City Pacific Limited, in the matter of; City Pacific Limited ACN 079 453 955 v Bacon

Federal Court of Australia|2009-06-23|Before: Dowsett J

REASONS FOR JUDGMENT 1 City Pacific First Mortgage Fund (the "scheme") is a managed investment scheme within the meaning of the Corporations Act 2001 (Cth) (the "Act"). The responsible entity is the plaintiff in these proceedings, City Pacific Limited ("City Pacific"). On 20 May 2009 Mr Rodger Bacon ("Mr Bacon") issued a notice of meeting pursuant to s 252D of the Act convening a meeting of members of the scheme to be held on Thursday, 25 June 2009 for the purpose of considering and, if thought fit, passing, the following resolution as an extraordinary resolution, namely: That City Pacific Limited ABN 90 079 453 955 be removed as responsible entity of the City Pacific First Mortgage Fund ARSN 088 139 477 in accordance with section 601FM(1) of the Corporations Act 2001 (Cth) and that Trilogy Funds Management Limited, ACN 080 383 679, be appointed as responsible entity of the City Pacific First Mortgage Fund ARSN 088 139 477. 2 Trilogy Funds Management Ltd ("Trilogy") is the second defendant in these proceedings, and Balmain NB Corporation Limited ("Balmain") is the third defendant. Trilogy and Balmain are joint venturers in another company which has been formed to manage the scheme in the event that the resolution is adopted. Mr Bacon is the chairman of Trilogy. 3 In issuing the notice of meeting, Mr Bacon purported to act on behalf of unidentified members of the scheme. No point is presently taken concerning that matter. The identities of the relevant members have now been notified to City Pacific. It seeks to join them as defendants in these proceedings. I will so order. However I note that they have not been served with notice of the present application for interlocutory relief. 4 At the time that the notice of meeting was issued, an explanatory memorandum was also forwarded to members, together with proxy documents. A large number of proxies have been lodged, apparently something like 50.9% of those eligible to vote have supplied proxies in favour of the proposed resolution. Following the issue of the explanatory memorandum, correspondence was exchanged between the solicitors for City Pacific and the solicitors for the first and second defendants in which questions were raised as to the adequacy or otherwise of the explanatory memorandum. Other matters were also addressed. 5 On 4 June 2009 the Australian Securities and Investments Commission ("ASIC") wrote to Mr Bacon, drawing his attention to various aspects of the explanatory memorandum which were said to be unclear or to require clarification. As a result of that letter, Trilogy and Balmain issued a further explanatory statement in which they sought to clarify certain matters. This document was dated 10 June 2009. 6 On 17 June 2009, City Pacific commenced proceedings seeking declaratory and injunctive relief. I am presently considering an application for an interlocutory injunction to the effect that: Until further or other order the Defendants be restrained from proceeding with the business of the extraordinary resolution set out in the Notice of Meeting of the City Pacific First Mortgage Fund dated 20 May 2009. 7 City Pacific asserts that any vote upon the proposed extraordinary resolution should be restrained upon three distinct grounds. The first is that the original explanatory memorandum was misleading and deceptive, and that the subsequent memorandum either did not clarify, or did not clarify in a timely way, the alleged defects in the earlier document. However City Pacific has not identified any particular ongoing deficiencies. It has rather sought to demonstrate either that the original problems have not been remedied by the subsequent document, or that persons may have cast their proxies in reliance upon the earlier document and not withdrawn them in light of the further information. 8 The second ground is that the proposed resolution does not comply with the requirements of s 601FM of the Act. Section 601FM(1) provides: If members of a registered scheme want to remove the responsible entity, they may take action under Division 1 of Part 2G.4 for the calling of a members' meeting to consider and vote on a resolution that the current responsible entity should be removed and a resolution choosing a company to be the new responsible entity. The resolutions must be extraordinary resolutions if the scheme is not listed. 9 City Pacific submits that the subsection contemplates and requires that there be two distinct resolutions: one removing the existing responsible entity, and the other appointing a replacement. The consequence of removing one entity and not appointing a replacement is that the original responsible entity will be required to apply for the winding-up of the scheme pursuant to s 601NE(1)(d). It is said that the proposed resolution is one, inter-dependent resolution rather than two distinct resolutions. For that reason, City Pacific submits that the meeting could only accept or reject the removal of City Pacific and the appointment of Trilogy, without considering the alternative possibilities of removing City Pacific and going into liquidation for failure to appoint a replacement responsible entity or appointing a replacement other than Trilogy. 10 The third ground involves s 252D of the Act which provides that proxy documents must be received by the responsible entity at least 48 hours before the meeting. It is said that this means that the proxies must be sent only to the responsible entity, and not to any other intervening party. It is further submitted that any failure to comply with this requirement will result in the proxies being invalid or the meeting being invalid, or both. Authority for this proposition is said to be found in the decision of Dodds-Streeton J in Bisan Ltd v Cellante (2002) 173 FLR 310 and Re Golden West Resources Ltd (2008) 170 FCR 409, a decision of McKerracher J. A different approach was taken by the Takeovers Panel in Re Lion Selection Ltd (No 2) (2008) 66 ACSR 656. 11 I turn to consider the three grounds in a little more detail, particularly considering the prospects of success in the action and the balance of convenience.

