a cause of action which exists separately from, and is antecedent to, the scheme. No group member has given value or paid for those causes of action as part of the scheme.
The word “benefit” is relevantly defined in s 9 to mean:
(a) … any benefit, whether by way of payment of cash or otherwise; …
The New Shorter Oxford English Dictionary (4th ed) defines “benefit” as:
… A thing well done; a good deed … . A kind deed; a favour, gift; a benefaction … . (An) advantage …”
The Macquarie Dictionary (4th ed) defines the term as:
… an act of kindness … anything that is good for a person or thing.
Each group member claims to have a cause of action against Multiplex. Whether each has such a cause of action remains to be determined. Frequently, when a lawyer says that a person has a cause of action, he or she means that, on the person’s version of events, there is a cause of action. Much trouble, time, effort and cost frequently lie between assertion of a cause of action and the derivation of a financial benefit. On the other hand, it is not unknown for somebody without a cause of action to make an unmeritorious claim and enjoy a degree of success. A process which enables or assists a claimant to turn a claim into an amount of money, whether by judgment or settlement, seems to us to be a benefit. In the present case, each group member acquires a contractual right to share in his or her Resolution Sum in accordance with the terms of the scheme. It is reasonable to infer that each group member perceived some benefit or advantage in giving up part of any amount recovered in order to have access to legal services, protection from any adverse order as to costs and avoidance of any need to give security.
The relief from exposure to an order for costs should not be undervalued simply because the matter may be proceeding as a representative action. Even if group members, other than the representative party, may not generally be subject to such orders, a representative party may not be willing to accept that role unless other claimants offer appropriate indemnities. Further, an order for security for costs may have the effect of obliging other claimants to pay the other side’s costs if the action is unsuccessful.
At [22] the primary Judge said:
For an investor to obtain a benefit under a managed investment scheme he or she must acquire a right to some hoped for profit or gain the scheme will produce.
However subpara (i) of the s 9 definition speaks of “rights … to benefits produced by the scheme”. We see no justification for substituting the words “profit” or “gain” for the word “benefit”. Use of those words inevitably leads to a focus upon expenditure and receipts. The word “benefit” has a much wider meaning. Whilst there may be cases in which a managed investment scheme makes a gain or profit in which its members have interests, there will be other cases in which the scheme produces an outcome which is, itself, a benefit for members. The recreational or lifestyle schemes referred to in the Report are examples of that type of scheme. Again, it must be kept in mind that the “scheme” is not a legal entity.
The respondents submit that one must distinguish between “advantages that are merely direct incidents of the scheme” and “benefits produced by the scheme”. One is tempted to ask why that distinction should be drawn. The approach seems to assume that a scheme must necessarily involve discrete stages involving entry into the scheme, operation of the scheme and emergence of benefits from the scheme. The s 9 definition does not prescribe such an approach. In the present case, the benefit to the group members will be cumulative in the sense that as legal services are provided, the claims will progress towards their anticipated resolution. The definition simply does not require that the benefit be derived once and for all at the end of the undertaking.
It would do violence to language to deny that the opportunity to prosecute a claim, with virtually no exposure to any costs or outgoing in the event of failure, is a benefit. Such benefit will be the result of all parties carrying out their obligations under the scheme. It follows that it will be produced by the scheme. Similarly, any eventual financial yield to group members or to the Funder will be so produced.
The scheme satisfies subpara (a)(i)
We consider that the requirements of subpara (a)(i) of the s 9 definition are satisfied.
Subparagraph (a)(ii) – “… any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interest from holders) …”
The requirements of the subparagraph are:
·that any of the contributions are pooled, or used in a common enterprise;
·to produce financial benefits or benefits consisting of rights or interests in property;
·for the scheme members.
