Allco Funds Management Limited (Receivers and Managers Appointed) (In Liquidation) -v- Trust Company (RE Services) Limited (in its capacity as responsible entity and trustee of the Australian Wholesale Property Fund) [2014] NSWSC 1251

Establishment of the fund 14Rich was appointed a director of AFML on 28 March 2003, having been with the group for 14 years prior to that. At the material times, his designation was Executive Director and Head of Property. In this role, he was responsible for the day-to-day management of the group's real property funds and management business. As at 30 June 2007, in his own right, Rich held shares in Allco worth over $5 million. He was appointed a director of RFML on 31 August 2005. He ceased to be a director of AFML on 19 April 2009 and ceased to be a director of RFML on 12 November 2009. 15West was appointed a director of AFML on 11 November 2002, having been with the group since 1991. He was head of the funds management division of the group. He was a director of many companies within the group. Before the merger with Record, he was one of the four major shareholders in the group. He was appointed a director of RFML on 31 August 2005. He ceased to be a director of AFML on 14 November 2008 and ceased to be a director of RFML on 13 July 2007. 16The fund (initially named Allco Wholesale Property Fund) was established in 2005, as a registered management investment scheme, under the provisions of Chapter 5C of the Corporations Act. It is a unit trust, and it was set up to invest in property based assets. 17As Head of Property, Rich was instrumental in the establishment of the fund. Part of the thinking behind its establishment was that the fund would have access to what Rich describes as an untapped (by Allco) institutional market for investment capital for real property initiatives of the group as well as for its other divisions. According to Rich, together with other senior group executives and with the approval of the relevant management committee at the time, it was decided to acquire quality assets funded by "seed capital" contributed by the group and then issue a Product Disclosure Statement (PDS) inviting subscriptions from third party investors. At the time, Allco was privately controlled. 18Upon the establishment of the fund, Allco Managed Investments Limited, another Allco subsidiary, was appointed the Responsible Entity (sometimes referred to as the RE). On 15 February 2005, AFML was allotted 10 ordinary Units in the fund. 19On 30 June 2005, Allco Managed Investments Limited as RE entered into a management agreement with AFML. AFML was appointed investment manager of the business of the fund to provide or procure the provision of investment management services, comprehending amongst others, considering and recommending funding strategies including debt and equity. Under the management agreement, AFML would receive a fee of 1% of the purchase price of property acquired by the fund. 20By PDS dated 30 June 2005, units in the fund were offered for sale. This was replaced by an updated PDS on 30 June 2006. 21The Constitution of the fund (the Constitution) provides that the beneficial interest in the fund is divided into units which may be issued by the RE at any time. A unit confers an interest in the trust fund as a whole. The Constitution makes provision for the issue of different classes of Units. Two different classes of Units were created. One class was defined as Funding Units. The other class are referred to as Units. 22The Constitution provides that the RE must convene meetings of Unit Holders as provided by the Corporations Act and must call meetings in accordance with the Act. It provides that subject to the terms of issue, the net proceeds from realisation of the fund must be distributed amongst the Unit Holders in proportion to the number of units they hold. 23The Funding Units have the same rights and entitlements as the Units except that their terms of issue, which are contained in Schedule 3 to the Constitution provide that they alone have the following additional rights: 2.2 Compulsory withdrawal of Funding Units (a) The RE may at any time redeem any or all of the Funding Units of any Funding Unit Holder in its absolute discretion. (b) The RE will notify the Funding Unit Holders of its discretion to redeem any or all of the Funding Units by giving a written notice to the Funding Unit Holders and stating the date of redemption and redemption price calculated in accordance with paragraph 2.3 below. 2.3 Withdrawal Price Where the RE redeems the Funding Units in accordance with paragraph 2.2 above, the amount payable on redemption of each Funding Unit will be equal to the greater of $1.00 per Funding Unit and an amount equal to: Net Fund Value - Transactions Costs $1.00 _________________________________ X Number of Units on Issue including Funding Units)

Each of these variables will be calculated as at the day the RE elects to effect the redemption. 24The effect of these provisions is that, on a compulsory withdrawal, assuming there to be sufficient assets in the fund, the Funding Units will receive not less than $1 per unit. The Units simpliciter do not have this safety net. 25On 29 July 2005, AFML applied for, paid for, and was issued with 121,187, 077 Funding Units at $1 per Unit. On 24 August 2005, it was issued with a further 30,000,000 Funding Units. AFML paid for these Units with money lent to it by other members of the group. 21,500,000 Funding Units were redeemed on 30 March 2006 and a further 20,000,000 were redeemed on 30 June 2006. Thus, as at 1 July 2006, AFML held 109,687,077 Funding Units. 26AFML had no material funds of its own to invest. The funds invested by it were contributed by way of monies borrowed from other corporate members of the group. 27Another Allco associated entity acquired 20,000,000 Funding Units on 30 June 2006. 28In addition to the money raised by the subscription for Funding Units, the fund obtained external funding from, amongst others, the Commonwealth Bank (the Bank). 29With these resources, the fund acquired two substantial real properties, the World Square retail development and public carpark, and the Ernst & Young Centre, both in George Street, Sydney, for some $359 million. 30With effect from 1 July 2006, Allco merged with Record Investments Limited (Record), a publicly listed entity. The merged entity took on the Allco name. RFML, whose board had particular expertise in real property, became the Responsible Entity of the fund. 31The unit holdings in the fund (other than the Funding Units) as at 15 December 2006, were as follows:

• Military Superannuation and Benefits Fund (Military) - 20,000,000 Units, issued on 16 December 2005;
• Allco Investment No 2 Pty Ltd - a wholly owned subsidiary of a Singaporean real estate investment trust- 48,000,000 Units, issued on 30 March 2006; and
• Emergency Services Superannuation Fund (ESSS) - 35,024,806 Units, issued on 9 May 2006.

Corporate Governance 32Allco's Annual Report for 2007 provides details of its general governance arrangements after the merger with Record. The Allco Board was reconstituted. It comprised nine directors. Mr David Coe (Coe) was appointed Executive Chairman. Mr Michael Stefanovski (Stefanovski) was the Chief Operating Officer and Deputy Managing Director. 33The Annual Report describes the responsibilities of the Board and records that the Board established the Executive Committee (or Exco), whose responsibility it was to manage the global operations and business activities of Allco under the direction of the Executive Chairman. 34The Annual Report refers to recommendations of the ASX Corporate Governance Council, that a majority of the Board should be independent directors, and that the Chairperson should be an independent director. 35Allco did not comply with these recommendations. Only four out of the nine directors were independent or considered independent. Coe was not independent. 36However, the Annual Report states that the Allco Board believed that its non-compliance with these two recommendations did not impact adversely on the ability of the Board to make decisions that were in the best interests of all shareholders. It states that "With respect to related party dealings, this risk has been mitigated through establishing a Related Party Committee, comprised solely of Directors independent of Allco. The role of the Related Party Committee is to review contracts, transactions and other dealings between Allco and any related party to ensure that the terms are arm's-length, consistent with normal business relationship, and comply with regulatory requirements in relation to related party dealings". 37The Annual Report goes on to describe the Related Party Committee as comprising three members, each of whom was appointed by the Allco Board, and states that it operated in accordance with a separate Charter. It states that its main responsibility was to review contracts, transactions or other dealings between Allco and any Allco group entity, or any other related party to ensure that they complied with Allco's Related Party Transaction Policy. It identified the members of the Related Party Committee as Mr Bob Mansfield, Mr Rod Eddington and Ms Barbara Ward.

