First issue: Whether relief available under s 1325(2)
16 Chapter 5C is entitled "Managed Investment Schemes" and sets out detailed provisions regulating the management of such schemes and the responsibilities attendant thereon. The chapter is divided into parts. Part 5C.2 deals with the position of the responsible entity and is itself broken down into divisions. Division 1 is headed "Responsibilities and Powers". Contained within that division is s 601FD which specifies the duties imposed upon the officers of a responsible entity. The plaintiffs' proposed pleading alleges against the former responsible entity's officers that they failed to comply with the duties imposed upon them by this provision. The duties are of the characteristic kind one might expect to be cast upon those in a fiduciary position of trust. Nevertheless, it is worth setting it out. Section 601FD provides:
Duties of officers of responsible entity
(1) An officer of the responsible entity of a registered scheme must:
(a) act honestly; and
(b) exercise the degree of care and diligence that a reasonable person would exercise if they were in the officer's position; and
(c) act in the best interests of the members and, if there is a conflict between the members' interests and the interests of the responsible entity, give priority to the members' interests; and
(d) not make use of information acquired through being an officer of the responsible entity in order to:
(i) gain an improper advantage for the officer or another person; or
(ii) cause detriment to the members of the scheme; and
(e) not make improper use of their position as an officer to gain, directly or indirectly, an advantage for themselves or for any other person or to cause detriment to the members of the scheme; and
(f) take all steps that a reasonable person would take, if they were in the officer's position, to ensure that the responsible entity complies with:
(i) this Act; and
(ii) any conditions imposed on the responsible entity's Australian financial services licence; and
(iii) the scheme's constitution; and
(iv) the scheme's compliance plan.
(2) A duty of an officer of the responsible entity under subsection (1) overrides any conflicting duty the officer has under Part 2D.1.
(3) A person who contravenes, or is involved in a contravention of, subsection (1) contravenes this subsection.
(4) A person must not intentionally or recklessly contravene, or be involved in a contravention of, subsection (1).
17 Chapter 5C does not provide any machinery by which compensation may be awarded to a person who suffers loss or damage by reason of a breach by an officer of one of the duties imposed on him by s 601FD. It does, however, permit the members of a registered scheme to recover loss from the responsible entity (but not its officers or advisors) if it contravenes the requirements of Chapter 5C: s 601MA. That provision is of no assistance to the plaintiffs in their claims against MFSIM's officers or the auditors.
18 It is, therefore, to provisions lying outside Chapter 5C which a person must turn to in order to recover damages from an officer of the responsible entity for a breach of the duties imposed upon him by s 601FD. Many hundreds of pages later in the Act there appears Chapter 9 which is entitled "Miscellaneous" and which is also divided into parts. One of these is Part 9.4B which is entitled "Civil Consequences of Contravening Civil Penalty Provisions". Section 1317E is contained within that part and it sets out a list of provisions which are said to be "civil penalty provisions". One consequence of a provision being a civil penalty provision is the ability of ASIC under s 1317J(1) to apply for the imposition of a civil penalty of up to $200,000: s 1317G(1). Another consequence is the ability of a responsible entity of a managed investment scheme to apply for a compensation order, a concept elucidated by s 1317H(1), which relevantly provides:
Compensation orders--corporation/scheme civil penalty provisions
Compensation for damage suffered
(1) A Court may order a person to compensate a corporation or registered scheme for damage suffered by the corporation or scheme if:
(a) the person has contravened a corporation/scheme civil penalty provision in relation to the corporation or scheme; and
(b) the damage resulted from the contravention.
The order must specify the amount of the compensation.
Damage includes profits
19 This must be read with s 1317J(2) which provides:
Who may apply for a declaration or order
…
(2) The corporation, or the responsible entity for the registered scheme, may apply for a compensation order.
20 The list of civil penalty provisions in s 1317E(1) includes s 601FD(3). The text of s 601FD is set out above. A comparison with it shows that it is not, however, s 601FD(3) which imposes any duties upon the officers of a responsible entity. The substantive duties are imposed by s 601FD(1). Section 601FD(3) assumes that s 601FD(1) has been contravened; it says as much. It then declares that a person contravening s 601FD(1) also contravenes s 601FD(3). This is a curious statement in some ways. "Contravene" means to infringe or to disobey. Subsection (3) establishes no rule or norm susceptible to disobedience. That entails that "contravenes" must really mean "is taken to contravene" and, in that light, s 601FD(3) appears in its true light as a deeming provision.
