Shao v One Funds Management Limited

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST

S ECI 2023 00414

BETWEEN:

JIANQIANG SHAO & ORS	Plaintiffs
v
ONE FUND MANAGEMENT LIMITED (ACN 117 797 403) (IN ITS CAPACITY AS TRUSTEE OF THE IPROSPERITY JY HOTEL FUND) & ORS (according to the attached Schedule)	Defendants

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JUDGE:	Derham AsJ
WHERE HELD:	Melbourne
DATE OF HEARING:	5 & 6 April 2023
DATE OF JUDGMENT:	17 April 2023
CASE MAY BE CITED AS:	Shao & Ors v One Funds Management Limited & Ors
MEDIUM NEUTRAL CITATION:	[2023] VSC 192

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MANAGED INVESTMENTS – Trusts – Trial of preliminary questions pursuant to r 47.04 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (‘Rules’) – Priorities between classes of units issued in trust – Construction of Constitution – Whether Information Memorandum a part of the ‘context’ for the purpose of the construction of the Constitution – Scope of r 54.02 of the Rules – Rule 54.02 of the Rules – ING Funds Management Ltd v ANZ Nominees Ltd [2009] NSWSC 404, followed; MSP Nominees Pty Limited v Commissioner of Stamps (South Australia) (1999) 198 CLR 494; Re Gaydon [2001] NSWSC 473; Westfield Queensland No 1 Pty Ltd v Lend Lease Real Estate Investments Ltd (2008) 1 ASTLR 525; [2008] NSWSC 516, referred to.

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APPEARANCES:	Counsel	Solicitors
For the ‘A’ Class Unitholders	Mr J Evans KC one of his Majesty’s counsel with him Ms B Slocum of counsel	Madgwicks
For the First Defendant	Ms C Ernst of counsel	Allens
For the ‘C’ Class Unitholders	Mr C Moller SC	Resolve Litigation Lawyers

TABLE OF CONTENTS

Introduction........................................................................................................................................ 1

The Questions..................................................................................................................................... 2

The Parties........................................................................................................................................... 4

The need for answers to the Questions......................................................................................... 5

Agreed facts and tender bundle...................................................................................................... 6

The JY Hotel Fund............................................................................................................................. 6

Constitution................................................................................................................................... 6
Information memorandum........................................................................................................ 10
Class A Units Terms of Issue..................................................................................................... 14
Class C Units Terms of Issue..................................................................................................... 17
Further relevant facts.................................................................................................................. 19

Jurisdiction under r 54.02 of the Rules......................................................................................... 23

Construction principles.................................................................................................................. 26

Class A Submissions....................................................................................................................... 29

Have the Class C Units been redeemed?................................................................................. 31
Has there been an appropriation of Assets to make Class C redemptions?....................... 32
Priority if no termination of the Fund before the Class A Redemption Date.................... 35
Priority termination of Fund occurs before the Class A Redemption Date....................... 36
Termination of the Fund before the Class A Redemption Date........................................... 36

Class C Submissions....................................................................................................................... 38

Construction of Class Terms..................................................................................................... 38
Have the Class C Units been redeemed?................................................................................. 40
Priority if no termination of the Fund before the Class A Redemption Date.................... 42
Termination of the Fund before the Class A Redemption Date........................................... 43

Consideration.................................................................................................................................... 46

Question 1 – Termination of the Fund..................................................................................... 46

Question 4 – Priority if the Fund is not terminated.................................................................. 50

Have the Class C Units been redeemed?................................................................................. 50
Does the decision in ING v ANZ apply to the Class C redemption?................................... 51
Priority if no termination of the Fund before the Class A Redemption Date.................... 57

Conclusion......................................................................................................................................... 60

HIS HONOUR:

Introduction

These reasons deal with preliminary or separate questions ordered by Garde J to be tried, pursuant to r 47.04 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (‘Rules’). The questions arise in the proceeding, commenced by originating motion on 3 February 2023, seeking orders pursuant to r 54.02 of the Rules requiring the first defendant (‘OFM’), as Trustee of the iProsperity JY Hotel Fund (‘JY Hotel Fund’ or ‘Fund’), to take steps to wind up the Fund with the effect that the Class A Unitholders’ claims on the remaining assets of the Fund have priority over the claims of the Class C Unitholders, and other relief referred to below.

On 28 February 2023 Garde J made orders (‘Court Orders’) (so far as presently relevant) that—

(a) pursuant to r 47.04 of the Rules, the relief sought in paragraphs 2, 5, 6, 7, 8 and 9 of the originating motion is set down for a preliminary hearing on an estimate of one day on a date convenient to the Court between 4 April and 14 April 2023 (‘Preliminary Hearing’) (order 2);

(b) subject to any further order of the Court, pursuant to r 16.01(c) of the Rules, the plaintiffs are appointed to represent the interests of all Class A Unitholders of the JY Hotel Fund in the proceeding (order 3);

(c) subject to any further order of the Court, pursuant to r 16.01(c) of the Rules, the following are appointed to represent the interests of all Class C Unitholders of the JY Hotel Fund in the proceeding (‘Class C Representative’):

(i) Any current Class C Unitholder who does not hold a direct or indirect interest in the Class A Units notified to the plaintiffs’ solicitors by OFM’s solicitors; or

(ii) If no such person is identified, a legal practitioner nominated by OFM and notified to the plaintiffs’ solicitors by OFM’s solicitors,

in each case, to occur by 9 March 2023 (order 4).

(d) the costs of the plaintiffs, the Class C Representative (including any nominated legal practitioner) and of OFM, in relation to the Preliminary Hearing, be paid out of the assets of the JY Hotel Fund on an indemnity basis (order 5);

(e) OFM provide to all Class A and Class C unitholders the originating motion, supporting summons and Court Orders together with an offer to give them copies of the affidavits in the proceeding (order 6);

(f) OFM disclose certain critical documents (order 7);

(g) subject to any further order of the Court, the Preliminary Hearing shall be conducted on the basis of an Agreed Statement of Facts and Agreed Tender Bundle (order 8) and directions as to the process to agree to the facts and documents (orders 9-11);

(h) the parties file outlines of written submissions (orders 12-13); and

(i) the summons on the originating motion be adjourned for further directions to the judge hearing the Preliminary Hearing at its conclusion (order 14).

The Questions

The questions to be tried separately as set out in the originating motion (‘OM’), together with my short answers, are as follows (the ‘Questions’):

(a) Question 1: Whether an order should be made pursuant to r 54.02 of the Rules directing OFM to give, prior to 1 April 2023,[1] a notice to the Unitholders of the JY Hotel Fund specifying 16 April 2023 as the date of termination of the Fund pursuant to cl 2.3 of the Constitution of the Fund dated 4 January 2017 (paragraph 2).
[1]That date had passed by the time the trial of the separate questions could be held, but nothing turned on the passing of that date.

Answer: No order requiring notice of termination of the Fund should be made.

(b) Question 2: Whether there should be declarations as to the Redemption Date in respect of the Class A Units and the Class C Units in the JY Hotel Fund. (paragraph 5)

Answer: Unnecessary to answer.

(c) Question 3: If the relief in Question 1 is granted, whether there should be a declaration that the Class A Unitholders of the JY Hotel Fund are entitled to the payment of the whole of the net assets of the JY Hotel Fund after the payment of liabilities incurred by OFM as Trustee in the administration of the Trust (Net Assets):

(iii) First, in satisfaction of the right to unpaid Coupon payments in accordance with the Class A Units Terms of Issue;

(iv) Second, in satisfaction of the right to payment of the Redemption Amount in accordance with the Class A Units Terms of Issue, and to the extent of any shortfall, to be paid pari passu. (paragraph 6)

Answer: Unnecessary to answer.

(d) Question 4: If the relief in Question 1 is not granted, whether there should be a declaration that the Net Assets are payable by OFM as Trustee of the Fund in the following priority:

(i) First, in satisfaction of the right of the Class A Unitholders to unpaid Coupon payments in accordance with the Class A Units Terms of Issue;

(ii) Second, in satisfaction of the right of the Class C Unitholders to unpaid Coupon payments in accordance with the Class C Units Terms of Issue;

(iii) Third, in payment of the Redemption Amount under the Class A Units Terms of Issue and the Class C Units Terms of Issue on a pari passu basis. (paragraph 7)

Answer: The priority should be, first, Class C Redemption Amount, second, Class A unpaid Coupons, third, Class A Redemption Amount.

(e) Question 5: Alternatively to paragraphs 6 and 7, whether there should be such other declarations as to the order of payment of Unitholders of the Net Assets as the Court determines. (paragraph 8)

Answer: Further submissions required.

(f) Question 6: Whether there should be an order directing OFM as Trustee of the Fund to make payment to the Unitholders of the Fund in accordance with the declarations made by the Court. (paragraph 9)

Answer: Unnecessary to answer.

The parties agreed at the hearing that it was neither necessary nor appropriate to determine the answers to Questions 2 and 6 (paragraphs 5 and 9 of the OM). That is because there is a factual dispute that must first be resolved to answer those questions and neither the parties nor the Court is equipped in this application to resolve the dispute. In consequence it is also unnecessary to answer Question 3.

The Parties

There are two representative parties appointed pursuant to r 16.01 of the Rules:

(a) It can be seen from the Court Orders that the plaintiffs were appointed to represent the interests of all Class A Unitholders of the JY Hotel Fund. The plaintiffs in fact comprise all but two of the Class A Unitholders in that Fund.[2] For convenience, I will abbreviate them to ‘Class A’. Extensive written and oral submissions were made on their behalf. Rather than abbreviate and ‘pick the eyes’ out of these submissions, as I would prefer, I have set out a large part of them almost fully due to pressure of time.

(b) The Class C Unitholders are represented by Mr David Hing of Resolve Litigation Lawyers. He was appointed by OFM’s solicitors pursuant to the Court Orders. I will abbreviate them to ‘Class C’. Extensive written and oral submissions were made on their behalf. Again, I have set out large parts of these submissions almost fully due to pressure of time.

(c) OFM appeared as Trustee of the Fund and took a neutral stance, and did not advocate for any particular outcome. It nevertheless participated for the purpose of assisting the Court and made brief written and oral submissions.

[2]The second defendant and the seventh defendant are also Class A Unitholders.

The need for answers to the Questions

The questions reserved for separate determination concern how OFM as Trustee of the Fund should distribute the Net Assets of the Fund as between Class A and Class C. There are not enough monies in the Fund to satisfy the claims of both Classes. As at 28 February 2023, the Fund had assets of approximately $7.9 million, comprising approximately $0.4 million in cash and approximately $7.5 million in bank bonds and interest on those bonds. Class A also have unredeemed capital of $15,837,307.00 and unpaid Coupons (being interest payments at rates set out in the Terms of Issue) and Class C have ‘unredeemed’ capital of $8,170,000.00[3] and unpaid Coupons.
[3]I put ‘unredeemed’ in quotes as one of the issues to be determined in order to answer Question 4 is whether the Class Units have been redeemed.

The questions for separate determination have been brought before the Court on an urgent basis as the Class A Redemption Date is 18 April 2023. Class A are seeking to have the Trust terminated before that date as that will, or may, give them priority over Class C in a return of capital or at least an entitlement to a return of capital pari passu with Class C.[4]
[4]Class A Terms, cl 7.3(b), contained within the Tender Bundle, 134 (‘[TB]’).

Agreed facts and tender bundle

In accordance with the Court Orders, a Statement of Agreed Facts was produced as between Class A and OFM. It was adopted by Class C. I will relate the Agreed Facts as necessary for an understanding of the questions for determination. Also produced in accordance with the Court Orders is a tender bundle of documents.

The JY Hotel Fund

The JY Hotel Fund was constituted on 4 January 2017. It is a managed investment scheme which was not registered (and was not required to be registered) under the Corporations Act 2001 (Cth) (‘Corps Act’).[5] Its constitution is a trust deed poll, one of the documents to be construed in answering the Questions (‘Constitution’).[6] The executed minutes for establishment of the JY Hotel Fund by OFM’s board[7] show that it was resolved: that OFM accept office as Trustee of the JY Hotel Fund under the trust deed, for the Fund to issue 10 Initial Units in the Trust,[8] and issue Class A Units with rights, obligations and restrictions set out in the Terms of Issue apparently tabled at the meeting and for OFM, in its capacity as Trustee of the Fund, to apply for one ordinary unit in the Trust to be established and known as the ‘iProsperity JY Hotel Fund No 1’ (‘Sub Trust’). The trustee of the Sub Trust is One FS Pty Ltd.
[5]Final Statement of Agreed Facts, 8 (‘Agreed Facts’).
[6]JY Hotel Fund Constitution [TB 8–71] (‘Constitution’).
[7]OFM Board Minutes for Establishment of JY Hotel Fund [TB 72–80].
[8]Initial Units rights are defined by cl 3.1 of the Constitution and are not relevant to a determination of the Questions.

