Shao v One Funds Management Ltd
[2024] VSCA 231
•10 October 2024
| SUPREME COURT OF VICTORIA COURT OF APPEAL |
| S EAPCI 2023 0065 |
| JIANQIANG SHAO & ORS (ACCORDING TO THE ATTACHED SCHEDULE) | Applicants |
| v | |
| ONE FUNDS MANAGEMENT LTD (ACN 117 797 403) (IN ITS CAPACITY AS TRUSTEE OF THE IPROSPERITY JY HOTEL FUND) & ORS (ACCORDING TO THE ATTACHED SCHEDULE) | Respondents |
| AND | |
| DAVID HING | Class C Representative |
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| JUDGES: | KENNEDY, MACAULAY and ORR JJA |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 14 June 2024 |
| DATE OF JUDGMENT: | 10 October 2024 |
| MEDIUM NEUTRAL CITATION: | [2024] VSCA 231 |
| JUDGMENT APPEALED FROM: | [2023] VSC 192 (Derham AsJ) |
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TRUSTS – Unit trust – Managed investment scheme – Insufficient assets to meet unitholders’ claims – Terms of issue provided that on ‘Redemption Date’ trustee became obliged to redeem units by paying cash to unitholders – Redemption Date for ‘Class C’ unitholders preceded that for ‘Class A’ unitholders – Whether judge erred in finding that on Class C’s Redemption Date assets became segregated for purpose of paying Class C – No error.
TRUSTS – Unit trust – Whether judge erred by finding redemption occurred ‘automatically’ on the Redemption Date – No such finding.
TRUSTS – Unit trust – Class A unitholders given information memorandum stating that they were entitled to periodic payments in priority over payments of income or capital to other classes – Information memorandum not given to other classes – Resort to non-constituent documents to be avoided in investment trusts – Class A terms of issue provided that Class A’s rights could be subordinated to other classes’ rights – No basis for priority.
Basis Capital Funds Management Ltd v BT Portfolio Services Ltd (2008) 219 FLR 157; Fischer v Nemeske Pty Ltd (2016) 257 CLR 615; ING Funds Management Ltd v ANZ Nominees Ltd (2009) 2 ASTLR 326; Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1; MSP Nominees Pty Ltd v Commissioner of Stamps (1999) 198 CLR 494.
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| Counsel | |||
| Applicants: | Mr J Evans KC with Ms BE Slocum | ||
| First respondent: | Ms E Doyle-Markwick | ||
| Class C representative: | Mr C Möller SC with Mr DW Foster | ||
Solicitors | |||
| Applicants: | Madgwicks Lawyers | ||
| First respondent: | Allens | ||
| Class C representative: | Resolve Litigation Lawyers | ||
TABLE OF CONTENTS
Introduction
Background
Reasons of the Associate Judge
The applicants’ submissions
The Class C Representative’s submissions
The associate judge’s findings
Issues 1 & 2: Have the Class C units been redeemed, and did the decision in ING v ANZ apply?
Issue 3: What is the priority of distributions from the Fund if it is not terminated before the Class A Redemption Date?
Grounds of appeal
Relevant legal principles
Did the judge err in finding that redemption of the Class C units occurred ‘automatically’ on the Class C Redemption Date (ground 2)?
Applicants’ submissions
Class C’s submissions
OFM’s submissions
Consideration
Did the judge err in (a) failing to have regard to the Information Memorandum in construing the Class C Terms (ground 1), and (b) finding that, upon redemption of the Class C units, OFM was required to pay the Class C Redemption Amount to the Class C unitholders, in priority to the claims of Class A unitholders to payment of the Class A Redemption Amount (ground 3)?
Applicants’ submissions
Class C’s and OFM’s submissions
Consideration
(a) The nature of Class C’s right to payment
(b) The implications of Class A’s right to be paid Coupons
(c) Information Memorandum
(d) Commercial purpose
(e) Clause 4.5 of the Class A Terms
(f) Proceeds from withdrawals which have not yet been paid
(g) ING v ANZ distinguished?
(h) Relationship between OFM and the Class C unitholders
(i) Other matters
Conclusion
SCHEDULE OF PARTIES
KENNEDY JA
MACAULAY JA
ORR JA:
Introduction
A managed investment scheme was established to purchase and operate the Novotel hotel in Glen Waverley, a suburb of Melbourne. Investors in the scheme bought units in a trust which, through a sub-trust, owned the hotel, the principal asset. Different classes of unitholders enjoyed different rights, mainly relating to the payment of a periodic return on their unitholding (a ‘Coupon’ payment) and, ultimately, the return of their investment (the ‘Redemption Amount’). Among the differences in the rights enjoyed by investors holding the different classes of units was their relative level of priority to payment of Coupons and Redemption Amounts vis-á-vis other classes of unitholder.
When it emerged that the fund had inadequate assets to repay all amounts due to all investors, a dispute arose between the holders of the different classes of units as to who should be paid out first, both in relation to outstanding Coupon payments and the Redemption Amounts. An associate judge to whom this question was referred made a decision in favour of one class of unitholders, adverse to another class. The unsuccessful class of unitholders has sought leave to appeal against that decision.
The essential details of the dispute and application for leave to appeal are as follows. The managed investment scheme in question is the iProsperity JY Hotel Fund (the ‘Fund’), which, relevantly to the present proceeding, has two classes of units: Class A and Class C. The Redemption Date has now passed for both classes of units — the Class C Redemption Date occurring earlier in time — without these amounts having been paid.
The proceeding concerns the question of how the Fund’s trustee — the first respondent (‘OFM’) — ought to distribute the assets of the Fund as between Class A and Class C unitholders, in circumstances where the monies remaining in the Fund are not enough to satisfy the claims of both classes. The six applicants represent the Class A unitholders, while the Class C unitholders (some of whom are respondents) are represented by Mr David Hing, the Class C Representative.[1] In these reasons, it will be convenient to refer to the applicants as ‘the applicants’ or ‘Class A’, and to refer to the Class C Representative as ‘Class C’.
[1]The orders appointing the Class C Representative were made by Garde J on 28 February 2023.
The interests of the Class A and Class C unitholders are governed by the Fund’s Constitution, the Class A and Class C Terms of Issue and — so the applicants assert — an Information Memorandum provided to Class A unitholders.
Answering certain preliminary questions referred to him for determination, an associate judge of this Court concluded that, after payment of trust creditors and the parties’ legal costs, the balance of the monies remaining in the Fund ought to be paid to the Class C unitholders on account of the Class C Redemption Amount, prior to payment of any amount to Class A unitholders.[2]
[2]Shao v One Funds Management Ltd [2023] VSC 192 (‘Reasons’).
The applicants seek to challenge this finding, and propose three grounds of appeal which, in substance, raise the following questions:
(a)Did the associate judge err in failing to have regard to the Information Memorandum when construing the Class C Terms (proposed ground 1)?
(b)Did the associate judge err in finding that redemption of the Class C units occurred ‘automatically’ on the Class C Redemption Date (proposed ground 2)?
(c)In the alternative to (b), did the associate judge err in finding that, upon redemption of the Class C units, OFM was required to pay the Class C Redemption Amount to the Class C unitholders, in priority to the claims of Class A unitholders to payment of the Class A Redemption Amount (proposed ground 3)?
The applicants seek orders including a declaration that the monies remaining in the Fund be paid as follows: first, to Class A unitholders for their outstanding Coupons (approximately $3,176,498); second, to Class C unitholders for their outstanding Coupons (the quantum of which will depend on the determination of the Class C Redemption Date); and third, (if any balance remains) in payment of the Class A and Class C Redemption Amounts on a pari passu basis.
For the reasons that follow, the associate judge did not err, and we will not make the orders sought by the applicants. Leave to appeal is refused in respect of proposed grounds 1 and 2, granted in respect of proposed ground 3 but the appeal is dismissed.[3]
[3]For convenience, hereafter, we will refer to the proposed grounds of appeal as ‘grounds’.
In February 2024, the Class C Representative also filed a notice of contention seeking to affirm the associate judge’s decision on a ground of fact or law that had not been decided. The factual subject matter of the contention concerned a payment made from the Fund by OFM of approximately $10.6 million to Class A unitholders in September 2020. Ultimately, we did not need to consider the notice of contention. The parties agreed that, if leave was granted on the current application and the appeal allowed, the terms of any direction to OFM — including in relation to the issues raised by the notice of contention — should be remitted to the Trial Division of this Court for determination.
Background
The Fund was constituted on 4 January 2017. It is a managed investment scheme that was not registered (and was not required to be registered) under the Corporations Act 2001 (Cth). It was established for the purpose of acquiring — through a wholly‑owned sub‑trust (the ‘Sub-Trust’) — the Novotel Melbourne Glen Waverley (the ‘Hotel’). On the same day that the Fund was constituted, OFM issued the Information Memorandum.
From 24 January 2017, pursuant to a power provided by the Constitution, OFM began issuing Class A units upon terms which OFM determined. It issued 26,430,000 Class A units at a price of $1 per unit. Each person who became a Class A unitholder was, prior to their investment, provided with the Constitution, the Information Memorandum, the Class A Terms and a Class A application form.
From 13 April 2017, OFM began issuing Class C units. It issued 8,170,000 Class C units pursuant to the Class C Terms which OFM determined, at a price of either $1, $1.13 or $1.15 per unit.
Without setting them all out, it is convenient to provide a summary of some of the key provisions of the Constitution, Class A Terms, Information Memorandum and Class C Terms:
(a)The Constitution provided that:
(i)‘The Trustee holds the Assets on trust for the Unitholders on the terms contained in this Constitution’ [cl 2.2(a)];
(ii)‘Assets … excludes … (b) proceeds from withdrawals which have not yet been paid’ [sch 1, Dictionary];
(iii)The rights of unitholders are ‘subject to the rights, obligations and restrictions established by the Terms of Issue of the Class’, and ‘are subject always to the rights, obligations and restrictions which attach to Units issued in other Classes’ [cls 3.4(c), (d)]; and
(iv)The ‘Terms of Issue’ are the terms on which a Class is issued, as determined by the Trustee [sch 1, Dictionary].
(b)The Class A Terms provided that:
(i)Class A unitholders were entitled to a ‘Coupon’, payable in arrears about every six months until the ‘Redemption Date’ (being 18 April 2023) [cl 4.1];
(ii)‘Each Class A 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 of units’ [cl 4.4(a)(i)];
(iii)‘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’ [cl 4.5];
(iv)‘[O]n the Redemption Date, each Class A Unit shall be redeemed by payment in cash by the Trustee of the Redemption Amount … [which] is payable 60 Business Days after the Redemption Date’ [cl 7.1];
(v)‘Redemption Amount [means] the aggregate of (a) the amount of the Issue price of a Class A Unit; and (b) the amount of any accrued and unpaid Coupon in respect of that Class A Unit’ [cl 1].
