FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd [2013] NSWSC 817 | Case summary

Judgment Nature of applications 1The plaintiffs in these three applications, heard together, seek orders relating to three inter-conditional schemes of arrangement in respect of a proposed restructure of the DUET Group, namely a company scheme under s 411 of the Corporations Act 2001 (Cth) ("Corporations Act") and two trust schemes under s 63 of the Trustee Act 1925 (NSW) ("Trustee Act"). 2By way of background, the DUET Group currently comprises three companies, DUET Management Company 1 Limited ("DMC1"), DUET Management Company 2 Limited ("DMC2") and DUET Investment Holdings Limited ("DIHL"), and three trusts, Diversified Utility and Energy Trust No. 1 ("DUET1"), Diversified Utility and Energy Trust No. 2 ("DUET2"); and Diversified Utility and Energy Trust No. 3 ("DUET3"). Each trust is a managed investment scheme registered under Chapter 5C of the Corporations Act. DMC1 is the responsible entity of DUET1 and DMC2 is the responsible entity of DUET2 and DUET3. Shares in DMC1, DMC2 and DIHL and units in DUET1, DUET2 and DUET3 are stapled together and are quoted on the Australian Securities Exchange ("ASX") as stapled securities. 3On 30 May 2013, DMC1 (in its personal capacity and as responsible entity of DUET1), DMC2 (in its personal capacity and as responsible entity of DUET2 and DUET3), DIHL and a newly incorporated entity, ACN 163 100 061 Limited (to be renamed DUET Company Limited) ("DUECo") entered into an "Implementation Agreement" directed to a proposed simplification of the structure of the DUET Group ("Proposal"). The steps required to implement the Proposal are somewhat complex and were set out in the affidavits and summarised in the submissions, and I do not need to set them out here. Subject to the relevant shareholder, unitholder and Court approvals, the effect of implementing those steps would be that units in DUET 2 and shares in DUECo would be consolidated so that securityholders would hold DUET2 units and shares in DUECo, DIHL and DMC2 on a 1:1:1:1 basis; shares in DUECo, DIHL and DMC2 would be stapled to units in DUET2 and would resume normal trading as stapled securities on the ASX; and DUET Group's underlying interests in its operating businesses would also be restructured. Securityholders would not pay any cash consideration for DUET2 units issued under the DUET3 Trust Scheme or for DUECo shares issued under the DUET1 Trust Scheme or DMC1 Company Scheme. The nature of the orders sought at the first hearing 4At the hearing on 31 May 2013, DMC1 sought orders under s 411(1) of the Corporations Act, inter alia, convening a meeting of holders of fully paid ordinary shares of DMC1 ("DMC1 Company Scheme Meeting") for the purpose of considering and, if thought fit, agreeing to a proposed company scheme ("DMC1 Company Scheme") and approving an associated explanatory statement ("Explanatory Memorandum"). 5DMC1, as the responsible entity of DUET1, sought judicial advice under s 63 of the Trustee Act that, inter alia, it would be justified in convening a meeting of holders of fully paid units of DUET1 ("DUET1 Trust Scheme Meeting") for the purpose of considering, and if thought fit, agreeing to a proposed trust scheme ("DUET1 Trust Scheme"); distributing the Explanatory Memorandum to all registered DUET1 unitholders other than those whose registered or nominated addresses are in Malaysia or Thailand; and proceeding on the basis that proposed amendments to DUET1's constitution would be within the powers of alteration conferred by DUET1's constitution and s 601GC of the Corporations Act. DMC2, as responsible entity of DUET3, sought broadly corresponding judicial advice under s 63 of the Trustee Act, in respect of a meeting of unitholders in DUET3 ("DUET3 Trust Scheme Meeting") for the purpose of considering, and if thought fit, agreeing to a proposed trust scheme ("DUET3 Trust Scheme") and proposed amendments to DUET3's constitution. 6I made orders in the form sought, with one modification, on 31 May 2013 and delivered a short oral judgment dealing with one aspect of the application. This judgment constitutes the more detailed reasons for my decision that I indicated I would provide. I have drawn on the helpful written submission provided by Mr I Jackman SC, who appears for the Plaintiffs, to prepare this judgment. Further orders will be sought at a second hearing on 24 July 2013 if the DMC1 Company Scheme, the DUET1 Trust Scheme and the DUET3 Trust Scheme are approved at the relevant meetings. The applicable principles 7The court will order a first meeting of a company's members to consider a scheme of arrangement if the scheme proposed is such that, if it achieved the relevant majority at the meeting, the court would be likely to approve it on hearing an application which was