21 The sixth, seventh and ninth defendants submitted that the compensation regime revealed by Part 9.4B is an exhaustive code setting out all and the only ways in which compensation may be recovered for a breach of a civil penalty provision. Below I set out my reasons for rejecting that proposition. However, even if I were otherwise disposed to accept that argument it would not avail the sixth, seventh and ninth defendants. The plaintiffs submit, and I accept, that the proposed pleading does not allege that the officers in question contravened the civil penalty provision, s 601FD(3). The contraventions alleged are set out in paragraph 298 (at page 382) and they are contraventions of s 601FD(1) not s 601FD(3).
22 I cannot read the reference to s 601FD(3) in s 1317E as a reference to s 601FD(1). The legislative decision to make some, but not all, contraventions of the Act civil penalty contraventions is very far from the kind of obvious slip or error which might justify a different reading: cf. Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297 at 304-305 per Gibbs CJ, 310-311 per Stephen J and 320 per Mason and Wilson JJ. Indeed, the legislative decision seems to have been a deliberate one whose end was the confinement of the serious and quasi-criminal consequences of contraventions of civil penalty provisions to a tightly controlled list. In that circumstance, I find it is textually impossible to resist the plaintiffs' argument that since they are not alleging a contravention of a civil penalty provision, a compensation order could not be obtained under s 1317J(2). The exhaustive nature of Part 9.4B, even if established, is irrelevant.
23 Mr Jackman SC, who appeared for the sixth, seventh and ninth defendants, described the plaintiffs' submission in paragraph 21 above as one of purest formalism and accused the plaintiffs of hair-splitting and that, I suppose, is true. But formality - even of a pure kind - is not without its place in curial proceedings and what is one person's hair-splitting is another's important distinction.
24 Mr Jackman also submitted that every breach of s 601FD(1) was also a breach of s 601FD(3); that the proposed pleading should have alleged the full legal consequences of the facts which were alleged; that those full legal consequences included breaches of both ss 601FD(1) and (3); and that the proposed pleading could not avert the consequences of pleading s 601FD(3) simply by excising any reference to it.
25 I accept the first step in this argument but I regret I cannot accept the balance. There is no particular reason why the plaintiffs must be bound to allege a breach of s 601FD(3) which has no relevance to their allegations since they are not seeking compensation for a breach of a civil penalty provision under s 1317J(2). In any event, the remedial provision pursuant to which they seek compensation - s 1325(2) - specifically permits them to seek compensation for "a contravention of Chapter 5C" which might ordinarily be thought to encompass a contravention of s 601FD(1) as a part of Chapter 5C. It was not explained how the reference to Chapter 5C should be construed so as to exclude references to contraventions of Chapter 5C which might happen to overlap with contraventions of other civil penalty provisions. An attempt to formulate such a construction shows why. The expression "a contravention of Chapter 5C" would have to mean something like "a contravention of Chapter 5C except a contravention of a non-civil penalty provision where the same facts would also make out a breach of a civil penalty provision". This is too far from the text to be plausible.
26 In those circumstances, I reject the sixth, seventh and ninth defendants' contention that Part 9.4B means that the plaintiffs cannot sue because Part 9.4B is not engaged on the plaintiffs' case. In effect the sixth, seventh and ninth defendants' argument is that the plaintiffs lack standing to make an allegation which they do not make.
27 I turn then to the argument based on s 601MA which provides:
Civil liability of responsible entity to members
(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.
28 This provision is contained within Chapter 5C and was said by the sixth, seventh and ninth defendants to be the sole civil remedy conferred by the Act on fund members for a contravention of Chapter 5C. However, s 1325(2) of the Act provides:
The Court may, on the application of a person who has suffered, or is likely to suffer, loss or damage because of conduct of another person that was engaged in in contravention of Chapter 5C, 6CA or 6D or Part 7.10, or on the application of ASIC in accordance with subsection (3) on behalf of such a person or 2 or more such persons, make such order or orders as the Court thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (5)) if the Court considers that the order or orders concerned will compensate the person who made the application, or the person or any of the persons on whose behalf the application was made, in whole or in part for the loss or damage, or will prevent or reduce the loss or damage suffered, or likely to be suffered, by such a person.
