Australian Securities and Investments Commission v Edensor Nominees Pty Ltd

What happened

In early 1999 Yandal Gold Pty Ltd made a takeover bid for all shares in Great Central Mines Ltd, a company taken to be incorporated under the Corporations Law of Victoria. Before the bid, Yandal Gold, Edensor Nominees Pty Ltd (trustee for the Gutnick family interests) and Normandy group companies had entered a shareholders agreement that gave Yandal Gold a relevant interest in 40.37 per cent of Great Central's shares. ASIC formed the view that entry into that agreement, and subsequent informal arrangements under which Edensor and Normandy companies would not accept the offers, involved two distinct contraventions of the prohibition on acquisitions in s 615 of the Corporations Law. ASIC also alleged that the Part A statement contained misleading or deceptive conduct in trade and commerce contrary to s 52 of the Trade Practices Act 1974 (Cth), s 12DA of the Australian Securities and Investments Commission Act 1989 (Cth) and s 995(2)(b) of the Corporations Law.

On 25 March 1999 ASIC commenced proceedings in the Federal Court of Australia (Victoria District Registry) seeking declaratory and injunctive relief, including orders under ss 737 and 739 of the Corporations Law. After a contested trial Merkel J delivered reasons on 16 June 1999. His Honour found that the shareholders agreement and the informal arrangements each caused acquisitions of relevant interests in contravention of s 615. He made declarations to that effect and, pursuant to ss 737 and 739, ordered Edensor to pay ASIC the sum of $28.5 million (order 7) for pro-rata distribution to shareholders who had accepted the offers or whose shares had been compulsorily acquired. Merkel J expressly held that the Federal Court was exercising federal (including accrued) jurisdiction and had power to grant all the relief sought.

Edensor appealed. The day after Merkel J's judgment this Court delivered Re Wakim; Ex parte McNally (1999) 198 CLR 511. The Full Court of the Federal Court (Hill, Sundberg and Mansfield JJ) heard the appeal on 31 August and 1 September 1999. In reasons published on 10 December 1999 their Honours accepted that there was a common substratum of fact that gave the Federal Court jurisdiction over the whole matter but concluded that the Court lacked power to grant relief under the Corporations Law of Victoria. After further submissions, and after the Federal Courts (State Jurisdiction) Act 1999 (Vic) had commenced, the Full Court on 9 March 2000 made two declarations: first, that order 7 was invalid for want of jurisdiction; second, that the Federal Court had had no jurisdiction to hear and determine ASIC's proceeding under the Corporations Law. The Full Court stood the appeal over pending an application to this Court for special leave.

ASIC sought special leave to appeal against those declarations and, in the alternative, constitutional writs. Edensor, Yandal Gold and the Normandy interests brought their own applications for special leave and writs, contending that while the Federal Court had jurisdiction it lacked power to make order 7. All applications were heard together on 30 August 2000. On that day the Court announced that special leave would be granted to ASIC, the appeal allowed instanter, the two declarations set aside and the matter remitted to the Full Court for further hearing and determination on the merits. The respondents' applications were dismissed. Reasons were published on 8 February 2001.

The joint reasons of Gleeson CJ, Gaudron and Gummow JJ (with which Hayne and Callinan JJ agreed in substance) form the principal judgment. McHugh J and Kirby J each wrote separately but reached the same dispositive orders. The Court emphasised that the litigation did not involve the validity of the cooperative legislative scheme struck down in Re Wakim; rather, it turned on the independent sources of federal jurisdiction and the operation of s 79 of the Judiciary Act 1903 (Cth).

