MacarthurCook Fund Management Limited & Anor v TFML Limited

[2014] HCATrans 26

[2014] HCATrans 026

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S183 of 2013

B e t w e e n -

MACARTHURCOOK FUND MANAGEMENT LIMITED

First Applicant

SANDHURST TRUSTEES LIMITED

Second Applicant

and

TFML LIMITED (ABN 39 079 608 825)

Respondent

Application for special leave to appeal

KIEFEL J
GAGELER J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 14 FEBRUARY 2014, 10.16 AM

Copyright in the High Court of Australia

MR N.C. HUTLEY, SC:   If the Court pleases, I appear with my learned friend, MS V.A. THOMAS, for the applicant.  (instructed by Ashurst Australia)

MR B.W. WALKER, SC:   May it please the Court, I appear with my learned friend, MR M.A. IZZO, for the respondent.  (instructed by Piper Alderman Lawyers)

KIEFEL J:   Yes, Mr Hutley.

MR HUTLEY:   Your Honour, the appeal, in our respectful submission, raises the issue as to the scope of Part 5C.6 of the Corporations Act to the extent ‑ as to the circumstances in which one can leave a managed investment scheme, and particularly whether the concept of “withdrawal” used in that legislation applies to all leavings from a managed investment scheme.  Your Honours are no doubt seized of the facts, but shortly, MacarthurCook, the applicant, subscribed for 15 million units in the trust for $1 each.  They were described as “founder units”.  The then trustee had power to issue the units with particular rights under clause 4.2(b) which your Honours will see at page 123 at about line 35 of the constitution.

The issue of the units were subject to the terms of various agreements which glory in the acronym facts, and under clause 2.4 of those terms which your Honours will find at application book 90, the trustee agreed to repay the amount that MacarthurCook had subscribed within a specified six month period.  The Court of Appeal found that on the true construction of clause 2.4, RFML’s obligations was to redeem the units due in that specified period, and it did not have to begin at the commencement of the period.  Your Honours will see that at judgment 62, application book 74.  The trustee did not repay the subscription amount to MacarthurCook during the relevant period and towards the end it purported to suspend withdrawals from the trust under clause 7.6 of the constitution, which your Honours will find at application book 131.

Now, if the redemption constituted a withdrawal, as the Court of Appeal found, then the consequence which the Court of Appeal found followed.  The critical part of Justice Meagher, who wrote the judgment of the court, appears at application book 62 in paragraph 28.  His Honour said:

The requirements of the Act in relation to members withdrawing from a scheme are contained in Part 5C.6 . . . The notion of “withdrawing” from a scheme is not defined.  However the sense in which it is used in these provisions is clear.  A managed investment scheme is a collective investment scheme in which members contribute money or money’s worth which is pooled . . . In return the members receive interests which entitle them to share . . . The ways in which an investor may exit a collective investment scheme include redeeming his or her interests –

his Honour starts with “redeeming” –

requiring the scheme operator to buy his or her interests, selling the interests on a recognised exchange or by private arrangement, or terminating the scheme and liquidating its assets.  In Part 5C.6 “withdrawing” describes exiting the collective investment scheme during its continued operation by receiving a payment of money out of the scheme funds in exchange for the extinguishment of the interest . . . That is clear from provisions such as ss 601KB –

That is the critical passage.

GAGELER J:   That leads to paragraph 36 at the bottom of page 65?

MR HUTLEY:   Exactly, your Honour, 35.  Your Honour, the special leave question is, is that right?  We say withdrawing, to withdraw, has a concept of having an interest, determining to seek it back and being repaid, such as withdrawing money from a cheque account or withdrawing one’s nomination from an election.  Here, in effect, there was an agreement which obliged the trustee to redeem at a date, and that did not involve a withdrawal.  That is the point.

GAGELER J:   So “withdrawal” on your submission needs to be always entirely voluntary.  There can be no contractual commitment.  Is that what it comes down to?