not opposed: FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd (1977) 3 ACLR 69; (1977-78) CLC 40-368; Central Pacific Minerals NL [2002] FCA 239 at [8]. In Re NRMA Insurance Ltd (No 1) [2000] NSWSC 82; (2000) 33 ACSR 595; (2000) 156 FLR 349 at 354-6, the Court summarised the matters as to which the court must be satisfied at this stage as: (1) whether there has been proper disclosure for the purposes of s 412(1); (2) whether the scheme can properly be described as an arrangement or a compromise; (3) whether the applicant is a Pt 5.1 body; (4) whether the scheme is properly proposed for the purposes of this section; and (5) whether the Australian Securities and Investments Commission ("ASIC") has had a reasonable opportunity to examine the terms of the scheme and make any submission to the courts. In Re AMP Ltd [2003] FCA 1465; (2003) 48 ACSR 540 at 545, the Federal Court of Australia summarised the relevant factors as whether (1) the proposal fits within the statutory concept of arrangement; (2) there will be available to shareholders all the main facts relevant to the exercise of judgment on the proposal; and (3) the scheme is so conceived and presented as to its structure, purpose and effect that there is no apparent reason, so far as can be foreseen, why it would not, in due course, receive the court's approval if the necessary majority of shareholders voted in favour of it. 8In Re Westfield Holdings Ltd [2004] NSWSC 458; (2004) 49 ACSR 734, at 736 Barrett J summarised the case law as follows: "The Court's role on a s 411 application of this kind has been described in a number of cases. According to the formulation adopted by Santow J in Re NRMA Insurance Ltd (2000) 156 FLR 349; 33 ACSR 523 , the Court must see on the material placed before it, that the proposal fits with the statutory concept of arrangement or compromise, that there will be available to members all main facts relevant to the exercise of their judgment, that ASIC has had a reasonable opportunity to examine the proposal and that the scheme is so conceived and presented as to that structure, purpose and effect that there is no apparent reason, so far as can be foreseen, why it should not, in due course, receive the Court's approval if the necessary majority of members' votes is achieved. To substantially similar effect are observations of Austin J in Re GIO Building Society Ltd and ASIC (2001) 39 ACSR 77 , French J in Re Foundation Health Care Ltd (2002) 48 ACSR 252 and Parker J in Re Ranger Minerals Ltd (2002) 42 ACSR 252. Slightly different, but by no means conflicting are the criteria enunciated by Emmett J in Re Central Pacific Minerals NL [2002] FCA 239 and repeated in the following terms by Conti J in Re CSR Ltd (2003) 45 ACSR 34 at 37: (i) the likelihood or otherwise that the Court will approve the scheme of arrangement, if the statutory majority of shareholders is achieved at the proposed scheme meeting; (ii) whether there has been compliance with such preliminary matters that are relevant to the holding of the meeting; (iii) where [sic] there will be sufficient disclosure, to those persons and entities who will be affected by the scheme of arrangement, of its detail and effects; and (iv) whether there has been any reasonable opportunity for the commission to examine the terms of the scheme of arrangement." 9Registered managed investment schemes such as DUET1, DUET2 and DUET3 are, of course, not Part 5.1 bodies for the purposes of the scheme regime in Part 5.1 of the Corporations Act. However, a responsible entity may seek judicial advice in a trust scheme, typically also in two stages: Re Mirvac Ltd [1999] NSWSC 457; (1999) 32 ACSR 107; Re Macquarie Goodman Funds Management Ltd (as responsible entity of Macquarie Goodman Industrial Trust) [2004] NSWSC 1197; (2004) 52 ACSR 194; Re Abacus Funds Management [2005] NSWSC 1309; (2006) 24 ACLC 211; Re Macquarie Private Capital A Ltd [2008] NSWSC 323; (2008) 26 ACLC 366; Re Macquarie Capital Alliance Ltd [2008] NSWSC 745; (2008) 67 ACSR 484; Re Macquarie Communications Infrastructure Group [2009] NSWSC 487. In particular, the Court may provide judicial advice at the first hearing that the responsible entity is justified in propounding resolutions to implement the trust scheme and proceeding on the basis that amendments proposed to be made to the constitution of the registered managed investment scheme to implement the trust scheme would be within the powers of alteration conferred by that document and s 601GC of the Corporations Act: Re Mirvac Ltd above at [47]; Re Macquarie Capital Alliance above at [19]. That judicial advice, and the right of any unitholder in the managed investment scheme to appear at the second court hearing and object, will then be disclosed in an explanatory statement sent to unitholders for a meeting of unitholders to consider the resolutions to implement the trust scheme. 