asic's response to hca, regarding appeal wcl , page-2

The first seven (7) pages of the nineteen (19) page document.


IN THE HIGH COURT OF AUSTRALIA SYDNEY OFFICE OF THE REGISTRY 5 10 15 On appeal from The Full Court of the Federal Court of Australia BETWEEN: AND: ~----~~~~~;--HiGH COUR_T Of_AUSD"tt\UA__ FILED 1 7 JAN 2014 THE REGISTRY SYDNEY No. S275 of 2013 WELLINGTON CAPITAL LIMITED (ACN 114 248 458) Appellant AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION First Respondent L-..:.:..:.:::_:.:.::...:.;..:;..-------PERPETUAL NOMINEES LIMITED (ACN 000 733 700) Second Respondent 20 25 SUBMISSIONS OF THE FIRST RESPONDENT Filed by the First Respondent: Georgina Hayden Solicitor for the Australian Securities & Investments Commission Level 5, 1 00 Market Street SYDNEY NSW 2000 Date of document: 10 January 2014 Contact: Georgina Hayden/James Docherty DX 653 Sydney Phone: (02) 9911 2000 Fax: (02) 9911 2414

PART I FORM OF SUBMISSIONS 1. These submissions are in a form suitable for publication on the internet. PART II 5 2. ISSUES The issues to be determined in the appeal are whether: PART Ill 3. clauses 13.1 and 13.2.5 of the Constitution of the Premium Income Fund (Fund) authorised the appellant to make an in specie pro-rata distribution of shares in Asset Resolution Limited (ARL) to all unit holders in the Fund; unit holders in the Fund prospectively agreed to become members of any company that might be selected for them (here ARL) for the purposes of s 231 (b) of the Corporations Act 2001 (Cth) (Act) by the anterior facts of subscribing for units in the Fund and thereby agreeing to abide by the Fund Constitution (which contained cll13.1 and 13.2.5) absent any further specific agreement of individual unit holders; assuming the Full Court correctly decided the above issues, it nevertheless erred in exercising its discretion to make declaratory relief. JUDICIARY ACT 1903 (Cth), s 788 The first respondent (ASIC) considers that no notice is required under s 78B of the Judiciary Act 1903 (Cth). PART IV 25 4. FACTS The summary of the facts at [8]-[19] of the appellant's submissions (AS) is accurate but incomplete. A more complete statement of the facts, particularly as underpin the issue of discretion, is as follows. 5. 30 6. At the time of the transaction with ARL, the Fund had in excess of 10,000 unit holders.1 The Fund was listed on the National Stock Exchange (NSX) and units in the Fund were tradeable on the exchange.2 ARL was registered as a special purpose vehicle exclusively for the purposes of the transaction. 3 ARL was unlisted
The assets transferred to ARL constituted approximately 41% of the assets of the Fund,5 with a publicly stated value of $90.75 million.6 On 4 September 2012, ARL issued 100% of its issued share capital to the second respondent (Perpetual) in its capacity as custodian of the Fund.7 On the same date, the appellant instructed Perpetual to distribute the ARL shares to each unit holder based on their individual unit holding in the Fund as at 4 September 2012.8 The distribution was complete by 5 September 2012.9 The appellant did not consult with unit holders in relation to the sale of 41% of the Fund's assets to ARL or the transfer to them of shares in ARL.10 The appellant instead issued a media release to the NSX on 5 September 2012, which noted, inter alia: 11 "As a result of this transaction, the [Fund] received 830,532,768 ordinary shares in ARL, a special purpose unlisted public company. These shares have been transferred to Unitholders based on their Unitholding in the [Fund] as at 4 September 2012. Each Unitholder now owns shares in ARL on the basis of one ARL share for each Unit they hold in the [Fund]. . .. Holding statements will be sent to each Unitholder shortly." Unit holders were sent a holding statement setting out the ARL shares issued to them, together with a copy of the 5 September media release, by 19 September 2012.12 Accordingly, unit holders, neither individually nor through any collective mechanism sanctioned by the Fund Constitution nor the Act, consented to the transfer to them of shares in ARL or to the corresponding decrease in assets held on trust for them in the Fund. It also follows that, as to a substantial part of the assets of the Fund (equivalent to 41% by value), the unit holders of the Fund went from being members of a listed managed investment scheme involving a trust operated by the appellant as responsible entity and subject to the duties imposed by Ch 5C of the Act, to being members of an unlisted company under the control of different people, and this without any specific agreement on their part or even consultation with them.13 13. One issue joined between the Appellant and ASIC before Jagot J, which on appeal was the sole surviving legal issue, was whether that action by the appellant constituted a contravention of the Act and went beyond power under the Fund Constitution. PARTV 5 LEGISLATIVE PROVISIONS 14. ASIC agrees with the appellant's identification of applicable legislation. PART VI SUMMARY 15. ARGUMENT In summary, ASIC submits: (a) (b) (c) clauses 13.1 and cl 13.2.5 of the Fund Constitution did not authorise the appellant to distribute ARL shares in specie and pro-rata to all unit holders. Both clauses proceed on the basis of a hypothetical state of affairs (absolute ownership) that is unrelated to the trustee/beneficiary relationship actually in place between the appellant and unit holders. Neither clause expressly refers to the making of distributions to unit holders. Neither clause speaks to the circumstances in which the appellant (as trustee) was entitled to make distributions of trust property to unit holders (as beneficiaries). ASIC's construction of cll13.1 and 13.2.5 is reinforced by a consideration of the Constitution as a whole (which expressly provides for distributions to unit holders in ell 16 and 26) and by a consideration of the general law and statutory context in which the Constitution operates; the Full Court did not err in failing to hold that the unit holders to whom ARL shares were distributed agreed to become members for the purposes of s 231(b} of the Act. Even if cll13.1 and 13.2.5 of the Fund Constitution might otherwise bear the appellant's proposed construction, the mere existence in the Fund Constitution of those plenary powers clauses was not sufficient to evidence agreement on the part of each unit holder to the receipt of shares in any company that might be selected for them in any circumstances without prior notice or consultation and absent any further specific agreement of individual unit holders; the Full Court having correctly decided the above two legal issues, did not err in declaring that the in specie transfer was not authorised by the Fund Constitution and that the appellant thereby contravened s 601 FB of the Act. It was not necessary for ASIC separately to join all unit holders, or representatives of those unit holders, because the relief sought had, at most, an indirect effect on unit holders. The discretion of the Full Court did not otherwise miscarry.
