In the matter of Securities Exchanges Guarantee Corporation Limited as trustee for the National Guarantee Fund

Case •

[2016] NSWSC 76

•

17 February 2016

No judgment structure available for this case.

Supreme Court


New South Wales

  • Amendment notes
Medium Neutral Citation: In the matter of Securities Exchanges Guarantee Corporation Limited as trustee for the National Guarantee Fund [2016] NSWSC 76
Hearing dates:9 February 2016
Decision date: 17 February 2016
Jurisdiction:Equity
Before: Ball J
Decision:

Judicial advice given

Catchwords: TRUSTS – Judicial advice under Trustee Act 1925 (NSW), s 63(1) – advice in relation to compensation regime established under Part 7.5 of the Corporations Act 201 (Cth)
Legislation Cited: ASIC Market Integrity Rules (Competition in Exchange Markets) 2011
Corporations Act 2001 (Cth)
Corporations Regulations 2001 (Cth)
Corporations Legislation Amendment Regulation 2011 (No 1) (Cth)
Trustee Act 1925 (NSW)
Cases Cited: Application of Dev Menon [2014] NSWSC 1888
In the matter of All Class Insurance Brokers Pty Ltd (in liq); Vardy v Westpac Banking Corporation [2014] NSWSC 475
Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66
Texts Cited: Pearce and Geddes, Statutory Interpretation in Australia (8th ed 2014, Butterworths)
Category:Principal judgment
Parties: Securities Exchanges Guarantee Corporation Limited ACN 008 626 793 as trustee for the National Guarantee Fund (Plaintiff)
Representation:

Counsel:
JC Sheahan QC with JJ Hutton (Plaintiff)

  Solicitors:
Clayton Utz (Plaintiff)
File Number(s):2015/371616
Publication restriction:Nil

Judgment

Introduction

  1. Securities Exchanges Guarantee Corporation Limited (SEGC) is the trustee of the National Guarantee Fund (the NGF), which is a fund established for the purpose of compensating retail clients for losses they suffer as a consequence of a default by a participant in the financial market operated by ASX Limited (ASX). In this proceeding, SEGC seeks judicial advice pursuant to s 63 of the Trustee Act1925 (NSW) in relation to the settling of contract guarantee claims on the NGF arising out of the collapse of BBY Ltd (In Liq) (Receivers and Managers Appointed). BBY was, until it went into external administration, admitted as a participant of the market operated by ASX under the ASX Operating Rules. It was also a participant of the market operated by Chi-X Australia Pty Ltd under the Chi-X Operating Rules. It will be convenient in this judgment to refer interchangeably to ASX and the market it operates as “ASX” and to Chi-X and the market it operates as “Chi-X”.

  2. Before dealing with the matters on which advice is sought and the question whether the advice should be given, it is convenient to say something about the compensation regime established by Pt 7.5 of the Corporations Act 2001 (Cth) (the Act).

The compensation regime

  1. Prior to 31 October 2011, ASX operated a monopoly. However, as a result of legislative changes that came into effect on that day, competing market operators (such as Chi-X) were permitted to operate financial markets in competition with ASX. As part of the changes, Pt 7.5 of the Act sets out revised compensation arrangements for retail clients who suffer losses as a consequence of the default of a broker who participated in one or more of the markets. In broad terms, the operators of financial markets other than ASX must have in place approved compensation arrangements for retail clients that meet the requirements of Div 3 of Pt 7.5. The compensation arrangements that govern ASX are set out in Div 4. The losses covered by arrangements established by Div 3 are referred to as “Division 3 losses” and those covered by the arrangements set out in Div 4 are referred to as “Division 4 losses”.

  2. In relation to Division 3 losses, s 885C provides that the arrangements must cover cases where a client gives a broker money or other property or authority over property and the client suffers a loss as a consequence of a defalcation or fraudulent misuse of the money, property or authority. Section 885D provides that where the client did not instruct the broker to use a particular market (and it was not apparent from usual business practice which market would be used), the loss is not covered by Div 3, leaving it to be dealt with as a Division 4 loss.

