National Nominees v Agora Asset Management
[2011] VSC 243
•7 JUNE 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
PRACTICE COURT
No. S CI 2011 02672
| NATIONAL NOMINEES LTD (ACN 004 278 899) AND MILITARY SUPERANNUATION AND BENEFITS BOARD OF TRUSTEES NO. 1 | Plaintiffs |
| v | |
| AGORA ASSET MANAGEMENT PTY LTD (ACN 122 895 989) | Defendant |
---
JUDGE: | DIXON J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 2 JUNE 2011 (further argument: 6 JUNE 2011) | |
DATE OF JUDGMENT: | 7 JUNE 2011 | |
CASE MAY BE CITED AS: | NATIONAL NOMINEES v AGORA ASSET MANAGEMENT | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 243 | |
---
Practice and procedure – interlocutory injunction – application of established principle in particular circumstances – discretionary considerations – exercise by fund manager of discretion to reject withdrawal of redemption request following imposition of discretionary exit fee – balance of convenience - injunction extended to trial.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr JB Davis with Mr AJ Weinstock | Norton Gledhill |
| For the Defendant | Mr P Corbett | DLA Piper Australia |
HIS HONOUR:
The Military Superannuation and Benefits Board of Trustees No. 1 is a statutory corporation established by the Military Superannuation and Benefits Act 1991 (Cth). Military administers the Military Superannuation and Benefits Scheme. National Nominees Ltd, as nominee for Military, holds units in the Agora Absolute Return Fund II. The defendant, Agora Asset Management Pty Ltd, is the trustee of the fund. Citco Fund Services (Aust) Pty Ltd performs administrative services for the fund.
An urgent application was made, inter partes, prior to the issue of this proceeding before the Honourable Justice Hollingworth on 27 May 2011. Following submissions, and upon:
·being informed by the defendant that the proposed redemption of units had not occurred and was not scheduled to occur until 31 May 2011, and
·the plaintiffs by their counsel giving the usual undertaking as to damages, and
·the plaintiffs by their counsel undertaking to commence the proceeding forthwith,
her Honour restrained the defendant until 4.00 pm on 2 June 2011 from taking or purporting to take any steps to act upon the withdrawal request contained in communications from the second plaintiff and/or the first plaintiff on 5 and 11 May 2011 regarding the proposed withdrawal of all of the first defendant’s units in the trust. By consent, I extended the operation of this injunction, upon the undertakings continuing, until 4.00 pm on 7 June 2011. Having now commenced the proceeding and given the defendant an opportunity to answer the affidavits on which the interim injunction was sought, the plaintiffs now apply to continue the injunction until trial. The defendant contends that the injunction should be discharged.
The principles to be applied on this application are not in doubt. They are identified by the High Court in Australian Broadcasting Corporation v O’Neill.[1] In summary, the matters to which the Court must have regard are these:
(a)The plaintiff must demonstrate, prima facie, a sufficient likelihood of success to justify, in the circumstances, the preservation of the status quo pending trial. Thus, in seeking to restrain Agora from taking or purporting to take any steps to act upon the disputed request to withdraw the redemption request, the plaintiffs must demonstrate that they have a putative legal or equitable right in respect of which they seek final relief in the proceeding which will justify the restraint sought.[2]
(b)The injury that the plaintiff is likely to suffer must be one for which damages will not provide an adequate remedy.
(c)The balance of convenience must favour the granting of the injunction. As the Court of Appeal explained in Bradto Pty Ltd v Victoria[3] the Court must, in determining whether to grant an interlocutory injunction, “take whichever course appears to carry the lower risk of injustice if it should turn out to have been ‘wrong’, in the sense of granting an injunction to a party who fails to establish his right at the trial, or in failing to grant an injunction to a party who succeeds at trial”.[4]
(d)There may be other discretionary considerations which militate against the grant of an injunction.
[1](2006) 227 CLR 57 at [19], [65]-[83]. See also Beecham Group Ltd v Bristol Laboratories Pty Ltd (1968) 118 CLR 618.
[2]See also Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at [8]-[13].
[3](2006) 15 VR 65.
