SECOND ISSUE-ASSENT OF UNIT HOLDERS AND SECTION 231 (b)...

SECOND ISSUE-ASSENT OF UNIT HOLDERS AND SECTION 231 (b) Disposition of the second issue 58. 5 10 59. If the Court accepts the construction of ell 13.1 and 13.2.5 set out above, the second issue .falls in favour of ASIC. This is because the only basis on which the appellant contends that assent was provided in the present case is the existence of those clauses (as construed by the appellant) in the Fund Constitution. However, even if the Court accepts the appellant's construction of ell 13.1 and 13.2.5, ASIC submits that s 231(b} has not been satisfied. (What follows is therefore premised, for the purposes of argument only, on acceptance of the appellant's construction.) Section 231 {b) not satisfied in the present case 60.
61. 62. Whether or not s 231(b) is satisfied is a question of fact in each particular case. 54 The agreement of a member may be satisfied in a variety of ways. In some cases, s 231(b) may be satisfied by a bilateral agreement between the putative member and the company. In other cases, a bilateral agreement may not be necessary and s 231(b} will be satisfied by unilateral conduct on the part of the putative member. 55 In still other cases, agreement may be inferred from the conduct of the putative member after receipt of shares.56 As Higgins J recognised in Farmers' Mercantile, to attempt to provide greater content for the statutory requirement risks undue formalism. 57 The appellant's reference to socalled "far reaching consequences" of the Full Court's decision ignores these matters.58 In the present case, the appellant contends that each unit holder agreed to accept shares in any company that might be selected for it (here ARL shares) for the purposes of s 231(b) merely by reason of the anterior facts of the existence of ell 13.1 and 13.2.5 in the Fund Constitution. That contention should not be accepted for four reasons. First, the Constitution does not contain any power expressly providing for an in specie distribution of shares in a company to unit holders (at most, ell 13.1 and 13.2.5 impliedly authorise that conduct). Nor does the Constitution disclose that the powers contained in the Constitution could result in an in specie distribution of shares in a third-party company in lieu of a cash distribution pursuant to cl 16 of the Constitution. This is not a case in which the agreement of members can safely be inferred from the fact that unit holders have applied for units in the Fund and have agreed to be bound by the terms of the Fund Constitution. 63. 64. 65. 66. Secondly, the appellant's reliance on Re Crusader Limited (1995) 1 Qd R 117 is misplaced.59 In that case, the constitution conferred an express power on noteholders in general meeting to pass an extraordinary resolution sanctioning the exchange of notes for shares, stock, debentures, debenture stock or other obligations. In reliance on that power, a meeting of noteholders was called and an extraordinary resolution was passed altering the constitution so as to require the exchange of notes for shares and cash. Having regard to these matters, Thomas J found that the predecessor to s 231(b) had been satisfied in respect of all noteholders, including those that voted against the resolution. It is unnecessary for the Court to decide whether Re Crusader was correctly decided. This is because the facts of the present case are far removed from those considered by Thomas J. The Fund Constitution contains no mechanism of the type relied upon in Re Crusader and no steps were taken by the appellant to seek the approval of unit holders, whether in general meeting or otherwise, prior to the distribution to each of them of ARL shares. Thirdly, the appellant's reference to capital reductions under Pt 2J.1 of the Act is misdirected.60 That legislative regime has no application to a managed investment scheme. In any event, the existence of that regime only serves to highlight the nature of the appellant's conduct in the present case. Under Pt 2J.1, a reduction may not take place unless a general meeting of members has been called and either a general or special resolution (depending upon whether the reduction is equal or special in nature) has been passed authorising the capital reduction to take place.61 No conduct of an analogous kind was undertaken by the appellant; it simply transferred ARL shares to unit holders without prior notice or approval. Similar difficulties pertain to the appellant's reliance on the judgment of Dixon J in Archibald Howie v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143. In the passage cited by the appellant at AS [52]. his Honour emphasises the then statutory requirement that a capital reduction could only be effected if "so authorized by its articles". That requirement echoes the importance placed by Thomas J in Re Crusader on the existence in a constitution (whether original or as amended) of an express regime permitting the relevant in specie transfer to take place -a circumstance not satisfied in the present case. The appellant's submissions also ignore the fact that, at the time Archibald Howie was delivered, capital reductions in Australia also required court approval, thereby giving disaffected shareholders a further opportunity to ventilate their concerns prior to the reduction taking place. Fourthly, the appellant points to no circumstance other than the "plenary powers" clauses in the Constitution in support of the existence of agreement. There is no evidence that unit holders were ever apprised of the possibility that, as to a substantial part of the Fund, they could go from being unit holders in a registered scheme to being members of an unrelated and unlisted company that was not required to be operated in accordance with the Constitution or with Ch 5C of the Act and owed no equitable obligations as trustee to unit holders. The notion that they have impliedly agreed in advance to becoming members of whatever company the appellant might select for them, with whatever control and under whatever circumstances, is fanciful. THIRD ISSUE-RELIEF 68. 69. 70. 71. The Full Court made two declarations. The first declared that the in specie distribution of ARL shares to unit holders was beyond the power of the appellant under the Fund Constitution. The second declared that, in making the in specie distribution, the appellant failed to operate the Fund and perform the functions conferred upon it by the Fund Constitution, in contravention of s 601 FB(1) of the Act. Any consideration of the entitlement of the Court to make a declaration must consider two questions. The first is whether the proceedings were properly constituted. The second is whether the resolution of the proceedings warrants the granting of declaratory relief. The appellant's submissions wrongly elide these questions. In the present case, the appellant takes no issue in its submissions with the standing of ASIC to seek declaratory relief in respect of conduct that gives rise to a contravention of s 601 FB.62 That position reflects long-standing authority that ASIC may seek purely declaratory relief in furtherance of its responsibility for the general administration of the Act.63 Nor does the appellant contend that the proceedings were abstract or hypothetical in nature.64 The proceedings concerned actual conduct on the part of the appellant and raised squarely for judicial consideration whether that conduct was authorised by particular clauses in the Fund Constitution and in turn by the Act. Contrary to AS [63], no principle of law required ASIC to join each of the 10,000 unit holders in the Fund, or to join representatives of the units holders, in order for the proceedings to be properly constituted. The question of whether or not a person ought be joined to proceedings involves matters of judgment and degree, having regard to the practical realities of the case and the nature and value of any third party rights and liabilities that might be directly affected by the relief sought. In contrast to the position it took before the primary judge, ASIC did not ask the Full Court to set aside the in specie distributions made to unit holders. The declarations made by the Full Court were concerned with the conduct of the appellant alone. As non-parties to the proceedings, unit holders are not subject to the declarations and are not bound by them. The unit holders may have had an indirect interest in the outcome of the proceedings before the Full Court but their rights and interests were not directly affected by the making of the declarations sought by ASIC. It is unclear whether the appellant seeks to impugn the Full Court judgment on the basis that the proceedings were not properly constituted from their commencement before Jagot J due to the non-joinder of unit holders.66 If that submission is sought to be made, it should be rejected. At trial, ASIC sought declarations setting aside the in specie distributions made to each unit holder. It was in that context that Jagot J ordered several unit holders to be joined to the proceedings as representative parties. However, ASIC did not press that relief on appeal to the Full Court. In any event, no notice of contention was filed in the Full Court by the appellant contending that Jagot J's decision dismissing ASIC's proceeding ought be upheld by reason of the non-joinder of all unit holders, or a larger number of representative parties, and the contention was therefore not the subject of any consideration by the Full Court. Once it is accepted that the proceedings before both the primary judge and Full Court were properly constituted, both courts had an obligation to decide the case before them and to determine appropriate relief. l:iaving determined that the primary judge erred in her construction of the Fund Constitution and having concluded that the in specie distribution was not authorised, it was both permissible and orthodox for the Full Court to formally record its conclusion by way of declaratory relief. Indeed, it is relevant to ask what reasonable alternative course was open to the Full Court? To have allowed ASIC's appeal and to have set aside the orders of the primary judge, but then to have made no orders other than for costs, would not have reflected modern judicial practice, which recognises that declaratory relief may usefully record the outcome of litigation and may also serve to mark the Court's disapproval of the contravening conduct.67 The utility of the Full Court's declarations was only heightened by the acceptance on both sides of the record that ell 13.1 and 13.2.5 of the Fund Constitution are in a form commonly used by managed investment schemes.68 There was therefore utility in declaring that the in specie distributions were not authorised by clauses in those terms. 75. 76. The various additional "factors" relied upon by the appellant do not favour a refusal of declaratory relief. Taking each 'factor' identified at AS [65] in turn: (a) this submission ignores s 21 (2) of the Federal Court of Australia Act 1976 (Cth), which provides that a suit is not open to objection on the ground that declaratory relief alone is sought. Section 21 replicates the effect of 0 25, r 5 of the Rules of the Supreme Court for England and Wales 1883 (UK), which was described contemporaneously as an "innovation of a very important kind" that made "a great change in the law with reference to declaratory judgments".69 Suits in which declaratory relief alone is sought are now commonplace; (b) (c) (d) the fact that ASIC did not seek to impugn the in specie distributions on additional bases is not relevant to whether it ought be granted declaratory relief in relation to the basis that ASIC has proved -namely, noncompliance with the Fund Constitution; the absence of evidence of detriment proves nothing. Detriment was not a matter for consideration by either the primary judge or Full Court. The question in both courts was a different one -namely, whether the in specie distribution of shares to ARL unit holders complied with the Fund's Constitution. That question will be answered the same way irrespective of whether the distribution conferred a benefit or detriment on unit holders; the appellant's submission that it has "only'' contravened s 601 FB is an odd way of arguing against the grant of declaratory relief in respect of that contravention. The appellant's non-compliance with s 601 FB cannot be characterised as de minimis or non-material in nature. The ARL shares transferred to unit holders constituted some 41% (by value) of the assets of the Fund.70 The right of a member to have an MIS administered in accordance with the scheme constitution is fundamental71 and is entrenched by ss 601 GA and 601GB. In summary, in formulating relief the Full Court did not act on any wrong principle, it did not take into account extraneous or irrelevant matters, it did not mistake the facts and did not fail to take into account some material consideration.72 Nor did the exercise of discretion by the Full Court to grant declaratory relief stand outside the limits of a sound discretionary judgment.73 PART VII 77. ESTIMATE OF TIME ASIC estimates that it will require approximately 1.5 hours to present its oral argument. Dated: 10 January 2014.