(c)The Information Memorandum provided that:
(i)Class A unitholders were entitled to Coupons ‘in priority to any distributions of income or capital to the holders of any other Unit class’ [ss 2.7, 2.12];
(ii)‘The Trustee may in its absolute discretion, issue new classes of Units at any time … [which] may have different terms and rights attached’ [s 2.7].
(d)The Class C Terms provided that:
(i)Class C unitholders were entitled to a ‘Coupon’, payable in arrears about every six months until the ‘Redemption Date’ (being either 18 April 2018 or 24 April 2020)[4] [cl 4.1];
(ii)Class C unitholders rank for payment of unpaid Coupons in priority to the holders of all other Classes ‘other than Class A Units’ [cl 4.3(a)(i)];
(iii)‘Any available profits of the Trust shall be applied … first in paying any Class A Coupon to the Class A Unitholders in accordance with the Class A Units Terms of Issue, and then in paying any Coupon to Class C Unitholders in accordance with these Terms of Issue’ [cl 4.3(b)];
(iv)‘[O]n the Redemption Date, each Class C Unit shall be redeemed by payment in cash by the Trustee of … the Redemption Amount … [which] is payable 60 Business Days after the Redemption Date’ [cl 7.1]
(v)‘Redemption Amount [means] the aggregate of (a) the amount of the Issue price of a Class C Unit; and (b) the amount of any accrued and unpaid Coupon in respect of that Class C Unit’ [cl 1].
[4]There is some confusion as to which of these dates is the correct Class C Redemption Date. However, which date is correct is not an issue in this application.
On 18 April 2017, the Fund — through the Sub-Trust — purchased the Hotel for a total price of approximately $73.66 million.[5] As defined in both the Class A and Class C Terms, the ‘Settlement Date’ for acquisition of the Hotel was therefore 18 April 2017. Under the Class A Terms, the Class A Redemption Date was fixed at six years from the Settlement Date, which was therefore 18 April 2023.
[5]Comprised of deposits totalling approximately $7.36 million, paid throughout February 2017, and payment of the $66.3 million balance.
Under the Class C Terms, the Class C Redemption Date was fixed at 12 months from the Settlement Date, which was therefore 18 April 2018. However, a circulating resolution of the Class C unitholders records that the Class C Redemption Date was later amended to be 24 April 2020. As noted, which of these is the correct Class C Redemption Date is not an issue to be resolved on this application.
From 13 October 2017, OFM began paying to the Class A unitholders the Class A Coupons, in six-monthly instalments as required under the Class A Terms. No Class C Coupons were paid to Class C unitholders on or after the six-monthly instalment dates applicable to those units.
On 18 April 2018, the first potential Class C Redemption Date passed without OFM making or having made any payments — in the way of Class C Coupons or the Class C Redemption Amount — to Class C unitholders.
In around July 2019, the Sub-Trust sold the Hotel for $88,300,000. Throughout August and September 2019, OFM, as trustee of the Fund, received deposit amounts from the purchaser of the Hotel totalling $13.4 million, all but $200,000 of which it invested in units in the Cornerstone New SIV Bond Asset Trust — a separate trust, of which OFM was also the trustee.
On 13 December 2019, OFM paid the final of five Class A Coupons paid to Class A unitholders after 13 October 2017, for the coupon periods up to and including 30 June 2019. Still no Class C Coupons were paid to Class C unitholders.
On 24 April 2020, the alternative Class C Redemption Date passed. The Class C Redemption Amount — comprising the aggregate of the amount of the issue price of the Class C units and the amount of accrued and unpaid Class C Coupons — was not paid. The unit register for the Fund records that there were 8,170,000 Class C units issued at a price of $1, some of which were issued after 18 April 2018 (the first possible Class C Redemption Date). The capital component of the Class C Redemption Amount therefore stands at $8,170,000. Class C Coupons ceased to accrue on the Class C Redemption Date. By 24 April 2020, the latest date on which Class C Coupons stopped accruing, no Class C Coupons had been paid to unitholders (as remains the case). As at that date, unpaid Class C Coupons had accrued in the amount of $2,834,894.08.[6]
[6]If it is determined that the Class C Redemption Date was in fact 18 April 2018, the amount of accrued Class C Coupons will be smaller.
On or around 1 September 2020, OFM paid $11,910,442 out of the Fund to Class A unitholders. Payment of accrued Class A Coupons accounted for $1,407,306.98 of this amount. Updates issued to investors in the Fund described the remaining $10,592,693.02 as being paid to Class A unitholders as a ‘return [or partial return] of capital’. However, OFM has not identified any resolutions, board minutes or similar documents that record the basis upon which this latter payment was made.
On 3 February 2023, the applicants filed an originating motion seeking orders requiring OFM to wind up the Fund, with Class A unitholders’ claims on the remaining assets of the Fund to have priority over the claims of Class C unitholders. On 28 February 2023, a judge of the Trial Division of this Court ordered an urgent preliminary hearing to determine relief concerning, amongst other matters, the priority of payment of the remaining assets of the Fund as between Class A and Class C unitholders. As at that date, the Fund’s assets totalled approximately $7.9 million, comprised of $400,000 in cash and $7.5 million in bank bonds and interest. The urgent preliminary hearing was referred to an associate judge.
In summary, at the date of the preliminary hearing, the Class C unitholders had not received any Coupon payments, nor payment of their Redemption Amount. The capital component of that Redemption Amount was $8.17 million, which itself exceeded the remaining assets of the Fund. The Coupon component was approximately $2.834 million, assuming that the Class C Redemption Date was 24 April 2020.[7]
[7]As noted, if the Class C Redemption Date was 18 April 2018, the Coupon component of the Class C Redemption Amount will be lower.
The Class A unitholders had received all Coupon payments that were owing to them as at the Class C Redemption Date (whichever of the two possible dates that was). They had also received the additional amount of approximately $10.592 million in September 2020, which OFM says it paid by way of a partial return of capital. Since 24 April 2020 (being the second of the two possible Class C Redemption Dates) the Class A unitholders had accrued a further amount of approximately $3.2 million in unpaid Coupons. As noted, the Class A Redemption Date was due on 18 April 2023.
On 30 March 2023, an associate judge of this Court identified questions for determination in the preliminary hearing, which was subsequently held over 5 and 6 April 2023. The associate judge answered the questions for determination and published his substantive reasons on 17 April 2023. The effect of these reasons was that, after payment of trust creditors and the parties’ legal costs, the balance of the monies remaining in the Fund was to be paid to Class C unitholders in satisfaction of the Class C Redemption Amount, in priority to any payment to Class A unitholders.
The Class A Redemption Date occurred the following day, 18 April 2023, whereupon under the Class A Terms OFM became obligated to pay the Class A Redemption Amount, comprising the aggregate of the amount of unpaid Class A Coupons and the issue price for Class A units. The Class A Coupons stopped accruing on the Class A Redemption Date, as at which point the unpaid Coupons totalled $3,176,498. Depending on what is to be made of the approximately $10.592 million paid to Class A unitholders in September 2020 as a so-called ‘[partial] return of capital’ (see [22] above), the outstanding capital component of the Class A Redemption Amount is either $15,837,306.98, or the full issue price of $26,430,000.
On 18 May 2023, following further submissions from the parties on costs and the appropriate form of final orders, the associate judge published further reasons.[8]
[8]Shao v One Funds Management Ltd [2023] VSC 251 (‘Further Reasons’).
Reasons of the Associate Judge
The associate judge ultimately confined his analysis to two of the six questions posed for determination. The first (Question 1) was, in summary, whether the Court — under r 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 — ought to direct OFM as trustee to terminate the Fund (as had been sought by the applicants in their originating motion). The associate judge concluded that, assuming the Court has such a power, this was not a proper case for such a direction to be made.[9] The applicants do not seek to challenge this finding.
[9]Reasons, [99].
The second question determined by the associate judge (Question 4) was in the following terms:
If the relief in Question 1 is not granted [that is, if the Court decides not to direct OFM to terminate the Fund, as indeed occurred], whether there should be a declaration that the Net Assets [of the Fund] are payable by OFM as Trustee of the Fund in the following priority:
(a)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;
(b)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;
(c)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.[10]
[10]Ibid [3(d)].
The associate judge set out in some detail the relevant terms of the essential documents, namely, the Constitution, the Class A Terms, the Class C Terms, and the Information Memorandum. Some are summarised above.
The applicants’ submissions
Broadly, the applicants argued that Class A unitholders were entitled to payment of the Class A Coupons and the return of their capital in priority to Class C unitholders, even after the passing of the Class C Redemption Date.[11] Class A units were a six-year investment, were first in time, and provided a Coupon rate of 6.5 per cent per annum. In contrast, Class C units were envisaged as a short-term investment of approximately one year, and had a Coupon rate of 13 per cent per annum. This higher rate was said to reflect the risk for Class C unitholders of their interests being postponed to those of Class A unitholders.[12]
[11]Ibid [59].
[12]Ibid [63]–[64].
Further, the applicants argued that the Class A Terms were to be interpreted consistently with the Constitution and Information Memorandum, but without regard to the Class C Terms; whereas the Class C Terms were to be interpreted consistently with the Class A Terms.[13]
[13]Ibid [66].
More particularly, the applicants argued that:
(a)the Class C units had not been redeemed and could only be redeemed by payment in cash (which had not occurred);[14]
(b)alternatively, no money had been appropriated to pay for the redemption of Class C units, and therefore no liability had arisen out of the Fund in favour of Class C that would defeat Class A unitholders’ priority to payment;[15] and
(c)in circumstances where there was no termination of the Fund before the Class A Redemption Date (18 April 2023), Class A Coupons must be paid in priority to Class C Coupons, and the preferable view is that payments of capital to both Class A and Class C should be pari passu.[16]
The Class C Representative’s submissions
[14]Ibid [67].
[15]Ibid [72].
[16]Ibid [80]–[82].
Class C disputed Class A’s analysis of the appropriate approach to interpretation of the documents which contained or bore upon the governing terms of each class’s units.[17]
[17]Ibid [86].
