Sandhurst Trustees Limited as custodian for MacarthurCook Property Securities Fund v RFML Limited

REASONS FOR JUDGMENT 1 This application is made pursuant to s 247A of the Corporations Act 2001 (Cth). The plaintiff claims an order authorising it to inspect original books and records of the defendant as listed in the Amended Schedule 2 to the originating process. The right of inspection would be limited to servants, agents and professional advisers of the plaintiff and MacarthurCook Fund Management Limited (MacarthurCook) who had given an undertaking as to confidentiality in the form of Schedule 1 to the originating process. 2 The application was supported by the affidavit of Michael Allen Goldman affirmed on 20 June 2011 to which relevant documents were exhibited and marked as MG-1. Mr Goldman is employed by MacarthurCook as the fund manager of the MacarthurCook Property Securities Fund (MPS Fund) of which MacarthurCook is the Responsible Entity. 3 The defendant, RFML Limited (RFML) is the responsible entity of the P-REIT Unit Trust. The plaintiff holds 22,581,875 units in P-REIT in its capacity as custodian for MacarthurCook. It is in that capacity that the plaintiff brings this application. 4 The background to the application is the proposed listing of P-REIT on the Australian Securities Exchange (ASX). For that to occur it is necessary to make certain amendments to the constitution of P-REIT. Those amendments are to be put to a meeting of unitholders for approval on 30 June 2011. The imminence of that meeting was the expressed reason for the plaintiff seeking an urgent hearing of the present application. 5 On 20 June 2011 I gave the plaintiff leave for short service of the originating process and supporting affidavit of the defendants. The matter was listed for mention at 2.30 pm on 21 June 2011. It was adjourned to 3.30 pm on that day to allow an earlier proceeding to be finalised. Mr Leopold SC, who appeared for the plaintiff, argued that the matter be fixed for an urgent hearing given that the meeting of P-REIT unitholders was fixed for 30 June. Mr Leopold said: Our application, for the reasons set out in the supporting affidavit of Mr Goldman, seeks access to documents which will enable it to consider, amongst other things, the bringing of proceedings aimed at, again, amongst other things, setting aside transactions which will alter the voting rights … at that meeting and would propose, if those proceedings are brought, as interlocutory orders sought in those proceedings, to defer the conduct of that meeting. It would follow from that purpose of the plaintiff that in order, usefully, to gain access to documents, there would need to be a very urgent hearing, which would permit, not only the hearing of the matter, but your Honour to consider the matter, deliver reasons and judgment, if in our favour, to enable access to be given, then, to enable the documents to be considered and then, how they fit in with the possibility of the bringing of proceedings, all of which would need to be dealt with prior to 30 June. 6 For the reasons given by Mr Leopold the matter was listed for hearing on 23 June. Directions for the conduct of the hearing were made including for the amendment of the list of documents in Schedule 2 to the originating process. 7 It is not in dispute that under s 247A it is the applicant who bears the onus of proving, before an order can be made, that the requirements of the section have been met. The section states: The Court may only make the order if it is satisfied that the applicant is acting in good faith and that the inspection is to be made for a proper purpose. The authorities establish that "good faith" and "proper purpose" is a composite requirement and that the Court will determine if the requirement has been demonstrated by applying an objective test: see Smartec Capital Pty Limited v Centro Properties Limited [2011] NSWSC 495 at [64]. 8 Some background concerning the transactions impugned by the plaintiff is necessary here. The first is a transaction whereby 6 million shares in the second defendant, BlackWall Property Funds Limited were exchanged for 9,419,289 P-REIT units: (BlackWall transaction). The second concerns a development of property known as the Bakehouse Quarter Project in North Strathfield a suburb of Sydney. In that transaction P-REIT will acquire or has acquired $30 million worth of transferable CPI indexed bonds secured over the Bakehouse Quarter property. The development of the Bakehouse Quarter is controlled by BQF which is a special purpose trust. The registered proprietor of the Bakehouse land is Kirela Pty Limited as trustee for the Kirela Development Unit Trust (Kirela). 9 The plaintiff also expressed concerns about an Investment Management Agreement (IMA) between the first and second defendants. 