Norman v National Australia Bank Ltd & Ors

[2010] HCATrans 134

[2010] HCATrans 134

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A22 of 2009

B e t w e e n -

TREVOR GILBERT NORMAN

Applicant

and

NATIONAL AUSTRALIA BANK LTD

First Respondent

EXECUTORS AND TRUSTEES OF THE DECEASED ESTATE OF ALLAN McFARLANE

Second Respondent

Application for special leave to appeal

GUMMOW J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

FROM CANBERRA BY VIDEO LINK TO ADELAIDE

ON FRIDAY, 28 MAY 2010, AT 11.24 AM

Copyright in the High Court of Australia

MR N.J. O’BRYAN, SC:   May it please the Court, I appear with MR M.C. LIVESEY, QC for the applicant.  (instructed by EZRA Legal)

MS W.A. HARRIS:   May it please the Court, I appear with MS R.M. NELSON for the first respondent.  (instructed by Johnson Winter & Slattery)

GUMMOW J:   There is no appearance for the second respondent, which are the executors of the estate?

MR O’BRYAN:   That is correct, your Honour.

GUMMOW J:   Thank you.  Yes, Mr O’Bryan.

MR O’BRYAN:   Your Honours, special leave should be granted in this case because the decision of the Full Court has imposed conditions and limitations upon the statutory definition of the expression “managed investment scheme” that are inconsistent with both the language of the statute and the policy underlying it.  They are also inconsistent with earlier decisions of intermediate appellate courts.  The decision requires proof of investors’ intentions and their knowledge of elements of the statutory definition, in particular, the element in item 2 of the definition in connection with the pooling of contributions which are not found in the definition itself.

KIEFEL J:   Your reference to subjective intention is taken from Justice Graham’s judgment, is it not?

MR O’BRYAN:   No, your Honour, it is taken from both Justice Graham’s and from Justice Gilmour’s judgment, relevantly, as Justice Spender, who expressed agreement with both decisions, your Honours, but said that his decision was to be understood as an endorsement of the reasons of Justice Gilmour in connection with the rejection of the characterisation of the scheme.  We look to Justice Gilmour’s decision and could I invite your Honour’s attention please to page 85 of the application book and to paragraph 148 where your Honours will find the relevant passage in the reasoning and, indeed, Justice Gilmour’s ratio on this part of the case.  His Honour says:

In my opinion, the words “contributions are to be pooled” in para (a)(ii) require an intention, objectively discerned, forming part of the “scheme” and formed prior to the making of contributions, that the contributions are to be pooled.

His Honour goes on to questions of proof, but makes clear in the last sentence in paragraph 148, your Honour, that it is the members’ intentions that his Honour is focusing upon, the last sentence referring to the intention of the members.

KIEFEL J:   No, his Honour says, that might be relevant but not determinative.

MR O’BRYAN:   Yes, certainly, your Honour, but I am identifying the word “members” in the last sentence only to indicate that that strongly suggests that the intention which his Honour draws attention to in the first sentence of paragraph 148 is a reference to the intention of members objectively discerned.  His Honour does not identify whose intentions are relevant in that first sentence, but it is submitted that his reference to members in the third sentence makes clear that he is addressing his mind to the intentions of the members.

Indeed, that is implied in any event, we would submit, in that first sentence because his Honour is looking for an intention “formed prior to the making of contributions” and it would seem clear that he is therefore addressing his mind of the intentions which have been formed by the minds of the members.  Now, your Honours, the effect of this decision is to remove from the purview of the Corporations Act many investment schemes which the legislature intended to be caught by the deliberately wide language which it employed in the definition of “managed investment scheme”.

GUMMOW J:   There is a problem with this expression “contributions are to be pooled”, is there not?  It is said against you that there is not the necessary evidentiary footing here to find satisfaction with the statutory definition.