Constitution

The Constitution is a trust deed and constitutes the Fund.[9] It provides for the Trustee to create and issue units (described as ‘further units’, presumably to the Initial Units) in the same class or of a different class to those already on issue,[10] subject to the rights, obligations and restrictions speciﬁed in their ‘Terms of Issue’[11] which may (without limitation) eliminate, reduce or enhance any of the rights or obligations which would otherwise be carried by such Units.[12]
[9]Constitution (definition of ‘Trust’) [TB 70] .
[10]Ibid cl 3.4(a) [TB 17].
[11]Ibid cl 3.4(c) [TB 17].
[12]Ibid cl 3.4(b) [TB 17].

Clause 2.3 specifies the Term of the Trust. It provides:

The Trust will end on the earlier of—
(a)the date specified by the Trustee as the date of termination of the Trust in a notice given to Unitholders; and
(b)the date on which the Trust terminates in accordance with another provision of this Constitution, in accordance with the Act or in accordance with the law.

Class A seek to employ cl 2.3(a) to terminate the Fund, by seeking an order of the Court directing OFM to give a notice specifying a date of termination of the Trust before 18 April 2023.

By cl 3.4(d) it is provided:

Notwithstanding any other provision in this Constitution, the rights, obligations and restrictions attaching to a Class (including the rights, obligation and restrictions attaching to Class B Units) are subject always to the rights obligations and restrictions which attach to Units issued in other Classes. For example, and for the removal of doubt, if a Class is issued by the Trustee which has a right to receive some of the Distributable Amount or Dividend Amount in priority or preference to other Classes, then the rights of holders of other Classes are subject to this right.[13]

[13]‘Distributable Amount’ is defined to mean, in part, the net income of the Trust: Constitution [TB 64]. ‘Dividend Amount’, curiously, concerns the allocation of costs, expenses, liabilities, fees and taxes between Classes of Units: Constitution [TB 65] and cl 14.1(b) [TB 40].

Unitholders’ rights to distributions from the JY Hotel Fund are expressly subject to the Terms of Issue: ‘for example, the Trustee may issue a Class having rights to receive a distribution in preference to other Classes’.[14]
[14]Constitution cl 14.12 [TB 40].

Clause 19 of the Constitution deals with winding up of the Trust and of Classes of Units. By cl 19.1, the Trustee must wind up the Trust or cause the Trust to be wound up in any one of the following circumstances:

(a) The Trust comes to the end of its term as set out in this Constitution;

(b) If the Trust is a Registered Scheme, then where a court orders the Trust be wound up pursuant to s 601ND of the Corps Act, where the Trust’s purpose has been accomplished or cannot be accomplished and the Trustee uses the mechanism provided for in s 601NC of the Corps Act, or where any of the circumstances set out in s 601NE of the Corps Act apply.

By cl 19.2, the Trustee may terminate and wind up a Class if the Trustee issues a notice to Unitholders in the Class notifying Unitholders in that Class of the date of termination.

If the JY Hotel Fund, or any Class of Units, is wound up pursuant to cl 19 of the Constitution, preferential distribution of the assets of the Fund may be made by the Trustee, as required by the Terms of Issue of each Class (cl 19.3(b)) or, in the Trustees’ discretion, by distribution of Assets in specie.

The Constitution includes provisions relating to withdrawal of Unitholders and redemption of Units, as follows:

(a) Clause 5.1 provides, so far as relevant, that if the Trust is not a Registered Scheme, then Units may be redeemed at a ‘Withdrawal Price’ determined by the Trustee in its absolute discretion.[15] Clause 5.2 provides for the time to calculate the withdrawal price in two situations. First, while the Trust is Liquid, then at the next Relevant Valuation Time after the withdrawal request is accepted or approved by the Trustee. Second, while the Trust is not Liquid, at the time the withdrawal offer closes.

(b) Clause 6, headed ‘Withdrawal procedures’, provides by cl 6.1(a) that subject to the Terms of Issue, where the Trust is not a Registered Scheme, a Unitholder has no right to withdraw from the Trust other than as determined by the Trustee in its absolute discretion. Clause 6.1(b) provides for the Unitholders right to withdraw where the Trust is a Registered Scheme and applies the remainder of cl 6 to that right to withdraw. [The reference to rights of withdrawal need to be read in the light of the provisions of Chapter 5C of the Corps Act which governs managed investment schemes. The Constitution of a Registered Scheme must, if the scheme gives members a right to withdraw from the scheme, specify the right and deal with the procedures where the scheme is liquid and if it is not liquid, provide for the right to be exercised in accordance with pt 5C.6 of the Corps Act.[16]]

(c) Clause 6.2 provides for the application of particular provisions of cl 6 according to whether, in effect, the Fund is a Registered Scheme and whether or not the Trust is a Registered Scheme.[17] In the latter case, cls 6.4 to 6.6 apply. Clause 6.6 authorises the Trustee to redeem Units ‘of any Unitholder’ without the need for a withdrawal request if certain conditions are satisfied. Clause 6.5 authorises the Trustee to deduct amounts owed by a Unitholder from the proceeds of withdrawal due to the Unitholder. Clause 6.6 authorises the transfer of Class Assets rather than cash in satisfaction of all or a part of ‘a withdrawal request, pursuant to a withdrawal offer or in payment of a distribution’.

[15]‘Withdrawal Price’ is defined to mean the price at which a Unit is redeemed and calculated in accordance with cl 5.1 of the Constitution [TB 70].

[16]Corporations Act 2001 (Cth) s 601GA(4) (‘Corps Act’).

[17]The terms of clause are perhaps not so clear, as they apply certain sub-clauses whether or not the Trust is Liquid, whether or not the Trust is a Registered Scheme, where the Trust is Liquid and where the Trust is not Liquid. The term Liquid is given the meaning in s 601KA of the Corps Act. Given the terms of cl 6.1(a), which gives a Unitholder no right to withdraw other than as determined by the Trustee, many of the provisions are not applicable. The implication arising from reading the provisions as a whole is that sub-cls 6.3 and 6.7 to 6.9 only apply to a Registered Scheme.

The Dictionary includes the following relevant definition:

‘Assets’ includes all property, rights and income of the Trust and any provisions the Trustee considers should be taken into account in determining Assets, but excludes–
(i)Application Money or property paid in respect of which Units have not been issued;

(ii) proceeds from withdrawals which have not yet been paid; and
(iii) any Distributable Amount awaiting payment to Unitholders.

Clause 7, headed ‘Register’ requires OFM to keep and maintain or cause to be kept and maintained an up-to-date Register [of Unitholders] (‘JY Hotel Fund Unitholder Register’ or ‘Register’). By cl 7.3, it is provided that:

Except in the case of manifest error, the Trustee may treat a registered Unitholder as the legal owner of Units registered in the Unitholder’s name on the Register. The Trustee is not required to recognise any beneficial interest held in any Unit.

The Fund must be wound up if the Fund comes to the end of its term as defined in the Constitution.[18] A Class may be terminated if the Trustee issues a notice to Unitholders of that class of the date of termination.[19] The Trustee must proceed with the winding up of the JY Hotel Fund efficiently, diligently and without undue delay. However, if it is in the interests of Unitholders to do so, then the Trustee may postpone any part of the winding up for such time as it thinks desirable.[20]
[18]Constitution cl 19.1 [TB 45].
[19]Ibid cl 19.2 [TB 45].
[20]Ibid cl 19.3(c) [TB 45–46].

Information memorandum

On the date of the establishment of the JY Hotel Fund (4 January 2017), OFM issued an Information Memorandum (‘IM’) the purpose of which was to provide information for prospective Investors to decide whether they wish to invest in the Fund. Class A seek to rely on the IM as a part of the ‘context’ in the construction of the Constitution and the Class A Units Terms of Issue. It provides some background information and explains the purpose of the establishment of the Fund and the structure adopted for investment of funds raised through the issue of Units in the Fund.

The IM refers to the following matters (some of which are agreed facts):

(a) OFM appointed iProsperity Capital Group Pty Ltd (ACN 610 840 018) (‘Capital Group’) as the investment manager of the Fund pursuant to an Investment Management Agreement dated 2017;[21]
[21]Agreed Facts [3].

(b) the Offer made under this IM was only available to persons who qualify as wholesale clients (as defined in s 761G(7) of the Corps Act) or sophisticated investors (as defined in s 761GA of the Corps Act);[22]
[22]Not an agreed fact, but nevertheless common ground as the basis for the managed investment scheme being ‘unregistered’ under the Corps Act.

(c) the Fund intends to indirectly invest in the Novotel Melbourne Glen Waverley, located at 285–287 Springvale Road, Glen Waverley, Victoria (‘Novotel Hotel’ or ‘Hotel’). This investment will be facilitated by the Fund owning all of the units in the Sub Trust, which in turn will acquire the Hotel (if the proposed acquisition is successful);[23]
[23]Essentially an agreed fact: see Agreed Facts [12], [17].

(d) it is intended that the acquisition of the Hotel will be funded by a combination of equity raised under the Offer from Investors through the issue of Class A Units and borrowings from a financial institution at the Sub Trust level. If the equity raised under the Offer and borrowings obtained by the Sub Trust are insufficient to fund the acquisition of the Hotel, then it is intended that the balance of the purchase money may be raised by issuing additional Class B Units (which may include to the Manager, its related parties, associates or affiliates), and/or by issuing underwriting units to an underwriter on terms to be agreed between the Manager and the underwriter. Until the acquisition of the Hotel, the Fund will invest Investors’ monies in Significant Investor Visa (‘SIV’) compliant investments. The Fund is intended to be a complying investment for the purposes of the Old SIV Regime and the New SIV Regime;

(e) the Manager will use a combination of senior debt, capital raised under the IM in the form of Class A Units and equity (Class B Units) to fund the acquisition of the Hotel. The final capital structure of the Fund is not determined. It will be determined once the Manager is able to confirm the terms on which it is able to secure senior debt. When the terms on which the senior debt are provided are determined, the Manager will be able to determine the number of Class A Units required to be issued pursuant to the IM. Depending on the cost and quantum of senior debt the Manager is able to secure, the Manager may elect to issue Class A Units in excess of what is required to complete the acquisition of the Hotel. The Manager might do this if, based on its best estimates of the performance of the Hotel, it considers it necessary to have an additional capital buffer which it could use to fund Coupon Payments to Investors. For example, if the income generated from the Hotel is not sufficient to meet the interest on the senior debt, pay the expenses of the Fund and meet the Coupon Payments, the Manager may elect to satisfy Coupon Payments from surplus capital;

(f) the Manager intends to provide Investors with payments at a fixed coupon return rate (after all fees and costs but before tax) on the amount they invest in the Fund (Coupon Payments). During the Minimum Investment Term (three years from acquisition of the Hotel), it is intended that these Coupon Payments will be at a fixed coupon rate of 6.5% per annum (Initial Coupon Rate), paid semi-annually;

(g) as of the date of the IM, there will be two classes of Units in the Fund: Class A Units and Class B Units. The Units available for subscription by Investors under the Offer are Class A Units only. Class A Units are governed by the provisions of the Constitution and the Terms of Issue. Class A Units entitle Investors to Coupon Payments on the amount they invest in the Fund. These payments are made in priority to the payment of the Manager’s performance fee (if any) and in priority to any distributions of income or capital to the holders of any other Unit class. Investors are entitled to the return of capital in respect of their Class A Units upon a winding up of the Fund in priority to other Unit classes. However, following the return of capital in respect of their Class A Units, Investors are not entitled to participate in the surplus assets of the Fund on a winding up. Class B Units are a separate class of Units which may be issued to the Manager, its related parties, associates or affiliates. Class B Units are governed by the provisions of the Constitution. Class B Units entitle Class B Unitholders to participate in the surplus assets of the Fund on a winding up;[24]
[24]Information Memorandum for the JY Hotel Fund, cl 2.7 [TB 89] (‘IM’).