[4]See also Tymbook Pty Ltd v Victoria (2006) 15 VR 65 at [35]; Magna Alloys and Research Pty Ltd v Coffey [1981] VR 23.
On the first matter for consideration, and subject to the other considerations to which I must have regard, the plaintiff can, I consider, demonstrate that it has a prima facie case in this proceeding. In expressing this conclusion I mean no more than the plaintiff has a sufficient likelihood of success to justify the preservation of the status quo pending trial.
Agora is a funds manager. It is the current trustee and investment manager of the Agora Absolute Return Fund II. The fund is an unregistered managed investment scheme. The initial trustee was Berkley Investment Corporation Pty Ltd, a professional trustee. Following a variation in the Australian financial services licence held by Agora, it became the trustee of the fund, having been the investment manager of the fund since its inception.
Military invested in the fund in May 2008. At the time the investment was made, the then current information memorandum, of November 2007, stated that the investment objective of the fund is “to preserve capital and generate a return in excess of 15% per annum after all fees over a minimum three years suggested investment time frame”. Three types of fee were identified in the information memorandum:
Contribution/withdrawal fee: Nil;
Management fee: 2% per annum;
Performance fee: 20% of positive returns of a series of units provided the “high watermark” has been exceeded.
The information memorandum notes that the trustee has the right to change the fund’s objective and investment strategy, asset allocation range and currency strategy (if any) without prior notice. It also states that information in this information memorandum is subject to change from time to time. The information memorandum discloses that all fees can be changed for reasons including changing economic conditions and changes in regulation. However, it states that fees cannot be raised above the amounts allowed for in the fund’s trust deed without the approval of investors.
Before the relevant notice of redemption and notice of withdrawal of redemption, which are the transactions at the heart of this dispute, were given, a further information memorandum was published. It was published to the plaintiffs by letter dated 24 November 2010, purporting to become effective on 24 December 2010. It is convenient, before turning to that document, to note some of the relevant terms of the trust deed.
Clause 1.3 provides that the responsible entity must perform its obligations in accordance with the trust deed and the applicable laws. The responsible entity has an absolute discretion in doing so. Clause 2.29 provides that a unit holder may apply to the responsible entity to withdraw units with the manner in which a withdrawal request may be given being determined by the responsible entity. Clause 2.30 provides that a withdrawal request may not be withdrawn without the consent of the responsible entity. Clause 2.39 entitles the responsible entity to reimburse itself for any costs properly incurred in effecting a withdrawal request which may include paying the proceeds of a withdrawal request to the unit holder net of such costs. However, “costs” is not a defined term in the deed. Although not explained in the evidence, the exit fee will likely be regarded by the responsible entity as a cost which will, in the first instance, be withheld in the fund upon the completion of the redemption.
Fees and expenses are governed by Clause 4 of the deed. Clause 4.5 provides that the responsible entity may determine that a unit holder has to pay a fee not exceeding 5% of the proceeds of a withdrawal request. The trust deed also provides for management fees, entry fees, administration fees and performance fees. The trust deed further provides that the right of the responsible entity to its fees is available only in relation to the proper performance of its duties.
An updated information memorandum was published by Agora on 24 November 2010. The covering letter explained “We note our current agreement in relation to the management fee you incur on your investment in the fund will remain at 1% per annum as has been the case since January 1, 2010”. This comment suggests that fees were the subject of commercial negotiation between the parties, either when the investment was made or on an ongoing basis, which seems unsurprising given the extent of the investment. I was not taken, in argument, to any statements in the affidavits suggesting otherwise.
The information memorandum of December 2010 purported to effect material changes in relation to fees. Where there had been a single entry for contribution/withdrawal fee, the information memorandum now provided that such fees might be “up to 5% of the application monies/withdrawal proceeds, at the absolute discretion of Agora” in each case. It is immediately apparent that there is a material change in the language being used in the information memorandum. The language does not reflect the trust deed, in terms. In the context of the issues arising in this proceeding, which I will later explain, there appears to be a nice question of construction as to when discretions to determine fees may be exercised. The issue was not raised by counsel and in the circumstances, it is not a question which I need presently discuss.