MR O’BRYAN:   That is so, your Honour, but much depends upon what meaning is to be attributed to that expression “are to be pooled”.  His Honour attributed, Justice Gilmour, that is – if your Honours turn the page to application book page 86, paragraph 151, and to the second sentence of that paragraph, his Honour says that these words are “prospective and purposive words”.  He describes them as the “prospective and purposive words ‘to be’ in par (a)(ii)”.  Now, your Honours, that may ‑ ‑ ‑

GUMMOW J:   That then says, look at paragraph 152, “the mere fact that the moneys are thereafter collected into one bank account” does not meet the definition.  Now, what do you say about that?

MR O’BRYAN:   Your Honour, we submit that that is inconsistent with a number of earlier decisions of the Court of Appeal in Western Australia which has found that ‑ ‑ ‑

GUMMOW J:   It might be, but what do you say as to the reasoning?

MR O’BRYAN:   Your Honours, we say that if there has been in fact pooling, the prospective element of the verbal formulation to be pooled is satisfied for exactly the same reason, your Honour, as the Western Australian Court of Appeal found that it was satisfied in the Burton v Arcus Case.  In that context, your Honours, in paragraph 67 of the Western Australian Appeal Court’s decision in Burton v Arcus their Honours observed that Chief Justice Gibbs in the DKLR Holdings Case in 1982 in this Court:

explained that the words “to be”, before a past participle –

which is exactly this verbal formulation, your Honours –

and used in relation to a noun, can express –

a number of different things grammatically, they –

can express obligation, intention, possibility or simply futurity.  The sense in which the words “to be” are used, in any case, depends on the context –

and thus, we submit, your Honours, that it does not follow and is incorrect, it is an error, for his Honour to conclude that the words “to be” used in that verbal formulation are necessarily both prospective and purposive, particularly in circumstances in which there was a directly contrary authority in the Court of Appeal in Western Australia in Burton v Arcus in a fully reasoned and unanimous decision of that Court of Appeal which Justice Gilmour did not consider was plainly wrong and thus did not follow the route which this Court has laid down or disagreements of this sort between intermediate appellate courts ‑ ‑ ‑

GUMMOW J:   What do you say the expression “are to be pooled” conveys?

MR O’BRYAN:   It conveys, relevantly, only futurity, that is to say, if the evidence demonstrates that the contributions were in fact pooled in the way that occurred in this case, and there is submitted to be no question about that whatsoever because they all ended up in the one trust account and were ‑ ‑ ‑

GUMMOW J:   You read it as meaning “are” or “have been” – “are to be” or “have been” pooled?

MR O’BRYAN:   Yes, that is so, your Honour.  It is to be read in the future perfect, that is to say, if at the time of trial it is clear that the contributions have in fact been pooled and that the pooling is part and parcel of ‑ ‑ ‑

GUMMOW J:   These sections create offences, do they not?

MR O’BRYAN:   Your Honour, not the definitional sections.  There are certain offences ‑ ‑ ‑

GUMMOW J:   Obviously not, but the sections of which the definitions are part create offences, do they not?

MR O’BRYAN:   Your Honour, there are offences in relation to the offering of certain investments in certain circumstances.  There are no offences in the structure of Chapter 5C that are relevant to this definition, your Honour, though we would submit that there is nothing which would suggest that there is any need to prove intention by way of mens rea in connection with these provisions and therefore no reason because of any criminal law considerations.

GUMMOW J:   It is not a question of mens rea.  It is a question of when you would judge the compliance or non‑compliance with the statute.

MR O’BRYAN:   Your Honour, that will be judged at the time of trial having regard to the events which are proved ‑ ‑ ‑

GUMMOW J:   It cannot be at the time of trial, it just cannot be.  It has to be at some anterior ‑ ‑ ‑

MR O’BRYAN:   Indeed, your Honour, but ‑ ‑ ‑

GUMMOW J:   The trial is determining pre‑existing rights and liabilities.

