Huntley Management Limited (ACN 089 240 513) v Australian Olives Limited

BACKGROUND AND PLEADING - PARTIES AND CLAIMS 6 The first respondent, Australian Olives Limited (ACN 078 885 042) ("AOL"), was the promoter of Project 5 and, until on or about 18 March 2008, was the responsible entity of Project 5: para [2] of the ASC. The second to seventh respondents were the directors of AOL during the relevant period. AOL was replaced by HML as responsible entity for Project 5 as a result of a vote of investors in Project 5. 7 After HML's appointment as responsible entity, it carried out certain investigations and commissioned reports from Australian Green and Gold Limited ("AGG") in relation to Project 5 and AOL's performance while AOL was responsible entity of Project 5. HML formed the view that there had been serious breaches by AOL of its obligations to the investors both in its disclosure in the Project 5 prospectus ("the Prospectus") and in its management of Project 5. HML negotiated and secured a litigation funding agreement with LCM Litigation Fund Pty Ltd, by its subsidiary ALF No 5 Pty Ltd. As a result of the events just described, these proceedings were issued. 8 Consistent with authority, I proceed to determine the application on the basis that the assertions of fact in the ASC, taken at their highest, are to be accepted: Lotus Development Corporation v Mayne Nickless Ltd (1991)100 ALR 167 at 168-169 citing Barwick CJ in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129. 9 The starting point is the Prospectus issued by AOL in relation to Project 5. In the Prospectus, Project 5 was described as involving the establishment of olive groves on a portion of land which had been dedicated to Project 5, known as the "Yallamundi land", located south west of Toowoomba in Queensland and owned by Collective Olive Groves Limited ("COGL"): para [6] and [9] of the ASC. The Project offered investors the opportunity to acquire "Grove Interests", being interests in one of 3,520 olive groves on the "Yallamundi land" with each grove having an area of 0.15 hectare (1,500m2) and planted with 53 olive trees: paras [10] and [11(a) and (b)] of the ASC. Each investor was required to pay an initial investment sum of $4,433 for each Grove Interest and was required to enter into: 1. a Grove Licence Agreement with COGL, giving the investor a licence to use and occupy a separate and identifiable 0.15 hectare olive grove on the "Yallamundi land"; and 2. a Grove Agreement with AOL, under which AOL would establish and maintain the grove until 30 June 2023. (Under the Grove Agreement, AOL undertook to use reasonable endeavours to harvest and market the olive products produced from the investor's grove at the maximum available price.) See paras [11(c), (d) and (e)] of the ASC. 10 In addition to the initial investment of $4,433, each investor was to pay an annual licence fee to COGL of $33.00 (inclusive of GST) and an annual management fee to AOL of $935.00 (inclusive of GST) in the first year for the ongoing maintenance of the investor's grove: para [11(f)] of the ASC. In subsequent years, the annual licence fee to AOL was to be indexed annually in accordance with the consumer price index: para [11(f)] of the ASC. 11 Although AOL undertook to harvest an investor's grove (see [9(2)] above), an investor could elect to conduct its own harvesting and marketing of olives from their allocated grove or groves: para [11(g)] of the ASC. The trees on the groves were to be "legally" owned by COGL but, for an additional $80, each investor would be entitled to acquire a parcel of 73 ordinary shares in COGL for every Grove Interest held by that investor. AOL offered 256,960 shares in COGL to investors in Project 5: paras [11(j) and (k)] of the ASC, para [11(k)] of the Defence and para [3] of the Reply. 12 After describing the parties, the relevant entities and the contents of the Prospectus, the ASC is divided into the following principal headings: 1. Prospectus representations and promises by AOL: paras [12]-[15]; 2. AOL's Tree Replacement Obligation: para [16]; 3. AOL's contractual obligations under the Grove Agreement: paras [17]-[19]; 4. Grove licence fee: paras [20] and [21]; 5. Take-up of Grove Interests and planting of trees: para [22]; 6. Misleading and deceptive conduct: paras [28]-[45]; (a) Reliance: para [28]; (b) Water Representations and Viability Representations misleading: paras [29]-[32]; (c) AOL misleading conduct - Corporations Act: paras [33]-[37]; (d) AOL misleading conduct - ASIC Act: para [38]; (e) Loss and damage suffered by investors: para [39]; (f) Liability of AOL for losses: para [40]; (g) Director Respondents' liability for losses: paras [41]-[45]; 7. AOL's breaches of contract and duty: paras [46]-[61A]; (a) Duties under the Corporations Act and Constitution: paras [46]-[49]; (b) Breaches of the Compliance Plan and related duties: paras [49A]-[49M]; (c) Breaches of Grove Agreements: paras [50]-[55A]; (d) Director Respondents' involvement in contraventions: paras [56]-[57A]; (e) Director Respondents' contraventions of duties: paras [58]-[61A]; 8. Death of, and damage to, Scheme trees and charging of excessive fees: paras [62]-[68]; (a) Breach of Tree Replacement Obligation and Grove Agreements: paras [69]-[70]; (b) AOL's breaches of duty in respect of management fees: para [71]; (c) Investors' loss and damage by reason of breaches of Tree Replacement Obligation and duties in relation to management fees: para [72]; (d) AOL's liability for investors' loss and damage by reason of breaches of Tree Replacement Obligation and duties in relation to management fees: para [73]; (e) Scheme's loss and damage by reason of breaches of Tree Replacement Obligation and duties in relation to management fees: para [73A]; (f) Director Respondents' involvement in contraventions: paras [74]-[75A]; (g) Director Respondents' contravention of duties: paras [76]-[79A]. 13 As is apparent from those headings, there are two principal groups of claims - AOL's allegedly misleading and deceptive representations and AOL's alleged breaches of contract and duty.