More particularly, Class C argued that:
(a)relying upon the decision in ING Funds Management Ltd v ANZ Nominees Ltd,[18] OFM’s obligation to pay the Class C Redemption Amount was engaged immediately upon the arrival of the Class C Redemption Date;[19]
(b)Class A unitholders do not obtain priority for payment of Class A Coupons over Class C Coupons if the Fund is not terminated before the Class A Redemption Date, in part because the Class C Redemption Amount, being the aggregate of both the outstanding capital sum and the amount of accrued and unpaid Coupons, is of a different character to the unpaid Coupons themselves.[20]
The associate judge’s findings
[18](2009) 2 ASTLR 326; [2009] NSWSC 404 (‘ING v ANZ’).
[19]Reasons, [90].
[20]Ibid [92].
Ultimately, the associate judge answered the question set out above at [30] as follows:
The priority should be, first, Class C Redemption Amount, second, Class A unpaid Coupons, third, Class A Redemption Amount.[21]
[21]Ibid [3(d)]. The associate judge accepted Class C’s argument that the amount of their accrued and unpaid Coupons was rolled up in the aggregated sum called the Class C Redemption Amount, which comprised more than, and is of a different character to, the Coupons themselves: Reasons, [132].
In reaching this conclusion, he addressed three key issues that arose from the parties’ submissions:
(1)Have the Class C units been redeemed?
(2)Does the decision in ING v ANZ apply to the Class C redemption?
(3)What is the priority of distributions from the Fund if it is not terminated before the Class A Redemption Date?
Issues 1 & 2: Have the Class C units been redeemed, and did the decision in ING v ANZ apply?
The associate judge considered that the dispute was really about whether the Class C units were redeemed on the arrival of the Class C Redemption Date, or whether redemption required the appropriation by OFM of identified money to pay to the Class C unitholders.[22]
[22]Ibid [109].
The associate judge observed that, in ING v ANZ, Barrett J dealt with a constitution which required a member to request a redemption, after which the responsible entity was to ‘satisfy’ the request by payment within 30 days. Justice Barrett determined that the responsible entity’s obligation to redeem ‘became operative’ when the request was made, causing the responsible entity to be ‘fixed immediately with an obligation … to pay to the member’ the sum calculated as per the relevant provision of the constitution in question.[23] Further, Barrett J held that although the redemption is complete only when payment is made — there is no redemption until payment — nonetheless, redemption is ‘effected by payment [that] occurs in discharge of the obligation to redeem’. Similarly to the definition of ‘Assets’ in the present case, in ING v ANZ the definition of ‘Assets’ in the constitution of the trust excluded ‘proceeds of redemption which have not yet been paid’.[24]
[23]Ibid [114], citing ING v ANZ (2009) 2 ASTLR 326, 331–2 [18]–[22] (Barrett J).
[24]Reasons, [115], citing ING v ANZ (2009) 2 ASTLR 326, 332–3 [26]–[28] (Barrett J).
The associate judge applied this reasoning to the construction of cl 7.1 of the Class C Terms and to the definition of ‘Assets’ in the Constitution.[25] In doing so, he explained that the sense in which he was considering whether the Class C units had been ‘redeemed’ was whether OFM held assets representing money due to Class C unitholders ‘either as creditors or beneficiaries’.[26] Although agreeing that only a payment in cash would constitute the redemption, the associate judge held that the obligation to pay that Redemption Amount arose on the Redemption Date (whenever it was), and thus the redemption of the Class C units ‘happens automatically’ on the arrival of the Redemption Date.[27]
[25]Reasons, [114]–[116].
[26]Ibid [105], [109].
[27]Ibid [118].
Drawing upon the analysis in MSP Nominees Pty Ltd v Commissioner of Stamps,[28] the associate judge found that OFM’s obligation to pay the Redemption Amount ‘in cash’ meant that the Class C unitholders had an ‘absolute right’ to that payment within 60 days.[29] Critically, in the course of addressing this issue, the associate judge highlighted the reasoning of Barrett J in ING v ANZ, expressed as obiter, to the effect that, upon the creation of the obligation to redeem the units by payment in cash, and in view of the exclusion from the Fund’s assets of the proceeds of redemptions not yet paid:
the right to payment is a right, as beneficiary, to have the trust [fund] applied in satisfying the payment.[30]
[28](1999) 198 CLR 494; [1999] HCA 51 (‘MSP Nominees’).
[29]Reasons, [119].
[30]Ibid [121], citing ING v ANZ (2009) 2 ASTLR 326, 332 [23] (Barrett J).
Applying this reasoning, the associate judge concluded, in respect of the present case, that:
[t]he amounts due to the Class C Unitholders upon the redemption of their Units are held in trust by OFM.[31]
Issue 3: What is the priority of distributions from the Fund if it is not terminated before the Class A Redemption Date?
[31]Reasons, [122].
The associate judge disagreed with Class A’s argument that, on the proper construction of cl 4.3(a)(i) of the Class C Terms, payment to Class C unitholders of the Class C Coupons is postponed not only to the payment of Class A Coupons, but also to the payment of Class A capital (as a component of the Class A Redemption Amount). The associate judge found that the argument involved an unnatural reading of the clause.[32] It is convenient to note that, on appeal, Class A no longer maintains that argument. For the purpose of the appeal, Class A argued only that payment of Class C Coupons is postponed to the payment of Class A Coupons.
[32]Ibid [124].
The associate judge held that Class A’s priority for payment of its Coupons over Class C Coupons did not operate when the unpaid amount of Class C Coupons was subsumed into the Class C Redemption Amount falling due on the Class C Redemption Date. In those circumstances, in practical effect, the Class C Coupons (strictly speaking, an amount equivalent but of a different character to the accrued and unpaid Class C Coupons) are to be paid regardless of any priority that the Class A Coupons would otherwise have.[33]
[33]Ibid [132].
Moreover, the associate judge held that there were no unpaid or outstanding Class A Coupons on the Class C Redemption Date that could have priority over the Class C Coupons.
Grounds of appeal
In order to better understand how Class A’s grounds of appeal operate in aid of Class A’s overall argument, it is useful to set out the broad sweep of Class A’s submissions. As we understand it, Class A’s argument is, broadly, as follows:
(a)Clause 7.1 of the Class C Terms requires that there be a payment in cash before redemption of the Class C units occurs. Redemption does not ‘happen automatically’ (ground 2).
(b)Justice Barrett’s reasoning in ING v ANZ — to the effect that, once the trustee’s obligation to redeem units arises and before actual redemption occurs, a sum of money is placed outside of the trust Assets as ‘proceeds of redemption not yet paid’ — does not apply in the present case for the following reasons:
(i)whereas, in ING v ANZ, the trustee’s obligation to redeem units arose on the member making a request, in the present case a further act by OFM is required after the Redemption Date to create the obligation, such as an appropriation of identified money toward payment or, perhaps, an entry in the Register cancelling the units (neither of which has occurred);
(ii)whereas, in ING v ANZ, there was only the trust constitution and one form of withdrawal to consider, in the present case OFM had a general power to create further units on new Terms of Issue and, under the Constitution, there were potentially many different forms of withdrawal, presenting different constructional considerations that do not justify a conclusion about the meaning of ‘proceeds from withdrawals not yet paid’ akin to the one drawn by Barrett J; and
(iii)unlike ING v ANZ, in the present case there are various Terms of Issue in respect of different classes of unitholders and, when construed in the context of the Information Memorandum (ground 1), those Terms demonstrate that Class A unitholders are to be paid their Coupons ahead of Class C unitholders being paid their Coupons, again presenting a constructional consideration that was not present in ING v ANZ.
(c)Instead, on the proper construction of cl 7.1 of the Class C Terms, nothing automatically occurs on the Redemption Date — redemption is only effected by payment in cash — and, because no payment in cash was ever made, no redemption occurred and there are no ‘proceeds from withdrawals’ to be carved out of the trust Assets. At most, Class C unitholders stand as creditors for payment of the Redemption Amount and have no proprietary interest in any money held by OFM such as would give them priority for payment of their Redemption Amount over the payment of Coupons (or capital) to Class A unitholders (ground 3).
(d)There being no priority for Class C unitholders for payment of their Redemption Amount, the priority for payment out of the remaining trust Assets is governed by cl 4.3 of the Class C Terms and cl 4.4 of the Class A Terms, with the result that the available assets of the Fund are to be applied, first, in payment of Class A Coupons and then in payment of Class C Coupons, after which the capital of both classes is to be paid pari passu (orders sought by applicants).
Relevant legal principles
All three grounds of appeal turn on the construction of the relevant documents. There was no dispute that the Constitution and the Terms of Issue for both Class A and Class C were relevant documents. The Class A unitholders argued that the Information Memorandum was also a relevant document, together with the application form used by Class A unitholders to apply for their units. These last two documents, the Class A unitholders argued, were not of themselves constituent documents of the trust; rather, they were relevant contextual documents to be taken into account when construing the Constitution and the Terms of Issue for both classes. Class C and OFM disputed that argument.
Nevertheless, the parties were substantially in agreement as to the applicable legal principles relevant to the construction of the documents, although they differed on their application. The associate judge set out the relevant principles at length.[34] We agree that the principles he identified are the correct principles. We will content ourselves with a brief summary.
[34]Ibid [55]–[58].
The starting point is the High Court’s authoritative statement in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd,[35] concerning the applicable principles for construing the terms of a commercial contract. In short, the court is to undertake an objective task enquiring what a reasonable businessperson would have understood the terms of the contract to mean. Reference is made to the text, context and purpose of the relevant provisions. If an expression is unambiguous, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning. However, if there is a constructional choice, it may be necessary to have recourse to such matters external to the contract to identify the purpose or objects of the contract.[36]
[35](2015) 256 CLR 104; [2015] HCA 37 (‘Mount Bruce’).
[36]Mount Bruce (2015) 256 CLR 104, 116–7 [46]–[50] (French CJ, Nettle and Gordon JJ).
A corporate constitution is a particular type of commercial contract. The principles that apply to the construction of commercial contracts also apply to the interpretation of trusts inter vivos,[37] including constitutions of managed investment schemes.[38] In earlier times, the rule was that a court did not have regard to external surrounding circumstances to construe the terms of a constitution. A basis for that rule appears to have been that not all investors, investing at different points of time, can be taken to be aware of the same set of circumstances surrounding their entry into the contract formed by becoming a shareholder‑member of a company. The same may be said of a unitholder of a commercial trust governed by a constitution or a trust deed.
[37]Byrnes v Kendle (2011) 243 CLR 253, 263 [17] (French CJ), 273–4 [53]–[55], 275 [59] (Gummow and Hayne JJ), 286 [102]–[105] (Heydon and Crennan JJ); [2011] HCA 26.