(h) Class A Units will be issued at an application price of $1.00 each. The minimum initial investment is $500,000.00. However, the Trustee may accept a lower amount from Investors who meet the criteria for a Qualifying Investor in its absolute discretion. Following the minimum initial investment, Investors may invest additional funds at the Trustee’s discretion.[25] In particular:[26]
[25]Ibid cl 2.10 [TB 90].
[26]Ibid cl 2.12 [TB 90].

Investors holding Class A Units are entitled to Coupon Payments on the amount they invest in the Fund. These payments are made in priority to the payment of the Manager’s performance fees (if any) and in priority to any distributions of income or capital to the holders of any other Unit class.
In addition to funding Coupon Payments with cash from operations, the Trustee may raise additional capital from Investors and may use this capital to fund Coupon Payments. However, if there is a deficit of funds available to make Coupon Payments to Investors, then to the extent necessary the Manager will forgo performance fees owed to it (if any) in relation to the Fund and apply these amounts towards Coupon Payments to Investors before the Manager draws on any capital to meet Coupon Payments.
During the Minimum Investment Term, it is intended these Coupon Payments will be at the Initial Coupon Rate.
Following the Minimum Investment Term, the Manager intends to provide Investors who are still invested in the Fund with Coupon Payments at the Subsequent Coupon Rate, which may be higher or lower than the Initial Coupon Rate.
Coupon Payments to Investors will be made semi–annually following each payment period.
However, if it is not possible to pay the full amount of a Coupon Payment to each Investor for a payment period, then Coupon Payments will be paid by instalments on a pro-rata basis to Investors, with the amounts owing to each Investor carried forward into the next payment period.
Other than Coupon Payments, Investors holding Class A Units are not entitled to any income distributions from the Fund.

(i) in relation to withdrawals of Class A Units, the IM provides:[27]

The Fund is illiquid and does not offer regular liquidity. You will not have a right to withdraw your investment until six years after the Settlement Date (Redemption Term).
Once the Minimum Investment Term has expired, the Trustee may (at its discretion) make withdrawal offers to all Investors who hold Class A Units prior to the expiry of the Redemption Term.
However there is no guarantee the Trustee will make a withdrawal offer at the end of the Minimum Investment Term, nor is there any guarantee the Fund will have sufficient liquidity to fund all withdrawal requests made in response to a withdrawal offer.
In addition, the Trustee has the discretion to compulsorily redeem any or all Investors’ Class A Units at any time before the expiry of the Redemption Term. This means Investors who do not wish to avail themselves of a withdrawal offer made by the Trustee may nonetheless have their Class A Units redeemed once the Minimum Investment Term has expired or at any other time that the Trustee determines prior to the expiration of the Redemption Term.
Once the Redemption Term has expired, Investors who still hold Class A Units have a right to redeem their investment in the Fund. It is intended a liquidity event will then take place to redeem Investors’ Class A Units, which may involve the sale of the Hotel and/or the winding up of the Fund. At this time, if the Trustee has used capital to make Coupon Payments and the value of the Hotel has not increased by a corresponding amount, then there will be insufficient funds to return $1.00 per Class A Unit to Investors.
[27]Ibid cl 2.13 [TB 91].

Class A Units Terms of Issue

By the Class A Units Terms of Issue (‘Class A Terms’):

(a) where there is an inconsistency between the terms of the Constitution and the Class A Terms, then the Class A Terms shall prevail;[28]
[28]Class A Terms, cl 1(b) [TB 130].

(b) the rights, obligations and restrictions attaching to the Class A Units are set out in the Class A Terms;[29]
[29]Ibid cl 2(a) [TB 131].

(c) any other rights, obligations and restrictions attaching to Class A Units are as set out in the Constitution, except to the extent of any inconsistent provision in the Class A Terms;[30]
[30]Ibid cl 2(b) [TB 131].

(d) each Class A Unitholder is entitled to receive the Coupon for each Coupon Period on a pro rata basis in accordance with the number of days the Class A Unitholder has held Class A Units during the relevant Coupon Period.[31] Coupon Period means the period commencing on the Settlement Date and ending on 30 June 2017, and each successive period of six months thereafter (ending on 31 December or 30 June, as the case may be, in each calendar year) except that the last such period will end on the Redemption Date and may be a period of less than six months;
[31]Ibid cl 4.1(a) [TB 131].

(e) the Settlement Date is the date of settlement of the acquisition of the Novotel Hotel by the Sub Trust. The Redemption Date is the date that is six years from the Settlement Date;[32]
[32]Ibid cl 1 [TB 131].

(f) the payment of any Coupon is subject to there being funds available for the payment of such entitlements, which if the Trustee determines can include capital of the Fund.[33] If any Coupon cannot be paid, for any reason, on the due date for payment—
[33]Ibid cl 4.2(a) [TB 132].

(iv) the payment of those entitlements may be deferred by the Trustee to a later Coupon Date or paid by instalment on a pro-rata basis as the Trustee determines in its absolute discretion; and

(v) any such deferral or payment by instalment will not be a default by the Trustee of these Terms of Issue or the Constitution.

(g) under the heading of ‘Priority’, cl 4.4 provides:[34]
[34]Ibid cl 4.4 [TB 131–2] (emphasis added).

(a) Each Class A Unitholder holder shall have—
(i)the right to rank for payment of all unpaid, unsatisfied or deferred Coupons (whether earned or declared or not) in priority to the holders of all other classes of units; and
(ii)no right to any further participation in the profits or assets of the Fund other than to receive payment of the Redemption Amount within a reasonable time after the Redemption Date.

(b)Any available profits of the Fund shall be applied first in paying any Coupon in accordance with these Terms of Issue.

(h) under the heading ‘No Reduction in entitlements’, cl 4.5 provides:[35]
[35]Ibid cl 4.5 [TB 133] (emphasis added).

Despite anything to the contrary in the Constitution, the Trustee must not create or issue units in any class of units which would reduce or limit in any way the right of the Class A Unitholders to receive the Coupons.

(i) Class A Units do not confer on their holders any beneficial entitlement to any assets of the Fund or any right to participate in the surplus assets of the Fund on a winding up or termination of the Class A Units.[36]
[36]Ibid cl 6 [TB 133].

(j) under the heading ‘Redemption’, cl 7 provides:[37]
[37]Ibid cl 7 [TB 133–4]

7.1 Redemption Date
Subject to the Act and clause 7.5, on the Redemption Date, each Class A Unit shall be redeemed by payment in cash by the Trustee of the Redemption Amount to the holder of that unit. The Redemption Amount is payable 60 Business Days after the Redemption Date.

7.2 No General right of redemption
(a)Class A Unitholders have no right to require the Trustee to redeem any Class A Units before the Redemption Date.
(b)Notwithstanding clause 7.2(a) and subject to clause 7.5, at any time before the Redemption Date, the Trustee, in its absolute discretion, may offer to redeem the Class A Units by payment in cash of the Redemption Amount to the holders of those units.

7.3Preference on a winding up
(a)Class A Unitholders are entitled on a winding up of the Fund or termination of the Class A Units before the Redemption Date to payment of the Redemption Amount in priority to any return of capital or payment of any distributions to the holders of all other classes of units.
(b)For the avoidance of doubt, the priority in clause 7.3(a) does not apply if winding up of the Fund or termination of the Class A Units occurs after the Redemption Date.

7.4 Compulsory redemptions
For clause 6.4(b) of the Constitution and subject to clause 7.5, at any time before the Redemption Date, the Trustee in its absolute discretion may redeem the Class A Units by payment of the Redemption Amount to the holders of those units.

7.5 Payment of the Redemption Amount
The Trustee may pay the Redemption Amount by instalment on a pro-rata basis, as the Trustee determines in its absolute discretion.

Class C Units Terms of Issue

Like the Class A Terms, the Class C Units Terms of Issue (‘Class C Terms’) together with the terms of the Constitution, define the rights, obligations and restrictions attaching to the Class C Units in the JY Hotel Fund. Clause 2 provides:[38]

(a) The rights, obligations and restrictions attaching to the Class C Units are set out in these Terms of Issue.
(b) Any other rights, obligations and restrictions attaching to Class C Units are as set out in the Constitution, except to the extent of any inconsistent provision in these Terms of Issue.

[38]Class C Terms, cl 2(a) [TB 220].

Thus the Class C Terms prevail in the event of any inconsistency between the two.[39] The Class C Terms refer to, as defined terms, the Class A Units, the Class A Coupons and the Class A Terms.[40] As with the Class A Units, the issue price was $1.00.
[39]Class C Terms, cl 1(b), 2(b) [TB 220].
[40]Class C Terms, cl 1(c) [TB 220].

The Class C Terms entitle the Class C Unitholders to:[41]

(a) a ‘Coupon’, which accrues daily at an annual rate of 13 per cent and is payable in arrears approximately every six months (on each ‘Coupon Date’) until the ‘Redemption Date’ (‘Class C Coupon’);[42] and

(b) a ‘Redemption Amount’, payable after the Redemption Date, comprising the aggregate of the ‘Issue Price’ of the Class C Unit and any accrued and unpaid Coupon (‘Class C Redemption Amount’).[43]

[41]Agreed Facts [29].

[42]Class C Terms, cl 4.1 [TB 223].

[43]Class C Terms, cl 7.1 [TB 225].

Clauses 4.2 and 4.3 provide:

4.2 Cumulative distribution entitlements
(a) The payment of any Coupon is subject to there being funds available for the payment of such entitlements, which—
(i) if the Trustee determines, can include capital of the Trust; and
(ii) must be determined following payment of the Class A Coupon to the Class A Unitholders.[44]
[44]Emphasis added.

(b) The Coupon cannot be paid in breach of any applicable law or any agreement to which the Trustee is a party.
(c) If any Coupon cannot be paid, for any reason, on the due date for payment—
(i) the payment of those entitlements may be deferred by the Trustee to a later Coupon Date or paid by instalment on a pro-rata basis as the Trustee determines in its absolute discretion; and
(ii) any such deferral or payment by instalment will not be a default by the Trustee of these Terms of Issue or the Constitution.

4.3 Priority
(a) Each Class C Unitholder shall have—
(i) the right to rank for payment of all unpaid, unsatisfied or deferred Coupons (whether earned or declared or not) in priority to the holders of all other Classes, other than Class A Units; and[45]
[45]Emphasis added.
(ii) no right to any further participation in the profits or assets of the Trust other than to receive payment of the Redemption Payment within a reasonable time after the Redemption Date.

(b)Any available profits of the Trust shall be applied—
(i) first in paying any Class A Coupon to the Class A Unitholders in accordance with the Class A Units Terms of Issue; and
(ii) then in paying any Coupon to Class C Unitholders in accordance with these Terms of Issue.
(emphasis added)

Further relevant facts

OFM acts in separate capacities as the trustee of the following trusts:[46]
[46]Agreed Facts [2].

(a) Glen Waverley Fund (‘GWF’) (the second defendant);

(b) iProsperity Cornerstone Property Income Fund (‘Income Fund’) (the third defendant),

(c) iProsperity Property Opportunities Fund (‘Opportunities Fund’) (the fourth defendant); and

(d) the Cornerstone New SIV Bond Asset Trust (‘New SIV Bond Fund’).

OFM formerly acted as the trustee of the iProsperity Cornerstone 333 Kent Fund (‘333 Kent Fund’) (the fifth defendant). The 333 Kent Fund was wound up on or about 29 June 2021 and OFM distributed the Class C Units in the JY Hotel Fund held by the 333 Kent Fund to the 13 Unitholders (two Unitholders hold their units jointly) in the 333 Kent Fund (‘Kent Fund Unitholders’) on 23 June 2021.[47]
[47]Ibid [4]. Class C Unit Movement Report [TB 552–554].

There are three classes of units in the JY Hotel Fund: Class A, Class B and Class C. The rights of the Class B Unitholders are not affected by this proceeding, because their entitlement is limited to a share in profits of the JY Hotel Fund, of which there are none.[48]
[48]Agreed Facts [5].

Each of the plaintiffs, the second, third and seventh defendants are Class A Unitholders in the JY Hotel Fund.[49] The third and fourth defendants and the Kent Fund Unitholders[50] are the Class C Unitholders in the JY Hotel Fund.[51]
[49]Ibid [6].
[50]All Class Unit Movement Report [TB 478–80].
[51]Agreed Facts [7].

