BETWEEN : SOUTHERN WINE CORPORATION PTY LTD (IN LIQ) (ACN 083 901 786)

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : PERERA -v- REILLY & ANOR [2006] WASC 200

Corporations - Managed investment scheme - Responsible entity - Special resolution to delete voting restriction - Where responsible entity in liquidation and voted on resolution - Construction of s 253E Corporations Act 2001 (Cth) - Whether responsible entity had an interest in resolution other than as a member - Meaning of "interest"

Corporations Act 2001 (Cth), s 9, s 191(1), s 253E, s 601ED, s 601FC, s 601FG(1)

Respondent's action against the appellant dismissed

Hospital Products Ltd v United States Surgical Corp [1984] HCA 64; (1984) 156 CLR 41

McGellin v Mount King Mining NL (1998) 144 FLR 288

Perera v Reilly [2006] WASC 200

Sycotex Pty Ltd v Baseler [1994] FCA 1117; (1994) 13 ACSR 766

Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1

Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) [2005] HCA 20; (2005) 220 CLR 592

Franklins Selfserve Pty Ltd v Commissioner of Taxation (Cth) [1970] HCA 33; (1970) 125 CLR 52

Geneva Finance Ltd v Resource & Industry Ltd [2002] NSWSC 856; (2002) 169 FLR 152

In re A Caveat; Ex parte Canowie Pastoral Co Ltd [1931] SASR 502

In re Paul & Gray Ltd (1932) 32 SR (NSW) 386

Lancedale Holdings Pty Ltd v Heath Group Australasia Pty Ltd [1999] NSWCA 460; (1999) 33 ACSR 247

North­West Transportation Co Ltd v Beatty (1887) 12 App Cas 589

Spies v The Queen [2000] HCA 43; (2000) 201 CLR 603

Whitlam v Australian Securities and Investment Commission [2003] NSWCA 183; (2003) 57 NSWLR 559

1 STEYTLER P: This appeal turns upon the meaning of the phrase "interest in the resolution or matter other than as a member" in s 253E of the Corporations Act 2001 (Cth) ("Act"). That section reads as follows:

"The responsible entity of a registered scheme and its associates are not entitled to vote their interest on a resolution at a meeting of the scheme's members if they have an interest in the resolution or matter other than as a member. However, if the scheme is listed, the responsible entity and its associates are entitled to vote their interest on resolutions to remove the responsibility entity and choose a new responsible entity."

There is no definition in the Act, or in the Corporations Regulations, of the word "interest" where it appears in the phrase to which I have referred.

2 The question of construction arises in the context of a resolution voted upon by the appellant (then in liquidation) at a general meeting of the Fernvale Unit Trust Managed Investment Scheme ("Scheme"), of which the appellant was the responsible entity as defined in s 9 of the Act (the Scheme was registered pursuant to the provisions of s 601ED of the Act). The resolution was one to amend the Scheme's constitution ("Constitution"). This had been made by deed dated 25 November 1998, executed by the appellant as responsible entity and by the unit holders of the Scheme ("unit holders"). Unusually, the terms of a trust deed ("Deed") made with effect from 25 November 1998 between parties who were not parties to the Constitution were incorporated into the Constitution.

3 Clause 11.3 of the Deed provided that no transfer of units in the Scheme was permitted (subject to exceptions that are not presently relevant) that would have the effect of increasing the interest of any person in units to greater than 5 per cent of the issued units ("prohibition"). The appellant held 56 per cent of the issued units in the Scheme. It wanted to sell all of its units to a third party and had entered into an agreement of sale accordingly. Necessarily, that agreement was conditional upon the removal of the prohibition. It was common ground between the parties that the sale could not be effected without this amendment being made and also that the resolution proposing the amendment was required by s 601GC of the Act to be a special resolution. Consequently, the appellant proposed its resolution to amend the Deed by deleting cl 11.3 and associated provisions.

4 It did this by circulating to the unit holders, on about 18 November 2004, notice of a general meeting of unit holders to be held on 15 December 2004 to consider and pass a special resolution effecting these amendments. The notice of general meeting was accompanied by an explanatory memorandum which suggested that the resolution would benefit all unit holders because it would make the units a more attractive investment if they could be bought in parcels comprising more than only 5 per cent of the total issued units.

