Basis Capital Funds Management Ltd v BT Portfolio Services Ltd [2008] NSWSC 766 | Case summary

1137/08 BASIS CAPITAL FUNDS MANAGEMENT LTD AS RESPONSIBLE ENTITY OF BASIS YIELD FUND AND BASIS AUST-RIM FUND V BT PORTFOLIO SERVICES LTD & ORS JUDGMENT 1 HIS HONOUR: This proceeding arises out of the suspension, on 16 July 2007, of redemptions of units in two Australian managed investment schemes, the Basis Yield Fund ("Yield Fund") and the Basis Aust-Rim Diversified Fund ("Aust-Rim Fund"), as a result of the disruption of global credit markets. Three issues are presented for decision: · whether investors who applied for units in either fund in June 2007 ("the June Applicants") are entitled to the return of their June application money, or conversely, that money is to be retained as part of the relevant Fund for the benefit of the whole body of unitholders of that Fund (including the June Applicants); · whether unitholders who applied, with proper notice, for redemption of units to take effect on 2 July 2007 ("the June Redeemers") are entitled to be paid out the value of the units they applied to redeem, calculated as at 30 June 2007, or conversely, those units are to remain as units in each Fund, sharing pari passu with the whole body of unitholders of each Fund whatever assets there are at current valuations; · as a factual matter, whether the fourth defendant ("Combined Fund"), which made an application to redeem units in the Yield Fund in June 2007, validly withdrew that application. 2 The plaintiff ("Basis"), an Australian company, is the responsible entity of both funds. It has three directors, Stuart Fowler, Peter Dobson and Steven Howell. Mr Dobson and Mr Howell have given affidavit and oral evidence. 3 Orders have been made under UCPR 7.6 constituting the proceeding as a representative proceeding in which the first defendant represents the June Applicants in each Fund, the second defendant represents the June Redeemers in each Fund, and the third defendant represents the remainder of the unitholders in each Fund ("the Continuing Investors"). The fourth defendant, Combined Fund, does not appear in a representative capacity. It was a June Redeemer in the Yield Fund but it claims that it validly withdrew its application to redeem units. 4 The determination of the rights of the June Applicants and the June Redeemers will necessarily affect the value of units held by the Continuing Investors, and therefore there are contests between, on the one hand, the Continuing Investors, and on the other hand, the June Applicants and the June Redeemers respectively. Note that the classes are not mutually exclusive: a single investor may be a June Applicant seeking to make an additional investment, and also a June Redeemer seeking to redeem units, and may also be a Continuing Investor in respect of other units. 5 Given its position as responsible entity, Basis has initiated the proceeding and has assisted the Court by making submissions to identify the issues for resolution and to present its construction of the relevant provisions of the Corporations Act and the Funds' Constitutions. Additionally, there is a contest involving disputed facts between Basis and Combined Fund, as to whether Combined Fund withdrew its application for redemption, and Basis has adduced evidence and made submissions on the subject. 6 As the responsible entity of the two registered managed investment schemes, Basis has statutory duties in respect of each scheme, including the following duties: · to ensure that all payments out of the scheme property are made in accordance with the scheme's constitution and the Corporations Act (s 601FC(1)(k)); and · to carry out or comply with any other duty, not inconsistent with the Corporations Act, that is conferred on it by the scheme's constitution (s 601FC(1)(m)). 7 The principal relief sought by Basis in its amended originating process is declaratory relief concerning the discharge of these duties. It seeks declarations, in respect of each Fund, that: (1) subject to the valid exercise by any June Applicant of any statutory cooling off rights, Basis would be acting in compliance with its duties under s 601FC(1)(m) in retaining the application proceeds received in respect of the June Applicants' June applications as assets of the Fund; (2) the June Redeemers are creditors of the respective Funds in respect of their redemption requests, and Basis would be acting in compliance with its duties under s 601FC(1)(k) and (m) in calculating redemption proceeds for those redemptions based on the Fund's net asset value as at 30 June 2007. 8 Basis also seeks a declaration that Combined Fund is not a Yield Fund June Redeemer. The foundation for this declaration is the contention by Basis that Combined Fund validly withdrew its redemption request. 9 This is a proceeding for binding orders inter parties, not merely for judicial advice to a trustee. Under UCPR 7.7, the declaratory relief sought in the proceeding will bind the parties, and also the classes represented by those parties who have been appointed representatives: UCPR 7.6. Structure and operation of the Funds 10 The Yield Fund was established under a constitution dated 28 November 2003 ("Yield Fund Constitution"). The Aust-Rim Fund was established under a constitution dated 21 July 2000 ("Aust-Rim Fund Constitution"). The Constitutions are not materially different from one another. 11 The Yield Fund's Constitution provides that Basis, referred to in the instrument as "the Manager", is to hold the Assets on trust for Members (clause 2.1). The beneficial interest in the Trust is divided into Units (clause 3.1). Each Unit confers an equal undivided interest (clause 3.2) in the Assets as a whole, subject to the Liabilities, and does not confer an interest in a particular Asset (clause 3.3). Terms commencing with a capital letter are defined terms. I shall return to the pertinent definitions later. 12 The operation of the Funds is described in Basis' written submissions as follows: "The Funds operate a monthly investment cycle and a quarterly redemption cycle. That is, applications for units in the Funds are processed on a monthly basis and requests to redeem units in the Funds are processed on a quarterly basis. The application price and redemption price are based on each Fund's net asset valuation as at the last day of the month and quarter respectively. In the ordinary course, the net asset value of the Funds is usually determined within 20 business days of the first business day of the following month." 13 The written submissions also said: "The calculation of the net asset value of the funds at 30 June 2007 was relevant to applications for units received in June 2007 and applications to redeem units on the 2 July 2007 redemption date in that the number of units issued to each such applicant, or the redemption proceeds payable to each such Redeemer, depended on the funds' net asset value as at 30 June 2007." 14 At least 80% of the Yield Fund's assets are invested in redeemable participating shares in the Basis Yield Alpha Fund ("Yield Alpha Fund"), a mutual fund company formed in the Cayman Islands. There are also offshore investors into the Yield Alpha Fund, which has issued a confidential information memorandum relating to the offering of its shares. Substantially all of the assets of the Yield Alpha Fund are, in turn, invested in another registered mutual fund, also domiciled in the Cayman Islands, called the Basis Yield Alpha Fund (Master) ("Yield Master Fund"). 15 At least 80% of the Aust-Rim Fund's assets are invested in redeemable participating shares in a mutual fund company formed in the Cayman Islands called Basis Pac-Rim Opportunity Fund ("Pac-Rim Fund"). There are also offshore investors into the Pac-Rim Fund, which has issued a confidential information memorandum relating to the offering of its shares. Substantially all the assets of the Pac-Rim Fund are invested in another registered mutual fund domiciled in the Cayman Islands called the Basis Pac-Rim Opportunity Fund (Master) ("Pac-Rim Master Fund"). 16 I shall refer to the Yield Alpha Fund and the Pac-Rim Fund together as "the Intermediate Funds". 17 The Yield Master Fund invests in structured credit investments (including asset-backed securities, mortgage-backed securities, collateralised debt obligations and collateralised loan obligations) and high-yield corporate credit securities. The Pac-Rim Master Fund invests in high-yield bonds, convertible and other hybrid securities, equities, futures, credit default swaps and some structured credit "equity" securities. Approximately USD79.84 million of the Pac-Rim Master Fund's assets were invested in the Yield Alpha Fund as at 31 May 2007. Basis is the investment adviser to the Yield Master Fund and the Pac-Rim Master Fund. 18 Both the Yield Fund and the Aust-Rim Fund receive applications for investment from wholesale and retail investors under product disclosure statements. Mr Dobson, a director of Basis, gave evidence that the majority of investments into the Australian Funds are made by operators of an "investor-directed portfolio service" or "wrap platform account service". He explained that these operators usually pool their investors' money and make a single investment in the Fund, which is held in the name of a custodian. Suspension of redemptions and new applications 19 There is evidence tracking the decline of the Master Funds, and hence the Intermediate Funds and the Australian Funds, in the affidavit of Mr Dobson and in documentary evidence including Basis newsletters and disclosure notices for the Funds. It is relevant to deal with this evidence in some detail. 20 Mr Dobson said that by late June 2007, each of the Funds had been adversely affected by the downturn in global structured credit markets caused by investor concerns surrounding the US sub-prime mortgage market. Earlier in June 2007, problems had emerged in two Bear Stearns funds, which caused much comment and concern in the financial press. Credit rating agencies issued ratings downgrades on US sub-prime credit markets, focusing particular attention on collateral issued in 2006 and rated BBB+ or lower. Some of these had been placed on negative watch by rating agencies by early July 2007. 21 On 11 June 2007 Basis distributed a newsletter by e-mail to financial advisers, researchers and some investors in the Funds who had subscribed to receive it, providing a review and an estimate of the Funds' performance for the month of June. Subsequent developments have proved that the sentiments expressed in the review were unduly optimistic. The newsletter claimed that the Basis Funds contained some important structural features designed to ensure their survival through periods of extreme dislocation: one feature mentioned was the existence of limits to total redemptions on a quarterly basis. The newsletter also mentioned that hedges had delivered gains to the underlying portfolios and that to date all margin calls had been met. I take this to be a reference to margin calls made by lenders to the Master funds. The newsletter estimated that the Net Asset Value of the Yield Fund had declined by 13.69% for the month of June and that the Net Asset Value of the Aust-Rim Fund had declined by 9.2% for the same period. 22 On 22 June 2007 Sahil Sachdev, of Basis, sent an e-mail to Mr Fowler, a director of Basis, which appears to have been in the nature of a liquidity report for the two Master Funds. It responded to an e-mail from Mr Dobson requesting information, after communications with Citigroup concerning possible margin calls. The e-mail said that Pac-Rim had enough liquidity, but that Yield Alpha would be short of cash "in the 15% mark down scenario". I take this to be a reference to a hypothetical marking down of the Net Asset Value of the Yield Master Fund by 15%. The e-mail identified a figure for total expected margin calls on the 15% scenario, and total available margin excess. It said that Mr Sachdev had asked Mr Dobson "to put his foot on the pedal in collecting unreceived cash distributions from previous months". I take this to be a reference to the Yield Master Fund collecting previously declared but unpaid distributions from its investments. 23 On about 29 June 2007 Basis circulated to clients a newsletter entitled "Investor Update - Recent Developments in Sub-Prime Markets". On its face, the document was a response to the February 2007 reassessment by the credit markets of the likelihood of future defaults and losses in the US sub-prime debt market, and some more recent headlines concerning the Bear Stearns Asset Management Fund, which had large exposures to sub-prime mortgages. The newsletter is interesting for several reasons. 24 First, the newsletter explained two components of the Yield Fund's indirect investments, namely its investment in asset-backed securities that were placed partly in sub-prime mortgages, and its investment in collateralised loan obligations (CLOs) and collateralised debt obligations (CDOs). CLOs and CDOs are instruments issued from special purpose vehicles that hold portfolios of assets including mortgages. The instrument repackages and redistributes credit risk by assembling and slicing up parcels of debt obligations into separately rated tranches against which bonds are issued and traded, with typically the highest rated and lowest yielding bonds bearing a high credit rating (perhaps AAA), and the lowest rated but potentially highest yielding being referred to as "equity". According to the newsletter, Basis "invests in the equity piece of the capital structure". 25 Secondly, the newsletter acknowledged that the sub-prime debt problem had impacted negatively on Basis' exposure to asset-backed securities, but said it would take some time for Basis to receive valuations disclosing what that impact had been. 26 Thirdly, the newsletter identified what was at that stage a very recent problem in the CDO/CLO market, in particular the market for the high-rated tranches of these instruments, said to have been caused by the difficulties experienced by the Bear Stearns funds. It noted that spreads on the high-rated bonds had increased from around 50 basis points above the cash rate to around 300 basis points. The tone of the newsletter was generally optimistic on the question whether these difficulties would impact on CDO/CLO equity. 27 Notwithstanding such optimism, the continued deterioration of the credit markets in July 2007 impacted on the Basis Funds. 28 On 16 July Basis announced, by a disclosure notice for each Fund, that on 13 July it had acted under the Constitution of each Fund to suspend the redemption of Units, on the ground that it was unable fairly to calculate the Net Asset Value of the Fund, and that during the period of suspension no applications for the issue of Units in the Fund would be accepted. Although (as noted below) the provisions of the Constitutions of the Funds and the most recent Product Disclosure Statements authorised Basis to suspend the determination of the Net Asset Value and the payment of redemption proceeds, as well as the issue and redemption of Units, according to the disclosure notice the decision was limited to suspension of the issue and redemption of units. 29 The Yield Fund's disclosure notice said, in part: "The concerns surrounding US sub-prime mortgages have caused significant disruptions in global credit markets with adverse implications for the valuation of a wide range of structured credit investments to which the [Yield Master Fund] has exposure. The uncertainty regarding the valuations of these investments has resulted in difficulties for the [Yield Master Fund], which has liabilities to its financiers secured over structured credit investments. This recent turn of events has made it impracticable to be able to fairly calculate the net asset value of the [Yield Fund]." 30 The disclosure notice for the Aust-Rim Fund pointed out that the Pac-Rim Master Fund, in which the Aust-Rim Fund indirectly invested most of its assets, had a long-term strategic investment of USD79.84 million in the Yield Master Fund, and then it disclosed the difficulties for the Yield Master Fund in terms identical with the Yield Fund disclosure notice. It added that "the valuation issues also affect certain assets held directly in the [Pac-Rim Master Fund]". 31 On 18 July 2007 Yield Alpha Fund (the Intermediate Fund for the Yield Fund) wrote to its shareholders, including the Yield Fund, stating that on the basis of advice it had received from Basis as its investment adviser, it had suspended the payment of the Redemption Price in respect of Participating Shares redeemed with effect from 30 June 2007. This was said to be pursuant to article 72 of the articles of association of the Yield Alpha Fund (in fact, article 73), which (inter alia) authorises the Company to suspend the payment of the Redemption Price in respect of any redemption of Participating Shares during any period when the Company is unable to repatriate funds required for the purpose of making payments on redemption. The letter asserted that the Company was not currently able to repatriate funds required for the purpose of making payments of the Redemption Price in respect of Participating Shares redeemed with effect on 30 June 2007. 32 A disclosure notice for the Yield Fund, dated 18 July 2007, made it explicitly clear that the Yield Master Fund's financiers had reduced their valuations of the Master Fund's investments and had made margin calls, and the Master Fund was in default in meeting some of the margin calls. Consequently a number of its financiers had declared an event of default and were seeking to realise their security over the Master Fund's assets. This was happening in circumstances where there was no liquid market for any of the investments, and consequently there was a prospect that the investments would be realised at prices significantly below their book value in the Master Fund's accounts as at 31 May 2007, leading to a serious risk of substantial losses for the Master Fund. The disclosure notice said that enforcement action by the financiers at distressed sale prices would result in a reduction in the Net Asset Value of the Units in the Yield Fund to below one-half of their level as at 31 May 2007. 33 A disclosure notice for the Aust-Rim Fund, also dated 18 July 2007, referred to the Pac-Rim Master Fund's substantial investment in the Yield Master Fund and consequently the risk of loss through that investment. However, the disclosure notice said that although there were also other indirect investments in structured credit investments, more than one-half of the Aust-Rim Fund's assets as at 31 May were in readily marketable bond securities and the Pac-Rim Master Fund was not in default to its financiers. 34 The Intermediate Fund for Aust-Rim Fund, Pac-Rim Fund, did not suspend redemptions of participating shares concurrently with the Yield Alpha Fund on 18 July, but it did so subsequently. By a disclosure notice dated 6 August 2007, Pac-Rim Fund announced that its directors, acting on the advice of Basis as its investment adviser, had resolved to suspend payment of the Redemption Price in respect of all 30 June 2007 redemptions. The disclosure notice asserted that as at 31 May 2007, the Pac-Rim Master Fund had approximately a 50% exposure to liquid high yielding Asian and emerging market credit securities and a 50% exposure to structured credit securities consisting of collateralised debt obligations, collateralised loan obligations and asset-backed securities. Of that exposure, approximately USD79 million represented the longer-term strategic investment in the Yield Alpha Fund. The disclosure notice explained that the Pac-Rim Master Fund had liabilities to its financiers secured over most of its assets, and the financiers had increased their margin requirements for both structured and liquid securities, resulting in the Master Fund having to sell assets. It said that the Pac-Rim Master Fund was not in default in meeting any margin calls, and had taken steps to maintain liquidity, but the Pac-Rim Fund was not currently in a position to meet redemption requests made by existing investors for 30 June 2007. 