MR O’BRYAN:   Yes, that is accepted, of course, your Honour, but at the time of trial if it appears, as it did in this case, that the intention all along was to bring these moneys into one account, and there is no doubt that that was the intention, that is what the investors were invited to do and that is what they in fact did.  Every one of the certificates of deposits, every one of the invitations that they received refer to this gentleman’s trust account.  If it was necessary to prove, there was always the intention to pool.  We submit it was not necessary to prove that and, indeed, the way in which it has been laid down in this case is error, is inconsistent with numerous

intermediate appellate court decisions, but even if it was required, it was satisfied in this case, your Honours, we submit.

GUMMOW J:   Thank you.  We will hear from your opponent.  Yes, Ms Harris.

MS HARRIS:   Thank you, your Honours.  There are a number of special leave grounds set out but the two that have been focused on this morning relate to the necessity or otherwise of an existence of some subjective intention on the part of investors in a putative scheme and the other is this question of the timing, as it were, of any existence of an intention to pool funds.  Can I first refer your Honours to the broader statutory scheme insofar as it was relevant to this case.  The learned trial judge was asked to wind up a managed investment scheme pursuant to section 601EE ‑ ‑ ‑

GUMMOW J:   We know that initially it was ex parte.

MS HARRIS:   Yes, that is right, your Honour, but under section 601EE, and your Honours will see that from tab 4 of our bundle, a managed investment scheme can only be wound up if it ought to have been registered under section 601ED and section 601 ‑ ‑ ‑

GUMMOW J:   If it is not registered, there must be an offence.

MS HARRIS:   Precisely, your Honour.  The point is that there must be a scheme in existence at the time of registration and it must be a scheme which bears the statutory features set out in the definition of “managed investment scheme”, namely, it must be a scheme or, as Justice Mason said in Softwood Products, it must be a program or a plan of action that has the following features and the features include that contributions are to be pooled. 

So a feature of the scheme which ought to have been registered must be that it contemplated that contributions of members were to be pooled; not just to be pooled in the sense of being co‑mingled in a bank account as the applicants would have, but pooled to produce financial benefits for the members of the scheme.  That was the point of the judgment of Justice Gilmour, that there was no evidence at all of a scheme which had those features, that is, some program or plan of action by which Mr McFarlane collected money from various people with the honest or disingenuous intention, as the case may be, of pooling them together to produce a financial benefit for the members of that scheme.

On the contrary, the facts which were found by the Full Court and which are set out in Justice Gilmour’s judgment, on the basis of the evidence that was before the trial judge, showed that this was not a scheme at all of the statutory kind.  This was an investment adviser, albeit a dishonest one, who had a number of clients who gave him money to make individual investments on their behalf.  Your Honours will see that, I do not need to take your Honours to it, but ‑ ‑ ‑

KIEFEL J:   I think at paragraph 167 his Honour refers to the individual nature of the transactions and the more startling evidence about that.

MS HARRIS:   That is right, your Honour, and at paragraph 165 his Honour has referred to the investment certificates that were given by Mr McFarlane to the investors, and his Honour says – this is at page 89 of the application book towards the bottom of the page:

I accept the submissions made on behalf of NAB that the certificates provided to investors by McFarlane are reflective of investments of funds on different dates, in different amounts, in different investment products and on different terms for the sole benefit of the individual owners of those funds.

Then, as your Honour Justice Kiefel has pointed out, he goes on to say:

The individual nature of the investments is further evidenced by –

the statements of funds that Mr McFarlane gave to his investors which showed that some of the funds were not even invested, they were used to pay credit card bills.  Your Honours will see that from page ‑ ‑ ‑

KIEFEL J:   McFarlane himself used the account.  He had moneys going in and out of the account.

MS HARRIS:   Your Honour, he did, that is right, and that was at page 92 of the application book at paragraph 170:

Other evidence disclosed that some of the moneys passing through the Account belonged to McFarlane himself.