5 On 15 December 2004 the meeting was adjourned until 22 December 2004. On that day the special resolution was passed (which required, by virtue of the Deed, a three quarters majority of the votes cast) with 75.12 per cent of the units having been voted in its favour. It is consequently plain that, if the appellant was not entitled to vote its units, the resolution would have failed.

6 The respondent was one of those who had voted units against the resolution. He held 14 units in the Scheme. He contends that the appellant was precluded by s 253E of the Act from voting in support of the resolution because it had an interest in the resolution or matter other than as member. He said that the resolution had consequently not been validly passed. He brought proceedings in the Supreme Court for a declaration accordingly.

7 The trial Judge upheld the respondent's contention: Perera v Reilly [2006] WASC 200. He did so upon the basis that the appellant had an interest in the resolution other than as a member because it was in liquidation. He said in this respect (at [23] - [24] of his judgment):

"Its interest arises out of its liquidation. Upon its insolvency it has entered upon a process designed to ensure ... [its] orderly winding up ... That is, of course, the responsibility of the liquidator, Mr Reilly [who was the first defendant in the proceedings]. The process involves getting in the property of ... [the appellant], generally speaking converting it into liquid assets, and rateably meeting the claims, according to law, of creditors and ultimately, if anything remains, its members.

The interest of ... [the appellant] in its insolvency and Mr Reilly, as its liquidator, are very much identified in insolvency with its creditors."

8 Then, after referring to the judgment of Mason J in Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1 at 7 (where Mason J emphasised that directors of a company, in discharging their duty to the company, must take account of the interests of its shareholders and its creditors) and to that of Gummow J in Sycotex Pty Ltd v Baseler [1994] FCA 1117; (1994) 13 ACSR 766 at 785 (where Gummow J said that, when a company is insolvent or nearing insolvency, the creditors are to be seen as having a direct interest in the company that cannot be overridden by the shareholders), he went on to say (at [26]):

"In this case, the simple fact is that ... [the appellant] was a member holding units in the ... [Scheme]. It was also the responsible entity. It was not seeking to terminate its interest as the responsible entity, but it was seeking to vacate its status as a member as part of a liquidation process. It sought to amend the Constitution of the ... [Scheme] so that it could make the sale to the purchaser with which it had entered into a contract - one sale to one purchaser who would then acquire all of ... [the appellant's] 56 per cent interest. It had an interest in the resolution as a company in liquidation seeking to recover value by the sale of its unit holding, particularly in the interests of its creditors."

9 He said (at [47]) that the inevitable consequence of this conclusion was that the "block of votes wrongly cast in favour of the special resolution" had to be removed "from the scales", with the result that the resolution had not validly been passed. He made a declaration accordingly.

10 The appellant contends, in its sole ground of appeal, that the trial Judge erred in finding that, merely because it was insolvent, it had an interest in the resolution or matter other than as a member. The respondent has lodged a notice of contention whereby it supports the finding of the trial Judge on the additional basis that:

" ... the Appellant had an interest in the resolution other than as a member because the resolution, which was to facilitate the sale of the Appellant's 56% interest in the scheme, was a step taken in the process of winding up the Appellant which would inevitably lead to the cessation of the Appellant as Responsible Entity."

Legislative history and context of s 253E of the Act

11 Before turning to the question of construction that arises in the appeal I will set out the legislative history of s 253E and make some comments concerning its context.

12 A "managed investment scheme" is defined in s 9 of the Act (subject to exclusions that are not presently relevant) to mean:

(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 day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or

13 An "interest" in a managed investment scheme is defined, in s 9 of the Act, as meaning "a right to benefits produced by the scheme (whether the right is actual, prospective or contingent and whether it is enforceable or not)".

14 Managed investment schemes are regulated by ch 5C of the Act. That chapter was introduced into the then Corporations Law by the Managed Investments Act 1998 (Cth) which was, in turn, a response to recommendations for reform that had been made by the Australian Law Reform Commission and the Securities Advisory Committee. The Explanatory Memorandum which accompanied the Managed Investments Bill 1997 suggested that adoption of the legislative proposals would result in:

(a) a simplified structure for the managed investments industry;

(b) clarification of the responsibilities of the operators of managed investment schemes (the responsible entities);

(c) the introduction of measures to improve corporate governance in relation to responsible entities; and

(d) appropriate powers for the Australian Securities Investments Commission (then the Australian Securities Commission) as the regulator.

