Arakella v Paton

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4543/03 ARAKELLA PTY LTD V GEOFFREY DOUGLAS PATON (AS REPRESENTATIVE OF THE UNITHOLDERS OF GNS TRADING TRUST) JUDGMENT HIS HONOUR: Introduction 1 The plaintiff ("the Trustee") is the trustee of the GNS Trading Trust ("the Trading Trust"). "GNS" stands for "Group Newsagency Supplies". The proceeding, commenced by summons filed on 28 August 2003, was initially an application for judicial advice and directions from the Court, under s 63(1) of the Trustee Act 1925 (NSW), with respect to a question set out in a statement of facts. The question was whether the Trustee was justified in incurring reasonable expenses for the purpose of investigating and developing a proposed restructure of the Trading Trust, by evaluating and documenting the proposed transactions, with a view to seeking further judicial advice at a later stage. Interlocutory relief has been sought, and progressively obtained to date, that the Trustee is justified in incurring reasonable costs as trustee, in preparing and advancing its proposal and the application to this Court. 2 An application for judicial advice under s 63(1) may be, and typically is, brought ex parte. Its effect is to protect a trustee, who engages in conduct honestly and diligently in accordance with the Court's advice, from liability in respect of that conduct, provided that all material matters have been fully and fairly disclosed to the Court. McLelland CJ in Eq usefully explained the latter proposition, in the analogous context of application by a liquidator under s 479(3) of the Corporations Act, in Re GB Nathan Pty Ltd (in liq) (1991) 24 NSWLR 674, 679ff; see also Jacobs' Law of Trusts in Australia (6th ed by RP Meagher and WMC Gummow, 1997), paragraph [2134]. 3 The Trustee wishes to implement a proposal akin to a scheme of arrangement, by amending the trust instrument for the Trading Trust dated 30 May 1989 ("the Trading Trust Deed") after obtaining the approval of a special majority of unitholders. The amendment will irrevocably affect the rights of unitholders. At the first hearing of its application for judicial advice, an ex parte hearing, two legal issues were identified, which were thought to be potential obstacles to the achievement of the Trustee's objectives. One is whether s 81 of the Trustee Act is wide enough to empower the Court to confer on the Trustee a power to amend the Trading trust Deed to permit implementation of the proposal. The other is whether, if the Trustee is given a power of amendment on condition that it has obtained the approval of a special majority of unitholders, the amendment is capable of binding dissident unitholders, having regard to relevant equitable principles. This raises, in particular, the questions whether the principles enunciated by the High Court in Gambotto v WCP Limited (1995) 182 CLR 432 with respect to the amendment of a corporate constitution, are applicable to the proposed amendment of the Trading Trust Deed and if so, whether they can be complied with. 4 The identification of these issues led to some concern, at the first hearing, as to whether the proceeding was appropriately constituted as an ex parte application for judicial advice. At an adjourned ex parte hearing, the Trustee sought and was granted leave to amend its summons so as to add an immediate application for an order under s 81 that would empower it to implement the transaction referred to in its statement of facts. It also sought leave to file a notice a motion for the determination, as separate questions under Part 31 rule 2 of the Supreme Court Rules, of the two legal issues to which I have referred. The Trustee foreshadowed that arrangements would be proposed to reconstitute the proceeding as a proceeding inter partes between it as trustee and a representative of the unitholders who are the beneficiaries of the Trading Trust. I granted the Trustee leave to file its notice of motion, noting that on the return date for the notice of motion the Court would consider the question of appointment of a representative party as defendant. The letter to unitholders, and the appointment of Mr Paton as representative 5 At further brief hearings on 10, 17 and 31 October 2003, counsel and solicitors appeared for Geoffrey Douglas Paton, a unitholder suggested by the Trustee as an appropriate person to be appointed as a representative of the unitholders of the Trading Trust. 6 On 20 October 2003 the Trustee caused a letter to be written to each of the 365 unitholders, other than 15 unitholders (no longer customers of the Trading Trust) whom it has not been able to contact after making attempts to do so. A draft of the letter was placed before the Court on 17 October 2003. The draft was the subject of submissions by counsel for Mr Paton, and the text was settled in a form acceptable to Mr Paton. In broad terms, the letter notified unitholders of the present proceeding and the application for an order to appoint Mr Paton as a representative, to be determined on 31 October 2003, and gave them an opportunity to appear or otherwise express their views to Mr Rogan, the managing director of the Trustee, or to any of the other directors. 7 No unitholders have responded by contacting Mr Rogan or any of the other directors of the Trustee. Nor has any unitholder objected to the proposed appointment of Mr Paton as their representative, or sought leave to appear at the hearing on 31 October 2003 or any subsequent hearing. On 31 October 2003 I made an order under Part 8 rule 14(1) of the Supreme Court Rules appointing Mr Paton to represent the unitholders of the Trading Trust in the proceeding, and I also made an order for the separate determination of the two questions that I have identified. I have allowed Mr Paton's reasonable legal costs to be paid out of the assets of the Trading Trust. The separate questions 8 The questions formulated for separate determination are as follows: (a) Whether the Court has the power, under s 81 of the Trustee Act 1925 (NSW) or otherwise, to make orders empowering the Trustee to amend the terms of the Trading Trust Deed, for the purpose of implementing the transaction described in the Explanatory Memorandum filed in these proceedings ("the Transaction") and in circumstances where resolutions approving the amendments to the Trading Trust Deed and the Transaction are passed by at least 75% of the unitholders who are present and voting at a general meeting; and (b) Whether amending the terms of the Trading Trust Deed, for the purpose of implementing the Transaction and in circumstances where resolutions approving the amendments to the Trading Trust Deed and the Transaction are passed by at least 75% of the unitholders who are present and voting at a general meeting, would constitute a fraud on the power. 9 The hearing for determination of the separate questions took place on 17 December 2003. Mr Paton was represented by counsel and solicitors. I later made orders answering question (a) "yes, it does" and question (b) "no, it would not", and stood the proceeding over for further mention before me on 2 March 2004, on the basis that I would publish the reasons for my decision on the separate questions after the Christmas break. These are my reasons for decision. Proposed further steps 10 The Trustee has provided me with a timetable which indicates that, having received a favourable decision with respect to the separate questions in December 2003, it would use the month of January 2004 to prepare meeting documentation, an investigating accountant's report and transfer documentation, which it would then submit to the Australian Securities & Investments Commission ("ASIC") for comments. 11 At the hearing on 2 March 2004 I shall make arrangements for the further hearing of the proceeding. The Trustee's timetable contemplates that the Court will be asked at that stage (that is, before the meeting of unitholders) to make an order under s 81 conditional upon favourable resolutions being passed by 75% of the unitholders present and voting at the proposed general meeting. The issue for the Court under s 81 will be whether it is expedient to make the order in the management and administration of the trust business, given the present determination that the Court has the power to do so. Although I am prepared to hear further argument on the point, I am not at present inclined to make a binding order under s 81 before having evidence of the attitude of the unitholders at the meeting. It may be that some issues going to the merits of the proposed order under s 81 will be raised by the unitholders. The Court should have the benefit of knowing about those issues before making the order. 12 I think it would be appropriate, however, for the Court to be invited to make a further order under s 63(1) before the meeting is convened, to the effect that the Trustee is justified in despatching its explanatory statement to the unitholders and in recommending the implementation of the scheme. The hearing for that purpose would be roughly analogous in scope (though not in legal content and effect) to the first hearing in scheme of arrangement proceedings under s 411 of the Corporations Act. 13 The Trustee's timetable contemplates that, if the unitholders approve the scheme by the requisite majority at their meeting, there will be a final application to the Court, seeking the Court's opinion or advice under s 63(1) as to whether the Trustee would be justified in implementing the proposed restructure, and also seeking an order under s 85 of the Trustee Act excusing past breaches of trust. It seems to me, subject to any further submissions, that the final order under s 81 should be sought at that stage. 14 I shall first set out the facts relevant to determination of the separate questions, then note some issues raised by the Trustee about the Trading Trust Deed and the Corporations Act, and in the light of those issues, set out the Trustee's proposal. I shall then make some observations about the constitution of the proceeding as a representative proceeding, and give my reasoning with respect to each of the two questions. The facts 15 The facts for the purpose of determination of the separate questions are agreed facts set out in a Statement of Facts (with annexures) filed on 28 August 2003. The following is a summary of that document. 16 The Trading Trust carries on business as a wholesaler of stationery and office supplies. The vast majority of its customers are individual newsagents operating in New South Wales, Queensland and Victoria. It was established by the Trading Trust Deed in May 1989. The plaintiff became the Trustee in March 1990. Its shares are held by directors. 17 The Trading Trust, and its predecessor business structure, were established, for the benefit of newsagents, in order to concentrate the buying power of many disparate newsagencies into a single entity and thereby enable individual newsagents to obtain stationery and office supplies at cheaper prices. It does not aim to maximise profit (although it has derived profits in recent years), but rather to supply its customers at the lowest possible prices. It purchases stationery and office supply products and holds them at various locations, from which individual customers may buy stock as and when required. 18 The Trading Trust currently has over 3,400 customers, the vast majority of whom are newsagents, although it will supply its products to anyone who is a retail seller of stationery. There are currently 365 unitholders, of whom all except approximately 34 carry on business at present as newsagents. No single unitholder controls the Trading Trust. 15 unitholders who have changed their addresses and no longer carry on business as newsagents are not contactable by the Trustee notwithstanding efforts to trace them. For a long time the annual general meetings of the Trading Trust have been attended by fewer than 20 unitholders. 19 Customers of the Trading Trust pay an additional amount by way of security deposit, over and above the invoice price for the goods. The additional amount is paid by way of a 2% contribution until the total security deposit held by the Trading Trust reaches a set figure ($6,500). If the customer ceases to trade with the Trading Trust, the security deposit is returned after deduction of any amount owing under invoices that have been issued. If the customer is a newsagent, once the contribution reaches $1,500, he or she may be offered units. If he or she chooses, that $1,500 may be applied as the "joining fee" and in that event the newsagent is issued with 1,500 units in the Trading Trust. However, since about August 2002, when the Trustee sought legal advice and became aware of certain breaches of trust and contraventions of the Corporations Act (described below), it has ceased issuing new units. 20 If a newsagent, having acquired units, retires or sells his or her newsagency business, the Trustee's practice in the past has been to redeem the units held by the newsagent for a value equivalent to the "joining fee", that is $1,500. During the last 12 months there have been 45 redemptions of 1,500 units each, for $1,500 in each case. 21 The Trading Trust has shown accounting profits in some past years, but until recently they have been offset by losses carried forward. As a result the Trading Trust paid tax for the first time in 1999. It now has an annual turnover of approximately $100 million and achieved profits of approximately $1.3 million and $1.4 million before tax in the financial years ended 30 June 2002 and 30 June 2003 respectively. 22 The balance sheets for the years ended 30 June 2002 and 2003 each show as a non-current asset a loan made by the Trading Trust to Group Owners Pty Ltd as trustee of a trust that I shall call "the Discretionary Trust". The Discretionary Trust was established for the purpose of holding two buildings from which the Trading Trust conducts its business. It has gross assets of $16 million and debts of approximately the same amount, comprising a combination of bank debt and the loan from the Trading Trust. The Trading Trust pays variable rent to the Discretionary Trust, sufficient to enable the Discretionary Trust to break even. Directors of the Trustee own all the shares in Group Owners. 23 Under the terms of the trust deed for the Discretionary Trust, the Trustee holds the trust fund on trust for the Trading Trust and the unitholders, collectively, who are together referred to as the beneficiaries. The Trustee has discretion to pay or apply distributable income for the benefit of the beneficiaries or to accumulate it. It has discretion to pay or apply capital for the benefit of one or more of the beneficiaries. The annual accounts of the Trading Trust do not disclose the existence of the assets of the Discretionary Trust, on the ground that the income and capital of the Discretionary Trust do not vest in any of its beneficiaries until Group Owners as trustee makes a distribution. 