It appears that Military, which receives advice from independent consultants, became dissatisfied with the performance of Agora in the management of this investment. Precisely when this dissatisfaction surfaced is not a matter which has been made clear on this application. The parties deposed to communications in early December 2010 which suggested that Military was unhappy with Agora’s performance and was proposing a substantial, but not a total, redemption. According to Mr Apostolopoulos, the sole director of Agora, he was, in December 2010, concerned that there would be a significant loss of revenue and reputation for Agora. Quite possibly smoke could be smelt before the flames could be seen. In other words, as commonly occurs, the evidence upon which that question will fall to be determined may be different to that revealed so far. The circumstances may become relevant in assessing whether the trustee has exercised powers under the trust deed for the purposes for which such powers were conferred.
In February 2011, Mr Apostolopoulos learned that Military intended a full redemption of its investment. The evidence does not reveal what other investment management or trustee activities are carried on by Agora. The significance of the proposed full redemption by Military can be highlighted by noting that Military’s investment in the fund has an approximate estimated value of $160,000,000. There is one other investor, about which no information is provided, with an estimated investment of $250,000.
The notice of a full redemption was provided by letter dated 9 February 2011 from Mr Seton, the chief executive officer of Military, to Mr Apostolopoulos. Mr Seton noted that full redemption by 30 June 2011 was sought, preferably by transfer in specie with a cash balance. Mr Seton stated that whether a redemption was effected in tranches or by a full redemption was a matter for Agora.
In the months that followed there were communications between the respective parties concerning implementation of the redemption. During the course of these communications there appears to be reference to the application of a 5% withdrawal fee on the redemption. This is an estimated fee of nearly $8,000,000 and the circumstances surrounding whether, and how, Agora exercised the trustee’s discretion to determine and apply this fee are matters of factual dispute in several respects.
First, on or about 5 May 2011, a formal redemption request notification was provided by Military. This formal request was confirmed on behalf of the custodian, National Nominees, on 11 May 2011. A document was then issued by Citco, the fund’s administrator: “Order Receipt Confirmation Redemption”. This document confirmed the order to redeem shares of an estimated value of $152,181,222.03 incurring estimated charges of $7,885,878.74 with the note “5% withdrawal fee applies”. There is a dispute about when this matter first came to the attention of Military, perhaps arising from the fact that there is no evidence of a clear, direct communication from the trustee about that specific exit fee being applied to the redemption at or prior to this time.
The apparently quantified exit fee was being openly discussed by 20 May 2011. At this time Mr Apostolopoulos, as his affidavit makes clear, considers that the exit fees were management fees for the benefit of Agora. I say “apparently quantified“ as Mr Apostolopoulos also stated, and I quote:
I told him I could not give him a definitive answer on the amount of the exit fee.
The following Monday, 23 May 2011, Mr Apostolopoulos met with Mr Seton. This conversation is the subject of evidence on affidavit from each of the participants, including a contemporaneous diary note compiled by Mr Seton. One matter which emerges as common ground is that Mr Apostolopoulos did not, at that time, confirm the precise fee he intended to charge. He stated:
I replied that I would be charging up to 5% as was expressed in the IM and the deed.
Mr Seton said that Mr Apostolopoulos:
would not say what the fee would be for Military, only that it would be up to 5% and that we would find out when the redemption was processed.
It is clear from the evidence of both men that there were discussions of a commercial nature directed towards possible resolution of the rising dispute between them.
It is not appropriate for me to enter into this factual dispute, and I decline to do so. The significance of these matters is that they demonstrate, in my view, that there is a prima facie case for the relief sought in the proceeding, in a sense warranting that the status quo be maintained. I shall refer to two of the issues in the plaintiffs’ claims which were debated before me. First, the plaintiffs seek a declaration that Agora is not entitled to charge the exit fee. Second, to the extent that Agora relies on its absolute discretion under the trust deed, that discretion has not been exercised for the purpose for which it was conferred.