The stamp duty position 38At all material times, the Duties Act 1997 (NSW) and the Duties Act 2000 (Vic) (collectively the stamp duties legislation) made provision for the imposition of stamp duty on the acquisition of units in unit trust schemes such as the fund. 39The broad effect of the provisions of the stamp duties legislation as it stood at material times, and as is presently relevant, may briefly be summarised as follows. 40A purchaser of units in an entity which was a land rich landholder (being an entity with land holdings of more than 60% of the unencumbered value of its property) would be liable to pay duty if the transaction constituted the acquisition of a significant interest in the landholder. A significant interest was an acquisition of units entitling the acquirer in the event of a distribution of all the property of the landholder, in the case of a private unit trust scheme, to 20% or more of the property distributed and in the case of a landholder (other than a private unit trust scheme), to 50% or more of the property distributed. A private unit trust scheme was a unit trust scheme that was not a wholesale unit trust scheme. A wholesale unit trust scheme was one that was registered as such. 41If a scheme was registered as a wholesale unit trust scheme, investors would be able to purchase units which had a value of up to 50% of the distributable property of the fund, without the imposition of any stamp duty on the transaction. If the fund did not qualify for such registration, it would be a private unit trust scheme and investors would be able to purchase units which had a value up to 20% of the distributable value of the property of the fund, without the imposition of stamp duty on the transaction. 42To obtain registration as an actual wholesale unit trust scheme, no unit holder alone or in association, could have an interest of 50% or more in the fund, and not less than 80% of the units had to be held by qualifying investors, which included widely held superannuation funds (which were the target market for the fund). AFML itself was not a qualifying investor. 43The stamp duties legislation made provision for a unit trust scheme which did not immediately qualify for registration as an actual wholesale unit trust scheme, to be registered as an imminent wholesale unit trust scheme, to give it time to qualify. 44On 21 July 2005, the fund secured registration as an imminent wholesale unit trust scheme in NSW, with effect from 29 June 2005 and to expire on 16 December 2006, unless extended. On 23 June 2006, the NSW Office of State Revenue extended the fund's imminent wholesale unit trust scheme registration to 16 December 2006. On 1 December 2006, the NSW Office of State Revenue extended that registration to 16 June 2007. It was apparently thought that the fund would satisfy the criteria to be registered as a wholesale unit trust scheme by then. 45On 26 July 2005, the fund obtained registration as an imminent wholesale unit trust scheme in Victoria for a period of 12 months. On 19 July 2006 the Victorian State Revenue Office extended the fund's imminent wholesale unit trust scheme registration to 16 December 2006. However, on 7 December 2006 the Victorian State Revenue Office declined an application for a further extension. 46Thus, at least so far as the State of Victoria was concerned, the deadline for the fund to satisfy the requirements for registration as an actual wholesale unit trust scheme was 16 December 2006. Apparently, in the event of non registration in Victoria, payment of some $1.8 million in stamp duty on past transactions would have become due. Also, a failure to register would translate into an investment disincentive.

Events leading to the Loan Agreement 47Rich says he believed that the Allco investment in the fund would be replaced by third party investment by 30 June 2007 and that if this did not happen, the fund would have in excess of $300 million in assets which could be sold. During the first half of 2007, the portfolio was offered for sale. Offers were received but not accepted. 48According to Rich, the stamp duty problem caused a significant issue for Allco because the RE had represented to institutional investors to whom they were marketing the fund, that it would qualify for wholesale unit trust registration, which they had intended to achieve by selling down Allco's seed capital position represented by AFML's Funding Units to qualifying investors. 49On 11 December 2006, Rich wrote a memorandum to Coe, Stefanovski, Mr Tim Dodd (Dodd), who was the group Chief Financial Officer and Mr Justin Lewis, who was the group Chief Information Officer, setting out the issue which faced the fund with respect to stamp duty. He pointed out that the Victorian registration was to expire on 16 December 2006, and that the fund had to qualify as a "wholesale unit trust" by that date. He pointed out that the criteria for registration as a wholesale unit trust scheme were that not less than 80% of the units had to be held by qualifying investors and that each qualifying investor had to hold less than 50% of the units. He pointed out that AFML was not a qualifying investor and held 109.7m Funding Units, amounting to 47.13% of the fund. 50The memorandum contained the following proposal and recommendation: Proposal In order to qualify by 16 December 2006 we propose that:

• AFML lend money to AWPF at a rate of interest equal to the distributions which unit holders would receive;
• the proceeds of that loan will then be used to redeem the AFML redeemable funding units. The terms of the loan are:
• a term of 18 months,
• it will be subordinate to CBA and ANZ's senior loan,
• the rate of interest will be equal to the distributions which unit holders would receive, and
• the loan will be unsecured. The result of the restructure will be that qualifying investors would represent 84% of the equity in the fund and non-qualifying investors would only represent 16% of the fund. Also, no one investor would hold 50% or more of the fund. AWPF would therefore satisfy the criteria for "wholesale unit trust" status in NSW, and more importantly for now, Victoria. The restructure will not affect the economic outcome for AFML. AFML will still receive an amount equal to the distributions from AWPF (approximately 6.0% pa) and will also be entitled to be repaid $109.7m in principal. Similarly to the funding units, it is intended that as more equity is raised in AWPF, the AFML loan is repaid. In accordance with the approaches previously outlined in a separate paper, fundraising activities are continuing. The overall time horizon for the raising of $109m is 30 June 2007. The restructure will result in a profit of approximately $8.4m in profit for AFML. This is due to the fact that the units are currently being carried on the AFML balance sheet at a value of approximately $0.923 per unit, but AFML will actually receive $1.00 per unit under the redemption. The downside is that AFML will no longer be entitled to the NTA uplift above $1. However, it is not expected that the NTA will reach $1 per unit until at least June 2007. Recommendation We recommend that approval be given to:

1. the proposal for RFML as the responsible entity of AWPF and AFML to enter into a loan agreement for an amount of $109.7m, and
2. the redemption of 109.7m AWPF funding units held by AFML 51On the same day, Rich addressed a memorandum in almost the same terms, to the other members of the RFML Board, Mr Robert West (to be distinguished from Mr Christopher John West), Mr Gary Best (Best), Mr Warren Eades and West. One difference between the memoranda was that the memorandum to RFML stated that the terms of the loan were 24 months (rather than 18 months). Another was that the second memorandum did not contain the three paragraphs immediately above the Recommendation in the memorandum to Coe and others, presumably because these were matters which concerned AFML rather than RFML. 52A draft loan agreement was apparently submitted to the Bank before 14 December 2006. Mr Pat Burton of the Bank commented that the Bank wanted to see the term of the Loan to be six months in excess of the current facility term, which was apparently a July 2008 maturity. 53Mr Rich's memoranda spawned some responses. For example, on 14 December 2006, Dodd wrote to Rich as follows: A couple of thoughts on the attached: 1. I'd need to defer to the technical referee for an answer to this one, but are we sure that the proposal allows us to treat the new loan as debt (rather than equity) given we are converting our current equity position into a loan with the same return profile. I would hope this wouldn't be the case as we rank ahead of the ordinary units/have repayment in 18 months, but just thought I'd seek confirmation of this as it could be interpreted that our position has not changed sufficiently. 2. If we are getting paid out at $1 does that mean the remaining shareholders are left to wear the $8.4m shortfall between them? Can they block this? 3. As things stand, as a group we are tracking to our half year forecast. The proposal with AWPF would bring forward $8m PBT (the selldown had been assumed in the second half so there is no change in the full year forecast) which, by default, would place less need on landing the full amount of the GPT fee this half (and the RFML Board approval could presumably be based on a break fee for a lower amount). I know I'm stating the obvious but, at a 6% yield this doesn't even cover our variable cost of debt, let alone feed our shareholders their promised return - (and whilst I'm wearing my black hat, isn't the '$8m profit' simply a reversal of prior year losses rather than a real profit). In short, we cannot continue to carry this much into 2007. 54On 15 December 2006, Best wrote to Rich and West: I have no difficulty, and am in favour of the proposal. I have one query. If I understand the proposal correctly, the current units held by Allco-related entities will be redeemed, and the redemption price will be funded by a loan from Allco entities. The effect of that is to convert the Allco entities from having an equity interest sharing risks pari passu with other unitholders, into a (preferred) creditor/debtor relationship with AWPF. If the Trust was to get into financial difficulties, this rearrangement effectively gives the Allco entities a preference because it raises their entitlement on a winding-up of the Trust ahead of the other unitholders (ie, as a creditor compared to an equity participant). In addition, unless otherwise structured, Allco entities' rights to a return (ie, interest) will rank ahead of distributions to unitholders. If the loan has a term of 24 months, then again the Allco holders are being benefited because no other unitholder has a guaranteed take-out at the end of 24 months (I assume). Perhaps it is appropriate to ask Tom (or external lawyers if they are involved) whether this preference to the Allco entities raises any legal concerns, especially having regard to related party or conflict of interest issues. 55On 15 December 2006, Rich wrote amongst others, to Best and West: You are correct that the effect of the transaction is that the Allco-related entities will be converting their equity interest into a creditor/debtor relationship with AWPF. However, it is important to note that Allco currently holds Funding Units in AWPF. These units were issued at the time of settlement of the initial portfolio to effectively underwrite the fund and allow the settlement of the initial portfolio. Under the constitution, the terms of the funding units are the same as ordinary units except that they are redeemable for a minimum of $1.00, which is the same price they were issued at. This means that in a winding up, for instance, the owners of the Funding Units would be entitled to the greater of $1 or the NTA. Therefore, Allco is not gaining any preference over ordinary unitholders that it was not already entitled to under the terms of the Funding Units. In terms of the interest payments, the interest is equal to the amount that would be payable as a distribution to an equity holder. So, if the distribution to an equity holder would be zero, then the interest payable to Allco under the loan would be zero. There are no penalty rates payable for late payments under the loan document. The loan has a 24 month term because this is post the expected fund raising period. As with the Funding Units, the strategy is to pay down the AFML loan as more investors subscribe for units in AWPF. It is envisaged that the loan will actually be paid down within the 24 months. I have attached below an analysis from Victoria Poole covering the powers of RFML to redeem the units and enter into the loan, and also related party advice. Can everyone confirm for me that this adequately addresses the issues and we are OK to proceed.

The Loan Agreement and Subordination Deed 56On 15 December 2006, AFML and RFML executed the Loan Agreement (the Loan Agreement). AFML lent RFML $109,687,087 (the Loan Amount) with a Repayment Date of 31 January 2009. 57Rich and another director Mr Andrew Rutherford, signed the Loan Agreement on behalf of AFML. West and the Company Secretary Mr Tom Lennox (who was also group Company Secretary), signed on behalf of RFML. 58Contemporaneously, AFML and RFML executed a Subordination Deed with the Bank and the ANZ Bank, which provided amongst others, that for so long as amounts owing to the banks (the Senior Debt) remained unpaid, and except as otherwise expressly permitted by the Deed or the banks in writing, AFML could not demand or accept payment of the Loan Amount. 59Under cl 1.3 of the Loan Agreement, RFML agreed to use the Loan Amount to redeem AFML's 109,687,087 Funding Units. 60Under cl 1.5 of the Loan Agreement, the parties acknowledged that it was subject to the terms of the Subordination Deed, and that no payments were to be made by AFML to RFML, other than as permitted by the Subordination Deed. 61Under cl 3.1 of the Loan Agreement, on the Repayment Date, RFML was required to repay the Loan Amount and any accrued interest. 62Under cl 3.3 of the Loan Agreement, whilst the Senior Debt was outstanding and provided there was no Event of Default or potential Event of Default under the Subordination Deed, RFML could make repayments under the Loan Agreement out of the proceeds of subscriptions for further units in the fund by a third party or further subordinated loans to the fund by a third party. 63Clause 2 of the Loan Agreement obliged RFML to pay AFML interest on the daily balance of the Loan Amount at the Interest Rate which was defined in cl 8.1 to mean "the rate of interest from time to time equal to such rate as is necessary to ensure that in respect of an Interest Period, the interest payable by the Borrower on the Loan Amount which has not been repaid is equal to the Distribution that the Unitholders actually receive for a period corresponding to that Interest Period". 64The Loan Amount was advanced to RFML. It used it to redeem AMFL's Funding Units. 65On 15 December 2006, Mr Tom Lennox sent a memorandum to the Allco Related Party Committee, Mr Bob Mansfield and Ms Barbara Ward, referring to the entry into of the Loan Agreement. However, there is no evidence that the Related Party Committee considered or resolved to approve the transaction. No member of that Committee was called to give evidence. 66There is also no evidence that the "legal concerns, especially having regard to related party or conflict of interest issues" referred to in Best's letter to Rich and West of 15 August 2006 were addressed by external lawyers or otherwise. 67Rich says that the chosen solution, in the form of the Loan Agreement, was intended to be a change in form only and not a change to the substance of AFML's interest in the fund, both from AFML's perspective and from the perspective of the other unit holders. He says that loan interest would replace the unit holding/membership interest, the interest payable under the loan would be equivalent to distributions to unit holders and the intention that the "Group's interest" (as Funding Units or as a loan) would be recovered via the raising of new equity subscriptions or from the sale of assets on the winding up of the fund, either of which was anticipated to occur no later than 30 June 2007. He says it was an integral part of the proposal that AFML not be financially advantaged or disadvantaged by the transaction and that he believed that it would be in the same position as an owner of Funding Units, except that it would no longer be a member of the fund and therefore no longer entitled to vote. He did not believe that it was significant that AFML could not vote, because it was the parent company of RFML and as an associate would be prohibited by the Corporations Act from voting its interest in any motion affecting that interest. 68He says that the Repayment Date of 31 January 2009 was chosen because the Bank required a repayment date beyond the then expiry date of its facility, RFML expected to raise sufficient new subscriptions for equity and to have fully redeemed AFML's interest in the fund by then, and if this was not achieved, the group would look to wind up the fund. 69West, on the other hand, says that whilst it was important for the fund to obtain registration as a wholesale unit trust scheme, he did not play an active role in the decision and action taken to convert AFML's Units to a loan. This was done by persons in the property group under Rich, assisted by corporate persons, in areas such as tax, accounting and legal.

