Plaintiff v CHRISTOPHER ARTHUR SEELS

CORPORATIONS - Application for directions - Whether Responsible Entity justified in calling a meeting of Grower members of Managed Investment Schemes to consider resolutions to amend constitution of schemes - Order that calling of meetings justified.

1 On 4 June 2012, after hearing the application for directions, I made orders as sought by the plaintiff (EFML). I reserved my reasons for making the orders. I now publish my reasons.

(a) the responsible entity of 8 registered managed investment schemes[2] described as the Mature Projects;

(b) the responsible entity of 4 registered managed investment schemes[3] described as the Immature Projects; and

(c) the manager of an unregistered managed investment scheme described as the Tree Project 2005

3 EFML proposes to restructure the Projects through a sale of certain plantations forming part of the standing timber of the Projects (and other assets) to entities associated with Global Forest Partners LP (GFP). In order for the sale transaction with GFP (GFP Transaction) to be completed for the benefit of Grower members, it is necessary to extinguish certain of the Growers' rights.

4 EFML seeks directions pursuant to r 54.02 of the Supreme Court Rules in relation to the GFP Transaction. The documents filed in this proceeding have been served on ASIC, GFP and Elders Ltd (Elders). In addition, as required by previous orders, circulars about this proceeding have been sent to Growers, a notice has been published in a national newspaper, and the Court documents have been posted on EFML's website.

5 ASIC informed EFML that it did not intend to appear at the directions hearing. Mr Seels, a Grower, filed an appearance and appeared in person. He is identified as a defendant. He did not purport to speak, however, on behalf of the Growers generally. He was concerned with the directions as they affected him. He is a member of the ITC Eucalyptus Project (ARSN 084727828), a Mature Project. In addition, Mr Bucknell a member of the Australian Blue Gum 2000 Mature Project filed a submission. I deal with their submissions at the conclusion of these reasons.

6 Rule 54.02 of the Supreme Court Rules confers on the Court jurisdiction to give judicial advice to trustees. The High Court discussed the power in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar, The Diocesan Bishop of Macedonian Orthodox Diocese of Australia & New Zealand.[4] In giving advice the Court does not finally determine the rights and liabilities of parties arising out of the subject-matter of the application for directions.

7 Often, in the reconstruction of managed investment schemes by constitutional amendment, the responsible entity has asked the Court to give directions in relation to the restructure.[5] This Court has done so regularly in the context of insolvency.[6] Recently, many have involved primary production schemes, such as this application.

8 The purpose of the Projects is the cultivation of trees and the harvest and commercial sale of timber in the form of woodchips. Each of the Mature Projects and the Immature Projects is a registered managed investment scheme, regulated by Chapter 5C of the Corporations Act 2001 (Cth) (the Act). The Tree Project 2005 is unregistered.

9 EFML is the responsible entity of the Mature Projects and the Immature Projects, and the manager of the Tree Project 2005. EFML is a subsidiary of Elders, and is a member of the Elders Group.

10 The land used in the Mature Projects is located in Albany (Western Australia), Green Triangle (South Australia/Victoria) and Tasmania. The land used in the Immature Projects is located in Albany, Bunbury, Green Triangle, Queensland and Esperance (Western Australia). The land used in those Projects is owned by either entities related to the Elders Group or external land-owners, and leased to EFML or Elders Forestry, and in turn sub-leased to Growers. The GFP Transaction only relates to plantations located in Albany, Bunbury and the Green Triangle regions.

11 The land used in the Tree Project 2005 is located in Albany and is owned by Elders Forestry Land Holdings Pty Ltd as trustee for the Land Project 2005. The unitholders in the Land Project are substantially the same as, but not identical to, the unitholders in the Tree Project.

12 Each Project is governed by, inter alia a constitution, Grower sub-leases (or forestry rights) and Grower management agreements. In some Projects, the Grower sub-lease is described as a lease or a land agreement, and the management agreement is generally described as a plantation management agreement. In some Projects, the Grower sub-lease and management agreement are combined in a single document (described as a forestry management agreement or a lease and management agreement). Summaries of the Project documents are contained in the relevant prospectus or product disclosure statement. Proforma Grower sub-leases and management agreements are included as schedules to each constitution.[7]

13 Under the Grower sub-lease EFML, or Elders Forestry, grants each Grower a sub-lease (or, in some cases, some other type of forestry right) over a parcel of land (described as a Timberlot or a Plantation Unit or a Diversified Forestry Unit) for the purpose of cultivation, establishment, harvest, marketing and sale of the timber. Some Grower sub-leases relevantly provide that the grantor, and the responsible entity (both for itself and as attorney for the Grower) will be entitled, by supplemental deed, to alter, modify, add or cancel the provisions of the Grower sub-lease. Other Grower sub-leases relevantly provide that a modification or amendment must be made in writing and duly executed on or behalf of the parties. The vast majority of Grower sub-leases terminate automatically once harvesting is completed or if the Project is wound up.

14 Under each management agreement, the Grower engages EFML to perform initial (pre-planting) services, planting services, ongoing (management) services, pruning services, and harvesting and marketing services on behalf of the Grower. In turn, EFML engaged Elders Forestry Pty Ltd (Elders Forestry) (another member of the Elders group) to provide forestry management and other business services to EFML.

15 The application form (attached to the prospectus or product disclosure statement) signed by Growers in order to apply for interests in each Project contained a grant of a power of attorney to the responsible entity.

16 The trees of the Mature Projects are ready for harvest generally in accordance with the timeframes proposed in the relevant Project documents. The Immature Projects contain trees that have not yet reached maturity and are not yet ready to be harvested in accordance with the relevant Project documents.

17 EFML is integral to the operation of each Project, as it is the provider of management services to each Grower, and in many cases it is the sub-lessor to the Growers.