10The Plaintiffs also point out, and I accept, that the constitution of a managed investment scheme may be altered by a special resolution of the members of the scheme under s 601GC(1)(a) of the Corporations Act and that judicial advice may be given in respect of that power of alteration in a trust scheme context: Re Mirvac Ltd above at [44]-[47]; Re Great Southern Managers Australia Ltd (recs and mgrs apptd) (in liq) [2009] VSC 557; (2009) 76 ACSR 146. Explanatory Memorandum and expert reports 11The proposed Explanatory Memorandum for the Proposal is in evidence. Appropriately, there is also evidence that a due diligence and verification process in the usual form has been undertaken in respect of that Explanatory Memorandum. 12KPMG Financial Advisory Services (Australia) Pty Ltd ("KPMG") was engaged by the DUET Group to prepare an Independent Expert's Report ("KPMG Report"), which is to be annexed to the Explanatory Memorandum. That report will express the view that the Proposal (including the DMC1 Company Scheme, the DUET1 Trust Scheme and the DUET3 Trust Scheme) is in the best interests of securityholders. That report is in turn supported by affidavits dated 28 and 30 May 2013 affirmed by Mr Ian Jedlin of KPMG. 13PricewaterhouseCoopers ("PwC") was engaged by the DUET Group to prepare, for inclusion in the Explanatory Memorandum, a summary of the Australian income tax implications of the DMC1 Company Scheme, the DUET1 Trust Scheme and the DUET3 Trust Scheme. Section 7 of the Explanatory Memorandum contains a draft version of that summary, which is supported by an affidavit dated 31 May 2013 of Mr Stephen Ford of PwC. Ashurst Australia, was engaged by the DUET Group to prepare statements for inclusion in the Explanatory Statement, in relation to the Australian stamp duty implications of the transactions and to apply, on behalf of the DUET Group, to the Victorian State Revenue Office and the Western Australian Office of State Revenue for certain stamp duty relief related to the transactions. Those matters are addressed in affidavits of Ms Barbara Phair dated 28 and 30 May 2013. 14Arrangements have been made with the DUET Group's registry services provider, Computershare Investor Services Pty Ltd, for the despatch of the Meeting Booklet and a proxy form to securityholders, other than those whose registered or nominated addresses are in Malaysia or Thailand. I will address the approach adopted in respect of securityholders in those jurisdictions below. Copies of the Meeting Booklet and Proxy Form will also be available for download from the internet, including by new securityholders on the register, until at least 18 July 2013, the date of the proposed meetings. Notice to securityholders in Malaysia and Thailand 15It appears that sending the Meeting Booklet to addresses of securityholders resident Malaysia or Thailand could constitute an offer of securities requiring regulatory approval in each of those countries, as DUET2 units will be issued as consideration under the DUET3 Trust Scheme. One securityholder (representing 10,000 Existing Stapled Securities) has a registered or nominated address in Malaysia and two securityholders (representing 15,582 Existing Stapled Securities) have a registered address in Thailand. This is, both by number of holders and numbers of securities, a very small number. The directors of DMC1, DMC2 and DIHL have determined that it would be unreasonable, having regard to the cost to other securityholders and administrative burden, to send the Meeting Booklet (including the Explanatory Memorandum) to the three securityholders whose registered or nominated addresses were in those jurisdictions and that a letter in the form of a draft in evidence should instead be sent to those securityholders, informing them that they are not able to receive the Meeting Booklet because their registered address is in Malaysia or Thailand, but that the Meeting Booklet could be sent to them if they have a postal address outside Malaysia and Thailand; that more information on the DUET Group and on the Proposal will continue to be available on the DUET Group's website and the ASX website; and they may object to the Proposal by appearing at the hearing set down for 24 July 2013. DMC1, DMC2 and DIHL draw attention to the fact that an alternative to this approach would have been to set up a sale facility in respect of the securityholders' securities, which does not seem to me to be a matter that would be in the interests of those securityholders since, if they have not themselves sold those securities, it should be inferred that they wish to retain them. 16DMC1 and DMC2 have applied for, and ASIC has indicated it is inclined to grant, relief from the requirements of s 601FC(1)(d) of the Corporations Act, to allow them not to send the Meeting Booklet to securityholders whose registered or nominated address is in Malaysia or Thailand without contravening the requirement under that section to treat all Securityholders equally. However, ASIC does not have statutory power to grant such relief so far as Chapter 2G and s 412 of the Corporations Act is concerned. The DUET Group has indicated that it intends to apply for orders under s 1322(4) of the Corporations Act at the second hearing in respect of DMC1's non-compliance with ss 249J, 252G and 412(1) of the Corporations Act in relation to the three holders of fully paid ordinary shares in DMC1 whose registered or nominated addresses are in Malaysia or Thailand. 