Events leading up to the Deed of Amendment 70Almost immediately after the entry into the Loan Agreement, its terms and effect were perceived to be somewhat problematic. 71The Bank raised a concern that the transaction had a negative impact on the performance of the fund. Payments made to AFML as interest, albeit tax deductible, reduced the profits of the fund, in contrast to distributions of profits made to it as unit holder. Interest payments were above the line whereas distributions were below the line. 72Further, the conversion of AFML's equity into a loan with a fixed repayment date, had implications for the unit price because, whereas the price of Funding Units would be determined by attribution of net assets to units on issue, this was not the case with a loan. At the time, the Unit price based on attribution was about 93 cents. Additionally, there were possible implications with respect to Interest Cover Ratio covenants in the Bank facilities and a possible double taxation problem for the fund. 73Ms Fiona Ward (Ward) was an Associate Director in the property group who worked closely with Rich on matters relating to the fund. 74In an email dated 20 December 2006, Ward reported that the Bank was "slightly concerned" about the effect on the fund's rating due to the loan and decrease in total profit. She reported that the Bank had asked her to put something in writing for them, and that she had asked Mr Conor O' Byrne (O' Byrne), the Chief Financial Officer, for the real estate division to follow up the auditors to see whether there was any way they could treat the interest as a below the line expense. 75In an email dated 20 December 2006 to Messrs Glenn Hilleard (Hilleard) and Patrick Burton of the Bank, Ward sought to allay the Bank's concerns, making the points that the interest rate was equal to the distribution that unit holders actually receive, that the appropriate measure of the fund's performance was the return on equity, and the earnings per unit of the remaining unit holders would not be affected. Apparently, however, this did not allay the Bank's concerns. 76O'Byrne himself raised a concern that the structure of the transaction would have an adverse impact on the price of units because, the loan advance would be used to redeem the Funding Units at their full price of $1, whereas the unit price at that time was somewhat less than that. He considered that this concern would be addressed if the loan was classified as equity for accounting purposes on the balance sheet, and the interest was tax deductible. O'Byrne had some discussions with Mr Robert Goss (Goss), Allco's Chief Financial Officer, whose view was that if the repayment date was amended to be "the end of the fund", the loan would be equity. 77On 20 December 2006, Rich emailed Ward as follows: Maybe we can dress the loan up so that the accountants call it equity? Can we do this under the constitution? 78On 8 January 2007, O'Byrne emailed Ward as follows: I have confirmed with Rob that the removal of the date would be all that is required to ensure that (in the hands of AFML) the instrument was viewed as an equity investment. 79On 15 January 2007, O'Byrne emailed Goss stating that there would be an amending deed that stated that the definition of Repayment Date would be changed to: The earlier of termination of the AWPF Trust and raising any alternative equity funding by the AWPF Trust. 80In mid January 2007, O'Byrne sent an "Accounting Memorandum", dated 31 December 2006, amongst others to Rich, reviewing the accounting treatment of AFML's interest in the fund, in light of the amendment to the definition of the Repayment Date. The memorandum stated, relevantly: Review of the Loan Agreement indicates no defined repayment date exists for the debt and therefore the debt funds would be treated as equity rather than debt. As such interest payments received, by AFML, on the debt will be debited directly to equity. Redemption of the debt is at the discretion of the RE (through its decision wither [sic] wind up the fund or to introduction of new ordinary unit holders). 81On 17 January 2007, solicitors Mallesons Stephen Jaques advised that if the Repayment Date was amended, the interest paid by the fund to AFML should be allowable as a tax deduction in the calculation of the net income of the fund in the income year in which interest accrues. Their advice was premised on the existence of an intention to repay the AFML Loan on or before 30 June 2007. 82On or about 18 January 2007, the Bank indicated that the revised definition of Repayment Date was not acceptable and proposed the following wording: Repayment Date means the earlier of: (a) the date on which the AWPF Trust is terminated; (b) the date on which the Borrower receives the proceeds of subscription for further units in the AWPF Trust which are available for the purpose of, and which are in an amount sufficient to, fully and finally repay the Loan Amount and any accrued interest. 83On 19 January 2007, Ward emailed Hilleard relevantly, as follows: I note that the commercial discussion we had at the time of converting AFML's Funding Units into a loan was that the loan was to operate in the same way that the Funding Units did. I also note that clause 2.2(b) of the Subordination Deed and clause 3.3 of the AWPF Loan Agreement were drafted so that AFML could be paid down in the same way that the Funding Units were able to be paid down (or redeemed). The intention was always that as new equity was raised, AFML's position would be paid down. For example, if say $50m of equity was raised in AWPF (less than the $109m required to pay back the full amount of the loan), this would be used to pay back a portion of AFML's loan. This is the same as the way the Funding Units operated. 84On 19 January 2007, Ward emailed O'Byrne, Rich and others that they had hit "a bit of a roadblock" with the Bank on their approval of the Deed of Amendment, and that the matter would hopefully resolve "this next week". 85On 25 January 2007, Hilleard emailed Ward suggesting the following wording for cl (b) of the definition of Repayment Date: the date on which the Borrower receives the proceeds of subscription for further units in the AWPF Trust which are available for the purpose of, and which are in an amount sufficient to, fully and finally repay the Loan Amount and any accrued interest. For the avoidance of doubt partial reductions to the outstanding loan amount will not trigger a Repayment Date.

The Deed of Amendment 86On 1 February 2007, AFML and RFML executed the Deed of Amendment. Clause 2(b) is in the following terms: The parties have agreed that the Loan Agreement is amended from the Effective Date in the following manner: (b) On page 1 revised definition for "Repayment Date" is inserted as follows "the earlier of: (i) the date on which the AWPF Trust is terminated; and (ii) the date on which the Borrower receives the proceeds of subscription for further units in the AWPF Trust which are available for the purpose of, and which are in an amount sufficient to, fully and finally repay the Loan Amount and any accrued interest. For the avoidance of doubt partial reductions to the outstanding loan amount will not trigger a Repayment Date". 87West and Rutherford signed on behalf of AFML. Rich and West signed on behalf of RFML. At the time, Rich and West were directors of both AFML and RFML. 88There is no evidence that the Deed of Amendment was submitted to, or considered by, the Related Party Committee, let alone approved by it. None of its members was called to give evidence. 89Rich says that he believed that unless addressed immediately, the problems identified with the Loan Agreement in its terms, could have offset the advantages gained by the fund and consequently Allco. The impact on fund profitability, unit price and loan ratios could have severely affected the fund's ability to raise new debt and equity. This could have jeopardised the group's ability to earn additional fees from the fund pursuant to the management agreement, made Allco as a fund manager less attractive to the target institutional market and negatively affected the interests of the other unit holders in the fund. For these reasons and because there were some issues around the accounting treatment of the loan in Allco's own books, he concluded that the loan needed to be amended, such that it could be treated as equity for accounting purposes. Although the Deed of Amendment was only finalised after Christmas, it was assigned the date 22 December 2006, to avoid potential adverse impact on the Unit price and debt equity ratio would not impact the final reports produced for the upcoming reporting date of 31 December 2006. 90From mid 2006 and throughout early 2007, West's role in the funds management division was decreasing. He had discussed with Coe a desire to pull back from full time involvement in group business. Rich initially reported to West, but towards the end of 2006 and into early 2007, he began increasingly to report to Stefanovski. 91West was on a family holiday in January 2007, and says he did not play any role in directing, supervising or in the actual preparation of the Deed of Amendment. He says that in executing the Loan Agreement and the Deed of Amendment, he believed that the outcome was in the commercial best interest of both the fund and AFML, because it resolved the stamp duty issue and preserved AFML's investment in the fund, leaving it in the same position and not diluting the value of its interest.

