Colonial First State Investments Limited as responsible entity for Colonial... [2011] NSWSC 484 | Case summary

Judgment 1HIS HONOUR : This is an application for judicial advice under s 63 of the Trustee Act 1925. The plaintiff ("Colonial") is the responsible entity of two registered managed investment schemes called, the Colonial First State Mortgage Income Fund - Entry Fee Option and the Colonial First State Mortgage Income Fund - Nil Entry Fee Option. Both schemes are unit trusts of which the plaintiff is the trustee. The investments of the trusts were largely in mortgage loans. Both funds are illiquid. 2As at February 2010 payment of monthly income to unitholders had been suspended. On 15 February 2010 the plaintiff advised members of the funds that the funds would be terminated as at 1 March 2010 and thereafter investors would be paid over time their proportionate shares of the net proceeds of the funds' assets. It was expected that payments would be made every three months and that is what has occurred. 3Clause 26 of the Constitution of each fund provides: " 26. TERMINATION: Subject to the Law, the Responsible Entity at any time may terminate any Trust by written notice to the Holders with effect as at the time ( Termination Date ) specified in the notice ( Termination ). From the Termination Date of a Trust, the issue, switching and redemption of Units ceases. The Responsible Entity will realise all Trust Property, pay, discharge or provide for all Trust Liabilities and expenses of Termination and distribute the net proceeds among Holders pro rata to the number of Units held on the Termination Date. Each Holder registered on the Termination Date of a Trust will continue to be entitled to their proportionate share of Distributable Income during the winding up period. The Responsible Entity may make partial distributions of Trust proceeds during the winding up period. The Responsible Entity must cause the accounts of the winding-up to be independently checked and signed off by a registered company auditor or firm of chartered accountants of which at least one partner is a registered company auditor, and in either case independent of the previous Trust auditor. The Responsible Entity may postpone realisation of Trust Property and will not be responsible for any resulting loss unless caused by its negligence or breach of trust. " 4Units were issued at a price of $1. Clause 12 provided that if units were redeemed, the redemption price would be $1 per unit less any applicable exit fee or taxes. Clause 26 provided that on the termination date of the trust the redemption of units was to cease. The trusts were terminated as at 1 March 2010 and have since been in the course of being wound up. The plaintiff has made five distributions to unitholders pursuant to clause 26, being distributions in March, June, September and December 2010 and in March 2011. Approximately 52 per cent of the value of unitholders' investments as at 1 March 2010 has been returned. 5Although clause 26 provides for the cessation of redemption, the plaintiff adopted an administrative system for dealing with the return of capital on the winding-up of the trusts by which unitholders were allocated an account balance, the initial value of which was based on the number of units held by the unitholder as at 1 March 2010 multiplied by $1. As distributions of capital were made, the account balance was adjusted by reducing the number of units registered in the name of each unitholder. Distributions under clause 26 were calculated based on the unitholders holding as at 1 March 2010. 6The present application arises in circumstances similar to those I considered in Re Perpetual Investment Management Limited as responsible entity for Perpetual's Monthly Income Fund And Perpetual's Wholesale Monthly Income Fund [2011] NSWSC 133 (" Perpetual ") and in Re Challenger Managed Investments Limited as responsible entity for Challenger Howard Mortgage Fund [2011] NSWSC 213 (" Challenger "). 7As in those cases, Direct Share Purchasing Corporation Pty Limited ("DSPC") has made offers to unitholders of the two funds offering to acquire their units at prices less than its stated estimate of the fair value of the units. It is not clear to how many unitholders such offers have been made. Several offers have been made. These are referred to below. DSPC declined to inform Colonial as to whom the offers were made. In the case of the first offer it said that the offer had not been made to all unitholders. 8DSPC made offers on or about the following dates to buy units of unitholders in the funds at the following prices per unit. It stated in respect of each offer the following value as being its estimate of the fair value of each unit, namely: Date Offer Price Stated Estimate of Fair Value 27 August 2010 $0.80 $1 20 September 2010 $0.80 $1 25 October 2010 $0.35 $0.70 5 November 2010 $0.48 $0.94 10 November 2010 $0.40 $0.70 15 November 2010 $0.48 $1 7 December 2010 $0.40 $0.94