  3. In relation to Division 4 losses, s 888A of the Act provides:

The situations in which compensation may be claimed

(1)   The situations in which compensation may be claimed in respect of a loss that is connected with a financial market to which this Division applies are as specified in the regulations.

(2)   Without limiting subsection (1), a loss is connected with a financial market if it is caused by a participant, or past participant, in the market.

  1. Section 888C of the Act provides that compensation to which a person is entitled in respect of a claim is to be determined in accordance with the regulations. Section 888E, somewhat repetitively, provides that claims are to be made and determined in accordance with the regulations and any relevant provisions of the SEGC’s Operating Rules. There are no relevant provisions of the SEGC’s Operating Rules. Section 888F provides that SEGC has power to determine claims in accordance with the Division.

  2. Subdivision 4.3 of the regulations deals with the compensation payable in respect of failed contracts. Regulation 7.5.24 provides:

Claim by selling client in respect of default by selling dealer: ASTC-regulated transfer

(1)   This regulation applies to a person (the selling client) if:

(a)   a dealer enters into a reportable transaction on behalf of the selling client; and

(b)   the reportable transaction is a sale of securities; and

(c)   a transfer of the securities concerned pursuant to the sale would be an ASTC-regulated transfer; and

(d)   at the end of the prescribed period for the transaction:

(i)   if subparagraph (ii) does not apply - the selling client has done all things necessary to enable the dealer to do all things that the dealer is required to do under the operating rules of a participating market licensee or ACH to effect a transfer of the securities pursuant to the sale; and

(ii)   the dealer has been suspended by the participating market licensee concerned or ACH, that suspension has not been removed and the selling client has done, or is ready, willing and able to do, all things necessary to enable the dealer to do all things that the dealer is required to do under the operating rules of the participating market licensee or ACH to effect a transfer of the securities pursuant to the sale; and

(iii)   the dealer's obligations to the selling client in respect of the sale, in so far as they relate to the consideration for the sale, have not been discharged.

(2)   The selling client may make a claim in respect of the sale.

(3)   The selling client may make a single claim under this regulation in respect of 2 or more sales.

(4)   A claim made under subregulation (3) is to be treated for subregulation (5) as if it consisted of a separate claim in respect of each of the sales to which it relates.

(5)   The SEGC must allow the claim if the SEGC is satisfied that:

(a)   subregulation (1) entitles the selling client to make the claim; and

(b)   the selling client:

(i)   has done all things necessary to enable the dealer to do all things that the dealer is required to do under the operating rules of ACH to effect a transfer of the securities pursuant to the sale; or

(ii)   has, for the purposes of the claim, in accordance with the operating rules of ACH, transferred to the SEGC or to an Exchange body securities of the same kind and number as the first-mentioned securities; and

(c)   the dealer's obligations to the selling client in respect of the sale, in so far as they relate to the consideration for the sale, have not been discharged.

(6)   If the SEGC allows a claim, the SEGC must pay to the selling client the amount of the consideration less so much (if any) of the total of any brokerage fees and other charges, and any stamp duty and other duties and taxes, payable by the selling client in connection with the sale as has not already been paid by the selling client.

(7)   If a selling client transfers securities to an Exchange body as mentioned in subparagraph (5)(b)(ii), the Exchange body must account to the SEGC for those securities in accordance with the operating rules of ACH.

  1. “ASTC” is a reference to ASX Settlement and Transfer Corporation Pty Limited, now known as ASX Settlement Pty Limited, which operates a settlement facility. “ASTC-regulated transfer” is, broadly speaking, the transfer of a financial product that is effected through ASTC.

  2. “Reportable transaction” is relevantly defined in reg 7.5.01 in these terms:

… a transaction that is entered into before or after the commencement of this Part in relation to securities, and:

(a)   is or has at any time been a sale or purchase, by a participant (the first dealer) of a participating market licensee, of securities, if the securities are quoted on a financial market of a participating market licensee when the agreement for the sale or purchase is made, and:

(i)   in any case - the participating market licensee's operating rules, as in force when the agreement for the sale or purchase is made, require or permit the first dealer to report the sale or purchase to the participating market licensee; or

…

“Participating market licensee” is defined in reg 7.5.01 to mean “a licensee that is a member of the SEGC”. The only member of SEGC is ASX.