AOL's allegedly misleading and deceptive representations 14 The representations were allegedly made to investor applicants prior to them executing the relevant Project 5 agreements (see [9] and [10] above) and making the requisite payment to participate in Project 5. The representations are said to be contained in, or made because of omissions from, the Project 5 Prospectus. The representations are divided into two sub headings - "the Water Representations" (para [15(c)] of the ASC) and "the Viability Representations" (para [15(d)] of the ASC). The ASC (paras [29]-[38]) alleges that the representations were materially false or misleading, misleading or deceptive and further or alternatively, likely to mislead or deceive in contravention of: 1. ss 728, 1022A(1), 1041E, 1041F of the Corporations Act 2001 (Cth) ("the Corporations Act"); 2. further or alternatively, s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) ("the ASIC Act"). Ancillary claims are also made against the remaining respondents, defined as the "director respondents": paras [41]-[45] of the ASC.

AOL's breaches of contract and duty and ancillary relief against director respondents 15 The second group of claims concern the management of Project 5 by AOL as the former responsible entity and include: 1. Claims for breach of the Grove Agreement by AOL. AOL and each investor were parties to a Grove Agreement under which AOL agreed to establish and maintain the olive groves, including by ensuring that they had adequate irrigation. The applicants allege that AOL was in breach of its contractual obligations from the outset because it had not put in place the necessary irrigation infrastructure; 2. Claims that AOL breached its duties as a responsible entity under the Corporations Act. The applicants allege that AOL's duties are similar to fiduciary duties - to act in the best interests of the members of Project 5, to avoid conflicts of interest, to exercise due diligence and so on. The applicants allege these duties were breached because AOL preferred it own interests, thereby depriving them of the opportunity to remedy the defaults and terminate Project 5 if it failed to do so. The ASC also contends that the director respondents were involved in AOL's contraventions of its responsible entity duties; 3. Claims against the director respondents for breach of their duties under s 601FD of the Corporations Act; and 4. Claims that AOL was in breach of its contractual and statutory duties by continuing to charge the full amount of the annual management fee even though a good third of the olive trees died and had not been replaced. The applicants allege that certain of the director respondents were involved in this breach by AOL of its statutory duties and / or contravened their duties under the Corporations Act.