[38]SIF Holdings Pty Ltd v CRC Gosford Pty Ltd (2021) 392 ALR 697, 712 [73] (Payne JA, White JA agreeing at 724 [126], Payne JA agreeing at 724 [127]); [2021] NSWCA 174.
In more recent times that rule has been moderated so that, in an appropriate case, surrounding circumstances may be taken into account in construing the terms of a constitution in the same way as for other commercial contracts. Nevertheless, in a publicly marketed investment scheme it is not readily supposed that the constituent documents will be given meanings other than the meanings ordinarily conveyed by the words used.[39] For the same reasons that courts did not previously have regard to surrounding circumstances at all, courts will be cautious about taking them into account in construing a constitution. As explained in Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd,[40] a ‘tight rein’ may need to be kept on what should count as surrounding circumstances when construing a company’s constitution and, by parity of reasoning, constitutions of the kind considered in the present case.[41]
[39]Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570, 583 [38] (Gummow, Hayne and Kiefel JJ); [2008] HCA 57.
[40](2006) 156 FCR 1; [2006] FCAFC 144 (‘Lion Nathan’).
[41]Lion Nathan (2006) 156 FCR 1, 13 [55]–[59] (Weinberg J), 51 [259] (Lander J).
Because ground 1 was incorporated within Class A’s argument on ground 3, it is convenient to address ground 2 first.
Did the judge err in finding that redemption of the Class C units occurred ‘automatically’ on the Class C Redemption Date (ground 2)?
The full terms of ground 2 are as follows:
The primary judge erred in determining, in construing the Class C Terms, that redemption of Class C Units on the Redemption Date, occurred automatically without any act of the Trustee.
The primary judge should have found, to the contrary, that the redemption of Class C Units was not automatic, and in order for redemption to occur, an act or acts by the Trustee was required, being:
(1)The recording of the Class C Units as having been redeemed or cancelled in the books of the JY Hotel Fund; or
(2)The making of payment to a Class C Unitholder of the Redemption Amount applicable to the unitholder’s Class C Units.
The primary judge should further have found that, as at the date of the hearing, redemption of 8,170,000 Class C Units had not yet occurred, and that as a result, Question 4 below should have been answered ‘Yes’.
Clearly, from the terms of ground 2, it is the applicants’ contention that redemption of the Class C units required an act of the trustee, and could not simply occur ‘automatically’ as they contend the associate judge had found. For the reasons that follow, we agree with the submissions of Class C that this ground presents a false issue, as the judge did not find that redemption had occurred in the sense that the ground implies.
Applicants’ submissions
The applicants submitted that whether the redemption of units occurs automatically upon a particular event, or requires an act of the trustee, will depend on the terms of the constituent documents. In this case, the question whether the redemption of the Class C units had occurred on the Class C Redemption Date turns on the construction of cl 7.1 of the Class C Terms.
The applicants argued that the critical words in that clause are: ‘on the Redemption Date, each Class C unit shall be redeemed by payment in cash by the Trustee’. Emphasising the future verbal tense ‘shall be redeemed’, and that the method of redemption is ‘by payment in cash’, the applicants argued that because no payment had occurred no redemption had occurred.
The applicants also highlighted the associate judge’s agreement with Barrett J’s conclusion in ING v ANZ that payment was required in order for redemption to occur, submitting that that proposition was correct. On the applicants’ argument, the associate judge’s ‘happens automatically’ finding was inconsistent with his acceptance that redemption was made by payment in cash, especially when no cash had been paid.
Even if redemption did not require the actual payment of cash, the applicants submitted that OFM’s obligation to pay the Redemption Amount, and the Class C unitholders’ concomitant entitlement to the Redemption Amount from the Fund, required more than the mere arrival of the Redemption Date. Some act on the part of OFM was required for the obligation to pay to arise, such as the identification and appropriation of a specific sum of money toward payment of the Redemption Amount, or recording that the units had been cancelled in the Register of units.
It follows, the applicants argued, that the associate judge was wrong to find that ‘the redemption of Class C units happens automatically’.
At most, they submitted, OFM had breached a contractual obligation to the Class C unitholders to pay the Redemption Amount within 60 days of the Redemption Date. That gave the Class C unitholders only a remedy for damages against OFM, not a claim against the Fund.
Class C’s submissions
Class C argued that the premise of ground 2 was false: that is, the associate judge did not determine that the Class C Units ‘had been redeemed’. Instead, Class C argued, the associate judge had compared and contrasted the present case with ING v ANZ. The ‘happens automatically’ statement — appearing in [118] of the associate judge’s reasons — was made in the context of the associate judge contrasting the situation in ING v ANZ, where the redemption was to follow a member making a redemption request, with the situation in the present case, where redemption occurs ‘on the Redemption Date’.
Class C emphasised that the associate judge had used the word ‘redeemed’ in a particular sense. That sense was made plain in the associate judge’s statement that, ‘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’.[42] Therefore, Class C argued, by use of the words ‘happens automatically’, the associate judge was referring to OFM’s obligation to pay the Redemption Amount, rather than factual redemption. In this way, the associate judge’s analysis conformed to that of Barrett J in ING v ANZ.
[42]Reasons, [105].
Class C also submitted that the applicants’ contentions failed to engage with the principal element of the associate judge’s reasoning, namely, that the arrival of the Class C Redemption Date gave rise to an obligation on the part of OFM to pay the Redemption Amount to Class C unitholders. Nor, they submitted, did the applicants’ arguments address his conclusion about the nature of that obligation. Moreover, Class C submitted that the applicants’ contentions could not sustain their ultimate argument that Class A unitholders enjoyed priority for unpaid Class A Coupons.
OFM’s submissions
OFM submitted that the associate judge is to be taken as having concluded that, while the Class C units were redeemable only ‘by payment in cash’ (which payment has not been made), the Class C unitholders obtained an absolute right to the Redemption Amount on the Redemption Date. That is, the arrival of the Class C Redemption Date created an obligation on OFM to pay, and a concomitant right in the Class C unitholders to receive, the Class C Redemption Amount. This ‘absolute right’ was recognised by the exclusion of the Class C Redemption Amount from the Fund Assets when, on the Redemption Date, that amount became ‘proceeds from withdrawals that have not yet been paid’.[43]
[43]See the definition of Assets in the Constitution at [14(a)(ii)].
Several reasons were advanced for this conclusion:
(a)the associate judge used ‘redemption’ as a shorthand for the consequence of a finding that ‘OFM holds assets representing moneys due to Class C Unitholders either as creditors or beneficiaries’;[44]
(b)no party submitted below that the Class C units had been redeemed, and it would therefore be surprising if that was the associate judge’s conclusion; and
(c)the associate judge clearly intended to follow the decision in ING v ANZ, in which Barrett J concluded that, under the redemption concept embodied in cl 7 of the relevant constitution in that case, it was payment that constituted redemption.[45]
[44]See the passage from Reasons, [105] extracted above at [63].
[45]ING v ANZ (2009) 2 ASTLR 326, 332–3 [26] (Barrett J).
If, contrary to its primary submission, the associate judge had intended to convey, by using the words ‘happens automatically’, that the Class C units had been redeemed in fact on the Redemption Date, OFM agreed with the applicants that the associate judge had been in error.
Consideration
Seemingly, the question raised by ground 2 is: when does redemption ‘happen’ or ‘occur’ in the sense that redemption is completed?
As has been discussed in other cases,[46] the precise content of the rights of unitholders in managed investment schemes of this kind turns on the construction of the particular, relevant constituent documents in the case at hand. So much is common ground between the parties in this case. It follows that differently expressed provisions, and different combinations of provisions, can produce different results on similar issues from case to case. From that it also follows that we should not adopt a meaning given to a term in a previous case unless that meaning is justified on orthodox construction principles in the context of the particular documents in the present case.
[46]Ibid 328–9 [4] (Barrett J); MSP Nominees (1999) 198 CLR 494, 500–2 [3]–[8], 509 [34] (Gleeson CJ, Gaudron, Gummow, Hayne and Callinan JJ); Basis Capital Funds Management Ltd v BT Portfolio Services Ltd (2008) 219 FLR 157, 185–6 [142] (Austin J); [2008] NSWSC 766 (‘Basis Capital Funds’).
In respect of ground 2, the key clause is cl 7 of the Class C Terms. The relevant parts of cl 7 are as follows:
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)if the Redemption Date is less than three months after the date the Class C Unit was issued, the Early Redemption Amount.
(b)The Redemption Payment is payable 60 Business Days after the Redemption Date.
…
7.5 Payment of the Redemption Payment
The Trustee may pay the Redemption Payment by instalment on a pro‑rata basis, as the Trustee determines in its absolute discretion.
Close attention to the language of cl 7 invites questions about its meaning. Clause 7.1(a) provides that ‘on the Redemption Date, each Class C Unit shall be redeemed’. Pausing at that point, it is important to note that something is to happen ‘on’, not merely after, the date in question. What is to occur? The answer, it appears, is that the units ‘shall be redeemed by payment in cash by the trustee’. But clause 7.1(b) provides that the amount may be paid up to 60 business days after the Redemption Date. What is to be made of this? As it happens, both parties appear to be in agreement that, on the Class C Redemption Date, but before payment of the money constituting the Redemption Amount, no redemption in fact occurred. Indeed, as mentioned, Class C argued that the associate judge did not say that redemption had occurred without the payment of cash.
For our part, we also think that it is an unlikely construction of cl 7.1 to read it as meaning that redemption occurs on the redemption date, in the sense that it has been completed, without payment of money. Nonetheless, the language of cl 7.1(a) suggests that something happens inexorably on that date from which an obligation arises. In MSP Nominees, the High Court described a similar consequence — albeit after a unitholder requested redemption — as the creation of an ‘absolute right’ in the unitholder to receive the redemption amount.[47]
[47]MSP Nominees (1999) 198 CLR 494, 502 [8] (Gleeson CJ, Gaudron, Gummow, Hayne and Callinan JJ).
The associate judge expressed the view that redemption — a term he used in a specific sense — ‘happens automatically’. As pointed out by both Class C and OFM, the associate judge made that statement in the context of a discussion of Barrett J’s decision in ING v ANZ. In ING v ANZ (a case concerning a registered managed investment scheme), the unitholders’ rights were governed by the terms of the constitution of the trust. In particular, the most relevant clause was (as it happens) cl 7 of the constitution.