10 Given the urgency of the present application it is only possible to summarise very briefly the concerns that the plaintiff expressed about these transactions. The plaintiff provided very full submissions which I have taken into account and which have been marked "MFI-1" and placed on the Court file. 11 The plaintiff submitted that in part its application to investigate the impugned transaction is justified by the extent of inter-relationship between the various parties to those transactions. BlackWall and RFML are related parties having a number of directors in common. RFML and Blackwell were part of the Pelorus Property Group Limited prior to the demerger in late 2010. Pelorus is the ultimate holding company of RFML. RFML and Kirela have directors in common. The plaintiff contends that Pelorus will be the responsible entity of BQF once it is registered as a managed investment scheme under the Corporations Act. 12 Following the issue of a Replacement Product Disclosure Statement dated 2 May 2011 the plaintiff sought further information from the defendants' solicitors by letters dated 12 and 16 May 2011. It sought a copy of the P-REIT register of unitholders on or about 3 June 2011 for the purpose of approaching other unitholders in P-REIT to discuss potential related party transactions entered into by RFML Limited. Further letters and requests were sent during the first half of June without the plaintiff receiving information which satisfied its concerns. 13 In para 51 of his affidavit Mr Goldman set out his reasons for initiating an application under s 247A. In addition to the "insufficiency of response by RFML to MCFM's requests for information", they included comments that the BlackWall transaction was "not a standard investment for P-REIT" and did not appear to provide a benefit to P-REIT unitholders; that both the BlackWall and Bakehouse transactions would substantially dilute MacarthurCook's unitholding in P-REIT with consequences for its voting power including that it would lose "its ability to block the passing of special resolutions which are thought by [MacarthurCook] not to be in its best interests". 14 Mr Goldman expressed the concern that the terms of the IMA suggested that it was not an arms length transaction and would have the effect of entrenching RFML, the existing responsible entity of P-REIT, and its management company, BlackWall. Among the terms that Mr Goldman refers to as likely to have this effect was the obligation under the IMA for the responsible entity to remit all but $50,000 of its fees to the investment manager. 15 Mr Goldman was extensively cross-examined by Mr Kelly SC who appeared for the defendants. The most remarkable feature of his evidence was his disavowal of the 30 June meeting of unitholders as being the basis for the extreme urgency claimed for the hearing of the plaintiff's application under s 247A. Again and again he stated that it was not the imminence of the meeting but rather the fact that the plaintiff had repeatedly and without success asked the defendants for information. Mr Kelly several times put to him that if the meeting was not the problem it would not matter if the documents sought were received after the meeting. Each time Mr Goldman rejected that proposition and said that provision of the documents was urgent. 16 On re-examination Mr Leopold attempted to clarify the issue. He asked Mr Goldman to assume that he possessed the information sought under s 247A and further, to assume, that you form the view, whether on advice or otherwise, that that information reveals an arguable case that the BlackWall share transaction and/or the Bakehouse bonds transaction are invalid with the result that the holders of those units, BlackWall and the other counterparty, are arguably not entitled to exercise voting power pursuant to those units at the meeting next Thursday. Mr Leopold then asked, What would your view be as to whether it would be appropriate at that point, having that information and on those assumptions, to make an application to defer the meeting? Mr Goldman responded: If we believed that the transactions were invalid and if those transactions had completed and those unit holders were … unable to vote, I guess we would - subject to advice, we would allow the meeting to proceed and then if there was other action to be taken subsequent to the meeting in relation to those transactions, I guess pursue those avenues. 17 That answer is inconsistent with the statement in para 55 of Mr Goldman's affidavit, that in such circumstances the plaintiff would want to commence proceedings and, if necessary, make an application to defer the meeting. 