Summary 16 The claims in the ASC relate to matters occurring before and after the commencement of Project 5 though, it should be noticed that the earliest complaints relate to the content of the Project 5 Prospectus, and therefore concern a state of affairs at a time when the Prospectus, the Constitution and the form of the Grove Agreement and the form of the Grove Licence Agreement were in existence but the investors were not yet members of the Project. 17 The loss and damage claimed is quantified, in some cases, as the amount contributed by the investors initially and, in other cases, as the amounts paid as ongoing management fees under the Grove Agreement. It is however of the first importance to notice that no claim is made by or on behalf of an investor for relief which would bring their participation in Project 5 to an end. That is, all of the claims, whether made in relation to events before the Project got under way, or subsequent events, are claims made on the premise of their continued membership of the Project. Not only that, the claims that are made in relation to these events (both before the Project got under way and those concerning later events) take the form, in effect, of claims that the amounts contributed by the investors have been lost either to the investors or the Project. 18 Once these features of the claims are understood, all of the complaints advanced by the respondents will be seen to fall away. They fall away because, reduced to their essentials, the claims can be seen as ones in which the current responsible entity (HML) and members of the Project claim damages against the former responsible entity (AOL) and its directors for contraventions of statutory prohibitions and contractual obligations which are alleged to have caused loss to either the Project as a whole or its members. The fact that the loss is sought to be measured by reference to the particular levels of contributions made by members at various stages in the life of the Project should not be permitted to obscure the essential nature of the claims that are sought to be advanced. Damages are sought on the footing that money was paid but has been lost to either the Project or to its members. Whether those claims are good or bad is of course not a matter I am in a position to, or asked to, make any judgment about. It is enough to say that I am not persuaded that the claims as framed in the ASC are unarguably bad and I am not persuaded that HML has been improperly and unnecessarily joined as a party to these proceedings or that these proceedings are brought in the names of the individual members without authority.

ROLE OF HML AS THE RESPONSIBLE ENTITY - THE ASC, THE CORPORATIONS ACT AND THE SCHEME DOCUMENTS 19 Project 5 was and continues to be a registered management investment scheme: Ch 5C of the Corporations Act. 20 As the responsible entity of Project 5, HML is obliged to exercise its statutory and other obligations. So, for example, HML must "operate the scheme and perform the functions conferred on it by the scheme's constitution and [the Corporations] Act": s 601FB of the Corporations Act. Section 601FC prescribes HML's statutory duties and powers and the manner in which they are to be exercised. Those powers and duties include, by way of example: 1. to act in the best interests of the members: s 601FC(1)(c); 2. to comply with the Project's compliance plan: s 601FC(1)(h); 3. to ensure that all payments out of the Project Property are made in accordance with the Project's constitution and the Corporations Act: s 601FC(1)(k); 4. to carry out or comply with any other duty, not inconsistent with the Corporations Act, that is conferred on the responsible entity by the scheme's Constitution: s 601FC(1)(m). 21 Consistent with s 601FC of the Corporations Act, the Constitution of Project 5 dated 28 February 2003 (between, and binding on, the investors and the responsible entity) contains extensive provisions about the legal obligations of the parties and the rights and powers of each party: cl 1. A number of other provisions of the Constitution should be noted. 22 Clause 20.2 of the Constitution provides: In addition to all other powers conferred on the Responsible Entity by this Constitution and the [Corporations] Act, the Responsible Entity has the power to do any act or thing, which, in the Responsible Entity's opinion, is necessary for the proper and efficient establishment, management and development of the Project. (Emphasis added.) "Project" is defined in the Constitution (in Sch 1) as the managed investment scheme established by the Constitution (defined previously as Project 5 - see [1] above). In addition, the responsible entity covenants with the members to act in accordance with the Grove Licence Agreements and the Grove Agreements (cl 20.5). 23 Secondly, consistent with s 601FC(2) of the Corporations Act, the Constitution provides "Project Property" is held by the responsible entity on trust for the members for the term of Project 5: cl 3.1. The term "Project Property" is defined in Sch 1 to mean: The Funds, all Investments, assets and any other property acquired throughout the term of the Project using the money or property contributed by Members, but excluding any assets or any other property vested in the Members … The definition acknowledges that there will be "Project Property" (or scheme property) as well as other property connected with the scheme which is not "scheme property": see Treecorp Australia Ltd (in liq) v Dwyer (2009) 175 FCR 373 at [43]. 24 Clause 3.3 of the Constitution provides that: The law applying to trustees and trusts at common law does not apply to the Responsible Entity, except as expressly referred to in this Constitution or the [Corporations] Act. 25 Thirdly, cl 7.3(a) of the Constitution provides that: Despite anything else in this Constitution, the Responsible Entity is not entitled to any fees, recovery of costs or indemnity from Project Property in circumstances where the Responsible Entity has not properly performed its role under the Constitution or the [Corporations] Act. 26 As a result, the responsible entity must not pay any money from the "Funds" contributed by investors (defined in the Constitution as the "Application Fund and Proceeds Fund") unless authorised by the Constitution, the Corporations Act or where the payment is in respect of identified types of payments: cl 20.1 of the Constitution. Further, cl 8.1 provides that the responsible entity has a right of indemnity out of the Funds and the Project Property in respect of any liability incurred by the responsible entity in the performance of its duties as the responsible entity and all fees payable to the responsible entity under the Constitution except where there has been negligence, deceit, breach of duty, fraud or breach of trust by the responsible entity. Moreover, cl 8.6 provides that nothing in the Constitution limits the liability of the responsible entity for negligence, deceit, breach of duty or breach of trust. 27 Next, cl 20.4 of the Constitution provides that: The Responsible Entity may on its own behalf or on behalf of any Applicant or Member commence and prosecute legal proceedings of any kind in any court in respect of the Project or any Member's Interest. 28 "Interest" is defined in Sch 1 of the Constitution as: The interest in the Project a Member acquires by applying under the Prospectus and having the Application accepted by the Responsible Entity. An Interest includes a Member's participation in a Grove Licence Agreement and a Grove Agreement. … An Interest also includes - (a) the Member's business in carrying on the primary production enterprise of planting, maintaining, harvesting and selling the produce from the Grove; and (b) the net proceeds which result from the Member carrying on its business. 29 In this context, s 601MA of the Corporations Act is also relevant. It provides that: (1) A member of a registered scheme who suffers loss or damage because of conduct of the scheme's responsible entity that contravenes a provision of this Chapter may recover the amount of the loss or damage by action against the responsible entity whether or not the responsible entity has been convicted of an offence, or has had a civil penalty order made against it, in respect of the contravention. (2) An action under subsection (1) must be begun within 6 years after the cause of action arises. (3) This section does not affect any liability that a person has under other provisions of this Act or under other laws.