9At the date of these respective offers the amount of capital that had been paid out to unitholders in respect of the units held at the termination date of 1 March 2010 was as follows: (i) by 27 August 2010, 25.2 cents had been paid calculated on the basis of the number of units held on 1 March 2010; (ii) on the subsequent dates of the offers from DSPC, 36.42 cents had been paid. 10In assessing the apparent value of DSPC's offers, account has to be taken of the fact that the register of unitholders supplied to DSPC had recorded a reduced number of units from the number of units held as at the termination date to reflect the distributions of capital made since that date. 11On this basis the number of units recorded for each unitholder in Colonial's administrative system was not diminished by the return of capital paid. The net asset backing of units so recorded in its system as at 31 December 2010 was approximately 95 cents per unit. 12It is clear enough that DSPC proceeded reasonably on the basis that each unitholder held only the number of units so recorded in the registers with which it was provided. On this basis it can be seen that the offers of 25 October and subsequent dates were very substantially below the net asset backing of the units, although unitholders would, no doubt, bear in mind that if the offers were accepted and transfers registered they would receive an immediate payment. 13The form of the offers sent to unitholders was materially the same as the form considered in Perpetual. Each form of offer was to purchase a stated number of the unitholders' units for a stated price. Each offer contained, as required by s 1019I(2)(c) of the Corporations Act 2001 (Cth), a statement by DSPC of its assessment of fair value of the units to be acquired. There was provision for acceptance of the offer. On acceptance the unitholders appointed DSPC as their attorney to exercise all rights attaching to the units and to execute any document necessary or desirable to effect the transfer of the units. 14Between 11 October and 19 November 2010 Colonial received 60 or 68 letters from DSPC in purported exercise of its power of attorney, changing the addresses and bank account details for the accepting unitholders to its own address and account. Colonial has acted on this correspondence only to the extent referred to below where it has registered transfers of unitholders' interests in the funds in favour to DSPC. 15On or around 20 October 2010 Colonial received a letter from DSPC dated 12 October 2010 containing seven standard transfer forms and seeking registration of the transfers of 6242.97 units together with corresponding powers of attorney forms. On 28 October 2010 Colonial wrote to DSPC as follows: " We are currently unable to process your requests for the following reasons: Due to the termination of the Fund, only the registered unit holders, or their estates, are recognised by the responsible entity, Colonial First State Investments Limited, as being entitled to the net proceeds of the Fund. As a result, only the beneficial rights and entitlements to the units can be transferred. The scope of the power of attorney in our view is not broad enough to cover the transfer of the beneficial ownership. ... We have a Transfer of Investments & Acceptance form for the Fund to accommodate the transfer of beneficial interest in the units given the restrictions regarding the transfer of units in the terminating fund under the constitution. An important element of this process is that we require an indemnity from the unit holder to enable us to undertake the transfer. Due to the fact that this indemnity would not be part of a normal transfer process, we do not consider the current POA is broad enough to cover the giving of this indemnity." 16It appears that because the funds were being wound up and having regard to clause 26 of their constitutions, Colonial took the view that it should not register transfers of units. This was because clause 26 requires Colonial to make income distributions and to return capital to the persons who were the registered holders of units as at the termination date. However, it also took the view that the rights of unitholders to compel due administration of the winding-up of the trusts was a chose in action capable of assignment. Hence it provided a different form from the usual transfer form to deal with the transfer of those interests. 17The transfer form it provided to DSPC did not state the particular number of units that were to be transferred. Nor did it contain the price to be paid. The transfer form was expressed to be a simple transfer of a percentage of the unitholders' interest in the fund. In all the cases in which these forms have been subsequently completed the percentage has been completed as 100 per cent. The use of this form avoids the confusion which would otherwise arise as a result of a reduction of the number of units registered for each unitholder, notwithstanding the stipulation in clause 26 of the constitution that redemption of units was to cease. 18Since receipt of Colonial's letter of 28 October 2010 DSPC has submitted Transfer of Interest forms in respect of 109 unitholders. Many of those forms have deficiencies, which, in any event, would result in the forms not being acted on by Colonial until the deficiencies are rectified. As a result of queries raised by Colonial, at least 55 of the unitholders subsequently informed it that they did not wish to proceed with the transfer to DSPC. Reasons have been advanced by unitholders as to why they had accepted DSPC's offers. These reasons are similar to matters advanced by unitholders in the cases of Perpetual and Challenger . 