the present dispute
31 The fundamental issue between the parties is one of construction. ASIC contends that cl 16 is an exhaustive statement of the power of Wellington, as the responsible entity, to make distributions to unit holders. As such, all distributions must be in cash because cl 16 provides a mechanism which relates only to cash payments. Wellington contends that cl 16 applies only to distributions of cash. According to Wellington distributions in specie are otherwise authorised by cl 13.1 and in addition cl 13.2.5.
32 According to ASIC, on its proper construction cl 16 is not a source of power but a qualification on the powers otherwise provided for under the constitution, insofar as distributions to unit holders are concerned. ASIC submitted that:
(1) Clause 16.2 identifies two obligations imposed upon Wellington: - (i) the obligation to make calculation as set out in cl 16.2.1 and (ii) the obligation to make payment as set out in cl 16.2.3. Clause 16.2 also vests a right in the unit holders to the distribution entitlement in cl 16.2.2. ASIC notes that cl 16.3 refers to the integers to be taken into account for the calculation of the "Distributable Amount", which includes any additional amount (including capital, previous reserves, and previous provisions) that the responsible entity has determined during the distribution period is to be distributed.
(2) Clause 16.4 is a mandatory provision which identifies three methods of distribution of the Distributable Amount: a payment of cash or, as ASIC puts it, two other methods, both of which require the prior consensual involvement of the unit holder - being either a reinvestment in the scheme or distribution as otherwise directed by the unit holder. ASIC submitted that the relevant point is that the only method of distribution contemplated that involves a reduction in the assets of the fund that does not involve the prior consent of a unit holder is a payment of cash.
(3) On its face, cl 16 covers the field in respect of distributions to the unit holders, short of the fund being wound up.
(4) The approach taken in the constitution to distributions by way of cash follows through to the winding up provisions, which provide for distribution of the net proceeds from the realisation of scheme property.
33 As to cl 13.1, ASIC submitted that the power in that clause is the kind of general power often included in constitutions to protect external persons dealing with the company or responsible entity from a suggestion that the body is acting ultra vires. It is for this reason that the clause is expressed in relatively wide terms. According to ASIC, there are a number of reasons why the clause does not empower Wellington to act in a manner inconsistent with the limitations imposed in cl 16.
34 First, on its face cl 13.1 is concerned only with that which is "legally possible". Insofar as Wellington pointed to s 124(1)(d) of the Corporations Act as empowering the distribution, ASIC submitted that s 124(1)(d) is concerned with distribution of a company's property among members, not a distribution of trust property to unit holders, and accordingly does not apply to the facts. In any event, s 125(1) provides that a constitution may contain an express restriction on, or a prohibition of, the company's exercise of its powers. Clause 16 is in the form of an express restriction or prohibition on power. As ASIC put it, "[t]he concept of "legally possible" does not carry with it action contrary to the constitution".
35 Second, ASIC submitted that "the general principles that govern the construction of a commercial document apply equally to the construction of the constitution, provided due regard is given to the special characteristics of the latter" as a constitution, citing Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1; [2006] FCAFC 144. ASIC identified the relevant principle of construction as the proposition that "[a] conflict involving apparently inconsistent provisions in the one instrument is to be resolved, if at all possible, on the basis that one provision qualifies the other and hence that both have meaning and effect. That rule is an aspect of the general rule that an instrument must be read as a whole". ASIC said that, applying this rule in the present circumstances, the critical issue is whether, if one were to give cl 13.1 a wide ambit and thereby use it to empower the transfer, that could be done ignoring the terms of cl 16. The clauses on their face are apparently inconsistent and the above rule of construction requires cl 16 to be read as qualifying cl 13.1, the former being the mode by which the power is to be observed in respect of distributions to unit holders.
36 As to cl 13.2.5, ASIC pointed to the opening words of cl 13.2 as material. The opening words records that "[i]n the administration of the provisions of this Constitution…the Responsible Entity shall have the following powers". ASIC said that these words are words of limitation and make plain that the ambit of the additional powers is to be ascertained by the provisions of the constitution and of the Corporations Act. In other words, ASIC said that one would not read these words as empowering the responsible entity to "act in a way outside the field of operation that the Constitution and the Corporations Act mark out".
37 In addition, ASIC said that to read cl 13.2.5 as providing the power to distribute assets in any way Wellington considers fit is "inconsistent with the specific formula for "Distributable Amount" and the closed methods of payment referred to in cl 16".
38 Accordingly, the general principle of construction to which ASIC referred is applicable and has the same effect in the proper construction of cl 13.2.5.
39 ASIC also noted the following: - (i) that the nature of the investments in the fund indicated that the capacity to make an in specie distribution was either absurd or at least unlikely, those assets as set out in the evidence primarily consisting of investments in mortgages, equity, debt instruments and cash, and (ii) that the Constitution does not specify any mechanics by which an in specie distribution should take place, in contrast to the detailed mandatory provisions for a cash distribution as set out in cl 16.
40 For its part, Wellington submitted first that cl 16 does not in terms purport to qualify cl 13.
41 Second, Wellington submitted that cl 16 has its own field of operation on its natural and ordinary meaning. The field of operation of cl 16 is the making of a cash distribution by the responsible entity. Insofar as any matter is within that field of operation cl 16 applies and must be complied with, but outside that field of operation there is scope for other forms of distribution including an in specie distribution as authorised by cll 13.1 and 13.2.5.
42 Third, the commercial context of the constitution is important. Scheme property may not always be readily convertible into cash. If it is in the interests of unit holders for a distribution to be made other than by way of cash then it is commercially sensible, as I understand the submission, for such a capacity to exist. In other words, the fact that on their face cll 13.1 and 13.2.5 would authorise an in specie distribution of scheme property is not commercially inconvenient and is not an unlikely result.