RESPONDENTS' ARGUMENTS AND ANALYSIS 30 As noted earlier, the respondents make two complaints - that HML should not be party to the proceedings and, secondly, the investor applicants have not authorised the solicitors to institute proceedings on their behalf.

Removal of HML as a party 31 The respondents' contend that notwithstanding the subject matter of the two groups of claims (see [6]-[18] above), HML should be removed as a party to the proceeding. They dealt with each group of claims separately.

Breach of contract and duty claims 32 In relation to the second group of claims - for breach of contract and duty - the respondents addressed their complaint in the following terms: [HML] contends that it can bring the proceeding in the capacity of trustee of the "scheme property" of the scheme: see paragraph 4(b)(ii) of the [ASC]. Thus, pleadings have now been introduced alleging that causes of action against director Respondents, and the former Responsible Entity [AOL], concerning breaches of the Grove Agreements and duties imposed under s 601FC of the [Corporations Act] are causes of action that can be brought by the new Responsible Entity [HML] against the former Responsible Entity and the director respondents. Yet claims remain that the investor applicants also bring such causes of action. In each case the loss and damage claimed consists of the recovery of contributions made by members to the scheme, management fees and licence fees: see paragraphs 49F, 49M, 55A, 57A, 61A, 73A, 75A and 79A of the [ASC]. The fallacy is that these alleged losses can be described as "scheme losses": see the heading immediately prior to paragraph 73A. In truth the losses claimed are those of individual investor applicants (or members) and not those of the scheme itself. 33 As the respondents acknowledge, this group of claims is pleaded against the respondents in two ways - by HML as responsible entity and by the applicants as individual investors. The respondents make two complaints - that the investor applicants bring the same claims as HML and HML is not a proper party, and secondly, that the applicants' particulars of loss and damage show that the loss allegedly suffered was loss by the investors, not the scheme itself. 34 HML is described in para [4] of the ASC in the following terms: The First Applicant, [HML]: (a) was appointed to replace AOL as the Responsible Entity of the Scheme on 18 March 2008; (b) is: (i) empowered, pursuant to clause 20.4 of the Constitution for the Scheme, to initiate and conduct this proceeding on behalf of the other applicants in its capacity as the responsible entity for the Scheme; (ii) further or alternatively, entitled to bring this proceeding in its capacity as trustee of the scheme property of the Scheme ("the Scheme Property"). 35 As that paragraph of the ASC pleads, HML is now the responsible entity. The respondents focus on the last sub-paragraph (para (b)(ii)) as providing the only basis for HML to institute proceedings. That is not accurate. It is not the only capacity in which HML can and does bring the second group of claims in these proceedings. 36 As noted earlier, the Corporations Act and the Constitution, read together, provide that HML as the responsible entity has certain duties and powers: see [19]-[29] above. In the present context, those provisions of the Corporations Act and the Constitution expressly empower HML, amongst other things: 1. to "operate the scheme and perform the functions conferred on it by the Scheme's Constitution and [the Corporations Act]": s 601FB of the Corporations Act; 2. in addition to all other powers conferred on HML by the Constitution and the Corporations Act, to do any act or thing, which, in HML's opinion, is necessary for the proper and efficient establishment, management and development of the Project: cl 20.2 of the Constitution; and 3. on its own behalf or on behalf of any applicant or member, to commence and prosecute legal proceedings of any kind in any court in respect of the Project or any Member's Interest: cl 20.4 of the Constitution. As noted at [22] above, the "Project" is the managed investment scheme established by the Constitution (being Project 5 - see [1] above). The definition of "Interest" is set out in [28] above. 37 Project 5 remains registered as a managed investment scheme governed by the Corporations Act, the Constitution, the Grove Licence Agreement and the Grove Agreement: see [19]-[28] above. The entity which is obliged to operate it is HML. 38 However, HML was appointed as the responsible entity in March 2008. From the time of their appointment, HML allegedly faced difficulties. HML reported to investors as early as 10 April 2008 that there were no project funds to operate Project 5. Notwithstanding that fact, HML gave approval for the harvesting of the olives and had its responsible manager inspect the Project's property. In a letter to investors dated 27 May 2008 (which enclosed a copy of the report prepared by AGG (see [7] above)), HML stated, in part, that: Please find enclosed a copy of a report from our Responsible Manager dated 24 April 2008 following his inspection of the Project property on 23 April 2008. The report covers … Project 5 … and highlights the number of dead and commercially unviable trees on your Project. Clearly this situation is disgraceful. The future of your Project remains uncertain and largely depends upon a successful claim against … [AOL]. In this regard we have sought advice from our lawyers on grounds for a legal action for recovery from AOL of funds taken for dead trees that have not been replaced and for water that has not been supplied. We have advised AOL of our intention to proceed with a claim and have now met a leading specialist litigation lawyer to seek their advice on a class action. … Our farm manager has completed the harvest and a total of 220 tonnes of olives have been recovered from your Project. This has been crushed, processed and quality assessed and the result is a yield of 17% of extra virgin oil (36,000 litres). We are currently reviewing options for its sale. With the lack of water being a continuing major problem and wanting to limit costs we have decided for the moment to place the Project on "care and maintenance" pending a decision on its future. (Emphasis added.) 