18 EFML is experiencing financial difficulties. For the year ended 30 September 2011, EFML made a total comprehensive loss of $133 million and had negative equity of $58 million. Its financial position resulted in a breach of its Australian financial services licence (which licence is required in order to operate a registered scheme)[8] though this has since been rectified through support from Elders.

19 EFML is reliant on funding from Elders in order to operate the Projects, for example to pay rent to lessors and to pay management fees to Elders Forestry. On 3 October 2011, Elders announced that it would proceed with a staged divestment of its forestry assets. The net operating cash outflow for Elders forestry division for the 2011 financial year was approximately $40 million. The economic position of the forestry division is not expected to improve materially for some time. Elders considers that it is uneconomic to continue funding EFML and it cannot commit to providing funding to EFML indefinitely.

20 Although EFML is solvent, it relies heavily on Elders for funding, and EFML's board considers that it would be difficult to obtain funding from other sources because of the current and foreseeable state of the industry. Elders has informed EFML that it considers the present business model to be unsustainable, and that if the GFP Transaction does not proceed, Elders will seek materially to reduce the costs of funding the forestry division where it is in the interests of Elders and its shareholders to do so. EFML's board considers that it is not clear that EFML could compel Elders to continue to provide its current level of support in the long term.

Expression of interest process and GFP Transaction

21 In November 2010, Elders and Elders Forestry engaged Macquarie Capital Advisers (Macquarie) to undertake a rigorous expression of interest process to seek a purchaser to acquire the trees in the Projects and/or other assets owned by Elders Forestry, and/or explore other options. Macquarie explored selling the trees as standing timber as opposed to harvesting them, as there are extremely poor current and foreseeable market conditions for timber produce. Macquarie prepared a presentation which was provided to interested parties. It undertook an investor sounding process. Six formal expressions of interest were submitted. None of them offered to replace EFML as responsible entity or to take the remaining standing timber of the Projects (ie that located in Esperance, Queensland or Tasmania or any teak or sandalwood plantations). Macquarie recommended three proposals be progressed, and Elders Forestry followed this advice. Two bidders provided non-binding indicative offers for the standing timber of the Projects located in the Bunbury and Albany regions and the Green Triangle region, and certain freehold land and other assets of Elders Forestry. Macquarie recommended that Elders Forestry pursue the GFP Transaction over the other indicative offer.

22 As a result of the expression of interest process, EFML and Elders Forestry identified entities associated with GFP as their preferred purchasers of the standing timber of the Projects located in the Bunbury and Albany regions and the Green Triangle region as well as certain assets of Elders Forestry. During negotiations, GFP reduced the purchase price because Elders could not deliver certain supply contracts for timber produce and the market conditions for timber produce deteriorated further.

23 The remaining trees (located in the Esperance region, Tasmania, and Queensland, and also certain sandalwood and teak plantations) are not part of the GFP Transaction. EFML and Elders Forestry are continuing to explore a way to realise value for those assets. There was no interest in the Esperance trees due to the low yields, lack of infrastructure and poor outlook. In addition, for one of the Mature Projects, the ITC Eucalypts Scheme (which in fact comprises two sub-projects, each of which has two pools of Growers), one pool (the 1999 WA project - 1999 pool) does not form part of the GFP Transaction because its trees, which were mature, have been harvested and sold already.

24 On 18 April 2012, a confidential sale and purchase agreement (SPA) was entered into by EFML, Elders, Elders Forestry and two entities associated with GFP - Australian Bluegum Plantations No 2 Pty Ltd and Australian Bluegum Plantations Pty Ltd (the Purchasers) - which provides for the sale of the trees to the Purchasers or their nominee. In addition, on 18 April 2002 a confidential implementation agreement (IA) was entered into by EFML, Elders, Elders Forestry and the Purchasers, which provides for the implementation of the GFP Transaction. Completion under the SPA is required to occur in a series of processes commencing on 29 June 2012. These must be concluded by 18 December 2012. A substantial amount of work and pre-completion steps, which are expected to take many months, are required to be undertaken before then and notification that the first completion process is ready to proceed must be given by EFML, Elders and Elders Forestry to the Purchasers by 8 June 2012 for it to occur as planned on 29 June 2012.

25 If the GFP Transaction does not complete and Elders ceases funding EFML, then this could force EFML to accelerate harvesting of the Mature Projects, and/or seek to find another buyer for the standing timber, and/or wind up the Projects, and/or appoint administrators. Any of these would result in a worse outcome for Growers than that contemplated under the GFP Transaction. It is unlikely that an alternate restructure of the Projects is feasible.

26 It is a requirement of the SPA that the trees be sold unencumbered by the Grower sub-leases. It is also a condition precedent of the IA that EFML seek and obtain directions from the Court that EFML would be justified in amending the constitutions of the Mature Projects, and convening meetings of members of the Immature Projects and the Tree Project 2005 to consider resolutions to amend the constitutions of those Projects, to enable the termination of the Grower sub-leases. These are the directions that the EFML now seeks.

27 Upon completion of the GFP Transaction, the Purchasers will pay a total gross consideration of $62 million. In addition, for some Immature Projects Elders will pay Growers a total of $8 million in relation to the cancellation of their management agreements. Combining those amounts, and deducting the deferred management fees of $5 million, results in net proceeds payable to Growers in excess of $70 million. These net proceeds will be distributed among Growers in all Projects by EFML progressively in accordance with the Project documents, the SPA and the IA. In addition, some fees are payable to EFML in some Projects. This was set out in the circulars sent to Growers.

GFP Transaction: EFML's board considers in best interests of Growers

28 EFML's board considers that the GFP Transaction, in combination with the payments which Elders proposes to make to Growers in some of the Immature Projects in relation to the cancellation of their management agreements, is in the best interests of Growers in each of the Projects.