The plaintiffs contended there was a distinct issue for trial in respect of the validity of the exit fee. The power vested in Agora is that it “may determine a fee”. Originally, it had determined that there was no entry/exit fee applicable as the table at Clause 1.1 of the Information Memorandum of November 2007 makes clear. There were, it was submitted for the plaintiffs, two fetters upon the power to determine an exit fee. The first is found in Clause 8 of the Information Memorandum. As it now appears in the Information Memorandum of December 2010, the fees that a unit holder may be charged include a withdrawal fee, in terms to which I have already referred. The dispute between the parties was whether the publication of the Information Memorandum by Agora to Military in November 2010 was both sufficient as a determination of the exit fee as required by Clause 4.5 and gave the requisite notice of the changed fee applying as required by Clause 8.3 of the Information Memorandum. Mr Corbett submitted that there was both a determination and sufficient notice, contending that it matters not that the quantum to be set is at the absolute discretion of Agora. The exercise of that discretion in the manner which later occurred, that is upon the processing of the redemption, did not derogate from publication of that Information Memorandum as the determination of the fee.
Mr Davis contended that the fee was not determined until its quantum was set and that the reservation of the right, or the notification of the prospect that such a fee may in future be determined, was just that and is not of itself a present determination of a fee as required by Clause 4.5 and notified in satisfaction of Clause 8.3. The new table of fees in the Information Memorandum of December 2010 could not, in respect of the withdrawal fee, be a determination of that fee.
Mr Davis submitted that the power to determine an exit fee to be paid on a redemption is fettered. He referred to Clause 8.3 of the Information Memorandum which states:
Yes, all fees can change … We will give you 30 days written notice of any proposed change to these fees.
The withdrawal fee, as described by Clause 8.2 of the Information Memorandum, could be any amount between 0% and 5% of the withdrawal proceeds. Referring to the decision in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd,[5] Mr Davis contended the evident purpose of the 30-day notice period is to permit a unit holder, faced with a change in the fee structure affecting its investment, a period of 30 days to consider its position and take such action as it may be advised. The expression “these fees” refers to the fees described in Clause 8.2, not the fees described in the Information Memorandum of November 2007.
[5][2004] HCA 52; (2004) 219 CLR 165; (2004) 79 ALJR 129; (2004) 211 ALR 342.
Thereafter, the evidence is not consistent with any determination having been made at all prior to the redemption request until the letter of 25 May 2011, which is after the purported withdrawal of the redemption request.
The second respect in which I consider that the plaintiffs have a prima facie case for the relief they seek is that, assuming Agora was able to apply an exit fee to this redemption and determined to do so, the absolute discretion under the trust deed on which the trustee relies in making the determination has not been exercised:
·for the purpose for which it was conferred;
·to effect a determination of the exit fee applicable upon the redemption either prior to the redemption or alternatively, more than 30 days prior to the redemption.
The affidavits suggests that Military was completely surprised by the application of this substantial fee. There are issues of fact for future resolution arising out of whether Military’s surprise, as I have characterised it, was the product of its own conduct or that of Agora. This is, I consider, a different issue for trial from those I have been discussing. In any event, Military immediately foreshadowed that one of its options was withdrawal of the redemption notice.
On 24 May 2011, Military and National Nominees submitted a cancellation notice stating that the redemption was revoked, cancelled and of no effect. Alternatively, the trustee was informed that Military “wants to withdraw the Military redemption request and hereby requests that it be withdrawn”.
Agora responded by letter dated 25 May 2011, stating:
[Agora] does not consent to any withdrawal of the existing redemption request previously effected … in respect of the Agora Absolute Return Fund II … Agora is entitled and intends to charge a withdrawal fee in respect of the redemption of 5% plus GST of the withdrawal projects. Agora’s entitlement to charge the withdrawal fee is expressly provided for in the trust deed for the fund. Agora also expressly informed your fee increases for the fund as detailed in the replacement information memorandum accompanying our letter dated 24 November 2010.
In respect of this refusal to consent to the withdrawal of the existing redemption request, the issue will again arise whether the absolute discretion of the trustee, Agora, to refuse consent was exercised for the purpose for which it was conferred.
The battlelines having been drawn between the parties, application was then made in the Practice Court as I have described above.