  1. Consequently, to be a “reportable transaction” the transaction must be entered into before or after the commencement of Pt 7.5, it must be for the sale or purchase of securities quoted on the ASX at the time the agreement was made, the sale must be by a participant of the ASX and the rules of the ASX as in force when the agreement was made must “require or permit” the ASX participant to report the transaction to ASX.

  2. The words “or permit” were added by the Corporations Legislation Amendment Regulation 2011 (No 1) at the time amendments were made to permit others to offer financial markets in competition with ASX. It appears from the relevant Explanatory Statement that the amendment was made to take account of the fact that it would no longer be necessary to report to ASX all transactions and, in particular, those that occurred on another exchange. As the Explanatory Statement says:

Subregulation 7.5.01(1) provides a definition for a ‘reportable transaction’ as a transaction which, amongst other things, is required to be reported to the market operator under the operating rules of the market. With the introduction of competing market operators (such as Chi-X), the Australian Securities Exchange (ASX) operating rules are to be amended to permit these transactions to be reported to other market operators, meaning that technically the transactions are no longer ‘required’ to be reported. These items [ie, the amendment to the definition of ‘reportable transaction’] therefore amend the subregulation to refer to transactions that are ‘required or permitted’ to be reported to the market operator, in order to preserve the intention of the definition.

  1. Regulation 7.5.26 mirrors reg 7.5.24 except that it applies to a client buying securities and requires SEGC to transfer to the buying client securities of the same kind and number as the securities the client had instructed the defaulting broker to acquire. An exception is created by reg 7.5.28 where it is not reasonably practicable for SEGC to obtain those securities. In that case, SEGC must satisfy the claim by paying to the claimant the amount that, when the claimant became entitled to make the claim, was the amount of the actual pecuniary loss suffered by the claimant in respect of the purchase.

  2. Subdivision 4.10 of the regulations sets out general provisions relating to claims. Regulation 7.5.72 is in the following terms:

Power of SEGC to allow and settle claim

(1)   The SEGC may, at any time after a person becomes entitled to make a claim, allow and settle the claim.

(2)   Subregulation (1) authorises the SEGC to partially allow a claim (including, for example, in a case where the SEGC considers that the claimant's conduct contributed to the loss).

  1. Regulation 7.5.75 provides that SEGC may reduce an amount of compensation in certain circumstances, most relevantly where a right of set‑off is available to the claimant and to the extent to which the claimant was responsible for causing the loss.

  2. Regulation 7.5.78 provides that if SEGC allows a claim in whole or in part the claimant is also entitled to be paid an amount equal to the total reasonable costs of, and the reasonable disbursements incidental to, the making and proof of the claim. Regulation 7.5.79 permits the payment of interest.

Matters on which judicial advice sought

  1. Paragraph 7 of the Summons seeks an order in the following terms:

An order giving the Court's opinion, advice and direction pursuant to s 63 of the Trustee Act 1925 (NSW) or the Court's inherent jurisdiction, as to whether in:

(i)   the circumstances set out in the Statements of Facts dated 14 December 2015 and filed in these proceedings; and

(ii)   the further circumstances set out in the affidavit of Gabriella Lianne Hart affirmed on 14 December 2015 and filed in these proceedings

the plaintiff, Securities Exchanges Guarantee Corporation Limited (SEGC), as trustee of the National Guarantee Fund (NGF) as defined in sections 880B and 889A of the Corporations Act 2001 (Cth) (Act), would be justified in allowing and settling contract guarantee claims made on the NGF under Subdivision 4.3 of Division 4 of Part 7.5 of the Corporations Regulations 2001 (Cth) (Regulations) on the basis that:

(a)   it may allow and settle a contract guarantee claim made by a claimant who comes within the terms of sub-regulation 7.5.24(1) (selling client) or 7.5.26(1) (buying client) of the Regulations, even though not all of the elements of sub-regulation 7.5.24(5) or 7.5.26(5) are satisfied;