29 EFML is of the opinion that if EFML were to harvest the Mature Project trees, the Growers would receive significantly less proceeds than if those trees are sold as standing timber under the GFP Transaction. EFML is of the view that the net present value to Growers of the likely future cash flows from the Immature Projects is likely to be no more than the price offered under the GFP Transaction plus the cancellation payments.

30 An independent expert, Deloitte Corporate Finance, has prepared a report for each Project. In respect of the Mature Projects, the expert concludes that the sale of standing timber under the GFP Transaction is fair and reasonable and therefore in the best interests of Growers for all those Projects (except the ITC Eucalypts Scheme - 1999 WA Project - 2000 Pool, in respect of which the expert concludes that the sale is not fair but reasonable and therefore in the best interests of Growers).

31 In respect of the Immature Projects and the Tree Project 2005, the expert concludes that the sale of standing timber under the GFP Transaction, in combination with the cancellation payments (where relevant), is fair and reasonable and therefore in the best interests of Growers for all those Projects.[9]

32 Section 601GC(1) of the Act provides relevantly:

The constitution of a registered scheme may be modified, or repealed and replaced with a new constitution:

(a) by special resolution of the members of the scheme; or

(b) by the responsible entity if the responsible entity reasonably considers the change will not adversely affect members' rights.

33 In order to implement the GFP Transaction, EFML proposes:

(a) to amend the constitutions of the Mature Projects unilaterally under s 601GC(1)(b);

(b) to call meetings of Growers in the Immature Projects to consider special resolutions for the amendment of the constitutions of those Projects under s 601GC(1)(a); and

(c) to call a meeting of Growers in the Tree Project 2005 to consider a special resolution for the amendment of the constitution of that Project.

34 EFML has decided to put the issue to a vote of Growers of the Immature Projects in case they hold the view that those Projects should continue until the harvest time originally envisaged. EFML says that the Mature Projects were due to end now anyway as the trees are mature and ready to be harvested.

Unilateral constitutional amendments for the Mature Projects

35 Section 601GC(1)(b) of the Act (the subsection) enables the responsible entity to amend the constitution of a registered scheme unilaterally if it 'reasonably considers the change will not adversely affect members' rights'.

36 The proposed constitutional amendments in relation to the Mature Projects are set out in a deed of variation for each Project. In substance, it is proposed to insert a new clause 12.2A into each constitution, that notwithstanding the other provisions of the constitution and the relevant management agreement, would give the responsible entity irrevocable power, in its own capacity or as the agent, representative and attorney of the Grower, relevantly:

(a) to assign, terminate, surrender or otherwise deal with any Grower sub- leases;

(b) to sell, transfer, surrender, terminate or otherwise deal with any interests in land used in the Project, including trees;

(c) to sell, transfer, surrender, relinquish, release or otherwise deal with any rights of Growers in the trees;

(e) to treat the proceeds of sale of trees and payments made by Elders to the responsible entity for the surrender or termination of any Grower sub-lease as forming part of the Proceeds Fund for pooling and proportionate distribution to Growers; and

(f) to take any other necessary or desirable actions,

for the purposes of and incidental to implementing the GFP Transaction.

37 The qualifying words at the conclusion make it clear the amended power is being given for the purpose of implementing the GFP Transaction.

38 There are some ancillary amendments, namely the addition of a new clause 30.5 (which confirms that the Grower will remain a Grower notwithstanding the extinguishment of their Grower sub-lease) so they can participate in the pooling of the sale of other timber in the Projects, and new definitions of Proportional Interest and Transaction.

39 On 16 April 2012, the board of EFML considered the proposed amendments and concluded that the amendments and the implementation of the GFP Transaction were in the best interests of the Growers, and further concluded that the company had the power to make the amendments under s 601GC(1)(b) in order to implement the GFP Transaction. The board resolved to seek directions from the Court that the company would be justified and otherwise acting reasonably and appropriately in amending the constitution of the Mature Projects to enable the surrender of the Growers' subleases for the purposes of implementing the GFP Transaction.

40 At the meeting on 16 April 2012, the board had before it a board paper entitled 'Amendments to Mature Project Constitution' prepared by Freehills. The paper addressed whether the Growers' rights would be affected by proposed amendments. It stated that under the Mature Project constitutions, Growers have the right to:

(a) receive periodic distributions of proceeds from the sale of the Growers' trees; and

(b) ensure that the responsible entity performs the services in accordance with the contractual rights of Growers and the Prospectus or Product Disclosure Schedule.

41 The paper noted that relevantly, under the Growers Agreements, Growers have the right to:

(a) retain their sublease until harvest has been completed and/or the sales proceeds have been distributed to Growers;

(b) harvest, market and sell the timber grown on their plantation units - although this right is contracted to be performed by EFML; and

(c) obtain the Proportional Interest of the proceeds of sale of the timber of the Mature Project.

42 The paper concluded that if the proposed amendments were made the Growers' rights would be affected.

43 As mentioned above, s 601GC(1)(b) enables the responsible authority to amend the constitution of a registered scheme unilaterally if it 'reasonably considers the change will not adversely affect members' rights.'

44 It is useful to review the authorities as to the meaning in this subsection of 'members' rights'; what is meant by 'adversely affect'; and the process the responsible authority should follow to validly amend the constitution. Before doing so it is helpful to consider some aspects of the legislation pertaining to managed investment schemes under Part 5C of the Act.

45 Section 601ED(5) provides that '[a] person must not operate in this jurisdiction a managed investment scheme that this section requires to be registered under section 601EB unless the scheme is so registered'.

46 Section 601ED(1) relevantly provides that a managed investment scheme must be registered under s 601EB, relevantly, if:

(a) it has more than 20 members; or

(b) it was promoted by a person, or an associate of a person, who was, when the scheme was promoted, in the business of promoting managed investment schemes ...