MISLEADING AND DECEPTIVE CONDUCT 12 The matter has been somewhat complicated by uncertainty as to the statutory basis for the assertion that misleading and deceptive conduct in the explanatory memorandum will invalidate either the notice or the proposed resolution, if adopted. It was, at one stage, suggested that the relevant provision was s 1041H of the Act. That section deals with misleading or deceptive conduct in relation to a financial product or a financial service. It is not immediately clear to me that dealings in connection with a meeting of members of a scheme fall within that description. When I raised this concern, City Pacific sought to rely upon s 52 of the Trade Practices Act 1974 (Cth) (the "Trade Practices Act"), possibly in conjunction with s 51A. That posed a further problem in that the meeting had been called by various members who had not, themselves, committed any misleading or deceptive conduct, at least as far as the evidence goes. Further, it seems unlikely that any of their conduct would have been in trade or commerce. It may be that Trilogy and Balmain issued the explanatory memorandum in trade or commerce. However, it would not be appropriate to restrain consideration and adoption of the proposed resolution upon the basis of their conduct. It was then suggested that the requisitioning members procured the issue of the explanatory memorandum by Trilogy and Balmain and were therefore liable for their allegedly misleading and deceptive conduct. As I understand it, it would have to be shown that the requisitioning members knowingly procured the relevant conduct. I am not sure that there is any real evidence of this, but their requisitioning of the meeting and the sending of the memorandum may be sufficient for present purposes. 13 It may be difficult to apply the notion of misleading and deceptive conduct to the conduct of a member in requisitioning a meeting of this kind. There will often be significant disagreement amongst members as to facts which are said to justify a proposed resolution. A function of the meeting of members will be to allow them an opportunity to hear different points of view and decide how each can best protect his or her own interests. Members would not resolve any disagreement as to relevant facts as a court would. 14 Members who disagree with statements made in support of a proposed resolution cannot simply resort to the Court in order to determine whether or not those facts are true. Such procedure, if it were available, would presumably also be applied to statements made at a meeting. The practical difficulties are obvious. It would be an abuse of the judicial process and would undermine the proper function of the meeting of members. Even if there is an arguable case for remedying misleading conduct by intervening in the conduct of a meeting, the Court would normally be careful not to do so in areas where the dispute may be more a difference of opinion than a case of truly misleading or deceptive conduct. 15 In the present case City Pacific has identified four areas in which it says the original explanatory memorandum was misleading or deceptive. Firstly, it is said that a change in the identity of the responsible entity may result in a bank loan going into default, at least if the bank has not consented to the change. This matter was not mentioned in the original explanatory memorandum. Following the intervention by ASIC, Balmain and Trilogy, in the material sent on 10 June 2009, revealed the possibility and stated that the bank was not committed to extending the loan following any such change. 16 Secondly, Balmain and Trilogy asserted in the explanatory memorandum that they had put in place a "robust strategy" designed to restart the payment of distributions as soon as possible. Members had expressed dissatisfaction that City Pacific had ceased to pay distributions. In the additional material that was provided, it was said that: Members should be aware that there may be a period of time before it is in their interests to recommence distributions and redemptions. The agreement of [the bank] may be necessary for this to occur however, we believe that a reasonable distribution and redemption plan which properly takes into account the financial position of the fund can be negotiated with [the bank]. 17 City Pacific also asserts, relying on s 51A of the Trade Practices Act, that Balmain. Trilogy and Mr Bacon had no reasonable grounds for representing that if Trilogy Funds Management were appointed as responsible entity it would be able to restart distributions. 18 Thirdly, Trilogy and Balmain said, in the explanatory memorandum, that they were committed to restarting the redemption of interests, commencing with an asset review and legal review. 19 In the subsequent material, Balmain and Trilogy revealed that the redemption price might not be one dollar per unit, and that reduction of the redemption price would require a special resolution, passed by at least 75% of the members entitled to vote. They also disclosed that there were other qualifications to the commitment to restarting distributions and redemptions, namely that: Members should be aware that there may be a period of time before it is in their interests to recommence distributions and redemptions. The agreement of [the bank] may be necessary for this to occur however we believe that a reasonable distribution and redemption plan, which properly takes into account the financial position of the fund, can be negotiated with [the bank]. 20 City Pacific submits that Balmain Trilogy and Mr Bacon had no reasonable grounds for representing that it would be able to re-commence redemptions. 21 Fourthly, City Pacific asserts that the cost of the proposed initiatives was not disclosed in the explanatory memorandum. In the subsequent material it was revealed that the cost would be met from scheme funds, and that such cost might be up to $100,000 for the asset review and up to $100,000 for the legal review. It was also disclosed that the cost of an independent guardian and independent registry provider would be up to .12% per annum of the prevailing value of assets under management. 22 It would be inappropriate for me to form a concluded view at this stage as to the merits of the assertion that the explanatory memorandum was misleading in these respects. That exercise will require a close examination of the document and, perhaps, reference to other evidence. My initial impression is that although the explanatory memorandum may have been a little on the optimistic side, it was not misleading, having regard to its nature and purpose. In any event, the subsequent document, supplied before the vote, and at a time when persons who had cast proxies could revoke them, significantly reduces the significance of these complaints. Whilst conceding the possibility that the memorandum may have been misleading or deceptive, I do not consider that the case is a strong one.