Later Events 92The fund made distributions to unit holders for the quarters ending 30 September 2006, 31 December 2006 and 30 March 2007. 93On 21 June 2007, the fund sold a building at 222 Exhibition Street in Melbourne (Exhibition St) for $162.5 million. It made a final distribution of $19.1 million for the quarter ending 30 June 2007. 94On 21 January 2008, out of the proceeds of Exhibition St, $18.8 million of the AFML Loan was repaid along with a redemption of 21.1 million units at $1.101 per unit. ESSS complained about the payment to AFML, expressing concern, amongst others, that in paying AFML, RFML may have failed to act in the best interests of members and may have failed to have given priority to members' interests over those of its own. 95If, at that time, AFML had held its Funding Units and had participated in the redemption it would have been left with 90,854,072 Funding Units. The parties agree that if AFML is entitled to have its Funding Units reissued, it would be entitled to that number of them. 96The fund made distributions to Unit Holders for the quarters ending 30 September 2007, 31 December 2007 and 31 March 2008. The fund claimed tax deductions in respect of interest paid on the AFML Loan during the 2007 and 2008 financial years. 97As at 31 January 2009, $88,948,007 of the AFML Loan was outstanding, and that position remains unchanged. 98On 23 February 2009, TCL replaced RFML as the responsible entity of the fund. TCL engaged Arcadia Funds Management Limited to provide investment management services. 99For each financial year since its appointment, TCL has determined that there be no financial distributions to unit holders. Accordingly, no payments of interest have been made to AFML. 100The Senior Debt expired on 31 July 2008. It was extended on a number of occasions, most recently in March 2013, and will now expire in December 2015. 101As at 23 February 2009, the fund owed the Bank an amount of $276.17 million. 102As at 31 May 2009, the fund was in breach of loan to value ratio (or LVR) covenants in its facility with the Bank. The Bank indicated that it required a minimum reduction in the level of the Bank debt of $60 million. The Bank provided a proposal for a new three year extension of a $216.17 million portion of the Bank debt subject to unit holders contributing $60 million of new capital to the fund by 30 September 2009. 103On 25 August 2009, TCL issued an Explanatory Memorandum to Unit Holders outlining a proposal to refinance and amend the capital structure of the fund. 104The first component of the proposal required the contribution of a minimum of $60 million by one or more Unit Holders and the substitution of the new contribution for an equivalent portion of the Senior Debt. The unit holder loan would have an initial term of three years and would be entitled to a return that would provide an internal rate of return (or IRR) of 18% p.a. over the term of the loan. 105The second component of the proposal was a proportional return of capital (with no redemption of current units on issue) to each unit holder solely for the purpose of, and conditional upon, each unit holder, simultaneously reinvesting the full amount in the fund of the return of capital via a new equity loan. These equity loans would be unsecured, have no voting rights attached, be subordinated to the Senior Debt, would be interest free and would be repayable on terms which are exactly the same as the repayment terms of the loan from AFML. 106These proposals were implemented. Accordingly, in September 2009, ESSS and Military lent the fund $60 million. These loans were designated as B Notes. The Senior Debt was reduced to $216.17 million and then became designated as A Notes. 107Simultaneously, there was a return of capital totalling $51.34 million to all Unit Holders, who lent the money back to the fund by way of new equity loans as envisaged. There were no subscriptions for further units. The restructure therefore did not require or result in any repayment to AFML and, not being a Unit Holder, it received no return of capital. One of the reasons (if not the only reason) this structure was chosen in preference to the making of a distribution, was to ensure that AFML could not participate. 108In May 2011, another Unit Holder, SunSuper, lent the fund a further $60 million at an interest rate of 8.7% p.a. This loan was designated as C Notes. 109The Senior Debt (now A Notes) was further reduced from $216.17 million to $156.17 million. 110All Units in the fund are now owned by Military, ESSS and SunSuper. 111On 12 May 2011, they executed a Unitholders Deed, under which they agreed to seek a resolution of the AFML Loan. 112In late 2012, the terms of the A notes were renegotiated with the Bank. Effective 10 May 2013, the term of the A notes was extended to December 2015, and the covenants and other commercial terms amended, including a lower margin. The Bank required that the term of the B Notes and C Notes expire at least 6 months after the expiry date of the A Notes. Accordingly, the period of the B Notes and C Notes was extended to June 2016. Their terms were otherwise aligned. They all became entitled to a fixed rate return of 14% p.a., they rank equally and are subordinated to the A notes. 113Interest payable on the B Notes and the C Notes is subject to an assessment by the responsible entity of the amount of cash the fund has available to make interest payments. Interest that is unpaid following the assessment accrues and is capitalised - as at 31 October 2013, the accrued but unpaid interest on the B Notes and C Notes was $43.1 million.

Fiduciary duty and conflict of interest 114For over 100 years, it has been the law that directors owe duties of a fiduciary nature to act as best to promote the interests of the corporation whose affairs they are conducting. It has been a rule of universal application that no one having such duties to discharge shall be allowed to enter into engagements in which they have, or can have, a personal interest conflicting or which may conflict with the interests of those whom they are bound by fiduciary duty to protect. Where a director of a company is also a director of another company which is proposing to enter into engagements with the company, he has a personal interest within the rule and owes a duty which conflicts with his duty to the first company. The rule is so strictly adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract entered into: Transvaal Lands Company v New Belgium (Transvaal) Land and Development Company [1914] 2 Ch 488 at 502-503, approved in Ford v Andrews (1916) 21 CLR 317 at 321, 324. 115Conflict in this context includes a real sensible possibility of conflict: Boardman v Phipps [1967] 2 AC 46 at 124. 116Unless the articles of association of the company otherwise provide, a contract made in breach of this fiduciary duty, will be voidable at the option of the company unless the director makes a full disclosure of the nature of his interest in the contract to the members of the company, in general meeting, who must approve the contract by ordinary resolution. A provision in the articles may validate a contract which would otherwise be voidable under the general law. The director bears the onus of proving that he has strictly complied with such a provision: see Woolworths Limited v Kelly (1991) 22 NSWLR 189 at 207 and R v Donald, Ex Parte Attorney General [1993] 2 Qd.R 680 at 684.

Statutory duties 117The Corporations Act imposes on directors duties to the company analogous to their fiduciary duties at general law. 118Section 181(1) of the Corporations Act, which is in Part 2D.1, provides: Good faith - civil obligations Good faith - directors and other officers (1) A director or other officer of a corporation must exercise their powers and discharge their duties: (a) in good faith in the best interests of the corporation; and (b) for a proper purpose. ... 119Section 182(1) of the Corporations Act, which is in the same Part, provides: Use of position - civil obligations Use of position - directors, other officers and employees (1) A director, secretary, other officer or employee of a corporation must not improperly use their position to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. ... 120Section 187 of the Corporations Act provides: Directors of wholly-owned subsidiaries A director of a corporation that is a wholly-owned subsidiary of a body corporate is taken to act in good faith in the best interests of the subsidiary if: (a) the constitution of the subsidiary expressly authorises the director to act in the best interests of the holding company; and (b) the director acts in good faith in the best interests of the holding company; and (c) the subsidiary is not insolvent at the time the director acts and does not become insolvent because of the director's act. 121Section 601FD(1)(c) of the Corporations Act provides: Duties of officers of responsible entity (1) An officer of the responsible entity of a registered scheme must: ... (c) act in the best interests of the members and, if there is a conflict between the members' interests and the interests of the responsible entity, give priority to the members' interests 122Section 601FD(2) of the Corporations Act provides: A duty of an officer of the responsible entity under subsection (1) overrides any conflicting duty the officer has under Part 2D.1. 123The test for impropriety under ss 181 and 182 of the Corporations Act is objective. Impropriety consists of a breach of the standards of conduct that would be expected of a person in the position of a director by reasonable persons, with knowledge of the duties, powers and authorities of the position, and the circumstances of the case. When impropriety consists of an abuse of power, the state of mind of the director is important: The Queen v Byrnes (1995) 183 CLR 501 at 514. Section 181(1)(a) has an additional subjective element of good faith: ASIC v Australian Property Custodian Holdings Ltd [2013] FCA 1342. 124A transaction brought about by directors in breach of these duties will, if the counter-party entered into it with knowledge of the breach, be voidable at the instance of the company and rescission is available: Robbins v Incentive Dynamics (2003) 45 ACSR 244 at [72].