“any of the contributions are to be pooled, or used in a common enterprise”
The primary Judge, referring to the decision of Pullin J in Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339, said that the word “pooled” has its ordinary meaning, and that it “describes an arrangement where there is a ‘common fund into or from which all gains and losses of the contributions are paid’, or ‘a fund made up of numerous payments from the participants and used for a purpose they contemplate’ ”. His Honour considered that the phrase “to be pooled … to produce” implies that the intention must be to “pool the contributions and, by use of the pool, produce benefits”. Other possible meanings were said to include “any aggregation of the interests or property of different persons made to further a joint undertaking or end by subjecting them to the same control and a common liability” and “a common fund or combination of interests for the common adventure in buying and selling”. The primary Judge then concluded that it was not possible to apply any of those meanings to the facts in question, at least in part because his Honour considered it “difficult” to pool choses in action because the concept of pooling “is a physical concept”. His Honour conceded that choses in action might be “pooled” by being bundled together and dealt with as a bundle by, for example, sale or mortgage but considered that nothing of that kind had occurred in this case.
Multiplex submits that the promises were “aggregated in the hands of MBC”, in that it was able to deal with the Resolution Sums in accordance with the agreements, and that such aggregation constituted pooling. It also submits that amounts actually received by way of Resolution Sums are to be pooled in the hands of MBC. His Honour considered that each group member had assigned to the Funder part of his or her Resolution Sum. In return the litigation Funder had agreed to provide funding for each group member. The result was a series of bilateral arrangements, not an aggregation of them. This approach appears to overlook the conclusion expressed at [3] that individual group members instructed MBC to perform work for their common benefit as well as in connection with individual claims.
The approach taken to pooling in Knightsbridge [2001] WASC 339 was based upon the decisions at first instance and on appeal in Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403 (at first instance) and (2000) 35 ACSR 620 (on appeal). Both that case and Knightsbridge [2001] WASC 339 concerned contributions of money. However the s 9 definition clearly contemplates contributions other than of money.
In Crocombe, Young CJ in Eq held that the contribution of interests in land by investors in a pine forest plantation scheme was a contribution of money’s worth. His Honour emphasised the need to take a wide view of the meaning of contributions. He accepted that a contractual promise to contribute an interest in land to be used for the purposes of the venture was a contribution of money’s worth: Crocombe at [49]-[54].
Hance was concerned with the tax treatment of income received and outgoings incurred in connection with the operation of a managed investment scheme. An issue arose as to the meaning of “money’s worth”. Their Honours (Finn, Dowsett and Edmonds JJ) referred at [99]-[100] to English authorities, which were also cited in the present matter by Finkelstein J, for the proposition that the phrase means equivalent to money in the sense of something essentially material.
Finkelstein J was prepared to accept that the promises given by the group members were money or money’s worth. He said at [19] that each promise was capable of being valued, notwithstanding the contingent nature of “the right that has been assigned”.
The authorities to which the primary judge referred, including the decision of Buckley J in Secretan v Hart(Inspector of Taxes) (1969) 1 WLR 1599 at 1603, support the proposition that the phrase “money’s worth” must be something which is essentially material.
This is borne out by a consideration of that phrase in its full statutory context.
Contributions of money or money’s worth form part of the “scheme property” of a registered scheme: see definition in s 9. The “scheme property” of a registered scheme serves as a guide to what should be considered to be the property of an unregistered scheme: Mier v F N Management Pty Ltd (2005) 56 ACSR 93 at [26]-[28] per Keane JA.
The scheme property of a registered scheme (which includes contributions of money or money’s worth) must be clearly identified as scheme property, held separately from the property of the responsible entity, and valued at regular intervals: s 601FC(1)(i) and (j). The responsible entity must hold it on trust for scheme members: s 601FC(2).
The duties and responsibilities of the responsible entity in relation to scheme property are clearly inapplicable to contributions that are not capable of being characterised as material in nature. But having regard to the mandate that the broad words of the definition should not be read down, I do not see that it is possible to exclude a contractual promise to pay a sum of money from the concept of “money’s worth”.