Why the court decided this way

The High Court decided the case the way it did because the constitutional and statutory text, read in light of long-standing authority on federal jurisdiction, compelled the conclusion that the Federal Court was exercising federal jurisdiction from the moment ASIC, as the Commonwealth, instituted the proceeding seeking declaratory and injunctive relief. That jurisdiction extended to the whole justiciable controversy, including the claims arising under the Corporations Law of Victoria. Once federal jurisdiction was engaged, s 79 of the Judiciary Act applied the substantive provisions of that Law (including the remedial powers in ss 737 and 739) as surrogate federal law. The Full Court's reasoning had conflated jurisdiction with power and had misapplied both Re Wakim and Smith v Smith (1986) 161 CLR 217.

At [36]-[39] the joint reasons explain why ASIC is "the Commonwealth". The ASIC Act 1989 (Cth) establishes a body corporate whose members are appointed by the Governor-General on ministerial nomination, whose staff are public servants, whose funding is appropriated by Parliament, whose operations are audited by the Auditor-General and which is subject to ministerial direction. These features place ASIC squarely within the description adopted in Deputy Commissioner of Taxation v State Bank (NSW) (1992) 174 CLR 219 at 232 and Austral Pacific Group Ltd v Airservices Australia (2000) 74 ALJR 1184 at 1187-1189 [10]-[15]. The absence from s 39B(1A)(a) of the words "or a person suing on behalf of the Commonwealth" that appear in s 75(iii) does not narrow the statutory grant; those words in the Constitution are words of extension, not limitation.

Because ASIC (the Commonwealth) was seeking a declaration of contravention of s 615 and interlocutory and final injunctive-type relief, the proceeding was a matter within s 39B(1A)(a). The joint reasons at [47]-[50] emphasise that "the Commonwealth" limitation in that paragraph is satisfied once the moving party is the Commonwealth and the relief sought is injunctive or declaratory. The term "injunction" is not confined to traditional equitable remedies; it extends to the statutory orders authorised by ss 737 and 739, which are not fundamentally distinct from equitable relief (citing ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 38 FCR 248 and Truth About Motorways Pty Ltd v Macquarie Infrastructure Investment Management Ltd (2000) 74 ALJR 604 at 616 [67]).

The content of the "matter" is identified at [51]-[58]. The controversy was the alleged contraventions of the takeovers chapter and the appropriate remedial response. That controversy was identifiable independently of the proceeding brought to determine it. Once federal jurisdiction was attracted by reason of the identity of the moving party, it encompassed all claims that arose out of the same substratum of facts, including those under the Corporations Law of Victoria. The joint reasons expressly reject any suggestion that "accrued jurisdiction" is discretionary; jurisdiction conferred is to be exercised.

Section 79 then supplied the substantive law. At [57] the Court repeats that s 79 renders the laws of the State or Territory binding on courts exercising federal jurisdiction in that State or Territory "in all cases to which they are applicable". The Corporations Law of Victoria was applicable because the proceeding was brought in the Victoria District Registry, Great Central was a "company" for the purposes of that Law, and the remedial provisions in ss 737 and 739 expressly contemplated applications by ASIC. The definition of "Court" in s 58AA(1) (which includes the Federal Court "when exercising the jurisdiction of this jurisdiction") is not a law that purports to confer or withhold federal jurisdiction; it is a definitional provision that assumes the operation of Pt 9 of the Victorian Corporations Act and does no more than distinguish between courts that may grant all forms of relief and inferior courts that may not. It does not prevent s 79 from picking up the substantive remedial provisions.

The Full Court's reliance on s 58AA to conclude that the Federal Court could only exercise State jurisdiction was therefore erroneous. At [72]-[94] the joint reasons demonstrate that the authorities (including John Robertson & Co Ltd v Ferguson Transformers Pty Ltd (1973) 129 CLR 65, Commissioner of Stamp Duties (NSW) v Owens [No 2] (1953) 88 CLR 168 and the United States analogy in Railway Company v Whitton's Administrator 13 Wall 270 (1871)) establish that a State law does not cease to be "applicable" merely because it identifies only State courts as the forum. To hold otherwise would stultify federal jurisdiction and allow State legislatures to limit the exercise of federal judicial power, contrary to the negative implication from Ch III.