47 Section 9 of the Act relevantly defines a 'managed investment scheme' as:

(a) a scheme that has the following features:

(i) people contribute money or money's worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not);

(ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders);

(iii) the members do not have daytoday control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or

...

48 The definition includes reference to the commercial nature of a scheme and in particular its reference to 'a common enterprise, to produce financial benefits' for members of the scheme. This feature is of some relevance in my later consideration of whether the proposed amendments to the constitutions would adversely affect a members' rights.

49 The duties and responsibilities of the responsible entity are prescribed in s 601FC that relevantly to this matter provides:

In exercising its powers and carrying out its duties the responsible entity of a registered scheme must:

....

(c) act in the best interests of the members and, if there is a conflict between the members' interest and its own interests, give priority to the members' interests;

....

(i) ensure that scheme property is clearly identified as scheme property and held separately from property of the responsible entity and property of any other scheme;

....

(m) carry out or comply with any other duty, not inconsistent with the Act, that is conferred on the responsible entity by the scheme's constitution.

50 This provision also has relevance to whether the rights of members are adversely affected. Apart from the subsection, EFML would not be justified in amending the constitution unless it believed the amendment was in the best interest of members. Further, EFML would not be justified in exercising the new power unless it believed that exercise was in the best interests of the members.

51 Section 601FC(2) provides that the responsible entity holds scheme property on trust for scheme members.

52 Section 601FD prescribes the duties of officers of responsible entities which relevantly are the same as those of the responsible entity under s 601FC.

53 The application of the subsection has been the subject of considerable judicial consideration. In ING Funds Management Ltd v ANZ Nominees Ltd[10] Barrett J of the Supreme Court of New South Wales examined the meaning of the phrases 'members' rights', 'adversely affects' and the procedure that should be followed by a responsible entity to satisfy the obligation to 'reasonably consider' the affect of an amendment to the constitution under the subsection. In this regard he said:

"Members' rights"

[92] Counsel have referred to only one decided case in which the expression "members' rights", as used in s 601GC(1)(b), has received direct attention. In Seabrook; Re Takeovers Panel and the Corporations Act, Conti J expressed a preference for adoption of the approach taken by Young J in Smith v Permanent Trustee Australia Ltd to the expression "rights of the unitholders" in an amendment clause in a unit trust deed. Young J said:

"There are a series of cases in the reports dealing with what are the rights attached to a class of shares... These cases hold that where the shareholder is personally affected in a commercial sense by a scheme, such as a watering down of the value of shares in a particular class by increasing the number of shares of that class or reducing capital, etcetera, one cannot say that the rights attached to the shares are affected."

[93] Young J drew a sharp and clear distinction between the rights of unitholders and the interests of unitholders as a whole. In the context with which I am concerned, that distinction appears clearly on the face of the statute: while s 601GC(1)(b) refers to "members' rights", s 601FC(1)(c) requires a responsible entity, in exercising its powers and carrying out its duties, to "act in the best interests of the members". Mr Dick pointed out numerous other provisions of the Corporations Act referring to the "interests of members as a whole", whether of a company or of a managed investment scheme. He did so in order to emphasise the distinction the legislation makes between "rights" and "interests".

[94] Young J accepted a submission that the "rights of unitholders" referred to "the contractual and equitable rights conferred on unitholders by the deed". This is consistent with the earlier decision of J D Phillips J in Eagle Star Trustees Ltd v Heine Management Ltd where, in circumstances similar to those now before me, the right of unitholders to have their units repurchased was seen as a central component of "the rights of unitholders" for the purposes of an amendment provision denying the trustee ability to act alone if of the opinion that "the rights of unitholders may be adversely affected".

[95] The company law cases to which Young J referred are those considered by the Court of Appeal in Wilson v Meudon Pty Ltd. They are concerned with modification of class rights or, to quote the provision under consideration in White v Bristol Aeroplane Co Ltd, modification or abrogation of "the rights or privileges attached to any class of shares". The test applied by the English Court of Appeal in that case (and by the same court some two months later in Re John Smith's Tadcaster Brewery Ltd was whether the rights of persons holding relevant shares, as created by the company's constitution, remained the same, not whether enjoyment of the rights was impaired or diluted.

[96] It is consistent with what was said by Young J in Smith v Permanent Trustee Australia Ltd (above) and approved by Conti J in Seabrook (above) to apply this test to s 601GC(1)(b). The task of the responsible entity, when approaching that provision, is first to ascertain the rights of members created by the constitution, as they exist immediately before the modification. The responsible entity must then decide whether those rights - as distinct from the enjoyment of them or their value - will be changed or impinged upon by the modification. If that question is answered in the affirmative, the responsible entity must undertake a process of comparison and assessment in order to decide whether the impact is within the "adversely affect" description.

[97] There is a question whether s601GC (1)(b) is confined to rights of the members as a whole, being rights of the generality of members or perhaps the hypothetical individual member; or whether the provision is concerned also with rights of some part of the membership distinct from rights of the remainder. I do not need to decide that question here. The actions of November 2008 did not differentiate among members. Had those actions been effective, they would have had the same effect upon all members and all units of the relevant managed investment scheme.

[98] It is possible to argue that "members' rights" include a right to have the managed investment scheme operated and administered according to the constitution as it stands. If that is so, any modification of the constitution involves an invasion of that right that is arguably adverse. I am not persuaded that this is a correct approach. It denies all efficacy to s601GC (1)(b) and must, for that reason, be rejected. Because the power to modify is concerned with the constitution, the focus is on rights created or secured by the constitution itself.

"Adversely affect"

[99] These words are used in many legal contexts. It has been held, for example, that a person is "adversely affected" by a caveat if the caveat operates to foreclose a course that would otherwise be open to the person: Delma Investments Pty Ltd v Shillito. In Dainford Ltd v Lam, Powell J observed that "adverse" affectation, in the context before him, was that which was "unfavourable", "hurtful" or "injurious".