39 By August, HML's investigations had progressed. It provided a further report to investors dated 22 August 2008 which stated, in part, that: [AOL] has charged management fees in advance for the year ending 30 June 2008 and are required by law to account to us for the proportion of these annual charges from 19 March 2008 to 30 June 2008. Despite our numerous requests we have received nothing to date from AOL. Despite the fact that we had received no payment from AOL, we completed the harvest incurring costs in excess of $100,000 and have incurred other substantial costs in managing the Project. … I believe growers have been providing the party for AOL and there needs to be a change in the way the Projects are structured and managed. As things stand, you are legally obliged to pay the current management fees for the term of the project and I believe investors have little hope of achieving any reasonable return on this basis. We propose charging management fees at the current rate on a quarterly basis until we have resolved the best option for the future of the project and this will be concluded with agreement by a majority voice from growers. … Options for the future include the termination of the Project. We could determine this as Responsible Entity on the grounds it cannot achieve its objectives. … We are currently assessing the options … (Emphasis added.) 40 The next report to investors by HML was dated 17 December 2008. A copy was not provided to the Court. However, in another letter to investors dated 10 March 2009, the 17 December letter was described as "outlining [HML's] plans and timeframe for all projects up to the end of June 2009". 41 By 10 March 2009, HML reported to investors that: I want to assure all Project 5 growers that, that plan is on track. … Peter Shakespeare, our farm manager, has completed his evaluations of all six projects. As we have advised, you will receive our recommendations based on his reports along with a business plan for the future later this month. A meeting of growers will be arranged following the release of these recommendations. At that meeting, growers will be offered the choice of terminating their involvement and "walking away" from the project subject to their management fees being paid up to that time. The termination date is expected to be no later than 31 May 2009. For those who choose to continue their involvement under a new structure that option will be available. Both these options will be clearly explained in the report which will cover all projects. You have all received a copy of our farm manager's report. … The farm manager has been active throughout 2008 and 2009 improving the groves in Project 5. Project 5 is now clear of lace bug and effective weed control has been undertaken. He has advised that his staff on the plantation, most of whom are ex AOL employees, have reported that all projects have never looked so good. While we have been fortunate with the amount of rain that has been received in recent months the efforts of the farm manager and his staff have been commendable and in the best interests of all Growers. Growers are welcome to visit Yallamundi at any time. We informed you earlier of our agreement with LCM Litigation Fund to bring a claim against Australia Olives Limited and its directors in relation to both Project 5 and 6 for their management and the disclosure documents issued by them with respect to those projects. This Statement of Claim for Project 5 will be lodged with the Federal Court next week. It will seek recovery of substantial amounts including the majority of payments made by investors. … … On our appointment we undertook to restructure the Project along with the remaining AOL projects and, if Growers wished, provide the opportunity to "walk away" from their investment. We have outlined our plan and will implement it - Growers will have the opportunity to "walk away" from their investment subject to their fees being up to date, or, remain as an investor in a restructured business with the prospect of a commercial return. (Emphasis added.) 42 These proceedings were filed on 18 March 2009. 43 The Project is said to be short of funds and at least one of the sources being explored by HML to secure funds is action against AOL, as the former responsible entity. Whether that action is being commenced by HML under s 601FB of the Corporations Act (read in the context of the other provisions including s 601FC) or cl 20 of the Constitution or both is not an issue I need to resolve. It is sufficient for present purposes to conclude that HML had the power to commence the proceedings to seek to recover the loss and damage caused by the alleged breaches of contract and duty pleaded in the ASC. 44 That then brings me to the question of loss and damage. The respondents submitted that the applicants' allegation that HML, as the new responsible entity, "brings action to recover loss" was "misconceived, and contrary to the whole thrust of the claim which is one brought to recover loss to individual investors, and not loss caused to the scheme as such". 45 There are, in my view, two answers to these contentions. First, as set out above (see [29]), s 601MA of the Corporations Act provides that a member of a registered scheme who suffers loss or damage because of conduct of the scheme's responsible entity that contravenes a provision of Ch 5C of the Corporations Act may recover the amount of the loss or damage by action against the responsible entity. Section 601MA is to be understood in its context. Section 601MA was one of the core provisions inserted in Ch 5C to implement and "preserve the concept of a single responsible entity responsible to members for the operation of a scheme": Explanatory Memorandum, Managed Investments Bill 1997 (Cth), Ch 14. It ensures that the "liability for any loss of investors' funds, through negligent or illegal activity, rests entirely with the responsible entity": Second Reading Speech, Managed Investments Bill 1997 (Cth), House of Representatives (1997) Vol 218, p 11928. 