18 The other remarkable aspect of Mr Goldman's evidence on cross-examination is, with respect, the extent of his ignorance about other aspects of the relationship between the plaintiff and the defendants. Of particular relevance is litigation currently between the parties. A BlackWall Property Funds Trust Update of 7 June 2011 refers to litigation between MacarthurCook and the defendants. Under the heading, "MacarthurCook Litigation" it states: As previously advised, MacarthurCook Funds Management Ltd (MCK) is suing the Trust in an attempt to force the redemption of 15 million P-REIT units. MCK is seeking to have these units redeemed ahead of all other unitholders at $1.00 per unit plus accumulated interest. Alternatively, MCK is seeking damages that would equate to the difference between the current value of units and the amount sought on redemption - that is $1 per unit plus interest … In the second legal action MCK has alleged the Trust's constitution cannot be amended to allow the Trust to list on the ASX without a meeting of unitholders to approve the necessary constitution amendments to comply with listing rule requirements. We have concluded that litigation would be time consuming and there is no benefit in the Trust incurring the legal costs of proving our point in court when MCK's tactic can be dealt with by a meeting of unitholders. A meeting has been called in order that MCK does not continue to spoil the opportunity of unitholders to take advantage of a listing and consequent liquidity of your investment. The directors urge you to read the attached Notice of Meeting, vote in favour of the resolution by signing the yellow proxy form and return it in the reply paid envelope. 19 Mr Goldman rejected the "spoiling" allegation however, he argued that no protest had been made as to its inclusion in the update or as to any of the comments about the litigation between the parties. The Explanatory Memorandum that accompanied the Notice of Unitholders' Meeting to be held on 30 June 2011 also referred, in greater detail to this litigation. These comments were also not the subject of any complaint by the plaintiff. Mr Kelly put to Mr Goldman that the purpose of the litigation for redemption of units in P-REIT was for the plaintiff to recoup losses on its investment resulting from the Global Financial Crisis that had arisen since the investment was made in 2007. 20 Mr Goldman said that he was managing the investment but not the litigation. He denied being able to throw any light on the commercial purpose of the litigation. It is worth noting here that Mr Goldman commenced employment with MCFM only in January 2011 however the failure of the plaintiff to call any other employee or officer who might have had more extensive information is also worth noting. 21 This is especially so given that Mr Jim Miltiadis who is Head of Operations for the AIMS Financial Group (AIMS) was in Court during the hearing but was not called to give evidence. AIMS is the parent company of MCK Management Limited, which is in turn, the parent company of MCFM. According to Mr Goldman, Mr Wang, the Founding CEO and Chairman of AIMS has ultimate control of the proceeding however Mr Miltiadis would be familiar with the issues. 22 In summary Mr Goldman was a most unimpressive witness. The inconsistencies in his evidence and also the inconsistency between his evidence the reasons given by the plaintiff's legal representative for seeking an urgent hearing (I have no doubt on instructions) suggest that little weight can be given to his evidence. Mr Leopold's very able submissions were not able to remedy the scepticism as to good faith and proper purpose that must result from the defects in the plaintiff's evidence. 23 It is important to note here that it is no part of my reasons to suggest that the plaintiff is not entitled to try and defer the meeting on 30 June should it have grounds for doing so and should it regard such a move as being in its unitholders' interests. It is not because any such move would be an improper purpose, but rather because, for the reasons I have already given, there must be scepticism about what that purpose is. 24 Mr Kelly submitted that the assessment of good faith and proper purpose must be made in the context of all relevant circumstances. He submitted that the context in this case, put in issue the purpose of spoiling the listing [on the ASX] as a lever to obtain a tactical advantage when it comes to settling the first proceeding and enabling the plaintiff to withdraw its investment at full face value, in preference to other investors whose investment had been devalued by the [global financial crisis]. 25 Support for this submission can be found in an email dated 12 January 2011 from a non-executive director, Mr Tony Wood to other senior officers of the plaintiff including Mr Miltiadis. The email says, inter alia, Is there any material downside to going to ASIC immediately re objecting to the listing? This strikes me as the point of vulnerability … [emphasis added] 26 This email, Mr Goldman's equivocal evidence, the timing of the present application and the plea for urgency in relation to the unitholders' meeting all support the conclusion that the plaintiff has not discharged its onus as to good faith and proper purpose. 27 Although Mr Goldman also referred to taking action to prevent the completion of the Bakehouse transaction (if that had not already occurred). This motive for seeking an order under s 247A is not sufficient to allay the scepticism to which I have already referred. 28 For this reason the application must be dismissed with costs. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone.