wcl v asic and pn

Wellington Capital Limited v Australian Securities & Investments Commission and Anor [2013] HCATrans 281 (8 November 2013)

Last Updated: 11 November 2013

[2013] HCATrans 281


IN THE HIGH COURT OF AUSTRALIA


Office of the Registry
Sydney No S122 of 2013


B e t w e e n -


WELLINGTON CAPITAL LIMITED ACN 114 248 458


Applicant


and


AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION


First Respondent


PERPETUAL NOMINEES LIMITED ACN 000 733 700


Second Respondent


Application for special leave to appeal


FRENCH CJ
GAGELER J


TRANSCRIPT OF PROCEEDINGS


AT SYDNEY ON FRIDAY, 8 NOVEMBER 2013, AT 11.29 AM


Copyright in the High Court of Australia


MR B.W. WALKER, SC: May it please the Court, I appear with my learned friend, MR N.M. BENDER, for the applicant. (instructed by McCullough Robertson Lawyers)


MR J.A. HALLEY, SC: May it please the Court, I appear with my learned friend, MR J.R. CLARKE, SC, for the first respondent. (instructed by Australian Securities and Investments Commission)


FRENCH CJ: There is a submitting appearance for the second respondent. Yes, Mr Walker.


MR WALKER: Your Honours, may I take you please to pages 104 and 105 of the application book? There you will see without the repeated, almost amusing, typographical error that you find in the submissions and some of the judgments, the actual terms of the provisions in question. 13.1 talks about “a natural person”, not an “actual” person, and 13.2.5 is the other important term.


May I turn first to the question of general importance? It is, as your Honours know, in the Full Court a positive reason given for the granting of bare declaratory relief; these are commonly used terms. That would not be enough for special leave terms if that is all that could be said because they might be commonly and unwisely used terms and the case from which special leave is sought is a valuable corrective which should be left to do its work, but we can go further. The terms, particularly 13.1, but also 13.2.5 in its closing phrase:


as if the Responsible Entity were the absolute and beneficial owner –


both of those are expressed in familiar terms which admit of no greater amplitude. There is the -


all the powers . . . that is legally possible for a natural person or corporation to have and as though it were the absolute owner –


in respect of the scheme in 13.1. Then in respect of dealing with “Scheme Property” –


acquire, dispose of . . . otherwise deal with . . . as if –


So this is not one of those cases where a common but unwisely used form of words is in question. Next, we come to the question of what might be called commercial significance in managed investment schemes. We know that there are degrees of liquidity in assets of a kind that are under management in such schemes. If they are liquid, clause 16, as your Honours know, provide for a capital distribution, willy-nilly as it happens; that is, no question of consent of the recipients. They have consented, as it were, because that is the scheme of managing their investment which they undertake by purchasing units. So if it is liquid it can be distributed by reason of the provisions that your Honours will have seen discussed, found at the application book page 110 at about line 10:


any additional amount (including capital –


et cetera. That determination, of course, requires there to be cash able to be distributed. That, in turn, requires if there be not sufficient cash at the time, liquidation, so we are left with relatively illiquid assets not being able to be dealt with by 16. One asks, does this provide, then, a scheme which on its face lacks the flexibility to permit dealing with assets which are not or not wisely or prudently to be converted into cash by way of distribution?


In our submission, one goes back then to the terminology of the powers one sees on page 104 and 105, to which we have drawn attention upon which we relied, and it is plain that they are words of such amplitude that unless the thing were not legally possible, that is, the transfer of the legal title, by in specie distribution, then these are words which twice, that is in each of these provisions, capture the possibility.


GAGELER J: The question is whether somebody who is a unit holder can wake up one morning and find themselves a shareholder.


MR WALKER: That is exactly the question. The short answer is, they can certainly wake up next morning and find their bank account increased. They can wake up next morning and find a great deal of cash has been distributed to them. There is not, as it were, some grundnorm which is being subverted, destroyed, by the approach taken by the first instance judge. Nor is there a legal principle except for the noticing, with respect, of the obvious proposition that my client holds as trustee which the Full Court identifies as showing error. That, in our submission, is a further reason to do with doctrinal importance why special leave is appropriate in this case.


These, after all, present the terms upon which a person holding as trustee is obliged to manage. It includes the possibility of very large cash distributions in relation to that capital in the form of cash by dint of basic principle and as understood by everybody adhering to these terms with knowledge that would bring an end to trust obligations and, indeed, management duties, with respect to that distributed cash. In other words, whether the cash be distributed income annually or distributed capital, which we know can be by catch up years, reserves and the like, there can be a bringing to an end willy-nilly the unit holders.


Justice Gageler’s question goes to the matter which does inform the Full Court’s reversal of the first instance decision as to whether there is some difference, in principle, in a managed investment scheme with explicit powers of utmost flexibility of dealing with assets, 13.1, 13.2.5, whether there is a difference to be observed between the liquid and the illiquid or the liquid and the not liquidated.


GAGELER J: Another way of putting it, Mr Walker, would be the question is as the relationship or the scope of clause 13 given the existence of clause 16.


MR WALKER: Absolutely, and may I point out as well, perhaps against myself but to make the frame, back on page 89 and 90, clause 2.2.1 which is at the heart of the matter to which the statutory trust then attaches. Now, the first thing to be said is that clause 13 in no aspect of its wording, and taking clause 13 as a whole, bespeaks what I might call any minor or incidental role in the terms of the scheme for clause 13. It is at the heart of the matter. In essence, it is what the unit holders buy by buying units. They buy the exercise of these powers. This is a managed investment scheme and for once that is exactly what one can see from the facts was going on. Investments were being managed by decisions which were made with all the flexibility and are intended to be made with all the flexibility of the extreme limits of legal possibility for natural persons or corporations. That is the first thing.


The second thing is, under 13.2.5, perhaps redundantly, that was specifically applied as well by way of the utmost flexibility to any forms of dealing with scheme property. In each case, the very familiar - that is why it is a special leave point - the very familiar similitude as if the responsible entity were the absolute and beneficial owner is used. Now, no one is arguing - and this case did not throw up any self-dealing - no one is arguing and this case did not throw up any abrogation of trust duty by serving the trustees or another person rather than the beneficiaries interests. It is a business judgment of a kind the unit holders purchased and agree to as to outcome, subject to breach of trust allegations, which produces the decision either to liquidate and distribute cash under clause 16 or not to liquidate and distribute in specie in a way that nobody has suggested was not completely fair in this case.


Your Honours appreciate that it is for those reasons, we submit, that this is certainly not a case about which it can be said this is but a decision on particular terms with no implications beyond the particular case.


FRENCH CJ: Well, now, the focus of the submission relates to, as I understand it, construction of clauses 13.1 and 13.2.5, which are commonly used clauses, and their interaction with section 601FC(2) of the Corporations Act.


MR WALKER: Yes.


FRENCH CJ: Now, the grounds of appeal, or the draft notice, rather obscure that. Can you identify those aspects of your draft notice of appeal at page 64, perhaps, which would – it is just that there is a lot of stuff in there that seems to be argumentative and really disposes one against the grant when one reads it.


MR WALKER: Yes. It is on page 64, ground 5, but particularly - - -


FRENCH CJ: So (a), is it not?


MR WALKER: Particularly (a), although even (a) has the vice, frankly, that it addresses an aspect of a reason rather than an actual ground but, yes, that is the closest. There is also, of course, on what I will call the consent – the corporation’s consent ground - there is the matter at 5(e), and then in ground 6 there is the same proposition (a), but is allied also with the aspects of reasoning attacked in - - -


FRENCH CJ: If one were to look at your summary of argument at page 69 and the statement of the special leave questions as kind of foreshadowing the actual grounds of a proposed appeal - - -


MR WALKER: It is really two.


FRENCH CJ: - - - we are really talking about two, are we not?


MR WALKER: Yes. One is simply argumentative about reasons.


FRENCH CJ: That is a characterisation issue, is it not?


MR WALKER: Yes, it is argumentative about reasons; yes, your Honour. Now, there is an entirely separate matter, not substantive, not unimportant at all, but not substantive, and that is special leave question 3 at the top of page 70.


FRENCH CJ: Yes, I understand.


MR WALKER: I need say little more than what is said in writing about that. Your Honours have seen what, with respect, could be called the unusual features of proceedings which culminated in declaratory relief leaving the transaction to lie where it is. Those who, if I may be permitted to put it this way, benefited from the distribution, were not heard to complain about it, adding flavour, in our submission, to - - -


FRENCH CJ: All right, so if I were to pin you down today, it is 2 and 3, what about 4?


MR WALKER: Yes, that is included. Sorry, I thought that was involved as well in what I said about 5(e) but, yes, your Honour.


FRENCH CJ: I am just trying to tie it back to the special leave questions because they are a more succinct statement, it seemed to me, to the propositions.