For Military, Mr Davis of counsel contended that Agora was obliged not to unreasonably withhold its consent to the withdrawal of the disputed redemption and only to withhold such consent in good faith. Further, Mr Davis contended that acting as a trustee, Agora cannot prefer its own interests to those of its unit holders. He also contends, as I have said, that if Agora is taken to have determined the exit fee, or declined to consent to the withdrawal of the redemption request in its absolute discretion, that exercise of discretion may be vitiated. Mr Corbett, for Agora, contended that his client had properly and appropriately exercised its rights as trustee by the terms of the trust deed. In particular, Mr Corbett drew the Court’s attention to the trustee’s entitlement to discharge its obligation under the trust deed in its absolute discretion and contended that Agora exercised its discretion on proper considerations.
In Karger v Paul,[6] McGarvie J held that the exercise of a broad and unfettered discretion by a trustee will not be examined or reviewed by a court if the discretion is exercised by the trustees in good faith, upon real and genuine consideration, and in accordance with the purposes for which the discretion is conferred and not for some ulterior purpose. My broad recollection is that the precise scope of the principle expressed by his Honour in that case has been the subject of significant subsequent judicial consideration. One instance is the recent decision of the Court of Appeal in Curwen v Vanbreck Pty Ltd (as trustee for the WS & NR Harvey Family Trust).[7] The Court of Appeal emphasised that the Court’s refusal to intervene in the exercise of an unfettered discretion, even where it seems that the discretion has been exercised for a poor or questionable reason, is excepted where the discretion has not been exercised for the purpose for which it has been conferred. This purpose must be identified from the trust deed. If the discretion has been exercised for a purpose other than that identified by the trust deed, it may have been exercised for an improper purpose.
[6][1984] VR 161.
[7][2009] VSCA 284 at [33]-[42].
The expression “fraud on a power” is used in recognition of an equitable limitation on the power conferred by a trust deed. It arises where the power is exercised for a purpose or with an intention which extends beyond the scope of the terms of the trust so as to be a “purpose foreign to the power”. The Court of Appeal noted that an improper purpose will constitute a fraud on the power if it is an operative or actuating purpose.
I am satisfied that, in summary, the plaintiffs have a prima facie case in the sense of a sufficient likelihood of success on a claim in the proceeding to justify preserving the status quo pending trial, in at least the following respects:
·whether a withdrawal fee can be applied to this withdrawal; and
·whether the discretion to determine that fee in the manner Agora contends or to refuse consent to withdrawing the redemption request were discretions exercised for a purpose contemplated by the trust deed and not actuated for some other extraneous purpose.
Other submissions were put to persuade me that the plaintiff has a prima facie case. In view of the conclusion I have expressed, it is undesirable that I express summarily formed views on the remaining matters raised in submissions. Having reached this conclusion I will turn to the remaining matters I must consider on the application.
There is some reference in the affidavits to the administrative process which must be cancelled or varied in order to effect cancellation of the redemption. It is clear that the redemption is merely an administrative process which is capable of being cancelled or rescheduled without relevant prejudice.
At the time of commencement of the proceeding and of the initial application in the Practice Court, the last notice between the parties purporting to effect their rights was Agora’s refusal to accept the cancellation/withdrawal notice in respect of the redemption. Restraining completion of the redemption preserves the status quo in two ways. Firstly, it returns the parties to the underlying relationship between them prior to this dispute. Each party’s financial position remains as it was. To the extent that there may be concerns about volatility in the market, such concerns remain a product of the nature of the investments made, which is not to be substantially changed in any event. Secondly, it defers the opportunity for Agora to appropriate from the assets of the Fund to its own use, the exit fee, which would remain unrealised until the redemption is processed. Thus, the status quo is preserved by continuing the restraint which is currently in place, rather than permitting completion of the transaction commenced by the earlier redemption notice.
I turn then to the balance of convenience. On the one hand I must consider the risk of injustice to Agora should I continue the injunction and Military fails to establish its rights at trial. This course will plainly result in deferral of the redemption and in Agora recovering the exit fee. Deferral of receipt of the exit fee is the most obvious impact upon Agora. Some reference was made to the prospect of a fall in the market such that the exit fee ultimately received may be lessened. The risk of market movement is also worn by Military, and overwhelmingly so, as the exit fee cannot exceed more than 5% of the net market value of the redemption. Agora will be protected from any injustice in this circumstance by Military’s undertaking as to damages.