35 Although the Pac-Rim Fund's disclosure notice did not say so, other evidence suggests that the Pac-Rim Fund was purporting to act under article 72 of the Company's articles of association, which is identical with article 73 of the articles of association of the Yield Alpha Fund, referred to above. 36 The Aust-Rim Fund issued another disclosure notice on 14 August 2007. The disclosure notice closely tracked the contents of the disclosure notice that had been released by the Pac-Rim Fund on 6 August, including the statement about the asset blend, even though that appeared on its face to be inconsistent with the Aust-Rim Fund's disclosure notice of 18 July, which had said that more than half of the investments were in "readily marketable bond securities". The disclosure notice of 14 August said that Pac-Rim Fund's suspension of redemptions meant that the Aust-Rim Fund would not be in a position to meet redemption requests, even if a Net Asset Value could be calculated. 37 According to a further disclosure notice by the Yield Fund made on 15 August 2007, the Yield Master Fund in fact suffered the forced sale of some of its assets by secured creditors, and also the purported closing out of positions by some financiers, as a result of "a global market-wide increase in risk aversion and the general desire by the financiers to reduce their exposure to these assets". The disclosure notice said that Basis was unable to give an accurate estimate of the reduction in the Net Asset Value of the Units in the Yield Fund but that, because of further deterioration of market conditions and the action of the Master Fund's financiers, the reduction in the Yield Fund's Net Asset Value might exceed 80%. 38 According to a disclosure notice by the Yield Alpha Fund dated 30 August 2007, provisional liquidators were appointed by the Grand Court of the Cayman Islands to the Yield Master Fund on its own application, in order to preserve and protect assets and for an orderly realisation. 39 On 25 September 2007 the Pac-Rim Fund wrote to its shareholders (presumably including the Aust-Rim Fund), advising that by board resolutions of that date, the suspension of payments in respect of Participating Shares redeemed with effect on 30 June 2007 had been ended. The letter said the company was able to repatriate funds required for the purpose of making payments in respect of those Participating Shares. However, on 28 September 2007 the Pac-Rim Fund wrote to its shareholders again, advising that on 25 September 2007 its board had declared the suspension of the redemption of Participating Shares that would otherwise be redeemed with effect on 30 September 2007 onwards, purporting to act under article 72 of the Company's articles of association. Presumably this did not affect the lifting of the suspension of the redemptions that were effective on 30 June. 40 In a case such as this, where the plaintiff, acting in a fiduciary capacity, seeks binding declarations affecting the rights of various representative parties, there is a particularly heavy onus on it to disclose to the Court all relevant facts and circumstances. That being so, in the absence of further evidence, I am able to infer, and I do infer, that there have been no other relevant developments, and accordingly that: (a) the suspension of redemptions in the two Australian Funds, made by Basis on 16 July 2007, remains in operation; (b) the decision of Basis not to accept applications for the issue of Units in each Australian Fund during the period of suspension of redemptions remains in operation (a matter in respect of which there is further detailed evidence, outlined below); (c) payments in respect of the redemption, with effect on 30 June 2007, of Participating Shares in the Yield Alpha Fund were suspended on 17 July 2007 and that suspension remains in operation; (d) the suspension on 6 August 2007 of payments in respect of the redemption, with effect on 30 June 2007, of Participating Shares in the Pac-Rim Fund was lifted on 25 September 2007 and there is no longer any impediment to those payments. The determination of the Net Asset Value of the Funds 41 It was not until 26 and 27 September 2007 that Basis' accountants produced a calculation of the value of the respective Funds as at 30 June. The Net Asset Value of the Yield Fund as at 30 June 2007 was determined at AUD267.204 million, resulting in a Net Asset Value per unit of $864.233, and the Net Asset Value of the Aust-Rim Fund as at 30 June 2007 was determined that AUD326.853 million, resulting in a Net Asset Value per unit of $979.3878. 42 There is some evidence as to the reasons for the delayed determination. According to the Constitution of each Fund, unless the Manager determines otherwise, the value of an Asset for the purpose of calculating Net Asset Value is its market value, and where there is no market value, the valuation methods and policies applied by the Manager must be capable of resulting in a calculation that is independently verifiable (clause 8.3). Obviously market value is centrally important and where the market collapses, the task of calculating an "independently verifiable" value is likely to be challenging and difficult. 43 The PDS for each Fund points to additional complexity in the calculation of Net Asset Value. The PDS explains that a calculation of the Net Asset Value of the Fund involves a calculation of the value of the Fund's shareholding in the Intermediate Fund. That valuation takes into account the performance fees paid to Basis as investment manager of the Intermediate Funds. The calculation of those fees is complex because if the Net Asset Value per share in the intermediate fund is other than the "Peak Net Asset Value" per share, adjustments called "equalisation credits" are made to reduce inequities that could otherwise arise. The Administrator of the Intermediate Funds, Fortis Prime Fund Solutions (Cayman) Ltd, provides services in respect of net asset valuations and unit pricing. 44 These matters are at least a partial explanation for why it takes some time to calculate Net Asset Value in routine circumstances, and why a market crisis is likely to cause substantial further delay. It appears from the newsletters and disclosure notices issued by Basis that the Yield Master Fund was in difficulties by about mid-July, then received margin calls from its financiers, and then went into default in making some of the margin calls, leading financiers to declare an event of default and to seek to realise their security, in circumstances where there was no liquid market for the Master Fund's investments. The Pac-Rim Master Fund was in a better position, because its investments were to some extent diversified, but by early August it too was in difficulty, though apparently it did not default. On 18 July and 6 August respectively, the intermediate funds suspended payment of the redemption price the shares redeemed with effect from 30 June 2007. By mid-August there had been forced sales of some of the assets of the Yield Master Fund, to which provisional liquidators were appointed in late August. 45 It appears that no further determinations of the Net Asset Value of the Yield Fund have been made since the determination on 26 September. It seems to me appropriate to infer, given the appointment of provisional liquidators to the Yield Master Fund and continuing problems in the global credit markets, that the Net Asset Value of the Yield Fund as at 30 September 2007 or any subsequent quarter, if it could be calculated at all, would be substantially lower than the Net Asset Value as at 30 June 2007. 46 Since 27 September there have been calculations of estimated Net Asset Value of the Aust-Rim Fund, but according to evidence given on behalf of Basis, those estimates have not been sufficiently certain to finalise them, and they are subject to change. Nevertheless, there are monthly estimates, according to which, except from August to September 2007, there was a steady decline in Net Asset Value of the Fund. The estimate as at 31 March 2008 was $176.467 million. A. THE JUNE APPLICANTS Investment applications received in June 2007 47 In the normal course, the Funds allot Units once each month. The procedure is that details of investment applications received throughout a particular month (that is, from the first to the last day of the month, inclusive) are accumulated for allotment of Units as at the first business day of the following month (the "Dealing Day"). Application money is placed in an application account. The number of Units issued in return for the application money is not calculated until the Net Asset Value of the Fund at the last day of the month before the Dealing Day ("the Valuation Time") has been determined. 48 Anita Das is a senior manager with Registries Ltd, which is retained by Basis to provide unit registry services for the two Funds. She has given detailed evidence about the usual processes employed to deal with applications for Units. 49 According to Ms Das, when an investment application is received from a person who is not an existing member of one of the Funds, Registries promptly (within a business day of receipt of the application) opens a holder account for the applicant in the relevant unit register, into which the applicant's details and the dollar amount of the investment are entered, using software which causes a unitholder number to be allocated to the holder account. When an investment application is received from an existing member of one of the Funds, the existing holder account is updated with the amount of the new investment. 50 Then, in each case, a confirmation letter from Basis is generated by the system, and sent to the investor. The confirmation letter: · thanks the applicant for "investing in" the Fund; · confirms the applicant's investment details, including the amount of the investment, the applicant's unitholder number, and the bank account into which income distributions are to be credited; · informs the applicant that "you will receive a Holding Statement providing the final details of your investment, as soon as we have received the information required to calculate the unit price", and that this may take upwards of 20 business days after month-end. 51 According to Ms Das, once the Net Asset Value per Unit of the Fund for the relevant Dealing Day has been provided by Basis' accountants to Registries, that information is entered into Registries' computer system and then the computer program used by Registries causes a calculation to be made of the number of Units held by new members of the Fund, and the updated number of Units held by existing members of the Fund, as at the relevant Dealing Day. The Constitutions of the Funds provide for the issue of fractions of units, so the calculation is quite precise. Then holding statements are issued to the new and existing members providing them with details of their unit holdings at the relevant Dealing Day. 52 Apparently there is no process of reporting by Registries to the Basis board, or any resolution of the Basis board to receive a Registries report and to issue and allot units in accordance with it. Instead the process of issue and allotment of Units to individual unitholders is automatic, through the operation of the Registries computer program. 53 There is some evidence as to what happened with the June applications. Basis has tendered copies of the investment applications received in June 2007 for each Fund. This evidence has been received subject to confidentiality orders, to protect the personal financial details of investors. It shows that the total net value of the June applications was AUD12.271 million for the Yield Fund and AUD11.39 million for the Aust-Rim Fund. (In his affidavit of 4 April 2008 Mr Dobson gave some higher figures for the total amount of application money received in each Fund: AUD14.554 million and AUD11.735 million respectively. The discrepancy was not explained by the evidence.) 54 The figures exclude applications in respect of which the statutory cooling off right under s 1019B of the Corporations Act has been validly exercised (according to Basis). Under that section, an investor in a financial product has the right to return the investment and obtain a refund of money paid, normally to be exercised only in the period of 14 days after confirmation of the investment is received. 55 The evidence shows that the initial steps outlined by Ms Das, by which the identities of investors and application amounts were entered into the system, holder accounts were created for new applicants and given numbers, and confirmation letters were promptly sent to the applicants after receipt of their applications, was followed for the June applications in each Fund. Additionally, on 2 July Basis arranged for the bulk of the June application money for each Fund to be transferred from the Fund's application account to an account controlled by its custodian, by way of an application for investment in the Yield Alpha Fund by the Yield Fund and in the Pac-Rim Fund by the Aust-Rim Fund. But in late July and August, following decisions by the Yield Alpha Fund and the Pac-Rim Fund to refuse to accept applications for investment in respect of the 2 July Dealing Day, the custodian transferred that money into the respective operating accounts of the Funds, where it has remained, although payments have been made to June Applicants considered by Basis to have validly exercised their statutory cooling off right. 56 On or about 28 September 2007, after the Net Asset Value had been determined as noted above, Registries calculated the unitholdings of the June Applicants using its computer program, adjusted the unit registers for each of the Funds, and transmitted to the June Applicants holding statements reflecting those valuations and updating unitholdings "at 2 July 2008". 57 Some of the June Applicants have sought to withdraw their June applications and to obtain the return of their application money. In his affidavit of 19 October 2007, Mr Dobson said that sufficient money is held by the custodian used by Basis "on deposit" for each fund to permit it to refund all June applications made by the June Applicants if required. However, he said, this assumes that Basis is entitled to defer payment of redemption proceeds to the June Redeemers. Mr Dobson's affidavit of 4 April 2008 apparently qualifies this evidence, by deposing that the application money is in fact held in the operating accounts of the respective Funds, rather than in any separately constituted deposit account. 58 Essentially, the issue for the June Applicants is whether they will receive a full refund of their application money, or be allocated Units valued as at 30 June 2007 (by a valuation made on 28 September 2007), to which their application money will be applied. The evidence to which I have referred indicates that the present value of the Units is substantially lower than their value as at 30 June 2007. Is Basis entitled to retain the application money of the June Applicants? 59 The answer to this question depends in part on the rights of the June Applicants under the Constitution of the relevant Fund and the Product Disclosure Statement pursuant to which they invested, and in part on the construction and application of s 1017E of the Corporations Act. The Constitutions and Product Disclosure Statements 60 The application forms lodged by the June Applicants are in evidence, in a confidential exhibit. In the case of retail investors, by and large the investors have used the application form ("Application Form") attached to the most recent Product Disclosure Statement ("PDS") for the Fund (the PDS dated 2 April 2007 for the Yield Fund, and the PDS dated 2 May 2007 for the Aust-Rim Fund). The Application Form contains an "Investor Declaration" by which the investor acknowledges and agrees that they have read carefully and understood, and are applying solely on the basis of, the PDS and the Application Form, and they agree to be bound by the terms of the Constitution. In the case of applications by institutions (including bundled master trust or wrap account services), the application forms are tailor-made and there is generally nothing in them to reveal the basis upon which the application was made. But in my view it is appropriate to infer that institutional applications made in June 2007 were made on the basis of the most recent PDS that was in the market place. Therefore the rights of the June Applicants as a class are to be assessed by reference to the Constitutions of the respective Funds and the terms of the most recent applicable PDS. 61 The Yield Fund Constitution constitutes a trust called the Basis Yield Fund (clause 1.1), the beneficial interest in which is divided into Units (clause 3.1). The Constitution (clause 26.1) defines "Unit" to mean an undivided share in the beneficial interest in the Trust, as provided in the Constitution. 62 The expression "Manager" is defined, while the Trust is a Registered Scheme, as the company that is registered with ASIC as the single responsible entity for the Trust under the Corporations Act. The Trust is a Registered Scheme and the responsible entity is Basis, which is therefore the Manager. 63 The Manager must hold the Assets on trust for Members. "Member" means the person Registered as the holder of a Unit, and "Registered" means recorded in the register of Members kept by the Manager (clause 21.6). Being a Member of a Fund is significant, because only Members are entitled to attend a meeting and vote on resolutions (clause 16), or to be considered for the distribution of income (clause 10). Further, only Members have the constitutional right to transfer Units (clause 3.9), and a transfer is not effective until Registered (clause 3.11). The drafter of the PDS for each Fund has not employed the word "Member", but instead each PDS refers frequently to Unit holders. A "Unit holder" is defined in the PDS as a person registered as the holder of a Unit. In other words the definition of "Unit holder" in the PDS is closely similar to the definition in the Constitution of "Member". 64 "Assets" are defined as all the property, rights and income of the Trust, but not (inter alia) application money or property in respect of which Units have not yet been issued (clause 26.1). It is of critical importance to identify the point at which Units are issued. Once that has occurred, the application money is part of the Assets of the Trust and so the Manager is entitled and obliged to retain it. Before Units have been issued, there is a statutory trust of the money for those who paid it, and also a statutory obligation to return the money, under s 1017E. Section 1017E is considered below. 65 There is no express general provision in the Constitution or the PDS for either Fund authorising or requiring the Manager to issue Units, but in my view it is implied by clause 3.4 of the Constitution, which authorises the Manager to issue a fraction of a Unit, that the function of issuing Units is vested in the Manager. 