(b)   in allowing and settling a contract guarantee claim as specified in subparagraph (a) above, it may provide compensation to the claimant so as to make good the loss or damage found to have been suffered by the claimant and is not constrained to provide compensation only in accordance with sub-regulations 7.5.24(6) or 7.5.26(6) of the Regulations;

(c)   in considering a contract guarantee claim made by a selling client who comes within the terms of sub-regulation 7.5.24(1), and where all of the elements of sub-regulation 7.5.24(5) are satisfied, but where the selling client has retained the securities the subject of the original transaction and has not transferred to SEGC or to ASX Limited (ASX) securities of the same kind and number;

(i)   it may allow and settle the claim without requiring the claimant to transfer to it or to ASX securities of the same kind and number as the securities that the claimant sought to sell through its dealer in the transaction the subject of the claim; and

(ii)   it may provide compensation to the claimant so as to make good the loss or damage found to have been suffered by the claimant and is not constrained to pay the monetary consideration referred to in sub-regulation 7.5.24(6);

(d)   it may, subject to the terms of Part 7.5 of the Act and Regulations, allow a contract guarantee claim made in respect of a transaction in securities that are quoted on the financial market operated by ASX, but where the transaction was conducted or executed on the financial market operated by Chi-X Australia Pty Ltd (Chi-X Australia) rather than the financial market operated by ASX; and

(e)   it may, subject to the terms of Part 7.5 of the Act and Regulations, allow a contract guarantee claim made in respect of a transaction in securities that are quoted on the financial market operated by ASX, but where the transaction was conducted or executed 'off-market’ (that is, on neither the financial market operated by Chi-X Australia, the financial market operated by ASX nor any other financial market).

  1. Broadly speaking, the advice concerns two questions. The first is whether regs 7.5.24 and 7.5.26 set out exclusively the compensation that is payable to a client where BBY, because of its external administration, has failed to execute a client’s instructions to buy or sell shares. It is apparent from the statement of facts accompanying the Summons that a number of clients have suffered losses that are not obviously covered by regs 7.5.24 and 7.5.26. Those losses arise where the client has either sold shares through another broker for a lower price than the client would have obtained if BBY had executed the client’s instructions or bought shares for a greater amount than the client would have paid if BBY had executed the client’s instructions. On the face of it, regs 7.5.24 and 7.5.26 do not apply in those cases because those regulations appear to assume either that the client has not sold the shares at the time compensation is sought or has not bought them at that time. Consequently, if regs 7.5.24 and 7.5.26 set out exclusively the circumstances and the amount of compensation that is payable where a broker does not execute instructions to sell or buy securities, clients who subsequently sell or buy the relevant securities will receive no compensation at all, even though they may well suffer a loss.

  2. It may be a client could put himself or herself in a position to obtain compensation by buying further shares (in cases where compensation is sought for failing to exercise a sell instruction) or selling the shares that the client has bought (in cases where compensation is sought for failing to exercise a buy instruction). However, not only would that be cumbersome but anomalies would arise where there had been further movements in the share price. To take just one example, suppose a client gave instructions to BBY to sell a certain parcel of shares, that BBY did not execute those instructions as a result of being placed into external administration and the client subsequently sold the shares at a loss. The client may be able to buy an equivalent parcel of shares and deliver that parcel to SEGC in accordance with sub-reg 7.5.24(b)(ii) so as to be entitled to compensation. However, the amount that the client would receive would be the price of the shares at the time the original instructions were given. If the shares had increased in price since the time the client sold his or her original parcel, the client would not receive full compensation for the loss he or she had actually suffered. On the other hand, if the shares had decreased further in value over that time, the client would be over-compensated.

  3. A further problem appears to arise under reg 7.5.24. Under sub-reg (5), SEGC must allow the claim if the selling client has done all things necessary to enable the dealer to do all things that the dealer is required to do under the ASX Operating Rules to effect a transfer of the securities pursuant to the sale. The selling client is not actually required to transfer the securities to SEGC or ASX. However, it appears that under sub-reg (6), SEGC must pay the selling client the value of the shares even if the client retains possession of them, with the result that the client will be over-compensated.