Unlike the present case, where the redemption of units is triggered by the arrival of a particular date, in ING v ANZ, cl 7 of the constitution provided that a unitholder ‘may make a request for the redemption of some or all of their Units’. Clause 7 further provided that ‘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’. Further provisions of the clause required the responsible entity to ‘satisfy a redemption request … by payment from the Assets of the Redemption Price’. The payment had to be made within 30 days of receipt of the request.
In those circumstances, Barrett J repeated a statement made by Austin J in Basis Capital Funds, namely that the redemption of units in a registered managed investment scheme ‘does not happen automatically’. Justice Barrett said that, on the terms of the constitution in the case before him, a further act was necessary to effect a redemption, and that further act was payment.[48] Nevertheless, Barrett J found that under the particular terms of that constitution, the making of the redemption request created an obligation upon the responsible entity to satisfy the request by a payment within 30 days. Once the redemption price was paid, the relevant units were then redeemed.[49]
[48]ING v ANZ (2009) 2 ASTLR 326, 331 [19] (Barrett J).
[49]Ibid 332 [22] (Barrett J).
Similarly, in Basis Capital Funds, the relevant constitution of the fund required that a unitholder make a request for a redemption. Additionally, and in contrast with ING v ANZ, for the redemption obligation to arise, the responsible entity had to accept the request and make an entry of the cancellation of the units in the relevant unit register.[50] It was in that context that Austin J said ‘the redemption of units in a registered scheme is an event that does not occur automatically, absent some special provision in the constitution of the scheme (and there is none here)’.[51]
[50]Basis Capital Funds (2008) 219 FLR 157, 185–6 [142] (Austin J). The judgment does not set out the precise terms of the applicable provisions of the constitution in question, but the conditions just described are implicit from what Austin J said in the paragraph referred to.
[51]Ibid.
It is plain that in stating that the redemption of Class C units ‘happens automatically’, the associate judge was distinguishing the event that triggered the redemption obligation in the case before him from those that applied in both ING v ANZ and Basis Capital Funds. And yet, as pointed out by all parties, the associate judge also accepted that it was ‘payment in cash’ that constitutes redemption.
There is no conflict between these statements when it is understood, as we believe it should be, that the associate judge took the view that, in this case, the creation of the obligation to pay the redemption amount occurred upon the arrival of the Redemption Date. No particular act by the unitholder or OFM was required to bring about that obligation and its concomitant entitlement. Identifying the event which ‘automatically’ created that obligation — that is, to make the payment that, when made, would satisfy the obligation to redeem the units — did not imply that the event completed the redemption.
In our opinion, the associate judge’s construction of cl 7 of the Class C Terms is correct.
The language used in cl 7 in the Class C Terms (relevantly the same as the equivalent clause in the Class A Terms) is quite stark. As noted already, the clause states that ‘on the Redemption Date’ the units ‘shall be redeemed’. Even though these words cannot be construed as declaring the immediate and present redemption of the units, they nonetheless must be construed as denoting a mandatory and imperative obligation falling upon OFM on that day, to redeem the units in the manner that the clause directs — that is, by payment in cash within 60 days.
The creation of the obligation and its corresponding entitlement happens inexorably. Indeed, apart from the termination of the trust itself, neither the Class C Terms nor the Constitution provide for any event that would interrupt or prevent the obligation to redeem arising upon the arrival of the Class C Redemption Date.
We therefore reject the applicants’ argument that the proper construction of cl 7 requires a finding that some further act of OFM was required in order to trigger the redemption obligation. At one point, the applicants seemed to suggest that OFM was required to ‘identify and appropriate’ a sum of money toward the payment of the Redemption Amount before the obligation to redeem can be said to have arisen.[52] At another, the applicants suggested that some entry first needed to be made in the register of units for the obligation to arise. Interposing either requirement would, necessarily, add a step between the immediate imperative to redeem, made plain by the clear language of cl 7, and the payment in cash within 60 days to effect the redemption. Nothing in the text of cl 7 supports the addition of such a step; rather, the text opposes it.
[52]Although this argument might (also) have been intended as an element of the argument under ground 3 that the existence of the obligation, without more, did not create any proprietary claim to the money.
We therefore agree that ground 2 proceeds upon a false premise. The associate judge did not say that the Class C units had been redeemed on the Redemption Date, except in a quite narrow sense. That sense was explained as meaning that, on the Redemption Date, OFM came to hold assets representing monies due to the Class C unitholders, for those unitholders, ‘either as creditors or beneficiaries’.
The real issue arising from this conclusion is the nature and content of the obligation so created, and its consequence for the priority of payments as between Classes A and C. That question is addressed by ground 3, which, in substance, occupied the parties most fervently in oral argument.
There is no merit in ground 2. Leave to appeal on that ground must be refused.
Did the judge err in (a) failing to have regard to the Information Memorandum in construing the Class C Terms (ground 1), and (b) finding that, upon redemption of the Class C units, OFM was required to pay the Class C Redemption Amount to the Class C unitholders, in priority to the claims of Class A unitholders to payment of the Class A Redemption Amount (ground 3)?
The full terms of grounds 1 and 3 are as follows:
Ground 1: The primary judge erred, in construing the Class C Terms, in disregarding the words used in sections 2.7 and 2.12 of the Information Memorandum.
Ground 3: Alternatively to Ground 2, the primary judge erred in finding that, upon redemption of the Class C Units, the Trustee was required to pay to the Class C Unitholders, an amount from the Assets of the Fund, to the Class C Unitholders in priority to the claims to payment of Class A Unitholders upon redemption of their units in the Fund.
The primary judge should have found, upon a proper construction of the definition of ‘Assets’ in the Constitution, and clause 7.1 of the Class C Terms, that:
(1) upon redemption of the Class C Units, the Class C Unitholders became creditors of the Trustee (as trustee of the JY Hotel Fund), without any proprietary claims to the property of the JY Hotel Fund;
(2) further, unless and until the Trustee caused property of the JY Hotel Fund to be identified and appropriated for payment to the Class C Unitholders, the rights of the Class C Unitholders to payment of the Class C Redemption Amount was an unsecured claim to payment by the Trustee, as creditors of the Trustee;
(3) as a finding of fact, that no such appropriation had occurred at any time prior to judgment.
The primary judge should further have found that, as at the date of the hearing, as a result of these findings, Question 4 below should have been answered ‘Yes’.
It is evident that ground 3 — incorporating the construction argument that is ground 1 — is argued in the alternative to ground 2. That is, by this ground the applicants assume that an obligation to redeem the Class C units fell upon OFM on the arrival of the Class C Redemption Date. What follows from that?
To recap, the associate judge held that, upon the arrival of the Class C Redemption Date, the Class C unitholders had an ‘absolute right’ to the payment in cash of the Redemption Amount within 60 days.[53] That ‘absolute right’ was the concomitant of OFM’s obligation to pay ‘in cash’ the Redemption Amount.
[53]Reasons, [119], adopting the reasoning in MSP Nominees (1999) 198 CLR 494, 502 [8] (Gleeson CJ, Gaudron, Gummow, Hayne and Callinan JJ).
Adopting and applying the reasoning of Barrett J in ING v ANZ, the associate judge held that, until paid, the money to be paid in consequence of OFM’s obligation met the description of ‘proceeds from withdrawals which have not yet been paid’, being property that is expressly excluded from the definition of Assets appearing in the Constitution. Being excluded from Assets for that reason meant that the sum to pay the Redemption Amount was taken to be held by OFM for the specific purpose of discharging its obligation, owed to each Class C unitholder, to redeem their units by payment in cash. Thus, the associate judge determined that OFM held the amounts due to the Class C unitholders for the redemption of their units in trust for them.[54]
[54]Reasons, [115]–[116], [119], [121]–[122].
Because Class C unitholders had a beneficial interest in a sum of money equalling the Redemption Amount, which was excluded from the trust Assets available to fulfil any payment obligations owed to other classes of unitholders, Class C enjoyed a ‘priority’ to payment of that sum before the remaining Assets (if any) were to be distributed.
In the Further Reasons delivered to explain the orders he made, the associate judge rejected the applicants’ submission that the effect of his reasoning was to recognise the creation of a ‘separate trust’ for the Class C unitholders upon the Redemption Date.[55]
Applicants’ submissions
[55]Further Reasons, [39]–[42].
The starting point for Class A’s argument is to emphasise the intended pre‑eminence[56] of Class A’s entitlement to payment of its Coupons as the essential backdrop or context against which to consider the entitlement of Class C unitholders to payment of their Redemption Amount. This is to be considered in the situation where there is a deficiency of Assets to pay out all unitholders’ entitlements.
[56]‘Pre-eminence’ was not a word used by Class A in their submissions, but it seems to us that it accurately expresses the tenor of their argument.
Class A submitted that its pre‑eminent entitlement to payment of its unpaid, accrued Coupons:
(a)results from the construction of the Class A and Class C Terms, each of which is informed by the content of the Information Memorandum; and
(b)is also a basis for not applying the reasoning in ING v ANZ to the construction of cl 7.1 of the Class C Terms.
Class A spent considerable time developing an elaborate submission about why and how the Information Memorandum should be taken into account when construing, first, the Class A Terms and, derivatively, the Class C Terms. So understood, ground 1, which is concerned with the use of the Information Memorandum, was an integer in the argument for ground 3. We endeavoured to identify where the Information Memorandum features in the ground 3 argument when we set out the broad sweep of the applicants’ overall submissions.[57]
[57]See above, [47].
In summary, Class A submitted:
(a)this is a case in which the caution against resorting to surrounding circumstances in construing the terms of constitutions, as explained in Lion Nathan, should be put aside;
(b)the Information Memorandum was prepared to inform Class A investors of their rights and entitlements and, in ss 2.7 and 2.12,[58] emphasised that Class A’s entitlement to Coupon payments (whether accrued or not yet accrued) has priority to any distribution of income or capital to the holders of any other unit class;
[58]See above, [14(c)(i)].