MR HUTLEY:   Quite, yes.  It amounts to this, and we say the structure of the legislation is consistent with it.  Can I take your Honours to Part 5C.3 which is, your Honour, in the materials commencing at page 7?  That is the contents of the constitution; it says subsection (3):

If the responsible entity is to have any powers –

I am sorry, (4) –

If members are to have a right to withdraw –

that is, an entitlement, so we are talking about a right to withdraw –

from the scheme, the scheme’s constitution must:

(a)     specify the right; and

(b)if the right may be exercised while the scheme is liquid (as defined in section 601KA)—set out adequate procedures for making and dealing with withdrawal requests –

In other words, the concept of “withdrawal” is that the constitution must make provision for requests, i.e. the concept of voluntarily seeking to leave the scheme.

KIEFEL J:   But if, as Justice Meagher held at paragraph 36, the purpose of the legislation is protective of the financial security of the scheme, what does it matter by which method moneys exit the scheme?  Is it not meant to protect the scheme overall?

MR HUTLEY:   Your Honour, the method can be very important.  Can I take your Honour to an example under this constitution?  This constitution, in clause 7.4 at application book 131, has a provision which entitles the trustee to:

redeem the Units of any Unitholder without the need for a withdrawal request –

For example, a trustee may become aware that his trust is being used for laundering purposes; people are using the trust to buy units to launder drug money or illegal cash.  That is a power to redeem without going through the process which, if that is the termination of an interest and his Honour’s judgment is right, one would have to go through the process of 601KB, that is, offer all other members of the scheme the opportunity to withdraw also.

KIEFEL J:   But that example stands somewhat apart from a provision under an agreement where an agreement might be entered into for the purpose of avoiding protective provisions of the Act.

MR HUTLEY:   But, your Honour, should such an agreement be entered into, it would breach all manner of other provisions of the legislation which requires the trustee – in effect, the manager – to act bona fide in the best interests of the scheme as per the trust, and if there was, in effect, a device of that variety it is not, in effect, needed to, as it were, change the natural meaning of “withdrawal” and what we say the purposes of this was to protect against what his Honour observed, we submit, was a floodgates argument.  Should such a proposal be undertaken, that is, a device to avoid to the benefit of particular unit holders the liquidity requirements – no such suggestion in this case, that would be a clear breach of trust ‑ and would expose the manager to liability and the interest to be set aside, or to restrain them being enforced.  That is why it is not necessary to protect against the fear that his Honour observed upon.  What we say is – and it is to be observed, your Honours – if your Honours go to 601GA it says:

(4)      If members are to have a right to withdraw –

It contemplates that there may be no right to withdrawal, but it does not say under no circumstances short of termination can a trustee trust in those circumstances, where there is to be no right of withdrawal, not have arrangements whereby certain unit holders are redeemed, or certain people are removed.  It is really, in effect, about whether this is a code, and if it is a code, it constricts the flexibility of these instruments.  We have referred to the explanatory memorandum to indicate really what the purpose of this was, and your Honours will find that at page 18, paragraph 7.14 and following, and particularly at 19, dealing with “Redemption in wholly or partly illiquid” fund.

It is really, in effect, the problem is to avoid runs.  The problem is when things start to get a bit dodgy in the marketplace, everybody comes, quite different to a planned structure whereby a manager agrees to issue units with a fixed time of payment.  That is not a run.  That is something which in all likelihood could be planned for, and probably would be planned for.

KIEFEL J:   Why is the characterisation of this agreement as a withdrawal providing for a withdrawal or not a sufficiently wide question?

MR HUTLEY:   Because, your Honour, if “withdrawal” means any circumstance short of liquidation when a person leaves the fund – and that is what his Honour Justice Meagher appears to say – then that would, for example, take out clause 7.4 and would take out all manner of other possible arrangements which are for the good of the fund, namely, as means of raising money which the fund needs, through the issue of units which may mean it is an efficient means of financing with fixed terms of repayment, with fixed terms of interest, such that not only is it for the benefit of my client, it is for the benefit of the trust.