46 However, in a 2003 industry report entitled Managed Investment Schemes: an Industry Report, G Moodie and Prof I Ramsay from the Centre for Corporate Law and Securities Regulation at The University of Melbourne, considered the policy assumptions that had in their view been made in Ch 5C of the Corporations Act in dealing with "investor rights". Section 601MA was the prime example used by them. The authors said (at 74-75): The grant of a direct cause of action to scheme members is premised on a number of flaws relating to both [Ch 5C of the Corporations Act] and how it operates in practice. The primary flaw is that there is no means by which scheme members can become aware that the [responsible entity] has 'contravened a provision of this Chapter'. Neither the board nor the compliance committee of the [responsible entity] is under an obligation to report or disclose contraventions (material or otherwise) to scheme members. … The second flaw is that it assumes that scheme investors will have sufficient resources and inclination to bring a civil recovery action against the [responsible entity]. In relation to non-institutional scheme members, this is unrealistic given that in Australia civil proceedings, costs follow the event and thus the risk of an unsuccessful action is likely to be prohibitive to implementing proceedings. … 47 It must be remembered that the Corporations Act expressly provides that a responsible entity must "operate the scheme and perform the functions conferred on it by the scheme's constitution and [the Corporations] Act": s 601FB(1). In that context, cl 20 of the Constitution for Project 5 is important. Clause 20.4 provided that HML could "on its own behalf or on behalf of any Applicant or Member commence and prosecute legal proceedings of any kind in any court in respect of the Project or any Member's Interest". Clause 20.4 provides that the proceedings commenced by HML "may be of any kind" and "in any court". There are, however, some limitations. The proceedings must be commenced on HML's own behalf or on behalf of any applicant or member. That limitation recognises that HML may institute proceedings on behalf of a group of people who have applied for interests but not yet been accepted. Next, the proceedings commenced on its own behalf or on behalf of any applicant or member must be "in respect of the Project or any Member's Interest". "Project" is defined in the Constitution (in Sch 1) as the managed investment scheme established by the Constitution (see [22] above). "Interest" is defined in Sch 1 of the Constitution as the interest in the Project a member acquires by applying under the Prospectus and having the application accepted by the responsible entity and also includes a member's participation in a Grove Licence Agreement and a Grove Agreement, the member's business in carrying on the primary production enterprise of planting, maintaining, harvesting and selling the produce from the grove and the net proceeds which result from the member carrying on its business (see [28] above). 48 Such a broad provision is not surprising: see eg Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 511. Clause 20.4 enables a responsible entity in the position of HML to deal not only with the problems and issues identified by Moodie and Prof Ramsay (see [46] above) but also the fact that Ch 5C of the Corporations Act recognises that the statutory right of action under s 601MA against the responsible entity for loss and damage suffered as a result of a contravention of Ch 5C does not extend to actions against or facilitate accountability to scheme members for loss or damage suffered as a result of contraventions of Ch 5C by parties other than the responsible entity. The possibility of action against others depends on the general law and ss 1324 and 1325 of the Corporations Act. Clause 20 permits a responsible entity to address these kinds of claims thereby minimising, if not removing, the number, complexity and expense of multiple proceedings raising the same or similar issues. Of course, if members with at least 5% of the votes in a scheme are unhappy with the actions of HML, they have a statutory course open to them under s 601FM - call a members' meeting to consider and vote on a resolution that HML be removed as the responsible entity. 49 For those reasons, I consider that Ch 5C of the Corporations Act read with the Constitution (including cl 20), was intended to, and does, empower HML to institute proceedings alleging claims for breach of contract and duty by a former responsible entity. Put another way, there is nothing in the express words of cl 20.4 either alone or read in conjunction with the other provisions of the Constitution or the Corporations Act which support the respondents' contention that cl 20.4 only authorises certain kinds of action against certain kinds of defendants. 50 For example, the respondents submitted that cl 20.4 only authorised the bringing of actions relating to the management of the Project. For the reasons stated at paras [45]-[47], I reject that contention. However, even if that was the correct or preferable construction of cl 20.4 (which I do not accept), in the circumstances which presently exist in relation to Project 5, it cannot be said that these proceedings do not relate to the management of the Project. As HML reported to investors, it is "operating" the Project but the course of management adopted by HML is dependent, at least in part, on the outcome of these proceedings. In my view, HML has not been improperly and unnecessarily joined as a party to these proceedings in relation to the second group of claims.