66 Clause 8.2 authorises the Manager to determine Net Asset Value at any time, and obliges the Manager to do so at each Valuation Time. Clause 8.4 permits the Manager temporarily to suspend the determination of the Net Asset Value and the issue and redemption of Units and the payment of redemption proceeds during any period when certain specified circumstances exist. One of the circumstances is if, in the opinion of the Manager, the Net Asset Value cannot be calculated fairly. As explained above, Basis invoked this clause (and the equivalent clause in each PDS) on 16 July 2007 when it announced that it had acted to suspend the redemption of Units in the two Australian Funds, and that during the period of suspension no applications for the issue of Units would be accepted. 67 Clause 8.5 of the Constitution (and comparable provisions in each PDS) recognises a distinction between the allotment and the issue of Units, by providing that in the event of suspension of the issue and redemption of Units, no Units may be issued "(other than those that have already been allotted)". I infer that the allotment of Units is also a function to be performed by the Manager. The concept of "allotment" is not defined in the Constitution, but the notion that Units are to be allotted as well as issued would reinforce the proposition, explored below, that the process of allotment and issue is not automatic and requires that some event must occur. 68 Under the heading "Temporary Suspensions of Determination of NAV", each PDS contains a provision authorising temporary suspension of determination of the Net Asset Value and the issue and redemption of Units and the payment of redemption proceeds, closely similar to clauses 8.4 and 8.5 of the Constitution. 69 The Constitution sets out the procedure to be followed for the processing of applications for new Units. The procedure is as follows (disregarding, for the sake of simplicity, provisions dealing with the initial issue of Units, and the reinvestment of distributions in new Units): · an applicant for Units must complete a form approved by the Manager if the Manager requires it (clause 5.1); · under clause 4.1, a Unit must only be issued at an Application Price calculated under a formula which depends in part on Net Asset Value, which is the value of the Assets of the Fund calculated under clause 8; · fractions of a Unit may be issued by the Manager (clause 3.4); · under clause 4.2, Net Asset Value must be determined as at the immediately preceding Valuation Time, defined as the time immediately following the close of business on the last day of each calendar month, being a day on which the Manager calculates Net Asset Value; · payment in a form acceptable to the Manager must either accompany the application or be received within the time determined by the Manager (clause 5.2); · the Manager has a discretion to reject any application (clause 5.3); · Units may not be issued unless the Manager receives and accepts the application and receives the application money or other property (clause 5.5); · Units may only be issued on a Dealing Day (clause 5.5), "Dealing Day" being defined as the first Business Day of a calendar month (for example, 2 July 2007). 70 Some provisions in the most recent PDS for each Fund should be noted. Each PDS under the heading "Payment", identifies when the payment is due, and then says that cleared funds must be received before Units will be issued. Where application monies are not received on the due date, the Fund is not obliged to issue Units on the relevant Dealing Day and any such application may be deferred until the money is received. In two respects the Aust-Rim Fund PDS goes further than the Yield Fund PDS. One difference is that the Aust-Rim Fund PDS says that application monies will be held in trust by the Custodian. The other difference is that the Aust-Rim Fund PDS says that "units will be issued within one month of receipt of application monies in respect of an application". 71 I have noted the evidence indicating that the calculation of Net Asset Value takes some time, and that the practice of Basis is to calculate the Net Asset Value, as at a particular Valuation Time, at least some weeks after that Valuation Time has passed. I have also referred to the evidence by Ms Das concerning holder accounts, unitholder numbers and confirmation letters. In my view, the sending of the confirmation letter implies the Manager's prior acceptance of the application and receipt of the application money, for the purposes of clause 5.5, and communicates those facts to the Applicant. But as the confirmation letter points out, the "final details" of the investment (presumably including the Application Price and the number of Units to be credited to the Applicant's account) are not calculated until the information required to calculate unit price has been received, which may take more than 20 business days after month-end. Once the requisite information is received, and Net Asset Value has been determined, the Application Price and the number of Units (including fractions of Units) are calculated and recorded in the holder account on the unit register, and a holding statement is sent out. 72 In those circumstances the provisions of the Constitution seem to operate inconsistently, in practice. On the one hand, clause 5.5 says that Units may only be issued "on" a Dealing Day. On the other hand, clause 4.1 says that a Unit must only be issued at an Application Price calculated by a formula that depends upon the Net Asset Value at the Valuation Time immediately preceding the Dealing Day. But the Application Price, and consequently the number of Units issued, will not be known for some weeks after the Dealing Day. 73 In the case of Units issued on reinvestment of a distribution, that inconsistency is addressed by the Constitution. Clause 10.14 states that "if reinvestment applies, the Manager is deemed to have received and accepted an application to reinvest on the next Dealing Day after the end of the relevant Distribution Period", and the last sentence of clause 5.5 says: "Units which are issued on a reinvestment of distribution in accordance with clause 10.4 are taken to be issued on the Dealing Day after the end of the Distribution Period in which the application in respect of those Units is deemed to have been received even though the number of Units is not able to be calculated until a later time ." [emphasis supplied] 74 There is no similar provision regarding applications for new Units. In those circumstances, the conundrum presented by the constitutional provisions and the practice followed in calculating Net Asset value is to be resolved, in my view, by first considering when new Units were in fact issued. The issue of new Units 75 Investors to whom Units are issued become Members, as defined in the Constitution, and Unit holders as defined in the PDS for each Fund, when they are registered as holders of Units. The general nature of unit holding was explained by Mason CJ, Deane and Gaudron JJ in Read v Commonwealth (1988) 167 CLR 57, at 61-62: "A unit holder has a beneficial interest in the assets of the Trust, a right to have the Trust executed in accordance with the Deed, and a right to proportionate distribution of the proceeds representing the assets of the Trust Fund upon termination of the Trust. The extent of the unit holder's beneficial interest at any given time is that proportion which his or her units bear to the total number of units issued." 76 When, on the facts of this case, were new Units issued to the June Applicants? 77 Neither the Constitutions of the Funds nor the PDS for each Fund defines the word "issue", but according to clause 26.2(a) of the Constitution, terms defined in the Corporations Act are used in the Constitution with their defined meaning. Section 761E(2) of the Corporations Act says that a financial product is "issued" to a person when it is first issued, granted or otherwise made available to a person. Since, on my construction of the Constitutions, it is the Manager who issues new Units, it is necessary to identify something that amounts to Basis (or its agent, Registries) issuing, granting or otherwise making available new Units to the June applicants. 78 Three possible times need to be considered, namely · when applications were processed and confirmation letters sent; · on the Dealing Day, namely 2 July; · on 28 September, when (after the determination of the Net Asset Value of each Fund at the Valuation Time of 30 June), the Application Price and the number of Units for each June Applicant were calculated and the unit register for each Fund was adjusted accordingly, and holding statements were sent out. 79 As to the first possibility, applications were "processed" by Registries on the day they were received, or the next business day, by opening (in the case of a new investor) or updating (in the case of an existing Member of the Fund) a "holder account" in the relevant unit register, in the manner described by Ms Das. Nothing in the facts indicates that the creation of a holder account could be regarded as the issuing of new Units to the applicant. At that stage, the only information entered in the holder account in the unit register was information identifying the applicant, the applicant's bank account, the amount of the investment and the unitholder number. None of that amounts to or implies the issuing of new Units to the applicant. 80 The matter can be tested in two ways. First, consider what the unit register would show in the case of an existing Member, immediately after Registries had processed an application by that Member for new Units. The amount of the new investment would appear, but the evidence of Ms Das implies that there would be no alteration to the number of existing Units held by the Member, pointing to the conclusion that at that stage, no further Units had been issued. Secondly, consider whether an Applicant who did not already hold Units became a "Member" after the application has been processed and a unitholder number was issued. "Member" is defined as a person registered in the Register of Members as the holder of "a Unit". Until the number of Units is entered in the Register in respect of the Applicant, it would be a distortion of language to say that the Applicant was registered as the holder of "a Unit" in the definition of "Member". 81 The submissions in reply on behalf of Basis sought to reach a contrary position by emphasising the definition of "Unit" and contending that the procedure followed by Ms Das gave the applicant an undivided share in the beneficial interest of the Trust, represented by the dollar amount recorded in the unit register. But this submission overlooks the use of the word "a" before the word "Unit". That definition was satisfied only when the number of Units acquired by the applicant could be ascertained. 82 The confirmation letter issued by Registries begins by thanking the applicant for "investing in" the Fund, but the letter does not state or imply that Units have been issued. On the contrary, the statement that "the final details" of the investment will be provided in a holding statement at a later time, coupled with the absence of any information about the Application Price or the number of Units that the application money would acquire, points to the conclusion that there was no issue of Units at that time. 83 The provisions of the PDS for each Fund, under the heading "Payment", reinforce the view that Units were not issued at the point when the application was processed and a confirmation letter was sent. This is particularly clear in the Aust-Rim Fund PDS, which (as noted above) refers to Units being issued within one month of receipt of application monies. 84 My conclusion is that new Units were not issued to the June applicants when Registries processed their applications and sent confirmation letters to them. Basis did not contend otherwise. There is a question as to whether, at the point when Registries processed applications and issued a confirmation letter, the investor acquired a financial product of some kind, other than new Units. Basis contended that this was so. I shall return to that question later. 85 Basis submitted that Units were issued on 2 July. It relied on the requirement of clause 5.5 that Units "may only be issued on" a Dealing Day, the relevant Dealing Day for the June Applicants being 2 July. It submitted that new Units were issued to the June Applicants on 2 July at an Application Price based on the Net Asset Value of the relevant Fund as at 30 June 2007. According to Basis, it did not matter that the Net Asset Value, and accordingly the Application Price and the number of Units to be issued to each June Applicant, could not be calculated on 2 July, and that these calculations were not made until late September. That, said Basis, was the inevitable consequence of clauses 4.1, 4.2 and 5.5, which had the effect of requiring that Units be issued on the first Business day following the Valuation Time, which on many occasions would be the day immediately following the Valuation Time, making it inevitable that calculations could not be made before new Units were issued. Basis pointed to the last sentence of clause 5.5, which, it submitted, shows that Units may be issued to an applicant on a Dealing Day even though the number of Units may not be calculated until a later time. 86 In my view there is a fatal flaw in Basis' submission, namely that nothing happened on 2 July that could be regarded as the issuing of new Units. The evidence indicates that no additional step was taken on 2 July. A notice to produce issued on behalf of the June Applicants required production of documents recording the issue on 2 July of Units in each of the Funds to any of the June Applicants, and documents evidencing the issue by Basis of a financial product to the June Applicants on that day. On 3 April 2008, the solicitors for Basis responded to the notice to produce by saying that, other than the documents already evidence in the proceedings, Basis had nothing to produce, and would rely on the evidence of Ms Das. 87 By 2 July, most of the applications of the June Applicants had already been accepted by Basis and processed by Registries, and confirmation letters had been sent. In any event, for the reasons I have given, the processing of applications and the sending of confirmation letters did not amount to the issue of new Units. It may be that some applications made late in June were processed on 2 July. But plainly enough, the fact that the processing of applications and the sending of confirmation letters may have occurred on the Dealing Day would not transform those events into acts of issuing new Units if they were not otherwise of that character. On 2 July there was nothing attributable to Basis, or its agent Registries, that could be pointed to as the issuing, granting or otherwise making available of Units, for the purposes of the definition of "issuing" in s 761E(2). The Constitutions do not expressly require that new Units be issued on the next Dealing Day after the month in which an application is received and accepted, but even if they did, the existence of a requirement would not of itself imply that the requirement was satisfied. 88 Furthermore, even if something had occurred on 2 July that might be pointed to as constituting the issuing, granting or making available of some financial product, in my view it could not be said that on that day Units were issued, in the absence of calculations revealing the number of Units to be credited to the Applicant's account. This is because clause 4.1 contemplates that Units are issued "at an Application Price", and according to the definitions in clause 26.1, an Applicant becomes a Member (and a Unit holder under the PDS) upon being registered as the holder of "a Unit" in the register of Members kept by the Manager, a process that cannot occur until the Application Price and the number of Units are ascertained. The last sentence of clause 5.5 of the Constitution provides that in the case of reinvestment of a distribution, Units are taken to be issued even though the number of Units cannot be calculated, but significantly there is no comparable provision in the case of a new application. Where Units are issued upon reinvestment of a distribution, there is an existing Member satisfying the definition of that word, but a new Applicant is not able to satisfy the definition of "Member" until registration of a number of Units in that person's holder account in the unit register. 89 These provisions of the Constitutions are reinforced by the provisions under the heading "Payment" in the PDS for each Fund, and particularly (as mentioned earlier) the statement in the Aust-Rim Fund PDS that Units will be issued within one month of receipt of application monies. 90 Given that the Application Price cannot be calculated until some time after the Dealing Day, the statement in clause 5.5 that "Units may only be issued on … any Dealing Day" must be understood to mean that when Units are eventually issued, after the Application Price becomes known, the issue of Units is taken to be an issue "on" the applicable Dealing Day. Consistently with this construction, the holding statements, when completed and distributed on 28 September 2007, gave the date of issue as 2 July 2007. As from 28 September 2007, the new units were to be taken under clause 5.5 to have been issued on 2 July. 91 My conclusion is that new Units were not issued to the June Applicants on 2 July 2007 or at any earlier time. On 16 July 2007 Basis announced that it had decided to suspend the redemption of Units and not to accept applications for the issue of Units during the period of suspension. While relevant for other purposes, that decision does not affect the analysis concerning the June Applicants. By 16 July their applications had been accepted and confirmation letters had been sent to them. For the reasons I have given, Units had not been issued and would not be issued until the Net Asset Value was determined, but the suspension of acceptance of applications was not an impediment to the issue of the Units. 92 Nothing relevantly happened between 16 July 2007 and the determination of the Net Asset Value of the Funds on 26 and 27 September, and consequently the calculation on 28 September of the Application Price and the number of Units to be issued to the Applicants, and then the issue of holding statements dated 28 September 2007 informing the Applicants of the number of new Units issued to them at 2 July 2007 and their holding balances (it is of significance that a note to the holding statements confirmed having "issued" the units). That leads me to the further conclusion that the new Units issued in response to the applications by the June Applicants were issued on 28 September 2007, although they were then taken to have been issued on 2 July 2007. A financial product other than Units 93 Basis submitted that the June Applicants were issued with a financial product either upon the acceptance of their applications or on the 2 July 2007 "Dealing Day". Once that financial product was issued, Basis said, the application money became part of the Assets of the Fund and the June Applicants were not entitled to withdraw their applications. 94 The expression "financial product" is defined in s 764A(1)(b) of the Corporations Act as including "an interest in" a registered managed investment scheme or "a legal or equitable right or interest" in such an interest. An "interest" in a managed investment scheme is defined in s 9 to mean a right to benefits produced by the scheme (whether the right is actual, prospective or contingent and whether it is enforceable or not). 