15 Division 1 of Pt 5C.2 deals with the responsibilities and powers of the responsible entity. Section 601FC(1) sets out, at some length, the duties of the responsible entity and s 601FC(2) provides that the responsible entity holds scheme property on trust for scheme members. Section 601FC(3) provides that a duty of the responsible entity under subs (1) or (2) overrides any conflicting duty an officer or employee of the responsible entity has under Pt 2D.1 of the Act, which deals with the duties and powers of officers and employees. The responsible entity's duties encompass such matters as acting in the best interests of the members and, if there is a conflict between the members' interests and its own interests, giving priority to the members' interests (s 601FC(1)(c)) and treating the members who hold interests of the same class equally (s 601FC(1)(d)). Paragraph 8.8 of the Explanatory Memorandum suggests that the extensive statutory duties provided for by these provisions "will reflect both the fundamental duties of a fiduciary, as well as certain of the duties currently imposed on the management company and trustee under the covenant provisions of Division 5 of Part 7.12 of the Law".

16 The duties of officers and employees of responsible entities are dealt with, also at some length, by s 601FD and s 601FE respectively. Officers are required to 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, to give priority to the members' interests (s 601FD(1)(c)).

17 Section 601FG(1) provides that the responsible entity of a registered scheme may acquire and hold an interest in the scheme, but it must only do so for not less than the consideration that would be payable if the interest were acquired by another person and subject to terms and conditions that would not disadvantage other members. The Explanatory Memorandum suggests, in par 8.25, that the holding of interests in the scheme by the responsible entity "will be subject to the restriction on voting those interests in proposed section 253E which appears in the Company Law Review Bill".

18 The Company Law Review Bill 1997 was introduced into Parliament on 3 December 1997. That Bill was largely based on the Second Corporate Law Simplification Bill 1996 which had, in some respects, been redrafted and improved. The former Bill became law in 1998 and s 253E was consequently introduced into the Corporations Law, now the Act, by the Company Law Review Act 1998 (see Sch 1 of that Act). Neither I nor counsel for the parties have been able to find anything in the Explanatory Memorandum that accompanied the Company Law Review Bill, or in the exposure draft that preceded it, or in the second reading speech concerning it that sheds any light on the construction of s 253E (save that counsel for each of the parties sought to draw some support for their respective contentions from the fact that there was, in the second reading speech, reference to the fact that the Government had been conscious of the need to afford a high level of protection to scheme assets).

19 Finally, under this heading, I should mention that the word "interest" is used in a relatively similar context in s 191(1) of the Act, which provides that a director of a company who has a "material personal interest" in a matter that relates to the affairs of the company must give the other directors notice of the interest unless s 191(2) applies. "Material personal interest" is not defined in the Act, but some guidance as to its meaning is available from the judgment of Murray J in McGellin v Mount King Mining NL (1998) 144 FLR 288, where he said (at 304), that a "material personal interest" was one that involved "a relationship of some real substance to the subject matter under consideration or the contract or arrangement which is proposed". He went on to say:

"In that way the nature of the interest should be seen to have the capacity to influence the vote of the particular director upon the decision to be made, bearing in mind that both the article and the section are concerned with that aspect of a director's fiduciary duties which relates to the resolution of conflict of interest which must, of itself, be of a real or substantial kind."

20 The authors of Ford's Principles of Corporations Law, 12th ed, 2005, at [9.130] suggest that an interest which does not give rise to a "real sensible possibility of conflict" (as to which see Hospital Products Ltd v United States Surgical Corp [1984] HCA 64; (1984) 156 CLR 41 at 103, per Mason J) would not be a material personal interest for the purposes of s 191(1).

"interest in the resolution or matter other than as a member"

21 It seems plain enough that, when read in its context and having regard for its legislative history, s 253E was designed to ensure that the responsible entity, in voting on a resolution, would not put its own interest, arising independently of its membership of the scheme, ahead of that of other members, to their potential detriment. It is, of course, true that the section is not limited in its operation to cases of an actual conflict of interest. The section provides that the responsible entity cannot vote its interest on a resolution where it has any interest in the resolution or matter other than as a member. However, there could have been no other purpose behind that provision than that of removing the potential for a conflict of interest.