24 The Trustee believes that steps need to be taken to overcome drafting deficiencies of the Trading Trust Deed, and the breaches of trust and of the Corporations Act that have been discovered. On the other hand, it believes that the Trading Trust, which has been solvent at all relevant times, has been providing a valuable service to the newsagency industry. It also believes that the winding up of the Trading Trust would be contrary to the interests of unitholders because that step would increase the cost of stationery and office supply products to newsagents, and give rise to substantial costs including taxation, and also because promotional activities funded by the Trading Trust would be likely to cease, and approximately 232 persons presently employed by the Trading Trust would be made redundant. The Trading Trust Deed 25 The Trading Trust Deed is, in some respects, a poorly drafted instrument. It makes provision for the beneficial interest of the trust fund constituted by it to vest in unitholders, on the basis that each unit entitles the registered holder to a proportionate beneficial interest in the trust fund, although no unitholder is entitled to any particular property or to the transfer of any property comprised in the trust fund. Initially there were (according to clause 6(b)) 100 units, vested in two unitholders (Mr Rogan and Mr Boyce), but the Trustee is given the power by clause 6(c) to issue additional units with the approval of unitholders in such manner and at such price as it thinks fit. The Trustee's discretion to issue new units is subject to a pre-emption procedure, according to which units are to be offered in the first instance to the original unitholders, but if any of them declines the offer of units then every unitholder to whom the offer has been made is deemed to have declined, and the Trustee may dispose of the units, at a price calculated by reference to a formula, to such other persons as it thinks most beneficial to the trust fund. 26 Clause 5(c) provides: "Each person who becomes registered as a Unit Holder shall be deemed to be authorised by a Newsagency Council as an authorised Newsagent. Upon the Unit Holder ceasing to be a Authorised Newsagent as defined, the Trustees shall within a period of three (3) months redeem to the Unit Holder the full value of the Units held in accordance with Clause 9(a) herein." 27 The Trustee is required to keep and maintain an up-to-date Register of Unit Holders, and to issue Unit Certificates in prescribed form. Clause 9(a) obliges the Trustee to value a unitholder's units upon receiving a written request to do so, and to redeem the units within 60 days. By clause 9(b) each unitholder is entitled, "subject to the provisions of clauses 6(b) and (c)", to transfer units to any person, and the Trustee is obliged to approve the transfer. There are provisions for the transmission of units upon the death or bankruptcy of the unitholder. 28 Clause 31 makes provision for the Trustee to sell the assets of the trust fund by public auction (unless otherwise authorised by Special Resolution of the unitholders) and to make a distribution to the unitholders proportionately to their holdings. Clause 32 permits the Trustee, with the unanimous consent of all the affected unitholders, to apply surplus cash to the redemption of units. Clause 35 authorises the Trustee to make distributions to unitholders, proportionately to their holdings, out of the income of the trust fund, and clause 36 permits capital distributions. 29 Amendments to the Trading Trust Deed are governed by clauses 50 and 51. Clause 50 permits the Trustee to vary the trusts by supplemental deed, with the prior written consent of all unitholders. Clause 51 provides that the Deed is not capable of being varied the otherwise than as expressly provided. 30 The Trustee contends that some of the provisions of the Trading Trust Deed are unworkable. First, it says that the meaning of clause 5(c) is unclear, and on one construction that provision might require all unitholders to redeem their units within three months of ceasing to be registered as authorised newsagents by the Newsagency Council. The Newsagency Council ceased to exist in about January 2001, and has not been replaced. This might mean that nobody is or will ever become eligible to be or remain as a unitholder. 31 Secondly, the Trustee draws attention to requirement of clause 6(c) for approval of the issue of additional units by a "Special Resolution", defined by clause 1(j) to mean the affirmative vote of at least three-quarters of all unitholders, not only those present or present and voting at a meeting. The Trustee says that the effect of these provisions is to make it impossible as a practical matter to issue new units, given that 15 unitholders cannot be located and typically fewer than 20 attend meetings. 32 Thirdly, clause 6(b), which requires that units be offered in the first instance to the "original" unitholders (Mr Rogan and Mr Boyce), appears to be a drafting mistake, and evidently should have referred to existing unitholders. 33 Fourthly, the Trustee says that the meaning of the words "subject to the provisions of clauses 6(b) and (c)" in clause 9(b), dealing with the Trustee's approval of a transfer of units to "any person", is problematic. On one construction, it may sidestep the requirement of clause 5(c) that a unitholder be an Authorised Newsagent. More generally, the meaning of the quoted words is obscure. The intention may have been to make the transfer of units subject to the pre-emptive rights set out in clause 6(c), but in that case the reference to clause 6(b) is hard to explain. If the quoted words had the effect of requiring that the transfer be approved by Special Resolution, then it would be impossible as a practical matter to transfer units. 34 Fifthly, the Trustee says that it is impossible as a practical matter for the Trading Trust Deed ever to be amended, because of the requirement of prior written consent from all of the unitholders. Problems about compliance with the Trading Trust Deed 35 One of the purposes of the proposal that the Trustee wishes to put to the unitholders is to establish a new constitution for the business free of these anomalies and uncertainties. But the Trustee is also concerned that there may have been breaches of trust in the administration of the Trading Trust Deed, and also breaches of some of the requirements of the Corporations Act. 36 First, the Trustee has issued new units without first procuring a Special Resolution or offering the new units to the original unitholders. Secondly, it has issued new units after the dissolution of the Newsagency Council, and has not redeemed units within three months of the dissolution or at all. Thirdly, it has not redeemed units within three months of the unitholder ceasing to carry on business as a newsagent. Fourthly, it has approved the transfer of units to persons who were not carrying on the business of a newsagent and has not then redeemed those units. 37 Fifthly, the Trustee has not followed the formula for pricing of units set out in clause 6(e). It has issued new units for $1 per unit, in parcels of 1,500 units, under the levy arrangements that I have described. Sixthly, the Trustee has not followed the valuation procedure prior to redemption of units, and has not purported to redeem units at their full value, but has instead redeemed units for $1 per unit in the manner that I have described, in effect treating the subscription price of $1,500 for 1,500 units as a refundable joining fee. Seventhly, the Trustee is concerned that the arrangements it has put in place for the vesting of property in the Discretionary Trust have the effect that the value of units in the Trading Trust may be understated at any point in time, even if a valuation is undertaken in accordance with the terms of the Trading Trust Deed. This is because Group Owners has a discretion as to the distribution and accumulation of income and capital and so it is inappropriate, for the purpose of valuation, to "distribute" accumulated income and the value of capital to unitholder interests. Problems about compliance with the Corporations Act 38 The Trustee has three broad concerns about contravention of the Corporations Act. First, the Trading Trust appears to be a "managed investment scheme" and accordingly should have been registered as such since July 2000, but it has not been. Secondly, the issue of units in the Trading Trust was regulated by the prospectus provisions in Chapter 6D of the Corporations Law and its predecessors, and then the Corporations Act prior to the introduction of the Financial Services Reform Act 2001, and by the product disclosure provisions of Part 7.9 of the Corporations Act thereafter, but it has never issued a disclosure document any kind in connection with the issue of units. Thirdly, neither the Trustee nor the Trading Trust has ever been licensed to carry on a business of dealing in or advising with respect to securities as required by s 780 of the Corporations Law/Act prior to the commencement of the Financial Services Reform Act, or licensed to carry on a "financial services business" under s 911A(1) of the Corporations Act thereafter. 39 The Trustee has, by its solicitors, supplied ASIC with a copy of the statement of facts for the present proceeding, which sets out the Trustee's concerns with respect to breaches of trust and breaches of the Corporations Act, together with a long letter providing further information. By a letter dated 18 August 2003, ASIC informed the Trustee's solicitors that on the basis of information that had been provided, it did not object to the Trustee seeking the orders set out in the court documents, although it reserved its rights to seek leave to intervene at a future stage. The letter noted that ASIC would be provided with further details of the proposal should it proceed. ASIC has not so far sought to appear at any hearing. The Trustee's proposal 40 Having considered various models for a restructure of the Trading Trust to further the interests of unitholders and ensure compliance with the law under a workable constitution, the Trustee prefers a proposal which it refers to as "the Top Hat Alternative". 41 The Top Hat Alternative is a transfer-based scheme, whereby a new company ("NewCo") will be established to acquire all of the existing units in the Trading Trust, as well as all of the shares in the Trustee and in Group Owners. There will be an implementation deed between the Trustee and NewCo, binding them to do all things required to implement the scheme and satisfy its conditions, subject to requisite approvals being obtained from the unitholders and the Court. 42 In exchange for their units in the Trading Trust, the existing unitholders will be issued with shares in NewCo. The aim of the Top Hat Alternative is to "capture" 100% of the value of the Trading Trust and the Discretionary Trust within the NewCo Group (comprising NewCo and its wholly-owned subsidiaries, the Trustee and Group Owners), with the existing unitholders in the Trading Trust owing 100% of the shares in NewCo. NewCo will be able to operate in accordance with the (relatively) inexpensive regime applicable to private companies, and the managed investment scheme provisions of the Corporations Act will not apply, there being only a single unitholder. It will be possible to offer shares pursuant to an offer information statement following the release of NewCo's annual accounts. If share buy-backs are required, it will be possible to conduct them in such a fashion that they can be approved at the annual general meeting of NewCo. 43 The constitution of NewCo will not include the unworkable aspects of the Trading Trust Deed to which I have referred. There will be pre-emptive rights provisions and a restriction of voting power to 5%. These are thought by the Trustee to be appropriate to an unlisted quasi-co-operative enterprise. Except for the 34 existing unitholders who are not newsagents, it will be a requirement for shareholding that the holder own a newsagency, and a shareholder will be required to accept a buy-back if the shareholding requirement ceases to apply. These provisions will be entrenched, in the sense that amendment will require a 90% majority of the shareholders present and voting at a meeting. The Trading Trust Deed will be amended to remove its anomalies and give the sole unitholder (NewCo) greater control over the affairs of the Trading Trust. 44 The Trustee proposes that, prior to the implementation of the Top Hat Alternative, there be full disclosure to unitholders of the Trading Trust, by means of a detailed explanatory statement. There will also be an investigating accountant's report. A unitholders' meeting will be convened and held to approve the necessary transactions. The scheme will not proceed unless the unitholders approve it by passing appropriate resolutions by a majority of 75% of the unitholders present and voting at the meeting. The matters put to the unitholders will include amendments of the Trading Trust Deed to permit implementation of the Top Hat Alternative by, inter alia, authorising NewCo to acquire all of the units of unitholders in exchange for the issue of an equivalent number of shares. It is proposed that the absence of an effective amendment power in the Trading Trust Deed be overcome by obtaining the Court's approval to the proposed amendments under s 81 of the Trustee Act. That is now one of the prayers for relief in the present proceeding. 45 The Trustee will lodge the draft meeting documentation with ASIC, and will apply for any required ASIC exemptions, and seek from ASIC assurances that it will not oppose the Trustee's application to the Court for final relief, or the implementation of the Top Hat Alternative, and that it will not seek to wind up the Trading Trust. 46 The two questions for separate determination refer in specific terms to the amendments proposed to the Trading Trust Deed in the explanatory memorandum filed in the proceeding. The explanatory memorandum is a document prepared for the Court for the purposes of the application (notwithstanding some inappropriate wording on its cover sheet), and is to be distinguished from the explanatory statement currently in preparation, which will be sent to the unitholders with the notice of meeting. The explanatory memorandum addresses other legal matters. In answering the two questions for separate determination, the Court does not express any opinion on those other matters. 