So, your Honours, this was a paradigm example of an investment adviser who collects clients’ funds and then places them in individual investments.  The applicant was asked by the Full Court – and your Honours will see this from the judgment – to identify the high point of his evidence in terms of showing that investors’ funds were pooled, and he pointed to one email where a man did not have enough for a term deposit, so he had to combine with his mother, and one other email where it was suggested that McFarlane might be able to put together the funds of one or more investors in order to obtain a reward of five business class tickets to an Asian destination.  That was the absolute high point of the evidence on pooling, your Honours.  So we would say that on the facts, regardless of the constructional issues that might have differentiated the minority opinion of Justice Graham on one hand and ‑ ‑ ‑

GUMMOW J:   What do you say about decisions in other jurisdictions upon which Mr O’Bryan relies?

MS HARRIS:   Well, your Honour, we find it very hard to understand what the difficulty is.  Justice Gilmour was very astute to point out that the decision in Burton v Arcus, which is referred to in paragraph 143 on application book 85 and following, is actually consistent with the decision of his Honour Justice Gilmour in this case.  Your Honours will see that from the decision at tab 1 of our bundle.  This was again a paradigm case of a managed investment scheme where funds were pooled from a number of investors in order to create a single loan amount.  So a number of investors contributed money towards a loan of 3.7‑odd million in order to fund a particular development.  There was a prospectus in that case, there were other documents given to the investors – I beg your pardon, there was not a prospectus.  There were letters of invitation given to the investors outlining the fact that they were going to contribute money to this bigger loan ‑ ‑ ‑

KIEFEL J:   Saying the pooling was not in issue.

MS HARRIS:   It was not in issue, your Honour, and that is precisely what Justice Gilmour says. Nevertheless, Justice of Appeal Buss – and this is at page 383 of the decision – perhaps I can take your Honour first to 382 at paragraph 56, Justice of Appeal Buss refers to the explanatory memorandum of the Managed Investments Bill 1997 which introduced these provisions into the Corporations Act as:

“incorporating a purposive element in the definition”.  In other words, the money or money’s worth must be contributed for the purpose of acquiring the relevant rights to benefits.

Then in paragraph 58 on the next page:

The second element in para (a) of the definition has three aspects:

(a)the contributions or some of them “are to be pooled, or used in a common enterprise”;

(b)the purpose of the pooling, or use in a common enterprise, must be “to produce financial benefits, or benefits consisting of rights or interests –

So his Honour recognises that there must be a purpose to the pooling and necessarily that must be a feature of the scheme as ought to have been registered.  Your Honours, I might also refer to paragraph 69 on page 385 where Justice of Appeal Buss says:

If the promoter or operator of a scheme in fact pools money contributed by people, and the pooling occurs without their agreement, approval or knowledge, the promoter or operator will have formed the intention, prior to the pooling, that the pooling should be or become a characteristic of the scheme.

Again, that is exactly consistent with the decision of Justice Gilmour.  Justice Gilmour explains his only possible bone of contention with Burton v Arcus in paragraph 147 on page 85 of the application book and this is a reference to paragraph 68 on page 385 of Burton v Arcus and also to paragraph 70 where Justice of Appeal Buss has picked up some words in another case, Enterprise Solutions.  Justice Gilmour says:

If, when Buss JA in obiter –

and it must be obiter because there was this intention to pool money and it did in fact occur in accordance with the scheme as set out to investors –

in Burton v Arcus 32 WAR at [68] and again at [70] employed the phrase “… does in fact pool the money …” his Honour intended to say that if funds are unilaterally pooled by the recipient of the funds at some time after contribution of those funds was made to acquire rights to benefits produced by a scheme which did not contemplate that funds were to be pooled is, nonetheless, sufficient to meet the test under para (a)(ii) . . . I would respectfully disagree with him and the other members of the Court.