17It is well established that s 1322 of the Corporations Act reflects a broad legislative policy that the law should not inflict unnecessary liability or inconvenience or invalidate transactions because of non-compliance with its requirements, where such non-compliance is the product of honesty or inadvertence and where the Court can avoid its effects without prejudice to third parties or the public interest in compliance with the law, the Court will have regard to the purposes of the Corporations Act, the interests of all affected parties and the public interest in exercising its powers under the section: Re Wave Capital Ltd [2003] FCA 969; (2003) 47 ACSR 418. Section 1322(4) of the Corporations Act in turn allows the Court to declare that an act, matter or thing purporting to have been done, or any proceedings purporting to have been instituted or taken, under the Corporations Act or in relation to a corporation is not invalid by reason of a contravention of a provision of the Act or a provision of the corporation's constitution. The power under s 1322(4)(a) may be exercised where, relevantly, the contravention is essentially procedural, or the persons concerned had acted honestly, or it is just and equitable that an order be made, and provided that no substantial injustice has been or is likely to be caused to any person: s 1322(6). The conditions specified in s 1322(6) are alternative, so that only one of them need be satisfied in order to allow an order to be made under s 1322(4). The width of the power under s 1322(4) of the Corporations Act has recently been confirmed by the High Court of Australia in Weinstock v Beck [2013] HCA 14; (2013) 93 ACSR 231. French CJ there observed (at [39]) that: "In accordance with its evident purpose, s 1322(4)(a) is to be construed broadly and applied pragmatically, principally by reference to considerations of substance rather than those of form". Hayne, Crennan and Kiefel JJ observed (at [55]) that "the power given to the Court by s 1322(4)(a) is not to be hedged by any implied limitation" and Gageler J also referred (at [60]), with apparent approval, to the Court of Appeal's observation in that case that s 1322(4)(a) is "to be construed with all the liberality that its language permits". 18Mr Jackman refers to the decision of Middleton J in Nenna v Australian Securities and Investments Commission [2011] FCA 1193; (2011) 198 FCR 32 as authority that an act that is advertent rather than inadvertent may nonetheless be not invalid, so far as it involves a "procedural irregularity" for the purposes of s 1322(2) of the Act, or may be validated by the Court under s 1322(4) of the Act. I agree with his Honour's reasoning and it also seems to me that an act may be taken honestly, or it may be just and equitable to validate it, for the purposes of s 1322(6) notwithstanding that a technical defect with the act is known at the time it takes place. 19It is not necessary for me to form a final view as to that matter, which will be a question for the second hearing, to be addressed in circumstances that other interested parties have an opportunity to make submissions. It is sufficient that I consider, as I do, that it is likely that the Plaintiffs' conduct in respect of the securityholders in Malaysia and Thailand will be validated under s 1322 of the Act, so as to permit the Court to make the orders sought at the second court hearing if securityholders otherwise approve the relevant schemes. Other matters 20Section 411(2) of the Corporations Act provides that the court cannot make an order convening a scheme meeting unless it is satisfied that ASIC has had a reasonable opportunity to examine the terms of the proposed arrangement and make submissions to the court. ASIC has confirmed it considers that it has had such an opportunity and advised that it did not seek to make submissions or intervene to oppose the scheme at this hearing. Section 411(17) of the Corporations Act provides that the Court may not approve a compromise or arrangement unless it is satisfied that it has not been proposed for the purpose of enabling any person to avoid the operation of any of the provisions of Chapter 6 of the Corporations Act, or there is produced to the court a written statement by ASIC stating that it has no objection to the compromise or arrangement. The balance of the case law indicates that it is not necessary for the court to consider this matter at the convening stage, and this matter should be considered at the second hearing: Re Coles Group Ltd (No 2) [2007] VSC 523; (2007) 65 ACSR 494 at [16]-[24], Re AXA Asia Pacific Holdings Ltd [2011] VSC 4 at [15]. I will take that course. 