19Twenty unitholders have informed Colonial that they do wish to proceed with the transfer to DSPC. Two have since died, and 27 (or perhaps 28) unitholders have not clearly indicated whether they wish to proceed with the transfer or not. In one case, the employee of the plaintiff who spoke to the unitholder formed the view that the unitholder did not understand the contract about which enquiry was being made. 20Colonial seeks judicial advice on the following matters: " 230. Subject to paragraph 231, whether the plaintiff would be justified in refusing to: (a) register the forms of transfer of units in the Funds to DSPC pursuant to the transfer documentation (which the plaintiff may presently have or may reasonably expect to receive in the future) executed by DSPC under powers of attorney granted by registered unitholders as at the Termination Date of the Funds (' Relevant Unitholders '); or (b) amend the register to record the transfer of any interest in the Funds of Relevant Unitholders to DSPC pursuant to the Transfer of Investment Forms executed by the Relevant Unitholders and DSPC, provided that the plaintiff write to the Relevant Unitholder at the last address notified to the plaintiff by such unitholders to ascertain whether it is their wish that their interest in the Fund(s) be transferred to DSPC (' the Colonial Communication '), until ordered to do so by a Court of competent jurisdiction. 231. Whether the plaintiff would be justified in recording the transfer of any interest in the Fund(s) of the Relevant Unitholders to DSPC where the Relevant Unitholders have indicated to the plaintiff that they wish their interest to be transferred otherwise than by executing the transfer documentation in paragraph 230(a) and the Transfer of Investment forms in paragraph 230(b) above. 232. Whether the plaintiff would be justified in refusing to record the transfer of any interest in the Fund(s) of Relevant Unitholders to DSPC where the Relevant Unitholders have indicated, in response to the Colonial Communication, that they do not wish their interest to be transferred. 233. Whether the plaintiff would be justified in distributing each Relevant Unitholder's proportionate share of income and net termination proceeds under clause 26 of the Constitutions of the Funds to either the Relevant Unitholder or to DSPC if DSPC is recorded on the register as transferee of the interest of the Relevant Unitholder in the Fund(s). 234. Whether the plaintiff would be justified in paying its costs and expenses incurred in connection with these proceedings out of the assets of the Funds on the indemnity basis. " 21Notice of this application has been given to DSPC. The statement of facts was also served on DSPC. By letter dated 29 April 2010 Piper Alderman Lawyers, the solicitors for DSPC, advised as follows: " The purpose of this letter is to inform you and the Court that our client does not intend to attend at or make oral submissions at the hearing of your client's application for the following reasons:

His Honour Justice White has, on two occasions opined on the circumstances in which Responsible Entities of unit trusts would or would not be justified in registering a transfer of units [see Re Perpetual Investment Management Limited [2011] NSWSC 133 ( Perpetual ) and Re Challenger Managed Investments Limited [2011] NSWSC 213 ( Challenger )] .
Justice White's advice in Perpetual and in Challenger is that, unless or until the relevant unit holder indicates that [he or she] wish a transfer to be registered, a Responsible Entity would be justified in not registering a transfer of units where there is a gross disparity between the offered price for the units and the market value of the units.
While we respectfully disagree with the advice provided by Justice White in Perpetual and Challenger and the reasons for the advice, the advice is unequivocal and as a matter of comity is likely to be followed by any Justice of the New South Wales Supreme Court who advises your client.
The factual considerations for your client (and the Court, now that advice has been sought) in seeking to bring the facts disclosed in the Statement of Facts and Mr Ho-Shon's affidavit within the rationale for the judicial advice received by Perpetual and Challenger are: 4.1 Whether as a matter of fact there is a 'gross disparity' between the offered price and market value noting the absence of a secondary market for the units, that a unit holder has no present right to withdrawal of funds invested, no income is to be paid on the units for 18 months and the rates of return in the Funds; and 4.2 Whether the Transfer of Investments and Acceptance Forms that have been signed by unit holders reflect their 'wish' that their units be transferred to DSPC.
We accept that the Court, on your client's application, will be constrained by the statements of legal principle in Perpetual and in Challenger and we recognise that there is nothing that our client, given the nature of your client's application, need (or usefully can) contribute in respect of the above two factual matters arising.