[100] The task of a responsible entity under s601GC (1)(b), then, is to assess members' rights as they exist before the modification and members' rights as they will exist after the modification and, if the rights afterwards are different from the rights beforehand, to decide whether the difference in the rights will be, from a member's perspective, unfavourable. To put this another way, the responsible entity must decide whether the change will remove, curtail or impair existing rights in a way that is disadvantageous to the persons whose holdings of units cause them to possess and enjoy the rights. No particular degree of affectation is contemplated by the legislation. Any adverse affectation at all, however slight, is sufficient to deny the responsible entity the modification power.

[101] The question is not a general question whether members will be "worse off" if the change is made (to use language found in the judgment of J D Phillips J in Eagle Star Trustees Ltd v Heine Management Ltd). Nor is it a general question of prejudice or disadvantage. It is a specific question that goes wholly and exclusively to the much narrower matter of members' rights. Their interests are, as stated, another thing altogether. So is the value of their rights.

"Reasonably considers"

[102] The s601GC (1)(b) power is available to a responsible entity only if it "reasonably considers" that the modification will not adversely affect members' rights. This form of words has the same meaning as "considers on reasonable grounds" or "believes on reasonable grounds". The requirement is twofold: first, that the relevant belief or opinion be actually held by the responsible entity; and, second, that facts exist that are sufficient to induce the belief or opinion in a reasonable person. This is the approach indicated by Gummow J, Hayne J, Heydon J and Kiefel J in Gypsy Jokers Motorcycle Club Inc v Commissioner of Police. Their Honours referred with approval to George v Rockett where all seven members of the High Court said (at 112):

"When a statute prescribes that there must be 'reasonable grounds' for a state of mind - including suspicion and belief - it requires the existence of facts which are sufficient to induce that state of mind in a reasonable person."

[103] It is not sufficient, the High Court said, for the decision-maker to act "parrot-like" upon the bald assertion of an informant. The decision-maker must be "satisfied that there are sufficient grounds reasonably to induce the state of mind".

[104] Walters J pointed out in Hoobin v Samuels that an inquiry into the existence of grounds for a belief is an objective inquiry into a positive fact capable of determination in the same way as a broken ankle; and that when the reasonableness of the grounds is challenged, it is for the tribunal to examine those grounds and to determine whether they are reasonable.

[105] In the present case, attention is directed to whether the responsible entity "reasonably" considered, so that inquiry must be made into the basis on which the decision was made and the rationale for the decision; in other words, what were the considerations that led the responsible entity to the conclusion reached? It is the basis for the decision and rationale for the decision, as they actually existed in the mind of the decision-maker, that must be found to conform to the standard of reasonableness. (citations omitted)

54 This passage was cited and followed by Gordon J of the Federal Court of Australia in Premium Income Fund Group Inc v Wellington Capital.[11] In Re Great Southern Managers Australia Ltd (receivers and managers appointed)(in liquidation)[12] Davies J of this Court considered an application as to whether a responsible entity would be justified and otherwise acting reasonably in amending the constitution of certain forestry schemes. Her Honour approved Barrett J's three step approach to be taken by the responsible authority in making an amendment under the subsection. Her Honour also applied Barrett J's judgment regarding the meaning of the words 'reasonably considers'.

55 In Re Timbercorp Securities Ltd[13] Davies J again had cause to apply the decision of Barrett J in ING Funds Management. Her Honour said that she generally agreed with the views of Barrett J about the approach to the subsection. She specifically applied Barrett J's three step approach to be taken by the responsible entity in considering whether the change in the constitution would adversely affect members' rights.[14] Her Honour also applied his distinction between 'rights' and 'interests'[15]. She cited with approval Barrett J's finding in ING Fund Management that the valid exercise of an amendment to a constitution by the responsible entity requires an examination of whether the responsible entity did in fact form the view that the constitutional amendment would not adversely affect members rights, and that there was a reasonable basis for the view of the responsible entity that the amendment would not do so. Her Honour accepted that the latter test is an objective inquiry and requires consideration of whether there were facts sufficient to induce that state of mind.[16]

56 In Premium Income Fund Gordon J accepted that the contractual rights of the members of the scheme under its constitution constituted 'members' rights' for the purposes of the subsection. Her Honour distinguished between the incidents or character of a legal right and the value of that right in a monetary sense. Her Honour said that in the case before her, the incidents or character of the legal rights (and not just a right in a monetary sense) had been modified by the disputed amendment made under the subsection.[17]

57 Gordon J also cited Barrett J in ING Funds Management regarding the meaning of adversely affected. Her Honour said:[18]

Having formed the view that cl 3.2.2 was a contractual right and that the right was changed or impinged by the modification, the next question to be asked is whether the impact was within the "adversely affect" description of s 601GC(1)(b) of the Act. As Barrett J stated in ING Funds Management at [102], Wellington had to actually consider and decide whether the change would remove, curtail or impair existing rights in a way that was disadvantageous to Unit Holders who possessed and enjoyed the rights, and that decision had to be reasonable. No particular degree of affectation is contemplated by the legislation. Any adverse affectation at all, however slight, was sufficient to deny Wellington the modification power. I accept that the question is not a general question about whether members would be worse off if the change was made or a general question about prejudice or disadvantage (Timbercorp at [7]; ING Funds Management at [101]) but a specific question about being satisfied that the change would not adversely affect members' rights. (some citations omitted)

58 The following relevant principles may be drawn from these authorities:

(a) The 'members' rights' includes a reference to their contractual and equitable rights under the constitution.[19]

(b) A clear distinction is drawn between the rights of members on one hand and the interests of members on the other hand.