One of the consequences is my client could not stay in the trust as a unit holder if it wanted to.  If the trust was doing exceedingly well and my client wanted to stay in, it could not make a withdrawal request.  It had no entitlement to be there.  The consequences of this construction are to diminish the flexibility of these instruments.  Does it meet the true need and the object of the legislation, which was to prevent runs?  In our respectful submission, it puts a constrained and unreal construction on the word “withdrawal” which, as your Honours will see from the legislation, is predicated on the concept of “request” and “offers”.  I took your Honours to 601GA, but your Honours should also go through 601KB which:

The responsible entity of a registered scheme that is not liquid may offer members an opportunity to withdraw, wholly or partly, from the scheme to the extent that particular assets are available and able to be converted to money in time to satisfy withdrawal requests that members may make in response to the offer.

The withdrawal offer, that is, by the trustee or the responsible entity, has to have certain characteristics.  It has to either be in accordance with the constitution –

otherwise—by giving a copy of the offer to all members of the scheme . . . of a particular class –

so it has to be universal.  The withdrawal offer must specify various matters; the period to which it is open, the amount of money, et cetera, and the method of dealing with withdrawal requests –

(4)For joint members, a copy of the withdrawal offer need only be given to the joint member named first in the register –

Then 601KC, it says –

Only one withdrawal offer may be open at any time in relation to a particular interest in a registered scheme that is not liquid –

Non‑liquid schemes, that defines what it is.  So the whole structure of the legislation contemplates that if there is to be a withdrawal, it is something at the option of the withdrawing party, because there has to be an offer to it which it can decline.  That is, in our respectful submission, consistent with “withdrawal” meaning what we submitted.

The oddity here is if this applies here, we could only be made an offer we could not refuse because we had no right to remain within the scheme.  Our term was six months, the period.  At the end of that, we could be redeemed.  There could be no offer by the trustee which we could decline to take.  The whole structure gives withdrawal its ordinary meaning.  That is the object which it is directed at, to avoid runs, and their Honours’ construction, in our respectful submission, raises a very important question as to the scope of the scheme and how it was intended to operate.  The case raises no factual issues at all.  Our learned friends have in the grand old tradition threatened your Honours with a notice of contention, but your Honours are used to that, and I am not going to trouble with that ‑ ‑ ‑

KIEFEL J:   Do you say that the matters in the proposed notice of contention were not raised below?

MR HUTLEY:   We say that is apt, but if that has to be debated before your Honours, at the end of the day it will.  In any event, it will go nowhere because there is simply no evidence to support the contention, but that would be dealt with.  As I say, your Honours would not be deterred by that.

Paragraph 28 of his Honour’s judgment is a very important statement of principle which will govern all schemes in this country; not just trust schemes, all manner of schemes in this country and preclude flexible dealing with the character of interests.  With respect to his Honour, the concern his Honour expressed was not apposite because his Honour did not advert to the legal consequence should such a device be sought to be taken advantage of; could not do it.  It would be illegal.  So it is not the manner by which to test the scope of this provision.  Unless I can be of further assistance, your Honours, those are our submissions.

KIEFEL J:   Thank you, Mr Hutley.  Yes, Mr Walker.

MR WALKER:   If it please your Honours.  If commercial flexibility means the capacity to contract out of salutary statutory safeguards, then it is true that not only paragraph 28 but the holdings in this case would stand against that course, and a good thing, too.  Second, paragraph 28 is a description of the requirements of the Act which is rather broader than the holding in this case concerning what occurred in this case.  In particular, it refers to provisions of the Act which provide no textual footing at all.  Not a syllable has been pointed to by my learned friend in the statute to make an exception ‑ it seems to be regarded as an exception – for that which is the subject of contractual or prior contractual – it is not clear which is adequate or necessary for his argument – regimes to the contrary of the prudential and fairness or equity requirement of the statute.

Now, that, with respect, is odd bearing in mind that the very arrangements in question are subject to the constitution and the constitution is at pains, perhaps redundantly, to emphasise that it is in respect to so‑called redemptions or withdrawals, subject to the Act.  When one comes to the Act, one finds that there is a quality, a criterion of application of a certain nature of scheme, which of course lies in the future from the time of the inception of the fund or, indeed, the making of a contract, liquidity or otherwise.  Now, these are indications that there is, as I say, not merely no textual footing, but no purposive justification for seeing these statutory provisions which, subject to an argument about volition or voluntariness, plainly apply to what was attempted in this case.