THE PROPOSED RESOLUTION 23 I have already referred to the text of s 601FM(1). I agree that the subsection clearly contemplates two resolutions. The explanatory memorandum which accompanied the relevant legislation into the House of Representatives stated at para 832: Members who hold at least 5% of the value of the votes that may be cast on a resolution at a meeting, or who total 200 in number, may call a meeting in accordance with Division 1 of Part 2G.4 … to change the responsible entity. In order to change the responsible entity members will have to pass an extraordinary resolution to firstly remove the current entity and then another resolution to choose a new responsible entity… . 24 This statement offers clear support for City Pacific's case. I can see only two possible reasons for such an approach. Firstly, it may have been though desirable to focus the attention of the meeting upon the reasons for removing the existing responsible entity rather than allowing such a matter to become a "beauty contest" as between candidate A and candidate B. Only if the members decide that the existing entity should be removed will they consider the question of replacement. The second possibility is that advanced by counsel for City Pacific, namely that the intention was to allow the members to consider the possibility of replacing the existing entity with an entity other than that nominated in the notice, or to allow for the possibility that they might prefer to remove the entity and not replace it, with the intent that the scheme be wound up. That seems a little unlikely, but it is possible. 25 The defendants, on the other hand, submit that the section should be construed as merely contemplating, without prescribing, that there be two resolutions. It is submitted that such a proposed resolution provides members with the opportunity to vote on it as proposed. If they do not like it, they can reject it. If they do not like the combined resolution, but wish to remove the responsible entity, they can simply give notice of a further resolution to that effect and of another resolution to appoint the preferred replacement. From a logical point of view, there is much to be said for that approach. However it is difficult to reconcile it with the content of the explanatory memorandum. In the circumstances I conclude that there is a relatively strong argument advanced for the proposition that the resolution as notified is not one which can properly be adopted by the meeting.