From 24 January 2017 onwards, on the dates stated in the Unit Movement Report (the All Class Unit Movement Report), OFM issued the Class A Units to the Class A Unitholders.[52] OFM has issued 26,430,000 Class A Units for $1.00 each.[53] Before the issue of Class A Units, OFM gave each person who became a Unitholder, or their agent, the Constitution, the IM, the Class A Terms and a Class A application form.[54]
[52]All Class Unit Movement Report [TB 478–480]; Agreed Facts [9].
[53]Agreed Facts [10], [33].
[54]Ibid [11].

On 3 February 2017, 10 February 2017 and 22 February 2017, the trustee of the Sub Trust paid deposits of $2,000,000.00, $2,683,333.30 and $2,683,333.36, totalling $7,366,666.66, for the acquisition of the Novotel Hotel.[55]
[55]Ibid [12].

From 13 April 2017 onwards, on the dates stated in the All Class Unit Movement Report[56] and Unit Movement Report for Class C Units[57] (‘Class C Unit Movement Report’), OFM issued the Class C Units to the Class C Unitholders (with the Kent Fund Unitholders’ units being issued to the fifth defendant).[58] On about 13 April 2017, the fifth defendant (OFM as trustee of the Opportunities Fund) applied for 5 million Class C Units in the JY Hotel Fund.[59]
[56]All Class Unit Movement Report [TB 478–480].
[57]Class C Unit Movement Report [TB 552–554].
[58]Agreed Facts [13].
[59]Ibid [2], [14].

OFM issued 8,170,000 Class C Units for the unit prices set out at the Class C Unit Movement Report.[60] The JY Hotel Fund Unitholder Register records the Class C Units as remaining on issue.[61]
[60]Class C Unit Movement Report [TB 552–554].
[61]Updated JY Hotel Fund Unit Register [TB 547–551]; Agreed Facts [15].

On 18 April 2017, the Sub Trust acquired the Novotel Hotel by paying the balance of the purchase price, being $66,300,000.00, by a combination of funds (raised from Class A and Class C investors) and third-party financing.[62] The Settlement Date as defined in the Class A Terms (and the Class C Terms) is therefore 18 April 2017.[63] The Redemption Date as defined in the Class A Terms as the date that is six years from the Settlement Date, is therefore 18 April 2023 (the Class A Redemption Date).[64]
[62]Agreed Facts [17].
[63]Ibid [18].
[64]Ibid [19].

Under the Class C Terms, the Redemption Date is 18 April 2018. However there was no redemption (in the sense of redemption by payment) of Class C Units on that date or subsequently. A circulating resolution of the Class C Unitholders records that the Redemption Date as defined in the Class C Terms was amended to be 24 April 2020. OFM has not identified any documents that confirm the date of the execution of the circulating resolution.[65]
[65]Ibid [20].

Between 13 October 2017 and 13 December 2019, OFM paid to the Class A Unitholders the Class A Coupons for the coupon periods up to and including 30 June 2019, over five instalments as set out in the Transaction Detail by Account.[66]
[66]Ibid [23]; JY Hotel Fund Transaction Detail by Account [TB 472].

In around July 2019, the Sub Trust sold the Novotel Hotel for $88,300,000.00 (‘Sale Contract’). On about 21 August 2019 and 6 September 2019, OFM received $11,500,000.00 and $1,900,000.00, respectively, in relation to the deposit paid by the purchaser under the Sale Contract (‘Hotel Sale Proceeds’).[67]
[67]Agreed Facts [24]; NAB Bank Statement for August–September 2019 [TB 245–246 and TB 253–254].

On or about 29 August 2019, the JY Hotel Fund invested $11.5 million of the Hotel Sale Proceeds in units in the New SIV Bond Fund.[68] On or around 10 September 2019, the JY Hotel Fund invested a further $1.7 million of the Hotel Sale Proceeds in units in the New SIV Bond Fund.[69] The New SIV Bond Fund invested in a portfolio of debentures issued by the Agricultural Land Trust (‘Debentures’ and ‘ALT’, respectively). ALT on-lent the proceeds of the Debentures to IPU (‘IPU Loans’).[70] On about 3 April 2020, OFM, in its capacity as trustee of the New SIV Bond Fund sent to investors in the New SIV Bond Fund an investor update.[71] That investor update revealed that IPU had defaulted on the IPU Loans and the New SIV Bond Fund was unable to meet redemption requests or pay income distributions. The New SIV Bond Fund had sent a Notice of Default to the ALT.[72]
[68]Agreed Facts [25]; NAB Bank Statement for August 2019 [TB 245–246]; Cornerstone New SIV Bond Fund Application Form [TB 231–244].
[69]Agreed Facts [26]; NAB Bank Statement for September 2019 [TB 253–254]; Cornerstone New SIV Bond Fund Application Form and email [TB 247–252].
[70]One Investment Group Investor Update [TB 255]; JY Hotel Fund Investor Update [TB 277].
[71]Agreed Facts [27]; One Investment Group Investor Update [TB 255–256].
[72]One Investment Group Investor Update [TB 255].

On or around 1 September 2020, the OFM paid $11,910,442.00 to Class A Unitholders comprised of:

(a) $1,407,306.98 less tax of $89,558.00, in payment of Class A Coupons for the period 1 July 2019–24 April 2020;[73] and

(b) $10,592,693.02.[74]

[73]Agreed Facts [28(1)].

[74]Ibid [28(2)], [34].

OFM has not identified any resolutions, board minutes or similar documents that refer to or record the basis upon which the payment of $10,592,693.02 was made to the Class A Unitholders.[75]
[75]Ibid [34].

The various payments to Class A Unitholders are recorded in the Transaction Detail by Account, the Coupon Payment Request Form dated 1 September 2020 and the First Distribution Report dated 27 August 2020 and the Return of Capital Payment Request Form dated 1 September 2020 and Second Distribution Report dated 27 August 2020. The Transaction Detail by Account does not record any payments to Class C Unitholders whether Class C Coupons or the Class C Redemption Amount.[76]
[76]Ibid [30].

OFM’s position is that at no time from the inception of the JY Hotel Fund until the date of the Agreed Facts have the Class C Unitholders received the accrued Coupons or the capital component of the Class C Redemption Amount.[77]
[77]Ibid [31].

The Current Balance Sheet records unpaid Class A Coupons in the amount of $3,176,498.00.[78]
[78]Ibid [32].

The Current Balance Sheet records unpaid Class C Coupons in the amount of $2,834,894.08. The Class C Coupons stopped accruing on the Redemption Date for the Class C Units. This date is not agreed by the parties, but is either 18 April 2018 or 24 April 2020. In preparing the Current Balance Sheet, OFM has treated the Redemption Date for the Class C Units as having been 24 April 2020.[79]
[79]Ibid [35].

The JY Hotel Unitholder Register records 8,170,000 Class C Units on issue. The Class C Terms record the issue price of the Class C Units as being $1.00.[80]
[80]Ibid [36].

As at 28 February 2023, the JY Hotel Fund held approximately $0.4 million in cash and approximately $7.5 million in bonds issued by NAB and ANZ Bank and interest on those bonds.[81]
[81]Ibid [37].

Jurisdiction under r 54.02 of the Rules

Rule 54.02 of the Rules provides:

Relief without general administration
(1)A proceeding may be brought for any relief which could be granted in an administration proceeding and a claim need not be made for the administration or execution under the direction of the Court of the estate or trust in respect of which the relief is sought.
(2)Without limiting paragraph (1), a proceeding may be brought for—
(a)the determination of any question which could be determined in an administration proceeding, including any question—
(i)arising in the administration of an estate or in the execution of a trust;
(ii)as to the composition of any class of persons having a claim against an estate or a beneficial interest in an estate or in property subject to a trust; or
(iii)as to the rights or interests of a person claiming to be a creditor of an estate or to be entitled under the will or on the intestacy of a deceased person or to be beneficially entitled under a trust;

(b)an order directing an executor, administrator or trustee to—
(i)furnish and, if necessary, verify accounts;
(ii)pay funds of the estate or trust into court; or
(iii)do or abstain from doing any act;

(c)an order—
(i)approving any sale, purchase, compromise or other transaction by an executor, administrator or trustee; or
(ii)directing any act to be done in the administration of an estate or in the execution of a trust which the Court could order to be done if the estate or trust were being administered or executed under the direction of the Court.

There is no dispute that pursuant to this Rule, the Court has jurisdiction to answer the Questions, with the possible exception of Question 1, and the direction sought. Many of the authorities concerning the exercise of the powers of the Court pursuant to r 54.02 concern a trustee of a trust or a personal representative of an estate of a deceased person seeking judicial advice of the Court, commonly called a Bedoe Application in this jurisdiction after the decision in In re Beddoe; Downes v Cottam.[82] But as both the words of the Rule and its history make clear, it extends to enabling a beneficiary, or a Class of beneficiaries, to approach the Court to answer questions affecting the administration or execution of trusts by the trustee.
[82][1893] 1 Ch 547.

Without undue recourse to the history of the Rule, it is enough to note what the High Court said in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand[83] about the origins of s 63 of the Trustee Act 1925 (NSW) and of the corresponding Rules of Court in this jurisdiction. The majority noted the earlier English Rules:[84]
[83](2008) 237 CLR 66 (‘Macedonian Church St Petka’).
[84]Ibid [41].

In England another means by which judicial advice could be given to trustees without an administration order was developed. The RSC 1883, O 55 r 3(e)-(g), provided:
‘The executors or administrators of a deceased person or any of them, and the trustees under any deed or instrument or any of them, and any person claiming to be interested in the relief sought as creditor, devisee, legatee, next of kin, or heir-at-law or customary heir of a deceased person, or as cestui que trust under the trust of any deed or instrument, or as claiming by assignment or otherwise under any such creditor or other person as aforesaid, may take out, as of course, an originating summons returnable in the chambers of a judge of the Chancery Division for such relief of the nature or kind following, as may by the summons be specified and as the circumstances of the case may require, (that is to say,) the determination, without an administration of the estate or trust, of any of the following questions or matters: —
…
(e) directing the executors or administrators or trustees to do or abstain from doing any particular act in their character as such executors or administrators or trustees;
(f) the approval of any sale, purchase, compromise, or other transaction;
(g) the determination of any question arising in the administration of the estate or trust.’ (emphasis added)

This Rule is one of the predecessors of r 54.02. The court has a broad jurisdiction and power under s 54.02 to direct a trustee in relation to the performance of their trusts.[85] The Rule has application to questions concerning the proper construction of a trust instrument, and as to the proper administration or execution of an estate or trust.[86]
[85]Hornsby v Playoust (No 2)[2005] VSC 125, [10] (Mandie J), referring to Re Green (dec’d) [1972] VR 848, 850; Templeton v Leviathan Pty Ltd (1921) 30 CLR 34, 41, 74; Re Atkinson (dec’d) [1971] VR 612, 615 (Gillard J).
[86]CPSU v UniSuper Ltd(2020) 64 VR 108; [2020] VSC 825; [87] (Delany J).

Some of the principles that have been distilled from the authorities concerned with the judicial advice aspect of the Rule are relevant here:

(a) the procedure is a summary procedure, intended to enable questions arising in the administration of an estate or a trust to be resolved cheaply and simply[87] and operate as an exception to the Court’s ordinary function of deciding disputes between competing litigants;[88]
[87]Macedonian Church St Petka (n 83) 90–1 [61]–[63] (Gummow A-CJ, Kirby, Hayne and Heydon JJ) (references to this decision are to the joint judgment unless stated to the contrary); Re The Macedonian Orthodox Church Community ‘Saint Dimitrij Solunski’ Springvale Inc [2020] VSC 274, [33(b)] (‘Re The Macedonian Church Saint Dimitrij Solunski’).
[88]Macedonian Church St Petka (n 83) 91 [64]; Re The Macedonian Church Saint Dimitrij Solunski (n 87) [33(b)].