Whilst there may be practical difficulties in the discharge of the responsibilities of the responsible entity, for example, in relation to valuation of the contractual promises, this is not a reason for reading down the meaning of the statutory definition because provision is made for exemptions of schemes which might unintentionally be caught by the definition: see
s 601QA; Australian Softwood Forests at 130; Knightsbridge Managed Funds at [49].
It follows that, subject to the reservation I have expressed as to whether the contractual undertakings in relation to the Resolution Sum were contributions, I agree with the approach taken by the primary judge, namely that the promises given by the Funder and the group members were contributions of money’s worth.
ISSUE 2 – WHETHER THE CONTRIBUTIONS WERE “CONSIDERATION TO ACQUIRE RIGHTS … TO BENEFITS PRODUCED BY THE SCHEME”
The primary judge held that this feature of the characteristics of a managed investment scheme was not satisfied.
The essence of his Honour’s reasoning, expressed at [20]-[22], was that the group members’ contributions were not consideration for the acquisition of a benefit produced by the scheme, because the object of the scheme was for group members to recover damages on a pre-existing cause of action against Multiplex. His Honour said:
The recovery of damages or compensation is not, by any meaning, a “benefit” a group member has acquired. If any group member is entitled to recover damages or compensation from Multiplex, it is because there is in existence a justiciable cause of action against Multiplex, a cause of action which exists separately from, and is antecedent to, the scheme. No group member has given value or paid for those causes of action as part of the scheme.
The primary judge also said at [22] that although group members obtained a benefit from the scheme in that their claims are prosecuted “risk free”, this is not a relevant benefit. He said that for an investor to obtain a benefit under a managed investment scheme, he or she must acquire a right to “some hoped for profit or gain the scheme will produce”.
His Honour went on to say that although each group member may obtain an “advantage” from his or her risk free contribution to the scheme and from achieving economies of scale enabling the class action to be commenced, these are not benefits produced by the scheme.
It seems to me that there are a number of difficulties with his Honour’s analysis.
First, the principal benefit which the group members acquired under the scheme was the contractual entitlement to a pro rata share of the balance of the Resolution Sum, after payment of their share of commissions, legal fees and disbursements.
This “benefit” is not identical to the justiciable cause of action which existed before the formation of the scheme. Rather, it is the realisation of the pre-existing cause of action and consists of a contractual entitlement to a share of the Resolution Sum.
Considerations relating to the administration of justice may suggest that the benefits which flow from a successful judgment ought to be treated as arising from the pre-existing cause of action. But once it is accepted that the scheme provides for a contractual benefit that is different from the pre-existing right, it seems to me to follow that it is a benefit produced by the scheme.
This is because “benefit” is defined in broad terms in s 9 of the Act to mean any benefit, whether by payment of cash or otherwise.
Also, under the 1971 amendments to the Companies Act 1961, an “interest” included any right to participate in the realisation of a business undertaking or scheme. This suggests that the contractual entitlement to receive a share of the Resolution Sum (if any) is a benefit produced by the scheme, and that the promise by a group member to pay commission and legal fees was the consideration for the acquisition of that benefit.
This approach is reinforced by the statements in the authorities that the words or expressions used in the earlier form of the definition are relevant to the meaning of the expressions contained in the new definition: Knightsbridge Managed Funds at [44]; see also Report of the Law Reform Commission and Companies and Securities Advisory Committee, Collective Investments: Other People’s Money at [3.5].
Second, in light of the broad definition of “benefit”, there is force in the submission that the benefits comprised in the immunity from legal fees and exposure to costs orders are benefits produced by the scheme.
It is true that exposure to costs orders is limited by s 43(1A) of the Federal Court Act so that any analysis of the “benefits” of the scheme would have to bear in mind the incidents of representative proceedings under Pt IVA of that Act.
However, it is sufficient for present purposes to say that the conclusion I have reached about the benefit of the share in the Resolution Sum leads me to a different view from the primary judge on this feature of the scheme.