The Court also rejected the respondents' attempt to characterise order 7 as beyond power even if jurisdiction existed. At [64]-[71] the reasons explain that jurisdiction and power are not discrete; an exercise of jurisdiction is characteristically attended by an exercise of power to grant the remedies that the applicable law makes available. Sections 737 and 739 supplied both the norm of conduct (via s 615) and the remedy. Because the Victorian Parliament had included ASIC as an authorised applicant, the provisions contemplated their use in federal jurisdiction. The reasoning in Smith v Smith was distinguished because that case concerned a condition precedent to contractual efficacy rather than a remedy for contravention of a statutory norm.

McHugh J reached the same result by a slightly different route, emphasising at [128]-[140] that ASIC's status as the Commonwealth meant there was never a moment when the liability under s 615 was a purely State matter. Kirby J, in dissent on the power point, nevertheless agreed that the declarations should be set aside and the matter remitted. Hayne and Callinan JJ agreed with the joint reasons, adding at [164]-[170] that s 58AA is not concerned to distinguish federal from non-federal jurisdiction but to allocate business within the State court hierarchy.

The disposition followed: the declarations were set aside because they were founded on an erroneous view of both jurisdiction and power; the matter was remitted so that the Full Court could determine the remaining grounds of appeal that attacked the merits of Merkel J's findings.

Before and after state of the law

Before this decision the law concerning the interaction of federal jurisdiction and the cooperative corporations scheme was unsettled. The cross-vesting legislation upheld in Gould v Brown (1998) 193 CLR 346 had assumed that State Parliaments, with federal concurrence, could confer State jurisdiction on federal courts. Re Wakim held that assumption constitutionally impermissible. Many practitioners and lower courts read Re Wakim as denying federal courts any capacity to administer State corporations law. The Full Court in the present matter took that view, treating the Corporations Law as conferring only State jurisdiction that could not be exercised by the Federal Court once Re Wakim was decided.

This judgment clarified that federal jurisdiction may be attracted independently of the cross-vesting provisions. Where the Commonwealth (including a statutory agency such as ASIC) is the moving party seeking injunctive or declaratory relief, s 39B(1A)(a) supplies federal jurisdiction. That jurisdiction is not limited to Commonwealth law claims; it extends to the whole matter. Section 79 then operates to apply the relevant State law (here the Corporations Law of Victoria) as federal law. The judgment therefore restored to the Federal Court (and, by parity of reasoning, to State courts exercising federal jurisdiction) the practical capacity to administer the takeovers and other provisions of the Corporations Law in cases brought by ASIC.

After the decision, the law is that s 58AA and the remedial sections must be read subject to the Constitution and to federal laws such as the Judiciary Act. A State law that on its face limits remedies to courts "exercising the jurisdiction of this jurisdiction" does not, by that language alone, render the substantive provisions inapplicable in federal jurisdiction. The decision also confirms that the distinction drawn in some earlier authorities between jurisdiction and power cannot be used to deny a federal court power to grant a remedy that the applicable law (picked up by s 79) makes available once jurisdiction over the matter exists.

The practical consequence is that ASIC may continue to litigate corporations matters in the Federal Court without the need to rely on the now-invalid cross-vesting provisions. The judgment also limits the operation of the Federal Courts (State Jurisdiction) Act 1999 (Vic) in cases where federal jurisdiction was in truth engaged; there is no "ineffective judgment" requiring transfer to a State Supreme Court if the proceeding was at all times within federal jurisdiction.

Key passages with plain-English translation

Paragraph [1]: "The ultimate question in the proceedings in this Court is whether the Full Court of the Federal Court erred in holding that a judge of that Court had acted beyond its jurisdiction or powers in making certain orders in litigation arising from a company takeover bid. However, at the heart of the controversy lie basic principles of the Australian federal constitutional structure and the exercise of the authority of the judicial branch of government."