(b) the summary nature of the procedure is important to an understanding of the evidence the Court is entitled to rely upon in giving its advice. That evidence is ordinarily untested. The extent of the information available to the Court and its apparent reliability are factors going to the exercise of the discretion to give the advice. That is,

… while the time and cost involved in giving judicial advice at an early stage of litigation, when the issues involved in disputes about rights may not be fully sharpened and it may not be possible for the factual position to be as efficiently exposed as in a trial, may be factors relevant to a decision not to grant judicial advice but to let the matter be examined in conventional litigation, they are not factors which either automatically bar judicial advice or are so weighty as generally to compel the court not to grant the advice.

(c) the purpose of the procedure is to enable a trustee or executor [or beneficiary] to obtain the direction or opinion of the Court on a matter of administration or management, or as to the construction of the will or trust instrument, without the need to commence an administration suit with all its attendant delay and cost;[89]

(d) there is but one jurisdictional bar to relief: the applicant must point to the existence of a question respecting the management or administration of the trust property or a question respecting the interpretation of the trust instrument.[90]

[89]Macedonian Church St Petka (n 83) 91 [64]; Morris v Smoel [2013] VSCA 11, [22]; Re The Macedonian Church Saint Dimitrij Solunski (n 87) [33(c)]–[33(d)].

[90]Macedonian Church St Petka (n 83) 89–90 [58]; Re The Macedonian Church Saint Dimitrij Solunski (n 87) [33(f)].

Construction principles

There is no real difference between the approach of the combatants to the construction of the Constitution and Class Terms. Each agree that the principles applicable to the construction of contracts is applicable with the modification that the constituent documents are not multiparty instruments, but are in the nature of deeds poll. Class A relied in particular on the decision of the Court of Appeal in Adaz Nominees Pty Ltd v Castelway Pty Ltd (‘Adaz Nominees’),[91] whilst Class C referred in particular to Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (‘Mount Bruce’),[92] tempered by reference to authorities related to the interpretation of managed investment schemes and constitutions.[93]
[91][2020] VSCA 201, [70] (Whelan JA and Riordan AJA) (‘Adaz Nominees’).
[92](2015) 256 CLR 104, 116 [47] (French CJ, Nettle and Gordon JJ) (‘Mount Bruce’).
[93]AvSuper Pty Ltd v Commonwealth Managed Investments Ltd (2010) 81 ACSR 218, [37] (‘AvSuper’).

In my view, out of the welter of authorities to which reference is made, it is sufficient to refer to the basal principles set out in Mount Bruce with some additional observations drawn from decisions on managed investment schemes and constitutions. In Mount Bruce, French CJ, Nettle and Gordon JJ said about the construction of a contract:[94]

The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.

Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.

[94]Mount Bruce (n 92) 116 [46]–[50] (French CJ, Nettle and Gordon JJ) (citations omitted).

The observations of the majority in Adaz Nominees are in accord with this statement of principles in Mount Bruce, in particular that:[95]

… evidence of mutually known objective background circumstances relevant to the purpose is admissible ‘no matter how clear the “ordinary meaning” of the words’. Identification of purpose may allow admission of evidence of the genesis of the transaction, the background, the context and the market in which the parties are operating.[96]

[95]Adaz Nominees (n 91) [70]; citing Lopes v Taranto [2018] VSCA 288, [66]–[72] (Kyrou, McLeish and Hargrave JJA), quoted with approval in Canale v G W & R Mould Pty Ltd [2018] VSCA 346, [45] (Whelan and McLeish JJA, with whom Tate JA agreed).

[96]Mount Bruce (n 92) 116–7 [46], [49] (French CJ, Nettle and Gordon JJ).

As Class C submitted, the principles that apply to the construction of commercial contracts apply also to the interpretation of trusts inter vivos,[97] including the constitutions of managed investment schemes.[98] The qualification that must be made to these principles in the case of a deed poll or like instrument is the absence of ‘mutually known objective background circumstances’. Thus, the range of these circumstances is more limited in this context than as regards some other commercial contracts.[99] The surrounding circumstances include the underlying purpose and object of the commercial transaction,[100] but what other material may be take into account depends on the circumstances of each case.[101] A tight rein may well need to be kept on what should count as surrounding circumstances when construing a company’s constitution,[102] and by parity of reasoning constitutions of the kind considered here. But evidence of surrounding circumstances is not admissible to contradict the language of the Constitution when it has a plain meaning.[103]
[97]Byrnes v Kendle (2011) 243 CLR 253, [17] (French CJ), [53]–[55], [59] (Gummow and Hayne JJ), [102]–[105] (Heydon and Crennan JJ); Segelov v Ernst & Young Services Pty Ltd (2015) 89 NSWLR 431, [83] (Meagher JA; Gleeson and Leeming JJA agreeing); Schreuders v Grandiflora Nominees Pty Ltd [2016] VSCA 93, [12] (Ferguson, Kyrou and McLeish JJA); Lewski v Commissioner of Taxation (2017) 254 FCR 14, [119] (Perram, Pagone and Moshinsky JJ); SIF Holdings Pty Ltd v CRC Gosford Pty Ltd (2021) 392 ALR 697, [73] (Payne JA; White and Brereton JJA agreeing) (‘SIF Holdings’).
[98]SIF Holdings (n 97) [73] (Payne JA; White and Brereton JJA agreeing).
[99]AvSuper (n 93) [37].
[100]Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1, [251].
[101]Ibid [251]–[259].
[102]Ibid [259] (Weinberg J agreeing with Finn J as the primary judge).
[103]Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 352 (Mason J), which was affirmed in Mount Bruce (n 92) [52].

Class A Submissions

In essence, Class A submitted that the construction of the Constitution and Class A Terms, read with the IM to reveal their purpose, was that the Class A Unitholders would have both their Coupons and capital returned in priority to Class C Unitholders, notwithstanding that the Class C Redemption Date had passed – either on 18 April 2018 or on 24 April 2020, if the Circular Resolution was effective. That submission involved a number of steps as set out in the following paragraphs.

The JY Hotel Fund Constitution and the Terms of Issue for each of the Class A and Class C Units should be construed objectively[104] by reference to the text of the documents and its ordinary meaning, together with:

(a) the context, being the entire text of the relevant documents including matters referred to in the text; and

(b) the purpose.

[104]Byrnes v Kendle (2011) 243 CLR 253, [59].

Evidence of mutually known objective background circumstances relevant to the purpose is admissible ‘no matter how clear the “ordinary meaning” of the words’.[105]Identification of purpose may allow admission of evidence of the genesis of the transaction, the background, the context and the market in which the parties are operating.[106]
[105]Adaz Nominees (n 91) [70], citing Lopes v Taranto [2018] VSCA 288, [66]–[72] (Kyrou, McLeish and Hargrave JJA), quoted with approval in Canale v G W & R Mould Pty Ltd [2018] VSCA 346, [45] (Whelan and McLeish JJA, with whom Tate JA agreed).
[106]Adaz Nominees (n 91), citing Mount Bruce (n 92) 116–7 [46], [49] (French CJ, Nettle and Gordon JJ).

The identification of the purpose of the constituent documents (the Constitution, the Class A Terms and the Class C Terms) from their terms and the IM was to raise finance for the acquisition by the Sub Trust of the Novotel Hotel, in a manner that was ‘significant investor visa’- compliant.[107]
[107]IM [T81-128], 3, 31.

The Class A Units comprised a 6-year investment and were first in time. The Coupon (interest) rate payable on the Class A Units was 6.5% per annum – a commercial rate having regard to the relatively low risk associated with a first-tier lender’s investment in real property and an established business.

The Class C Terms envisaged that the Class C Units were a short-term investment of approximately one year. The higher Coupon rate of 13% per annum – twice that of the Class A Units’ Coupon rate – reflected the risks for the Class C Unitholders arising from the priority rights of Class A Unitholders.

The context of the JY Hotel Fund’s constituent documents includes the following:

(a) The Class A Terms, and the issue of all but the first plaintiff’s Class A Units, pre-dated the Class C Terms;

(b) OFM prepared and issued the Class A Terms on 4 January 2017, upon the creation of the JY Hotel Fund;

(c) OFM prepared and issued the Class C Terms in early April 2017;

(d) OFM prepared and issued the IM at the same time as it established the JY Hotel Fund and the Class A Terms;[108]

(e) The Class C Terms refer to the existence of the Class A Units, but the Class A Terms do not refer to the Class C Terms; and

(f) The initial Class C Unitholders were the fourth defendant (Opportunities Fund) and Capital Group. The fourth defendant was impressed with the OFM’s knowledge of the Class A Terms, when it acquired the Class C Units.[109] Capital Group was the manager of the JY Hotel Fund when it acquired its Class C Units and was therefore on notice of the Class A Terms.

[108]Agreed Facts [8], [11].

[109]The third, fourth and fifth defendants are trusts of which OFM is also trustee.

It follows that —

(a) The Class A Terms should be interpreted so that the rights and obligations which it creates should be consistent with the Constitution and the contents of the IM, so far as possible (but without regard to the Class C Terms);

(b) The Class C Terms should be interpreted so that the rights and obligations which it creates should operate consistently with the rights and obligations created by the Constitution and the Class A Terms; and

(c) In the event of any potential inconsistency between the Class A Terms and the Class C terms, the Class C Terms should be interpreted so as to operate consistently with the Class A Terms.

Have the Class C Units been redeemed?

The Class C Units have not yet been redeemed. The Class C Terms prescribe that the Class C Units shall be redeemed by payment in cash by OFM to the Class C Unitholder of the relevant Redemption Amount.[110] That means redemption can only occur by payment in cash and ‘only the payment in cash could make redemption occur’.[111] They do not yet have rights which flow from redemption having already occurred (those rights in turn being either as creditors of the JY Hotel Fund in respect of the Class C Redemption Amount, or beneficiaries of a separate trust over assets appropriated for the purpose of making that payment. The Constitution appears to use the words ‘redeem’ and ‘withdraw’ interchangeably, at least in the context of Unitholders.
[110]Class C Terms, cls 7.1–7.2 [TB 220].
[111]Transcript of Proceedings, Shao & Ors v One Funds Management Ltd & Ors (Supreme Court of Victoria, S ECI 2023 00414, Derham AsJ, 6 April 2023), 18 (J Evans KC).

OFM has not paid any Class C Redemption Amounts (Class C Coupon Amounts or the amount of the Issue Price of the Class C Units) to any of the Class C Unitholders.

The Class C Unitholders are still the holders of their units. The evidence compels a factual finding that if OFM was required by the Class C Terms to redeem the Class C Units by, at latest, 24 April 2020, it did not in fact do so, and has not yet done so, because:

(a) OFM is obliged to keep and maintain as up to date, a Register of Unitholders of the JY Hotel Fund.[112] The Register as at 21 April 2020 recorded 8,170,000 Class C Units on issue.[113] The Register as at 24 February 2023 continues to identify 8,170,000 Class C Units on issue.[114]

(b) The Unit Movement Report, which the Trustee maintains to record transfers and redemptions of Units, records that the fifth defendant (333 Kent Fund) transferred its Class C Units in specie to the former unitholders of the 333 Kent Fund in June 2021, after the Redemption Date for the Class C Units had passed.[115] By contrast, in the Unit Movement Report[116] Capital Group is recorded as having redeemed a total of 4,430,000 Class C Units in 2017 and 2018.

(c) OFM, in September 2020, determined to and did pay $11,910,442.00 to the Class A Unitholders, from its available cash resources.[117] There is no suggestion that at any time after that time, OFM had the cash resources to redeem Class C Units in accordance with the requirements of cl 7.1 of the Class C Terms.

[112]Constitution cl 7.1 [TB27].

[113]JY Hotel Fund Unit Holder Register (superseded) [TB 259].

[114]Updated JY Hotel Fund Unit Holder Register [TB 547].

[115]Class C Unit Movement Report [TB 552].

[116]Ibid.

[117]Agreed Facts [28].

Has there been an appropriation of Assets to make Class C redemptions?