95 There is an issue between Basis and the June Applicants as to how these definitions should be construed. Basis submitted that the definitions, which have their origin in the "prescribed interest" provisions of State Companies Acts, should be given their full literal meaning, like their predecessors (Australian Softwood Forests Pty Ltd v Attorney-General for New South Wales (1981) 148 CLR 121, and 130 per Mason J; ASIC v Enterprise Solutions 2000 Pty Ltd (2000) 18 ACLC 130), and that on a literal construction Basis had issued a financial product by 2 July even if it had not issued Units. 96 In their written submissions (paras 19-25), the June Applicants submitted that a purposive construction should be adopted, under which the statutory words were to be read fully and literally when to do so would give effect to the protective purposes of the legislation, but not when a literal construction would enable a product provider to rely on the technical point that a financial product had been issued to the investor if that financial product was different from what the investor bargained for: "These provisions are not in the Act so as to enable sellers of financial products to use the expanded definitions to claim that 'a' financial product or an 'interest' was issued even though it was different to that which was disclosed and bargained for. They have extended definitions for precisely the opposite reason. … What relevantly gives rise to the obligation to give the PDS is an attempt to offer a particular product and it is that product which the investor applies to purchase and s 1017E appears against that background." 97 In my opinion this submission is misplaced. The most effective way of giving effect to the protective purpose of the legislation is to read the definitional provisions literally in every case, in the manner prescribed by the High Court in Australian Softwood, and then to give full effect to the language of the substantive provisions including s 1017E. The limitation advocated by the June Applicants' submission emerges not from the definitional provisions but from s 1017E, which does not apply to every financial product created by processing an application, but only to the financial product that the investor's money was "paid to acquire". I shall return to this point. 98 Basis submitted that the June Applicants acquired an "interest" as defined in the Funds either: (a) when a binding contract for the application of Units came into existence; or (b) on the 2 July Dealing Day. On the construction of the definitions that I favour, Basis is right about (a) but not (b). 99 The submission in (a) was made on the ground that each June Applicant's completed application form and Basis' confirmation letter together constituted a binding contract for the issue of Units to that Applicant, on the terms of the applicable Constitution and PDS. When that contract was made, the Applicant thereby acquired a prospective or contingent right to be issued with Units in the relevant Fund upon calculation of the Application Price - that is, a right to be issued with the number of Units referable to their investment of a fixed dollar amount, based on the calculation of the Application Price. 100 Basis submitted that the Applicant's contractual right gave rise to an equitable proprietary interest in the Assets of the Fund, since the contract was specifically enforceable and so the principle in Holroyd v Marshall (1862) 10 HLC 191 applied. But in any event, regardless of whether the Applicant acquired an equitable proprietary interest in the Fund, there was (according to Basis) an "interest" created by the contract, since the definition of "interest" extends to a prospective or contingent contractual right to the benefits produced by the scheme. 101 I agree with Basis that the application form and confirmation letter together constituted a binding contract for Basis to issue Units to the Applicant. Under that contract, Applicant acquired a "prospective or contingent" right to benefits produced by the scheme. That right was a right to acquire Units which, when issued, would give the Applicant the actual rights of a Member of the Fund, including the right to participate in distributions of income and the right to vote at meetings of Members. Consequently the contractual right satisfies the definition of "interest in a managed investment scheme" in s 9, regardless of whether the contract was specifically enforceable and regardless of whether the right was a proprietary right with respect to Assets of the Fund. 102 There being, by virtue of the contractual right, an interest in a managed investment scheme, each June Applicant received a "financial product" as defined in s 764A(1)(b)(i) and (ii) when the application was accepted. For the purposes of s 761E(2), Basis, as the contractual counterparty, made that financial product available to the Applicant (through its agent, Registries) by accepting the application. 103 The alternative submission ((b) above) was that each June Applicant acquired an "interest" in the relevant Fund on the Dealing Day, 2 July, and hence a financial product as defined. The submission on this point was as follows: "The alternative basis upon which Basis submits that the June Applicants may have acquired an 'interest' in the funds is that, on the 2 July 2007 Dealing Day, they acquired an undivided beneficial interest in the assets of the funds as a whole, coincident with and equal to the amount of their accepted investment applications. The proportion that such an interest bore to the interests of all other members in the fund depended on the calculation of an Application Price based on the Net Asset Value applicable to that Dealing Day (in the case of the 2 July 2007 Dealing Day, the Net Asset Value at 30 June 2007), to be calculated on a future date. The calculation of the Application Price was essentially a mechanical process to determine the relative interests of all members. It does not detract from the proposition that the June Applicants acquired an interest in the funds on the 2 July 2007 Dealing Day in respect of their investment of a fixed dollar amount." 104 The passage I have quoted does not articulate any analytical basis for the conclusions it asserts. The argument cannot be that the June Applicants acquired an undivided beneficial interest under the contracts constituted by acceptance of the applications, for those contracts arose (in most cases) before 2 July. If the argument is that an "interest" falling short of "Units" was issued on 2 July, the submission encounters the same difficulty as the submission that new Units were issued on that day - namely, nothing happened 2 July that might constitute the issuing, granting or otherwise making available of that interest. 105 My conclusion is that each June Applicant acquired an "interest" and therefore a "financial product" when their application was accepted, although they did not acquire any "interest" on 2 July (unless their application was accepted on that day). However, I have decided that this conclusion is irrelevant to the question whether Basis is entitled to retain the application money, for the reasons to which I shall now turn. Entitlement to retain application money 106 Under clause 2.1 of the Constitutions, the Manager must hold the Assets on trust for Members. If, therefore, property has become part of the Assets, then the Manager is both entitled and obliged to retain that property within the Fund and not dispose of it except in accordance with the terms of the trust. The definition of "Assets" has the effect that the application money is excluded from the Assets of the Fund until Units are issued, regardless of whether a different financial product, a contractual right to be issued new Units, has arisen at an earlier time. 107 If one were to disregard s 1017E and some statements in the Aust-Rim Fund PDS, the position would be, subject to a qualification, that, during the period between acceptance of the application and issue of Units, the application money would belong to the relevant Fund and the Applicant would be an unsecured creditor with a contractual entitlement to the issue of Units in future. The qualification is that the law allows a trust of the money to arise for the person paying it, if a special arrangement can be proved. 108 In Re Associated Securities Ltd [1981] 1 NSWLR 742, where investors subscribed money in the expectation of an issue of preference shares that were never issued, Needham J said (at 746): "In the case of a contract under which one party is to allot shares to the other on payment of the price, the money paid for the projected allotment is paid as consideration for the allotment of the shares. In the ordinary case, in my opinion, the money so paid becomes the property of the company … The entitlement of the applicant to recover money from the company arises from the breach of the company of its obligation to allot the shares: that is, the applicant may sue for damages from breach of the contract, or may treat the breach as discharging the contract and sue in quasi-contract … In the latter case, the applicant would, no doubt, sue for money had and received to his use." After referring to several English cases including Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, his Honour concluded that "in order to find a trust relationship in [cases of promises to allot shares] it is necessary, in my opinion, to find 'some special arrangement creating' it". 109 I was referred to later cases (Salvo v New Tel Ltd [2005] NSWCA 281; Transocean Capital Pty Ltd v AFSIG Pty Ltd [2006] NSWSC 806; Twinsectra Ltd v Yardley [2002] 2 AC 164) but in my view they do not relevantly add to the analysis of the present case. It is doubtful whether there is any "special arrangement" creating a Quistclose trust of the application money paid for Units in the Yield Fund, but the position is arguably different for the Aust-Rim Fund because of the provisions in the PDS, already noted, that say the application money is held in trust pending issue of Units. However, it is unnecessary to pursue the general law analysis because s 1017E, arguably enacted to overcome the effect of Associated Securities, imposes a statutory trust of application money for those who have paid it, in the circumstances I shall describe. 110 According to my findings, Units were issued to the June Applicants on 28 September 2007. If the entitlement of Basis to retain application money depended only on the applicable Constitution and PDS, the position would be that Basis became entitled to retain the money on 28 September, unless a trust of the money arose at an earlier time under the general law principles that I have mentioned. But the June Applicants contend that the constitutional position is overridden by s 1017E. Section 1017E 111 Section 1017E creates statutory rights and obligations which are superimposed upon the constitutional rights of investors. Section 1017E(1) provides, as far as relevant: "(1) This section applies to money paid to: (a) an issuer (the product provider ) of financial products; … if: (c) the money is paid to acquire … one or more of those financial products from the product provider (whether or not the acquisition would be by a person as a retail client); and (d) the product provider does not, for whatever reason, issue … the product or products … immediately after receiving the money; and (e) either: (i) the financial product … was offered in this jurisdiction; or (ii) the application for the financial product … was made in this jurisdiction; or (iii) the money was received in this jurisdiction." 112 As to the jurisdictional question, whatever other jurisdictional nexus there may be, there is at least the nexus that the money paid by the June Applicants was received in this jurisdiction (s 1017E(1)(e)(iii)). Therefore s 1017E applies to money paid by a June Applicant to Basis if Basis was an issuer (and hence a product provider) of financial products, and the money was paid to acquire one or more of those financial products from Basis, and Basis did not issue the product or products immediately after receiving the money. 113 I have found that Basis issued two financial products to each June Applicant in respect of each Fund, namely the new Units in the Fund that were issued on 28 September 2007, and the interest constituted by the contractual right that arose when Basis accepted the investment application. Basis was an "issuer" and therefore a "product provider" in respect of each of those financial products. This is because s 761E(4) says (relevantly) that the issuer, in relation to a financial product issued to a client, is the person responsible to the client for the obligations owed under the terms of the facility (defined in s 762C to include an arrangement) that is the product. Basis was responsible to the Applicant for the contractual obligations arising in favour of the Applicant under the contract created by acceptance of the application; and it was responsible as the Manager under the terms of the Constitution. 114 Although Basis issued two financial products, s 1017E can only apply where (relevantly) money is paid "to acquire" one or more of the financial products issued by the product provider (s 1017E(1)(c)). The question is whether the June Applicants paid their application money "to acquire" Units, or the contractual right to be issued Units, or both. 115 On its face, s 1017E(1)(c) requires the court to ascertain the purpose of the investor in paying money to the product provider. It is appropriate, in my view, to identify the investor's purpose in paying the application money by considering the application form used for the investment and the relevant PDS. In my view it is plain from the reading of the application forms used by the June Applicants, and the PDS for each Fund, that the June Applicants paid their application money for the purpose of acquiring Units in the relevant Fund. Thus the Application Form attached to the PDS for each Fund and used by most of the retail Applicants invites the Applicant to "fill out this Application form if you want to apply for units" in the relevant Fund. The Applicant is required to give "the name(s) you wish to register the units in". The PDS for each Fund says very little about the process of acceptance of applications but refers to "applications for units". In my view an Applicant would be surprised if told that the result of the application was merely to confer a contractual right - a right that the Applicant would need to pursue if Basis resiled - and that the rights of a Member to distributions and voting would not arise unless the contract was performed. 116 My conclusion is that the June Applicants paid their application money to acquire Units in the relevant Funds, not to acquire a financial product constituted by a contractual right. Consequently s 1017E must be applied on the basis that the financial product under consideration is the Units. The fact that another financial product, the contractual right, arose when the applications were accepted is irrelevant. 117 The remaining ingredient of s 1017E(1), namely that the product provider has not, for whatever reason, issued the product (that is, the Units) immediately after receiving the money (s 1017E(1)(d)), is supplied on the facts, for Basis received the application money of the June Applicants in June and did not issue Units to them until 28 September. 118 Consequently s 1017E applies. In particular (in the circumstances of the present case) ss 1017E(2A), 1017E(3) and 1017E(4) apply. Failure to comply with s 1017E(3) or s 1017E(4) is an offence under s 1311(1). 119 Under s 1017E(2A), subject to s 1017E(2C) (which is not relevant to the present circumstances), the application money was taken to be held in trust by Basis for the benefit of the June Applicants who paid it, from the time that the payment was received. Clearly, the statutory trust is not perpetual. It comes to an end in the circumstances identified in s 1017E(4), namely (setting aside special cases under the regulations) when within the prescribed time limit the product provider either returns the money or issues the product. 120 Under s 1017E(3) (so far as relevant): "The money must only be taken out of the account if: (a) it is taken out for the purpose of return to the person by whom it was paid; or (b) the product is issued … to, or in accordance with instructions of, that person …." 121 Under s 1017E(4) (so far as relevant): "The product provider must: (a) return the money; or (b) issue … the product to, or in accordance with the instructions of, the person who paid the money … either: (d) before the end of one month starting on the day on which the money was received; or (e) if it is not reasonably practicable to do so before the end of that month - by the end of such longer period as is reasonable in the circumstances." 122 Subsection (4) imposes a duty on the product provider to return the money or issue the product within a time limit. The time limit is either the period of one month stated in subparagraph (d) or the longer period stated in subparagraph (e). The longer period applies if it is not reasonably practicable "to do so" before the end of one month starting when the money was received. The word "practicable" is not defined in the Act and should be given its ordinary meaning. According to the Macquarie Dictionary (2nd revised edition, 1987), "practicable" means "capable of being put into practice, done, or effected, especially with the available means or with reasonable prudence: feasible". 123 What do the words "to do so" refer to? In my opinion there are two possible constructions. First, it might be said that the words refer to all of the alternatives previously set out in subsection (4), namely (disregarding para (c), which is not relevant in this case) returning the money and issuing the product. On this construction, it is not reasonably practicable "to do so" within the month unless it is not reasonably practicable to issue the product and also not reasonably practicable to return the money. The conditions set by para (e) would be met, for example, if the person who paid the money could not be identified or located within the month, for then the product provider could neither issue the product nor refund the money to that person. This example was given in the Revised Explanatory Memorandum to the Financial Services Reform Bill, para 14.149. On this construction, if it is not reasonably practicable to issue the financial product because of a collapse in global markets, and yet there is no obstacle to returning the money to the persons who have paid it, the condition for the application of para (e) is not met and so subsection (4) requires the product provider to pursue the only alternative available within the one-month period, namely to return the money within that period. 124 The second construction is that the words "to do so" refer to the decision of the product provider, choosing between return of the money and issuing the product. In other words, to the use the language of the submission by Basis, the alternatives in s 1017E(4) of returning the money or issuing the product are permissive, in the sense that the product provider may do either of those things at its discretion. It is not reasonably practicable for the product provider to make its discretionary decision before the end of the month if, for reasons beyond its control, it is not possible to issue the financial product, even if it is possible to return the money, for in those circumstances the product provider is not able to make the choice that the section contemplates. It follows, on this view, that if it is not reasonably practicable to issue the financial product within one month, the product provider may retain the application money for such longer period as is reasonable, even if it would have been reasonably practicable to return the money. 