KIEFEL J:   You are effectively saying there is insufficient prospects ‑ ‑ ‑

MR WALKER:   Exactly.

KIEFEL J:   ‑ ‑ ‑ but is there a question of public importance?

MR WALKER:   The meaning of any public statute regulating ‑ dealing with the public’s funds is of public importance but that cannot suffice.  That would subject your Honours to a fire hose of disputes about what must be the most complicated and verbose legislation in the country.  There must be more than that.  Yes, of course what I have just been putting has to do with insufficient prospects, but it also has to do with the fact that nothing is proposed ‑ except for what I will call the volition or voluntariness point to which I am about to come – nothing is proposed in the applicant’s case in relation to a reading of the statute.  Otherwise, of course, it is all highly particular and completely individual matters of interpreting the three texts in question:  the statute, the constitution and the underwriting agreement.

Now, in our submission, when one comes therefore to the sole point, the so‑called voluntariness point, there is a number of answers.  The first is that the statutory text provides an insufficient indication that there is a regime here provided in a case of illiquidity on its face to ensure equity of treatment in light of conditions governing at various times, including the possibility of a change for the sake again of equity if conditions deteriorate ‑ there is no indication in all of that scheme that it can be avoided by someone who wishes ‑ I stress wishes – to have a future redemption or withdrawal obliging or purporting to oblige that to occur come what may ‑ come what may as to liquidity, come what may as to equity with others – by a prior contract.  When I say “prior”, I simply mean prior to what would otherwise be an incontestable need for a request.

The next thing is this.  There is nothing either conceptually or linguistically odd about a person making a request for the satisfaction of what the person says could the subject of a demand as of right.  It is not linguistically difficult.  It is certainly not schematically difficult.

Third, bearing in mind that on any view that is accepted by the applicant subsequent conditions can defeat the right in question, such as what my learned friend repeatedly described as circumstances in which an egregious breach of trust would be committed – one does not have to use that kind of language in order to make the point – it is clear that a statutory scheme which is directed to avoiding such matters is not at odds with the idea of a prior contract which gives what might be called a conditional right, a conditional right which can easily be understood as being a right to require a request – to make a request to which there must be a responsive offer.

So, in our submission, no point of general importance arises unless the voluntariness point is intended to indicate that as a matter of general public importance this Court should examine the question whether a person who bargains for and obtains a right rendered the subject of a contract can be seen not to be voluntary in a relevant sense and that, in our submission, is absurd.

KIEFEL J:   That is not a unique situation though, is it?

MR WALKER:   No, and in my submission, that is absurd.  To say that a purchaser of real estate is not in a relevant sense voluntary in terms of going ahead to complete the transaction because the person may also become by dint of contract obliged to complete is, in our submission, absurd when one looks at the overall proposition that the person agreed – consensus – to buy.  It is for those reasons, in our submission, that there is nothing of general importance in what comes down to be simply the application of this salutary and beneficial scheme to particular circumstances among the multifarious possibilities the legislature must have had in mind in relation to voluntariness.

Now, that deals with and gets rid of, in our submission, anything which is of any importance, general or public, beyond the particular decision in this case.  Otherwise no error is pointed to in the reasons of Justice Meagher at all.  Simply it is said that paragraph 28 fails to give weight to this apparently radically different class of person who, having extracted a right from somebody, ceases to be voluntary in terms of wanting to withdraw.  There is an element of commercial absurdity.  After all, it is not compulsory to enforce one’s own rights, so that if one has a right and enforces it, which is what is sought in this case, the notion that you do it without volition or that you do not do it of your own free will is, in our submission, simply not a question apt for this Court to consider.