(c)if there is any ambiguity in the Class A Terms, those terms should be construed in the context of the provisions of the Information Memorandum, in particular ss 2.7 and 2.12;
(d)clause 4.4(a)(i) of the Class A Terms is ambiguous, because it provides that Class A unitholders rank for payment of unpaid Coupons ‘in priority to the holders of all other classes of units’, leaving it unclear whether that priority ranks Class A Coupons ahead of Coupon payments only, or Coupon and capital payments, for other classes;
(e)construed in the context of the Information Memorandum, cl 4.4(a)(i) of the Class A Terms gives priority to the payment of Class A Coupons over both Coupons and capital of other classes;
(f)alternatively — since this last mentioned proposition seems to have been abandoned for the purpose of the appeal (see [44] above) — construed in the context of the Information Memorandum, cl 4.4(a)(i) of the Class A Terms gives Class A unitholders a pre‑eminent right to payment of all their Coupons until those Coupons cease accruing, such that the rights of other classes are to be construed as subordinate to that pre‑eminent right;
(g)although not issued in conjunction with the Information Memorandum, the Class C Terms:
(i)were issued after the Class A Terms;
(ii)expressly refer to the Class A Terms;
(iii)are to be construed in the context of the Class A Terms as they, in turn, are to be construed in the context of the Information Memorandum; and
(iv)expressly ranked the payment of the Class C Coupons behind payment of the Class A Coupons [cl 4.3(a)(i)];
(h)the Class A Terms provided that OFM must not create any units in any other class that would reduce or limit Class A’s entitlement to its Coupons [cl 4.5], and the Class C Terms are also to be construed in that context;
(i)it follows from the foregoing that the construction of Class C’s entitlement to any Redemption Amount provided for by cl 7.1 of the Class C Terms is informed and constrained by Class A’s pre‑eminent right to payment of all accrued or unaccrued Coupons.
This pre-eminence or superiority of Class A’s claim to be paid all of its accrued and unaccrued Coupons ahead of Class C’s Coupons has, according to Class A, a number of consequences.
First, it means that cl 7.1 of the Class C Terms cannot be given a meaning that would override the priority Class A enjoys to receive its Coupons, as expressed in both cl 4.4(a)(i) of the Class A Terms and cl 4.3(a)(i) of the Class C Terms.
Secondly, it means that ‘proceeds from withdrawals which have not yet been paid’, appearing as an exclusion in the definition of Assets in the Constitution, cannot be construed to mean some notional sum representing a redemption that has not yet occurred. To start with, it is questionable whether a redemption is the same thing as a withdrawal. Even so, there must, at least, be some specific appropriation or identification of money toward payment of the redemption before there can be any ‘proceeds’. The phrase ‘proceeds from withdrawals’ should be given the same narrow meaning that Barrett J was initially attracted to in ING v ANZ yet did not ultimately adopt.
In this submission, the applicants were referring to the following passage in ING v ANZ:
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.[59]
[59]ING v ANZ (2009) 2 ASTLR 326, 332–3 [26]–[27] (Barrett J).
When speaking of Barrett J’s ‘initial’ view, Class A were referring to the first sentence of the first paragraph set out above, which they took to mean that ‘proceeds of redemption’ (the equivalent expression in that case) were the proceeds after a redemption was completed and the redemption rights had been fulfilled. Class A argued that the intended preservation and survival of their Coupon entitlements through to and including their final accrual (at the Class A Redemption Date) dictates that ‘proceeds from withdrawals’ can only mean proceeds once a redemption is complete and the redemption rights are fulfilled.
Thirdly, Class A argued, the pre-eminence of their Coupon payment entitlements provides an important point of distinction between the present case and the regime of documents and entitlements with which ING v ANZ was concerned. According to Class A, Barrett J confronted a conundrum interpreting the exclusion from Assets of ‘proceeds of redemption which have not yet been paid’. Justice Barrett had to grapple with a seeming inconsistency between a redemption that had not yet occurred but which had generated ‘proceeds’. According to Class A, Barrett J — acknowledging that only payment constituted redemption — arrived at a ‘commercially sensible’ resolution by construing the word ‘proceeds’ to mean monies that are to be paid in consequence of the creation of the obligation to redeem.
That ‘commercially sensible’ resolution is not warranted in the present case, the applicants submitted, because here, unlike in ING v ANZ:
(a)OFM had an ongoing power under the Constitution to create as many classes of units and types of withdrawals as it liked, including, for example, a mode of redemption that reflected the one which Barrett J identified. In other words, the need for judicial creativity is not warranted where the documentary regime allowed for such creativity but the trustee, OFM, chose not to use it; and
(b)the construction of cl 7.1 is to take place in the context of an intended pre‑eminence for the payment of Class A Coupons until they cease accruing, thereby differentiating the commercial context in which the construction exercise takes place.
Finally, Class A argued that the associate judge failed to explain how the Class C unitholders gained a proprietary interest in the Class C Redemption Amount before actual payment of the money, whilst OFM remained under an obligation to pay the amount to Class C unitholders and when the money was not the subject of any separate trust. Class A pointed out that cl 3.2 of the Constitution states that no unit conferred an interest in a particular part of the Trust or in any particular Asset. In those circumstances, Class A argued that Class C stood as creditors only for the Redemption Amount.
Class C’s and OFM’s submissions
Class C and OFM disputed Class A’s analysis and supported the associate judge’s reasoning and conclusion. Rather than enumerate their respective responses to Class A’s arguments, we will incorporate them into our consideration of those arguments. As will be gleaned from what follows, we largely adopt and agree with the submissions put forward by Class C and OFM.
Consideration
In considering ground 3 (and relatedly, ground 1), it is necessary to begin with the conclusion we have reached in respect of ground 2. That is, on the Class C Redemption Date, OFM was fixed with an obligation to pay the Class C unitholders their Redemption Amount, and the Class C unitholders acquired an absolute right to payment of that amount. No further act by OFM was required to either cement that obligation or perfect that right.
(a)The nature of Class C’s right to payment
What is meant by an ‘absolute right’? The right to the redemption of units was one of the collection of rights and interests conferred upon Class C unitholders by the terms of the Constitution and the Class C Terms. In the language of MSP Nominees, redemption:
did not yield up those rights and interests so as to discard them or to swell the interests of any remaining Unit Holders. Rather, the redemption effectuated, fulfilled or realised those rights and interests. Upon the favourable exercise of the Trustee’s discretion under cl 34, the Unit Holder in question had, at least, an absolute right to the price for the redemption.[60]
[60]MSP Nominees (1999) 198 CLR 494, 502 [8] (Gleeson CJ, Gaudron, Gummow, Hayne and Callinan JJ).
In MSP Nominees, the trigger for the creation of the trustee’s obligation to pay the redemption price and the concomitant absolute right in the unitholder to that price was a request by the unitholder and the discretionary consent given by the trustee. Relevantly, the difference between that case and the present is merely the definition of the trigger. In the present case, as we have explained, the trigger is the arrival of the Redemption Date. Allowing for that difference, the nature of the right created is the same.
Thus, the right to have units redeemed by OFM is to be understood as a means by which the unitholder effects, fulfills or realises the interest of a unitholder in a trust; that is, as the holder of a certain beneficial interest in the Assets of the trust. It is correct for Class A to point out that, pursuant to cl 3.2 of the Constitution, every unit confers an ‘equal and undivided interest in the Assets as a whole’ but ‘no Unit confers an interest in a particular part of the Trust or in any particular Asset’. However, when analysing the effect of the creation of the redemption obligation provided by cl 7.1 of the Class C Terms, it is critical to begin with the understanding that what is being effected by the redemption process is the effectuation, fulfilment or realisation of an equitable interest in the Assets as a whole. With this understanding, rather than asking how the creation of the obligation to redeem, without more, can result in a proprietary interest in favour of the unitholder whose units are to be redeemed, the question might more appropriately be asked, how can it not? To conclude that a unitholder, with an undivided beneficial interest in the Assets as a whole, beneficially holds the sum of money partitioned from those Assets when, under the terms of the trust, that interest is realised, makes more sense than finding that the unitholder loses any beneficial interest in that process.
(b)The implications of Class A’s right to be paid Coupons
As outlined above, a critical line of reasoning in the applicants’ argument is the fundamental pre-eminence to be accorded to the right of Class A unitholders to be paid their Coupons through to the Class A Redemption Date. Returning for the moment to the chronology: Class A units were first issued on 24 January 2017 with a Redemption Date set six years from the settlement of the purchase of the Hotel, making that date 18 April 2023; Class C units were first issued on 13 April 2017 with a Redemption Date set 12 months from the settlement, making that date 18 April 2018.[61] In each case, between the issue of the units and their respective Redemption Date, each class was to accrue and be paid Coupons at six-monthly intervals, calculated as a yearly percentage return on the unit price of each unit (which was $1.00 in each case).[62] Class A unitholders were to receive Coupons paid at 6.5 per cent per annum and Class C unitholders were to receive Coupons paid at 13 per cent per annum.
[61]Putting aside the question of whether the Class C Redemption Date might have been subsequently altered.
[62]Although some Class C units were said to have been issued at prices slightly greater than $1 — see [13] above — the unit register for the Fund records that there were 8,170,000 Class C units issued at a price of $1.
In broad terms, Class A subscribed capital for six years with a 6.5 per cent annual return until the return of their capital; Class C subscribed capital for 12 months with a 13 per cent annual return until the return of their capital. Class A accepted that the clear inference from the facts we have just described is that, shortly before settlement of the purchase of the Hotel, OFM saw fit to seek ‘mezzanine’ finance for the purchase of the Hotel by offering and issuing short-term units at a high rate of return.
The implication of Class A’s argument about the pre-eminence of the payment of their Coupons until those Coupons ceased accruing six years after the issue of the Class A units, is this: OFM should not pay Class C’s Coupons in the 12-month period until the Class C Redemption Date, nor Class C’s Redemption Amount at the end of that 12‑month period. This is because there would always remain a doubt as to whether OFM would be able to continue to pay Class A’s Coupons for the approximately five‑year period after the Class C Redemption Date.
Class A accepted that the effect of their argument was that it would at least be ‘prudent’ for OFM to postpone Class C’s payments, adding that that is in substance what has occurred. They also accepted that the effect of that argument would require various express provisions of the Class C Terms not to be given their ‘literal’ meaning. One such provision is the entitlement of the Class C unitholders ‘to receive’ the Coupon for each Coupon Period (as defined) in cl 4.1 of the Class C Terms, and another is the requirement in cl 7.1 that Class C unitholders be paid the Redemption Amount 60 days after the Redemption Date.
Not giving those provisions their ‘literal’ meaning might be viewed as a rather euphemistic expression; what Class A must mean is that in each case the provisions are to be construed as if qualified by words which entirely contradict their plain meaning. Class A’s argument would require those provisions to be read as if they provided for a deferral of payment until after Class A’s Redemption Date, more than five years after the expiry of what was intended to be a short-term, 12‑month investment. Such radical surgery to the plain terms of the Class C Terms would require compelling contextual indications that that was the objective intention of the parties to the Class C Terms. In our view, for reasons we will go on to explain, no such compelling contextual indications exist.