(c) In applying the subsection, the responsible entity should undertake a three step approach to its consideration:[20]

(i) the responsible entity should assess members' rights as they exist before the modification;

(ii) the responsible entity should assess the members' rights after the modification; and

(iii) if the rights afterwards are different from the rights beforehand, the responsible entity must decide whether the difference in the rights will be, from a members' perspective, unfavourable.

(d) The responsible authority must decide whether the change will remove, curtail or impair existing rights in a way that is disadvantageous to the members' rights.[21]

(e) No particular degree of affectation is contemplated by the legislation. Any adverse affectation at all, however slight, is sufficient to deny the responsible entity the modification power.[22]

(f) The basis for the decision of the responsible entity and the rationale for the decision, as they actually existed in the mind of the decision maker, must be found to conform to the standard of reasonableness.[23]

59 The minutes of 16 April 2012, discloses that EFML applied the appropriate three step approach. After describing the amendments to the Mature Projects, the Board noted:

[T]he fact that, if the amendments are implemented, Growers would no longer have the right to have their wood harvested by the Company and their sub-leases would be surrendered shortly before the proceeds of sale are distributed, but that any effect on the rights of Growers in Mature schemes would not be adverse to their interests because:

(i) the trees in the Mature Projects are due to be harvested and turned into cash proceeds and their sub-leases surrendered;

(ii) the Growers will still receive the cash proceeds from the sale of their trees under the GFP transaction after the amendments are made, noting, in passing, that Growers will receive the cash proceeds earlier than would be the case if the trees were harvested and, it is expected, in a larger amount; and

(iii) the constitutions will be amended to ensure that the surrender of the Grower's sub-leases does not disturb the manner in which any future Mature Project proceeds will be distributed to Growers.

60 I am satisfied that the directors and thus EFML genuinely believed that the amendments did not adversely affect the Growers rights for the reasons they give. The critical question is whether, on an objective basis, the grounds they relied on reasonably support the belief they formed.

61 The amendments will enable the GFP Transaction to be effected. According to EFML the amendments to the constitution will be to the benefit of the Growers for the reasons set out above.

62 As indicated above, a distinction has been drawn in the authorities between rights and interests. For example, in Smith v Permanent Trustee Australia Ltd[24] Young J referred to the position where a shareholder may be personally affected in a commercial sense by the watering down of the value of his shares through the company issuing further shares. He made the point that although the shareholders interests may be adversely affected, the legal rights attaching to his shares are not affected.

63 In White v Bristol Aeroplane Co Ltd[25] the Court of Appeal considered the issue of whether a resolution to issue shares in the relevant circumstances directly affected the rights or privileges of the shareholders in the same class of shares. Lord Evershed, with whom Denning and Romer LJJ agreed, said that the court was 'concerned with the question whether the rights of the preference shareholders are 'affected,' not as a matter of business but according to the articles, that is according to their meaning construed under the rules of construction and as a matter of law.'[26]

64 Adapting what was said in ING Funds Management by Barrett J[27] the responsible authority must decide whether the change will remove, curtail or impair existing rights in a way that is disadvantageous to the Growers whose membership of the scheme cause them to possess and enjoy those rights.

65 The issue before me is whether there were reasonable grounds for the board forming the view that the Growers' rights are not adversely affected. In ING Funds Management Barrett J said that 'the inquiry must be made into the basis on which the decision was made and the rationale for the decision, in other words what were the considerations that led the responsible entity to the conclusion reached.' He said that 'it is the basis for the decision and rationale for the decision, as they actually existed in the mind of the decision maker, that must be found to conform to the standard of reasonableness.'[28]

66 I have set out the basis and rationale for the board's decision. In substance, the board noted that the trees in the Mature Projects were due to be harvested and turned into cash and their sub-leases surrendered. Under the amendment the Growers will still receive the cash proceeds from the sale of the Mature Trees, after their sub-leases are surrendered. The amendment has expanded the circumstances under which the Mature Trees could produce financial benefits for the Growers. The board may only exercise the new power if they consider it is in the best interests of the Growers to do so.

67 EFML contends that the board's decision was made in the circumstances of the Mature Projects being ready for harvest but facing difficulties in achieving sales on acceptable terms, and bearing in mind the context of the financial difficulties faced by EFML and the likelihood that the status quo of the Projects could not continue. EFML says that in those circumstances it was reasonable for EFML to consider that the Growers' rights would not be adversely affected by the amendments. The original scheme arrangements could not continue; Elders would be unlikely to continue to fund EFML to operate the Projects; an alternate restructure of the Projects would be unlikely; the alternatives would probably lead (directly or indirectly) to termination of the Projects (formally or de facto), in which case the Grower sub-leases would have terminated anyway. I accept these submissions.

68 I am satisfied that the rationale and grounds that EFML took into account did form a reasonable basis for the view of EFML that the amendment would not adversely the Growers' rights.

69 For these reasons, I ordered that EFML would be justified in making the amendments to the constitutions of the Mature Projects.

Constitutional amendments for the Immature Projects by members' resolutions

70 The proposed constitutional amendments are in similar form to those contained in the proposed deeds of variation relating to the Mature Projects. The members have power to make those amendments by special resolution.

71 EFML proposes to call meetings of members of the Immature Projects (under s 252A of the Corporations Act), at which special resolutions will be proposed to amend the constitution of the relevant Project. If the amendments are passed by special resolution, EFML proposes to ask the Court, at a later hearing, for directions that it is justified in effecting the amendments (by lodging them with ASIC under s 601GC(2)).

72 Section 601GC(1)(a) authorises the amendment to the constitution of a registered scheme by special resolution. That provision does not fetter the kind of amendment that can be made to the constitution.[29] The only limitation is that the amendment power must be exercised for a proper purpose.

73 The restructure of a managed investment scheme with a responsible entity that faces financial difficulties which are likely to prevent it from continuing to operate the scheme in the manner originally envisaged is and must be a proper use of the power under s 601GC. EFML contends that the proposal does not discriminate between members. It does not expropriate the property of members. It is not inconsistent with the express or implied terms of any instrument. It is a perfectly legitimate use of the power conferred by s 601GC. I accept those submissions.