PROXIES 26 I turn to the question of the proxies. As I have said, there is authority which supports the proposition that proxies must be sent to the nominated recipient, the company in the case of a corporation, and the responsible entity in the case of a scheme. However, s 252Z does not actually say that. It requires only that the proxy documents be received by the responsible entity at least 48 hours before the meeting. That seems not to exclude the possibility that they might be collected by a third party. I accept that the authorities to which I have referred may be distinguishable but, nonetheless, they suggest that there is a serious question to be tried with respect to the question.

SECTION 1322 27 I was also referred to s 1322. It confers upon the Court a discretion to validate proceedings and steps, notwithstanding irregularities. There is a good chance that at least the second and third complaints might be remedied pursuant thereto. However the justice of the situation has not been fully investigated. For present purposes I note the capacity to validate irregular process without determining how the discretion might be exercised in this case. I should also say that no submission has been made concerning the way in which the decision in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 might be applied in this case.

BALANCE OF CONVENIENCE 28 I turn to the balance of convenience. City Pacific submits that the balance of convenience favours the grant of injunctive relief. Primarily, the argument is that in the event that the meeting goes ahead and the resolution is adopted, the effect will be to change the responsible entity in circumstances in which future litigation might establish that the change is invalid. That is a possibility. It is worthy of serious consideration. An undertaking as to damages is offered so that the costs of the meeting thrown away would be recoverable from City Pacific in the event that injunctive relief were granted, and it subsequently appeared that City Pacific's case is without merit. There is also the question of the effect of the appointment on the bank accommodation. 29 The defendants say that the balance of convenience does not weigh in favour of interlocutory relief. They point out that there has been a significant delay in seeking this relief and that a large number of people propose to attend the meeting. The notice of meeting was dated 20 May 2009. It was followed by correspondence between the parties. It would have been better, given the fact that the meeting involved the potential attendance of a very large number of people, had something been done earlier. However I do not attribute significant weight to that factor. 30 The evidence discloses a certain amount of dissatisfaction with City Pacific's performance. I do not imply that the dissatisfaction is justified. Such dissatisfaction probably led the requisitioning members to call the meeting, whether or not they were encouraged by Trilogy and Balmain. In those circumstances it seems quite inappropriate that I restrain it. City Pacific does not seek such relief. 31 The question, then, is whether or not the balance of convenience favours preventing the meeting from considering the resolution of which notice has been given. I have expressed reservations as to two aspects which may affect the validity of the meeting. No doubt, members will be invited to take those matters into account. Hopefully, appropriate legal advice will be available to them as to the extent to which my concerns may be justified. The decision for the members is largely a commercial one. They can be acquainted with the dangers of a change of responsible entity at this stage, as well as the advantages. It is for them to weigh up those matters and to decide upon the course to be followed. The balance of convenience favours my leaving the members to determine the matter. In those circumstances, the application for injunctive relief will be dismissed. 32 I order that City Pacific Limited as the responsible entity for the City Pacific Income Fund, be joined as the second plaintiff in the proceedings. 33 Upon City Pacific undertaking not to seek costs orders in the interlocutory application filed on 17 June 2009 against any of the requisitioning members personally, pursuant to O 6 r 8, persons named as the requisitioning members in annexure A to the letter from Clayton Utz to McCullough Robertson dated 19 June 2009 be joined as the fourth defendants in the proceedings. 34 I order that Balmain Trilogy Investment Pty Ltd be joined as fifth defendant in the proceedings. 35 Where there is a reasonable prospect that the conduct of the applicant for interlocutory relief, in bringing proceedings, will ultimately be vindicated, the preferable order is that costs of an application for interlocutory relief be reserved. Costs will be reserved. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett.

Associate: Dated: 24 June 2009 Counsel for the Plaintiff: Mr PJ Davis SC and Mr D Piggott

Solicitor for the Plaintiff: McCullough Robertson

Counsel for the First Defendant: Mr W Sofronoff QC and Mr JM Horton

Trade Practices Act 1974(Cth)

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