47 The explanatory memorandum does not set out the text of the proposed amendments to the Trading Trust Deed, but it says: "The amendments to the Trust Deed will include amendments to the following effect: · the Trustee may amend the Trust Deed in accordance with a resolution passed by 75% of the unitholders present and voting at a general meeting of the Trading Trust; · the Trustee is empowered to do all things which it considers necessary or desirable to implement the Scheme, including power (i) to redeem, transfer or cancel units in the Trading Trust; (ii) to execute any documents, including any application for securities in NewCo or transfer of units in the Trading Trust, as agent for add-on behalf of any unitholder; and (iii) to pay the subscription money for the securities in NewCo, as agent on behalf of any unitholder, from the assets of the Trust or from the redemption proceeds payable to unitholders; · the existing restrictions and conditions on the eligibility of unitholders, as well as on the issue, transfer and pricing of units in the Trading Trust be altered or deleted so far as is necessary to implement the Scheme; · if the Scheme is approved by the unitholders: (i) the Scheme binds the Trustee and/or present and future unitholders of the Trading Trust notwithstanding that particular unitholders may not have approved or voted in favour of the Scheme; (ii) the Trustee and the unitholders must give effect to the Scheme; (iii) the Trustee will not have any liability of any nature whatsoever to unitholders beyond the assets of the Trading Trust out of which the Trustee is actually indemnified arising directly or indirectly from the Trustee doing or refraining from doing any act pursuant to or in connection with the Scheme; and (iv) the Trustee may amend the terms of the Scheme if such amendment is not inconsistent with the approval given by unitholders or such amendment does not adversely affect the rights of the unitholders in which case, this clause will apply to the Scheme as amended." The proceeding as a representative proceeding 48 I have made an order under Part 8 rule 14, appointing Mr Paton to represent the unitholders of the Trading Trust. The effect of sub-rule 14(3) is that a judgment or order entered in the proceeding is binding on all of the unitholders, as if each of them was a party to the proceeding. It is appropriate that I set out my reasons for making the representative order. 49 In written submissions with respect to the two questions for separate determination, counsel for Mr Paton made the following observations: "2. It should be made clear that Mr Paton sees his role to be one of representing the unitholders as a group of persons. He cannot and does not present the disparate views (if any) of all unitholders. "3. It is also important to note that Mr Paton does not see his role to be a contradictor. He will contradict only when he considers that contradiction is in the interests of unitholders. When he considers that it is in the interests of unitholders to support the Trustee, that is what he will do." 50 These remarks raise for consideration the questions whether Mr Paton has properly understood the role of a representative appointed under Part 8 rule 14, and consequently whether the Court can be satisfied that it is appropriate to make orders binding the unitholders with respect to determination of the separate questions, after a hearing in which Mr Paton has participated in this fashion. At the hearing on 17 December 2003 I invited the Trustee to make some supplementary submissions on these matters. I subsequently received helpful written submissions from counsel for the Trustee. The following remarks draw upon those submissions extensively. 51 The origins of the representative procedure in courts of equity were briefly outlined by Starke J in Templeton v Leviathan Pty Ltd (1921) 30 CLR 34 at 75-77, and by Young J (as he then was) in Carnie v Esanda Finance Corporation (1995) 38 NSWLR 465 at 470-472. In the Templeton case, Starke J observed (at 76) that it was "the duty of the Court in such suits to see that the absent interests were fairly and honestly represented". In the Carnie case, Young J said (at 472): "… the real prejudice that a person may suffer through being represented in proceedings without being named as a party is that the judge hearing the proceedings may not be informed of a point that he or she wishes to raise and that the person will be bound by the result. The former point has never been sufficiently worrisome because it is up to the judge to ensure that proper argument is put by both sides and that if it is not, by the judge's own researches, to supply the deficiency." 52 Young J's observation about the role and responsibilities of the judge identifies one of the essential characteristics of representative proceedings. In Carnie v Esanda Finance Corporation (1995) 182 CLR 398, which concerned Part 8 rule 13 of the Supreme Court Rules, Brennan J said (at 408) that judicial control of the conduct of representative proceedings is important "… to ensure not only that the litigation as between the plaintiff and the defendant is efficiently disposed of but also that the interests of those who are absent but represented are not prejudiced by the conduct of the litigation on their behalf", and he pointed out that the Court should intervene if it is not satisfied that the representative is properly advancing the interests of the represented group. 53 Counsel for the Trustee was not able to find any case explaining precisely what constitutes "fair and honest representation" or "proper argument" on the part of a representative appointed under Part 8 rule 14. He identified cases dealing with whether a representative should be appointed under the rule or its equivalent in other jurisdictions, noting that they did not go on to explain the representative's role after the appointment had been made: see Kingston v Kepose Pty Ltd (1987) 12 ACLR 323; Lewis v Nortex Pty Ltd [2002] NSWSC 271; Occidental Life Insurance Co of Australia Ltd v Bank of Melbourne (1991) 7 ANZ Ins Cas 61-201; Yunghanns v Candoora No 19 Pty Ltd [1999] VSC 524; Foskett v McKeown [1998] Ch 265. But the concepts are relatively plain and the precise requirements that they import will depend on the facts. 54 In my opinion a representative appointed under Part 8 rule 14 is not required to oppose the orders sought by the other party. The representative's responsibility, acting honestly and fairly, is to represent what he or she considers to be the interests of the represented group. If the representative forms the view that it is in the interests of the represented group that some or all of the orders sought by the other party should be made, then his or her responsibility is to inform the Court accordingly, providing reasons in support of that view in order to assist the Court to reach its decision. Indeed, for the representative to do otherwise would be inconsistent with his or her role as representing the interests of the represented group. 55 The Court must be satisfied that the representative is in a position fairly and honestly to represent the interests of the represented group. This entails that the Court must be able to conclude, on the evidence or by observation, that the representative is able to conduct the hearing and make submissions independently of influence by the other party. The Court will be especially careful to satisfy itself that the representative is acting independently of the other party in cases where the representative supports the other party's position on one or more issues. Obviously the concern about independence will be enhanced if the person selected as representative is proposed by the other party, and the other party pays that person's legal costs. That combination of circumstances may in some cases, perhaps even in most cases, make it impossible for the Court to be satisfied that the representative is in a position fairly and honestly to represent the interests of the represented group. But sometimes it will be open to the Court to be satisfied of the representative's independence notwithstanding these matters. 56 I have reached the conclusion that this is the position in the present case. I have taken into account evidence which shows, in my opinion, that Mr Paton has the qualifications and experience to act appropriately as the representative of the unitholders, and that his connections with the Trustee and the circumstances leading to his appointment do not compromise his position. 57 Mr Paton has provided an affidavit showing that he has had extensive experience as a newsagent in New South Wales, and that he has been involved in the management of various newsagency industry bodies. He held positions in the Newsagents' Association of New South Wales (including the position of chairman) until he retired from the Association in 1999. He was instrumental in launching a company called Newspower Australia Pty Ltd, which organises shared marketing on behalf of member newsagents throughout Australia, and he remains active in overseeing the activities of that body. He had experience as a newsagent with the arrangements for the supply of stationery and office supplies to newsagents before the Trading Trust was formed in 1989, and he was issued with units in the Trading Trust upon its formation. The newsagency which he owns and operates has purchased the vast majority of its stationery and office supply products from the Trading Trust since 1989. He says he understands from conversations with other newsagents that almost all newsagents operating in New South Wales do likewise. 58 Mr Rogan has provided an affidavit in which he says that he suggested that Mr Paton be approached to act as representative. He says that in his view Mr Paton is an appropriate person to fulfil that role on the basis of his long experience of the newsagency industry, his knowledge of newsagency affairs and the respect with which he is regarded in the industry. He says that to his observation, Mr Paton is well-known to other unitholders and is recognised as a person whom other unitholders could approach to raise any issues they have. He approached Mr Paton on 15 September 2003 to consent to being appointed representative, and Mr Paton agreed to do so. 59 Mr Paton has never been involved in the management of the Trading Trust, apart from attending annual general meetings, and he has not held any positions of responsibility within the Trading Trust or the Trustee. He knows the members of the present board of the Trustee, which is a shareholder on behalf of the Trading Trust in Newspower Australia and occupies the same premises as the offices of Newspower Australia, but his evidence (confirmed by Mr Rogan's evidence) is that until he had the conversation with Mr Rogan in September 2003 in which he consented to being appointed representative, none of the directors of the Trustee ever discussed the management or internal affairs of the Trading Trust with him. Both Mr Paton and Mr Rogan say that, based on their experience and knowledge of the industry, they think it likely that any of the unitholders who has sufficient knowledge of and experience within the newsagency industry to act as representative of the unitholders would also know the members of the board of the Trustee. 60 I have made orders allowing Mr Paton's reasonable legal costs to be paid by the Trading Trust. This is quite different from payment of costs by the other party to the proceeding out of its own assets. I do not regard the arrangements for payment of costs as an indication of lack of independence in this case. 61 The Court places particular reliance, in representative proceedings, upon the lawyers who act for the representative. It has been observed that, in proceedings under Part IVA of the Federal Court Act, the lawyers acting for the representative have an obligation "to conduct the proceedings on behalf of [the representative] in a way consistent with the interests of members of the representative group" (King v AG Australia Holdings Ltd (2002) 121FCR 480, per Moore J at [27]), and that where the interests of the representative do not coincide with the interests of the members of the group, it is incumbent on the lawyers for the representative to put before the Court all relevant matters (Lopez v Star World Enterprises Pty Ltd (1999) ATPR 41-678, per Finkelstein J at 42,670). Those propositions are applicable, in my view, to representative proceedings under Part 8 rule 14. 62 Mr Paton has been represented before me by experienced equity counsel instructed by a well-known firm of city solicitors. Counsel's submissions on behalf of Mr Paton have been thoughtful, helpful and constructive. He has not by any means agreed with the Trustee's position in unqualified way, and in fact some of his observations (for example, with respect to the text of the letter to unitholders) have been accepted and acted upon by the Trustee. Counsel for Mr Paton has acted in the manner outlined in paragraph 3 of Mr Paton's written submission, quoted above. In my opinion that is a proper and appropriate way to act. 63 Paragraph 2 of Mr Paton's written submission raises the question of the extent to which a representative is required to consult with individual unitholders and then carry forward to the Court the opinions they have expressed. 64 The authorities indicate that a representative has no obligation to organise or participate in a consultative process in order to ascertain, and then present, the views of the individuals who constitute the represented group. In the Carnie case in the High Court, McHugh J made the following observations about the history of representative actions in equity (182 CLR at 429): "In some cases the represented parties had consented to and encouraged the plaintiff to bring the action as a representative action. But in other cases the Court allowed the plaintiff to represent persons with similar interests whether or not they consented or even knew of the action. This was particularly true of actions arising from the activities of joint stock companies and friendly societies. In that situation, as Yeazell points out, 'the represented must rely on the congruence of their interests with those of the representatives as the incentive for effective representation; the self-interest of the representative rather than the consent and supervision of the represented drives the active party'." 