  4. The second question is whether regs 7.5.24 and 7.5.26 cover a case where the relevant transaction is executed on Chi-X, or as a result of an off-market transaction, rather than ASX. The answer to that question depends on whether such a transaction is a “reportable transaction” and, in particular, whether it can be said that such a transaction is one that the rules of the ASX “require or permit” BBY to report to the ASX. (It is accepted that, in principle, a transaction that occurred on Chi-X, or an off-market transaction, could satisfy the other requirements set out in sub-reg 7.5.24(1) and, in the case of a buying client, the equivalent requirements set out in sub-reg 7.5.26(2)). The answer to this question is significant not only because there may be transactions of those types involving BBY, but because, on the current state of SEGC’s knowledge, it is not known whether some transactions executed by BBY for clients were executed on the ASX or Chi-X, with the result that at present SEGC is prevented from settling those claims, even though it may ultimately turn out that the relevant transactions were executed on the ASX.

Standing and jurisdiction

  1. Section 63 of the Trustee Act confers a discretion on the court to give advice to trustees in a broad range of circumstances. Only one jurisdictional bar to relief under s 63 exists, and that is that the applicant must point to “the existence of a question respecting the management or administration of the trust property or a question respecting the interpretation of the trust instrument”: Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66 at [58] per Gummow A-CJ, Kirby, Hayne and Heydon JJ.

  2. There can be no doubt that SEGC has standing to seek the advice it does in this case. Under s 889C the assets of the NGF are the property of SEGC. They must be kept separate from all other property and “must be held on trust by SEGC for the purposes of this Division”. The fact that the trust is a statutory one does not exclude the operation of s 63: see, eg, Application of Dev Menon [2014] NSWSC 1888; In the matter of All Class Insurance Brokers Pty Ltd (in liq); Vardy v Westpac Banking Corporation [2014] NSWSC 475.

  3. Nor can there be any doubt that the advice sought relates to the management or administration of the trust property. The advice concerns the extent to which claims by BBY clients for losses they have suffered should be paid out of the trust property. The advice concerns the general administration of the NGF and there is no obvious discretionary reason why the advice sought should not be given if the court is satisfied that advice is consistent with the statutory regime.

Should the advice be given?

  1. SEGC has obtained detailed written advice from Mr Sheahan QC and Mr Hutton in relation to the questions on which judicial advice is sought to the effect that regs 7.5.24 and 7.5.26 do not set out exclusively the means by which clients who have suffered losses as a consequence of a broker’s failure to carry out the client’s instructions are to be compensated and that transactions executed by a participant in the ASX are reportable transactions even if they are executed on Chi-X or off market. The question is whether it is proper for SEGC to act on that advice. In my opinion, it is.

  2. As to the first issue, the essential question is whether reg 7.5.72 should be read as conferring a general power on SEGC to allow and settle claims notwithstanding the specific and detailed provisions contained in subdiv 4.3 and regs 7.5.24 and 7.5.26, in particular. In my opinion, there are a number of reasons why it should.

  3. First, the ordinary and natural meaning of sub-reg 7.5.72(1) is to confer a general power on SEGC to allow and to settle a claim where a person becomes entitled to make a claim. That conclusion is supported by sub-reg (2), which authorises SEGC to partially allow a claim. It is difficult to see what function reg 7.5.72 has unless it is that. SEGC is already given specific powers to pay claims determined in accordance with specific provisions such as regs 7.5.24 and 7.5.26. If those specific provisions set out the only bases on which claims may be settled, reg 7.5.72 seems otiose.

  4. Second, although the language of sub-regs 7.5.24(5) and (6) (and 7.5.26(5) and (6)) is expressed in mandatory terms (SEGC “must allow a claim” if satisfied of certain matters and “must pay” a specified amount (or, in the case of sub-reg 7.5.26(6) “must, subject to regulation 7.5.28, transfer to the buying client” specified securities) if it allows the claim), those provisions cannot be interpreted as setting out exclusively the circumstances in which compensation is payable and the amount of that compensation. It is plain, for example, from other provisions of subdiv 4.10 that the specific provisions must be read subject to that subdivision. In particular, reg 7.5.75 confers a specific power on SEGC to reduce a claim if a right of set-off exists or if the claimant contributed to the loss. Consequently, the specific provisions must be read as being subject to the general provisions.

  5. On this interpretation, despite their mandatory language, the specific provisions such as regs 7.5.24 and 7.5.26 are to be interpreted as dealing with the normal situation but are to be read as being subject to the general provisions of subdiv 4.10, including the general power conferred by reg 7.5.72.

  6. Third, the circumstances in which a person may make a claim under regs 7.5.24 and 7.5.26 are broader than the circumstances in which SEGC may pay a claim under those regulations. Taking reg 7.5.24 as an example, sub-reg (1) sets out when the regulation applies and sub-reg (2) provides that the claimant may make a claim in those circumstances. Under the terms of sub-reg (1), the claimant may make a claim if, among other things, the claimant “has done, or is ready, willing and able to do, all things necessary to enable the dealer to do all things that the dealer is required to do under the operating rules of the participating market licensee or ACH to effect a transfer of the securities pursuant to the sale”. However, under sub-reg (5), SEGC is only required to allow the claim if the claimant has either “done all things necessary to enable the dealer to do all things that the dealer is required to do under the operating rules of ACH to effect a transfer of the securities pursuant to the sale” or “transferred to the SEGC or to an Exchange body securities of the same kind and number” as the securities the subject of the sale. Unless reg 7.5.72 is read as conferring a substantive power on SEGC to allow and to settle claims, the regulations appear to permit claimants to make claims for which no compensation can be paid. That could not have been what was intended.

  7. Fourth, Pt 7.5 of the Act and the regulations by which the compensation scheme is established is beneficial or remedial legislation that should be given a liberal rather than a constrained interpretation: see Pearce and Geddes, Statutory Interpretation in Australia (8th ed 2014, Butterworths) at [9.2]-[9.4]. Unless the language is clear, it should not be interpreted as arbitrarily excluding certain types of loss from the compensation scheme or as requiring the payment of an amount or the provision of other compensation which may under-compensate a client for the loss that the client has actually suffered. Nor should the language be interpreted as requiring SEGC to over-compensate clients in certain circumstances. That, however, would be the effect of interpreting regs 7.5.24 and 7.5.26 as setting out exclusively the circumstances in which compensation is payable and the amount of compensation in cases covered by those regulations.

  8. As to the second issue, the question is whether a purchase or sale of securities that are listed on the ASX which is made through Chi-X or off-market by a participant of the ASX (relevantly in this case, BBY) can be said to be a transaction that the Operating Rules of the ASX “require or permit” to be reported to the ASX by the participant (BBY).

  9. It is convenient to start with off-market transactions. ASX Operating Rule [3500] relevantly provides:

A Trading Participant must report to ASX, in the time and manner set out in the Procedures, the following:

(a)   all sales of Cash Market Products effected by the Trading Participant;

(b)   each Derivatives Market Transaction entered into by the Trading Participant; and

(c)   all Crossings and Special Crossings,

except for transactions listed in the Procedures. However, this requirement does not apply to transactions in Equity Market Products which are executed on or reported to a financial market other than the ASX market in accordance with ASIC Market Integrity Rules (Competition in Exchange Markets) 2011.

“Cash Market Products” is defined in rule [7100] to include a “Quoted Product”, which itself is defined to include a “Financial Product” as defined in Div 3 of Pt 7.1 of the Act. “Equity Market Products” has the meaning given to that expression by the ASIC Market Integrity Rules (Competition in Exchange Markets) 2011. It includes shares and certain types of Financial Product. The precise meaning of “Cash Market Products” and the other defined terms on which its meaning depends is not important for present purposes. It is obvious from what has been said that it covers a wide range of securities that are traded on the ASX.

  1. It seems clear from rule [3500] that off-market transactions in securities listed on the ASX must be reported by a participant in the ASX unless the transaction is listed in the Procedures or is executed on or reported to a financial market other than the ASX market. It appears from the advices prepared by Mr Sheahan and Mr Hutton that an off-market transaction falls within none of those exceptions. Consequently, it must be reported to the ASX, with the result that it is a “reportable transaction” provided it is a product of a type referred to in rule [3500].

  2. The position in relation to transactions that occur on Chi-X is not as clear. Plainly, the ASX Operating Rules do not require such a transaction to be reported. Can it be said that they permit it to be reported when they are silent on the question?

  3. Mr Sheahan and Mr Hutton advance two reasons for why it can be said that they do. The first is that the question must be tested at a time prior to execution (“when the agreement for sale or purchase is made”). At that time, it can be said that the rules permit or require the transaction to be reported because they require the transaction to be reported if it is executed on ASX. In other words, the word “permit” is used to describe a contingent requirement. The second is that the ASX Operating Rules do not prohibit the reporting of such a transaction. Applying the principle that what is not prohibited is permitted, the ASX Operating Rules permit the reporting of a transaction that is executed on another exchange even though the rules say nothing on the subject.

  4. I have some difficulties with these reasons.

  5. As to the first, although as will become apparent, I accept that in a sense the word “permit” introduces a contingent requirement, I do not think that the contingency is temporal. The question whether the ASX’s Operating Rules require or permit the transaction to be reported is to be tested by reference to the rules as in force when the agreement for the sale or purchase is made. The agreement is the agreement between the buyer and seller of the relevant securities. By the time that agreement is entered into, the exchange on which the sale is to be executed has been determined, since the offer and acceptance will occur through that exchange.

  6. As to the second, although it is true that the ASX Operating Rules do not prohibit the reporting of transactions on other exchanges, they make no provision for how that is to be done and they appear to proceed on the assumption that transactions that occur on other exchanges will not be reported to the ASX because they will be reported in accordance with the operating rules of the other exchange. It is likely to lead to confusion if the same transaction is reported twice, and it is difficult to see that that possibility was really in contemplation at the time the regulation was made. It is apparent from the Explanatory Statement that the words “or permit” were added not in anticipation that the ASX Operating Rules would be amended to permit transactions that were not required to be reported to the ASX nonetheless to be reported to it in the discretion of the relevant broker. Rather, they were added in anticipation that the rules would be amended to permit a participant to report a transaction to the operator of another exchange where the transaction was executed on that exchange; and they were added “to preserve the intention of the definition” of “reportable transaction”.

  7. Despite these reservations, I agree with the conclusion reached by Mr Sheahan and Mr Hutton. It seems to me appropriate to interpret the words “or permit” as a reference to the ability of the reporter (that is, a broker) to bring about a state of affairs where it is required to report the transaction to the ASX by executing the transaction on that exchange. In other words, if the Operating Rules of the ASX as they existed at the time the contract was entered into permitted that contract to be made on that exchange, then they permitted the broker to report that transaction to the ASX because they permitted the broker to execute the transaction on that exchange.

  8. No doubt, this is not the ordinary meaning of the words “or permit the first dealer to report the sale or purchase”. On their ordinary meaning, the words appear to be concerned with the reporting of an actual transaction, not a hypothetical one. But as Mr Sheahan and Mr Hutton point out in their advice, the acceptance of the ordinary meaning of the words is not consistent with the purpose of the legislation or the context in which the definition of “reportable transaction” was amended.

  9. As I have said, the words “or permit” were added in anticipation that the ASX Operating Rules would be amended to permit transactions to be reported to the operators of other exchanges rather than the ASX, not in anticipation that the rules would be amended to permit (but not require) transactions on other exchanges to be reported to the ASX at the discretion of the broker. It is difficult to see why the Operating Rules of the ASX would ever be amended in that way.

  10. It is apparent from the Explanatory Statement that the words “or permit” were added to preserve the intent of the definition in the light of other changes that were then being made. Prior to the amendments, at least one intent of the definition of “reportable transaction” was to provide a criterion by reference to which compensation from the NGF was payable to retail clients who had suffered a loss. The definition limited compensation to losses in respect of transactions that had to be reported to the ASX. But that covered a broad range of transactions because a broad range of transactions had to be reported to the ASX under the ASX Operating Rules. By tying the right to compensation to reportable transactions as defined, the regulations ensured that compensation was available in respect of a broad range of transactions that might be entered into by retail clients. It might be inferred that that was consistent with an overall policy of providing a comprehensive compensation scheme to retail clients who invested in shares and other securities so as to ensure that confidence in the market was maintained. When the category of transactions that had to be reported to the ASX was narrowed to exclude transactions reported to the operators of other exchanges, the intention of ensuring that the compensation scheme continued to apply to those transactions was achieved by adding the words “or permit”.

  11. The conclusion of the previous paragraph is consistent with s 885D of the Act, which assumes that certain losses are covered by the NGF notwithstanding that the participant used or might have intended to use a market other than the ASX to effect a particular transaction on behalf of a client. It is apparent from this section that it was intended that the compensation scheme available through the NGF would not be limited to transactions that were effected on the ASX, but rather would be available to retail clients who suffered losses except to the extent that those losses were specifically covered by the compensation arrangements established pursuant to Div 3 of Pt 7.5. The specific exclusion contained in s 885D would make no sense otherwise.

Orders

  1. The orders of the court are:

The Court orders that pursuant to section 63 of the Trustee Act 1925 (NSW) the plaintiff, Securities Exchanges Guarantee Corporation Limited (SEGC) be advised and directed that in:

(i)   the circumstances set out in the Statement of Facts dated 14 December 2015 and filed in these proceedings; and

(ii)   the further circumstances set out in the affidavit of Gabriella Lianne Hart affirmed on 14 December 2015 and filed in these proceedings

the plaintiff, Securities Exchanges Guarantee Corporation Limited (SEGC), as trustee of the National Guarantee Fund (NGF) as defined in sections 880B and 889A of the Corporations Act 2001 (Cth) (Act), would be justified in allowing and settling contract guarantee claims made on the NGF under Subdivision 4.3 of Division 4 of Part 7.5 of the Corporations Regulations 2001 (Cth) (Regulations) on the basis that:

(a)   it may allow and settle a contract guarantee claim made by a claimant who comes within the terms of sub-regulation 7.5.24(1) (selling client) or 7.5.26(1) (buying client) of the Regulations, even though not all of the elements of sub-regulation 7.5.24(5) or 7.5.26(5) are satisfied;

(b)   in allowing and settling a contract guarantee claim as specified in subparagraph (a) above, it may provide compensation to the claimant so as to make good the loss or damage found to have been suffered by the claimant and is not constrained to provide compensation only in accordance with sub-regulations 7.5.24(6) or 7.5.26(6) of the Regulations;

(c)   in considering a contract guarantee claim made by a selling client who comes within the terms of sub-regulation 7.5.24(1), and where all of the elements of sub-regulation 7.5.24(5) are satisfied, but where the selling client has retained the securities the subject of the original transaction and has not transferred to SEGC or to ASX Limited (ASX) securities of the same kind and number;

(i)   it may allow and settle the claim without requiring the claimant to transfer to it or to ASX securities of the same kind and number as the securities that the claimant sought to sell through its dealer in the transaction the subject of the claim; and

(ii)   it may provide compensation to the claimant so as to make good the loss or damage found to have been suffered by the claimant and is not constrained to pay the monetary consideration referred to in sub-regulation 7.5.24(6);

(d)   it may, subject to the terms of Part 7.5 of the Act and Regulations, allow a contract guarantee claim made in respect of a transaction in securities that are quoted on the financial market operated by ASX, but where the transaction was conducted or executed on the financial market operated by Chi-X Australia Pty Ltd (Chi-X Australia) rather than the financial market operated by ASX; and

(e)   it may, subject to the terms of Part 7.5 of the Act and Regulations, allow a contract guarantee claim made in respect of a transaction in securities that are quoted on the financial market operated by ASX, but where the transaction was conducted or executed 'off-market’ (that is, on neither the financial market operated by Chi-X Australia, the financial market operated by ASX nor any other financial market).

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Amendments

08 March 2016 - Typographical error in [17] change "regs 7.4.24 and 7.4.26" to "regs 7.5.24 and 7.5.26"

Decision last updated: 08 March 2016

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