The plaintiffs anticipate that the C Class Representative may seek to rely on the definition of ‘Assets’ in the Fund’s Constitution,[118] which provides that the assets of the Fund do not include ‘proceeds from withdrawals which have not yet been paid’, to assert that the Class C Redemption Amount has priority over the payment of Class C Coupon Amounts and any amounts payable to Class A Unitholders; it would do so by analogy with the reasoning of Barrett J in ING Funds Management Ltd v ANZ Nominees Ltd (‘ING v ANZ’).[119] The reasoning in that decision should be distinguished because of the wording of the exception from the ‘Assets’. In that case, ‘proceeds of redemption which have not yet been paid’ could only mean the amounts payable by the Trustee pursuant to the obligation arising upon a unitholders request for redemption. In this case, the different wording ‘proceeds from withdrawals which have not yet been paid’ is referrable to ‘an entire universe’ of situations under cls 6.4 to 6.6 of the Constitution where the proceeds of redemption which have not yet been paid could exist because redemption was possible without the necessity for ‘payment in cash’. I will deal with the decision in ING v ANZ and the Class A and Class C submissions in my consideration of the matter.
[118]Constitution [TB 63].
[119][2009] NSWSC 404, [25]–[27] (‘ING v ANZ’).

Further, the phrase ‘proceeds from withdrawals which have not yet been paid’ – at least in the case of the JY Hotel Fund – properly requires both a ‘withdrawal’ (redemption by the Trustee) and the appropriation by the Trustee of ‘proceeds’ to enable the payment of the obligation which arises on redemption. The wording of cl 7.1 of the Class C Terms (‘the Class C Unit shall be redeemed by payment in cash’) and the latter words of the phrase in the exclusion from Assets in the definition (‘proceeds from withdrawals which have not yet been paid’) further requires that the ‘proceeds’ be cash or cash equivalent, not merely that they be fungible. This issue appears not to have arisen in ING v ANZ.

Thus, the evidence does not support a conclusion that OFM has appropriated any assets of the Fund to make payment of any particular payment obligation of the Fund. The Balance Sheet discloses that the Assets of the Fund are, apart from $400,000.00 in cash, only Bank Bonds, not money. While OFM did, in September 2020, have a significant amount of cash, it applied that money to Class A Unitholder obligations, primarily a partial return of capital to them.

The consequence of either redemption not having occurred, or alternatively no money having been identified and appropriated by OFM to the payment of the Class C Redemption Amount, is that the Class C Redemption Amounts are not liabilities of the JY Hotel Fund payable by OFM in priority to the rights of the Class A Unitholders.

Turning to the Coupon Amounts, neither the Class C Coupon Amounts nor the Class A Coupon Amounts are proceeds from withdrawals which have not yet been paid which sit outside the JY Fund Assets. They are not payable by reason of ‘withdrawal’ or ‘redemption’ of Units, but by reason of the holding of Units.

In the interpretation of both cl 7.1 of the Class C Terms (dealing with redemption of Class C Units), and the phrase ‘proceeds from withdrawals which have not yet been paid’ as an exception to the assets of the Fund, regard must be had to other clauses of the Constitution, the contents of the IM, and the Class A Terms.

Clause 7.3 of the Class A Terms expressly provides for the priority of Class A Redemption Amounts and Class A Coupon Amounts in priority to any return of capital or payment of any distributions to the holders of all other classes of units in the event of a winding up of the Fund or termination of the Class A Units before the Class A Redemption Date. This is also reflected in the IM (see above [23(g)]).

Given the Class C Redemption Date was contemplated to (and did) pre-date the Class A Redemption Date, the Class C Terms cannot be construed in a manner that might undermine OFM’s ability to give effect to the Class A Unitholders’ rights upon a winding up, prior to the Class A Redemption Date; that is, there cannot be an appropriation of the assets of the JY Hotel Fund to pay Class C Unitholders until the Class A Redemption Date has occurred, because the Trustee could not be satisfied that it could meet the Class A Unitholders’ rights to a priority return of capital, should a winding up occur before that date.

Put another way, OFM’s intention, objectively construed, when it issued the Class C Units on the Class C Terms, was to do so in a manner which did not prejudice Class A Unitholders’ rights created pursuant to cl 4.5 of the Class A Terms, prior to the creation of the Class C Units and Class C Terms. If the Class C Terms were construed so as to permit the Class C Redemption Amount to sit outside the JY Fund Assets on and from the Class C Redemption Date (whenever that was), this would disentitle the Class A Unitholders from priority to payment of their outstanding Class A Coupon Amounts, contrary to cl 4.5 of the Class A Terms and the representations in the IM.

The evidence does not support a conclusion that OFM has appropriated any assets of the Fund to make payment of any particular payment obligation of the Fund. The Balance Sheet discloses that the Assets of the Fund are primarily Bonds issued by ANZ and NAB, not money. While OFM did, in September 2020, have a significant amount of cash, it applied that money to Class A Unitholder obligations, primarily a partial return of capital to them.

Priority if no termination of the Fund before the Class A Redemption Date

Whether or not the JY Hotel Fund is terminated, cl 4.3(a) of the Class C Terms and cl 4.4(a) of the Class A Terms expressly provide for the priority of at least Class A Coupon Amounts over Class C Coupon Amounts. Thus, on any view, the first $3,176,498.00 from the Net Assets (upon their conversion to money) must be paid to the Class A Unitholders to satisfy the Outstanding Class A Coupon Amounts.

Class A submit that, properly interpreted, the Class C Terms also provide for the priority of the Class A Redemption Amounts over the Class C Coupon Amounts. Clause 4.3(a) of the Class C Terms provides that Class C rank for payment of Coupons in priority to the holders of all other classes ‘other than Class A Units’. Clause 4.3(a) does not say that Class C rank for payment of Coupons in priority to the holders of all other classes ‘other than Class A Coupon Amounts’. Thus, the priority afforded to Class A Unitholders arguably includes all rights of Class A Unitholders (including to the Class A Redemption Amounts). Such an interpretation is also consistent with the contents of the IM.

However, the Class A Terms do not expressly provide for priority of payment of capital ahead of payments of capital to other unit classes, other than upon a termination of the Class A Units or a winding up of the JY Hotel Fund before the Class A Redemption Date (Winding Up Event).[120] Therefore, it may be that the Court’s preferred interpretation of the constituent documents of the JY Hotel Fund is that, in the absence of a termination of Class A or a winding up of the JY Hotel Fund before the Class A Redemption Date, the Class A Redemption Amount and the Class C Redemption Amount should rank pari passu, after payment of the Class A Coupon Amount and the Class C Coupon Amount.
[120]Class A Terms, cl 7.3 [TB129].

Priority termination of Fund occurs before the Class A Redemption Date

If termination of JY Hotel Fund occurs before the Class A Redemption Date (18 April 2023), the priority of the Class A Coupon Amounts over the Class C Unitholders subsists by reason of cl 4.3(a) of the Class C Terms and cl 4.4(a) of the Class A Terms. Further, by the operation of cl 7.3 of the Class A Terms, upon a Winding Up Event, the Class A Redemption Amounts will have priority over the Class C Coupon Amounts and the Class C Redemption Amounts. The only way in which a termination (and commencement of winding up) of the JY Hotel Fund can occur before 18 April 2023 will be if the Trustee gives a notice to all Unitholders, before 18 April 2023, specifying a date before 18 April 2023 as the date of termination of the Fund, under clause 2.3(a) of the Constitution.[121]
[121]Constitution [TB 16].

[125][2001] NSWSC 473, [29]–[31].

Because the Trust is an unregistered managed investment scheme, the Court has power under s 601EE of the Corps Act to order that it be wound up. But the plaintiffs have not sought to engage that provision.[126]
[126]I note that this is unsurprising as it turns on a person operating a managed investment scheme in contravention of s-s 601ED(5), in effect where the scheme is required to be registered, a matter upon which it is inappropriate to comment.

The Court should not make the directions sought by the plaintiffs. Instead, it should direct that OFM pay the Class C Unitholders the amounts to which they are entitled under cl 7.1 of the Class C Terms.

Consideration
Question 1 – Termination of the Fund

In my opinion, this is not a proper case for the Court to direct OFM as Trustee of the Fund to terminate the Fund pursuant to cl 2.3 of the Constitution, assuming the Court has that power under r 54.02 of the Rules. I form that conclusion for the following reasons, including those advanced by the Class C Representative:

(a) the application for the direction is a bold attempt to obtain the advantage of the operation of the Class A Terms concerned with a winding up where otherwise the Class A Unitholders will suffer a loss in light of the insufficiency of assets in the Fund;

(b) although in the course of argument Counsel for Class A retreated from reliance on some form of actionable result of the alleged representations contained in the IM, it has to be said that the statements relied on in the IM closely reflect the Constitution and the Class A Terms, with some irrelevant exceptions.[127] In short, as Class C submitted, the IM does not provide a proper basis for terminating the Fund, particularly when the effect of the termination will be to the detriment of the Class C Unitholders. If the plaintiffs contend that the IM was misleading or deceptive, the appropriate remedy is for them to take action against OFM (perhaps in their proceedings against OFM that are already on foot in this Court);
[127]For example, in cl 2.3 of the IM there is reference to a ‘Minimum Investment Term’ of three years, which is not referred to in the Class A Terms (see above [23(f)]). Given the power of the Trustee to redeem Class A Units at its discretion (cl 7.2(b) of the Class A Terms), this may have been anticipated to be the holding period of the Novotel Hotel or a time for further capital raising at a lower interest rate.

(c) I fail to see how the fact, if it be a fact, that termination of the Fund was contemplated by OFM in July 2020 supports terminating the Fund at this point in time;

(d) the Class A reliance on their ‘investment strategy’ argument (see above [84(c)]) does not provide a proper basis for terminating the Fund, as Class C submit. Class A have been on notice of OFM’s withdrawal from the Hotel investment and its decision to make the related party investment in the New SIV Bond Fund for a long time. Further, Class A’s complaints about those matters form part of its claim against OFM in the other proceeding. The sale of the Novotel Hotel in August 2019 does not support a very late termination of the Fund, just before the Class A Units come to their Redemption Date, and clearly so as to advance the interests of Class A over Class C Unitholders. The question has to be asked, would it be a proper exercise of the power of OFM now to give a notice of terminating the Fund when it has chosen not to do so in the past and with the result of advancing the interests of Class A over Class C Unitholders? If not, then it would not be proper for the Court to direct it to give that notice. For the reasons already given, it would not be a proper exercise of the power to give such a notice terminating the Fund where to do so can only be to advance the interests of one Class of unitholders over the other;

(e) the argument that the Class C Unitholders acquired their Class C Units while on notice of the rights of the Class A Unitholders to priority of capital on a winding up of the Fund (see above [84(f)]) does not assist the Class A argument. It depends on knowledge that on a winding up the Class A Unitholders will have priority. I fail to see how that justifies advancing the interest of one Class over another by act of the Trustee, in effect, who is bound to take into account the interests of all Classes, as is the Court in making any order;[128]

(f) the priority rights of Class A Unitholders as set out in the Class A Terms, and in the IM, are substantially the same. There is no assistance given by the IM in the construction of those Terms, save to identify more clearly the purpose of raising the funds was to acquire the Novotel Hotel. That adds nothing to the meaning of the Terms, which are clear that it is on a winding up before the termination of the Fund that Class A Unitholders receive their capital in priority to all other unitholders. The ‘priority’ clause (cl 4.4) is limited to unpaid, unsatisfied or deferred Coupons (whether earned or declared or not) in priority to the holders of all other classes of units; whilst the ‘no reduction in entitlements clause’ (cl 4.5) is clearly limited to the Class A Coupon rights. It is only the ‘preference on a winding up’ clause (cl 7.3) that confers on Class A Unitholders payment of the Redemption Amount[129] in priority to any return of capital or payment of any distributions to the holders of all other classes of units; and then only on a winding up of the Fund or termination of the Class A Units before the Redemption Date. The IM does not make any statement that is different in meaning to these clauses; and

(g) it would not be appropriate to make a direction, as a matter of the exercise of the discretion given by r 54.02, which would advance the priority afforded by the Constitution and the Class A Terms to Class A Unitholders over the Class C Unitholders, where otherwise that priority would not be available or enjoyed.

[128]Se below as to the power of the Court under r 54.02(2)(b)(iii) of the Rules.

[129]The Redemption Amount is the aggregate of the issue price of the unit and the accrued and unpaid Coupon: Class A Terms, cl 1(c) (definition of ‘Redemption Amount’).

In making these observations, I have assumed, contrary to the submissions of Class C, that the Court has the power under r 54.02 to make a direction to OFM as the Trustee of the Fund to terminate it and proceed to wind up the Fund. In light of my conclusion as to the exercise of any discretion, to which I have referred, it is not strictly necessary to come to any conclusion on the existence of the power.