MANAGEDINVESTMENTSCHEME:NATUREANDCONTEXT 16. Before considering the three issues, it is appropriate briefly to set out relevant aspects of the legislative regime that pertains to the appellant and the Fund. Legislative scheme in summary The Fund is a "managed investment scheme" (MIS) registered under Ch 5C of the Act.14 An MIS is defined ins 9 of the Act and has three principal features:15 (a) people contribute money or money's worth as consideration to acquire rights to benefits produced by the scheme; (b) (c) 18. any of the contributions so made are to be pooled, or used in a common enterprise, to produce benefits to members of the scheme; and members of the scheme do not have day to day control over the scheme's operation. An MIS has no legal personality either before or after registration. As a result, an entity must operate the scheme and hold the contributions and other property that forms part of the scheme. That entity is described in the Act as the "responsible entity" (RE). 19. 20. 21. 22. 23. Upon registration, a number of requirements and obligations are imposed upon theRE by Ch 5C of the Act.16 Four are presently relevant. First, theRE must operate the MIS. Section 601 FB(1) provides: "The responsible entity of a registered scheme is to operate the scheme and perform the functions conferred on it by the scheme's constitution and this Act." In operating an MIS, an RE is permitted to appoint agents to perform some of its functions and powers.17 An RE is also permitted to appoint a custodian to hold scheme property on its behalf.18 However, the RE remains ultimately responsible for the scheme and its operation.19 Secondly, section 601 FC(2) the Act provides: "The responsible entity holds scheme property on trust for scheme members." "Scheme property" is defined in s 9 of the Act and relevantly includes property acquired, directly or indirectly, with the proceeds of contributions made by members of the scheme. It is common ground that the ARL shares issued by ARL to the Fund custodian were scheme property of the Fund prior to the distribution of the shares to unit holders.20 Section 601 FC(2) has the effect of creating a trust, by force of law, of which the RE is trustee and scheme members are beneficiaries.21 The trust relationship thereby created is of prime importance in this appeal. Thirdly, an RE is required to create, and abide by, a scheme "constitution". The scheme constitution is a central feature of the legislative scheme. The right of a member to have the MIS administered according to the constitution of the scheme is fundamentally the most important right of membership. Without it, all other rights of membership, as well as the continuance, success and security of the scheme, would be at the whim of the RE.22 In order to register a MIS under the Act, a person must lodge an application that contains, inter alia: (a) a copy of the MIS's constitution; and (b) a statement by the directors of the proposed RE that the constitution complies with ss 601 GA and 601GB of the Act.23 Section 601 GA prescribes the contents of the constitution. Relevantly, the constitution must make adequate provision for: (a) (b) the powers of the RE in relation to making investments of, or otherwise dealing with, scheme property; and the winding up of the scheme.24 Section 601GB requires that the constitution must be contained in a document that is legally enforceable between the members of the scheme and the RE. Fourthly, ASIC is empowered pursuant to s 601 FF of the Act to check whether the RE of a registered scheme is complying with the scheme's constitution, compliance plan and the Act. An RE and its responsible officers are required to take all reasonable steps to assist ASIC in undertaking any such check.25 Historical context 29. Chapter 5C was inserted into the then Corporations Law by the Managed Investments Act 1998 (Cth). That Act formed the Commonwealth government's response to a joint report by the Australian Law Reform Commission and the Companies and Securities Advisory Committee entitled Collective Investments: Other people's money (ALRC No 65, 1993) (ALRC Report).26 As the Court has recognised, the ALRC Report was a consequence of:27 "the collapse or closure of many property trusts in the late 1980s, following a severe decline in commercial property values, which led to a loss of investor confidence. Amongst the issues which the Review addressed were the protection of investors and the termination of investment schemes." The ALRC Report relevantly recommended that: (a) (b) (c) (d) the then existing division of responsibility for prescribed interest schemes between a trustee and manager should cease. Rather, a single entity should be held responsible for the operation of the scheme;28 the scheme operator should owe duties directly to the members of the scheme;29 where the scheme operator held property of the scheme, it should do so on trust for members of the scheme;30 and ASIC (then the ASC) should supervise the operation of the statutory regime, approve the registration of schemes, and monitor compliance by scheme operators with the Act.31 Each of these recommendations was reflected in the Managed Investments Act, although different nomenclature was used in the legislation.32 FIRST ISSUE-PROPER CONSTRUCTION OF FUND CONSTITUTION 33. 25 34. Neither cl 13.1 nor cl 13.2.5 of the Fund Constitution authorised the RE to make an in specie and pro-rata distribution of ARL shares to all unit holders. Clause 13.1 Clause 13.1 is to be construed objectively, with due regard to its nature and purpose and to the words used in the provision, as assessed in the context of the Fund Constitution as a whole and the legal framework in which the Fund operates.33 Five main matters may be noted