Unconscionability 125Section 12CA of the ASIC Act provides: Unconscionable conduct within the meaning of the unwritten law of the States and Territories (1) A person must not, in trade or commerce, engage in conduct in relation to financial services if the conduct is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories. (2) This section does not apply to conduct that is prohibited by section 12CB. 126Section 12CB of the ASIC Act provides: Unconscionable conduct in connection with financial services (1) A person must not, in trade or commerce, in connection with: (a) the supply or possible supply of financial services to a person (other than a listed public company); or (b) the acquisition or possible acquisition of financial services from a person (other than a listed public company); engage in conduct that is, in all the circumstances, unconscionable. (4) It is the intention of the Parliament that: (a) this section is not limited by the unwritten law of the States and Territories relating to unconscionable conduct; and (b) this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour; and (c) in considering whether conduct to which a contract relates is unconscionable, a court's consideration of the contract may include consideration of: (i) the terms of the contract; and (ii) the manner in which and the extent to which the contract is carried out; and is not limited to consideration of the circumstances relating to formation of the contract. 127Section 12BAB(1)(d) of the ASIC Act provides that a person provides a financial service if they operate a registered scheme. 128Section 12GD of the ASIC Act gives the Court power, if it is satisfied that a person has engaged, or is proposing to engage, in conduct that constitutes or would constitute a contravention of a provision of the Division, to grant an injunction in such terms as the court determines to be appropriate. 129Section 12GM of the ASIC Act provides for other orders the Court can make against a person who engaged in the conduct or who was involved in the contravention if it considers that such an order will compensate the first mentioned person, in whole or in part, for loss or damage or will prevent or reduce loss or damage. Those orders include an order declaring the whole or any part of a contract to be void.

the proceedings 130Mr J.C. Sheahan SC together with Mr J.C. Hewitt and Ms Z Hillman of counsel appeared for AFML. Mr I.R. Pike SC and Mr C.R. Brown of counsel appeared for TCL.

AFML's Case 131First, AFML submits that Rich and West breached their duty to AFML at general law, not to place themselves in a position in which their duties conflicted - Rich by executing the Deed of Amendment on behalf of RFML, whilst he was a director of AFML and West by in executing it on behalf of RFML and AFML, whilst he was a director of both. 132In its Commercial List Statement, AFML directed its attack to both the Loan Agreement and the Deed of Amendment. However, during the hearing, its focus was on the Deed of Amendment alone. It seeks as its principal relief an order that the Deed of Amendment be rescinded. Rescission only of the Deed of Amendment would have the consequence that the Loan Agreement would stand with a fixed Repayment Date of 31 January 2009. AFML would in that event be entitled to judgment against TCL for $88,948,000 (plus interest from that date). 133The Commercial List Statement pleads as well that they breached the same duty in relation to the Loan Agreement - Rich by signing it for AFML whilst he was a director of RFML and West by signing it on behalf of RFML whilst he was a director of AFML. 134AFML puts that in committing it to the Deed of Amendment, Rich and West were acting whilst in a position of conflict because its rights and interests under the Loan Agreement were not the same as - and indeed, in certain respects were adverse to - those of RFML, its borrower and that the Deed of Amendment significantly prejudiced its position under the Loan Agreement. 135It puts that Rich and West were acting with the full knowledge of RFML, and that it follows that it is entitled to have the Deed of Amendment rescinded, without any inquiry as to the fairness of the transaction. 136Second, AFML submits that in committing it to the Deed of Amendment, Rich and West breached their duties under s 181(1) the Corporations Act (and at general law) to exercise their powers and discharge their duties in good faith in AFML's best interests and for a proper purpose. 137It submits that they also breached their duties under s 182(1) by improperly using their position to gain an advantage for RFML and cause detriment to AFML. 138It says that the Deed of Amendment was substantially concerned with improving the position of the fund, and was in RFML's interests, and to the prejudice of those of AFML. 139Third, it submits that TCL, by relying, and continuing to rely, upon its strict legal rights under the Loan Agreement as amended whilst at the same time asserting (inconsistently) that the mutual intent of the parties was for AFML to be treated as a funding Unit Holder with expected redemption or repayment to occur in mid to late 2007, has engaged, and continues to engage, in unconscionable conduct in contravention of ss 12CA and 12CB of the ASIC Act.

TCL's Answer 140As to AFML's contention that Rich and West were conflicted, TCL does not put in issue the existence of their duty to avoid any conflict. It does not dispute knowledge on the part of RFML. It accepts that Rich and West were personally interested in the transaction within the ambit of the obligation to avoid conflict. It does not allege the passing of a members' resolution or identify any permissive provision in AFML's articles authorising the conduct complained of. It does not raise any positive defence. It does not (although it initially did) assert any disentitling conduct on the part of AFML. It does not suggest that if the duty was breached, rescission is not available. 141TCL's answer is that Rich and West were not in a position of conflict because the 30 January 2009 Repayment Date was not a true date for repayment and when Rich and West committed AFML to the Deed of Amendment, they were doing nothing more than what was always intended anyway. 142It says that the Loan Agreement was devised to deal with the stamp duty problem in a way that was not intended to alter the economic outcome for either party and that the Deed of Amendment was devised to deal with unintended consequences and to ensure that the economic outcome for either party was not altered. It says that the Loan Agreement and the Deed of Amendment should be viewed as one transaction. 143It says that AFML's investment was always intended to be an equity investment and to rank for repayment equally with the entitlement of Unit Holders of distributions of the surplus assets on termination. It says that whether by way of repayment of the loan or redemption of the Funding Units, AFML was expected to recoup its investment out of equity raising by mid 2007. Hence, it says, the Deed of Amendment brought about no substantive change to the intended position. 144TCL denies that Rich and West breached the duties imposed on them by ss 181 and 182 of the Corporations Act (or similar duties at general law, the existence of which TCL does not dispute). 145TCL does not suggest that if a breach of ss 181 or 182 of the Corporations Act is established, rescission is not available. 146It says that Rich and West acted in good faith "in the best interests of AFML and/or the [Allco] group" in relation to both the Loan Agreement and the Deed of Amendment. 147It relies on the evidence of Rich and West as to their belief that what they were doing was in the interests of the group, including AFML. 148It argues that both the original stamp duty problem and the unintended consequences of the Loan Agreement had implications not only for the fund but also for AFML because any impact on the fund's financial position or its relationship with the Bank would have an impact on AFML. This would impair the ability of the fund to raise new capital to repay AFML its seed capital and could adversely affect the amount of management fees AFML might earn from the services it performed. Accordingly, it says, AFML benefited from both the Loan Agreement and the Deed of Amendment. 149It acknowledges that AFML lost its rights as a Unit Holder but says that as a lender it gained a right to priority over Unit Holders if the fund were to be wound up and that it would have in any event been unable to vote its Units due to its association with RFML. In addition, it says AFML obtained an upside under the Loan Agreement because its units were effectively redeemed at $1 each when the unit price was less than that at the time. 150TCL puts that there has been no substantial change in AFML's position from being a Unit Holder to a borrower because its initial equity investment is still accounted for as equity, its return on seed capital by way of interest is equal to distributions to Unit Holders and its recoupment of seed capital will still come from the raising of new money or on the winding up of the fund. 151It says that AFML's current position is the result of the GFC, which could not have been foreseen. 152TCL puts that Rich and West acted in the best interests of the members and to the extent that there was any conflict between those interests and the interests of AFML, the effect of s 601FD of the Corporations Act was that their duty to act in the interests of AFML was overridden by their duty to the members. 153Finally, TCL relies on Article 11.3 of AFML's constitution which provides: If this company is a wholly-owned subsidiary of a body corporate, a director may act in the best interests of the holding company provided that this company is not insolvent at the time the director acts and does not become insolvent because of the director's act. 154It puts that AFML was a wholly-owned subsidiary of Allco and by s 187 of the Corporations Act, read with the Article, Rich and West, having acted in good faith, in the best interests of the holding company, are taken to have acted in good faith, in the best interests of AFML. 155Initially TCL submitted that the following factors fairly precluded the granting of any equitable relief:

• one or more of the other Unit Holders would likely consider AFML to be an unacceptable investment partner;
• one or more of them invested in the fund after AFML's Funding Units had been redeemed and did so on the basis that the only other Unit Holders in the fund were like minded institutional investment funds, with similar investment objectives and investment horizons as themselves;
• one or more of the Unit Holders would not have invested if AFML was a Unit Holder and if AFML were to become a Unit Holder, the existing Unit Holders would be in an untenable commercial position in that they would have to deal on a day-to-day basis with a non-aligned and non-likeminded investment partner;
• the liquidity of, and value of, their units would be materially impaired in a situation where AFML attempted to sell its units at a discount to net asset value;
• the ability the fund to raise additional equity by the issue of new units would be materially impaired if AFML were a Unit Holder and/or the AFML units were offered for sale;
• TCL and the present Unit Holders in effect rescued the fund from collapse; and
• the time it has taken the Receivers to elect for rescission. 156This stance was no doubt developed to meet AFML's original attack which was levelled squarely at the Loan Agreement and to ward off AFML being restored to being a Unit Holder which would be the result if the Loan Agreement were rescinded. However, during submissions, TCL recognised that if relief with respect to the Deed of Amendment was available (which, as the hearing progressed, it appeared increasingly to acknowledge), a contention that restoring AFML to the status of Unit Holder was unpalatable, amounted to a contention in favour of rescinding only the Deed of Amendment. This would leave AFML as a lender with a fixed Repayment Date which had passed. This outcome is even less palatable to TCL than AFML being restored to being a Unit Holder. 157In the end result, in my view wisely, TCL abandoned all contentions of preclusionary factors, but maintained that the circumstances strongly favoured the moulding of any order to have the effect that if the Deed of Amendment were to go, so would the Loan Agreement. I record that in my view the evidence did not support the existence of factors sufficient to preclude the grant of relief. 158It puts that it would be a "wholly perverse result" if only the Deed of Amendment were set aside, when it is clear that it was only ever entered into to deal with unintended and unforseen consequences of the Loan Agreement, and that rescission of the Deed of Amendment alone would deliver to AFML the wholly unintended consequence that it would gain priority over other Unit Holders in terms of the Repayment Date. 159TCL denies that it has engaged in or is engaging in any conduct which is unconscionable. It says that AFML was not and is not under any special disadvantage in its dealings with RFML or TCL, that all parties involved are astute operators well accustomed to making commercial judgments, acutely aware of their own interests and how to advance them. It says there has been no unconscientious exploitation of AFML and that the conduct of TCL has not gone beyond that which would be expected in the ordinary course.

Fiduciary duty and conflict of interest 160With respect to the Deed of Amendment, Rich and West were clearly in a position of conflict. This was so both with respect to the Deed of Amendment in its own right and with respect to that instrument as it related to the Loan Agreement itself. 161AFML's interests, both economic and legal, were clearly not the same as those of RFML (or for that matter Allco). 162It is sufficient for AFML to establish that this was so at the time of the Deed of Amendment. 163No party suggests that the Loan Agreement was a sham, did not reflect the true and actual agreement of the parties or was not enforceable according to its tenor. 164Immediately prior to the Deed of Amendment, AFML had a legally enforceable right to repayment by 31 January 2009 and RFML had a corresponding legally enforceable obligation. TCL's submission that the Deed of Amendment involved no change of substance from what was originally intended (even if that be right) overlooks the legal rights which AFML had acquired. The Deed of Amendment deprived AFML of those rights. It left repayment of principal and payment of interest effectively at the discretion of the borrower. The submission also overlooks that in committing AFML to the Loan Agreement, Rich and West were also in a position of conflict. 165AFML has always had a direct interest in recouping its investment at the earliest time. The RE, representing the rights of Unit Holders, had (and continues to have) a direct interest in the loan not being repayable at all or being repayable as late as possible and, in any event, not being repayable in the absence of receiving new equity. 166The profound nature of the conflict is revealed by this very dispute. The most unpalatable outcome for TCL is if AFML were to have the Loan Agreement shorn of the Deed of Amendment. 167In the context of this breach, the fairness or unfairness of the transaction is irrelevant. 168It follows that AFML is entitled to rescission of the Deed of Amendment. 169Turning to the Loan Agreement, before that transaction, AFML was a Unit Holder with, amongst others, rights to vote at Unit Holder meetings. RFML owed it fiduciary duties under the Constitution. In addition, under s 601FC(1)(a)-(c) of the Corporations Act, in exercising its powers and carrying out its duties, the responsible entity must act in the best interests of the members and if there is a conflict between their interests and its own interests it must give priority to the members' interests. The Loan Agreement deprived AFML of those benefits and released the RE from the corresponding obligations. The conflict is clear. 170In its written Closing Supplementary Submissions, TCL put the following: If there was a problem - either by virtue of a duty conflict or a failure to act in the best interests of AFML - this was a problem with the entirety of the transaction. It thus infects both the Loan Agreement and the Deed of Amendment. The same conflict existed at both stages. Further, it was by virtue of the Loan Agreement that AFML lost its rights as a unitholder. 171There was indeed a problem at both stages. 172This conclusion renders it unnecessary to deal with AFML's further grounds for rescission. I will, however, nevertheless do so.

Statutory duties 173Section 181(1) imposes a duty upon directors to exercise their powers and discharge their duties both in good faith in the best interests of the corporation and for a proper purpose. Section 182(1) imposes a duty on directors not improperly to use their position to gain an advantage for someone else. These are statutory emanations of some of the recognised duties of directors to their company at general law. 174Little was said by TCL specifically in relation to the issue of proper purpose. 175I accept that Rich and West held the views they say they held. AFML did not challenge their credit. I accept that they were bona fide in that they believed that what they were doing was permissible, even advisable. But that is not enough. The test for impropriety is objective. 176Dealing firstly with the Deed of Amendment in its own right, in defence of this transaction, Rich says that the unintended consequences of the Loan Agreement could have impacted on fund profitability, unit price and loan ratios and severely affected the fund's capability to raise new debt and equity and could have made Allco, as a fund manager, less attractive to the target institutional market and negatively affected the interests of other Unit Holders in the fund. West says he was on holiday and played no meaningful role in the amendment. 177It is to be remembered that the stamp duty problem had been solved by the Loan Agreement. Immediately before the Deed of Amendment, AFML was not a Unit Holder but a lender who was expected to be paid by mid 2007 but with a fixed Repayment Date. It had no direct interest in the impact performance of the fund would have on the unit price. 178Measured objectively, no reasonable person in the position of Rich and West could reasonably and rationally have concluded that the Deed of Amendment was in the best interests of AFML. It was entered into to serve the purposes of the RE as representing the Unit Holders and the Bank. For the same reason, objectively viewed, committing AFML to that transaction was not for a proper purpose. 179With respect to the Loan Agreement, Rich refers in his evidence to the intention that the "Group's interest" (as Funding Units or as a loan) would be recovered by the raising of new capital which was expected to happen by mid 2007 and that it was an integral part of the proposal that AFML not be advantaged or disadvantaged. West disavows any meaningful involvement in the decision to convert AFML's units to a loan. He says that this was done by persons in the property group under Rich. 180Rich's approach that it was an integral part of the proposal that AFML not be advantaged or disadvantaged overlooked the fundamental nature of his obligation to promote its best interests. 181Rich also says he believed that AFML would be in the same position except that it could not vote, but this was not significant because it could not vote in any motion affecting its interest because of its association with RFML. 182This overlooks the possibility, as has come to pass, that that association might end and is symptomatic of how (as is revealed by this case) the Allco group was governed and did business, that is without due regard to the specific duties owed to, and the particular interests of, particular entities within it. It is perhaps not surprising that a matter which should clearly have been submitted to the Related Party Committee, was not. 183In any event, on any objective and rational assessment, AFML's economic position pre and post the Loan Agreement is not, and was never, the same. In his 11 December 2006 proposal, Rich acknowledged the downside that AFML would no longer be entitled to the "NTA uplift above $1". This is a reference to the Funding Units Terms of Issue which guaranteed it not less than $1 per unit on compulsory withdrawal. Under the Loan Agreement, on repayment, it would never get more than the subscription amount of the units, although it would never have to take less than that. As a Funding Unit Holder, it had been guaranteed not less than $1 per unit on compulsory withdrawal but could get more. The notion that AFML benefited because its redemption was at $1 when the Unit Price was less, is illusory. It was required to lend back the money forthwith at no interest beyond distributions and with no Unit Price upside. 184In his memorandum, Rich added that it was not expected that the NTA would reach $1 per unit until at least June 2007. His evidence was that it was anticipated that AFML would be paid from new subscriptions or sale of assets on winding up of the fund which would occur by no later than 30 June 2007. AFML lost its equity by way of a transaction which on any reasonable or rational assessment prejudiced its legal and commercial position. It lost the ability, because it ceased to be a Unit Holder, to vote its interest so as to influence the management of the fund, in particular with respect to its winding up out of which it was expected to be paid if subscriptions had not been received sufficient to pay it out by mid 2007. 185A further symptom of the detriment it suffered is that the capital reconstruction was able to be implemented without its participation. As referred to above, ESSS complained even about AFML receiving some repayment. 186At a more general level, what the evidence of Rich and West reveals is that neither paid direct or specific regard to AFML's particular legal and economic interests which it was their duty to advance. In the case of West, he did not apply his mind at all to the ramifications of the Deed of Amendment. In the case of Rich, he had his eye on fund profitability and performance, Allco's prospects as a fund manager and interests of other Unit Holders in the fund rather than the specific interests of AFML. 187Objectively viewed, AFML's particular economic and legal interests were at the time subordinated to, and indeed sacrificed, in favour of more general interests of the group which interests were not coextensive with those of AFML. 188The actions of Rich and West were not the exercise of their powers and discharge of their duties to AFML in its best interests or for a proper purpose within s 181(1) of the Corporations Act or under the general law. Additionally, in contravention of s 182(1)(a) they used their position improperly to gain an advantage for RFML. 189Section 601FD does not assist. The section does not permit or exonerate breaches of fiduciary duty committed against another party, in this case AFML. The section provides that where there is a conflict between the interests of the members and those of the RE, the interests of the members must take priority. Section 601FD(1)(c) involves only a contest between the members and the RE. It has no field of operation where there is a conflict of interest between the RE and some other entity of which the director of the RE is also a director. It also has no impact on their fiduciary duties at general law. 190Section 187 of the Corporations Act does not avail them because it does not operate on s 181(1)(b), s 182(1)(a) or on general law duties. 191It follows that AFML is entitled to rescission of the Deed of Amendment for these breaches as well.

Unconscionability 192Given the findings I have made, it is not necessary to deal with AFML's claim based on unconscionability. It may, however, be disposed of briefly. 193AFML's complaint is that TCL has unconscionably departed from the original common assumption underlying the Loan Agreement and Deed of Amendment that AFML's position as an equity holder would not be adversely affected. Contrary to this, AFML complains, TCL has treated it as a bare lender. 194The threshold difficulty is that neither party contends that the Loan Agreement or Deed of Amendment did not reflect the true agreement of the parties. These instruments reflect the arrangements the parties actually agreed upon and which they had in mind as being effective to mimic an equity interest. There has been no departure from this and therefore no unconscionable conduct in the manner articulated by AFML. The parties' true assumptions are embodied in the contract between them: Maurice Tarabay v Fifty Property Investments Pty Ltd [2009] NSWSC 617. 195Two matters are, however, worthy of observation. 196First, although this claim has not been made out, what it demonstrates is that the true interests of AFML were never coextensive with those of the RE and, in the circumstances that have arisen, are in direct conflict. AFML was committed to a device not in its best interests to serve the interests of others. 197Second, the outer limits of s 12CB of the ASIC Act have not been judicially determined. It clearly expands traditional notions of unconscionable conduct. I consider that TCL has engaged and continues to engage in unconscionable conduct in seeking to maintain its rights under the Loan Agreement and Deed of Amendment in the knowledge of the circumstances in which they were entered into and that AFML seeks rescission. But this is not its complaint and AFML has another remedy in respect of it.

Relief 198The jurisdiction to order rescission is equitable. It is a cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts: Warman International Limited v Dwyer (1995) 182 CLR 554 at 559. 199AFML is entitled to the principal relief it seeks, namely an order for rescission of the Deed of Amendment. However, both the Loan Agreement and the Deed of Amendment came about as a consequence of breaches of fiduciary and statutory duties. AFML still complains about the Loan Agreement in its own right but seeks only rescission of the Deed of Amendment. The transactions are legally distinct, but they came about in what might fairly be described as one factual continuum. The substantive effect of both was that AFML was deprived of its equity position. It is entitled to be restored to that position, but equity dictates that it should not get what will be more than that, if it gets the Loan Agreement without the Deed of Amendment. Justice does not dictate that AFML should be permitted in these circumstances here to cherry pick. 200There has been a significant passage of time since the Deed of Amendment and other Unit Holders have undoubtedly acted, with respect to their interest on the fund, on the footing that AFML was only a lender. 201In my view, justice requires that as a condition of the Deed of Amendment being rescinded, the Loan Agreement must also be rescinded. 202During the hearing the Court raised the question whether appropriate relief would include a provision enabling TCL to elect to acquire AFML's interest in the fund so as to enable it to avoid reinstatement of AFML as a Unit Holder in the fund. It seemed to me that AFML's prime commercial interest lay in realising its interest in the fund at an appropriate value and one of TCL's significant commercial interests was not to have AFML as a Unit Holder. There was debate between Bench and Bar about an appropriate formulation, including as to value and the procedure to ascertain it. The parties did not suggest that the Court was without power to mould an appropriate provision although neither appeared to embrace the notion with any degree of enthusiasm. The Court invited written submissions and submissions of some complexity were received. 203AFML's position is that if TCL has the benefit of such an election it should have a corresponding one. It put that the appropriate formulation was the value of a Unit as determined under the Constitution when the responsible entity makes a withdrawal offer, which is an amount equal to the Net Fund Value minus Transaction Costs divided by the number of Units on issue. It put that "fair value" was the next best formulation. It put that any valuation formulation adopted should be subject to the qualification that in determining the liabilities of the fund for the purpose of ascertaining its net assets or total equity, the Unit Holder equity loans of $51.34 million should be assumed not to exist. This is because if AFML had been a Unit Holder and had been offered the same terms as the other Unit Holders its share of the return of capital would have been approximately $24.2 million (43.13% of $51.34 million) and if those loans were to be repaid (actually or notionally) before AFML's share of the equity is calculated, the other Unit Holders will have extracted $51.34 million from the fund by way of return of capital without AFML receiving or being offered an equal right to share in any of that value. 204TCL put that the appropriate formulation was market value and that the fund's 2013 audited financial statements should be used as the basis for the valuation. It put alternative submissions about what should be the appropriate valuation date and took issue with the reversal of the equity loans transaction. It put that an adequate formulation to take this into account would be that the valuation be on the footing that those equity loans will not be repaid at a date before all of the funding units are redeemed. It provided financial calculations based on the fund's audited financial statements. 205Having had the benefit of written submissions, I have concluded that the imposition of such a condition on the relief would not be an appropriate exercise of my discretion in the particular circumstances of this case. Leaving aside the difficulties of formulating what is in the circumstances the appropriate price mechanism and the fact that TCL will in any event have the right under the Constitution to redeem AFML's Units if it so chooses, the true purpose of the provision would be to serve the commercial ends of both parties by facilitating the extrication of AFML from the fund on reasonable commercial terms. This is something which is properly left to the parties themselves.

CONCLUSION 206AFML is entitled to an order, should it elect to have it, that the Loan Agreement, the Deed of Amendment and the redemption of its Funding Units are simul ac semel rescinded ab initio. 207I will stand the matter over to enable AFML to make its election and for the appropriate short minutes to be brought in. I will hear the parties on costs. 208The exhibits are to be returned.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 11 September 2014