However, counsel for OFM referred to the terms of r 54.02(2)(b)(iii) which empower the Court to make an order directing a trustee to do or abstain from doing any act as a possible source of power, and to the decision of the Court of Appeal in Fast v Rockman[130] where the Court said in relation to a judicial advice application that the jurisdiction conferred by r 54.02 confers extensive power on the Court.
[130][2015] VSCA 61, [43].

Counsel for OFM submitted that ‘[t]he rule empowers the Court to determine any question that could be determined in a proceeding for the execution of a trust (r 54.02(2)) and to make a broad range of orders, including an order directing a trustee to “do or abstain from doing any act”: r 54.02(2)(b)(iii)… Having regard to the broad terms in which r 54.02 is framed, there does not appear to be an impediment to the making of such an order, provided that such an order would give effect to the Court’s conclusions on priority.’[131]
[131]One Funds Management Limited (ACN 117 797 403) (in its capacity as Trustee of the iProsperity JY Hotel Fund, ‘Outline of Submissions of the First Defendant’, Submission in Shao & Ors v One Funds Management Ltd & Ors, S ECI 2023 00414, 31 March 2023, [40]–[41].

In Fast v Rockman, the Court was hearing an appeal against the refusal of the primary judge to give judicial advice that was considered hypothetical. There was no consideration of the extent of the power in circumstances like those facing the Court in this case.

However, in Westfield,[132] Einstein J considered the extent of the power conferred by the NSW equivalent of r 54.02 of the Rules. His Honour considered the origins of the Rule and the basis of the jurisdiction being dependant on the power of the Court in an administration suit. Without going into the matter fully, it is sufficient to say that the Rule does not confer jurisdiction to decide questions which could not have been decided in an administration suit.[133] The essential limitation, for present purposes, is that the power of the Court in an administration suit extends to authorise a direction to trustees to do or abstain from doing some act within the scope of their trust.[134] If this is a correct statement of the extent of the power under r 54.02(2)(b)(iii), then in this case the Court does have that power:

(a) to terminate and wind up a Class, because OFM has that power under cl 19.2 of the Constitution; and

(b) to terminate the Fund through the giving of a notice pursuant to cl 2.3(a) of the Constitution, which results in the Fund coming to the end of its term (cl 19.1(a)).

[132]Westfield (n 124).

[133]Ibid [40].

[134]Ibid [41], citing Suffolk v Lawrence (1884) 32 WR 899 and Hudson v Gray (1927) 39 CLR 473, 501–502.

Question 4 – Priority if the Fund is not terminated
Have the Class C Units been redeemed?

It is the answer to this question that underpins the order of priorities to be declared under Question 4. That is because, in short, if the Class C Units have been ‘redeemed’, in the sense that OFM holds assets representing moneys due to Class C Unitholders either as creditors or beneficiaries, then substantially all the current assets of the Fund will go to the Class C Unitholders in preference to Class A Unitholders.

The answer to the question lies in the construction of the Constitution, in particular in the meanings to be ascribed to ‘redeem’ and ‘withdraw’, as well as the excision from the ‘Assets’ of the Fund of ‘proceeds from withdrawals which have not yet been paid’.[135] Despite Class A surmising that the Constitution uses ‘redeem’ and ‘withdraw’, and their participles, interchangeably, their argument requires both a ‘withdrawal’ (in the sense of a redemption by the Trustee) and the appropriation by the Trustee of ‘proceeds’ to enable the payment of the obligation which arises on redemption. The argument also requires the decision in ING v ANZ to be distinguished.
[135]See Constitution sch 1 (definition of ‘Assets’) [TB 63].

I agree with the submissions made by Class C in both the construction of the Class Terms (see above [86]) and in relation to their answer as to the present question that the Class C Units have been redeemed (see above [87]–[91]). I come to those views for the reasons set out in the following paragraphs.

Although the use of the words ‘redeem’ and ‘withdraw’ are not always used consistently in the Constitution, in general, ‘withdraw’ describes the action by a unitholder (including in response to an offer to withdraw made by the Trustee – see Constitution cls 5.2(b), 6.3, 6.6, 6.9 and 29.5(a)) that leads to a redemption by the Trustee. The word ‘withdrawal’ is also used to describe the result of, and the process leading to, a redemption. So, as I have pointed out (see above [18(a)]), units may be redeemed at a ’withdrawal price’ (Constitution cl 5.1). The ‘withdrawal’ procedures in cl 6 of the Constitution are apt to describe how either a unitholder or the Trustee proceeds to a redemption of units. Thus, in my view, when it comes to the use of the word ‘withdrawal’ in the definition of the Assets, it embraces the result of a redemption of Units in the Fund. In this way, the expression: ‘proceeds from withdrawals which have not yet been paid’, describes the proceeds of a redemption, if that has occurred.

The next matter to consider, then, is whether there has been a redemption of the Class C Units. There is no dispute that the Redemption Date for the Class C Units has passed and that no payments to the unitholders have been made. Whether there has been a redemption of the Class C Units turns in the first place on the argument by Class A that the requirements of cl 7.1 of the Class C Terms should not be seen as satisfied, merely by the arrival of the Redemption Date, but rather that in order for redemption to occur, OFM also needs to identify and appropriate an amount of money for the purpose of paying the Class C Redemption Amount, in order to satisfy the requirement for ‘redeemed by payment in cash’. Class C responds that the need for an appropriation is unsupported – whether by the text of the Constitution, the text of the Class C Terms, or by reference to any relevant authority or principle. This brings me to the debate about the application of the decision in ING v ANZ.

Does the decision in ING v ANZ apply to the Class C redemption?

I will not set out again the contentions to which I have referred, but go to the decision. The decision arose out of the termination of a registered managed investment scheme, by the responsible entity, where before the termination there had been redemption requests made by members of the trust. The issue was whether under the constitution of the trust the members who had requested redemption before termination were entitled to receive their monies in fulfilment of their redemption requests, notwithstanding the trust’s termination.

It is necessary to set out the provisions of the constitution in order to understand the logic of the decision and how it applies, or not, to this case. Clause 7.1 of the trust’s constitution provided for members to request redemption of some or all of their units:

7.1A member may make a request for the redemption of some or all of their Units in any manner approved by the Responsible Entity and, while the Trust is Liquid and before the Trust is terminated, the Responsible Entity must give effect to that request at the time and in the manner set out in this clause 7.
7.2A Member may not withdraw a redemption request unless the Responsible Entity agrees.
7.3If, after a Member has made a redemption request, the Trust ceases to be Liquid, the redemption request is deemed to be withdrawn unless the Trust becomes Liquid again within 5 Business Days.
7.4Clauses 7.5–7.11 apply only while the Trust is Liquid.
7.5The Responsible Entity must satisfy a redemption request for a Unit by payment from the Assets of the Redemption Price calculated in accordance with clause 6. The payment must be made within 30 days of receipt of the request or such longer period as allowed by clause 7.6.
…..
7.21When Units have been redeemed, the Responsible Entity must make an appropriate entry in the Register and issue a written confirmation of redemption stating the balance of the holding (if any) of the Member whose Units have been redeemed.
7.22Units are deemed to be redeemed on the date of redemption recorded in the Register.

Clause 21 of the constitution of the trust dealt with the consequences of termination and in doing so referred to the realisation of the ‘Assets’ of the trust for the purposes of the distribution of the proceeds of that realisation to the members. The definition of Assets and Liabilities thus became relevant. The definition of ‘Assets’ excluded the ‘proceeds of redemption which have not yet been paid’, as follows:

Assets: all the property, rights and income of the Trust, but not application money or property for which Units have not yet been issued, proceeds of redemption which have not yet been paid or any amount in the distribution account.
Liabilities:all present liabilities of the Trust including any provisions which the Responsible Entity decides should be taken into account in determining the liabilities of the Trust.

The Trust Deed did not define ‘redemption’. But Barrett J considered the meaning of the term to be clear:

It is clear from the context, however, that the concept is, at least metaphorically, that of buying back — that the responsible entity, in a figurative sense, takes back the issued unit in return for a payment, although it cannot be suggested that the responsible entity actually acquires anything from the member. Rather, the redemption effectuates, fulfils or realises the member’s rights or interests in respect of the fund: MSP Nominees Pty Ltd v Commissioner of Stamps (citations omitted).[136]

[136]ING v ANZ (n 119) [14].

In relation to the operation of cl 7.1, Barrett J analysed the words of cl 7 and concluded that the responsible entity’s obligation to redeem becomes binding (or, as the case may be, does not become binding) according to circumstances existing when the member’s redemption request is made. And it becomes binding at that time. The obligation, if it becomes binding, reflects the member’s right of withdrawal which, in accordance with s 601GA(4)(a) of the Corps Act, must be specified in the constitution of a registered management investment scheme.[137] In this conclusion, he said, cl 7.3 is helpful because it deals with the case where, ‘after a Member has made a Redemption Request’, the trust ceases to be ‘Liquid’. If that happens, what would otherwise be the course dictated by cl 7.1 is interrupted by a deemed withdrawal of the redemption request. Any such concept of interruption would have no meaning unless the requirement or condition in cl 7.1 that the trust be ‘Liquid’ was concerned with the position at the time of the making of the redemption request. The collocation in cl 7.1 of ‘Liquid’ status and absence of termination of the trust therefore indicates that the existence of both those circumstances at the time a redemption request is made causes the making of the request to give rise to the cl 7.1 obligation on the part of the responsible entity.[138] Then he proceeded:

The content of the responsible entity’s obligation under cl 7.1 to redeem which becomes binding when the member’s redemption request is made comes from cl 7.5. The obligation is there described as an obligation to ‘satisfy’ the member’s ‘redemption request’ (being, obviously enough, the member’s ‘request for the redemption of some or all of their Units’ referred to in cl 7.1). The obligation to ‘satisfy’ the request is, in terms of cl 7.5, an obligation to pay money from the fund. No other step or process is envisaged as constituting ‘redemption’. I say this because payment in accordance with cl 7.5 is the means by which satisfaction of a redemption request is effected. Satisfaction of the request occurs ‘by’ payment; and once a request has been satisfied, the request no longer exists and redemption is complete.
In Basis Capital Funds (above), Austin J observed (at [142]) that redemption of units of a registered managed investment scheme does not happen automatically. Some act of the responsible entity is needed. In this case, the act is payment.
Clauses 7.21 and 7.22 then arise for consideration. Clause 7.21 requires an entry to be made in the register ‘[w]hen Units have been redeemed’ — that is, after their redemption is complete. Clause 7.22 then says that units are ‘deemed to be redeemed on the date of redemption recorded in the Register’. On one reading, cl 7.22 means that there is no redemption until the date of the relevant recording in the register. I am of the opinion, however, that the temporal aspects of cl 7.21 militate against that construction given that, as I have said, it is redemption — by which I mean completed redemption by payment — that gives rise to an obligation to make in the register what can, at that point, only be, of its nature, a record of an established and past event. The time at which the recording of the past event later occurs cannot play a part in determining the time of the happening of the event itself.

There is a time specification in cl 7.5. The payment ‘must be made’ within 30 days after receipt of the redemption request. Since it is the making of the payment that effects and constitutes the redemption, the time requirement, although applying, in terms, to payment applies, in substance and reality, to redemption as well. This is because payment and redemption are inseparable and indivisible.
In summary, therefore, the responsible entity’s obligation to redeem units of a member becomes operative under cl 7.1 when the request for redemption of those units is made by the member, provided that, at the time of the making of the request, the trust is ‘Liquid’ and has not been terminated. Subject to that proviso, the making of the request causes the responsible entity to be fixed immediately with an obligation owed to the requesting member and related to the particular units. The obligation is an obligation to pay to the member a sum calculated as mentioned in cl 7.5; and to do so within the time stated in cl 7.5. (emphasis added)[139]

[137]Referring to Basis Capital Funds Management Ltd v BT Portfolio Services Ltd (2008) 67 ACSR 297; 219 FLR 157; [2008] NSWSC 766, [153].

[138]ING v ANZ (n 119) [17].

[139]Ibid [18]–[22].

