Rolfe, Herbert Stanley v Sunstate Credit Union Ltd

[1997] FCA 1109

FEDERAL COURT OF AUSTRALIA

TRADE PRACTICES - misleading and deceptive conduct - prospectus issued for merger of building society and credit union - whether nature of amalgamation and its effects made plain to members

EQUITY - whether proposal for amalgamation of building society and credit union was equitable - jurisdiction of court - whether decision could reasonably have been reached by the authority

Financial Institutions (Queensland) Code 1992 (Qld)
Australian Financial Institutions Commission Code (1992) (Qld)
Trade Practices Act 1974 s 52

Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 Cons

Herbert Stanley Rolfe, Shirley May Rolfe and Janine Gayle Oldershaw v Sunstate Credit Union Limited, First Provincial Building Society Limited, Lindsay James Hedger, Donald Morris Aitchison, John Richard Brand, Brian David Collins, Gregory Theodore Kruger, Robert Edward Thiedeke, Trevor Torenbeek, Ronald Kelvin Warnock and Queensland Office of Financial Supervision
NG 868 of 1997

KIEFEL J
BRISBANE
23 October 1997

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	NG 868  of   1997

BETWEEN:

HERBERT STANLEY ROLFE, SHIRLEY MAY ROLFE AND JANINE GAYLE OLDERSHAW
APPLICANTS

AND:

SUNSTATE CREDIT UNION LIMITED
FIRST RESPONDENT

FIRST PROVINCIAL BUILDING SOCIETY LIMITED
SECOND RESPONDENT

LINDSAY JAMES HEDGER
THIRD RESPONDENT

DONALD MORRIS AITCHISON, JOHN RICHARD BRAND, BRIAN DAVID COLLINS, GREGORY THEODORE KRUGER, ROBERT EDWARD THIEDEKE, TREVOR TORENBEEK AND RONALD KELVIN WARNOCK
FOURTH RESPONDENTS

QUEENSLAND OFFICE OF FINANCIAL SUPERVISION
FIFTH RESPONDENT

JUDGE(S):

KIEFEL J

DATE OF ORDER:

23 OCTOBER 1997

WHERE MADE:

BRISBANE

THE COURT ORDERS THAT:

1. The application be dismissed.

2. The fifth respondent be released from its undertaking to the Court.

3. Credit Union Services Corporation Limited pay the respondent’s costs of the proceedings, including any reserved costs.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	NG 868 of 1997

BETWEEN:

HERBERT STANLEY ROLFE, SHIRLEY MAY ROLFE AND JANINE GAYLE OLDERSHAW
APPLICANTS

AND:

SUNSTATE CREDIT UNION LIMITED
FIRST RESPONDENT

FIRST PROVINCIAL BUILDING SOCIETY LIMITED
SECOND RESPONDENT

LINDSAY JAMES HEDGER
THIRD RESPONDENT

DONALD MORRIS AITCHISON, JOHN RICHARD BRAND, BRIAN DAVID COLLINS, GREGORY THEODORE KRUGER, ROBERT EDWARD THIEDEKE, TREVOR TORENBEEK AND RONALD KELVIN WARNOCK
FOURTH RESPONDENTS

QUEENSLAND OFFICE OF FINANCIAL SUPERVISION
FIFTH RESPONDENT

JUDGE(S):	KIEFEL J
DATE:	23 OCTOBER 1997
PLACE:	BRISBANE

REASONS FOR JUDGMENT
EX TEMPORE

Sunstate is a credit union organised under the Financial Institutions (Queensland) Code 1992 (“Queensland Code”).   There is currently a proposal to amalgamate Sunstate with First Provincial Building Society Limited.  The members of Sunstate received two documents relating to the proposal on or shortly after 30 September 1997.  Those two books are the focus of the applicant’s case under s 52 Trade Practices Act 1974.  A proportion of the members, some 18 per cent, have voted with respect to the proposal and more than 90 per cent of them were in favour of it.

Members of First Provincial have also now met and sufficient have approved the proposal to enable it to proceed subject to final certification under the Queensland Code.  Although the applicants initially sought interlocutory relief by way of injunction, all parties are now agreed that, in the circumstances, the proceedings should be taken as for final relief.