With respect, your Honours, having regard to the statutory schemes and the words of the definition, his Honour’s conclusion must be right.

GUMMOW J:   Well, I think we are seized of all of that.

MS HARRIS:   Thank you, your Honours.  As the Court pleases.

GUMMOW J:   Yes, Mr O’Bryan, do you have anything in reply?

MR O’BRYAN:   Yes, if I might, your Honours.  In relation to Justice Buss’ decision in Burton v Arcus, it was an error for Justice Gilmour to characterise what Justice Buss said in paragraphs 68 and 70 as obiter.  That is clear, your Honours, when you look at paragraph 118 of the judgment – I am sorry, if you commence at paragraph 106 of the judgment in Burton v Arcus, your Honours will see the Court of Appeal’s discussion of the grounds of appeal which directly challenged the pooling element of the managed investment scheme which was in issue in that case.  There is a long discussion of the pooling element because it was directly in issue in that case.  It is discussed between paragraphs 106 and 118, and at that point, at 118, his Honour refers back to the discussion of principle ‑ ‑ ‑

KIEFEL J:   Can you identify where in particular you say that this discussion about pooling is identified as an issue?

MR O’BRYAN:   Yes, indeed.  Ground 1, which is described in paragraph 106, says that a critical issue in the appeal, as it was below, was whether there was:

a “scheme” and, if so:

(a)the identification of its characteristics; and

(b)the determination of whether the scheme had the three “features” which are required by para (a) of the definition.

It is the second of those features, of course, your Honour, which requires the pooling.  His Honour then, in paragraph 107, identifies characteristics which are relevant to the decision, including pooling characteristics.  You will see references to pooling characteristics in paragraph ‑ ‑ ‑

KIEFEL J:   Was it not pooling in a particular context that was in issue there?

MR O’BRYAN:   Yes, there is no doubt that is correct.

KIEFEL J:   Pooling in relation to the investment in the money market in relation to the loan.

MR O’BRYAN:   Yes, indeed, but there are several elements of pooling which were considered to be relevant in that case, your Honour, and one of them is item (b), the deposit ‑ ‑ ‑

KIEFEL J:   The point is the fact of pooling was not in issue.  The fact that the funds were to be pooled was not in issue.  The issues before the court there had regard to pooling but in particular contexts and for particular purposes.

MR O’BRYAN:   Your Honour, we would submit that insofar as one of the facts which was unquestionably clear in the Burton v Arcus Case was the fact that the money passed through the relevant trust account, is for all practical purposes identical with the facts in the present case, so that insofar as pooling was not in issue in connection with that aspect of the facts, that is equally true of this case.  Nevertheless, the court was called upon to characterise and consider the question whether paragraph (ii) of the definition was or was not satisfied did so very thoroughly and it is in these paragraphs of the judgment where his Honour, who gave the leading judgment, undertook that exercise. 

You will see in paragraph 118, your Honours, where this analysis is concluded, his Honour repeated precisely the same point which he had made earlier in his judgment in the paragraphs to which Justice Gilmour refers in his paragraph 147 to which my learned friend took you and repeats again that if – this is paragraph (c) in paragraph 118 – if the scheme involves pooling in fact, even “without the agreement, approval or knowledge of the people who have contributed”, it is sufficient.  Now, those are not obiter dicta, with respect to Justice Gilmour.  They are part of the ratio of the decision in Burton. 

Furthermore, your Honours, that ratio picked up and applied the ratio of Enterprise Solutions, which is the other case to which my learned friend referred and which is discussed at length in Burton v Arcus, a decision of the Queensland Court of Appeal in 2000, and again your Honours will see in paragraph 149 of the judgment below – that is on page 85 of the application book – his Honour also wrongly characterises what the Court of Appeal in Queensland had to say about this identical issue as obiter dicta.  It was not obiter dicta, as can be seen from paragraph [8] of the Enterprise Solutions decision.  Now, those, we submit, are errors.  They are errors of law in respect of the reasoning in this case, and ‑ ‑ ‑

GUMMOW J:   Just a minute, paragraph [8] of the Enterprise decision?

MR O’BRYAN:   It is paragraph [8] of the Enterprise decision, your Honours, which is on our list of authorities.

GUMMOW J:   Yes, we have the case.  Which page of the report?

MR O’BRYAN:   Your Honours, I am working from the Queensland Reports version.  I think you might have a different version.

GUMMOW J:   Yes, so are we.  Just tell us the page.

MR O’BRYAN:   Sorry, 144, your Honours, at line 5.  You will see the heading, “No pooling”.  Now, that was directly in issue, as the outline of argument also makes very clear.  This case was not reported for some years, your Honours.  It was actually decided in the year 2000, not reported until 2003.  You will see if you return to the outline of the argument commencing on page 136 that most of the outline of argument on the appeal related to the matter of pooling.  The argument commences, or the summary of it, on page 136 at about line 46 and it continues over the whole of page 137 and onto page 138.  It was directly in issue in that case.  The reasoning in paragraph [13], which is the critical reasoning, and particularly the end of paragraph [13], where their Honours said at the very end:

As for the words “to be”, it was contended that there was no evidence that the contributors appreciate that the contributions are to be pooled.  That contributions would be dealt with in that way is obvious; but in any event under the scheme pooling occurs and that is enough.

We submit that those words are not obiter dicta either.  They are reasoned conclusions of a unanimous intermediate appellate court which also has not been properly dealt with in accordance with the principles laid down by this Court in Marlborough Gold Mines and, more recently, in Say-Dee.

GUMMOW J:   The red light is on, Mr O’Bryan.

MR O’BRYAN:   I am sorry, your Honours, one very final point.  In the Brookfield Multiplex Case, a decision of the Full Federal Court handed down only 10 days before this decision, the court referred to Burton v Arcus with approval and so you have in the same court two different divisions of the Full Federal Court apparently taking different views as to the authority of Burton v Arcus.

KIEFEL J:   In Enterprise Solutions at paragraph [13] that you have taken us to, the last two sentences that you have referred to concluding with “pooling occurs and that is enough”, how can that be squared with their Honours’ observation that the words “to be pooled . . . to produce” imply that the intention must be to pool?  Is that somewhat inconsistent?

MR O’BRYAN:   Your Honours, we would submit not.

KIEFEL J:   That is a matter taken up by Justice Gilmour at paragraph 157.  His Honour, I think, recasts what is said there to make sense of what their Honours are intending to convey.

MR O’BRYAN:   No, with respect, your Honour.  His Honour is characterising a different part of the judgment in Enterprise Solutions, that is to say, the part in paragraph [8].  You will see in the immediately preceding paragraphs his Honour contrasts two comments; one in paragraph 155 deriving from Justice Buss’ decision in Burton v Arcus ‑ ‑ ‑

KIEFEL J:   Yes, you might be right about that, but his Honour fastens upon what their Honours have said about the implication that the intention must be to pool.  His Honour does not think that it is to be read down in light of what follows in the Court of Appeal’s reasons in Enterprise Solutions.

MR O’BRYAN:   Yes, that is a fair comment, your Honour, but we would submit strongly to you that if you look at both of the quotes in 155 and 156 of Justice Gilmour’s judgment, there is nothing in either of those comments which would suggest a need for the subjective intention which has been applied by Justice Gilmour.  They are purely objective facts.

GUMMOW J:   Thank you.

The oral submissions for the first respondent have demonstrated that the facts here did not meet the criteria in the definition of “managed investment scheme” in section 9 of the Corporations Act 2001 (Cth). It follows that the application for special leave should be refused with costs.

The Court will now adjourn to establish the video link to Perth.

AT 11.54 AM THE MATTER WAS CONCLUDED