43 Fourth, cl 13.1 requires the responsible entity to be treated as if it were a corporation. This is the purpose of the language of cl 13.1 which vests in the responsible entity all the powers in respect of the scheme that it is legally possible for, relevantly, a corporation to have and as if the responsible entity were the absolute owner of the scheme property and acting in its personal capacity. It is the language of cl 13.1 that leads to s 124 of the Corporations Act being engaged, because cl 13.1 vests in the responsible entity all the powers that it is legally possible for a corporation to have and treats the scheme property as if it were absolutely owned by the responsible entity. It necessarily follows that it must have been within the common contemplation of all those involved in the creation of the constitution of the scheme that the responsible entity would have the power relevantly to distribute any of the scheme property as referred to in s 124(1)(d) of the Corporations Act, because this is one of the powers that a corporation has vis-à-vis its members.
44 Fifth, s 125 is not material because it depends upon the existence of an express restriction on or a prohibition of the company's exercise of any of its powers and on Wellington's case there is no such restriction or prohibition.
45 Sixth, as to s 231, Wellington's primary point is that the provision is not relevant to its exercise of power at all. Section 231 is concerned with the capacity of a person to be a member of a company. It does not in any way go to the power of Wellington under the constitution. The other point that Wellington makes about s 231 is that, based upon its construction of the constitution, the requirement of s 231(b) - that a person agree to become a member of a company after registration and the entry of their name on the register of members - is satisfied by the fact that the unit holders entered into the scheme and thereby are bound by the terms of the constitution as provided for in cl 3.
46 In terms of this latter point, a series of cases was brought to my attention. The first is Re Hunter Resources Limited (1992) 34 FCR 418 (Re Hunter Resources), in which Lockhart J at 425 rejected a proposed reduction in capital of a corporation because s 184 (the then equivalent provision of s 231) also required that for a person to become a member of a company a person must agree to do so. His Honour said that this merely requires the agreement of the person in the sense of assent, rather than bilateral agreement. In that case, however, the arrangement for the reduction of capital did not involve assent of the shareholders, but rather coercion. His Honour said at 426 that the application for the shares in the third party company, which was part and parcel of the proposed reduction in capital, did not have its genesis in an agreement but rather, for all practical purposes, in compulsion, which was not an agreement within the contemplation of s 184.
47 In Re Crusader Limited (1996) 1 Qd R 117 Thomas J, in respect of the approval of a proposed scheme of arrangement, noted that the decision in Re Hunter Resources did not mean that actual agreement or assent of a person to become a shareholder is necessary. Thomas J said (at 128):
I do not read this into his Honour's judgment. His Honour expressly pointed out that no bilateral element of agreement was required by s 184. The section merely requires the agreement of the person to become a member, and uses the word "agrees" in the sense of "assents". This is consistent with long standing interpretations of the Companies Act which recognise that formal agreement is not necessary. The taking of a transfer of shares is an obvious example where appropriate assent may be inferred.
48 Thomas J noted that, in that case, all noteholders had assented to and were bound by the trust deed. His Honour concluded that (at 129):
In short, all noteholders in assenting to the trust deed bound themselves to whatever amended obligations might lawfully be effected under that deed. It seems to me that all noteholders, including the minority, have assented to be bound in this way, and that when they receive shares in due course they will be doing so consistently with the requirements of s 184.
…
On the facts of the present case I hold that there is sufficient assent or agreement on the part of all noteholders to satisfy the requirements of s 184 in relation to any shares that those note holders will receive.
49 In Re Etrade Australia Ltd (1999) 30 ACSR 516 Santow J noted (at 516-517) that prior to certain amendments to the Corporations Act relating to the reduction of capital it was:
…well settled that a scheme of arrangement was needed wherever the reduction of capital involves the shareholder being compelled to acquire shares ([Re Hunter Resources] where the shares, as here, were in another company), and a scheme was thus employed for that purpose, overlapping with the reduction.
50 I was also taken to Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15 (Youyang). That case involved a breach of trust. At [35] the High Court noted that "[w]hile the rights of Youyang against Minters crystallised on 24 September 1993", which I take to be the date of the breach of trust, "decisions…indicate that the appropriate remedy, and, in particular, the quantum of pecuniary remedy, falls for determination at a later stage". Their Honours referred to Target Holdings Ltd v Redferns [1996] AC 421, itself citing Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534, as follows:
A trustee who wrongly pays away trust money, like a trustee who makes an unauthorised investment, commits a breach of trust and comes under an immediate duty to remedy such breach. If immediate proceedings are brought, the court will make an immediate order requiring restoration to the trust fund of the assets wrongly distributed or, in the case of an unauthorised investment, will order the sale of the unauthorised investment and the payment of compensation for any loss suffered. But the fact that there is an accrued cause of action as soon as the breach is committed does not in my judgment mean that the quantum of the compensation payable is ultimately fixed as at the date when the breach occurred.
51 As I understand it, this is an expression of the principle referred to thereafter in [35] that compensation or other remedies for breach of trust are "assessed as at the time of trial, using the full benefit of hindsight", and accordingly are not subject to considerations which would ordinarily apply to tortious and contractual damages, including concepts such as remoteness and contributory negligence.
52 In any event, the first defendant's point in referring to the decision in Youyang was to note that a transaction carried out in breach of trust, as a matter of legal principle, cannot be thereby automatically void. Rather, the breach of trust gives rise to duties and rights, including those referred to in [35] of Youyang, and those may give rise to remedies including that the transaction is voidable and may otherwise expose persons involved in the breach of trust and others to appropriate orders. However, the availability of those remedies does not flow from a proposition that a transaction in breach of trust is automatically void, absent an order of a court voiding the transaction, and the granting of other remedies would necessarily involve discretionary considerations.