The applicants are members of Sunstate and bring these proceedings with the aid of Credit Union Services Corporation Limited (“CUSCAL”).  No issue is taken with respect to the maintenance of the proceedings for the purposes of the relief sought, although costs are sought against CUSCAL as a third party, and it gives an undertaking with respect to damages.

In connection with submissions in the proceedings, it is necessary to observe that there is a difference between the applicants.  The first and second applicants, Mr and Mrs Rolfe, have been members of Sunstate for a long time.  Ms Oldershaw, the third applicant, has however been a member only since February 1997.  The importance of this, in relation to the proposed amalgamation, is that Mr and Mrs Rolfe will be able to participate in the share offer in First Provincial but Ms Oldershaw and other persons who have become members in Sunstate only after January 1997 could not.

The members in Sunstate are those appearing in the Register of Members and comprise depositors and borrowers.  Each member is entitled to one vote and an equal participation in the distribution of any surplus in the event of its being wound up.  Each member would be entitled to participate in the distribution regardless of length of membership.  There is nothing to suggest the likelihood of a winding up.  The surplus in Sunstate referred to is that of assets over liabilities or reserves as they have been referred to in the material.  It was estimated at approximately $8.3 million as at 30 June 1997.  There is no evidence that that would in fact be realised in the event of a winding up.

The proposed amalgamation with First Provincial would involve, relevantly and essentially the transfer of all of Sunstate’s assets, liabilities and undertakings including its deposit and loan accounts.  Sunstate members would become members of First Provincial.  This follows the course of the transfer of engagement.  (See s 300 and s 308 of the Queensland Code).

The members of Sunstate would not, however, have the right to participate in the capital of First Provincial.  The merger, as in substance it is, is not of like with like, but of a credit union with a building society.  What was then proposed was an offer of 4,000,000 shares to qualifying members of Sunstate.  Sunstate had, at 6 August 1997, 22,083 members.  The number who did not qualify is not specified, but the documentation suggests that most of the members will continue as members of First Provincial which I take to mean that most will at least qualify.  Each qualifying member is to be entitled, on subscription, to a parcel of 100 shares in First Provincial at $1.20 per share.  Members were advised that First Provincial had traded in a range from $2.20 to, more recently, $2.62.  Entitlement to further shares was to be resolved by reference to the length of membership with Sunstate.  The shares the subject of the offer were to carry the usual entitlement to dividend including an 8 cent fully franked dividend payable shortly after takeup and also a special dividend of 70 cents per share payable between 31 October 1997 and 31 December 1999.  It was also expected to be fully franked.  Special provision by way of offer of shares was proposed to be made for directors and employees of Sunstate.  I shall refer to this aspect of the matter later.  2961 Sunstate members have applied for shares.  Taking into account those shares reserved for directors and employees, there will be a substantial oversubscription. 

No real issue is taken as to the value of what was proposed in the exchange which is to say, so far as concerns those qualified members of Sunstate who would take up the offer.  Rather, the applicants’ complaints centred upon what was said about the proposal and who was excluded from it.

The Section 52 case
The grounds based upon breach of fiduciary duty or unconscionable conduct under s 51AA Trade Practices Act were conceded by senior counsel for the applicants not to be true alternatives to the claim under s 52. That with respect to fiduciary duty was referred to for context and that under s 51AA relied for the necessary special disadvantage on the misleading and deceptive conduct itself.

The applicants’ contentions with respect to contravention of s 52 may be summarised.  It is alleged that Sunstate and First Provincial, who together circularised the material, did not make plain to members of Sunstate that:  members would lose their rights to participate in the surplus of Sunstate, and that a transfer of  Sunstate’s assets was involved;  that some members, namely those taking membership after January 1997, would not be entitled to participate in the share offer and would then receive nothing in exchange for their rights;  and that those who did not subscribe to the shares, for any reason, would lose their rights to the surplus.  A further submission, that independent accounting advice given to the board of Sunstate ought to have been provided to members, is not now pursued. 

Two matters may be first mentioned before I turn to consider the material provided to the  Sunstate members in  light of the allegations made.  The topics they concern are not complex.  They involve, principally, concepts of ownership rights, transfer away of assets, and the description of who might take advantage of an offer.  This situation may be contrasted with aspects of the proposal in Fraser v NRMA Holdings Ltd (1995) 55 FCR 452.