Barrett J dealt with definition of ‘Assets’ and the consequence of the exclusion of ‘proceeds of redemption which have not yet been paid’ and said:

The words ‘proceeds of redemption which have not yet been paid’, viewed in isolation, suggest that redemption can be complete and can have produced proceeds which remain unpaid by the responsible entity. This is at odds with the redemption concept embodied in cl 7. Under that clause, it is payment that constitutes redemption: a redemption request is satisfied (and redemption is constituted) ‘by payment’: cl 7.5. There is no redemption unless and until there is payment. But, of course, the redemption ultimately effected by payment occurs in discharge of the obligation to redeem that becomes operative when the redemption request is made and in fulfilment of the right of the member that is the concomitant of that obligation.
It follows, in my view, that the ‘proceeds of redemption which have not yet been paid’ are the moneys that are to be paid in consequence of the creation of the obligation and the right that arise upon and by reason of the making of a redemption request. It also follows that when ‘Assets’ are to be identified at a particular point in time, the exclusion of ‘proceeds of redemption which have not been paid’ places outside ‘Assets’ the moneys that are to be paid in discharge of the obligations (and in fulfilment of the rights) arising from the making of all redemption requests made before that time that have not already led to redemption by payment of those moneys.
The exclusion of the ‘proceeds’ just discussed from ‘Assets’ is significant in at least two ways. Under cl 19.7 of the constitution, all expenses properly incurred by the responsible entity are payable or reimbursable out of ‘Assets’. Under cl 2.1, the ‘Assets’ must be ‘held on trust for Members’. Once a sum of ‘proceeds’ is excluded from ‘Assets’, it is no longer either available to meet expenses properly incurred by the responsible entity or ‘held on trust for Members’. As a consequence, the sum must be regarded as held for the specific purpose of discharging the responsible entity’s obligation, owed to the particular member, to redeem by payment, being the obligation created by the member’s making of the particular redemption request.[140]

[140]Ibid [26]–[28].

In my view, the reasoning in ING v ANZ is applicable to the construction of the obligation of OFM under cl 7.1 of the Class C Terms and to the definition of ‘Assets’ in the Constitution in this case. Clause 7.1 of the Class C Terms provided:

7.1 Redemption Payment
(a)Subject to the Act and clause 7.5, on the Redemption Date, each Class C Unit shall be redeemed by payment in cash by the Trustee to the Class C Unitholder of—
(i) if the Redemption Date is more than three months after the date the Class C Unit was issued, the Redemption Amount, or
(ii)[irrelevant]

(b)The Redemption Payment is payable 60 Business Days after the Redemption Date.

The Redemption Amount is the aggregate of the amount of the issue price of the Class C Units and the amount of any accrued and unpaid Coupon.[141]
[141]Class C Terms, cl 1(c) (definition of ‘Redemption Amount’) [TB 222].

Like ING v ANZ where as a matter of construction of the constitution it was payment that constitutes redemption, so in this case it is ‘payment in cash’ that constitutes redemption. But the obligation has arisen, on the date 12 months after Settlement (18 April 2018) or if the circular resolution is effective, on 24 April 2020. There is no difference in substance between the exclusion from the ‘Assets’ in ING v ANZ and the exclusion from the ‘Assets’ in this case. Unlike the position under a registered managed investment scheme, the redemption of Class C Units happens automatically.

In MSP Nominees Pty Limited v Commissioner of Stamps (South Australia),[142] the High Court considered the meaning of a clause which provided: ‘The redemption of any Unit by the Trustee… shall notwithstanding any other provision hereof cancel such Unit and all right title and interest both legal and beneficial therein and the Trustee shall forthwith record such cancellation in the register of Unit Holders’. Gleeson CJ, Gaudron, Gummow, Hayne and Callinan JJ construed this term to mean that, upon the exercise of the trustee’s discretion to redeem a unit, the unitholder had ‘an absolute right to the price for the redemption’. The conclusion that the operation of arrival of the Redemption Date for the Class C Units gives rise to an obligation on OFM to pay ‘in cash’ the Redemption Amount (as defined) means that the Class C Unitholders have that ‘absolute right’ to the payment in cash of that Amount within 60 Business Days (cl 7.1(b) of the Class C Terms).
[142](1999) 198 CLR 494, [8].

The failure of OFM to make the payment, indeed to prefer Class A by making the payments in September 2020, does not change the fact of the obligation. Nor does the fact that the Class C Unitholders continue to be recorded as holding their Units in the Register. Until they are paid the Redemption Amount, or such of it as the Assets of the Fund allow, they must continue to be recorded as holding Class C Units.

In ANZ v ING, Barrett J also considered the status of the assets held by the trustee that are not included in the assets for the purpose of the termination of the trust. He opined:

It was suggested in the course of submissions that a member whose units become subject to the responsible entity’s obligation just described becomes a creditor of the responsible entity (and see Basis Capital Funds (above) at [142]). While it is not necessary to decide whether that is so, my inclination is to think that the relationship remains that of trustee and beneficiary. The characterisation of redemption as a process that effectuates, fulfils or realises the member’s rights or interests in respect of the trust fund (see [14] above) suggests that the right to payment is a right, as beneficiary, to have the trust find (sic) applied in satisfying the payment. The statement in MSP Nominees (above) at [8] that the unit holder ‘had, at least, an absolute right to the price for the redemption’ is consistent with this analysis.[143]

[143]ING v ANZ (n 119) [23].

I agree. The amounts due to the Class C Unitholders upon the redemption of their Units are held in trust by OFM.

Priority if no termination of the Fund before the Class A Redemption Date

Class A also contend that, properly interpreted, the Class C Terms also provide for the priority of the Class A Redemption Amounts over the Class C Coupon Amounts. Class A contend that cl 4.3(a) of the Class C Terms provides that Class C rank for payment of Coupons in priority to the holders of all other classes ‘other than Class A Units’, but that does not say that Class C rank for payment of Coupons in priority to the holders of all other classes ‘other than Class A Coupon Amounts’. Thus, the priority afforded to Class A Unitholders arguably includes all rights of Class A Unitholders (including to the Class A Redemption Amounts). Such an interpretation is also consistent with the contents of the IM.

I disagree with this interpretation of cl 4.3(a) of the Class C Terms. So far as relevant, the words of cl 4.3(a) are as follows:

Each Class C Unitholder shall have… the right to rank for payment of all unpaid, unsatisfied or deferred Coupons (whether earned or declared or not) in priority to the holders of all other Classes, other than Class A Units…

The natural and ordinary meaning of the provision read as a whole is that the final words refer back to unpaid, unsatisfied or deferred Coupons. To give it the meaning for which Class A contend would be perverse.

Having concluded that the Class C Unitholders are entitled to the Redemption Amount by reason of the Redemption Date having passed, the next question is whether Class C have priority in respect of their unpaid Coupons – which are included in the Redemption Amount – or whether Class A continue to enjoy priority payment of any unpaid Coupons due to them? Class A contend that, even if the Fund is not terminated, they are entitled (by force of the operation of cl 4.4(a) of the Class A Terms and cl 4.3(a) of the Class C Terms) to receive the Class A Coupon Amounts in priority to the payment of the Class C Coupon Amounts.

It is clear that as between payment of Class A and Class C Coupons, the Class A Unitholders have priority of payment. The Class A Terms entitle the Class A Unitholders to:

(a) a ‘Coupon’, which accrues daily at an annual rate of 6.5 per cent and is payable in arrears approximately every six months (on each ‘Coupon Date’) until the ‘Redemption Date’ (which, in the case of the Class A Unitholders, is 18 April 2023): cl 4.1; and

(b) a ‘Redemption Amount’, payable after the Redemption Date, comprising the aggregate of the ‘Issue Price’ of the Class A Unit and any accrued and unpaid Coupon: cl 7.1.

Under cl 4.4(a)(i) of the Class A Terms, Class A Unitholders have the ‘right to rank for payment of all unpaid unsatisfied or deferred Coupons (whether earned or declared or not) in priority to the holders of all other classes of units’. The payment of any Coupon is, however, subject to there being funds available (which, if the Trustee determines, can include capital) for the payment of such entitlements (see cl 4.2(a)).

The Class C Terms also provide for the payment of Coupons. The Class C Terms entitle the Class C Unitholders to:

(a) a ‘Coupon’, which accrues daily at an annual rate of 13 per cent and is payable in arrears approximately every six months (on each ‘Coupon Date’) until the Redemption Date: cl 4.1; and

(b) a ‘Redemption Amount’, payable after the Redemption Date, comprising the aggregate of the ‘Issue Price’ of the Class C Unit and any accrued and unpaid Coupon: cl 7.1.

The right of the Class C Unitholders to any Coupon has priority over ‘the holders of all other Classes, other than Class A Units’: cl 4.3(a)(i). Payment is subject to there being funds available for the payment (which, if the Trustee determines, can include capital), and the entitlement must be determined following payment of the ‘Class A Coupon’ to the Class A Unitholders: cl 4.2(a)(ii).

Each of the clauses is concerned with ‘unpaid, unsatisfied or deferred Coupons’. But the Class C Unitholders entitlement under cl 7.1 is to receive the Redemption Payment. The Redemption Payment is the ‘Redemption Amount, which comprises the aggregate of the amount of the Issue Price of a Class C Unit and the amount of any accrued and unpaid Coupon in respect of that Class C Unit, including any amount accrued for all or part of the Coupon Period in which the Redemption Amount is made’.

Class C submitted that it follows from these provisions that the Redemption Payment comprises more than, and is of a different character to, the unpaid Coupons with which cls 4.4(a) of the Class A Terms and cl 4.3(a) of the Class C Terms are concerned. Accordingly, the priority conferred by those provisions is not applicable. In my view, that is the preferred interpretation of the Class C Terms. The Redemption Amount is the amount payable pursuant to the obligation that arises on the Redemption Date. That obligation is fixed at that point.

In any event, unlike Class A Unitholders, Class C Unitholders have received no payments of Coupons. According to the Agreed Facts, there were no outstanding Class A Coupons as at the Redemption Date of the Class C Units as a payment of such Coupons had been made on 1 September 2020 covering the period up to 24 April 2020.[144] So there are no Class A Coupons having priority over the payment of the Class C Coupons comprised in the Redemption Amount.
[144]Agreed Facts [28(1)].

Conclusion

The answers I give to the Questions are, for the reasons appearing above, as follows:

Question 1 Answer: No order requiring notice of termination of the Fund should be made.

Question 2 Answer Unnecessary to answer.

Question 3 Answer: Unnecessary to answer.

Question 4 Answer: The priority should be, first, Class C Redemption Amount, second, Class A unpaid Coupons, third, Class A Redemption Amount.

Question 5 Answer: Further submissions required.

Question 6 Answer: Unnecessary to answer.

I will schedule a further hearing to hear any further submissions and make appropriate orders.

SCHEDULE OF PARTIES

S ECI 2023 00414
BETWEEN:
JIANQIANG SHAO	First Plaintiff
RUIXIANG YUAN	Second Plaintiff
LINGYUN HUANG	Third Plaintiff
TUNGPING SO	Fourth Plaintiff
YUEFANG XU	Fifth Plaintiff
HONGSHAN YANG	Sixth Plaintiff
BINGHUA YUAN	Seventh Plaintiff
GUIBAO YUAN	Eighth Plaintiff
HONG GUO	Ninth Plaintiff
- v -
ONE FUNDS MANAGEMENT LIMITED (ACN 117 797 403) (IN ITS CAPACITY AS TRUSTEE OF THE IPROSPERITY JY HOTEL FUND)	First Defendant
ONE FUNDS MANAGEMENT LIMITED (ACN 117 797 403) (IN ITS CAPACITY AS TRUSTEE OF THE GLEN WAVERLEY FUND)	Second Defendant
ONE FUNDS MANAGEMENT LIMITED (ACN 117 797 403) (IN ITS CAPACITY AS TRUSTEE OF THE IPROSPERITY CORNERSTONE PROPERTY INCOME FUND)	Third Defendant
ONE FUNDS MANAGEMENT LIMITED (ACN 117 797 403) (IN ITS CAPACITY AS TRUSTEE OF THE IPROSPERITY PROPERTY OPPORTUNITIES FUND)	Fourth Defendant
ONE FUNDS MANAGEMENT LIMITED (ACN 117 797 403) (IN ITS CAPACITY AS TRUSTEE OF THE IPROSPERITY CORNERSTONE 333 KENT FUND)	Fifth Defendant
IPROSPERITY UNDERWRITING PTY LTD (IN LIQUIDATION) (ACN 619 068 969)	Sixth Defendant
MINGHAO LI	Seventh Defendant

[2023] VSC 192

17 April 2023