29 This provision, on its face, appears to confer a right to compensation on a person who has suffered loss and damage by reason of a contravention of Chapter 5C. The sixth, seventh and ninth defendants submitted, however, that s 1325(2) was to be seen as a general provision which yielded to the more specific provision of s 601MA. At the outset it might be observed that the submission sits uncomfortably with the terms of subsection (3) which, on one view, exhibit a legislative intention that s 601MA should not derogate from any other right of recovery conferred by the Act.
30 There is authority for the proposition that s 1325 cannot be utilised where some other, more specific, compensation regime is available under the Act. In Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39 NSWLR 128 the plaintiff who was a shareholder in the defendant sought an injunction to restrain a director of the defendant from breaching the director's duties imposed upon her by the then s 232 of the Corporations Law. Her entitlement to that injunctive relief was said to lie in s 1324(1) of the Corporations Law which provided, at that time, that where a person has engaged, is engaging, or is proposing to engage, in conduct which is a contravention of the Law, the court may, on the application of the Commission, "or of a person whose interests have been, are or would be affected by the conduct" grant an injunction on such terms as the Court things appropriate. At the time that Mesenberg was decided s 232 was, by virtue of s 232(6B) a civil penalty provision. Compensation for breaches of civil penalty provisions was then, as now, dealt with under Part 9.4B. The second defendant argued that the availability of a remedy under Part 9.4B excluded the availability of a remedy pursuant to s 1324. Young J accepted this argument (at 137) in these terms:
In my view, except in so far as s 1324 can be used by the Commission in aid of its right under Pt 9.4B, or a delegate of the minister is a person affected, there is no longer any right for a person affected (not being the Commission or person referred to in s 1317EB) to seek an injunction in respect of an alleged contravention of s 232.
31 Mr Jackman very properly brought to my attention the decision of Einfeld J in Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 73 FCR 161 in which his Honour declined to follow this aspect of Young J's decision in Mesenberg (at 167). I do not, however, think it necessary to determine whether or not Mesenberg should be followed. This is for two reasons. First, unlike Mesenberg this case does not concern an attempt to use s 1325 to seek a remedy for contravention of a civil penalty provision. Secondly, unlike the then s 1317HA in Mesenberg,s 601MA(3) contains a textual indication that it does not seek to effect the existence of other remedies.
32 Since Mesenberg does not control the resolution of the issue, an assessment of the sixth, seventh and ninth defendants' argument requires one to begin with the relevant provisions. These are s 601FD(1), s 601FD(3), s 601MA and s 1325(2). This much is plain: s 601MA confers a right upon the member of a managed investment scheme to pursue a civil remedy against a responsible entity for a contravention of Chapter 5C. It is also plain that the language of s 1325(2) confers a right upon an aggrieved person to claim damages for a contravention of Chapter 5C. The terms of Part 9.4B which permit the responsible entity to recover compensation for a contravention of a civil penalty provision likewise means that there is a remedy under that part for a breach of s 601FD(3).
33 If the matter is attended to purely as a question of the written words which appear on the page then, it seems to me, the sixth, seventh and ninth defendants' argument cannot succeed. That argument is, put at its simplest, that there is a negative implication from s 601MA which requires s 1325(2) to be construed as not extending to provide a remedy in the case of contraventions of Chapter 5C. That argument is to be rejected for two reasons. First, assuming in the argument's favour that there can be otherwise located some material from which such a negative implication might be discerned, that implication would be directly inconsistent with the express words used in s 1325(2) which provides for a remedy for a contravention of Chapter 5C. Secondly, the suggested negative implication is inconsistent with s 601MA(3) which appears to have as its express purpose the precise suppression of such an implication.
34 Even if that were not so, however, the other materials from which the suggested negative implication is to be drawn are too meagre to justify its existence.