65 McHugh J's analysis was cited, evidently with approval, by Gleeson CJ in Mobil Oil Australia Pty Ltd v Victoria (2002) 189 ALR 161 (paragraph [6], note 3). His Honour pointed out (at [6]) that represented persons "were not even necessarily aware of the proceedings", observing that "limitation on the ability of group members to control the manner in which proceedings are conducted, and potential lack of involvement in or even awareness of the proceedings, were features of the procedural rules considered in Carnie". Gaudron, Gummow and Hayne JJ also affirmed (at [33], [65]) that the represented persons need not be consulted as to the conduct of the proceeding, or even have any knowledge of it. 66 In the present case it is unnecessary to proceed on the basis that the members of the represented group, the unitholders, have no knowledge of the present proceeding. In my opinion the letter sent to the unitholders (other than the 15 who could not be contacted and were no longer customers of the Trading Trust) on 20 October 2003 was sufficient to draw the attention of the group of unitholders to the proceeding and give them the opportunity, should they wish to do so, to come forward and present their views to a director of the Trustee or the Court. No one has done so. In these circumstances Mr Paton has no obligation to take any further steps to seek out and consult with unitholders. 67 Of course, if a member of the represented group were to notify Mr Paton of an objection to the proposal, or Mr Paton were otherwise to become aware that an objection exists, the Court would expect him to bring the relevant facts to its attention. Depending on the precise circumstances, his lawyers may have an independent duty to the Court to do so. But in the present case the evidence indicates that no such objection has been made. 68 Considerations of expense and efficiency strongly support the appointment of a representative in the present case. There are 365 unitholders, 15 of whom cannot presently be found. At present the Trading Trust Deed permits amendment only with the consent of all unitholders, so that effectively amendment is impossible under the terms of the Trading Trust. Even if all unitholders could be located, the evidence indicates that considerable expense would be involved if it were necessary to join all of those parties to the proceeding. As at 22 August 2003, the legal costs of developing the proposal stood at over $180,000. It was estimated in August 2003 that an additional $280,000 would be expended in connection with the proposed restructure of the Trading Trust. That estimate did not include the legal costs incurred by the representative, because at that time a representative proceeding was not contemplated; and it did not include the cost of writing and sending the letter of 20 October 2003. An estimate of the representative's costs, at between $30,000 and $50,000, was made by his solicitors on 9 October 2003. 69 In the context of the already substantial burden of legal costs, it is relevant that if all unitholders were to be joined in the proceeding, the costs that would be incurred would in all probability be substantially increased, even if (as appears likely) no-one were to object to the proposal. It is also relevant that joinder of all of the unitholders as parties to the proceeding would greatly add to the procedural complexity of the process, and cause substantial delay. 70 According to the evidence before me, there is no unitholder or group of unitholders whose interests in the Trading Trust conflict with those of Mr Paton. The primary benefit that 331 of the 365 unitholders who are customers of the Trading Trust derive from their unit holdings is the ability to purchase stationery and office supply products at low prices. There is evidence that the Trading Trust operates on a gross profit percentage substantially lower than that of its major competitor. As a unitholder operating a newsagency business, Mr Paton is in the same position as all other unitholders who operate newsagency businesses. 71 As to the 34 unitholders (including 15 who cannot be located) who are no longer carrying on business as newsagents and are therefore no longer customers of the Trading Trust, the evidence indicates that they would derive little (if any) benefit from a winding-up of the Trading Trust, the only feasible alternative to the Trustee's proposal that need not involve unitholder approval. As at August 2003, it appears that the net equity of the Trading Trust was $2,810,000, equating to an amount of $7,700 per unitholder. If the Trading Trust were to be wound up, there would be additional costs such as redundancies (there are approximately 232 employees) and the costs of winding up the business, which may mean that the distribution to each unitholder would be significantly less than this amount. Additionally, the assets of the Trading Trust might not be realised, in a winding up, for the value attributed to them in the financial statements of the Trading Trust. Finally, I note that under the proposal all unitholders, including those who no longer carry on business as newsagents, will be entitled to receive shares in replacement for their units. Question (a) - the scope of s 81 72 Counsel for the Trustee presented meticulous written and oral submissions which were designed to establish that s 81 of the Trustee Act of New South Wales authorises the Court to make orders empowering a trustee to amend the terms of the trust instrument for the purpose of implementing a beneficial transaction such as the one proposed in this case, notwithstanding that the trust instrument in terms does not permit the amendments, and even though the amendments operate to divest the beneficiaries of their beneficial interests and replace them with shareholdings. Counsel for Mr Paton provided briefer submissions on this point, supporting the Trustee's position although suggesting that the Court's order be limited to the precise circumstances of this case. Ultimately the Trustee has sought only such an amendment, as explained above. 73 I have found this issue to be a difficult one, and I have reviewed the authorities conscious of the fact that there is no contradictor to the Trustee's position. My decision is that, although no case been cited to me which has gone as far as the Trustee advocates, the Trustee's position is correct in law. I have therefore answered separate question (a) "yes, it does". 74 Section 81 provides: "(1) Where in the management or administration of any property vested in trustees, any sale, lease, mortgage, surrender, release, or disposition, or any purchase, investment, acquisition, expenditure, or transaction, is in the opinion of the Court expedient, but the same cannot be effected by reason of the absence of any power for that purpose vested in the trustees by the instrument, if any, creating the trust, or by law, the Court: (a) may by order confer upon the trustees, either generally or in any particular instance, the necessary power for the purpose, on such terms, and subject to such provisions and conditions, including adjustment of the respective rights of the beneficiaries, as the Court may think it, and (b) may direct in what manner any money authorised to be expended, and the costs of any transaction, are to be paid or borne as between capital and income. (2) The provisions of subsection (1) shall be deemed to empower the Court, where it is satisfied that an alterations whether by extension or otherwise of the trusts or powers conferred on the trustees by the trust instrument, if any, creating the trust, or by law is expedient, to authorise the trustees to do or abstain from doing any act or thing which if done or omitted by them without the authorisation of the Court or the consent of the beneficiaries would be a breach of trust, and in particular the Court may authorise the trustees: (a) to sell trust property, notwithstanding that the terms or consideration for the sale may not be within any statutory powers of the trustees, or within the terms of the trust instrument, if any, creating the trust, or may be forbidden by that instrument, (b) to postpone the sale of any trust property, (c) to carry on any business forming part of the trust property during any period for which a sale may be postponed, (d) to employ capital money subject to the trust in any business which the trustees are authorised by the instrument, if any, creating the trust or by law to carry on. (3) The Court may from time to time rescind or vary any order made under this section, or may make any new or further order. (4) The powers of the Court under this section shall be in addition to the powers of the Court under its general and administrative jurisdiction and under this or any other Act. (5) This section applies to trusts created either before or after the commencement of this Act." 75 Section 81 was introduced in the original Trustee Act and has not been amended. It was based upon trustee legislation in the United Kingdom (Law Property Act 1922 (UK), s 123), which became s 57 of the Trustee Act 1925 (UK). Although the language of s 81 is generally close to the language of the UK precedent, there are some significant differences. Most importantly, the words "including adjustment of the respective rights of the beneficiaries" in subsection (1), and the whole subsection (2), are not found in the UK provision. They were an adaptation of the s 45 of the Trustees Act 1900 (WA). The approach to construction of s 81 76 The criterion of expediency in the management or administration of trust property is a very broad one. Thus, in Re Strang (1941) 41 SR(NSW) 114, 115, Jordan CJ (with whom Nicholas CJ in Eq and Roper J concurred) said that the "obvious purpose" of s 81 is "to confer upon the Court a much larger administrative discretion than was formerly exercisable". After referring to the more limited powers of the Court in its inherent jurisdiction, his Honour noted (at 117) that s 81 "is expressed in very general terms, and it would be unwise to run the risk of imposing fetters on a discretion which is intended to be large in its scope by attempting to lay down general conditions for the exercise of jurisdiction under the section." 77 Later he continued (at 117): "I feel no doubt that the powers of the Court under the section are purely administrative powers. There is equally no doubt that so long as the manner arises in the management or administration of the trust there is nothing which limits the power of the Court under the section except the necessity that it should be exercised for the benefit of the particular trust as a whole." 78 In Riddle v Riddle (1952) 85 CLR 202, 214, Dixon J (as he then was) observed that s 81 "is a provision conferring very large and important powers upon the Court which depend upon the Court's opinion of what is expedient, a criterion of the widest and most flexible kind", and he added: "I do not think that the powers given by s 81 were intended to be restricted by any implications." 79 In the same case, Williams J (in the majority, together with Dixon and Webb JJ) expressed the opinion (at 220) that the section "is couched in the widest possible terms". He added: "The one and only test is the expediency of the act or thing which the Court is asked to authorise the trustee to do or abstain from doing. The Court has only to be of opinion that the trust property as a whole will in fact benefit from the making of the order."

Later he said: "Section 81 authorises the Court to step in whenever it is of opinion that sound practical business considerations make it expedient that trustees should have administrative powers in addition to or overriding the powers derived from the trust instrument or the general law." 80 These authorities indicate the general approach that the Court should take to the construction of s 81. The Court should resolve any ambiguity in the meaning of s 81 by adopting a construction which reflects the breadth of the Court's jurisdiction. The Court should not construe the section as subject to any fetters or limitations beyond what is clearly imported by the statutory language. One approaches the central question in this case, namely whether the Court is capable of forming the opinion that the proposed transaction is expedient in the management or administration of any property vested in the trustees, in that light. The breadth of the Court's power under s 81 81 Section 81(1) imposes two conditions upon the exercise by the Court of its statutory jurisdiction to make an order conferring power on trustees to enter into a transaction. They are: (i) the Court is of the opinion that the proposed transaction is expedient in the management or administration of any property vested in the trustees; and (ii) the transaction cannot be effected by reason of the absence of any power for that purpose vested in the trustees. 82 In its terms, s 81 does not impose any other limitation upon the exercise of the Court's power. The Court may make any order it thinks fit, to confer upon the trustees, either generally or in any particular instance, the necessary power to implement the transaction. 83 Thus, the fact that implementation of the Trustee's proposal would involve divesting the present unitholders of their units, and vesting all units in a corporate entity in which the present unitholders will be the shareholders, does not itself exclude the Court's jurisdiction under s 81. In Permanent Trustee Co Limited v National Australia Managers Limited (NSWSC, 8 August 1994, unreported), speaking of an express power of amendment in a trust instrument, the exercise of which would replace unitholdings with shares, McLelland CJ in Eq said (at 6): "Notwithstanding that the effect of the proposed alteration would be to bring the trust to an end, at least so far as concerns the present unitholders, and to make them shareholders in a company instead of beneficiaries under a trust, I am unable to conclude that there is any implied limitation which would prevent the power in [the amendment clause] from being exercised for such a purpose where, as here, all unitholders are to be affected in the same way." These observations are applicable, in principle, to a power of amendment conferred by the Court under s 81, assuming that the section authorises the Court to confer such a power. 84 In my opinion the Court's power under s 81 is available, provided the two conditions that I have stated are satisfied, even where the Court's order will authorise a fundamental reorganisation of the trust. In Cachia v Westpac Financial Services Ltd (2000) 33 ACSR 572, Hely J considered the scope of an express power of variation in a unit trust deed, which authorised the unitholders to sanction any amendment proposed by the manager. He noted some authorities which suggested that an express power to vary a trust deed may be held not to extend to a variation which would alter the substratum of the trust, on the ground that such an extreme change is more than a mere "variation". He decided that, if such a principle existed, it did not apply. He held that proposals to bring about a fundamental reorganisation of the trust by merger with another trust did not destroy the substratum of the trust. 