One knows that the good of the fund is a matter that our learned friend has raised in order to generalise the importance of this to commerce.  In our submission, the parliamentary judgment has been made about the relevant good of the fund, and that is that there may be future events which could not be dealt with either by constitution or by the terms upon which funds were raised and invited to be subscribed which will override ‑ and should override in the interests of equity ‑ what would otherwise be the opportunities for people to come and go from such funds as and when they pleased.  In our submission, there is no good of the fund which is threatened to be defeated or to be spoiled by compliance with these provisions of the Act and nothing in any of the judgments – in either of the judgments below suggests so.

I have earlier made reference to the fact it is not clear whether our learned friend’s argument of principle has to do with the lack of essential voluntariness or volition deriving from a prior contractual position, that is,

prior to subscription, or just to any contract which is in existence by the time the Act would otherwise require a request process to be followed.  That, in our submission, is indicative again of a want of prospects.  It is, in our submission, quite impossible to imagine that this Court could on the footing of the statutory text in question, let alone a purposive understanding of the ends to which it is directed, erect a distinction between contracts prior to subscription and contracts which are entered into precisely for the purpose of depriving somebody who makes a request of this elusive quality of voluntariness not found in the statutory text itself.

It is for those reasons, in our submission, that there are none of the dire commercial consequences which would render this of general, let alone practical, importance in business.  There are no floodgates of commercial disaster or investment gloom threatened by the conclusions and outcome of the case below and there is in particular no matter of principle arising from the statutory text which justifies examining the particular application of them to the transactions in question.  May it please your Honours.

KIEFEL J:   Anything in reply, Mr Hutley?

MR HUTLEY:   Shortly, your Honour.  My learned friend, as he must, adverted to – put it that Justice Meagher expressed his statement of principle broader than it was required for the case.  In our respectful submission, that is wrong.  Justice Meagher had to express it in precisely those broad terms to comprehend our case, for if our provision ‑ the terms upon which this interest were made requires redemption without a withdrawal within the meaning of the Act, as we submit, then we must succeed.  That is why his Honour had to express it in those broad terms and my learned friend tacitly accepted the expression is too broad.  It is not a question, as my learned friend put it, of some antecedent contract.  There may have been a contract, but that is neither here nor there.

It is the terms of issue which included terms under the contract which can be the only relevant matter.  Do those involve ‑ which were undoubtedly within power – involve upon redemption there having been a withdrawal within the meaning – needed to be a withdrawal within the meaning of the Act?  That is the fundamental question and that is why paragraph 28 was central to the reasoning, because the extraordinary thing would be ‑ let it be assumed the manager determined that he wished our interest to end.  To do that he would have to send us an offer to leave, not us sending a request under the Act – us an offer.  If we wished to remain there for our own interest, perhaps thinking it is a good investment, we could, if Justice Meagher is correct.  We could not be removed at all pursuant to the terms of issue because there has to be an offer from the manager, followed by a request to withdraw by the interested party.

The irony of this is, had the matter gone well, if this is right, we could have said, “We like our investment, we do not want it to end and we want it to remain forever”.  That is why it is absolutely critical to the decision in this case that his Honour construed it in a way which my learned friend said was broader than necessary, which implicitly means that that statement is a highly important statement of principle which will affect the construction of this division.  It is not a question of contract and it is not a question with respect of volition about suing for your right if it is not met which, with respect, is purely captious.  One is talking here not about failing to meet one’s obligations; one is talking about the consequence of meeting one’s obligations.  So, in our respectful submission, nothing my learned friend has done is other than send up, with all due respect to him, an elegant smokescreen about a fundamentally important question about the construction of this division.  Unless I can be of further assistance, that is our submission.

KIEFEL J:   Thank you, Mr Hutley.  There will be a grant of special leave in this matter.  Is it a half day matter, Mr Hutley?

MR HUTLEY:   Yes, your Honour.

KIEFEL J:   There is a possibility that the matter could be heard in the April sittings if the parties were able to ready themselves.

MR HUTLEY:   We certainly can ready ourselves, your Honour.  If your Honours please.

KIEFEL J:   It seems such a discrete point though.  I will inform the Registrar that the parties – could you see Mr Grey about the directions necessary to advance this matter before you leave today?  Thank you.

AT 10.48 AM THE MATTER WAS CONCLUDED