35 Mr Jackman sought to support the existence of the negative implication by reference to the legislative history of s 601MA and the secondary materials surrounding its introduction. The duty of a court is to give effect to the intention of Parliament as expressed by the words which it has used: CTM v The Queen (2008) 236 CLR 440 at 498 [203] per Heydon J. No doubt, this requires one to commence ("in the first instance") with a consideration of the context in which the legislation was passed: CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408 per Brennan CJ, Dawson, Toohey and Gummow JJ. Section 601MA was introduced into the then Corporations Law upon the passage of the Managed Investments Act 1998 (Cth). Mr Jackman submitted that the explanatory memorandum which was circulated during the debate on the bill in the House of Representatives and the debate which subsequently ensued in the Senate showed, in terms which were unusually plain, that it was Parliament's intention that the provisions in s 601MA should be an exhaustive statement of the circumstances in which a member of a managed investment scheme might pursue a statutory remedy under the Corporations Law for a contravention of Chapter 5C. The explanatory memorandum contained, inter alia, the following statement (at paragraph 14.2):
The right to bring a statutory action will not extend to actions against other persons involved in the operation of the scheme (such as directors, compliance committee members or any entity engaged by the responsible entity to have custody of scheme property). A member's right to bring an action against these persons will depend on the general law and will not be set out in the Law. This will preserve the concept of a single responsible entity responsible to members for the operation of a scheme.
36 One view of the operation of this proposal was that it would decrease the responsibility of individuals involved in the management of a scheme because such persons would no longer find themselves liable to suit under the Law at the hands of members. In the Senate this was pointed out in debate by Senator Margetts who sought to amend the bill to overcome this perceived effect of s 601MA. The Senator said (Hansard 23 June 1998 p. 3835):
Under the current law both scheme managers and independent trustees are directly liable to investors if they breach their duty of care or trust. Directors and officers of responsible entities of public offer superannuation schemes are directly accountable to investors under the SI(S) Act.
This outcome is not, however, achieved under this bill for managed investments. It is contrary to the fundamental rationale of the bill. Protections currently provided to investors would not be weakened but strengthened. The bill, as it stands, would give the ordinary investor no direct right of action against the director who was negligent. The bill proposes that only the responsible entity or the regulator, but not the investor who suffers the loss, may sue the directors and officers of the responsible entity.
Investors must rely on the responsible entity or the regulator to sue for compensation if loss is suffered due to failure to exercise proper care and diligence in meeting all requirements of the law.
37 The government and opposition of the day combined to defeat Senator Margett's proposed amendments. A member of the government, Senator Campbell, said (p. 3836):
The coalition will not support this amendment. The main reason is that by making other entities responsible in this way you diminish the responsibility of the responsible entity by definition. This amendment would quite specifically make other entities - other persons - responsible directly to investors. In so doing it would specifically and quite clearly reduce the responsibility of the responsible entity to investors.
(emphasis added)
38 Senator Cook, the Deputy Leader of the Opposition in the Senate said (p. 3838):
[The amendment] … [t]o be taken in the body of the bill… means that people can sue individual elements, be they a director, a secretary or an executive officer of the responsible entity. Frankly, I think that is a wrong view to take.
39 How the reduction in the responsibilities of directors and officers to members of a scheme increased their responsibility is not a matter calling for consideration by this Court. The point to be made, so it was submitted, was that these materials showed very clearly indeed that Parliament fully understood and intended s 601MA to be an exhaustive statement of the circumstances in which a scheme member would have a statutory right of damages under the Act. What Parliament thought it was doing by including s 601MA(3) is, therefore, obscure. That obscurity is augmented rather than dispelled by other events accompanying the passage of s 601MA.
40 On 30 June 1998, s 1063(2) of the Corporations Law provided:
The provision of this Law relating to securities shall, in their application in relation to securities being prescribed interests, have effect with such modifications (if any) as are necessary or as are prescribed by the regulations.