AOL's misleading and deceptive representations 51 The first group of claims of this kind concern the alleged misrepresentations by AOL summarised in para [14] above. The respondents contend that despite the provisions of the Corporations Act and the Project's Constitution (see [19]-[29] above), HML is improperly and unnecessarily joined as a party to the proceeding in relation to these claims: O 6 r 9 of the Federal Court Rules 1979 (Cth). I reject that contention. 52 Part 5C.2 of the Corporations Act provides the legislative framework for the responsible entity of a managed investment scheme. But, as we have seen, the Corporations Act cannot be read in isolation. The responsible entity must operate the scheme and perform the functions conferred on it by the Project's Constitution and the Corporations Act: s 601FB. For that reason alone, HML is a proper party. It is, on any view, a person with sufficient connection to the controversy: see Edge; Re Eco Panels Australasia Pty Ltd (in liq) (2007) 61 ACSR 139 at [12]. It is responsible entity of a managed investment scheme in which the members of the scheme raise serious allegations about what was contained in, and omitted from, the Project's Prospectus. 53 Moreover, the representations made by AOL which are the subject of complaint were made at a time when the Constitution existed and that Constitution and the Corporations Act bound AOL (as responsible entity) to exercise its powers and functions in particular ways. The allegation is that AOL did not do so. 54 Thirdly, cl 20.2 permits HML to do any act or thing, which, in HML's opinion, is necessary for the proper and efficient establishment, management and development of the Project. As with the second group of claims, the substance of the unchallenged evidence from HML was that there were no project funds to operate the Project, HML had paid for the cost of the 2008 harvest itself and that the issue of proceedings was a way the members "would be able to get some of their investment money back". It is therefore unsurprising that at least one of the options explored, and then taken, by HML as the responsible entity was to seek to recover investment funds paid to AOL by the members in circumstances where the contents of the Prospectus were allegedly misleading and deceptive. It might provide a source of funds to enable the members to seek "to generate a commercial return" from the Project. 55 Fourthly, cl 20.4 of the Constitution authorised HML, on its own behalf or on behalf of any applicant or member, to commence and prosecute this aspect of the proceedings. As noted earlier (see [45]-[50]), the language of the clause is broad. In light of the legislative scheme of Ch 5C of the Corporations Act and the definition of both "Project" and "Interest", it is not possible to conclude that the Prospectus and its contents is not a matter "in respect of the Project or any Member's Interest". In fact, without the Prospectus and its contents, there would be no Project and no Member's Interest. 56 These matters are important. Perhaps, standing alone, they are decisive. However, the points made earlier (see [16]-[18]) are conclusive. HML has not been improperly and unnecessarily joined as a party to these proceedings in relation to this group of claims.

