Commonwealth Bank of Australia ACN 123 123 124, in the matter of [2005] FCA 1940

Judgment (9 paragraphs)

[1]

REASONS FOR JUDGMENT 1 The plaintiffs apply to the Court for orders under s 1322(4) of the Corporations Act 2001 (Cth) ('the Act'). The application is made by reason of the operation of s 259C of the Act. Section 259C(1) provides that the issue or transfer of shares (or units of shares) of a company to an entity it controls is void unless: '(a) the issue or transfer is to the entity as a personal representative; or (b) the issue or transfer is to the entity as trustee and neither the company nor any entity it controls has a beneficial interest in the trust, other than a beneficial interest that satisfies these conditions: (i) the interest arises from a security given for the purposes of a transaction entered into in the ordinary course of business in connection with providing finance; and (ii) that transaction was not entered into with an associate of the company or an entity it controls; or (c) the issue to the entity is made as a result of an offer to all the members of the company who hold shares of the class being issued and is made on a basis that does not discriminate unfairly, either directly or indirectly, in favour of the entity; or (d) the transfer to the entity is by a wholly owned subsidiary of a body corporate and the entity is also a wholly owned subsidiary of that body corporate.' 2 However, under s 259C(2), the Australian Securities and Investment Commission ('the Commission') may exempt a company from the operation of s 259C(1). The exemption must be in writing and may be granted subject to conditions. 3 There are several circumstances in which s 259C(1) may have operated to avoid the issue or transfer of shares of the first plaintiff, Commonwealth Bank of Australia ('CBA'). CBA is the ultimate holding company of the second plaintiff, Commonwealth Life Limited ('Commonwealth Life') and the third plaintiff, the Colonial Mutual Life Assurance Society Limited ('CMLA'). Both Commonwealth Life and CMLA are controlled entities of CBA within the meaning of s 259E of the Act. 4 Section 295E provides for when a company controls an entity, for the purposes of Part 2J(2), in which s 259C is contained. CMLA operates CBA's life insurance business. Until 30 June 2003, Commonwealth Life operated CBA's life insurance business. On 30 June 2003, the business of Commonwealth Life was transferred to CMLA. As part of their respective life insurance businesses CMLA and, until 30 June 2003, Commonwealth Life provided investment linked benefits to policy holders. In doing so, they invested part of their statutory funds in shares or units of shares of CBA. 5 The circumstances in which s 259C(1) may have operated to avoid transfers and issue of shares or units of shares are as follows. First, both Commonwealth Life and CMLA have directly invested their statutory funds in CBA shares. CMLA has also invested its statutory funds in CBA shares by way of acquisition of units in management investment schemes. Secondly, CMLA has invested part of its statutory funds in units of schemes which hold CBA shares. It has invested in schemes in respect of which the responsible entity is another controlled entity of CBA. CMLA has also acquired units in schemes where the responsible entity is independent of CBA. Such independently managed schemes may also have invested in CBA shares. The third circumstance that may have attracted s 259C(1) is where CMLA has invested part of its statutory funds in units of schemes where those schemes held units in other schemes which in turn hold CBA shares. 6 While CMLA would hold an interest in the assets of the first scheme, it may be that it could not be said to hold a beneficial interest in the assets of the second scheme since the unit holders in the first scheme would have no right to compel the trustee of the second scheme to perform its obligations or to make any claim for breach of trust. 7 Where, however, CMLA holds all of the units in a scheme which in turn holds units in a second scheme, there is a stronger argument for suggesting that s 259C(1) would operate to avoid a transfer of units in CBA shares to the responsible entity of the second scheme. The argument would be that CMLA could at any time terminate the first scheme either by passing a resolution as contemplated by s 601NB of the Act or by calling for a distribution of the assets pursuant to the rule in Saunders v Vautier (1841) 49 ER 282. In such circumstances, CMLA may be treated as being in the same position as a holder of units in the second scheme. 8 CBA was mindful of the operation of s 259C(1) and applied on a number of occasions for exemption by the Commission pursuant to s 259C(2). Such exemptions were granted on a number of occasions by the Commission subject to conditions. For example, on 14 June 2005 the Commission exempted CBA from compliance with s 259C(1) in the following circumstances, namely, where there was an issue or transfer of shares or units of shares of CBA to or in trust for: (a) any managed investment scheme which has a controlled entity of CBA acting as responsible entity, (b) any unit trust which has a controlled entity of CBA acting as trustee, (c) any IDPS, (d) the statutory funds of any controlled entity of CBA which carries on the life insurance business of providing investment-linked benefits within the meaning of s 31(b) of the Life Insurance Act 1995 (Cth).