Plain English: The real fight is not just about one takeover case; it is about how federal and State courts divide work under the Constitution and whether the Federal Court can use Victorian corporations law when the Commonwealth sues.

Paragraph [7]: "A 'matter' in respect of which that jurisdiction is conferred may, in a given case, include claims arising under common law or under the statute law of a State. But the jurisdiction invoked remains, in respect of all of the claims made in the matter, 'wholly' federal..."

Plain English: Even if part of the dispute comes from Victorian law, once the case is in federal court under a federal head of power the whole case is federal. There is no separate State jurisdiction running alongside.

Paragraph [36]: "This is a clear case of a corporation established by a law of the Commonwealth which answers the description of 'the Commonwealth' in s 75(iii) of the Constitution."

Plain English: ASIC is part of the Commonwealth government for constitutional purposes. That single fact pulls the entire lawsuit into federal jurisdiction.

Paragraph [57]: "In the present litigation, s 79 operated to 'pick up' the laws of Victoria because the Federal Court was exercising federal jurisdiction in that State."

Plain English: When a federal court sits in Victoria it must use Victorian law to decide the case unless a federal law says otherwise. Section 79 automatically imports the Corporations Law, including the power to order money to be paid to shareholders.

Paragraph [79]: "The Federal Court, seised as it was of jurisdiction in the matter, did not lack the power to make the orders in question, including order 7."

Plain English: Once the court had jurisdiction over the whole dispute it automatically had power to make the orders the Victorian law allowed. Arguments that tried to separate "jurisdiction" from "power" failed.

Paragraph [94]: "Section 58AA... is not a law purporting to confer jurisdiction on any court... Nothing in s 58AA conferred jurisdiction. Nor did it impliedly amend the text of Pt 9..."

Plain English: The complicated definition in s 58AA was just a signpost telling readers which courts could hear corporations cases. It was never meant to stop s 79 from working, and it does not rewrite the Constitution.

What fact patterns trigger this precedent

The precedent is triggered whenever ASIC (or another Commonwealth agency performing analogous executive functions) institutes proceedings in a federal court seeking a declaration or an injunction and the controversy includes claims that arise under State corporations legislation. The critical elements are:

• the moving party is the Commonwealth within the broad sense explained at [36]-[39];
• the relief claimed includes declaratory or injunctive orders (widely construed);
• the dispute arises out of a single substratum of facts that would, but for the federal jurisdiction hook, involve State law; and
• the proceeding is brought in the State or Territory whose law is sought to be applied.

Typical triggers include takeover litigation, managed investment scheme disputes, directors' duties claims and financial services misconduct where ASIC elects to sue in the Federal Court. The precedent is not confined to the Corporations Law; it applies to any State statute that supplies a norm of conduct and a remedy, provided the State law is "applicable" in the s 79 sense. It does not matter that the State statute on its face refers only to "the Court" exercising the jurisdiction of the State. Nor does it matter that the cooperative cross-vesting legislation has been held invalid. The federal jurisdiction source is independent.

The fact pattern does not arise if the proceeding is brought by a private litigant without a Commonwealth party, or if the relief sought is purely damages at common law without any injunctive or declaratory component. In those cases the post-Wakim difficulties identified in Re Wakim remain, subject to any valid federal conferral of jurisdiction.

How later courts have treated it

The judgment itself treats Re Wakim as confined to the impermissible conferral of State jurisdiction on federal courts. At [10]-[12] the Court distinguishes Re Wakim on the basis that the present litigation did not involve any attempt to exercise State jurisdiction; the Federal Court was at all times exercising federal jurisdiction attracted by ASIC's status and the relief claimed. Later courts must therefore read Re Wakim as not touching cases where federal jurisdiction arises under s 75(iii) or s 39B(1A)(a).