85 It is not necessary for me to decide whether the Court could authorise, under s 81, an amendment to a trust instrument that would alter the substratum of a trust, although there is no obvious reason to impose such a limitation provided that the two conditions stated in the section are met. Cachia is authority for the proposition that, even if there is such a limitation, it is not attracted by the kind of fundamental reorganisation at issue in that case and in the present case. Absence of power in the trust instrument 86 The second condition of s 81 is clearly satisfied in the present case. The transaction in the present case is the implementation of the Trustee's proposal, under which (inter alia) the units held by all unitholders are transferred to NewCo, and each unitholder receives an equivalent number of shares in NewCo. The Trustee has no power under the Trading Trust Deed or at law to require a unitholder to transfer his or her units, or even to redeem units without the unitholder's consent. The provisions of clauses 6(c) and 9(b) of the Trading Trust Deed, which I have described, make it impossible as a practical matter for the Trustee to transfer or issue units to NewCo. Therefore a component of the transaction, as proposed by the Trustee, is that the Trustee will make amendments to the Trading Trust Deed, including amendments to permit NewCo to acquire all of the units regardless of whether the unitholder supports or opposes the Trustee's proposal. The Trading Trust Deed, clause 51, expressly prohibits variation of its terms other than as expressly provided. Clause 50 permits variation of the trusts constituted by the Deed only with the prior written consent of all unitholders. Since some of the unitholders cannot be located, variation of the terms of the Trading Trust Deed under clause 50 is impossible as practical matter. "The management and administration of any property vested in trustees" 87 It is more difficult to decide whether the first condition for the exercise of the Court's statutory jurisdiction is satisfied in the present case. 88 Dictionary definitions of the words "management" and "administration" are of only limited assistance. In the Macquarie Dictionary (3rd edition, 1997), the word "management" is defined to mean "the act or manner of managing; handling, direction, or control". The word "administration" is defined to mean "the management or direction of any office or employment". The words "management or administration", in a context such as appears in s 81, refer to both the manner in which trust property is managed, administered, handled, directed or controlled and the actual carrying out of those functions. In Re Downshire Settled Estates [1953] Ch 218, 247, Evershed MR and Romer LJ said that "the application of both words is confined to the managerial supervision and control of trust property on behalf of beneficiaries". Those observations, made about s 57 of the Trustee Act 1925 (UK), were applied to s 81 of the New South Wales Act by Rath J in Perpetual Trustee Limited v Godsall [1979] 2 NSWLR 785, 791. 89 In Re AS Sykes (Dec'd) and the Trustee Act [1974] 1 NSWLR 597, the transaction involved the transfer of a grazing property by the trustees of an estate to a newly incorporated ACT company in exchange for shares in the company. The purpose of the transaction was to avoid New South Wales death duty that may otherwise have been payable by the estate. Helsham J made orders under s 81 to permit the trustees to execute the transaction. He regarded the transaction as expedient in the management or administration of the grazing property even though it had the effect of converting that property into another form. 90 In the present case the principal trust property is the stationery and office supply business. The Trustee is confronted by three kinds of obstacles to the further management and administration of that trust property. The first is that the meaning of the Trading Trust Deed is obscure in various ways, touching upon eligibility to be a unitholder and the process of admission and resignation of unitholders, such as to make it difficult to be sure whether any administrative procedure that might be adopted for the issue, redemption or transfer of units is in compliance with the Deed. The second is that some provisions of the Deed are impossible or impracticable to adhere to. An example is the requirement for a Special Resolution for the issue (and possibly transfer) of units, having regard to the number of unitholders and the fact that some of them cannot be traced. Another is the requirement for valuation and pricing of units, which is incompatible with the Trustee's practice of issuing and redeeming units at a nominal value of $1 so as to treat the holding of units as a form of admission to membership of a co-operative enterprise. The third is that under the present law, which has become stricter since 1989 when the Trading Trust Deed was made, there are registration, licensing and documentary requirements in connection with the process of issuing units which the Trustee regards as onerous and with which it has not complied. 91 The trusts established by the Trading Trustee Deed are trusts for the purpose of conducting a business for the benefit of participating newsagents. The raison d'etre for the Trading Trust is to provide a mechanism for concentrating the buying power of newsagents so as to purchase and supply to them stationery and office supply products at low prices. A business trust of this kind is functionally quite different from a trust established inter vivos or by will to settle property on beneficiaries for enjoyment in succession. An essential component of such a business trust is that in normal circumstances, beneficiaries are expected to enter into participation when they commence a newsagency business, and depart when they cease to conduct their newsagency business. The process of maintaining the register of unitholders, which is in this context akin to a register of participants in a co-operative enterprise, is one of the essential managerial and administrative functions of the Trustee. It is a process that encompasses the admission and removal of "members" from time to time by issue, redemption and transfer of units. In my opinion matters touching upon the issue, redemption and transfer of units are therefore matters arising in the management and administration of the stationery and office supply business conducted by the Trustee. 92 The Trustee has formed the opinion, in the course of management and administration of the Trading Trust, that a restructuring is necessary, a major component of which is to replace unitholdings with shareholdings. The purpose of the restructuring is to avoid the difficulties that I have described with respect to the construction of the Trading Trust Deed, compliance with it, and compliance with the Corporations Act, touching upon the process of issue, transfer and redemption of units. The "expediency" of implementation of the Trustee's proposal, if it is in fact expedient (a matter upon which the Court still has to form and opinion), is an expediency relating to that process and therefore relating to the management and administration of trust property. Order empowering a trustee to affect beneficial interests 93 The most difficult issue of construction of s 81 is whether there is an implied limitation to the effect that it cannot be used where the transaction in question involves an alteration of beneficial interests. 94 The notion that such a limitation might exist has its origin in the cautious approach historically taken by courts of equity to the exercise of their inherent jurisdiction. At least by the end of the 19th century, English and Australian courts exercised an inherent jurisdiction to alter beneficial interests under a trust only in very limited circumstances. According to Viscount Simonds LC in Chapman v Chapman [1954] AC 424, 445, the "major proposition", evidently applicable to trusts created inter vivos as well as by will, was stated by Farwell J in Re Walker [1901] 1 Ch 879, 885, when he said: "I decline to accept any suggestion that the Court has an inherent jurisdiction to alter a man's will because it thinks it beneficial. It seems to me that is quite impossible." The same approach is found in Jordan CJ's judgment in Re Strang , at 115. 95 In Chapman, Viscount Simonds and Lord Morton of Henryton identified four exceptions to that proposition. First, the court was prepared to change the nature of an infant's property from real to personal estate and vice versa. Secondly, the court assumed jurisdiction to provide maintenance for an infant (and, rarely, an adult) beneficiary prior to the statutory authorisation to do so. Thirdly, the court had power to sanction a compromise by an infant in a suit in which that infant was a party by next friend or guardian ad litem. 96 Fourthly, the court in the administration of trust property would occasionally direct that a transaction unauthorised by the trust instrument be carried out "by way of salvage" (to use Viscount Simonds' words, at 445), but not merely in circumstances of expediency. Lord Morton of Henryton (at 451) described cases falling within this exception more broadly, as cases where the Court had allowed trustees to enter into a business transaction not authorised by the trust instrument. In Re New [1901] 2 Ch 534, which his Lordship described as a "leading case" (Chapman, at 452), the court permitted trustees to exchange their holding of shares for more realisable shares and debentures in a company reconstructed by scheme, on the ground (stated by Romer LJ at 544) that the proposal was not one that could have been anticipated by the author of the trust, was highly desirable or even essential in the interests of the beneficiaries, and needed to be accepted urgently, and the consent of all of the beneficiaries could not be obtained. But in Re Tollemache [1903] 1 Ch 955, Cozens-Hardy LJ (at 958) described Re New as the "high-water mark of the exercise by the court of its extraordinary jurisdiction", and in Riddle v Riddle Fullagar J (dissenting on the application of the law) said (at 228) that Re New probably represented "a short-lived tendency to a more liberal point of view". On the whole, the inherent jurisdiction in "salvage" cases appears to have been employed very cautiously. 97 The introduction of estate duty in the United Kingdom led trustees to seek court approval for schemes under which beneficial interests in trust estates would be rearranged so as to minimise or avoid estate duty, and to that end to persuade the courts that there was a plausible basis for jurisdiction. Three such cases came before the Court of Appeal in 1952 and were considered together, although the schemes were different from one another: Re Downshire Settled Estates; Re Chapman's Settlement Trusts; and Re Blackwell's Settlement Trusts [1953] 1 Ch 218. At issue was whether the court had any inherent or statutory power to approve the variations. In Downshire and Blackwell the Court of Appeal held that the schemes could be approved as compromises in the inherent jurisdiction. In Chapman the Court of Appeal held that there was no jurisdiction to authorise the scheme, either under the inherent jurisdiction or under s 57. 98 In reaching their conclusion that s 57 was not available as a source of jurisdiction, Evershed MR and Romer LJ (at 248) emphasised that the legislature "did not even mention beneficial interests from the beginning of the section to the end, or give the slightest indication that it was intending to give power to vary or interfere with such interests or intermeddle with them in any way - except to the extent that they might incidentally be affected by the exercise of the powers which the section does in terms confer". 99 The Chapman case was taken on appeal to the House of Lords (Chapman v Chapman [1954] AC 424), but the only issue argued was whether the inherent jurisdiction was wide enough to authorise approval of the scheme. The House of Lords held that no branch of the inherent jurisdiction, including the power to approve a compromise, was wide enough to authorise the variation of beneficial interests in the manner proposed, and in so doing their Lordships disapproved of some of the Court of Appeal's reasoning in Downshire and Blackwell. Lord Morton of Henryton recorded (at 459) that in the House of Lords counsel stated that they could not contend that s 57 had any application. Therefore the authority of the Court of Appeal's observations about s 57 was not diminished by the House of Lords. 100 Their Lordships' denial of any general inherent power to approve a variation of beneficial interests led to the enactment of the Variation of Trusts Act 1958 (UK), which gave the court power to make orders for the variation of trusts and to consent on behalf of infants, unborn and incompetent beneficiaries. That legislation was replicated in Victoria, Western Australia, Queensland and South Australia but not in New South Wales. 101 The observations by Evershed MR and Romer LJ in Chapman do not establish that there is no jurisdiction to authorise the alteration of beneficial interests under s 81. In the first place, their Lordships' observation appears to allow an order that incidentally affects beneficial interests, if the order is properly authorised by the section. This point is taken up in the Australian cases to which I shall refer. Secondly, their Lordship's' view was based squarely on the limited language of the UK provision. In contrast, subsection 81(1)(a) expressly permits the Court to include a provision or condition in its order adjusting the respective rights of the beneficiaries. Moreover, subsection 81(2) expressly empowers the Court to do or abstain from doing any act or thing which if done without the Court's authorisation or the consent of the beneficiaries would be a breach of trust, where it is satisfied that an alteration whether by extension or otherwise of the trusts or powers conferred on the trustees by the trust instrument is expedient. These words appear to contemplate an alteration of the trusts and therefore the interests of the beneficiaries. 102 The wording of the New South Wales provision does not purport to authorise the Court to make orders varying beneficial interests at large, but only in the management or administration of trust property. It cannot be suggested that the section is a substitute for variation of trusts legislation. A line of the Australian cases has considered the scope of s 81 having regard to its additional wording. 