We have not directed any comments to the judicial advice sought [paragraph 230(a) of the Statement of Facts] about forms of transfer submitted last year and executed by our client under power of attorney because the registration of those transfers have been refused by your client and the original transfer forms returned to our client. In respect of those transfers we do not understand there to be any subject matter on which the Court need advise. We ask that this letter be provided to the Court so that our client's position is understood. Given our client's interest in the subject matter of the judicial advice your client may receive we ask that, once given, you provide us with a copy of the Court's advice and reasons. " 22The thrust of Piper Alderman's advice is that DSPC does not advance any material point of distinction that would lead to different advice being given on the present application than was provided to the trustees in Perpetual and in Challenger . Piper Alderman did, however, advance for consideration whether in the present case there is the same gross disparity between the offer price and what it called " market value " (the fair value, one presumes) as was noted in the earlier decisions. 23Given the apparent length of time that would be taken fully to wind up each of the trusts, there is not the same disparity on the facts of the present case, so far as the first two letters of offer are concerned, as was evident in the earlier applications. I do not think the same can be said in relation to the prices offered in the subsequent offers having regard to the apparent subject matter of the offers (being the balance of the units still recorded in the register of Colonial at the time the offers were made). 24It does not appear that there were acceptances under the first offer, but there were some acceptances under the offer of 20 September 2010. 25Colonial has taken the position that it will only register the form which it calls " Transfer of Investments and Acceptance Form ". That form requires the transferor as well as the transferee to provide a release and indemnity to the Commonwealth Bank and its related bodies corporate including, I understand, Colonial. Colonial has taken the view that the power of attorney contained in the offer documentation submitted by DSPC was not wide enough to extend to all of the terms required by the transfer of investments and acceptance form. Accordingly, it proposes only to deal with those forms that have been personally executed by unitholders. 26A number of the forms have irregularities: such as not specifying the correct fund, or not specifying an account number. But the questions on which judicial advice is sought do not relate to any such administrative difficulties which, no doubt, can be corrected. The effect of the advice sought is that Colonial should proceed with recording transfers in respect only of those unitholders who informed it that they wish their transaction with DSPC to proceed. 27As in the earlier cases, DSPC has no statutory or contractual right against Colonial to have the transfers registered. Its equitable right to enforce any contract that may have been made as a result of the acceptance of its offer would depend upon the enforceability of such contracts. Colonial is not required to make any assumption as to the enforceability of those contracts. Subject to some minor adjustments to deal with the facts of this case the same judicial advice should be given in this case as in Perpetual and Challenger . 28One matter to be noted is that the plaintiff has registered nine of the transfer of investments and acceptance forms. It has done so not by recording DSPC as the transferee of the unitholders' units, but by recording in the register that the unitholders hold their units on trust for DSPC. In respect of those unitholders Colonial would be justified in proceeding on the basis that whilst moneys payable under clause 26 are distributable to holders registered on the termination date of the trust, where the holder is recorded as holding its units on trust for DSPC such distributions are to be made to DSPC effectively as sub-beneficiary. 29By proceeding in that way in respect of those unitholders who have confirmed that they wish the transfers to DSPC to proceed, Colonial would be acting properly to give effect to the arrangements made between DSPC and the unitholder. However, it is justified in not making the same entry on the register where unitholders have not confirmed their wish for the transactions with DSPC to proceed. 30So far as the letters changing the accounts of the unitholders and the addresses of unitholders are concerned, the recording of those details in the register is essential for Colonial's convenience to ensure that correspondence is sent and moneys are paid to the right people. It is justified in only recording such changes where it proceeds to register the " transfers " by recording DSPC as the unitholders' beneficiary. 31The Transfer of Investments and Acceptance Form does not include the details required by the Regulations for the registration of an instrument of transfer of interests in a registered scheme (s 1071B(3), Corporations Act and reg 7.11.22, Corporations Regulations 2001 (Cth)). However, that can be corrected. I see no reason why that cannot be corrected by Colonial itself. 32For these reasons, I order that:

Colonial First State Investments Limited as responsible entity for Colonial First State Mortgage Income Fund - Entry Fee Option and Colonial First State Mortgage Income Fund - Nil Entry Fee Option [2011] NSWSC 484

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