74 Apart from the requirement that it be exercised for a proper purpose, the power of amendment under s 601GC is unfettered.[30] I accept that the power of amendment of the constitution would be exercised for a proper purpose. In my view the amendment is authorised by s 601GC and is legitimate.

75 Section 252J of the Corporations Act prescribes the contents of a notice of meeting of members. The proposed notices of meetings satisfy the requirements of s 252J, as they state the general nature of the meeting's business, set out an intention to propose the relevant special resolutions and contain statements about rights to appoint proxies. In addition, EFML intends to send to each Grower an explanatory statement about the proposed resolutions. This is akin to a scheme booklet sent to members of a company in respect of a scheme of arrangement under Part 5.1 of the Corporations Act 2001. Courts have said that the members must be properly informed of the nature of the scheme before the scheme meeting.[31] The explanatory statements proposed to be sent to Growers achieve that.

76 Section 253C(2) of the Act provides:

On a poll, each member of the scheme has 1 vote for each dollar of the value of the total interests they have in the scheme.

77 Section 253F relevantly provides:

The value of an interest in a registered scheme is:

...

(c) in any other case - the amount that the responsible entity determines in writing to be the price that a willing but not anxious buyer would pay for the interest if it was sold on the business day immediately before the day on which the poll is taken.

78 The Growers are 'members', as defined in s 9 of the Act, because they hold interests in the relevant Projects. As discussed above, 'Interest' is defined in s 9 as a right to benefits produced by the scheme (whether the right is actual, prospective or contingent, and whether it is enforceable or not).

79 In order to value the interests of those Growers for voting purposes it is necessary to consider the 'rights to benefits produced by the schemes'. The valuation mechanisms in ss 253F(a) and (b) are not relevant because the Growers' interests are not quoted on a prescribed financial market, and the Projects are not liquid. Accordingly, EFML must determine, under s 253F(c), 'the amount that the responsible entity determines in writing to be the price that a willing but not anxious buyer would pay for the interest if it was sold on the business day immediately before the day on which the poll is taken'.

80 It is the usual practice of EFML to give each Grower $1 of value for each Plantation Unit or Diversified Forestry Unit (as the case may be) held by the Grower in that Project. Accordingly, EFML proposes to determine the value of the interests of each Grower under s 253F(c) as $1 multiplied by the number of Plantation Units or Diversified Forestry Units (as the case may be) held by the Grower. EFML proposes to apply the values of interests as determined above in allocating to a Grower on a poll, for the purposes of s 253C(2) of the Corporations Act 2001, 1 vote for each dollar of the value of the total interests the Grower has in the Project.

81 That is consistent with the way in which the interests of members of the Great Southern schemes were valued for voting purposes, which was the subject of directions given by Davies J to the receivers of the responsible entity of those schemes.[32]

82 It is proposed that each members' meeting will be chaired by Peter Zachert. Although strictly speaking Mr Zachert is an associate of the responsible entity (as defined in ss 11 and 12 of the Corporations Act 2001 because he is a director of EFML), the prohibition in s 253E does not apply as he is not 'voting his interests' as he will only be voting as directed by members: cf Great Southern (No 1), [20]-[25].

Constitutional amendments for the Tree Project 2005 by members' resolutions

83 There are no provisions of the Act which relate to voting at meetings of members of unregistered schemes. Instead, in relation to the Tree Project 2005, it is necessary to consider that Project's constitution.

84 Clause 34 of the constitution of the Tree Project 2005 provides that the constitution may be modified, relevantly, by special resolution of Growers.

85 EFML proposes to call meetings of members of that Project (under clause 26.1 of the constitution), at which special resolutions will be proposed to amend the constitution. If the amendments are passed by special resolution, EFML proposes to ask the Court, at a later hearing, for directions that it is justified in effecting the amendments.

86 The constitution of the Tree Project 2005 provides that on a poll each Grower has 1 vote for each Timberlot held by that Grower[33].

87 Mr Bucknell is a Grower member of the Australian Blue Gum 2000 scheme, one of the Mature Projects. Mr Bucknell says that it is his concern that Elders has not consulted with the Growers, and that the Growers have had little time to evaluate properly the information that has been provided to them. Mr Bucknell says that on evaluation of the information made available and from the records of the scheme it is not in the Growers interest to sell at the heavily discounted rates proposed. He says that Elders is not acting in the interest of the Growers and therefore should not be proceeding with the current plan without consultation.

88 Mr Bucknell has carried out a calculation based on the projections made in the original Australian Blue Gum 2000 - Product Disclosure Statement and a report on the project dated 4 November 2011. Mr Bucknell calculates that total projected payment per timberlot to a Grower should be $25,244.

89 EFML says that Mr Bucknell makes two major incorrect assumptions in his calculations. First he uses a price of woodchip of $207.40 whereas the latest price is $145.42. Second, EFML says that Mr Bucknell does not convert the AUD woodchip price per bdmt (that is the price per metric ton of woodchips if all the moisture content was removed) to a woodchip price per green metric tonne (gmt) (that is the price per metric ton of freshly collected woodchips.) This is relevant as the harvest yield is expressed in gmt not bdmt. EFML says that if Mr Bucknell's calculations are done on the correct assumptions, and after adjusting for some minor errors, the projected payment is $2,922 per Timberlot. EFML says that the GRP Transaction should yield more than this for Mr Bucknell.

90 Mr Seels is Grower member of the ITC Eucalyptus Project (ARSN 084 727 828), one of the Mature Projects. Mr Seels says that he has the absolute right to manage and harvest his trees on his 5 hectares. He says that EFML has no right to sell his trees or in any way deal with his trees without his written approval. Mr Seels has inspected his trees and says that it would be feasible for him to harvest his own trees without disturbing the other trees in the plantation. He wants to do so he feels the amount he will receive is greater than the amount he has been advised he will receive under the GFP Transaction.