103 Thus, the Full Court of the Supreme Court of New South Wales (Roper CJ in Eq, Brereton and Maguire JJ) noted the contrast in wording in Ku-ring-gai Municipal Council v Attorney-General (1954) 55 SR(NSW) 65, 73-4 but said that "the extent to which because of these differences s 81 confers wider powers upon the Court than the English s 57 is not really material to be examined in this case." 104 In that case a declaration of trust provided that certain lands were to be held by the Council "as public reserves and parklands and the Council shall permit the public free access thereto for the purposes of pleasure and recreation". The trust instrument provided that the Council "shall keep and preserve the said lands as far as may be reasonably practical in their present natural state" and "shall make and enforce by-laws and/or regulations providing that no game shall be played upon the said lands or any part thereof on Sundays which may materially interfere with or restrict the enjoyment of the whole or any part of the said lands by any member of the public". The Council owned Gordon Golf Links, which at that time had only 14 holes. It wanted to construct another four holes on a portion of the trust property which adjoined the golf course. Inevitably members of the public would be excluded from that part of the trust property, except by playing golf and paying green fees to do so. In order to implement this plan, the Council sought an order under s 81 that it be authorised to abstain from making or enforcing any such by-law or regulation. 105 At first instance ((1953) 19 LGR(NSW) 105) Myers AJ rejected the application, saying (at 109-110): "In the present case the order sought is in a sense merely administrative, but if it were granted the effect would be to destroy the beneficial interests which are provided by clause 3(a) and which are not provided elsewhere in the trust instrument. It would forever deprive the largest part of those entitled under the trust of the benefits that they were entitled to have, and I do not think the section entitles me to make an order which would have that as a consequence. It is true … that there are differences between s 81 of the NSW Act and s 57 of the Imperial Act. Paragraph (a) of subs (1) of s 81 specifically refers to an order including provisions or conditions adjusting the respective rights of beneficiaries. But this power to include such a provision in an order is not an independent right vested in the Court. It only enables the Court, where it confers upon the trustees power to effect a transaction which arises in the management or administration of property vested in them, to provide for that adjustment of the rights of beneficiaries which becomes necessary or proper because of the power the Court has conferred. What subsection (1) contemplates is a transaction which becomes expedient in the management or administration of property vested in trustees and an absence of any power in the trustees to carry out that transaction. What it authorises is an order conferring that power, and if - but only if - such an order is made an adjustment of the rights of the beneficiaries which is a necessary or proper accompaniment of the power conferred. … Consequently, I am of the opinion that I have no power under s 81 to make the order asked for by the plaintiff because it involves an interference with the beneficial rights of those entitled under the trust, and that interference is the sole purpose of the order and is not merely a necessary or proper thing to do because of some other power conferred on the trustee." 106 On appeal, the Full Court held (at 74) that no issue had arisen in relation to the management or administration of the trust property. But for the Council's desire to add four holes to the golf course, there was no problem or issue connected with the management or administration of trust property that would make it expedient for the Court to exercise its power under s 81. The Full Court's reasoning is not germane to the issue before me now, but it is not inconsistent with the opinion of Myers AJ, whose reasoning is pertinent. 107 According to Myers AJ, the section is not to be used where the sole purpose of the order is to interfere with beneficial rights, but an adjustment of beneficial rights may be made where that is a "necessary and proper accompaniment" to the conferral of power on the trustee in the management or administration of trust property. But once the case falls within the latter description, there appears to be no other limitation. Thus, in Re AS Sykes Helsham J, after noting the differences between the New South Wales and UK legislation, observed (at 601) that s 81 "might permit" the alteration of beneficial interests "in certain circumstances". The observation was developed in Tickle v Tickle (1987) 10 NSWLR 581, a case principally about the Court's power to alter beneficial interests of infants, when Young J (as he then was) noted (at 584) that "Helsham J pointed out that a proper application of the Court's power under the Trustee Act 1925, s 81(1)(a) may well involve the Court in rewriting trusts", adding that the power under that provision " may only be exercised in the carrying out of some expedient management decision." The idea of "rewriting trusts" appears to be a broad one. 108 Perpetual Trustee Limited v Godsall might appear to be authority for a more restrictive view, but in my opinion a close examination of the case shows that it is not. A testator devised his house and land called "Grey Leaves" at Bowral to his widow for life, directing her to keep the property in good repair, and upon her death upon trusts for his daughter. Faced with large and unexpected maintenance costs in relation to the house, the widow proposed that the property be sold and a smaller, more suitable house be purchased for her accommodation. The trustee agreed, subject to the Court's approval under s 81. The will disclosed an intention by the testator that the house property be preserved for the remainderman, subject (according to Rath J) to an equitable personal obligation on the part of the widow to keep it in repair. 109 Rath J noted (at 794) that to permit the property to be sold in bad repair must to some extent damage the remainder interests, and that it would not be appropriate to allow the whole of the proceeds of sale of Grey Leaves to be applied to purchase new accommodation for the widow, or to give her the benefit of the whole income of any surplus proceeds of sale during her lifetime. He observed (at 794) that to do so would, in effect, sanction and excuse the widow's breach of her obligation to repair the property, and he continued (at 794-5): "In my view neither s 81(1) nor 81(2) gives the court power to make such an alteration. I agree with the submission for the [remainderman] that powers, whether conferred by the instrument of trust or by s 81, are conferred upon trustees to facilitate and not to subvert the beneficial disposition in the trust instrument. Neither the words in s 81(1) ('adjustment of the respective rights of the beneficiaries') nor the words in s 81(2) ('whether by extension or otherwise of the trusts … conferred on the trustees by the trust instrument') should be taken as authorising the court to increase, or decrease, the interests of beneficiaries. 'Adjustment' refers to the altered condition of the trust property as a result of conferring or exercise of the new power. The beneficiaries' rights are to be accommodated to the new situation; but the court cannot create a new set of beneficial rights. In s 81(2) the word 'trusts' does not, in my view, referred to beneficial dispositions. The reference is to 'trusts conferred on trustees', and both the form of this reference and the context show that the trusts involved are powers coupled with a duty such as trusts for conversion … ." 110 His Honour's orders are important. He allowed Grey Leaves to be sold in its unrepaired condition, thereby necessarily causing some prejudice to the remainderman's interest. But he sought to address that prejudice, over time, by providing that part of the proceeds of sale be put into a separate fund, which was to be accumulated until the value of the accumulated fund and the amount used to provide new accommodation for the widow, when added together, were equal to the value that Grey Leaves would have had a the date of sale on the assumption that the property had been in good repair. 111 Rath J evidently regarded his orders as not amounting to an increase or decrease in the interests of beneficiaries or the creation of a new set of beneficial rights, and as doing no more than accommodating the beneficiaries' rights to the new situation created by permitting the sale of Grey Leaves and the acquisition of a new residence. Yet both the widow's and the remainderman's equitable proprietary rights were significantly different, upon implementation of the orders, than they had been under the will. His Honour was prepared to make such orders because it had been established that it was expedient in the management and administration of Grey Leaves to allow it to be sold and to provide a smaller residence for the widow, and it then became necessary to make "accommodations" in light of the new circumstances (see also at 792). 112 What emerges is that the Court's power under s 81 cannot be used to subvert the beneficial disposition in the trust instrument, but if an order is made in the management or administration of trust property, it is permissible under the section to accommodate the beneficial interests to the new situation created by the order. In my opinion that position is indistinguishable from the approach taken by Myers AJ in the Ku-ring-gai Council case. It is unnecessary to debate whether it is different from the position under the UK provision, as explained by the English Court of Appeal in the Chapman case. 113 Re Cosaf Pty Ltd (NSWSC, 18 December 1992, unreported) is consistent with this approach. The orders made by Young J in that case had the effect of expanding the trustee's power to amend a superannuation trust instrument to permit it to give effect to an agreement for restructuring members' benefits made between the Government, and employers' organisation and relevant trade unions. His Honour expressed some uncertainty as to whether the orders were expedient "in the management or administration of" the trust property, but ultimately decided that they were. As to the applicable principles, he said (at 3): "In Godsall's case, Rath J seems to me to have taken the view that so long as the prime purpose of the proposal of the trustees was in the area of management or administration, the Court could make an order under s 81 even though the beneficiaries would be affected in their property. Thus, an order was made to sell a house in which a life tenant widow was living, purchase a less expensive house and set up a fund to compensate the remaindermen. In Freeman v AG [1973] 1 NSWLR 729, Helsham J and 735-6 considered that the property of a charitable trust could be leased instead of operated by the trustees so long as what was happening was furthering the purpose or objects of the trust." 114 The case that comes closest to the present facts is Permanent Trustee Co Limited v National Australia Managers Limited. The proposal there, as here, was for existing unitholders of a unit trust to exchange their units in a trust for shares in a company that would hold units in the trust. The unit trust held a 10% interest in an aluminium smelter, and the units were quoted for trading on the Australian Stock Exchange. The proposal was to alter the trust deed to permit cancellation of the existing units and the issue of units to the new company. 115 McLelland CJ in Eq reached the conclusion that the proposed amendments to the trust deed were within the power of amendment conferred by the deed itself, and gave judicial advice accordingly. It was therefore not necessary for him to make any order under s 81. In respect of such an order, his Honour said (at 6) that "regardless of other considerations I would not, as at present advised, be prepared to confer additional authority on the trustees in the manner proposed, without proper opportunity being given to the unitholders to be heard". 116 In the present case I do not intend to make an order under s 81 until I am satisfied that the unitholders have been given a proper opportunity to be heard. They have been notified of the proceeding, in the letter dated 20 October 2003. If the order is not made until after the meeting of unitholders, it will be possible to take into account the views they express at the meeting, and to hear from any of them who may wish to appear after the meeting has been held. It is not entirely clear that McLelland CJ in Eq regarded the Court as having jurisdiction to make such an order if the unitholders have been heard, but at least he did not take the position that no jurisdiction existed. 117 It is true that in the present case, like Permanent Trustee v National Australia Managers but unlike Godsall, one cannot readily isolate the adjustment of beneficiaries' rights from the conferral on the trustee of the power sought in the application. The Trustee's proposal is a rolled-up proposal, a very important ingredient of which is the substitution of shares for unitholdings, and therefore the adjustment of the rights of beneficiaries. In Godsall, the adjustment of the rights of beneficiaries was merely consequential on the principal order. But what is proposed here is very much in the management and administration of the Trustee's business, for the reasons I have given. The Trustee's manifest purpose in making the application, consistently with the purposes for which the Trading Trust was formed, is to conduct the stationery and office supply business, effectively as a co-operative business, for the benefit of the "members" of the "co-operative", who will retain that commercial status after they are transformed from unitholders to shareholders. This is not a case where the sole or principal purpose of the application is to alter beneficial interests or in any way subvert the beneficial dispositions in the trust instrument. It is therefore a proper case for the making of an order under s 81 giving the Trustee the power to implement the transaction. The authorities establish that, this being so, s 81 permits an order that accommodates or adjusts the beneficial interests of the unitholders to the new situation created by implementation of the scheme. Question (b) - fraud on a power and Gambotto 118 Counsel for the Trustee has presented me with cogent written and oral submissions to support the Trustee's view that a negative answer should be given to separate question (b). Counsel for Mr Paton submitted that as the relevant power is the power conferred on the Trustee by the Court under s 81, if the acts done by the Trustee are within the scope of and are justified by the power conferred on it, there will be no fraud on the power. 