21Several cases have identified the need to address performance risk, by ensuring there is a mechanism for scheme members to enforce the right to entitlements that are to be received under a scheme: Re Kaz Group Ltd [2004] FCA 738 at [4]-[5]; Re Tempo Services Limited [2005] FCA 410; (2005) 53 ACSR 523; Re Brambles Industries Ltd [2006] FCA 1273; (2006) 59 ACSR 501; Re APN News & Media Ltd [2007] FCA 770 at [23]; (2007) 62 ACSR 400; Re Macquarie Capital Alliance Ltd above. The Plaintiffs submit, and I accept, that any such risk addressed, in respect of the DMC1 Company Scheme, by a Deed Poll executed by DUECo on 30 May 2013 under which DUECo covenants in favour of each Securityholder participating in the schemes ("Scheme Participants") that it will observe and perform all obligations imposed on it under the Implementation Agreement, including the obligation to pay or procure the payment of the consideration to Scheme Participants in accordance with the terms of the DMC1 Company Scheme and a condition in the DMC1 Company Scheme of Arrangement that the transfer of DMC1 shares will be subject to DUECo first issuing DUECo shares to the Scheme Participants. 22In the case of the DUET1 and DUET 3 Trust Schemes, any performance risk is addressed by the Deed Polls executed by DUECo and DMC2 (as responsible entity of DUET2) on 30 May 2013 under which DUECo and DMC2 (in that capacity) respectively covenant in favour of each Scheme Participant that they will observe and perform all obligations imposed on it under the Implementation Agreement, including the obligation to pay or procure the payment of the consideration to Scheme Participants in accordance with the terms of the DUET1 and DUET 3 Trust Schemes; and proposed amendments to the DUET1 and DUET 3 constitutions that will be executed if the schemes become effective, which respectively provide that the transfer of DUET1 and DUET 3 units will be subject respectively to DUECo first issuing DUECo shares to the Scheme Participants and to DMC2 (as responsible entity of DUET2) first issuing DUET2 units to the Scheme Participants. 23The proposed amendments to the DUET1 and DUET3 constitutions will also provide that each DUET1 unitholder eligible to participate in the DUET1 and DUET3 Trust Schemes is deemed to have warranted that all of their DUET1 and DUET3 units, including any rights or entitlements attaching to them, that are respectively transferred under the DUET1 and DUET3 Trust Schemes will, at the time of such transfer, be fully paid and free from all mortgages, charges, liens, encumbrances, pledges, security interests and other interests of third parties of any kind, and that the unitholders have full power and capacity to transfer their units pursuant to the DUET1 and DUET 3 Trust Schemes. The balance of the case law, which I would follow, has accepted the legitimacy of such provisions, where they are disclosed in the information provided to securityholders, on the basis that they seek to ensure that scheme participants whose shares are subject to an encumbrance are not unfairly advantaged: Re APN News & Media Ltd above at [59]-[62]; Re Coles Group Ltd [2007] VSC 389; (2007) 25 ACLC 1380 at [42]-[45]; Re Hostworks Group Ltd [2008] FCA 64 at [41]; (2008) 26 ACLC 137; Re Cytopia Ltd [2009] VSC 560 at [23]. The proposed amendments to the DUET1 and DUET 3 constitutions also provide that, "to the maximum extent permitted by law", units transferred pursuant to the DUET1 and DUET3 Trust Schemes will be transferred free from all mortgages, charges, liens, encumbrances and interests of third parties of any kind. Provisions of this character have also been accepted in the case law: Re Investa Properties Limited [2007] FCA 1104; (2007) 25 ACLC 1186 at [30]; Re HPAL Limited [2007] FCA 1570 at [5]; Re Dyno Nobel Limited [2008] VSC 154 at [8]-[9]. Orders 24Having regard to these matters, I was satisfied that orders under s 411(1) of the Corporations Act should be made and that judicial advice leading to a meeting of the members of the managed investment schemes should be given as sought, and I made orders substantially in the form sought by the Plaintiffs, as initialled by me and placed in the file in each matter.

FT Eastment & Sons Pty Ltd v Metal Roof Decking Supplies Pty Ltd

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