125 The question of construction is difficult. I have not derived any direct assistance from cases dealing with the proper construction of other legislation creating criminal liability, such as Krakouer v The Queen (1998) 194 CLR 202 at 223. This is not a case where the Court is asked to extend the scope of a legislative provision on the ground that the Legislature has failed to deal with some matter through inadvertence. The task of the Court in the instant case is to resolve ambiguity by recourse to established techniques of statutory construction. 126 I have decided that the first construction is the correct one, for two reasons. The first construction is the more plausible as a matter of literal meaning of the words of the section. Subsection (4) prescribes what has to be done, and it does so by stating alternatives. What has to be done is, then, a package of alternatives, the doing of any one of which satisfies the subsection. When para (e) contemplates that it may not be reasonably practicable "to do so", it is therefore contemplating a case where it is impracticable to implement the package by doing any one of the alternatives. The second construction postulates that subsection (4) empowers the product provider to choose between the alternatives set out in the subsection. But that involves notionally inserting into subsection (4) words that are not there: some such words as "choose between the following alternatives" after the words "the product provider must". That would amount to re-drafting the provision. 127 In terms of legislative purpose, I have been taken to para 14.149 of the Revised Explanatory Memorandum to the Financial Services Reform Bill 2001, and para 3.125 of the Explanatory Memorandum to the Financial Services Reform Amendment Bill 2003, relating to the repeal of s 1017E(2B) (which had allowed the product provider and the investor to agree that the money be not held in trust). Those provisions are unhelpful, except in that they confirm a broad legislative intention to protect investors in respect of their application money. 128 However, the wording of s 1017E itself suggests the underlying legislative purpose. If a person pays a product provider money to acquire a financial product and the product is not immediately issued, the application money is to be protected for the benefit of the person who has paid it, unless and until the product is issued. Protection of the application money involves three elements: (i) the money is taken to be held in trust by the product provider for the benefit of the person who paid it; (ii) the money is to be paid into an account and not withdrawn until the product is issued, except to return it to the person who has paid it; (iii) there is a time limit within which the product provider must either return the money or issue the product. The third element seems intended to require that the money be returned if there is to be a substantial delay in the issue of the product. If the time limit for return of the money or issue of the product were to be too elastic, and in particular, if the product provider were allowed some measure of control over extending the time limit, the measure of investor protection provided by the third element would be diminished. The Court should adopt a construction of the time limit that will promote that measure of investor protection. 129 Consequently, to borrow from the words of the submissions on behalf of the June Applicants, subsection (4) should be construed so that it does not give the product provider the ability to choose that which is not practicable of achievement within one month (ie, the issue of the financial product) over that which is (ie the return of the investor's money). The alternative construction would permit the product provider to retain the money on the basis of its own determination of the practicability of the issuing, by the product provider itself, of the financial product. 130 Basis submitted that if the first construction were adopted, s 1017E(4)(e) would have little work to do, because in almost every case there would be no impediment to the return of the application money from the separate trust account in which it is required to be held. There will, however, be some cases where it is impracticable to issue the product and also impracticable to return the money, and so para (e) will be attracted. The example I have given, taken from the explanatory memorandum, is where the applicant cannot be identified or located within the one-month period. 131 There is a further complication to note, in the case of the Aust-Rim Fund. As I have mentioned, the PDS for that Fund said "units will be issued within one month of receipt of application monies in respect of an application". The June Applicants made applications to that Fund on the basis of the PDS, and consequently that statement became either a representation inducing the making of applications or a term of the contracts that arose when the applications were accepted. The statement serves to confirm, in the case of the Aust-Rim Fund, that Basis was not entitled to defer the issue of the Units while retaining the application money. The legal consequences of the failure of Basis to act in accordance with the statement have not been explored in argument. 132 My conclusion, therefore, is that in the events that happened, Basis had a statutory duty under s 1017E(4) to return the application money to each June Applicant within one month of the day on which the money was received - that is, on various days in July 2007. Basis owed that statutory duty as trustee of the trust constituted by s 1017E(2A). Sections 1017E(2A) and 1017E(4) had the effect that, once the one-month period expired, the trust was simply a trust to return the application money to those who paid it, and it was a breach of trust for Basis to apply the money to payment for the Units issued on 28 September 2007. The June Applicants are therefore entitled, under the principles stated by the High Court in Brady v Stapleton (1952) 88 CLR 322, to trace into the application money now held in Basis' operating accounts. I am not asked to express a view on the status of the Units issued on 28 September 2007. 133 Having regard to my construction of s 1017E(4), it is unnecessary for me to decide whether, in the period from 2 July to 28 September 2007, it was not reasonably practicable to issue Units to the June Applicants. Appropriate Order as to June Applicants 134 The declaratory order sought in the amended originating process is a declaration for each Fund, subject to the valid exercise by any June Applicant of statutory cooling off rights, that the plaintiff would be acting in compliance with its duties under s 601FC(1)(m) in retaining the application proceeds as Assets of the Fund. That relief will be denied. 135 The appropriate course, in my view, is not merely to decline to make that declaration, but to make a declaration reflecting the conclusion I have reached. I would not make a declaration to the effect that the plaintiff would be acting in compliance with its statutory duties under s 601F(1)(k) and (m) in returning the application money to the June Applicants, for that implies determination of some questions of priority of classes of claimants inter se upon which I have not had the benefit of argument. 136 I am inclined to think that the best course is to make a declaration, in respect of each Fund, along the following lines: "The Court declares, without affecting the valid exercise by any June Applicant of any statutory cooling off rights, that: (i) the plaintiff holds the application money of each June Applicant in trust under s 1017E(2A), and (ii) in the events that have happened, the plaintiff is obliged by s 1017E(4) to return the money to each Applicant." That would leave open the question whether the plaintiff has sufficient funds available for performance of the obligation, having regard to competing claims upon those funds. 137 In view of my findings that the June Applicants paid their money to acquire new Units in the relevant Fund and that new Units were not issued until 28 September 2007, there may be a measure of uncertainty as to whether, and if so how, there were statutory cooling off rights. According to s 1019A(1)(a), Part 7.9 Division 5 applies where a financial product of a certain kind is "provided" to a retail client. The statutory language seems to raise an issue as to whether that occurred before 28 September. The submissions of the Continuing Investors drew attention to reg 7.9.64(1)(e) of the Corporations Regulations, which excludes from the classes of financial products to which the statutory cooling-off provisions of Part 7.9 Division 5 apply "a managed investment product that is not liquid in accordance with section 601KA of the Act at the time the managed investment product is issued". If that time was 2 July 2007, my view (explained below) is that the Funds were liquid at that time. If it was 28 September 2007, there is evidence that the Yield Fund was not liquid at that time, and that the Aust-Rim Fund may not have been liquid. 138 In his affidavit made on 4 April 2008 Mr Dobson referred to payments made in the period 28 August to 18 October 2007 on behalf of each Fund to June Applicants who Basis considered to have validly exercised the statutory cooling off rights. It is not clear to me, from this evidence, when Basis considered that the cooling off rights arose. I think the best approach to the granting of declaratory relief is to recognise the possibility of a valid exercise of cooling off rights by using the words that I have proposed, without purporting to determine what did or did not constitute a valid exercise of those rights on the rather murky facts that are before me. B. THE JUNE REDEEMERS Redemption requests for 2 July 2007 139 The "June Redeemers" are Members who complied with the notice requirements for the Redemption Date of 2 July 2007. The calculation of the Redemption Price for their redemptions is based on the Net Asset Value of the Fund as at the end of the calendar quarter immediately preceding the Redemption Date - that is, for the June Redeemers, 30 June 2007. 140 According to Mr Dobson, the total value of the redemption requests received from unitholders in the Yield Fund for redemption on the 2 July Redemption Date, determined by reference to the Yield Fund's Net Asset Value at 30 June 2007, is AUD5.762 million. The equivalent figure for the Aust-Rim Fund is AUD7.217 million. I take it that the Net Asset Value figures used for the purpose of these calculations are the Net Asset Values determined on 26 and 27 September 2007. The figure for the Yield Fund does not include Combined Fund. The impact of including Combined Fund in the June Redeemers from the Yield Fund is addressed later. 141 Basis has not paid the June Redeemers any redemption proceeds. Mr Dobson said that if the June Applicants for each Fund are not entitled to withdraw their June applications, then each Fund will have sufficient assets for Basis to pay the June Redeemers the redemption proceeds, whether calculated by reference to the net asset value of units at 30 June 2007 or following the lifting of the suspension on redemptions. If, however, the June Applicants of either Fund are entitled to the refund of their application money, then according to Mr Dobson, that Fund will not have sufficient assets for Basis to pay redemption proceeds to the June Redeemers for that Fund immediately. In that event, he said, Basis will have to extend the period for payment of those proceeds until such time as it can recover sufficient assets from the relevant intermediate fund. The redemption of Units 142 As with the issue of units, the redemption of units in a registered scheme is an event that does not occur automatically, absent some special provision in the constitution of the scheme (and there is none here). Redemption occurs when a unitholder's redemption request is accepted by the responsible entity, or a person with the authority of the responsible entity, and the unitholder's holding in the unit register is adjusted to cancel the redeemed units. The redemption process is illustrated by the facts of such cases as MSP Nominees Pty Ltd v Commissioner of Stamps (South Australia) (1999) 198 CLR 494 and Aust-Wide Management Ltd (rec'r apptd) v Chief Commissioner of Stamp Duties (1996) 33 ATR 384. Once redemption has taken place, the position of the former unitholder is "transmuted" from unitholder to creditor (MSP Nominees at 509 [34]), if the redemption price is unpaid. 143 It appears from Mr Dobson's evidence that the Units that were subject to the redemption requests of the June Redeemers have not yet been redeemed. The June Redeemers (and also, more succinctly, Basis and Combined Fund) made a contrary submission, asserting that redemption in fact occurred on 2 July 2007, but they did not point to any event constituting redemption. The facts of the present case are very different from the MSP Nominees case and the Aust-Wide Management case, where there clearly were events constituting the redemption of units. Here there was nothing comparable: no determination by a trustee to accept the redemption request, and no alteration of the unit register to remove the redeemed units. On the contrary, Mr Dobson's evidence implies that consideration of the holdings of the June Redeemers was suspended pending legal advice and, ultimately, the present proceedings. The statement, in the disclosure notices of 14 and 15 August 2007, that Basis had not made a decision in relation to the treatment of 30 June 2007 redemptions, "and in particular whether to suspend those redemptions or only to suspend payment of those redemptions", points to the same conclusion. Statutory and constitutional provisions about redemption 144 Each Australian Fund is a registered scheme. There are provisions in Part 5C of the Corporations Act governing withdrawal from a registered scheme. There are also provisions in the Constitution of each Fund concerning withdrawal from the scheme, while it is a registered scheme, by redemption of Units. 145 Section 601KA(1), which is in Part 5C.6, says that the constitution of a registered scheme may make provision for members to withdraw from the scheme, wholly or partly, at any time while the scheme is liquid. I shall return later to the statutory definition of when a scheme is liquid. Section 601KA(1) does not impose any additional requirements as to the contents of the constitutional withdrawal provisions that operate while a scheme is liquid, but as will be seen, there are some further requirements in s 604GA(4). 146 As to withdrawal from a scheme while it is not liquid, s 601KA(2) authorises the constitution of a registered scheme to make provision for members to withdraw from the scheme only in accordance with Part 5C.6. Sections 601KB and 601KC permit the responsible entity of a registered scheme that is not liquid to make an offer to members to withdraw from the scheme in certain circumstances and for a specified period. 147 Section 601GA(4) says that if members are to have a right to withdraw from a registered scheme, the scheme's constitution must: (a) specify the right; and (b) if the right may be exercised while the scheme is liquid - set out adequate procedures for making and dealing with withdrawal requests; and (c) if the right may be exercised while the scheme is not liquid - provide for the right to be exercised in accordance with Part 5C.6 and set out any other adequate procedures (consistent with that Part) that are to apply to making and dealing with withdrawal requests. Section 601GA(4) also says that the right to withdraw, and any provisions in the constitution setting out procedures for making and dealing with withdrawal requests, must be fair to all members. It is of some significance that s 601GA(4) distinguishes between the right of withdrawal and the procedures for making and dealing with withdrawal requests. 148 Section 7 of the Constitution of each Fund, headed "Redemption procedures", makes provisions for redemptions of Units, in purported compliance with these statutory requirements. I shall confine my attention to the provisions that apply when the scheme is a registered scheme. It is plain from the footnotes in the Constitution of each Fund that the drafter who prepared these provisions had the objective of complying with s 601GA(4). In my view section 7 must be construed in light of the statutory requirements. 149 Clause 7.1 provides that a Member may, by giving at least the notice specified in the offering document pursuant to which the Units were issued, request the redemption of some or all of their Units in a manner approved by the Manager. The most recent PDS for the Yield Fund, dated 2 April 2007, states that if a redemption request is received less than 60 days before any particular Redemption Date, it will be treated as a request for redemption on the next following Redemption Date. There is a comparable provision in the most recent PDS for the Aust-Rim Fund, dated 2 May 2007, except that the period is 45 rather than 60 days. The June Redeemers have complied with these notice requirements. 150 Where the Trust is a registered scheme, Clause 7.1 says that the Manager must give effect to a duly notified redemption request if the Trust is Liquid. By clause 7.2, Units may not be redeemed other than on a Redemption Date. The Redemption Date is defined as the Dealing Day immediately following March, June, September and December in each year. 151 In my view clauses 7.1 and 7.2 are intended to "specify the right" of withdrawal from the scheme (s 601GA(4)(a)), rather than the procedures for making and dealing with withdrawal requests (s 601GA(4)(b) and (c)). Clauses 7.1 and 7.2, read with clause 6, have the effect that the Manager's obligation to "give effect to" the redemption request arises on the next Redemption Date after the notice period for that redemption request expires, but only if at that time the Trust is Liquid. The Constitution does not explain what is meant by giving effect to a redemption request, but it is appropriate to infer, in accordance with the case law to which I have referred, that the Manager gives effect to a redemption request by redeeming the Units to which the request relates. The requirement that the Manager must give effect to a duly notified redemption request on the next Redemption Date, provided that the Fund is then Liquid, creates a corollary right in the Member who has given due notice, that right being to have the specified Units redeemed on the next Redemption Date. 152 The remainder of section 7 of the Constitution is subdivided into: · clauses 7.4 to 7.10, which according to clause 7.3 apply while the Trust (being a registered scheme) is Liquid; · clauses 7.11 to 7.14, which according to clause 7.11 apply while the Trust (being a registered scheme) is not Liquid; and · clauses 7.16 to 7.18, which according to clause 7.15 apply whether or not the Trust is Liquid (these clauses are not presently relevant). Footnotes to clauses 7.3 and 7.11 assert that the provisions in clauses 7.4 to 7.10 and in clauses 7.11 to 7.14 are required to be included by, respectively, ss 601GA(4)(b) and (c). This is significant, because it indicates that these provisions are intended to be (to use the statutory language) "procedures for making and dealing with withdrawal requests", rather than provisions specifying the withdrawal right. 153 Consistently with ss 601KB and 601KC, clauses 7.12 and 7.13 provide that while the Trust is not Liquid, the Manager must make withdrawal offers at certain specified intervals, and a Member may withdraw from the Trust in accordance with the terms of a current withdrawal offer. Significantly for present purposes, while the Trust is not Liquid a Member has no right to withdraw from the Trust if there is no current withdrawal offer. That is a consequence of the statutory provisions as well as the Constitution, and is consistent with clauses 7.1 and 7.2, which "specify the right" of withdrawal only if the Trust is Liquid. 154 Clauses 7.4 and 7.5, when read with clause 7.3, give rise to a difficult question of construction. Those provisions are as follows: "7.3 If the Trust is a Registered Scheme, clauses 7.4 to 7.10 apply only while the Trust is Liquid. 7.4 The Manager must satisfy a redemption request in respect of a Unit by payment from the Assets of the Redemption Price calculated in accordance with clause 6 [which sets out a formula that depends partly upon the Net Asset Value determined at the Valuation Time immediately preceding the Redemption Date]. The payment must, subject to clause 7.5, be made on or within 30 days of the Redemption Date. 7.5 Without limiting clauses 8.4 and 8.5 [which permit the Manager to suspend the redemption of units and the payment of redemption proceeds, inter alia, and prevent Units from being redeemed during a period of suspension and allow the Member to withdraw a redemption request], if the Manager has taken all reasonable steps to realise sufficient Assets to satisfy a redemption request and is unable to do so due to one or more circumstances outside its control such as restricted or suspended trading in the market for an Asset or if due to circumstances beyond the reasonable control of the Manager, the Manager is unable to calculate or pay the Redemption Price, the period allowed for satisfaction of the request may be extended by the number of days during which such circumstances apply." 155 On one view, these provisions operate to qualify the Manager's obligation under clauses 7.1 and 7.2 to "give effect to" a duly notified redemption request. On this view the Manager's obligation is deferred for up to the 30th day after the Redemption Date, or longer if the circumstances specified in clause 7.5 apply. But there is an alternative construction, which I prefer, namely that clauses 7.4 and 7.5 are only about the payment procedure when the Member's right of redemption has been exercised. 156 I prefer the latter construction for several reasons. First, it is consistent with the statutory distinction, reflected in section 7 of the Constitution, between provisions specifying a member's right of withdrawal from a scheme, and the procedures for making and dealing with withdrawal requests. As I have explained, clauses 7.1 and 7.2 specify the Member's right of withdrawal, correlative to the Manager's obligation to give effect to the redemption request. Clauses 7.4 and 7.5 address an aspect of the procedure for dealing with the withdrawal request, namely the procedure for calculating and making payment of the Redemption Price. 157 Secondly, the distinction between provisions specifying the Member's right and provisions dealing with procedure is supported by the change of language between clauses 7.1 and 7.2, and clauses 7.4 and 7.5. Whereas clause 7.1 talks about the Manager giving effect to a redemption request, and clause 7.2 talks about Units being redeemed on a Redemption Date, clause 7.4 speaks of the Manager satisfying a redemption request by payment within the period specified by clauses 7.4 and 7.5. 158 True it is that clause 7.6, also part of the procedural provisions, qualifies the Member's right by saying that the Manager need not "give effect to" a redemption request in certain circumstances, but those circumstances are of a procedural kind, namely where the redemption request does not relate to the balance of the Member's holding and is in respect of Units having an aggregate Redemption Price of less than the minimum application amount. Clause 7.10, also part of the procedural provisions, gives the Manager a discretion to redeem Units that are the subject of a redemption request, where it is not obliged to "give effect to" the redemption request, but only (in the case of a registered scheme) in circumstances where there is a procedural problem, namely that the Member has not given the requisite period of notice. 159 Some of the submissions I have received suggest that redemptions give rise to issues of construction similar to the issues I have addressed in the case of new applications. In particular, there is said to be a tension between the requirement that Units are to be redeemed "on" a Redemption Date and the fact that the Redemption Price could not be calculated for some months afterwards. But in my view the provisions governing redemptions are more straightforward than the provisions governing new applications. The effect of clauses 7.1 and 7.2, read together, is that the Manager is required to give effect to a redemption request by redeeming the Units on the Redemption Date. There is nothing in the Constitutions to suggest that the act of redeeming Units cannot occur until the Redemption Price is calculated and paid. On the contrary, while clause 7.4 requires the Manager to "satisfy" the redemption request by payment of the Redemption Price, it also provides that the payment is to be made on or within 30 days of (ie, after) the Redemption Date, and therefore after the date upon which (under clause 7.2) the Units are to be redeemed. In this way the Constitutions sever the link between redemption of the Units and payment of the Redemption Price. The severance between redemption and payment is reinforced by clause 7.5, under which the period of time between redemption and payment may be extended. 160 The submissions of the June Redeemers placed some reliance on the definition of "Assets" in the Constitutions of the Funds. According to that definition, "proceeds of redemption which have not yet been paid" are excluded from the Assets of the Trust. They submitted that this shows that money appropriated to pay the Redemption Price in respect of redeemed Units ceases to be part of the Trust, suggesting in turn that the person to whom the money is owed has ceased to have any interest in the Fund. These submissions raise a difficult issue of construction which I need not decide. It may be that the proceeds of redemption are to be excluded from Assets only when redemption has taken place (for only then are the rights of the unitholder "transmuted by the redemption process into the entitlement to the price arrived at …", to use the words of the High Court in the MSP Nominees case, at 509 [34]), not merely when there has been some appropriation of funds for the purpose of payment. I need not go further because, in the present case, no redemption has occurred. 161 An important consequence of my preferred construction is that the Member's right to redeem Units depends upon whether the Trust is Liquid on the Redemption Date, and not at any later time. If the Trust is Liquid on the Redemption Date, the Manager is obliged on that date to redeem the Member's Units in accordance with the redemption request, by taking the steps I have identified by reference to the case law, namely accepting the redemption request and adjusting the Member's holding in the unit register to cancel the redeemed Units. 162 If, after redemption but before payment of the Redemption Price, the Trust were to cease to be Liquid, then clauses 7.4 and 7.5 would cease to apply, because under clause 7.3 they apply only while the Trust is Liquid. But this does not mean that the former Member's right, by that time the right of a creditor to be paid the Redemption Price (when calculated), would be extinguished under clause 7.12. The consequence of clauses 7.4 and 7.5 ceasing to apply is that the Manager's authority under those provisions to defer payment of the Redemption Price is withdrawn, and the former Member's rights as creditor may be immediately asserted. As a creditor, the former Member is entitled to be paid the Redemption Price calculated in accordance with clause 6.1, as at the Valuation Time immediately preceding the Redemption Date. Was each Trust Liquid at the July Redemption Date? 163 "Liquid" is defined in each Constitution as having the same meaning as in the Corporations Act (with assistance, in the case of the Aust-Rim Fund Constitution, from s 1407). According to s 601KA(4), a registered scheme is liquid if liquid assets account for at least 80% of the value of scheme property. In the case of each of the Australian Funds, at least 80% of the value of the Fund's property is accounted for by redeemable shares in the relevant Intermediate Fund. 164 Section 601KA(5) specifies certain assets that are liquid assets unless it is proved that the responsible entity cannot reasonably expect to realise them within the period specified in the constitution for satisfying withdrawal requests while the scheme is liquid. The test is concerned with whether the assets may be realised within the specified period, not with whether they may be realised for a particular dollar value. The specified assets include marketable securities as defined in s 9. That definition includes shares of any body corporate. The redeemable shares (Participating Shares) held by each Australian Fund in its Intermediate Fund are shares in a body corporate and therefore marketable securities, regardless of whether there was any ready market for trading the shares. Under the terms of the articles of association of the Intermediate Funds, Basis is entitled to redeem the Participating Shares held by it on redemption dates which accord with those of the Australian Funds, or otherwise at the discretion of the directors of the Intermediate Funds (a discretion in fact delegated to Basis as the investment adviser to those funds). But redemption was not the only way to realise the redeemable shares. The shares could also be sold to a third party, as Mr Dobson recognised in cross-examination (T 48, 68, 71). 165 Mr Dobson gave evidence that, both as at the time of the closure of redemption requests for the June quarter 2007 (60 days before the Redemption Date in the case of the Yield Fund and 45 days in the case of the Aust-Rim Fund), and as at the Redemption Date (2 July 2007), he was not aware of any matter that would prevent Basis from being able, within the time specified in the Funds' Constitutions, to redeem its shares in the Intermediate Funds. In oral evidence he said that as at 2 July 2007 he was aware that there had been a "credit market event" following the collapse of two Bear Stearns funds, and he said that Basis was expecting a negative result for June, in the order of 2-3% (T 46). Accordingly, he said, he believed as at 2 July 2007 that Basis had a reasonable expectation that at least 80% of the assets held by it in the Australian Funds were in a form able to be realised for market value within the period specified in the Funds' Constitutions for satisfying withdrawal requests. 166 Mr Dobson was cross-examined thoroughly but nothing emerged in the cross-examination that has led me not to accept his evidence. He made it clear that in his view, at the time, provided there was a normally functioning market, the Master Funds could realise the assets they held within 30 days if they needed to (T 47, 53). It was only on 10 July 2007, when rating agencies in the US downgraded a material amount of asset-backed bonds, and placed on negative watch a materially larger amount of bonds, that events moved rapidly to the point that the Yield Master Fund's secured creditors called events of default and exercised security rights over the Fund's assets. He insisted that Basis had no reason to expect that this event would occur (T 66, 68-9). 167 Mr Dobson's evidence on these matters is consistent with the newsletters and disclosure notices to which I have referred. It was not until 13 July, 11 days after the Manager's obligation to "give effect to" the redemption requests of the June Redeemers arose, that Basis acted to suspend the redemption of units and applications, on the ground that there were difficulties for the Yield Master Fund because of uncertainty regarding valuations. I infer that as at 2 July 2007, he believed the position to have been approximately as described in the client newsletter of 29 June 2007, a document that he was aware of at the time it was produced. The evidence does not enable me to conclude that there was no reasonable ground for that belief, but that conclusion needs to be explained by reference to the detailed written submissions I received, by leave, from counsel for the Continuing Investors after the hearing. 168 Counsel for the Continuing Investors referred to various documents suggesting that the two Master Funds, and in particular the Yield Master Fund, had invested in assets that were, to a degree, illiquid. I shall not refer to every item of evidence. It is sufficient to convey the flavour of the evidence by quoting from the most recent Product Disclosure Statement for the Yield Fund: " Liquidity and Volatility of Investments The market value of investments made directly or indirectly by the Company may be adversely affected by the lack of an established liquid secondary market for certain of its investments and by temporary periods of general illiquidity in the corporate debt securities market or the asset backed securities market. Although the secondary market for structured credit instruments has grown dramatically, its liquidity is limited relative to the secondary markets for other types of securities. There is no organised exchange or board of trade on which structured credit instruments are traded. Instead, the secondary market for structured credit instruments is an unregulated inter-dealer or inter-bank resale market. Structured credit instruments usually trade in large denominations [typically US$1 million and higher], trades can be infrequent and information about actual trades may be difficult to obtain. Accordingly, some structured credit instruments may be relatively illiquid and this may affect the realisation of investments. Structured credit equity acquired by the Yield Alpha Fund should be viewed as a buy and hold investment as there is no assurance that there will be any liquid secondary market for structured credit securities in which the Yield Alpha Fund invests. It may be difficult, or impossible, for the Manager to reduce exposure to an underperforming SCV, resulting in increased risk of loss for the Fund's investors. Other securities in which the Yield Alpha Fund invests, may encounter market conditions which increase the risk of loss by making it difficult or impossible to effect transactions or liquidate or offset positions and realise their full value. In addition, global volatility levels in all asset markets are on the rise. The instruments in which the Fund intends to invest may encounter high price volatility, which may impact adversely on the market value and net asset backing of the Shares." 169 This document, and the others referred to in the submission, do not prove the illiquidity of the Yield Fund's holding of redeemable shares in the Yield Alpha Fund. They are in the nature of warnings to investors that some of the investments of the Fund may be illiquid from time to time, and indeed on some occasions the Manager may seek out illiquid assets in which to invest in order to obtain an "illiquidity premium". The information is consistent with an assessment by the Manager on any given occasion, such as 2 July 2007, that the Fund as a whole is Liquid. Moreover, the concept of illiquidity referred to in these documents is not an absolute concept of fixed meaning. As Mr Dobson explained in cross-examination (T 41), liquidity of underlying securities is a relative term. The securities in which the Master Funds invested were likely to be less liquid than readily tradable shares on a stock market, but more liquid than other assets (shopping centres were used as an example). The concept (or concepts) of liquidity used in the documents relied upon in the submission is (are) almost certainly not the statutory concept used in s 601KA. 170 Counsel for the Continuing Investors also provided detailed written submissions reviewing events affecting the Master Funds, and in particular the Yield Master Fund, during June 2007, in order to show that on 2 July the Manager could not reasonably expect to realise the redeemable shares in the Intermediate Funds within the 30 day period allowed by the Constitutions. Some of this evidence is about margin calls made in June 2007. The mere fact that a margin call was made is not evidence of illiquidity. Other evidence is about the general state of turbulence of the credit markets in June 2007. That evidence is consistent with the newsletters and other information to which I have referred, but in my view the general market turbulence was satisfactorily addressed by Mr Dobson's evidence. Particular reliance is placed on Mr Sachdev's analysis in his e-mail of 22 June 2007, showing that the Yield Alpha Fund would be short of cash "in the 15% price markdown scenario". I referred to this evidence earlier in this judgment. Importantly, Mrs Sachdev's analysis was hypothetical. It seems to me that a judgment of liquidity could be made for the purposes of s 601KA(5) consistently with that information. 171 Counsel for the Continuing Investors drew my attention to a cap on redemptions in the Yield Alpha Fund, disclosed in a confidential information memorandum for an offering of shares in the Yield Alpha Fund. The cap is set at the lesser of 7.5% of the Net Asset Value of shares in any redemption quarter, or a percentage of the Net Asset Value equivalent to $15 million in the redemption quarter. The submission was that Basis could not reasonably expect to realise its redeemable shares in the Yield Alpha Fund within 30 days of 2 July because the realisation of that entire portfolio would exceed the cap and therefore would not be permitted. 172 In my opinion this submission misreads the text of the confidential information memorandum. The paragraph describing the cap appears in a section headed "Inability to Pay all Redemptions", the whole of which appears to be applicable only "if the Fund cannot promptly liquidate sufficient quantities of underlying investments to fund redemptions on the relevant Redemption Date without a material adverse effect on the prices to be obtained for the underlying investments". Moreover, any decision to reduce the number of shares redeemed on any Redemption Date is said to be at the sole discretion of the Directors of the Fund, having sought advice from the Investment Manager. The discretionary nature of any decision to limit redemptions is confirmed by the articles of association of the Intermediate Funds (clause 44). Basis, as investment adviser, was in a position to influence the discretionary decision, and also in a position to know what the prospects of redemption would be. I therefore reject the submission. 173 In summary, it has not been proved, in terms of s 601KA(5), that on 2 July 2007 Basis as responsible entity could not reasonably expect to realise the redeemable shares held by the Australian Funds in the two Intermediate Funds within the period specified in the Constitution of each Australian Fund for satisfying withdrawal requests while the scheme is liquid (the period of up to 30 days under clause 7.4). Therefore each Australian Fund's holding of redeemable shares was a liquid asset, and since in each Fund the redeemable shares accounted for at least 80% of the value of scheme property, each of the Australian Funds was liquid on 2 July according to the criteria stated in s 601KA(4). 