ISSUE 3 – WHETHER THE CONTRIBUTIONS “ARE TO BE POOLED”
The primary judge accepted that it may be possible to “pool” choses in action, but he found at [28]-[29] that the group members’ contractual undertakings were not pooled in the present case.
His Honour considered the proper characterisation of the arrangements to be a series of bilateral arrangements, rather than an aggregation of the choses in action which are pooled in order to produce benefits for the members of the scheme.
It is true that, in a sense, every managed investment scheme involves a number of bilateral agreements. Nonetheless, I agree with the primary judge that the contractual promises in this case were not “pooled” in accordance with the meaning of that term as construed in the relevant authorities.
The meaning of the word “pooled” and the expression “to be pooled” were stated by Pullin J in Knightsbridge Managed Funds at [46] as follows:
… the word [‘pooled’] has its ordinary meaning. In particular, it will apply to describe arrangements where that is “a common fund into or from which all gains and loses of the contributors are paid” or “a fund made up of numerous payments from participants and used for a purpose they contemplate”. The phrase “to be pooled … to produce” implies that the intention must be to pool the contributions and, by use of the pool, produce benefits. Pooling will occur where moneys are paid into or collected in an account: see Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (2000) 35 ACSR 620 at [8], [9] and [13].
This statement was cited with apparent approval by Barrett J in Takaran at [13].
The same approach was adopted by the Western Australian Court of Appeal in Burton v Arcus at [60]-[66].
There are three principal reasons why the contractual undertakings of the group members are not “pooled” in accordance with those principles.
First, there is no common fund into or from which the gains or losses of the contributors are to be paid.
Whilst the Retainer and the Funding Agreements authorise MBC to receive the Resolution Sum and to combine it into one account, I do not consider this to be “pooling” in the sense required by the second limb of part (a)(ii) of the definition in s 9.
The payment of the Resolution Sum into one bank account, and the subsequent payments of the Funder’s commission and group members’ shares out of that account are merely matters of administrative convenience. They are carried out after the Resolution Sum has been received. They are not the pooling of the contributions required from the group members.
Second, other than in the sense referred to in the previous paragraph, there is no fund made up of payments or “contributions” from the participants and used for the purposes they contemplate.
Third, the expression “to be pooled” has a purposive element. This is clear from the observations of Pullin J and from the language of this limb of the definition. The contributions are to be pooled to produce benefit for the members; they are to be used for the purposes they contemplate: see also Enterprise Solutions at [9]; Burton v Arcus at [61]; ASIC v Emu Brewery at [101] per Simmonds J.
Here, the group members’ contributions comprising their contractual authorisation to MBC to receive and disburse the Resolution Sum are not pooled to produce financial benefits.
It may be accepted that the scheme contemplates the identification of a sufficient number of group members so that funding becomes commercially worthwhile. Indeed, this may be part of what Barrett J referred to as the “blueprint” of the scheme: Takaran at [15].
But here, the purpose of the individual group members in giving their contractual undertakings was not to produce financial (or other) benefits from the pooling of those contributions. Rather, the purpose of them was to deal with the financial benefits consisting of the realisation of the members’ claims for compensation, if and when produced.
The position here is unlike that which existed in ASIC v Emu Brewery where a form of promissory note was issued to lenders to raise funds. Those funds were then on-lent to another company in order to make possible particular finance arrangements for a specific project.
Simmonds J considered that the funds contributed to make possible the finance arrangements, which would produce the benefits contemplated by the contributors, were pooled: ASIC v Emu Brewery at [99].
Here, the contractual undertakings of group members may, in a loose sense, make possible the financial benefits that are contemplated. But it would be wrong to equate these promises with the provision of funds by a contributor which are combined in a discernible pool that is then used to produce financial benefits for the benefit of contributors.
ISSUE 4 – “COMMON ENTERPRISE”
The primary judge was of the view that the phrase “any of the contributions” makes it clear that not all of the contributions need be used in the enterprise. He considered it to be enough if a single contribution, for example the money contributed by the Funder, is used: see at [30].