41 This section was repealed on 1 July 1998 by the Managed Investments Act 1998 (as per s 143 of Schedule 2).
42 Section 22 of the Corporations Act 1989 (Cth) provided (in part):
The Governor-General may make regulations, not inconsistent with this Act or the Law, prescribing matters:
(a) required or permitted by the Law to be prescribed by regulations within the meaning of the Law; or
(b) necessary or convenient to be prescribed by such regulations for carrying out or giving effect to the Law;
…
43 That power therefore authorised the Governor-General on the advice of the Executive Council to make regulations altering the meaning of specified provisions of Chapter 7 of the Corporations Law. The day before the Managed Investments Act 1998 came into force (and the day before s 1063(2) was repealed) the Governor-General made the Corporations Regulations (Amendment) 1998 (No 186 of 1998) which included in the Corporations Regulations a new regulation 5C.11.07 in the following terms:
A reference in section 1325 to Part 7.12 of the Corporations Law is taken to include a reference to Chapter 5C of the Law.
44 At that time s 1325(2) of the Corporations Law provided:
The Court may, on the application of a person who has suffered, or is likely to suffer, loss or damage because of conduct of another person that was engaged in in contravention of Part 7.11 or 7.12, or on the application of the Commission in accordance with subsection (3) on behalf of such a person or 2 or more such persons, make such order or orders as the Court thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (5)) if the Court considers that the order or orders concerned will compensate the person who made the application, or the person or any of the persons on whose behalf the application was made, in whole or in part for the loss or damage, or will prevent or reduce the loss or damage suffered, or likely to be suffered, by such a person.
45 The immediate effect of that regulation was to ensure that s 1325 operated as if it included a reference to Chapter 5C. The passage of this regulation was inconsistent with the approach taken to the meaning of s 601MA in the debate in Parliament although it is consistent with the remedy preserving nature of s 601MA(3). The matter is complicated by the fact that the Minister who appears to have been responsible for announcing the regulation - Senator Campbell - was also the same person who explained the exclusivity of s 601MA in the Senate debate. Subsequently on 8 March 2000 the reference to Chapter 5C was removed from the Corporations Regulations (as a result of the Corporations Amendment Regulations 2000 (No 1)) and, by reason of the Corporate Law Economic Reform Program Act 1999 (Cth), included directly into the text of s 1325(2) where, in substance, it now remains.
46 Mr Jackman's argument was that it was evident that the original regulation had gone astray and that the present reference in s 1325(2) of Chapter 5C was to be seen, in effect, as a descendant of that error. There are, I think, at least two reasons for rejecting this argument. First, there is no inconsistency between the promulgated regulation and s 601MA because s 601MA(3) explicitly contemplates the existence of other remedies. The real conflict is between the text of the law as passed by Parliament and its cognate regulation, on the one hand, and the author of the explanatory memorandum and the Senators who spoke during the debate, on the other hand.
47 Secondly, assuming in Mr Jackman's favour that the reference to Chapter 5C in the original regulation could somehow be disregarded, that would provide no principled basis now to ignore the explicit references to Chapter 5C in s 1325(2). The Parliament in 1999 reckoned upon such an amendment to s 1325. What happened under an antecedent regulation attending the passage of a different act, the Managed Investments Act 1998, does not seem to be a legitimate interpretative tool in that process.
48 Thirdly, when Parliament decided to insert s 601MA it must be taken to have done so knowing not only that it was also introducing s 601MA(3) but also of the potential application of the regulation making power. The true question which arises is not whether there is any inconsistency between the regulation and s 601MA but, rather, whether there is any inconsistency between that provision and the regulation making power. There may be cases in which a regulation made pursuant to a regulation making power is invalid because it is inconsistent with other provisions in an Act. However, the second, seventh and ninth defendants did not submit that the regulation originally promulgated in 1998 was an invalid regulation: cf State of New South Wales v Law (1992) 45 IR 62; Combined State Unions v State Services Co-ordinating Committee [1982] 1 NZLR 742. Once it be accepted that the regulation was valid the inevitable consequence is that the interpretative task becomes one in which one seeks to discern what is meant by s 601MA and that regulation. Despite the clarity of the expressions of view in the debate as to the exclusive or exhaustive nature of s 601MA ultimately these are unable to stand in the face of s 601MA(3) and the altered operation of s 1325(2).
49 In those circumstances, I cannot accept that the plaintiffs are prevented from relying upon s 1325(2) of the Corporations Act. The sixth, seventh and ninth defendants' challenge to the standing of the plaintiffs to pursue them for breaches of Chapter 5C, therefore, fails.