MR WALKER: Well, 2, 3 and 4, which may be seen as a subset of 2. There could not be, obviously, something done by reference to powers in the scheme terms if it was prohibited by the statute, so 2 and 4 really ride together, 3 is different. Your Honours, in our submission, as I say, the importance can scarcely be gainsaid. The significance of knowing whether there is this kind of flexibility in managed investment schemes with the expected range of liquidities of assets is also, in terms of the usefulness from an investor’s point of view of these schemes, highly significant.


Going to the side of the business, of which my client is a representative, the importance of this for the professionals involved in this extremely important form of regulated business can hardly be overstated. To know whether there is granted by these most ample – maximum amplitude provisions of powers, whether there is provided something that most people would ordinarily expect can occur with respect to property, namely, the owner can distribute it in specie, does not always have to liquidate it and convert it into cash. That, in our submission, is an intuitively strong reason to doubt the correctness of the outcome.


There is only one further comment to add. There was this, if I may put it this way, figure of speech adopted in the Full Court’s reasons that what had been vindicated by the trial judge amounted to an impossible partial retirement. It is really only a figure of speech because you cannot be partly retired. It is intended to point up the fact that one can retire, that is, be quit of all trust duties in the future and hold no property on the statutory trust thereafter, that is, bringing the management investment scheme obligations to an end so far as the outgoing manager, responsible entity, is concerned. There is also the winding-up possibility which otherwise looms as the unrealistic and uncommercial way in which there could be in specie distribution.


GAGELER J: It is very hard to see that that sentence played any role in the - - -


MR WALKER: That is how my friends put it, your Honour. Those who read judicial reasons are entitled to give weight to matters which are called in aid, as it manifestly is, to support a conclusion. Do the reasons, if I may put it this way, hang together without that passage? Of course they do. So it is not a keystone but, in our submission, it bespeaks error because it assumed the conclusion. In particular, it did not deal with the fact that very large tranches of these assets, the scheme assets, could be freed of any trust obligation and given absolutely to members by way of clause 16; that is the first thing. There is nothing fundamentally jarring about that possibility. No one would suggest that a clause 16 determination and the compulsory distribution that would follow amounts to a partial retirement with respect to that amount of money. It is for those reasons, in our submission, that as an extra - and it is only as an extra - that, in our submission, is an indication that an error was committed by assuming a conclusion. May it please your Honours.


FRENCH CJ: Thank you. Yes, Mr Halley.


MR HALLEY: Your Honours, in answer to the ground concerning clauses 13.1 and 13.2.5, we say two things. First, we say, the clauses must be construed in their statutory context. The statutory context is most relevantly provided by 601FC(2) and that makes clear that the responsible entity must manage the scheme property in its capacity as trustee for scheme members and that carries with it, we say, the implication that the Full Court found which is that they must be construed through the prism of trust law.


To rely on a clause which, in effect, provides a hypothetical proposition that the responsible entity holds the property absolutely and the beneficial interest to that property, we say, does not speak to and cannot speak to the relationship between a trustee and its beneficiary. To try to rely on those clauses, to expand specific powers to a trustee with respect to the making of distributions, is not available. The clauses, we say, in context refer, as the Full Court found, to dealings between the responsible entity and third parties and for that purpose it had a real and meaningful result.


FRENCH CJ: So you are not responding on the basis that the question is not an important one but rather, simply, the Full Court got it right and it is clearly right, or the Court of Appeal got it - - -


MR HALLEY: Yes, we accept that it is an important issue but we say the Full Court got it right and plainly right. The second proposition we seek to advance is that there are number of clauses in this particular constitution which reinforce that this does deal with an income, an income fund, rather than what my friend was referring to as illiquid and the difficulty of trying to make distributions with respect to illiquid assets and how from a commercial perspective that would be unsatisfactory.


Now, the unit holders in this fund invested in an income fund. My friend has taken your Honours briefly to clause 16 dealing with the specific provisions with respect to distributions of income. We say those provisions in context are mandatory. They provide that if there is to be distributions it sets out the basis upon which they are to occur. Each of us have dealt with those in our written outlines. What we would wish to stress in addition are the provisions of clause 26 which are the winding-up provisions and your Honours will find those at the application book at pages 124 and 125. We say these provisions give us further insight into the extent to which this is an income fund and distributions and returns are to be made by way of income. If I could draw your Honours’ attention to clause 26.3, it provides that:


As soon as practicable after a Termination Event, the Responsible Entity must realise the Scheme Property and satisfy the Liabilities -