91 For the following reasons, I am satisfied that Mr Seels no longer has the right to harvest the trees on his lots as he wishes to do.

92 The services to be provided by the responsible entity comprise the planting, establishment, cultivation and management of trees on the land, and harvesting and selling the tree crop. As such, that there is nothing left for Mr Seels to do personally in relation to the plantation.

93 Mr Seels could have elected, by notice to the responsible entity within 12 months of the commencement date, to market and arrange for the sale of the tree crop himself.[34] Mr Seels did not give such notice. Any notice given after 12 months would be ineffective. Accordingly, Mr Seels delegated to the responsible entity the function of negotiating and entering into agreements to sell the tree crop grown on his leased land.

94 The fact that Mr Seels cannot harvest the trees is consistent with the collective nature of the Project which is a managed investment scheme. One of the key features of managed investment schemes is for the contributions to be pooled, or used in a common enterprise, to produce benefits for members.[35]

95 A Grower cannot require the transfer to him of any part of the Proceeds Fund in specie.[36] The responsible entity is to distribute the Proceeds Fund among Proceeds Fund Growers in accordance with their Proportional Interests.[37]

96 The Project documents contemplate that an investor pays fees to the responsible entity, in return for a lease of a parcel of land, management of the plantation from start to finish, and the sale and marketing of the harvested tree crop. This is a pooled investment. The harvested timber from all investors' leased areas is to be pooled and sold together, to achieve economies of scale. Ultimately the investor is entitled to a distribution from the pool of funds, rather than physical trees or woodchips.

97 At present, given that the trees in the Project have reached maturity and are due to be harvested, the 'members' rights' are ultimately to share in a pool of funds which includes the proceeds of realisation of harvested timber grown on all the land comprised in the Project.

98 For these reasons, I do not accept that Mr Seel's wishes to harvest the trees on his lots should affect my decision whether or not to give the directions sought.

Mr Seels' application to adjourn the proceedings

99 Mr Seels also sought an order that the matter be adjourned for three months to give all Growers the opportunity to review the large amount of evidence presented by the plaintiff and to give Growers in each separate project time to confer in relation to the matter and to consider replacing the responsible entity for each particular project.

100 EFML objected to this course and pointed to the tight timetable that needs to be observed to comply with the terms of the GFP Transaction. In my view, it is not feasible to adjourn the matter. The Court approved the form of notice to be given to growers and the time limits. The matter has proceeded on the basis of the Court direction. I reject the application for an adjournment of the application by EFML.

101 For these reasons, I made the orders sought by EFML.

[1] In giving these reasons I have relied extensively on the written submissions of the plaintiff.

[2] The Mature Projects are listed in Annexure A to the Originating Process.

[3] The Immature Projects are listed in Annexure B to the Originating Process.

[4] [2008] HCA 42; (2008) 237 CLR 66.

[5] Re Mirvac Ltd [1999] NSWSC 457; (1999) 32 ACSR 107, [45]-[47]; Re Macquarie Goodman Funds Management Ltd [2004] NSWSC 1197; (2004) 52 ACSR 194, [2]; Abacus Funds Management Ltd [2005] NSWSC 1309; (2006) 24 ACLC 211, [24]; Re Cromwell Property Securities Ltd [2006] NSWSC 1449, [14]; Re Macquarie Private Capital A Limited [2008] NSWSC 323; (2008) 26 ACLC 366; Re Macquarie Capital Alliance Ltd [2008] NSWSC 745; (2008) 67 ACSR 484, [20]; Re Macquarie Communications Infrastructure Group [2009] NSWSC 487, [16].

[6] Re Timbercorp Securities Ltd (No 2) [2009] VSC 411; Re Timbercorp Securities Ltd [2010] VSC 50; (2010) 77 ACSR 291; Re Great Southern Managers Australia Ltd (No 1) [2009] VSC 557; (2009) 76 ACSR 146; Re Great Southern Managers Australia Ltd (No 2) [2009] VSC 627; Re Willmott Forests Ltd (No 2) [2012] VSC 125 (some aspects of which were appealed).

[7] The 2001 Project documents are used as an example of the documents for the Mature Projects. The 2005 Project documents are used as an example of the documents for the Immature Projects.

[8] Section 601FA of the Act.

[9] The expert has used the concepts of fair and reasonable as set down in ASIC Regulatory Guide 111 that is used in relation to a range of change of control transactions including assessing takeover offers.

[10] [2009] NSWSC 243; (2009) 228 FLR 444, (ING Funds Management).

[11] (2011) 84 ACSR 600; (Premium Income Fund).

[12] [2009] VSC 627 (Great Southern No 2).

[13] [2010] VSC 50 (Re Timbercorp Securities).

[23] Ibid at [105]; Premium Income Fund at [17].

[24] (1992) 10 ACLC 906 at 913-914.

[25] [1953] 1 Ch 65.

[28] ING Funds Management at [105].

[29] Re Great Southern Managers (No 1) [2009] VSC 557; (2009) 76 ACSR 146 at [9]; Re Great Southern (No 2) [2009] VSC 627 at [7].

[30] Re Abacus Funds Management, [13], [24].

[31] Re NRMA Ltd [2000] NSWSC 82; (2000) 33 ACSR 595, [30]; Re Foundation Healthcare Ltd [2002] FCA 742; (2002) 42 ACSR 252, [38]

[32] Re Great Southern (No 1), [26]-[31].

[34] Clause 20.1 of the lease and management agreement that Mr Seels entered into.

[35] Definition of 'managed investment scheme' in s9 of the Act.

[37] Clauses 29.1 and 29.3 of the constitution.