The second matter relates to the approach to be taken to the documents which are to be taken as having been read by members.   As the NRMA case confirmed, whether there is misleading and deceptive material is to be assessed objectively and having regard to reasonable members of the class of persons to whom they were directed.  Here the class will be wide and comprise persons ranging from those having a good understanding of commercial matters and those having little.

Mr McDougall, QC, for the applicants, submitted that the documents provided to members ought to be regarded as complex.  I take it that was intended as part of a submission that the likelihood of confusion was thereby to be seen as greater.  I accept that parts of the material, more particularly the detailed financial analysis contained in the Accountants’ Reporting Book 2 would be beyond most persons ready comprehension, at least unassisted.  Much of that kind of material is required to be disclosed even if, realistically, not all people will attempt to absorb it.  But it is not that kind of material, or any topic arising from it, that I am presently concerned with.  As I have said, the topics in question in these proceedings are not obscure. They are the very matters which a Sunstate member would have been interested to have explained.  I accept otherwise the submission made that a reading of the material is not to be approached by careful dissection and analysis but to attempt to gauge what a reader of the class in question would fairly discern from it.

The reference to who is a qualifying member is made plain at a number of points in the material.  The initial description of it, appearing at a very early point in the information outlining the proposal in Book 1, is simply a “Qualifying Member is a person with a deposit and/or a loan account on 1 January 1997 who remains a member of Sunstate as at 6 August 1997”.  It is difficult to imagine how the description could be more clearly expressed.  The reader’s attention is then drawn to it again by way of answer in the same terms, which is set out in response to a question as to who a qualifying member is.  Further like reference appears elsewhere, and in the letter accompanying the material.  It could not mislead or deceive.  What it says is perfectly accurate. 

In these circumstances the applicant’s submissions must necessarily be understood as requiring further explanation or warning to the effect that members joining after 1 January 1997 are unable to participate and will lose their interest in the reserves.  As to the first part of that proposition, the question with which I am presently concerned, it would seem to me abundantly clear to any reader that that was the case.   To say that something might be stated more bluntly or by way of warning, would not itself convert what is said to a misleading statement.  Absent an apparent need for further clarification, this ground is not made out.

The ground referrable to what was explained and not explained about the Sunstate reserves and members’ loss of interest in them, whilst having a number of facets to it, also seemed to me, in the end result, to be without merit.  It must be taken as obvious to all readers that what was proposed was an amalgamation.  In the first few pages of the prospectus and information memorandum they were told that it means Sunstate and First Provincial were to become one Society.  This is reiterated at other points, usually in connection with statements about the size of the resultant society, and the benefits perceived to flow from that.  There is reference to the statutory scheme and to the transfer of engagement, and I accept that what that involves might not be plain to most.  But it is at the early point in the discussion, of what the amalgamation proposal means, that a member is informed that what is intended is a transfer by which all the assets, liabilities and undertakings of Sunstate were to become those of First Provincial.

Reading on, the tax advice contained in Book 1, might be considered unclear in its reference to assets and liabilities from a transferor institution to a transferee.  What it does state, and which is of relevance, is that members of Sunstate will have their rights to the reserves extinguished.  This is again referred to in the accountant’s advice contained in Book 2.  What that advice is concerned with, so far as Sunstate members would be concerned, is as to what those applying for shares would receive compared with their present situation.   It commences with the observation as to the interest of members in the reserves of Sunstate.  The members referred to are, however, for the purpose of the task at hand, limited to those who will be taking shares.  No separate point is taken in these proceedings as to whether or not any confusion is likely to arise from that statement taken by itself.  What follows is more useful.  In calculating what Sunstate members will receive by way of First Provincial shares it compares Sunstate’s net asset value, again observing the members’ ownership interest in it.

Accepting that the calculations set out later under “Analysis of Benefits to be Received by Sunstate Members,” might not readily be followed by many readers, nevertheless the body of the text explains the approach taken to the assessment, and that consideration was given to whether Sunstate members should receive something in excess of its net worth, likening the position to a takeover, and concluding that the consideration is likely to be at least equivalent to its net asset value.  A further summary of that comparison based on First Provincial share price is also contained in the conclusion. 

Mr O'Donnell of Queens Counsel, for the respondents, also submitted that the reference to the proposed alteration to the rules of First Provincial to allow a special reserve to be set up for Sunstate members is relevant, at least to confirm that as is otherwise apparent, Sunstate assets were being transferred.  This part of the proposal, which First Provincial members have now approved, will allow an equivalent amount to the Sunstate reserves to be set apart and made available to Sunstate members until the year 2002, in the event of liquidation of First Provincial.   The amount held in it will decrease by 20 per cent per annum in that period.  The reference to these proposed amendments to the rules in the information provided to Sunstate members in the booklet is not however clear.  I do not think it would have made much impression. 

What would have been gleaned overall, in my view, by a reasonable member of Sunstate, from the information provided, was that an amalgamation, merger or takeover was involved;  that First Provincial was larger and that Sunstate was being absorbed into it to make one large society;  that the assets of Sunstate were being transferred or added to those of First Provincial;  and that the assets of Sunstate would become those of First Provincial.  Were it not apparent from these factors that the members’ rights to the Sunstate reserves would come to an end, that is made clear at a number of points in the material which, as I have said, one must assume was read.  Whilst I accept, as Mr McDougall QC submitted, that it would not be correct to approach this question by piecing together information from various points in the material.  I cannot, on the other hand, assume that matters clearly stated are to be taken as glossed over.  Added to these factors, which would have been apparent to members, was the discussion of what Sunstate members might receive out of the special share offer, and a comparison with Sunstate’s present asset position.  It seems to be that it must have been clear on reading this material that the special share offer described was the quid pro quo for what they were giving up as members of Sunstate in the event that they were to become shareholders of First Provincial.

It is not at all likely, in my view, that the members of Sunstate would labour under a false impression that the assets of Sunstate would remain for them to have recourse to.  No misstatement is, as I have said, pointed to by the applicants.  In these circumstances I am unable to conclude that this ground is made out.

The last submission in relation to this cause of action relies upon lack of warning to Sunstate members that they would receive nothing if they did not subscribe to the shares.   Book 1 is littered with references to the share issue closing on 20 October, and that qualifying members have until that time to apply for shares.  Members are then advised that allotment of shares are to be made by 4 November 1997, and this is state on more than one occasion.  I do not think a member would need to be especially sophisticated to appreciate that you would need to apply by the date you were advised.  The information was correct and I cannot accept that members would have been misled into thinking that they might apply at some other time, or that their rights would remain unchanged if they did nothing.

QOFA- whether the proposal was equitable
The initial approach taken by QOFS was to contend for want of jurisdiction.  This was predicated on a statement of claim which, it submits, claims simply that the decision of QOFS, who approved the proposed arrangement under s 302(3) of the Queensland Code, notifying that decision on 19 September 1997, was simply wrong.  In submissions, however, it became apparent that the applicants were contending that there was no basis upon which QOFS could have come to that decision, which is to say that it was unreasonable in the administrative law sense.  Certainly the statement of claim alleged that it was not and is not properly open to QOFS to be satisfied that the amalgamation proposal was equitable.  That statement is elliptical, absent any further particulars.  The submission by Mr Sheahan, for QOFS, that the ground now sought to be advanced by the applicants does not squarely fall within the pleading is, I consider, well made.  Mr Sheahan also submitted that this did not give an opportunity for QOFS to consider its position in relation to justification of the decision, although it was not suggested to me that further evidence would have been necessary.  In any event it is not necessary, in my view, to determine the matter on this basis. 

The QOFS does not contend that the court would be unable to review the decision  on the basis now claimed, on common law grounds.  Certainly as Mr O'Donnell QC’s submissions point out, there are alternative procedures that might have been undertaken, and which likely were known at least to CUSCAL.  There are appeal procedures under the Queensland Code.  It seems to me however that were there substance in the applicant’s contentions, it might be appropriate for a court to grant relief, given that the matter is largely completed but for the challenge to this decision.  That would leave, however, the difficulty that QOFS has not made a decision to grant the necessary certificate of confirmation under s 304.  In that circumstance, it has a discretion not to issue it if it is not satisfied that there is no good reason why the transfer should not take effect, as sub-s 2(d) requires.  I accept that one could not assume that the authority would necessarily conclude that there is no such impediment, simply because it has earlier granted approval of the amalgamation proposal on the basis that it concluded that it was equitable.  If the contrary were shown in these proceedings, it would remain open to it as a responsible authority to refuse the certificate.  This highlights real difficulties in terms of any appropriate and practical relief which might be given in the event that the applicants were successful as to the substantive question.  Again, however, it has not been necessary for me to determine these questions since it seems to me that the basis for any of the relief claimed is not made out. 