Mr Corbett sought to rely on matters which had arisen since the interim injunction was ordered by the Honourable Justice Hollingworth. On 31 May 2011, Agora received a written resolution to amend the Constitution of the trust, executed by National Nominees. This document was provided by Military with a request that Agora circulate a blank resolution in the same terms to the other unit holders of the trust. Clause 5.27 of the trust deed permits unit holders to pass a resolution without meeting, where that resolution is circulated to all unit holders in accordance with the requirements of the clause. Military proposed a resolution to modify the Constitution of the fund by replacing Clause 4.5, which I have set out above, with a clause that denies the responsible entity any entitlement to a fee in respect of a withdrawal request. If the circular resolution is signed by unit holders holding the required majority, the resolution will be taken to have been passed. National Nominees holds in excess of 95% of the units in the trust.
Mr Corbett submitted that Agora is prejudiced by the continuing injunction in light of these developments. Constrained not to act, the unit holders could remove Agora’s right to set an exit fee. In response, Mr Davis informed the Court that his client was prepared to give an undertaking that the plaintiffs will take no action on the circular resolution prior to trial or any further order of the Court. I need not pause to consider the issues the circular resolution may raise.
On the other hand, I must consider the risk of injustice to Military should I refuse to grant the injunction and Agora fails to establish its contentions at trial. In these circumstances the investment will be redeemed. Of itself, the redemption may not be productive of injustice in the relevant sense as it is intended that the redemption will be, overwhelmingly, by in specie transfer of stock exchange listed shares. Further, there is a clear indication in the affidavits that this is what Military wants. It is now clear that that transaction will involve an exit fee of the full 5%. Whether that sum, once appropriated to Agora, could ultimately be recovered from Agora and restored to the Fund is another matter. There was limited evidence directed to the financial position of Agora but such evidence as there is, is insufficient to support any conclusion that there is, as in the case of Military, no risk that such funds could not later be restored.
Had it been the case that this dispute did not involve trust assets but was a commercial dispute over a management fee, intervention by equitable relief may not have been justified. In such circumstances, the relative risks of injustice being proximate, the deciding consideration might have been the adequacy of damages as a remedy. The plea for the intervention of equity in such cases has a tendency to become indistinguishable from a demand for security for a prospective damages award. Damages are said to be inadequate, but on analysis the inadequacy is a matter of recovery, not of remedy. This case might be thought headed in that direction were the court not to intervene, except to secure the exit fee pending trial.
This case is not merely a commercial dispute over a management fee. Each of Military and Agora act as trustees and the subject matter of the dispute between them is, depending on the result, trust property of either of the trusts which they separately administer. In such circumstances, I do not consider there ought be any doubt as to the security of the relevant trust assets. Equitable intervention to avoid the dissipation of trust property is different in principle from seeking security for a prospective damages award. Counsel did not suggest otherwise.
The evidence, such as it is, of the prospects of restoring the exit fee to the Fund by Agora, if appropriated to it, does raise a prospect that restraining Agora’s dealing with the fee as undistributed trust property, including and dealing by payment or other application of the fee to or for the benefit of Agora, may have adverse consequences for the continuing operation, and possibly solvency, of the Fund and of Agora. There appears a risk, which was not explored before the court, of the intervention of third parties in the affairs of Agora and the Fund if such circumstances were to eventuate, or of adverse consequences for the remaining unit holder in the Fund.
Weighing up all of the circumstances, for the reasons I have discussed, I consider that the lesser risk of injustice between the parties will be achieved if I continue the status quo as it existed prior to the eruption of this dispute. That means not just that the defendant be restrained until trial or earlier order, from completing the redemption but also that the plaintiffs be restrained from acting upon the circular resolution to amend the Constitution, which the plaintiffs have offered, at least by undertaking. I will make orders for mutual restraints accordingly.
I will now hear further from counsel as to the form of orders and the question of costs.
---
0