(c)Information Memorandum
The first premise of Class A’s argument involves the role to be played, if any, by the Information Memorandum in the construction of the Class C Terms, by reference to the role it plays in the construction of the Class A Terms. Clearly — and this was not disputed — the Constitution and the Terms of Issue for each class were, at least, the primary documents to consider. It was not suggested that the Information Memorandum was a constituent document of the contract made between either Class A and OFM or Class C and OFM when acquiring units in the trust. At its highest, the Information Memorandum potentially formed part of the relevant external surrounding circumstances when a unitholder agreed to the Class A Terms or the Class C Terms and the provisions of the Constitution under which each set of Terms was issued.
Neither set of Terms of Issue makes reference to the Information Memorandum. Both expressly provide that if there is an inconsistency between the terms of the Constitution and Terms of Issue, the latter prevails. So far as the Information Memorandum is concerned — noting that it was issued only in connection with the issue of the initial units to Class A (and Class B) — it states that to the extent there is any inconsistency between statements contained within it and the terms of the Constitution, the Constitution is to prevail.
The traditional reasons for not permitting resort to surrounding circumstances when construing a deemed contract such as a company constitution — and, by analogy, the constitution of an investment trust — apply in this case to justify strong caution against having regard to the provisions of the Information Memorandum. That caution applies with the greatest force when construing the Class C Terms. The evidence before the associate judge of the numbers of investors in both classes of units, the progressive issue of those units, and the transfers of the units to different unitholders subsequent to their initial issue, demonstrates that this is a significantly different case to Lion Nathan, in which the relevant membership in the company was ‘small and in some degree closely held and relatively static’.[63] In Lion Nathan, it was this tightly held membership and other ‘special features’ of the company in question which, in the view of Lander J, justified recourse to an explanatory memorandum. That memorandum had been prepared to explain the amendment to the constitution that was in question.[64] Such special features are absent in the present case.
[63]Lion Nathan (2006) 156 FCR 1, 14 [64] (last bullet point) (Weinberg J).
[64]Ibid 51 [257] (Lander J). Kenny J agreed that recourse to the explanatory memorandum was permissible: see 28–9 [126]; Weinberg J disagreed at 16 [73].
Even if it might have been appropriate to have regard to the Information Memorandum for the purpose of construing the Class A Terms, it is difficult to see how a rational argument can be mounted to say that it is also to be taken into account in construing the Class C Terms. It was not provided to Class C unitholders, as it did not relate to the issue of Class C units. At the time when OFM issued the Information Memorandum, only two classes of units were specifically contemplated: Class A units and Class B units (the latter of which are not relevant to any issue in this proceeding). It cannot be regarded as a document which all parties to the Class C Terms knew about and, hence, it did not form part of the mutually known circumstances at the formation of the contract between OFM and the Class C unitholders.
At most, the Information Memorandum might have contributed to a strong expectation on the part of the Class A unitholders that payment of their Coupons over the life of their investment was relatively secure. In other words, the statements made in ss 2.7 and 2.12 of the Information Memorandum[65] may have reinforced the message of the Class A Terms themselves that Class A’s entitlement to payment of ‘unpaid unsatisfied or deferred Coupons (whether earned or declared or not)’ ranked ahead of other classes [cl 4.4(a)(i) of the Class A Terms]. The Class A Terms strengthened that message even further by providing that OFM must not create any other class of units that would reduce or limit the right of Class A unitholders to receive their Coupons [cl 4.5].
[65]See above, [14(c)(i)].
Nevertheless, the Constitution also provided that: OFM could create and issue further units of a different class to those already on issue [cl 3.4(a)]; OFM could make the issue of further units subject to the rights, obligations and restrictions specified in their Terms of Issue [cl 3.4(b)]; and the rights and restrictions attaching to a class are subject always to the rights, obligations and restrictions which attach to the units issued in other classes [cl 3.4(d)]. The Information Memorandum also referred to OFM’s ‘absolute discretion’ to issue new classes of units at any time with different terms and rights.
When Class A units were issued, the Class A Terms made no reference to Class C units or the Class C Terms for the obvious reason that no Class C units had been issued at that time. Even so, it was certainly contemplated that OFM might issue other units at a later point in time. By contrast, when the Class C units were issued it was known that the Class A units existed, as the Class C Terms made specific reference to those units and the Class A Terms. To the extent that the Class C Terms subjected Class C unitholders’ rights to those of Class A, they only did so, explicitly, in relation to payment of Coupons.
(d)Commercial purpose
Payment of Coupons to both Class C and Class A was to be progressive; that is, they were to be paid at intervals over the duration of the respective investments. There is nothing in either the Class A Terms or the Class C Terms that says that Class A’s priority for payment of Coupons prioritises the entirety of its Coupon entitlements over any individual Coupon entitlement of Class C. There is nothing in the Constitution that says that OFM may not issue any subsequent class of units that will provide for payment of Coupons to that class during the period of the Class A investment. Nor is there anything that says that OFM may not issue any subsequent class of units that may be redeemed in the period of the Class A investment. Yet those prohibitions appear to be the logical result of Class A’s argument as to the ultimate pre-eminence of its entitlement to Coupon payments.
Class C units were issued to obtain money with which to complete the purchase of the Hotel, which was to be the asset of the Fund. As noted, they were issued for a 12‑month period at a high rate of return, compared to the return on the six-year, Class A investment. The evident commercial purpose of the issue of those units would be defeated if Class C investors were to have the redemption of their 12-month investment deferred for six years and the periodic payment of the high rate of return also postponed. Had the Class C Terms been issued on such terms, it is hardly to be supposed that the issue would have attracted any investors. A construction of the scheme of rights and entitlements amongst the different classes that produces that result invites the closest scrutiny.
The ambiguity which Class A first pointed to as justifying resort to surrounding circumstances, on the established construction principles, was the possible uncertainty as to whether Class A’s priority to payment of Coupons is meant to rank that payment ahead of payment of Class C Coupons only, or Class C Coupons and capital. Having abandoned that argument for present purposes, it is unclear what ambiguity Class A now points to. Their alternative argument (see [95(f)] above) looks very much like the one they abandoned. Its ultimate effect, if accepted, is to postpone the payment of Class C’s Redemption Amount (which incorporates Class C’s capital amount) to the payment of all accrued, and still to accrue, Class A Coupons.
(e)Clause 4.5 of the Class A Terms
Perhaps the strongest argument in favour of Class A’s position is the prohibition in cl 4.5 of the Class A Terms against OFM creating other units that would limit Class A’s right to receive Coupons. But several answers may be given to that argument. First, on one view, by issuing units on the Class C Terms, OFM has not limited Class A’s right to receive Coupons, because the Class C Terms expressly preserved Class A’s priority to receive Coupons ahead of payment of Class C Coupons.
Arguably, OFM might only have breached cl 4.5 of the Class A Terms if that clause is construed as prohibiting the creation of a class which is entitled to be paid any Coupons, or have its units redeemed, before Class A’s Redemption Date. We are not persuaded that cl 4.5 must carry that meaning. However, even if it does, the further question is what should flow from that. Would cl 4.5 of the Class A Terms negate the apparently plain terms of cls 4.1 (payment of Coupons during the investment period) and 7.1 (payment of the Redemption Amount in 60 days) in the Class C Terms? We think not. The alternative, and better view, is that any breach by OFM of cl 4.5 of the Class A Terms would give rise to a contractual right in Class A against OFM for damages resulting from that breach. Indeed, Class A has sought that relief and intends to pursue it if it fails in this argument. We are not to be taken as expressing any view on whether OFM has breached cl 4.5.
It follows from the views we have expressed that we reject Class A’s argument that a proper construction of the Terms of Issue of both classes, whether informed by the Information Memorandum or not, erects a premise as to the pre-eminence of Class A’s entitlement to be paid all of its Coupons to which the construction of cl 7.1 of the Class C Terms must submit. For completeness, we reject the proposition that the Information Memorandum may be taken into consideration in construing the Class A Terms, still less the Class C Terms.
(f)Proceeds from withdrawals which have not yet been paid
That still leaves for consideration the legal effect of the ‘absolute right’ which Class C obtains upon the creation, on the Redemption Date, of OFM’s obligation to pay the Redemption Amount.
In our view, the analysis applied by Barrett J in ING v ANZ and adopted by the associate judge is correct. That is to say, in this case, upon the Redemption Date the amount due to be paid to the Class C unitholders to redeem their units became ‘proceeds from withdrawals which have not yet been paid’. Having that character, a sum of money in that amount was excluded from the Assets of the trust that were available to be used to meet the expenses of the trust or to pay to other unitholders. As set out in the Constitution, other such exclusions are money that has been paid for units which have not yet been issued to a unitholder, or any Distributable Amount awaiting payment to unitholders. In other words, the exclusions represent money that does not ‘belong’ to the unitholders in general.
The Constitution does not define the word ‘withdrawals’. However, the word ‘withdrawal’ is used in numerous places in the Constitution, principally in Part 5, which is headed ‘Withdrawal Price for Units’ and Part 6, which is headed ‘Withdrawal Procedures’. In cl 5.1(a), appearing in Part 5, the Constitution provides that, if the trust is not a registered scheme (which the Fund was not), ‘Units may be redeemed at a Withdrawal Price determined by the Trustee’. That is not the only occasion in the Constitution where the language of redemption and withdrawal is used together.[66]
[66]See also cls 6.4, 6.6, 6.8.
In clauses appearing in Part 6, the Constitution provides for various means of ‘withdrawal’ of units including by the unitholder making a request (cl 6.3), and a ‘compulsory withdrawal’ whereby the Trustee ‘may redeem’ the units without a withdrawal request (cl 6.4). In context, it appears that the word ‘withdrawal’ is the generic description of the result of a unitholder no longer holding units, and ‘redemption’ is a process by which that might occur; namely that the trustee ‘buys back’ the unit. Especially where the withdrawal is effected by the trustee redeeming the units, it is perfectly apt to describe the money due to be paid for that redemption, until actually paid, as the ‘proceeds from withdrawals which have not yet been paid’.
Class A suggested that Barrett J had come to one view about the meaning of ‘proceeds of redemption’ (as that phrase occurred in ING v ANZ), but then adopted a different meaning for ‘commercially sensible’ reasons that do not apply to the current case. We do not see that there were two meanings considered. Justice Barrett merely queried how a completed redemption, which requires a payment to be made, can also result in money that had not been paid. Clearly that is illogical and an alternative construction of the phrase had to be sought. He resolved that illogicality by concluding that the proceeds of redemption are the moneys to be paid for the redemption (once that obligation to redeem has arisen).