Each of the parties accepts that the Prudential Standards under the Australian Financial Institutions Commission Code are incorporated into the Queensland Code, and that the QOFS is obliged to apply them.

The relevant question for the authority under Prudential Standard 4.5.1(a) was whether the effect on the reserves and any entitlement in the members to the reserves is equitable.  In this respect, the applicants contend that that conclusion could not have been reached when regard is had to the amalgamation proposal because:  it discriminates amongst members in relation to the qualification of those who might take shares;  it provides that further shares are to be allotted on the basis of length of membership;  and it points to the share parcels for the directors and employees of Sunstate.  There was a general further allegation that 100 special dividend shares is not adequate compensation.  How this conclusion is to be reached was not gone into in submissions before me.  From the material accompanying the proposal, the possibility is clear that it would indeed be a benefit from the shares offered when compared with Sunstate’s existing net asset value.  So far as the proposal discriminates against members who joined after 1 January 1997, this is explained largely by reference to Prudential Standard 4.5.2(d) which prohibits a credit union from participating in a merger of a building society where the building society extends an offer to persons who have not continuously been members of the credit union for at least six months prior to the dispatch of the offer documentation.  That documentation was here despatched in July.  The standard does, however, permit an approach to the authority for approval for a different course of action.  That was not here undertaken.  Nevertheless, it must be taken, in my view, as a statement of general policy under the standards that beneficial offers made to persons only recently ought be discouraged.  It might, for example, encourage speculation where the mere possibility of a merger had been mooted.  In my view, it would be open to the authority to conclude also that longer membership might have given Sunstate members greater benefits and created at least a moral entitlement for a greater return.  So far as the directors are concerned, there was disclosure, as required, of the shares which were to be made available for their subscription.  It was explained that they would, if the amalgamation proposal proceeded, lose the chance to seek retirement allowance from the Sunstate members.  The Sunstate members voted on special resolution with respect to this issue.  No separate resolution was made with respect to employees but it is explained in the material that it was sought to put them on the same basis as First Provincial employees who participate in an employee share scheme.

I have not stated any conclusion as to whether or not, in all these circumstances, the amalgamation proposal operates as equitable.  That is not the question posed for the court.  The question is simply whether or not QOFS, having regard to the terms of the amalgamation proposal, could have come to the view that it was.  Mr Sheahan referred to the judgment of Gibbs J, (as he then was) in Buck v Bavone (1976) 135 CLR 110, 118-9 where his Honour observed that it is common for statutes to provide that an authority may take certain action if it is satisfied of certain matters specified in a statute. However, where that satisfaction involves wide discretion and matters of opinion or policy, it may be difficult to show that its decision could not reasonably have been reached in the sense required. That observation, in my view, is most relevant to the facts of this case. What is equitable as between members is very much a matter of judgment and of opinion. It cannot, however, by any means be suggested that the QOFS could not have reached the view it did. The submissions for the applicants, whilst pointing to matters which might affect a final judgment as to whether the proposal was equitable, have not shown how a conclusion of unreasonableness could be drawn. In these circumstances, the application will be dismissed.

I certify that this and the preceding                nine (9) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Kiefel

Associate:

Dated:            23 October 1997

Counsel for the Applicants	Mr R McDougall QC and Mr R Lo Surdo
Solicitor for the Applicants:	Tress Cocks & Maddox
Counsel for the First Second Third and Fourth Respondents:	Mr B O'Donnell QC
Solicitor for the First Second Third and Fourth Respondents:	McCullough Robertson
Counsel for the Fifth Respondent:	Mr J Sheahan
Solicitor for the Fifth Respondent:	Corrs Chambers Westgarth
Date of Hearing:	22, 23 October 1997
Date of Judgment:	23 October 1997