174 The Yield Fund had probably ceased to be Liquid by 18 July 2007, when the Yield Alpha Fund suspended payment of the redemption price in respect of Participating Shares redeemed with effect from 30 June. The Aust-Rim Fund had probably ceased to be liquid by 6 August 2007, when the Pac-Rim Fund likewise suspended payment of the redemption price in respect of 30 June redemptions. Once the Funds ceased to be Liquid, clauses 7.4 and 7.5 of their respective Constitutions ceased to apply, with the result that the Manager ceased to be entitled to postpone payment of the Redemption Price under those clauses. But by that time redemptions had been suspended in each Australian Fund, and those suspensions remain in place. What was the effect of suspension of redemptions on the June Redeemers' rights? Significance of suspension of redemptions 175 The suspension of redemptions is dealt with in clauses 8.4 and 8.5 of the Constitutions, which are as follows: "8.4 The Manager may temporarily suspend the determination of the Net Asset Value and the issue and redemption of Units and the payment of redemption proceeds (or any portion thereof) during any period or part thereof: (a) when any of the principal markets or stock exchanges on which a substantial portion of the Assets of the Trust from time to time are quoted, listed, traded or dealt in is closed other than for ordinary holidays or during which valuations therein are restricted or suspended; (b) when, as a result of political, economic, military or monetary events or any other circumstances outside the control, responsibility and power of the Manager, disposal or valuation of a material portion of the Assets of the Trust is not, in the opinion of the Manager, reasonably practicable without this being seriously detrimental to the interests of the Members or if, in the opinion of the Manager, the Net Asset Value cannot be calculated fairly; (c) in which there is a breakdown in the means of communication normally employed in determining the price of any of the Assets of the Trust or when for any other reason the value of any of the Assets of the Trust cannot reasonably or fairly be ascertained; (d) when the Trust or the Manager is unable to repatriate funds required for the purpose of making payments on redemption or during which any transfer of funds involved in the realisation or acquisition of Assets of [sic] when payments due on redemption cannot in the opinion of the Manager be affected at normal rates of exchange; or (e) when proceeds of any issue or redemptions of Units cannot be transmitted to or from the account of the Trust. 8.5 No Units may be issued (other than those that have already been allotted) nor may Units be redeemed during a period of suspension. In the event of suspension, a Member may withdraw his redemption request provided that such withdrawal is actually received before the termination of the period of suspension. Where the request is not withdrawn the day on which the redemption of the Units will be effected will (if later than the day of which the redemption would otherwise have been effected if there had been no suspension) be the next Redemption Date following the end of the suspension. Any suspension in the determination of the Net Asset Value or of the issue or redemption of Units will be notified to Members immediately and where possible, all reasonable steps will be taken to bring any period of suspension to an end as soon as possible." 176 As mentioned above, the suspension of redemptions of Units in each Fund was under the last part of clause 8.4(b), namely that in the opinion of the Manager, the Net Asset Value could not be calculated fairly. No June Redeemers have purported to withdraw their redemption requests since 13 July. The suspensions remain in force. 177 If the third sentence of clause 8.5 were to apply to June Redeemers, it would require redemptions to be "effected" in the future, on the next Redemption Date following the end of the suspension. That would imply that the Valuation Time has not yet arrived. Consequently the Redemption Price would not be based on the 30 June 2007 Net Asset Value, but on some presumably much lower Net Asset Value yet to be ascertained. 178 However, in my opinion, the third sentence of clause 8.5 does not govern the position of the June Redeemers. I have reached this conclusion on two grounds, one based on facts and the other based on construction. 179 The factual ground arises from a sentence in the disclosure notice made by Basis for each Fund on 14 and 15 August 2007 respectively. The sentence is: "Furthermore [Basis] has not yet made a decision in relation to the treatment of the 30th June 2007 redemptions and, in particular, whether to suspend those redemptions or only to suspend payment of those redemptions". Therefore Basis itself has taken the view that its July decision to suspend redemptions did not apply to the June Redeemers. There is no evidence pointing to the contrary conclusion. The decision to suspend, reported in the disclosure notice for each Fund dated 16 July 2007, simply said that Basis had decided "to suspend the redemption of units until the net asset value can be determined fairly". That is ambiguous. On balance, therefore, the evidence points to the conclusion that the July suspension was not intended to apply to the June Redeemers. Recourse can be had to that evidence to clear up the ambiguity in the disclosure notice. It appears that no suspension decision that might affect the June Redeemers has subsequently been made. Therefore clause 8.5 has no application to the June Redeemers. 180 The second ground relates to the construction of the Constitution of each Fund. In my view, a suspension of the redemption of Units under clause 8.4 does not apply where the Redemption Date that next occurs after the Member has given the specified period of notice has already arrived before the suspension takes effect. Clauses 8.4 and 8.5 apply only where the redemption request has not fallen due at the time of suspension. In my view, the Member's rights to redemption, and to be paid the Redemption Price, accrue on the Redemption Date, and so the Manager is then obliged to redeem the Units and to pay the Redemption Price within 30 days, subject to an extension of the payment period if clause 7.5 applies, but not subject to a suspension of redemptions under clause 8.4. I have reached this conclusion for the following reasons. 181 First, s 601GA(4) requires that the right to withdraw, and the constitutional provisions setting out procedures for making and dealing with withdrawal requests, must be fair to all members. It would not be fair to a Member who has given due notice of a redemption request, to permit the Manager to suspend redemption after the obligation to redeem had arisen and should have been performed. That would be to permit the Manager to avoid the consequences of its own default. Secondly, although clause 7.5 is expressed to apply "without limiting clauses 8.4 and 8.5", if clauses 8.4 and 8.5 were to apply to permit suspension after a right of redemption had accrued, those clauses would also be available to suspend the payment of redemption proceeds in all of the circumstances identified in clause 8.4, circumstances going well beyond those identified in clause 7.5. Such a construction would leave clause 7.5 with little or no work to do. Thirdly, the third sentence of clause 8.5 seems to assume that the Redemption Date that would have been the operative date for redemption in the absence of suspension has not arrived when suspension occurs: the words "the day in [sic] which the redemption would otherwise have been effected if there had been no suspension" imply that it is the suspension that has prevented redemption from occurring when it should have occurred. Conclusions as to the June Redeemers 182 The questions I am asked to decide about the June Redeemers are whether they are creditors of the respective Funds in respect of their redemption requests, and Basis would be acting in compliance with its duties under s 601FC(1)(k) and (m) in calculating redemption proceeds for those redemptions based on the Funds' Net Asset Value as at 30 June 2007. 183 I have concluded that the June Redeemers are creditors of the respective Funds in respect of the Redemption Price for the Units they have asked to be redeemed, and that the Redemption Price should be calculated on the basis of the Net Asset Value as at 30 June 2007. 184 The June Redeemers gave due notice prior to the Redemption Date of 2 July 2007. As the Funds were Liquid on that day, Basis was then obliged to give effect to their redemption requests. It should have redeemed their Units on that day. Its obligation to do so has continued to the present time, notwithstanding the suspension of redemptions, for on the better view the suspension of redemptions does not apply to the circumstances of the June redeemers. Clauses 7.4 and 7.5 applied while the Funds remained Liquid, and while they applied, Basis was not obliged to satisfy the redemption requests by payment. But when the Funds ceased to be Liquid, those clauses ceased to operate to suspend the payment obligation of Basis. 185 Whatever may have been the position from the time when the Funds ceased to be Liquid until 26 and 27 September 2007, the position since that time is that the June Redeemers have been entitled to be paid the Redemption Price for the Units they have asked to be redeemed, calculated according to the Net Asset Value as at 30 June 2007. That is the appropriate Valuation Time with respect to the 2 July 2007 Redemption Day, according to clause 6.2. 186 I shall therefore make the declarations sought in paras 4 and 5 of the amended originating process; that is, I shall declare in respect of each Fund that the June Redeemers are creditors of the Fund in respect of their June redemption requests and the plaintiff would be acting in compliance with its duties under section 601FC(1)(k) and (m) of the Corporations Act in calculating redemption proceeds for those redemptions based on the Fund's Net Asset Value at 30 June 2007. C. COMBINED FUND 187 Clause 7.1 of the Yield Fund Constitution permits a member, by giving at least the requisite period of notice, to request the redemption of units "in any manner approved by the Manager". The Manager is required by that clause to give effect to the redemption request if the Trust is Liquid. Clause 7.1 then says: "A Member may not withdraw a redemption request unless the Manager agrees." 188 The most recent PDS for the Yield Fund, dated 2 April 2007, states that all redemption requests are irrevocable, save as otherwise determined by the Responsible Entity. 189 Combined Fund Pty Ltd is the trustee of a superannuation fund operated primarily for teachers at a number of independent schools, now known as Combined Fund and previously known as Combined Schools Superannuation Fund. The chairman of directors of the company is John Evans. One of the directors of the company is Terence Wills Cooke, who is also chairman of the board's Executive and Investment Committee, which considers and makes recommendations to the board with respect to investments. The company does not have employees. 190 A company called Group Benefits Pty Ltd provides accounting and administrative services to Combined Fund. Peter Braun is a chief financial officer employed by Group Benefits, and acts as the accountant for Combined Fund, dealing with correspondence relating to investment decisions. He was at the relevant time a director of Group Benefits. Also at the relevant time, Combined Fund's investment adviser was Jana Investment Advisers Pty Ltd ("Jana"). 191 Mr Evans gave evidence that it is, and has been for many years, a requirement of the board of Combined Fund, and a requirement of APRA, that all deposits and redemptions be signed by two authorised signatories. A form of authority for Combined Fund's investment in the Yield Fund was signed by Mr Evans and another person on behalf of Combined Fund and by Mr Dobson on behalf of Basis and dated 4 July 2005 ("the Signature Authority Form"). The Signature Authority Form said that all deposits must be signed by two authorised signatories and all redemptions must be signed by two 'A' signatories. The Schedule to the Form contained two lists of names of authorised signatories, in Groups 'A' and 'B', with specimen signatures. Mr Evans and Mr Wills Cooke, inter alios, are in Group 'A'. Mr Braun is in Group 'B' but not Group 'A', and so he has authority to sign deposits, with a co-signatory, but not redemptions. There have been no changes in the Combined Fund authorised signatories for the Yield Fund since that time. There is evidence that on every occasion when Combined Fund made further investments in the Aust-Rim Fund, the requirements of the Signature Authority Form were complied with. 192 Combined Fund is a significant investor in the Yield Fund - evidently at the end of May 2007 the fourth largest investor and the largest institutional investor in that fund. Mr Howell said that from time to time he had discussions with Mr Wills Cooke about the performance of the Funds, and responded to any queries he raised. It appears that by late February 2007, while Mr Wills Cooke continued to support the Yield Fund investment, Jana had developed a negative view of it. 193 On 26 February 2007 Combined Fund requested Basic to transfer $3.1 million from Combined Fund's account in the Yield Fund to its account in the Aust-Rim Fund, and to redeem the remaining balance of Combined Fund's account in the Yield Fund. The request was transmitted by facsimile directed to Mr Dobson and was signed by Mr Wills Cooke and Mr Evans on behalf of Combined Fund. As mentioned above, they are Group 'A' signatories and are therefore authorised to sign redemption requests. The facsimile was expressed in formal terms, and it acknowledged that there was a 60 day notice period for redemptions. That meant that the relevant Redemption Date would be 2 July 2007, being the Redemption Date for the April-June quarter. On 8 May 2007 Registries acknowledged the instruction and said that the redemption had been placed in the June quarter redemptions. 194 In making its February 2007 decision, the board of Combined Fund evidently sided with Jana Investment Advisers and against the views of Mr Wills Cooke. There is some evidence that this upset Mr Wills Cooke. He had a luncheon meeting with Mr Howell (who was aware of Combined Fund's February decision) on 28 May 2007, in which he indicated that he was considering replacement of Jana, and complained that Basis was letting him down in the service area. 195 On 14 June 2007 Mr Howell sent an e-mail to his co-directors, Mr Fowler and Mr Dobson, and others, reporting on a further discussion with Mr Wills Cooke. The e-mail said that Mr Wills Cooke was going to his investment committee in the following week, with a view to having the redemption from the Yield Fund rescinded, and that Mr Wills Cooke was fed up with Jana. The e-mail continued: "I said that we cannot rescind redemption once it has been lodged, but we should be able to accommodate an immediate reinvestment of redeemed proceeds." 196 Mr Wills Cooke was successful. On 28 June 2007 the board of directors of Combined Fund resolved to rescind the decision to terminate Combined Fund's investment in the Yield Fund, and also resolved to make an additional investment of $2.8 million in the Aust-Rim Fund. 197 Both Mr Howell and Mr Wills Cooke gave evidence of a 17 minute telephone conversation they had on the afternoon of 28 June, while Mr Wills Cooke was in his car. (In his first affidavit, Mr Howell said the conversation was at 10 a.m. in the morning, but after reading the affidavit of Mr Wills Cooke he accepted that the telephone conversation must have been in the afternoon.) Mr Howell made a file note of the conversation, which is in evidence. 198 They are ad idem that Mr Wills Cooke told Mr Howell that the board of Combined Fund had voted to cancel their redemption request for June in the Yield Fund, and that the board had also decided to make a further investment in the Aust-Rim Fund. According to Mr Howell, they discussed the state of the credit markets and the failure of the Bear Stearns funds, and he said that Mr Wills Cooke expressed confidence in the investment capability of Basis. Mr Wills Cooke generally agreed that these matters were discussed. 199 According to Mr Howell, the following was then said: Mr Howell : "Okay, that's great. It won't be a problem, but the cancellation request must ultimately be in writing and be approved by the Board. If you put it in writing, it will be okay. If we don't get written confirmation, the redemption will have to proceed and you would have to re-invest." Mr Wills Cooke : "Steve, take this as clear advice that we wish to cancel the redemption and you can expect to be contacted by Peter in the very near future to sort out the paperwork. Just make sure our money stays in [the] Fund, as that is the decision of the Board." 200 In oral evidence, Mr Howell confirmed that his reference to approval by the board was a reference to approval of cancellation of the redemption request by the board of Basis. Also in oral evidence, Mr Howell and Mr Wills Cooke agreed that the reference by Mr Wills Cooke to "Peter" was a reference to Peter Braun of Group Benefits. 201 Mr Wills Cooke denied that Mr Howell said the things that I have quoted, and he denied that he replied that Mr Howell was to "take this as clear advice that we wish to cancel the redemption". Mr Wills Cooke said that when he informed Mr Howell of the Combined Fund board's decision to cancel the redemption request, Mr Howell responded: "Well you just can't cancel. You'll have to redeem and reinvest but I will see what I can do to help you on the buy sell spread." Mr Wills Cooke denied that during the conversation he had instructed Basis to cancel or rescind the redemption. 202 On the other hand, Mr Howell denied that he said the words Mr Wills Cooke attributed to him. However, he agreed he had raised the prospect of proceeding with the redemption and then making a fresh application, in the context of considering what would happen if Basis did not receive written confirmation of the cancellation. 203 Mr Evans gave evidence that the board of directors of Combined Fund did not, on 28 June 2007 or at any other time, resolve to give Mr Wills Cooke authority to make any decisions regarding investments or redemptions, or to implement such decisions. On the other hand, Mr Howell said it did not occur to him that there was any question as to Mr Wills Cooke's authority to communicate the decision of the Combined Fund board to him, and he proceeded on the basis that Mr Wills Cooke, as the chairman of the investment committee and the person who communicated with him on behalf of Combined Fund in respect of its investments, had that authority. 204 Both Mr Howell and Mr Dobson gave evidence that they had a telephone conversation, after Mr Howell had spoken to Mr Wills Cooke and before 2 July, in which they discussed the cancellation of the redemption request, and agreed to accept it when they received written confirmation from Mr Braun. 205 Mr Howell and Mr Braun both gave evidence of a telephone call between them on 3 July 2007. There is disagreement between them as to part of the conversation, which I need not resolve. But Mr Braun did not disagree with Mr Howell's evidence that he told Mr Braun, "you just need to send me something in writing for the record and the directors will come back with their approval", that he asked Mr Braun to send written confirmation directly to Mr Dobson, and that he would ask Mr Dobson to respond in writing with confirmation of the decision by Basis. 