119 The doctrine of fraud on a power expresses an equitable limitation on a power conferred by an instrument such as a trust instrument. The limitation, explained by the Privy Council in Vatcher v Paull [1915] AC 372, 378, arises where "the power has been exercised for a purpose, or with an intention, beyond the scope of or not justified by the instrument creating the power". 120 The evidence presently before the Court provides no factual foundation for concern that any power will be exercised beyond the scope of the instrument conferring it, or in an unjustified manner. In the present case, the instrument conferring the power will be the Court's order under s 81, if the order is made. Either the order will not be made until the Trustee's proposal has been approved by a 75% majority of unitholders present and voting at the proposed meeting, or (if I am persuaded to do so) it will be made conditionally upon such approval being given, so that the Trustee will not be able to implement the proposal until the unitholders have approved. It seems highly unlikely that the doctrine will be attracted given that, by the time the Trustee exercises the power to implement the transaction, it will have been authorised to do so by the Court and by such a majority of the interested unitholders. There would have to be some additional facts not now before the Court, and difficult to imagine, to attract the doctrine. 121 Separate question (b) asks, in effect, whether in the given circumstances the amendment of the Trading Trust Deed for the purpose of implementing the transaction would necessarily constitute a fraud on the power of amendment, regardless of the presence or absence of any such further facts. The correct answer that question is "no, it would not". 122 Concern arises, however, because of the High Court's decision in Gambotto v WCP Ltd (1995) 182 CLR 432. There are a company passed a special resolution to amend its constitution in a manner that purported to enable the shareholder holding 90% of the issued shares to acquire compulsory the shares of minority shareholders at a stipulated price per share. There was evidence that the price was a fair one. Nevertheless the High Court held that the amendment was invalid. The concern is that the High Court may have extended the equitable limitation upon the exercise of a power beyond the traditional doctrine of fraud on a power, so that certain kinds of exercise of power are invalid per se. 123 Mason CJ, Brennan, Deane and Dawson JJ, who confined their attention to company law cases, endeavoured to strike a balance between the interests of majority and minority shareholders by stating a "workable criterion" (at 444), the presence of which would always vitiate a resolution altering the corporate constitution - that is, a principle leading to invalidity per se. They distinguished (at 444-5) between an alteration of the constitution not involving actual or effective expropriation of shares or valuable proprietary rights attaching to them, and a case "where what is involved is an alteration of the articles to allow an expropriation by the majority of the shares, or valuable proprietary rights attaching to the shares, of a minority". In the latter case, they said, the immediate purpose of the resolution is to give the majority the power to acquire compulsorily the property of the minority, and "of itself" the conferral such a power does not lie within the contemplated objects of the power (referring to Peters' American Delicacy Co Ltd v Heath (1939) 61 CLR 457). 124 They continued (at 445): "The exercise of a power conferred by a company's constitution enabling the majority shareholders to expropriate the minority's shareholding is valid if and only to the extent that the relevant provisions of the company's constitution so provide. The inclusion of such a power in a company's constitution at its incorporation is one thing. But it is another thing when a company's constitution is sought to be amended by an alteration of articles of association so as to confer upon the majority power to expropriate the shares of a minority. Such a power could not be taken or exercised simply for the purpose of aggrandizing the majority. In our view, such a power can be taken only if (i) it is exercisable for a proper purpose and (ii) its exercise will not operate oppressively in relation to minority shareholders. In other words, an expropriation may be justified where it is reasonably apprehended that the continuing shareholding of the minority is detrimental to the company, its undertaking or the conduct of its affairs - resulting in detriment to the interests of the existing shareholders generally - and expropriation is a reasonable means of eliminating or mitigating that detriment." 125 Their Honours explained (at 445) that an amendment to protect the company from significant harm would be for a proper purpose. Thus expropriation (and, presumably, an amendment to permit it) would be justified if the minority shareholder were, for example, competing with the company, or the expropriation was necessary to ensure that the company could continue to comply with an applicable regulatory regime governing its principal business (for example, television licence conditions excluding foreign shareholders), provided in each case that the terms of expropriation were not oppressive. They then said (at 446): "Notwithstanding that a shareholder's membership of a company is subject to alterations of the articles which may affect the rights attaching to the shareholder's shares and the value of those shares, we do not consider that, in the case of an alteration to the articles authorising the expropriation of shares, it is a sufficient justification of an expropriation that the expropriation, being fair, will advance the interests of the company as the legal and commercial entity or those of the majority, albeit the great majority, of corporators. This approach does not attach sufficient weight to the proprietary nature of a share and, to the extent that English authority might appear to support such an approach, we do not agree with it. It is only right that exceptional circumstances should be required to justify an amendment to the articles authorising the compulsory expropriation by the majority of the minority's interest in a company." [It is unnecessary for the purposes of this case to set out their Honours subsequent observations about procedural and substantive fairness.] 126 If these principles (which I shall call "the Gambotto principles") are relevant and applicable to the proposed amendment of the Trading Trust Deed, insofar as the amendment would permit the Trustee to require a dissenting unitholder to give up his or her units, then arguably the proposed amendment cannot be validly made. In my opinion, however, the Gambotto principles would not apply to invalidate the proposed amendment to the Trading Trust Deed, if it is made, for three independent reasons, namely: (1) the Gambotto principles are excluded in the present case because the trust instrument will be amended pursuant to orders of the Court, after unitholders have had the opportunity to contest the fairness of the proposal; (2) the proposed amendment will treat all unitholders equally, uniformly replacing their units with shares; (3) if, contrary to the first two propositions, the Gambotto principles are capable of applying to the present case, the amendments to the Trading Trust Deed will be valid because they avoid detriment to the Trading Trust, its undertaking and the conduct of its affairs, and are not merely for the advancement of the Trading Trust as a commercial entity. 127 It was also contended by counsel for the Trustee that the Gambotto principles are confined to companies and are incapable of applying where the trust instrument for a unit trust is amended by resolution of the unitholders. The argument is based on some obiter remarks by Hely J in Cachia v Westpac Financial Services Ltd, at 591, and especially at 593. The critical question is whether to characterise the Gambotto principles, as Hely J did, purely as an emanation of company law, notwithstanding that the "company law" formulation of fraud on the minority in the English cases was expressly rejected by the High Court (at 444) in favour of Dixon J's equitable formulation in Peters v Heath at 511 (and note Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46, 53); or to treat them as an outworking of the general doctrine of fraud on a power, specially arising in cases where a majority has exercised a constitutional power to impose its will on the minority, applicable in principle to any ownership structure where membership gives rise to valuable proprietary rights. 128 There are three other grounds for concluding that the Gambotto principles would not invalidate the proposed amendment in the present case. The Trustee's submissions have not been opposed by the representative. The answer to the question may have ramifications for commercial practice with respect to the merger of unit trusts. I shall therefore not express any view on it. Mechanism for review of fairness 129 As to ground (1), in the Gambotto case Mason CJ, Brennan, Deane and Dawson JJ said (at 446): "To allow expropriation where it would advance the interests of the company as a legal and commercial entity or those of the general body of corporators would, in our view, be tantamount to permitting expropriation by the majority for the purpose of some personal gain and thus be made for an improper purpose. It would open the way to circumventing the protection which the Corporations Law gives to minorities to resist compromises, amalgamations and reconstructions, schemes or arrangement and takeover offers." 130 Their Honours implied in these observations that there was no room for the application of the Gambotto principles where a compulsory acquisition of minority interests takes place under a scheme of arrangement for the reconstruction or amalgamation of entities, effected under s 411, or a compulsory acquisition after a takeover bid, under the provisions now found in Chapter 6A. Now that Chapter 6A permits compulsory acquisition in special circumstances independently of a takeover bid, and gives similar protections to the affected minority, it is clear that their Honours' reasoning applies so as to exclude from the Gambotto principles a compulsory acquisition in those circumstances. 131 The question is whether there is a sufficient analogy between those procedures and the procedure under s 81 to warrant the conclusion that here, as in those cases, there is no room for the application of the Gambotto principles. Assistance can be obtained by considering cases decided subsequent to Gambotto, dealing respectively with selective reduction of capital and schemes of arrangement of various kinds. 132 Sometimes the selective capital reduction provisions of the Corporations Act are used in a fashion that extinguishes all shareholdings in the "target" other than those of the "bidder", so as to effect a takeover of the target. The question arises whether the Gambotto principles are applicable. In Re Tiger Investment Company Ltd (1999) 33 ACSR 438, Santow J (at 445) raised the question whether "a cash takeover masquerading as a selective reduction of capital, but not associated with a scheme", would fall foul of the Gambotto principles, but it was unnecessary for him to answer the question and he did not do so. Re Goldfields Kalgoorlie; Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2000) 34 ACSR 737, another selective capital reduction case, squarely posed the issue. Santow J (at 747) set out the second sentence of the passage I have quoted from Gambotto and said: "While selective reductions of capital are omitted, the clear premise is that where the Corporations Law by statute provides a protective mechanism [for] minority shareholders, associated with a particular mode of acquisition, there is no 'circumventing' of that protection if the particular mechanism is utilised." 133 He pointed out that the selective capital reduction provisions in Part 2J.1 of the Corporations Act, when coupled with ASIC's administrative practices, expressly prescribe "fairness" requirements comparable to the substantive elements of fairness with which the High Court was concerned. He concluded (at 747) that the legislature had "created its own comprehensive, protective code" in the selective capital reduction provisions and that the Gambotto principles of the general law were "left with no further work to do". 134 On appeal (Winpar Holdings Ltd v Goldfields Kalgoorlie Ltd (2001) 40 ACSR 221, 245, Giles JA (with whom Beazley JA and Davies AJA agreed) expressly approved Santow J's reasoning and conclusions. He said (at 246) that in light of the procedure for capital reduction that the legislature had sanctioned, under which the shareholders whose shares were to be cancelled voted on the proposal at a meeting, it made little sense to speak of the majority of the minority having the purpose of securing the company from significant detriment or harm, and therefore the reasoning of the High Court did not transpose to the exercise of the power given by Part 2J.1. He added (at 246) that the legislature had addressed procedural and substantive fairness in a comprehensive fashion so that "superadded Gambotto principles would be conflicting and confusing". 135 Notwithstanding the clarity of the High Court's observations on the subject, it has subsequently been contended that the Gambotto principles apply to a scheme of arrangement, where the scheme effects a compulsory acquisition of minority interests. The matter was raised in Re GIO Australia Holdings Ltd (1999) 33 ACSR 283. Santow J said (at 286) that it was clear that the High Court "did not intend to preclude such compulsory acquisition as is provided for under schemes of arrangement or other statutory regimes where fairness is appraised". In Re NRMA Ltd (2000) 33 ACSR 595 schemes or arrangement were proposed, essentially to "demutualise" NRMA Insurance Ltd. Santow J explained (at 613) that "because fairness of the proposal overall is considered by the Court, including the compulsory acquisition of membership rights in Insurance, … the denial of that expropriation in [Gambotto] is not applicable here", and he referred to the High Court's observations at CLR 446. 