With respect to his Honour, I do not agree that this is the proper construction of the second limb of part (a)(ii) of the definition of managed investment scheme in s 9.
The opening words of that limb have to be construed as a whole. As Mr Hutley SC submitted, the words “any of the contributions are to be pooled” imports the plural; there must be two or more contributions to be pooled. It is not possible to pool one contribution.
This is further emphasised by the use of the plural “are” in the expression “are to be pooled”. .It must follow that the words “used in a common enterprise” also imports the plural. What is required is that any two or more of the contributions are used in a common enterprise.
The relevant part of the phrase is “are to be pooled, or used in a common enterprise”. It is true that the word “are” does not specifically qualify the word “used”. But upon the meaning contended for by Multiplex, the phrase would have to be read as “is or are used in a common enterprise”. That would be contrary to a literal reading of the phrase and is not supported by the context.
Nevertheless, for reasons mentioned above, I think that the plural is necessarily imported by implications from the opening words and the context.
The primary judge went on to reject Multiplex’s submission that the network of contractual rights and obligations under the Retainer and the Funding Agreements constituted a common enterprise engaged in by group members, MBC and the Funder: see at [31].
His Honour said:
In my opinion, where there is nothing more than an agreement to fund litigation on behalf of a group, whether that litigation be a representative proceeding, a class action or a test case, there is no joint participation in any enterprise. Nor, if it matters, is there a relationship between the group members and either the litigation funder or MB which could properly be described as an “enterprise”. For there to be an enterprise there must be something in the nature of a business or commercial undertaking; perhaps even something difficult, risky or hazardous. Litigation is not of that order.
Multiplex criticised his Honour’s suggestion that litigation is not “difficult, risky or hazardous”. The force of that criticism speaks for itself but it does not affect the primary judge’s conclusion.
A “common enterprise” was an element of the definition of “interest” in the 1971 amendments to the Companies Act 1961. For reasons already referred to, the meaning of the same term in the current definition is to be informed and assisted by the earlier authorities.
Those earlier authorities establish that an enterprise is a common enterprise if it consists of two or more closely connected operations with one part to be carried out by A and the other by B, each deriving a separate profit, and even in the absence of pooling or sharing of receipts of profit: Australian Softwood Forests at 133; Knightsbridge Managed Funds at [47].
The Retainer and the Funding Agreement provide for the Funder to obtain a separate profit, but this is the only aspect of the test stated by Mason J in Australian Softwood Forests that is satisfied.
Here it cannot be said that the contributions of the group members and the Funder, consisting of their respective contractual undertakings, are used in an enterprise where one part is carried out by the group members and another by the Funder, or by MBC.
The correct characterisation of the arrangements appears from the explanation of the nature of the promise to pay the Resolution Sum stated by a Full Court in IMF (Australia) Ltd (ACN 067 298 088) v Meadow Springs Fairway Resort Ltd (In Liq) (ACN 084 358 592) (2009) 253 ALR 240 at [72], [73] and [77]. It is part of the price or cost of the Funder’s agreement to fund the litigation.
Moreover, it may be doubted whether the arrangements are properly characterised as an enterprise notwithstanding the risky nature of the undertaking. This is because I accept that a “common enterprise” must be a business or commercial undertaking. This seems to me to be clear from the use of that term in the earlier definition which was concerned with a “business undertaking or scheme” and profits derived from the efforts of a promoter.
Whilst a business undertaking is a broad concept, which would plainly extend to the efforts of the Funder, I doubt whether the contractual undertakings of group members can be so characterised. However, in view of the conclusion that I have reached that the network of contractual arrangements is not a common enterprise, I do not need to deal further with this issue.
THE PRIMARY JUDGE’S REFERENCE TO POLICY AND PURPOSE
After construing the features of the “scheme”, the primary judge stated that the “upshot” of his reasoning was that the arrangements between the Funder, MBC and the group members do not fall within the statutory definition: see [37].