206 Mr Braun said he did not recall who asked him to communicate with Basis, or when, and he did not recall whether he spoke to Mr Wills Cooke, but said it was possible he did. He said if he did speak to Mr Wills Cooke, he did not believe Mr Wills Cooke told him about any conversation he had with Mr Howell concerning the board's decision. 207 On 3 July 2007, at 1:56 p.m., Mr Braun sent an e-mail to Mr Dobson, headed "Urgent and Very Important". It was copied to various people including Mr Howell and Mr Wills Cooke. The e-mail referred to the decision of the Combined Fund board to rescind the redemption request from the Yield Fund and to make a further investment in the Aust-Rim Fund, and then said: "Please accept this e-mail as your instruction to cancel the request as referred to above". 208 As Mr Evans pointed out in his evidence, the e-mail does not contain the signatures of two signatories listed in the Signature Authority Form. Mr Evans also said that the board of Combined Fund did not at any time authorise Group Benefits or Mr Braun to depart from the requirements of the Signature Authority Form. Mr Braun confirmed that he had not received any authority from the Combined Fund board to depart from the requirements of the Signature Authority Form, and he said that in sending the e-mail on 3 July, he did not turn his mind to the requirements of the Form. 209 Mr Dobson replied that afternoon, evidently at about 7 p.m., and copied his reply to Ms Das of Registries Ltd. In his e-mail Mr Dobson told Mr Braun that "The Directors of Basis Capital acknowledge the cancellations referred to in your e-mail below", and then he asked Ms Das to advise him and Mr Braun "should there be any further requirements to make these cancellations". 210 At 7:14 p.m. on 3 July, Ms Das sent an e-mail to Mr Dobson, copied to Mr Braun, Mr Wills Cooke and others, attaching the two earlier e-mails and saying "this will be fine". 211 Subsequently, Basis treated the withdrawal of the cancellation request as effective, and did not process any June redemption request from Combined Fund. A Registries spreadsheet of applications and redemptions dated 3 July 2007 lists Combined Fund's redemption request, but a similar spreadsheet dated 4 July 2007 shows that Combined Fund has been removed. Combined Fund's monthly holding statement in respect of the Yield Fund, issued by Basis on 28 September 2007, shows a balance of about 10,574 units with a total value as at 30 June 2007 of about $9.14 million. 212 Mr Howell said that he and Mr Fowler participated in a teleconference with the board of Combined Fund and representatives of Jana on 28 August 2007, to provide them with an update on the performance of the Funds since July 2007. He said that at no time during that teleconference was it suggested that Combined Fund's cancellation of its redemption was invalid, or that Combined Fund had in fact redeemed its investment in the Yield Fund, or that it was no longer a member of the Yield Fund. Nor, he said, was such a thing suggested by Mr Wills Cooke, Mr Braun or anyone else on behalf of Combined Fund prior to Combined Fund's letter of 29 October 2007. 213 The letter of 29 October 2007 was signed by Roy Freeman, Under-Secretary of Combined Fund, and addressed to Mr Dobson. The letter made the following claim: "We issued a request to cancel [the February redemption request] on 3 July 2007 and were advised that Basis Capital could not act on that request and that it was necessary for Combined Fund to apply for Units in the usual way." 214 The letter noted that no application for new units was made, and that accordingly Combined Fund should be treated, in effect, as a June Redeemer. Of course, if the request to cancel was issued only on 3 July, it was arguably too late as the Redemption Date was 2 July. The letter of 29 October does not refer to the telephone conversation of 28 June. 215 A different position was put in a letter dated 26 November 2007 from Mr Evans to Mr Dobson. In that letter Mr Evans asserted that "under the Constitution of the Yield Fund there is no power in the Trustee to rescind the redemption request". That statement appears to overlook the last sentence of clause 7.1, which impliedly allows a Member to withdraw a redemption request if the Manager agrees. Mr Evans claimed that in their conversation on about 28 June 2007, Mr Howell told Mr Wills Cooke that the redemption request would have to be processed and then a fresh application for units made. 216 If Combined Fund is a June Redeemer from the Yield Fund (that is, if the purported withdrawal of the redemption request was ineffective), the total value of redemptions in respect of the 2 July 2007 Redemption Date from the Yield Fund will increase from $5.76 million to $14.9 million. According to Mr Dobson, the Yield Fund will not then have sufficient assets to permit Basis to pay the June Redeemers from that Fund their redemption proceeds in full, and it will need to consider whether to extend the period for payment of those proceeds until it can recover sufficient assets from the Yield Alpha Fund. This will be so whether or not the June Applicants to the Yield Fund are entitled to withdraw their June applications. Did Combined Fund validly withdraw its redemption request? 217 In my opinion this question should be answered in the affirmative. 218 Under the Yield Fund Constitution, clause 7.1, it was open to Basis to agree to Combined Fund's withdrawal request after it was communicated. I agree with the submission made on behalf of Combined Fund that the word "agrees" in clause 7.1 seems to be used in the sense of "assents" or "consents" (citing Re Crusader Ltd [1996] 1 Qd R 117 at 128). But I do not agree that any such agreement must occur prior to the relevant Redemption Date in order to be effective. In my opinion Basis agreed for the purposes of clause 7.1, by the e-mails of 3 July 2007, and that was an effective agreement notwithstanding that it was after the Redemption Date. On 2 July, Basis became obliged to redeem the specified Units and Combined Fund became entitled to that redemption. But Basis did not redeem the Units of the June Redeemers or the units of Combined Fund on 2 July, and it has still not done so. Its obligation to redeem the Combined Fund Units was owed to Combined Fund, and accordingly Combined Fund was in a position to relieve it from performance of that obligation. It did so by seeking and obtaining the consent of Basis to withdrawal of the redemption request. It was not too late for Combined Fund to achieve this outcome on 3 July, since Basis had not acted to redeem the Units. 219 It was submitted on behalf of Combined Fund that its Units were redeemed on 2 July, but the submission did not point to any event constituting redemption on that day, or any provision of the Constitution that would cause redemption to occur automatically on the Redemption Date. Like the submissions of Basis and the June Redeemers on the same point, the focus of attention was to establish that redemption could occur prior to payment of the redemption proceeds. The analysis did not adequately address the issue, what is it that causes redemption to occur in any case? My reasoning on this point, with citation of some relevant authorities, is set out more fully during the discussion of the position of the June Redeemers. 220 Counsel for Combined Fund placed reliance on clause 15 of the Yield Fund Constitution. According to that provision, a notice required under the Constitution to be given to the Manager must be given in writing (which includes a fax) or in such other manner as the Manager determines. The notice must bear the actual, facsimile or electronic signature of the Member or a duly authorised officer or representative of the Member, unless the Manager dispenses with this requirement. In my view the statement in clause 7.1 of the Constitution that "a Member may not withdraw a redemption request unless the Manager agrees" does not amount to a requirement that a notice be given to the Manager, and therefore clause 15 has no application. The last sentence of clause 7.1 is to be contrasted with other provisions of the Constitution that confer a right on a Member to take some step that necessarily involves notifying the Manager, as opposed to seeking the agreement of the Manager (clauses 7.2, 8.5, 16.2 and 25). Compliance with the last sentence of clause 7.1 could, on the face of the provision, be achieved by the Member giving formal notice in writing of its withdrawal of the redemption request, followed by agreement from the Manager, but it could equally be satisfied by the Member and the Manager having oral negotiations leading to an agreement for withdrawal, without any giving of notice by the Member. 221 Were it necessary for me to make a finding about the contents of the telephone conversation of 28 June between Mr Howell and Mr Wills Cooke, I would prefer the version given by Mr Howell, for several reasons. 222 First, it is supported by his contemporaneous note. Secondly, I find it inherently plausible that Mr Howell would have proposed a simple written confirmation of the cancellation request, and that he would have said the matter would need to be approved by the Basis board. This is because of the size of the transaction and its desirability from the point of view of Basis. There was evidently a procedure for handling cancellations by processing the redemption and then treating the redemption proceeds as a reinvestment, but Mr Howell would no doubt have wished to encourage and facilitate Combined Fund's cancellation of a very large redemption request, and an obvious way of doing so would be to ask for written confirmation, which would then be approved by the Basis board. Thirdly, it seems to me plausible that Mr Wills Cooke, having already discussed with Mr Howell his disagreement with Jana and his desire to reverse his board's decision, would have spoken positively to Mr Howell when he achieved his objective, and would have wanted to emphasise to Mr Howell that Combined Fund had clearly decided on cancellation of the redemption. Fourthly, Mr Howell's version of the conversation is consistent with what subsequently happened. Mr Braun and Mr Howell had a telephone conversation on 3 July in which Mr Howell told Mr Braun to send something in writing for the record and that the directors of Basis would come back with their approval. Then Mr Braun sent an e-mail to Mr Dobson containing an instruction to cancel the redemption request, and Mr Dobson wrote back saying that the directors of Basis acknowledged the cancellation request. Fifthly, there were, as I have noted, two subsequent occasions when one would have expected Combined Fund to put forward Mr Wills Cooke's version of the telephone conversation (namely that there was to be a redemption and reinvestment), but those opportunities were not taken up. One occasion was the teleconference on 28 August 2007 in which Mr Howell updated Combined Fund and Jana on the performance of the Funds. According to Mr Howell's evidence, there was no suggestion during the teleconference that the cancellation of the redemption was invalid. The other occasion was when Basis issued Combined Fund's holding statement on 28 September 2007, showing a holding that was inconsistent with redemption, and yet there was no response from Combined Fund until 29 October 2007. 223 I have considered the careful submissions made by senior counsel for Combined Fund, advancing reasons for preferring Mr Wills Cooke's account of the conversation, but I do not accept those submissions. On the whole I thought Mr Howell's recollection of the conversation was reasonably good. I did not regard it as significant that he made a mistake about the time of day when the conversation occurred. He appears to have misread his diary note. An e-mail dated 14 June 2007 shows that Mr Howell had said on an earlier occasion that Basis could not rescind a redemption once it had been lodged but could accommodate an immediate reinvestment. In my view that does not increase the likelihood that he said the same thing two weeks later, given that his contemporaneous note suggests otherwise. It does, however, suggest that Mr Wills Cooke may have confused the earlier with the later conversation. 224 Mr Howell's version of the conversation does not establish that on 28 June Basis agreed to Combined Fund's withdrawal request. In this respect I disagree with the submissions made on behalf of Basis. As I understand Mr Howell's evidence, he made it plain to Mr Wills Cooke that the request would have to be in writing and be approved by the board of Basis. He gave some reassurance by saying, "if you put it in writing, it will be okay", but that does not negate the stipulation that board approval was needed. Written confirmation was not sought merely "for good order and proper record-keeping", as Basis submitted, but to provide a text to which the Basis directors' consideration would be directed. 225 I agree with the submissions on behalf of Basis that the conversation was the first occasion on which Combined Fund's decision to seek withdrawal of the redemption request was communicated. In my view, however, it does not matter whether the request for withdrawal was first communicated on 28 June or 3 July, since there was no redemption of Units on the 2 July Redemption Date. 226 In submissions, Combined Fund relied on the Signature Authority Form for the fact that Mr Braun, who sent the e-mail on 3 July, was only a Group B signatory and was therefore not authorised to sign a redemption request. The Form is, on its face, plain. The only signatory requirements are that all deposits must be signed by two Authorised Signatories and all redemptions must be signed by two "A" Signatories. Nothing else is made the subject of a signatory requirement. The Form makes no reference to a withdrawal of redemption request. But it was submitted that it should be taken to treat a withdrawal of a redemption request in the same way as a redemption request, either as a matter of construction of the Form or as an implied term in accordance with the principles stated in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283 and Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 347. 227 In my opinion there is no proper ground for extending the Form to cover withdrawal of a redemption request, on either basis. The fact that there is a formal procedure for redemptions does not imply that withdrawal of a redemption request must follow the same procedure. Redemptions of units are part of the management of an investment portfolio in unlisted managed investment schemes, and so one would expect (even apart from APRA requirements) that a superannuation fund in the position of Combined Fund would have relatively formal procedures to ensure that all redemption decisions are properly authorised. But the withdrawal of a redemption request is likely to be a less common occasion and moreover, under the constitution of a fund such as the Yield Fund, a successful withdrawal of a redemption request depends upon obtaining the agreement of the Manager. It is not obviously an event calling for a signature authority form. To extend the Form to cover withdrawal of a redemption request is not necessary to give business efficacy to the Form, and is not so obvious that "it goes without saying". There is nothing unworkable about an arrangement that would permit a validly made decision of Combined Fund to withdraw a redemption request to be communicated to Basis in some other way than by a form signed by two "A" Signatories. 228 The decision to withdraw the redemption request was made by the directors of Combined Fund on 28 June 2007. There is no dispute about that. Mr Wills Cooke merely purported to communicate the decision of the board to Mr Howell. He was a director of Combined Fund and also (to the knowledge of Mr Howell) chairman of the Executive and Investment Committee of the board of directors of Combined Fund, a Committee that considered and made recommendations to the board with respect to investments. He gave evidence that he was the "liaison director" for Combined Fund, liaising with Combined Fund's administrator, investment adviser and investment managers such as Basis, and that he was paid at an hourly rate for performing this role. Nearly all of Mr Howell's dealings with Combined Fund had been with Mr Wills Cooke. In my opinion Mr Wills Cooke had implied actual, or at least ostensible, authority to communicate the board's decision to withdraw the redemption request, both under the general law and by reason of s 129(3) of the Corporations Act. 229 There appears to be no dispute that Mr Braun had authority to implement investment decisions of the Combined Fund board. He gave evidence to that effect, which was not contradicted. He had at least ostensible authority to send his e-mail of 3 July, given my finding that the Signature Authority Form had no application. 230 Mr Dobson's e-mail of 3 July communicated to Mr Braun that the directors acknowledged the cancellation and he asked Ms Das to advise him and Mr Braun as to any further requirements to make the cancellations. Those statements, in their context, followed by the e-mail of Ms Das saying "this will be fine", constituted the agreement of the Manager to the withdrawal of the redemption requests, for the purposes of clause 7.1. 231 Therefore I conclude that Combined Fund's redemption request was validly withdrawn on 3 July 2007. It is appropriate to grant the relief sought in para 3A of the amended originating process, namely a declaration that the fourth defendant, Combined Fund, is not a Yield Fund June Redeemer. Conclusions 232 In lieu of the orders sought in paras 2 and 3 of the amended originating process, I shall make the following orders: "The Court declares, without affecting the valid exercise by any June Applicant of any statutory cooling off rights, that: (i) the plaintiff holds the application money of each June Applicant in trust under s 1017E(2A), and (ii) in the events that have happened, the plaintiff is obliged by s 1017E(4) to return the money to each Applicant." 233 I shall make orders in accordance with paras 3A, 4 and 5 of the amended originating process, to the effect that Combined Fund is not a Yield Fund June Redeemer, that the June Redeemers in each Fund are creditors of the Fund in respect of the June Redemption requests and that Basis would be acting in compliance with its duties in calculating redemption proceeds based on the Net Asset Value at 30 June 2007. 234 My understanding is that the costs orders proposed in paras 6 and 7 of the amended originating process are not controversial. These allow the representative parties, namely the plaintiff, the first, second and third defendants, to have their costs paid out of the Funds on an indemnity basis in preference to any other unsecured creditor. I assume there will be a contest with respect to the costs of the Court's determination of the position of Combined Fund, at least as between Basis and Combined Fund. I shall invite submissions on that matter. 235 I shall direct Basis to bring in draft short minutes of orders, and fix an adjourned hearing date to deal with costs and the making of final orders.

Basis Capital Funds Management Ltd v BT Portfolio Services Ltd

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Judgment (11 paragraphs)

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Cases Cited (9)

Cited By (7)