Commencing on the date of this exemption, CBA announces to ASX for release to the financial market operated by ASX, any change of 1 per cent or more in the aggregated percentage total referred to in paragraph 4 from the most recent notice given under either paragraphs 4 and 5. Disclosure under this paragraph must be made before the end of one business day after the day in which CBA became aware of the change.' 11 Notwithstanding the various exemptions that have been granted by the Commission, there are three separate circumstances which have the consequence that the exemptions do not operate to avoid certain transfers or issues of shares or units of shares in CBA. 12 First, there were gaps in the relief granted by the Commission. CBA applied for an exemption on 1 February 2001. The exemption, however, was not granted by the Commission until 16 March 2001. Secondly, CBA applied for relief on 4 March 2002 but the Commission did not grant an exemption until 21 March 2002. Thirdly, CBA inadvertently omitted to apply for an exemption when a previous exemption expired on 22 March 2004. The new exemption was not granted until 27 July 2004 following an application made on 10 June 2004. 13 The second circumstance gave rise to the application of s 259C(1) during the period from 13 June 2000 to 8 August 2000. On 13 June 2000 a scheme of arrangement became operative whereby the holders of shares in Colonial Limited were allotted shares in CBA as consideration for the transfer of their shares in Colonial Limited to CBA. As a consequence, CMLA and Colonial First State Investment Limited became controlled entities of CBA. However, it was not until 14 July 2000 that CBA applied to the Commission to extend the terms of the exemption that was then in place in relation to Colonial Life to make provision for the fact that shareholders of Colonial Limited had acquired shares in CBA. That exemption was granted on 9 August 2000. 14 The third circumstance in which s 259C(1) may have operated to avoid transfers or issues of shares arises from inadvertent failure to comply with conditions such as (4) and (5) of the current exemption, to which I have already referred. During the period 13 June 2000 to 26 July 2004 there were instances where CBA did not make the fortnightly announcements required by such conditions. The failure arose by reason of an oversight in the transfer of reporting responsibilities following CBAs acquisition of the share of Colonial Limited. 15 Upon discovering non-compliance, CBA conducted a full investigation of reporting requirements and prepared a policy identifying the reporting and record keeping obligations. Since 27 July 2004, CBA has complied strictly with the disclosure condition. While the failure to comply with the condition would not have had any effect on any transfer or issue of shares prior to non-compliance with the condition, the language of the exemptions is such that it is certainly arguable that any transfer or issue of shares after breach of the condition would not be exempted from the operation of s 259C(1). The terms of the exemptions were that CBA was exempted from compliance with s 259C(1) for so long as the conditions were met. Once the conditions were not met, the exemption was no longer operative. 16 The application is supported by an affidavit sworn by Mr Peter Winney, the Head Legal Counsel of Colonial First State Investments Limited ('CFSIL'). Mr Winney has responsibility for all legal services provided to the entities within the Colonial First State Group in Australia. That company is responsible for the administration of various managed investment schemes, superannuation trusts and investment portfolios. CFSIL's responsibilities include the administration and reporting of substantial shareholdings in respect of the schemes, trusts and portfolios in accordance with obligations imposed by the Act. Mr Winney was authorised to swear his affidavit on behalf of CBA Commonwealth Life and CMLA as well as on behalf of Colonial First State Investments Limited. Mr Winney sets out in his affidavit the detailed circumstances in which transfers and issues of shares or units of shares may have been affected by s 259C. 17 CBA wrote to the Commission and to Australian Prudential Regulation Authority ('the Authority'), on 12 October 2005. In its letters to the Commission and the Authority, CBA outlined the circumstances that have given rise to this application and informed each of the Commission and the Authority that CBA proposes to apply to the Court for orders validating any transfers or issues of shares or units of shares that may have been avoided by the operation of s 259C(1). 18 The Authority responded on 27 October 2005 through its general manager. The Authority's letter relevantly said: 'I confirm that based on the circumstances outlined in your letter, APRA is not aware of any injustice which may be caused should such orders be granted and that APRA does not object to the granting of the relief sought. Based on information provided by CBA, APRA would also note that the holdings of CBA shares by CMLA are within the limits permitted by section 43 of the Life Insurance Act 1995.' 19 The Commission's letter of 16 November 2005 included the following: 'Subject to the comments below I advise that the [Commission] does not object to the making of the orders in relation to CBA's failure to reapply for relief under section 259C(2). I confirm that had CBA made an application under subsection 259C(2) prior to the expiration of previous instruments of relief, it is highly likely that the [Commission] would have been minded to grant a conditional exemption (generally in the form of that given on 14 June 2005) from that time.

The Court may make such consequential or ancillary orders as the Court may think fit and the Court may make any such orders subject to such conditions as the Court imposes. 21 Under s 1322(6), the Court must not make an order under s 1322 unless it is satisfied, in the case of an order referred to in s 1322(4)(a) that the act, matter or thing, or the proceeding referred to in that paragraph is essentially of a procedural nature, that the person or persons concerned in or party to the contravention or failure acted honestly, or that it is just and equitable that the order be made. The Court must also not make an order unless it is satisfied that no substantial injustice has been or is likely to be caused to any person. 22 As at 29 November 2005, CMLA held 5,314,564 shares in CBA, valued at $223,371,124.92. CMLA also held units in some 14 funds managed by CFSIL the assets of which include shares in CBA as well as units in funds managed by responsible entities which are not controlled entities of CBA the assets of which may also include shares of CBA. If s 259C(1) operates to avoid transfers and issues of shares or units of shares in CBA, extraordinary inconvenience would be occasioned not only to the plaintiffs but to unidentifiable numbers of members of the public who have been parties to transactions which it would be almost impossible to undo. 23 In all of the circumstances, I consider that it is just and equitable that the orders sought be made. I am satisfied that no substantial injustice has been or is likely to be caused to any person by the purported transfers and issues of shares or units in shares and I am satisfied that no substantial injustice will be caused to any person by the operation of the orders asked. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

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Judgment (9 paragraphs)

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