The judgment distinguishes Smith v Smith at [60]-[63]. In Smith v Smith a State law made court approval a condition precedent to the validity of a contract releasing statutory benefits. The Family Court could not give that approval in federal jurisdiction because the approval itself was not a justiciable controversy. The present case is different because ss 737 and 739 create remedies for contravention of a statutory norm; they do not impose a condition precedent to contractual efficacy. Later courts must therefore treat the reasoning in Smith v Smith as inapplicable to remedial provisions that contemplate applications by ASIC.

The judgment applies the long line of s 79 cases (John Robertson, Owens [No 2], Thomas v Ducret) to confirm that a State law does not cease to be "applicable" merely because it identifies only State courts. At [79]-[89] the Court adopts the hypothesis that federal courts lie inside the field of application of State laws on the topics mentioned in s 79. Later courts are directed to ask whether the State law, on its proper construction, is capable of being applied in federal jurisdiction without imposing non-judicial functions or producing inconsistency with Ch III. The judgment therefore narrows the circumstances in which a State law will be held inapplicable under s 79.

The joint reasons also endorse the view that "accrued jurisdiction" language is apt to mislead when federal jurisdiction is attracted by party identity rather than by a federal statute as the source of the claim. At [53] the Court notes that the identity of the Commonwealth as moving party may animate the matter without any federal law supplying the substantive rights. That clarification has guided subsequent decisions about the scope of matters under s 75(iii).

Still-open questions

The judgment expressly leaves some questions unresolved. At [24] it notes a debate about which Commonwealth statute (the Trade Practices Act or the ASIC Act) governed the misleading conduct claim but finds it unnecessary to resolve that debate. That question remains open in future litigation.

At [58] the Court raises but does not answer the hypothetical of a Federal Court exercising jurisdiction in another State or Territory where the Corporations Law of Victoria would not, on its own terms, apply to a particular company. The interaction of s 79 with choice-of-law rules in such a case is left for another day.

The precise limits of the phrase "injunction or declaration" in s 39B(1A)(a) are not exhaustively defined. Although the Court holds that statutory orders under ss 737 and 739 fall within it, the boundary between orders that are "injunctive in nature" and orders for damages or purely statutory penalties remains to be worked out in future cases.

The judgment assumes but does not decide the validity of the Federal Courts (State Jurisdiction) Act 1999 (Vic) in circumstances where a proceeding was never within federal jurisdiction. That statute's constitutional validity in its full operation was not before the Court and is therefore still open.

Finally, the precise operation of s 58AA in a case brought by a private litigant (rather than ASIC) in a State Supreme Court exercising federal jurisdiction is not determined. The Court notes at [73] that on the Full Court's reasoning the Supreme Court of Victoria itself could never exercise the powers in ss 737 and 739 when exercising federal jurisdiction. That paradox remains for future resolution.

Gotchas

Most practitioners still assume that Re Wakim created a bright-line prohibition on federal courts using State corporations law. The gotcha is that the prohibition is limited to the conferral of State jurisdiction; where federal jurisdiction is independently attracted (most obviously by ASIC suing as the Commonwealth) the Corporations Law is picked up automatically by s 79 and applies with its meaning unchanged. Many litigators wasted months trying to reframe claims as purely federal when a simple s 39B(1A)(a) analysis would have sufficed.

Another gotcha is the persistent belief that the definition of "Court" in s 58AA is a jurisdictional statute. It is not. The High Court treats it as a purely definitional device that assumes the validity of Pt 9 of the Victorian Corporations Act. Once that is understood, the supposed "rewriting" problem disappears and s 79 can operate according to its ordinary terms. Courts and regulators have spent years drafting around a non-existent difficulty.

Finally, the judgment quietly buries the idea that "accrued jurisdiction" is discretionary. Once a matter is within federal jurisdiction the court must deal with the whole controversy unless abuse of process or forum non conveniens intervenes. That proposition, stated at [53], is routinely overlooked in interlocutory disputes about whether State claims should be severed.