22 Also, the section is not limited to circumstances in which the interest in question will provide the responsible entity with a financial benefit (it is similar, in this respect, to s 191(1), and see, by way of comparison, s 208 and s 229 of the Act). As I read s 253E, the word "interest", in its context in the phrase under consideration, encompasses any direct or indirect benefit or advantage, other than as a member, arising out of the passing of the resolution: see the definition in the Shorter Oxford English Dictionary, 8th ed.

23 On the other hand, as the authors of Ford's Principles of Corporations Law, 12th ed, point out at [11.040], Australian law has not yet come to regard controllers as subject to a fiduciary duty which would prevent them from exercising shareholder voting rights in a self-interested way. There is consequently no reason why a responsible entity should not vote its units in favour of (or against) a resolution in accordance with its self-interest, so long as it has no interest in the resolution, or subject matter of the resolution, other than as a member and so long as it does not otherwise contravene applicable provisions of the Act.

24 In this case the appellant plainly acted in its self-interest in voting in favour of the resolution (being its interest in maximising its return on the sale of the units held by it). However, it did so in support of a resolution which was expressed to operate equally in respect of all members and, as it seems to me, in circumstances in which its only interest in the resolution or matter arose in its capacity as a member.

25 It may be true, as the trial Judge said, that, because it was insolvent, the appellant's interest in maximising its return was pursued for the benefit of its creditors and that it was "seeking to vacate its status as a member as part of a liquidation process" (at [26] of his reasons). However, I am, with due respect, unable to accept that any of this gave the appellant an interest in the resolution or its subject matter other than as a member. The desire to maximise a unit holder's return on the sale of its units seems to me necessarily to be an advantage or benefit, and hence an "interest", that arises as a member regardless of whether the sale is for the benefit of its creditors in the case of an insolvent company or, in the case of a solvent company, for the benefit of its shareholders or, indeed, for the purpose of satisfying a particular debt or debts. While counsel for the respondent suggested that a desire to maximise the return to creditors in the course of the winding up of the appellant is a "concern" arising other than in its capacity as a member, and that the word "interest" is wide enough to encompass a "concern" (he relies, in this respect, upon the Shorter Oxford English Dictionary definition), it seems to me that a concern of this kind could not be categorised as an "interest" and that the appellant's purpose or motive in seeking to facilitate the sale of its units at the best price is irrelevant. Its only interest in the resolution or matter was that of achieving the best price for its units. Whatever may have been its motive for doing that, this is an advantage or benefit that is capable of arising only in its capacity as a member. There is no suggestion that the appellant had any other interest in the resolution or matter. Nor is there any suggestion that the resolution worked any inequality as between unit holders.

26 As to the notice of contention, it seems to me to be similarly irrelevant whether or not the passing of the resolution could be described as a "step taken in the process of winding up" the appellant (although it seems to me to be more properly categorised as a step that was ancillary to the winding up of the appellant). The appellant would necessarily have been wound up, and its units in the Scheme sold, regardless of whether or not the resolution was passed. If the resolution was not passed, the only consequence would have been that the units would have been sold in parcels of not more than 5 per cent of the total number of issued units, probably providing a lower total return to the appellant.

27 Counsel for the respondent also contended that the appellant had an interest, as responsible entity, arising out of the fact that it would be wound up while still acting in that capacity. However, it seems to me to be irrelevant that the winding up of the appellant would inevitably lead to its cessation as responsible entity. That would happen regardless of whether or not the resolution was passed. While it is true, as counsel for the respondent pointed out, that the appellant could, if it had wished to do so, have resigned as responsible entity before voting on the resolution, the fact that it did not do so does not bear upon the question whether it had an interest in the resolution or its subject matter other than as a member. Its interest in continuing to be the responsible entity (presumably because it continued to earn fees, to the benefit of its creditors) was entirely separate

and distinct from its interest in the passing of the resolution. It was entitled to continue to act as responsible entity until it was finally wound up regardless of whether or not the resolution passed.

28 In my opinion the appeal should consequently be allowed. The decision of the trial Judge should be set aside and, in lieu, there should be an order dismissing the respondent's action.

• Legislative history and context of s 253E of the Act
• "interest in the resolution or matter other than as a member"