Applicants not authorised solicitors to bring proceeding 57 In light of the views earlier expressed, it is not necessary for me to finally determine this part of the Motion. However, if the matter should proceed further, it might be of assistance if I set out in summary form why this aspect of the Motion would in my view also fail. 58 First, cl 20.4 of the Constitution was binding on all investors under s 601GB of the Corporations Act, a fact which was set out in the Project 5 Prospectus on at least 2 pages. 59 Secondly, at the time of applying for an interest in the Project, each investor acknowledged in writing that he or she agreed to be bound by the Constitution. 60 Thirdly, there is no suggestion that the authority conferred on HML by cl 20.4 has not been exercised in good faith or not in the interests of the members: cf Distillers Co Bio-Chemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 at 8, 9 (per Menzies J) and 23 (per Stephen J) and s 601FC of the Corporations Act. 61 Fourthly, even if cl 20.4 of the Constitution did not authorise HML to commence the proceedings (a submission I reject), each investor was sent a pro forma letter and asked to select one of the following options: 1. I support the Court action and confirm the authorisation given to Huntley Management Ltd (HML) in clause 20.4 of the Constitution for HML to bring the Court proceedings and to instruct DMAW Lawyers for and on behalf of me and in my name provided that this is at no cost to me except if there are any recoveries from the Court action and then only from those recoveries. 2. I oppose the Court action and wish to be removed as a named Applicant in the Court proceedings. I confirm that I fully understand that if I select this option then in the event the Court action is successful and monies are recovered, I will not be entitled to any part of any monies recovered. 3. I am unsure of my position in regard to the Court action and I would like further information. 62 Option 1 was supported by 55.81% of investors and 67.73% of Grove Interests. Even if cl 20.4 of itself was insufficient authorisation (a view I do not hold), I accept that by selecting Option 1, that investor ratified HML's actions in commencing these proceedings on their behalf: Presentaciones Musicales SA v Secunda [1994] Ch 271 at 277 per Dillon LJ (Nolan LJ agreeing) and at 284-285 per Roch LJ; Walsh v Permanent Trustee Australia Ltd (1996) 21 ACSR 213 at 217. Eight investors (6.20% of total investors) sought to be removed as a party to the proceedings. HML has informed the Court that they will be removed. It is worth noting that one of the eight has already settled with AOL on a confidential basis and another is a company owned by the sixth respondent. The balance of the investors did not respond or had ticked option three. At the time of the hearing of the Motion, in relation to the third group, the applicants' solicitors were liaising with or following up each of those investors. 63 After the hearing, the applicants' solicitors informed the respondents and the Court that as at 14 September 2009: 1. 90 Project 5 investors had returned the pro forma letter indicating support for the action brought by HML; 2. 11 Project 5 investors had sought to be excluded as investor applicants and had been removed; 3. of the remaining Project 5 investors: (a) 11 had verbally conveyed their support for the proceedings and expressed an intention to return the pro forma letter confirming their support; (b) 8 had requested further time to consider their position; and (c) 10 were yet to respond despite attempts to contact them. 64 I have no reason to doubt that the remaining 18 Project 5 investors will be dealt with in an appropriate manner and without delay and that the Court will be kept properly informed. If circumstances should change, I would expect HML to inform the Court of such matters. 65 For those reasons, it is not demonstrated that the proceedings are an abuse of process within the meaning of O 20 r 5 of the Federal Court Rules 1979 (Cth).

ORDERS 66 I will now grant leave for the applicants to file and serve the ASC and order that they pay the respondents' costs thrown away be reason of the ASC. 67 For the reasons set out above, I would dismiss the Motion and order that the costs of and incidental to the Motion be costs in the cause. I certify that the preceding sixty-seven (67) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.

Counsel for the Respondents: Mr Cawthorn SC with Mr Kirby

Solicitor for the Respondents: McMahon Clarke Legal

Date of Amended Statement of Claim and further written submissions: 4 and 8 September 2009.

Date of Judgment: 24 September 2009