In 26.4 there is provision with respect to a final distribution to unit holders and that provides that -


the net proceeds of realisation to be distributed to the Unit Holders -


so that –


all Liabilities having been discharged, and all expenses of termination - including anticipated expenses - have been met or accounted for, is the net proceeds of realisation to be distributed to the Unit Holders in proportion to the paid up value of the Units they hold –


Then also, we say relevantly to this issue, your Honours, 26.6, which provides that -


the Responsible Entity may retain in its hands, or under its control, any Scheme Property as may be required in its reasonable opinion, to meet any Liabilities or any of the investments of the Scheme –


and then, we say, relevantly and significantly -


provided that any Scheme Property –


which would include both liquid and illiquid assets -


so retained to the extent that they are ultimately found not to be required, will remain subject to the Scheme for conversion and distribution pursuant to this Constitution.


So the responsible entity is required to comply with the terms of the constitution. The constitution not only has specific provisions relating to the distribution of income and capital but also in the event of a winding-up has specific provisions which mandate the conversion of the scheme assets and then distribution to unit holders.


GAGELER J: Mr Halley, is clause 26 a standard form provision?


MR HALLEY: I do not think there is any evidence directly as to whether that clause in those terms would be found in every managed investment fund, but this is an income fund. There are many features of this constitution which are common, and we do not cavil with that, and the clauses, in particular 13.1 and 13.2.5, are, as we understand it, standard terms that are found in many constitutions. We say the combination of 26.4 combined with 16 and combined with 2, although 2, we accept, is a fairly standard clause, and if your Honours were to turn to clause 2 at page 89, my friend briefly referred to clause 2.2. Your Honours will see at page 89 of the application book, the unit:


confers on its registered holder in the Register an undivided interest in the Scheme Fund and Scheme Property as a whole –


Then in 2.2.2 at application book 90 -


does not confer any interest in any particular part of the Scheme Fund or in any Scheme Property but only such interest in the Scheme Fund and Scheme Property as a whole, subject to the Liabilities.


Making clear that with scheme assets it is the interest as a whole, not in any individual asset, so to the extent that the shares were issued initially to the custodian Perpetual, no unit holder had any beneficial interest in any particular share, rather the unit holders retained a beneficial interest in the whole of the scheme assets.


GAGELER J: That really does not speak to the disposal question, does it?


MR HALLEY: No, I accept that, your Honour. The other matters that have been raised include the declaratory relief. We rely on what we say in the outline. We say there is no relevant error. It is an exercise of discretion. We say with respect to the question of partial retirement and section 231, those matters, to the extent they are dealt with by the Full Court, were only

obiter. The reasoning with respect to 13.1 and 13.2.5 did not turn on any consideration of partial retirement or lack of consent relevantly. We accept that the judgment of the Full Federal Court may superficially appear to elevate those matters beyond their true significance, and if I could just take your Honours very briefly to application book page 52 and relevantly dealing with the question of partial retirement? In paragraph 83, the Full Court notes:


The steps taken by Wellington in the present case amounted to a partial retirement from office other than in accordance with the provisions of the Act.


It refers then to the - there was an absence of consent. Then in 84 it sets out what, in fact, occurred. Then 85, which we say perhaps has been misconstrued to some extent by the applicant in its submissions – we say 85 which provides:


In our view, the distribution of the shares in ARL to the Unit Holders of the Fund was contrary to the terms of the constitution and was done without power.


That is a reference not to the finding in 83 to the extent it might be characterised as a finding but to the earlier findings, particularly, in paragraph 62 and 74 dealing with the question of whether 13.1 and 13.2.5 in the constitution provided the responsible entity with the power to make the in specie distribution. We say, similar basis on page 51 of the application book at paragraph 79 does not independently give rise to a further ground upon which the Full Court relied, but really what the Full Court properly understood we are saying in paragraph 79 and in context was because we have found that there was no power in the constitution to make the distribution, one could not infer or imply any assent from the unit holders to the distribution in species. If your Honours please.


FRENCH CJ: Thank you.


There will be a grant of special leave in this matter on grounds reflected in questions 2, 3 and 4 identified in the applicant’s written summary of argument. The applicant will have to file and serve a notice of appeal. Can that be done by Tuesday the 11th?


MR WALKER: Yes, your Honour.


FRENCH CJ: The applicant to file and serve a notice of appeal setting out grounds reflecting those questions by Tuesday, 11 November 2013.


AT 11.56 AM THE MATTER WAS CONCLUDED