He went on to say that it should not come as a surprise because the arrangements do not fall within the evident purpose of the definition “stripped of all its technicalities”, and the registration of the scheme, if it were to fall within the definition, would not afford group members the protections of the kind contemplated by Pt 5C of the Act.
I reject the submission that this passage from his Honour’s judgment indicates that he sought to construe the definition by impermissibly resorting to policy considerations to avoid the apparent unintended consequences of a literal reading of the definition.
First, it is clear that his Honour did construe, in an orthodox manner, the various limbs of the definition. Second, although I have departed from some of the reasons adopted by the primary judge, I have reached the conclusion that he was correct in finding that the arrangements do not constitute a managed investment scheme.
Third, I consider there is some force in the proposition that the context in which the statutory definition appears reinforces the view that the present arrangements do not constitute a managed investment.
The context includes the comments in the Explanatory Memorandum to the Managed Investments Bill and the recommendation of the Parliamentary Joint Committee. These comments, which I have set out above at [155] to [157], indicate that the regulatory regime introduced by Pt 5C was intended to govern collective investments where financial contributions are gathered from investors and are pooled or used in a common enterprise.
This can be seen most clearly in the requirements of registration (s 601ED(5)), operation by a public company with a financial services licence (s 601FA), and identification of scheme property which is to be held separately (s 601FC)(1)(i)) and on trust for members (s 601FC(2)).
What may be seen in the present case is the use by a promoter of the scheme, namely the Funder, of its own funds to obtain a financial benefit for the members. This is not to eliminate the possibility that MBC may also be a promoter. It serves to emphasise that what occurs here is not consistent with the regulatory purpose.
The evident purpose of Pt 5C is to protect the investment of pooled contributions, or contributions that are used in a common enterprise, by a person who has day-to-day control. For the reasons given above, that is not what occurs in the present case.
STANDING
Since in my view the arrangements constituted by the Retainer and the Funding Agreements do not constitute a managed investment scheme, it is unnecessary for me to consider the issue of standing.
However, there appears to be force in the submission of the respondents that Multiplex lacks the requisite standing.
This is most clearly illustrated by the provisions of s 601EE which stipulate the classes of persons who have standing to apply to wind up a scheme which operates in contravention of the requirement of s 601ED(5) that it be registered.
That is the contravention of which Multiplex complains, but it has no standing under s 601EE to have the scheme wound up. Standing is limited under that section to ASIC, the person operating the scheme, or a member of the scheme.
This may suggest that Multiplex has no standing to seek an injunction, but I do not need to express a concluded view on that question.
Nor do I need to consider whether a declaration would have had any utility: see eg Australian Securities and Investments Commission v HLP Financial Planning (Aust) Pty Ltd (2007) 164 FCR 487 at [14]; Australian Securities and Investments Commission v FUELbanc Australia Ltd (2007) 162 FCR 174 at [61].
CONCLUSION
The appeal should be dismissed. The orders I would make are that:
1.The appeal be dismissed
2.The appellants to pay the costs of the respondents of the appeal.
I certify that the preceding one hundred and ninety-one (191) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson. Associate:
Dated: 20 October 2009
Counsel for the First and Second Appellants: Mr TF Bathurst QC with Mr SM Nixon and Mr DFC Thomas Solicitor for the First and Second Appellants: Mallesons Stephen Jaques Counsel for the First and Second Respondents: Mr J Sheahan SC Solicitor for the First and Second Respondents: Piper Alderman Counsel for the Third, Fourth and Fifth Respondents: Mr NC Hutley SC with Mr MBJ Lee Solicitor for the Third Respondent: Maurice Blackburn Pty Limited Solicitor for the Fourth and Fifth Respondents: Harris Legal
Date of Hearing: 5 August 2009 Date of Judgment: 20 October 2009
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