However, that very illogicality is inherent in Class A’s argument. They insist that proceeds from a withdrawal can only exist once redemption is complete, and redemption is only complete by payment of money. To avoid that illogicality, Class A sought to interpose another step in redemption whereby money would be earmarked as proceeds from withdrawals, referred to as ‘identifying and appropriating a specific sum of money’ toward redemption. As we have said, there is nothing in the text of the Constitution or the Class C Terms to support such a requirement.
But, suppose OFM had, soon after the Class C Redemption Date, identified and appropriated a specific sum of money toward payment of the Class C Redemption Amount, cancelled the Class C units in the unit register and paid the money to the Class C unitholders. On Class A’s argument, the redemption of Class C’s units would have been complete, and it would have been carried out in accordance with the method it argued was necessary to effect redemption. Adding those steps would have done nothing to ensure the payment of all of Class A’s Coupons through to the Class A Redemption Date. In other words, the additional steps that Class A argued are to be implied in the redemption process provided by cl 7.1 of the Class C Terms, in order to preserve Class A’s pre‑eminent right to be paid Coupons, would not have achieved that purpose. Put another way, the supposed pre-eminence of their entitlement to be paid Coupons does not support, as a matter of construction, Class A’s argument about what is required before Class C obtained an absolute right in the Redemption Amount.
To the contrary, the combination of:
(a)redemption being a unitholder’s means of realising their rights and interest in trust assets;
(b)the immediacy of the obligation to redeem occurring ‘on’ the Redemption Date without any qualification or further act mentioned;
(c)the fact that such redemption must nevertheless be completed by a payment in cash for which a timeframe is prescribed; and
(d)the exclusion from Assets of ‘proceeds from withdrawals which have not yet been paid’,
powerfully support the construction of cl 7.1 and the definition of Assets adopted by the associate judge.
(g)ING v ANZ distinguished?
We are not persuaded of the merit of any of the grounds upon which Class A sought to distinguish the circumstances in ING v ANZ from those in the present case. First, there is no intrinsic difference in the nature of a trustee’s obligation to redeem units that is dependent upon whether that obligation results from a member requesting the trustee to redeem, or from the occurrence of a specified event such as the arrival of a date. Secondly, the fact that the present case requires consideration of more documents, and more potential modes of redemption, than those considered in ING v ANZ only means that the construction analysis must cover more ground. Having undertaken that analysis, we do not see any basis for not applying the same reasoning that Barrett J applied. We have already discussed at length, and rejected, the third alleged basis for distinction, namely, the supposed pre-eminence of Class A’s Coupon rights affecting the construction exercise.
(h)Relationship between OFM and the Class C unitholders
The final debate concerned the precise nature of the relationship between OFM and the Class C unitholders in relation to the ‘proceeds from withdrawals’ excluded from Assets. Class A submitted that the redemption process ‘transmuted’ the Class C unitholders to creditors of the Trust in respect of the payment of the Redemption Amount.
The Constitution provides that the ‘Trustee holds the Assets on trust for the Unitholders on the terms contained in this Constitution’ [cl 2.2(a)]. As previously noted, it also provides that every unit confers ‘an equal and undivided interest in the Assets as a whole’ but not in ‘any particular Asset’ [cl 3.2]. The Assets include ‘all property, rights and income of the Trust’ but exclude those things we have already mentioned.[67]
[67]See above, [128].
In explaining why the ‘proceeds from withdrawals’ were held on trust for the Class C unitholders, not within the Assets which OFM held for all unitholders but also not subject to a separate trust, the associate judge adopted the statements of Barrett J on this point in ING v ANZ. In particular, Barrett J said:
It was suggested in the course of submissions that a member whose units become subject to the responsible entity’s obligation [to pay the member the relevant redemption sum] becomes a creditor of the responsible entity … . 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. … [T]he right to payment is a right, as a beneficiary, to have the trust fund applied in satisfying the payment.
…
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.[68]
[68]ING v ANZ (2009) 2 ASTLR 326, 332 [23], 333 [28] (Barrett J) (emphasis added).
The associate judge said that Barrett J’s reference to the ‘trust fund’ was a reference to the funds held by the trustee in trust for the members.[69] Here, those funds included the Redemption Amount. The associate judge said that the result of the redemption is that OFM became subject to an obligation to the relevant beneficiaries (Class C unitholders) to pay the Redemption Amount; it did not create a separate trust.[70]
[69]Further Reasons, [41].
[70]Ibid [42].
We agree. So long as the Class C units remained unredeemed (such redemption requiring payment of the Redemption Amount), the trustee-beneficiary relationship between OFM and the Class C unitholders subsisted. OFM continued to owe a fiduciary obligation to Class C unitholders. The arrival of the Class C Redemption Date created an obligation on OFM to pay the Redemption Amount to the Class C unitholders, who acquired a concomitant, absolute right to the Redemption Amount.
As Class C contended, there is no reason to suppose that a trustee may not hold money for a specific beneficiary, allocated out of assets held generally for all beneficiaries, without resettling the sum on a new and separate trust. It will depend on the terms of the trust.
Here, the terms of the trust were found in the Constitution and the specific Terms of Issue for the different classes of beneficiaries as determined by the trustee pursuant to powers granted under the Constitution. Those terms determined the life-cycle of a unitholder’s interest in the trust, through to and including when a unitholder’s units were completely redeemed. The process of redemption, through to ultimate payment of the Redemption Amount, was governed by the terms of the trust which, as we have said, included the provisions of the Terms of Issue. That process involved, for a period of time, OFM holding money for the relevant unitholder, yet to be paid, as the proceeds from the withdrawal. The holding of the ‘proceeds from withdrawals’ as provided under the terms of the Constitution does not represent some activity outside of the trust, so as to imply that the money so held is held under a separate trust. Rather, as explained already, the redemption process is a means of realising a unitholder’s interests in trust assets under the existing trust.
Class C referred us to the decision of the High Court in Fischer v Nemeske Pty Ltd,[71] and in particular to the judgment of Gageler J (as he then was), to support its submission that the notion that a trustee might allocate specific monies out of trust property to a specified beneficiary upon the terms of the existing settlement, without creating a new or separate trust, is ‘orthodox as a matter of principle’.[72] Fischer concerned a different trust context, namely a discretionary trust and the power conferred on a trustee to ‘advance’ and ‘apply’ money to specified beneficiaries. That said, the observations made by Gageler J at [96]–[100] appear to us to be of more general application. In those paragraphs, after reviewing two cases concerning a trustee exercising a power to apply trust property to the advancement of a specified beneficiary, Gageler J continued:
In neither of those cases was there any suggestion that the trustee’s exercise of the power to apply trust property involved a resettlement of trust property so as to result in the creation of a new trust. The exercise of the power by way of unconditional and irrevocable allocation of trust property was seen rather to result in the crystallisation of an immediate absolute beneficial entitlement in respect of property which, before and after the resolution of the trustee, remained property which the trustee held on trust under the terms of the existing settlement.
The trustee’s power to apply trust property having been held in each of those cases to be available to be exercised by means of an unconditional and irrevocable allocation of trust property, the consequence that the exercise of that power effected an alteration of beneficial entitlements in property which the trustee continued to hold on trust under the terms of the existing settlement was orthodox as a matter of principle. It was also unremarkable as a matter of practice. The power to apply trust property, as interpreted in the cases, was but an example of a power conferred on a trustee by the terms of settlement to bring about an alteration of beneficial entitlements: the power was of such a nature that the exercise of the power was ‘so to speak, to be read into’ the existing settlement with the result that the beneficial entitlements as altered by the exercise of the power were to be recognised and administered by the trustee after the exercise of the power ‘as if the settlement had actually provided’ for them.[73]
[71](2016) 257 CLR 615; [2016] HCA 11 (‘Fischer’).
[72]Ibid 650 [98] (Gageler J).
[73]Ibid 650 [97]–[98] (Gageler J). French CJ and Bell J, with whom Gageler J formed the majority, appeared to agree with Gageler J on this point at 635 [33].
In our view, those observations are apt in this case because the power to hold specific money for the Class C unitholders as ‘proceeds from withdrawals’, separately from the Assets of the Fund, was a power expressly provided by the ‘existing settlement’. No separate trust was required or created. The associate judge’s conclusion that OFM continued to hold the Redemption Amount on trust for the Class C unitholders does not disclose any error on his part.
(i)Other matters
We need not decide whether, as the associate judge found and Class A declined to challenge, the Class C Coupons took on a different character when aggregated with the issue price of the Class C units to form the Class C Redemption Amount, and thereby evaded the priority conferred upon payment of the Class A Coupons over payment of Class C Coupons. We need not decide that issue because the capital component alone of the Class C Redemption Amount will absorb the entirety of the Fund.
Conclusion
Class A’s proposed grounds 1 and 2 have insufficient prospects of success to justify leave to appeal being granted. We would, however, grant leave to appeal on proposed ground 3 but dismiss the appeal.
SCHEDULE OF PARTIES
JIANQIANG SHAO First applicant RUIXIANG YUAN Second applicant LINGYUN HUANG Third applicant TUNGPING SO Fourth applicant YUEFANG XU Fifth applicant HONGSHAN YANG Sixth applicant BINGHUA YUAN Seventh applicant v ONE FUNDS MANAGEMENT LIMITED (ACN 117 797 403) (in its capacity as trustee of the iProsperity JY Hotel Fund) First respondent ONE FUNDS MANAGEMENT LIMITED (ACN 117 797 403) (in its capacity as trustee of the Glen Waverley Fund) Second respondent ONE FUNDS MANAGEMENT LIMITED (ACN 117 797 403) (in its capacity as trustee of the iProsperity Cornerstone Property Income Fund) Third respondent ONE FUNDS MANAGEMENT LIMITED (ACN 117 797 403) (in its capacity as trustee of the iProsperity Property Opportunities Fund) Fourth respondent ONE FUNDS MANAGEMENT LIMITED (ACN 117 797 403) (in its capacity as trustee of the iProsperity Cornerstone 333 Kent Fund) Fifth respondent iPROSPERITY UNDERWRITING PTY LTD (in liquidation) (ACN 619 068 969) Sixth respondent MINGHAO LI Seventh respondent BINGHUA YUAN Eight respondent GUIBAO YUAN Ninth respondent HONG GUO Tenth respondent and DAVID HING Class C Representative
2
11
0