136 Santow J returned to the question of application of the Gambotto principles to a scheme of arrangement in Application of Australian Co-operative Foods Ltd (2001) 38 ACSR 71, where a statutory scheme of arrangement was proposed, under special legislation, for a co-operative enterprise. Under the scheme a new entity, the supply co-operative, would be interposed as majority holder, but the supply co-operative would in turn be owned by the members in equivalent proportion, although inactive members might have their shares forfeited and cancelled after the expiration of a period of time. Santow J (at 87) regarded the proposal as "simply a restructure, with no aggrandisement of anyone", and he applied by analogy the Court's approach to the fairness of a scheme of arrangement under the Corporations Act, noting that fairness "does not in the scheme context have the stringent narrowness of the non-statutory Gambotto test of only permitting a scheme which avoids detriment to the company". 137 The High Court's concern, evident in their Honours' remarks at CLR 446, was that if there were no principles preventing the majority from advancing the interests of the corporation as a commercial entity or the interests of the general body of corporators in disregard of the minority's proprietary rights, the technique of constitutional amendment could be used to sidestep the protections given to minorities when their proprietary rights are taken away in other contexts. That implies that the Gambotto principles are to be applied except where there is some other mechanism to protect the minority interest. The subsequent cases on schemes or arrangement indicate that the essential feature of such a mechanism is that it permits an affected minority interest to challenge the fairness of what is proposed before an independent forum. It is unnecessary for me to decide, here, whether the forum must be a court and whether the procedure must be ordained by statute. 138 The cases on selective reduction of capital could be read as suggesting that there are two other ingredients, but in my view it would be wrong to do so. One possible ingredient is that the mechanism for appraising fairness must constitute an exclusive code. In my opinion, where the Giles JA and Santow J identified Part 2J.1 as an exclusive code, they were not meaning to imply that the Gambotto principles would otherwise have applied. Where it is clear, on the face of the legislation, that the statutory considerations are meant to be exclusive, the conclusion that the Gambotto principles do not apply it is easier to reach. But there is nothing to indicate, for example, that the scheme of arrangement provisions are an exclusive code in terms rendering irrelevant other matters including general law principles, and yet it is clear that the Gambotto principles do not apply to schemes. The reason is that minority interests are protected by a mechanism for the appraisal of fairness. 139 Secondly, Giles JA noted in Winpar that the statutory mechanism, which required approval by a majority of the "minority", left no room for speaking of a purpose of securing the company from detriment. That, again, seems to me to be a feature of the particular statutory scheme that his Honour was considering, and should not be taken as a requirement for exclusion of the Gambotto principles. In the case of schemes of arrangement, it may happen that the "majority", not being a separate class for scheme purposes, is permitted to vote, although there may be a requirement for separate counting of votes. 140 In the present case s 81 has the effect that an order of the Court must be obtained before the Variation of Trust Deed is amended. The Court's task will be to decide whether the transaction proposed by the Trustee is "expedient" in the management or administration of the Trustee's business, so as to justify an order conferring upon the Trustee the necessary power of amendment. "Expediency" is not the same thing as "fairness", but the concepts are connected. If the Court were to form the view that there was some procedural or substantive unfairness to unitholders or any group of them in the implementation of the proposal, it would be duty-bound to decline to make the order. Therefore, in its application to a proposal which has the effect of replacing unitholders' beneficial interests with shares, s 81 necessarily requires the Court to review the procedural and substantive fairness of the implementation of the proposal. That being so, in such a context s 81 constitutes a statutory regime in which the overall fairness of a restructuring proposal is considered by the Court, and dissentients have the opportunity to present their views. It follows that, having regard to the observations of the High Court and cases concerning schemes of arrangement and selective reductions of capital, the Gambotto principles do not apply. Proposal in which members are treated equally 141 As to ground (2), the question is whether the Gambotto principles apply to a proposal, such as the one before me, where the beneficial interests of every interest-holder will be taken away and replaced by other property, and there is no acquisition of minority interests by the majority. 142 It is evident from their remarks at CLR 444-446 that Mason CJ, Brennan, Deane and Dawson JJ were concerned with a case where the amendment would affect the majority and minority interests differently, because it would authorise the "expropriation" of the minority interests by the majority holder. At 444 they referred to "an actual or effective expropriation of shares or of valuable rights attaching to shares", not at that point identifying the expropriator, but at 444-445 they said that "different considerations" (which they then identified and explained, and which I have described as "the Gambotto principles") apply "where what is involved is an alteration of the articles to allow an expropriation by the majority of the shares, or valuable proprietary rights attaching to the shares, of a minority". They then referred (at 445) to "the exercise of a power conferred by a company's constitution enabling the majority shareholders to expropriate the minority's shareholding for the purpose of aggrandizing the majority". Their reasoning did not in terms extend to a case where everyone, supporters and dissentients, is treated in the same way under the proposal. But it is arguable that, in terms of analysis, a dissident interest-holder is affected in the same way, and the unfairness to that person is the same, even where everyone is treated equally. 143 The question was considered by the Court of Appeal of New South Wales in Heydon v NRMA Ltd (2001) 51 NSWLR 1. In that case it was proposed that two companies limited by guarantee, "mutual" companies, would amend their constitutions so as to "demutualise" them, in a fashion that would cause the memberships by guarantee to be replaced by shareholdings in a new holding company. 144 Malcolm AJA (at 62-64) reasoned that the case before him involved no attempt by a majority to expropriate the shares of a minority. He noted that each of the members had one vote and there was nothing in the evidence identifying any group of members as being in a position to control the majority of votes. He said (at 63): "In my view, it cannot be said that, merely because the requisite majority might vote at a general meeting to pass the necessary special resolution, the consequence of the conversion of rights of membership in Association into a right to receive shares in NRMA Holdings Ltd and become a member of that company, or receive a cash payment in lieu, involved any element of expropriation." 145 Ormiston AJA (at 205) saw the question as whether it is "enough to condemn as illegal the proposed amending resolution that it will (or may in the future) result in the extinction in any way of members' rights as shareholders or members or must the proposed resolution extend so far in substance or effect to the majority's compulsorily acquiring or destroying the minority's shares or other membership rights so is also to achieve the end that the majority become the sole shareholders or members of the company or gain some new voting or other advantage over the minority". As I read his Honour's judgment, he treated the second alternative as the correct account of the ratio of Gambotto. He said (at 206): "Thus I would conclude that, although the word 'expropriation' is ordinarily wide enough to comprehend not merely compulsory acquisition but also compulsory destruction of rights, the High Court in Gambotto was concerned primarily with amendments to articles which have the effect of destroying the minority's shareholding or other membership rights or of placing those rights in the hands of majority shareholders, even if the amendments are not necessarily intended principally to give the majority the financial advantages attaching to those shares but are more directed to excluding the minority from continuing to exercise membership or other related rights in the corporation. In other words where transfer or destruction of the minority's rights is not in issue, I would not see the ratio of the case, insofar as it relates to expropriation, as extending to amendments which extinguish all a company's shares or all membership rights but which provide in their place rights or options available to all members equally, whether or not they choose to exercise them." [See also at 230, where his Honour linked "expropriation" to the concept of equitable fraud.] 146 MacPherson AJA took a different approach. He said (at 125): "Nor is it, in my opinion, sufficient to say that Gambotto involved expropriation by the majority of a minority whereas here the rights of all members of Association and NRMA Insurance Pty Ltd were to be extinguished and replaced by something of equal or greater value. Although at various points the majority in Gambotto speak of an 'aggrandisement' of a 'majority', the reasoning is in terms applicable to an expropriatory amendment as such, whether or not the specific target is a majority of members. … In any event, once special resolutions were passed altering the articles, those opposed to the change would ipso facto constitute a majority, whose rights in the companies would be expropriated equally with those of everyone else. One day they would, and the next day they would not, be members. In that way, as it seems to me, their rights as members would have been 'expropriated' in terms of the ratio in Gambotto ." 147 The question has been considered twice by judges at first instance. In Re Arrowfield Group Ltd (1995) 17 ACSR 649, Cohen J (at 654) distinguished Gambotto on several grounds, one of which was that the case before him did not involve an act against a minority, as the proposed resolutions would have an equal effect on all ordinary shareholders. In Application of Australian Co-operative Foods Ltd, Santow J referred (at 87) to the difference of opinion in the Court of Appeal in Heydon, and observed that one may question whether the Gambotto principles apply to a restructure with no aggrandisement of anyone. 148 Clearly the scope of the ratio in Gambotto is open to further consideration in Australian appellate courts. Sitting at first instance, however, and bearing in mind the views expressed by other judges at first instance, I should apply what seems to me to be the clear majority opinion in Heydon - namely that the ratio in Gambotto (and in particular, the requirement to distinguish between an amendment for the purpose of promoting the interests of the commercial entity and the general body of corporators, from an amendment to avoid detriment or harm to the company) has no application where the proposed amendment will replace all interests with another species of property in a manner that treats the interest-holders equally, at any rate where (as here) there is no "majority" voting bloc. Consequently my view is that the Gambotto principles are inapplicable to the present case on this ground. Proposal to prevent detriment or harm to the entity 149 In Gambotto Mason CJ, Brennan, Deane and Dawson JJ distinguished between a case where "the substantial purpose of the alteration is to secure the company from significant detriment or harm" (at 445) and a case where the justification for the amendment is that it "will advance the interests of the company as a legal and commercial entity or those of the general body of corporators" (at 446). The question is whether, if the Gambotto principles were otherwise applicable to the present case, the Trustee's proposal would fall within the former or the latter category. 150 It is not easy to answer the question, because the examples given by their Honours were cases where the expropriating resolution would target the minority, rather than cases where (as here) the resolution would treat all interest-holders equally. Nevertheless it seems to me, on the evidence before me now, that the Trustee's substantial purpose is to avoid immediate detriment or harm to the Trading Trust, rather than simply to improve its future prospects as a legal and commercial entity or those of the general body of member-newsagents. 151 The Trustee has come before the Court essentially because, having regard to the deficiencies of the Trading Trust Deed, unavoidable breaches of trust that have occurred and will continue to occur if the Trustee's business continues to operate, and breaches of the Corporations Act which it would be expensive to overcome, it will be necessary to wind up the Trading Trust unless some such restructuring as is proposed is implemented in the near future. The Trustee believes, for apparently good reasons, that the winding up of the Trading Trust will be very much to the detriment of newsagents, including those who hold units. As in the High Court's example of expropriation of foreign shareholdings to satisfy television broadcasting requirements, the Trustee in the present case is faced with the choice of acting or closing down (or selling) the newsagency supplies and office products business. This is not a case like Gambotto, where the amendment was proposed in order to deliver advantages in terms of taxation and administrative costs rather than to save the company's business from destruction. 152 My conclusion, therefore, is that if I were wrong in holding that the Gambotto principles do not apply to the present case on two other grounds, the Trustee's proposal would not be invalidated by the application of the Gambotto principles, because it is a proposal the substantial purpose of which is to avoid immediate detriment or harm to the Trading Trust.

Last Modified: 02/05/2004 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.