TFML Ltd v MacarthurCook Fund Management Ltd

Judgment 1McCOLL JA: I agree with Meagher JA's reasons and the orders his Honour proposes. 2MACFARLAN JA: I agree with Meagher JA. 3MEAGHER JA: The provisions of Part 5C.6 of the Corporations Act 2001 (Cth) (the Act) regulate the rights of members of managed investment schemes to withdraw from a scheme. This appeal is concerned with the application of those provisions to redemptions required by the terms on which units in a unit trust scheme were issued by the second cross-respondent (RFML) to the first respondent (MacarthurCook). Those terms were contained in facility agreements by which MacarthurCook underwrote a public offer of units in the scheme. The redemptions did not occur because of the increasing uncertainty in credit and real estate markets during 2008. MacarthurCook sued the appellant (TFML), as the new responsible entity of the scheme, and RFML, for damages for breach of those obligations. In his judgment delivered on 10 August 2012, Hammerschlag J held that MacarthurCook was entitled to damages from TFML: MacarthurCook Fund Management Ltd v Zhaofeng Funds Ltd [2012] NSWSC 911.

Background 4The registered managed investment scheme was known as Reed Property Trust (the RP Trust). The constitution creating that trust was dated 23 June 2006. Prior to 8 May 2010, and at the times when the liabilities sought to be enforced are said to have arisen, RFML was the trustee and responsible entity of the RP Trust. 5In 2006 the RP Trust was an unlisted unit trust investing primarily in property based assets. Those assets included retail shopping centres. In October 2006 and December 2007 RFML issued Product Disclosure Statements (PDS) by which it sought to raise funds by an open-ended offer of ordinary units at $1 per unit. Those funds were to be applied in part to reduce borrowings which had been used to finance new acquisitions of property. MacarthurCook agreed to underwrite the issue of units under that offer by subscribing for 10m fully paid units at $1. Those units were to be subscribed for by 1 November 2006 and to be redeemed out of moneys raised in the public offer. If not redeemed by 31 October 2007, they were to be purchased by RFML. That underwriting was undertaken by two facility agreements dated 27 October 2006. Those agreements were Facility Agreement Tranche 1 (FAT1) and Facility Agreement Tranche 2 (FAT2). The units issued were Founder Units which could be redeemed at $1 per unit. 6On 1 April 2007 RFML and MacarthurCook entered into Unit Conversion Agreement Tranche 1, by which the 5m Founder Units issued to MacarthurCook under FAT1 (incorrectly described in that agreement as Foundation Units) were converted to ordinary units in the RP Trust. In consideration of MacarthurCook agreeing to that conversion, RFML "in its personal capacity" agreed to pay MacarthurCook an annual fee, calculated as a percentage of the amount of $5m, if MacarthurCook continued to hold the ordinary units as at 30 June in each of the years in which the fee was payable. Those years were 2007 to 2011. 7MacarthurCook and RFML entered into three further facility agreements by which the former subscribed for a further 15m Founder Units in the RP Trust. Each agreement was for 5m units. They were Facility Agreement Tranche 3 entered into on 1 November 2007 (FAT3) and Facility Agreements Tranche 4 (FAT4) and Tranche 5 (FAT5), each of which was entered into on 3 December 2007. By FAT3 the parties agreed that FAT2 would cease on 31 October 2007 and MacarthurCook subscribed for 5m units on the basis that RFML would retain the subscription price under FAT2 as the consideration for the issue of those units. The units, in the case of each agreement, were held by Sandhurst Trustees Ltd (Sandhurst) as custodian and agent for MacarthurCook. 8The three facility agreements contained provisions for the redemption or purchase of the units. The provisions in FAT3 were in the following terms: "2.4 Redemption Subject to compliance with any requirements under the Corporations Act and the Constitution, during the Subscription Period, Subscription Units held by MacarthurCook must be redeemed by Reed RE for their Issue Price, using funds received by the Trust as a result of accepted applications under the Offer Documents, such redemptions commencing 6 months from the Subscription Date." "2.6 RFML's guarantee RFML guarantees to MacarthurCook to purchase all Subscription Units still held by MacarthurCook at the end of the Subscription Period, at their Issue Price. Reed RE will also at the same time pay to MacarthurCook any accrued but unpaid distributions on the Subscription Units for the period ending on the date the Subscription Units are purchased." Clause 2.4 in FAT4 and FAT5 concluded: "... such redemptions commencing a minimum six months from the Subscription Date." (emphasis added) These clauses were otherwise in the same terms in FAT4 and FAT5. 9In the descriptions of the parties in these provisions, the references to Reed RE were expressed to be to RFML "in its capacity as responsible entity" of the RP Trust and the reference to RFML was expressed to be to that entity "in its personal capacity". The Subscription Date was 1 November 2007 for FAT3 and 3 December 2007 for FAT4 and FAT5. The Subscription Period was in each case a period of 12 months from the Subscription Date. 10During the overlapping Subscription Periods under FAT3 (2 November 2007 to 1 November 2008) and FAT4 and FAT5 (in each case 4 December 2007 to 3 December 2008), the RP Trust received funds totalling $12,347,079 "as a result of accepted applications under the Offer Documents" within the meaning of cl 2.4. Those funds were received between 2 November 2007 and 5 September 2008. Notwithstanding that they were received, RFML did not redeem any of the units issued under FAT3, FAT4 or FAT5. Nor did it, at the end of the relevant Subscription Periods, purchase the Founder Units then held by MacarthurCook in accordance with its obligation under cl 2.6. 11Under cl 7.6 of the constitution of the RP Trust, the trustee could "suspend withdrawals for a period of time if it is not in the best interests of Unitholders for withdrawals to be made". By a notice dated 29 September 2008 RFML suspended all withdrawals from the RP Trust until further notice. That suspension continued to apply after the end of the relevant Subscription Periods on 3 December 2008. 12RFML also did not pay to MacarthurCook the conversion fee instalments due under cl 2.4 of the Unit Conversion Agreement Tranche 1. Those payments were to be made on 1 July 2009, 1 July 2010 and 1 July 2011 and totalled $131,250.

The decision of the primary judge 13In the proceedings before the primary judge, MacarthurCook made three relevant claims. 14First, it claimed damages from TFML for breach of contract in relation to the obligation to redeem under cl 2.4 of FAT3, FAT4 and FAT5. It was common ground that by reason of s 601FS(1) of the Act, TFML would be liable for such a breach by RFML. The question between the parties was whether RFML had breached any relevant obligation. That question gave rise to four issues. They were whether the requirements in Part 5C.6 of the Act applied to a redemption under cl 2.4; if so, whether those requirements had been complied with; if they had not been complied with, whether RFML had undertaken, expressly or impliedly, to do what was necessary to permit redemptions in compliance with those requirements; and, whether RFML was in breach of any such obligation. 15In relation to that claim, the primary judge held: (1) The provisions of Part 5C.6 applied to any redemption under cl 2.4. Specifically, s 601KA(3)(b) required that the responsible entity not allow a member to withdraw from the scheme otherwise than in accordance with the scheme's constitution and ss 601KB to 601KE: [66]-[71]. It followed, because of that provision and the introductory words to cl 2.4, that RFML's obligation to redeem was subject to compliance with those requirements. (2) Entry into facility agreements containing cl 2.4 was sufficient compliance with those requirements and the scheme's constitution. There was a written offer and acceptance of redemption on the terms of that clause which identified the assets available to satisfy the withdrawal: [78]-[83]. It followed that absent any other provisions of the Act or constitution which had to be complied with, RFML was obliged to redeem 12,347,079 of the 15m units issued under FAT3, FAT4 and FAT5. (3) If, contrary to (2), the entry into a facility agreement containing cl 2.4 was not sufficient compliance with the requirements of the Act and constitution, RFML, either expressly or by implication, undertook to do what was necessary to comply with those requirements and had the power to do so. It breached that obligation. Had it made a withdrawal offer or withdrawal offers, that offer or those offers would have been accepted with the result that MacarthurCook would have been entitled to redeem the same number of units: [84]-[96]. Any such offer and acceptance would have occurred before 29 September 2008, the date from which withdrawals were suspended, so as to entitle MacarthurCook to redeem the same number of units: [97]-[100]. (4) On the basis of the conclusions in (2) or (3), MacarthurCook was entitled to damages measured as the amount it would have received for redemption of 12,347,079 Founder Units less their value of $1,537,211, namely $10,809,868: [53], [106]. Clause 2.4 did not provide that only funds received in the second six months of the relevant Subscription Period were available to redeem units: [56], [102]-[103]. 16Secondly, MacarthurCook claimed damages from TFML, and in the alternative from RFML, for breach of the obligation to purchase under cl 2.6. It was accepted that there had been a breach of this obligation. The issue was whether TFML was liable for that breach by reason of s 601FS(1) of the Act. TFML argued that it was not because the obligation to purchase was expressed to be undertaken by RFML "in its personal capacity" as distinct from in its capacity as responsible entity. 17Thirdly, MacarthurCook claimed damages from TFML, and in the alternative from RFML, for breach of the obligation to pay the three conversion fee instalments. Again, there was no issue as to breach. The issue was whether TFML was liable for that breach by reason of s 601FS(1), in circumstances where the obligation was expressed to be undertaken by RFML "in its personal capacity". 18In relation to MacarthurCook's claims under cl 2.6 and in respect of the conversion fee instalments, the primary judge held that the liability of RFML under cl 2.6 was undertaken in its capacity as responsible entity and was a liability "in relation to" the scheme within s 601FS(1). That was sufficient to transfer that liability of RFML to TFML as the new responsible entity: [111]-[123]. The same conclusion followed in relation to the conversion fee claim: [125]. The primary judge did not expressly consider whether each liability remained a liability of RFML because RFML could not have been indemnified out of the scheme property in relation to either liability: cf s 601FS(2)(d). 19In the result the primary judge held that MacarthurCook was entitled to recover damages calculated as the amount it would have received had the 15m units been purchased (ie $15m) less their value in hand of $1,537,211 plus the unpaid conversion instalments of $131,250: [127].

The issues in the appeal 20In relation to MacarthurCook's redemption claim, TFML supports the primary judge's conclusion that the provisions of Part 5C.6 applied to a redemption under cl 2.4. That conclusion is challenged by grounds 1, 1A and 2 of MacarthurCook's amended notice of contention which argue that cll 4.2 and 7.4 of the constitution entitled RFML to enter into and give effect to cl 2.4 of the facility agreements and that the entitlement so created was not a right to withdraw to which Part 5C.6 applied. By its appeal, TFML challenges the primary judge's conclusions that those provisions were complied with (grounds of appeal 1 to 10) and that RFML as responsible entity was subject to an express or implied obligation to comply with them by making a withdrawal offer (grounds of appeal 11 to 19). 21TFML also challenges the primary judge's conclusion that RFML was in breach of any obligation in respect of the redemption claim (grounds of appeal 20 and 21). The obligation to redeem under cl 2.4 was required to be performed during a six month period which ended on 1 November 2008, in the case of FAT3, and 3 December 2008, in the case of FAT4 and FAT5. It was not in breach by not performing those obligations before 29 September 2008 and not in breach for not doing so after that date because of the suspension of withdrawals from that date. This argument is not directly addressed by the primary judge. It directs attention to the time for performance of any obligation to redeem and whether that had to occur as and when funds were received from the public offer, rather than by the end of the relevant period. MacarthurCook does not contend that this issue does not arise or that it is not able to be argued on appeal. 22Finally, TFML challenges the primary judge's conclusion that RFML's liabilities for damages for breach of cl 2.6 (grounds of appeal 23 to 26, 29 and 30) and for failure to pay the conversion fee (grounds of appeal 31 and 32) were transferred to it by s 601FS(1). TFML says that each liability is not one "in relation to" the scheme and that each was one for which it "could not have been indemnified out of the scheme property", relying upon s 601FS(2)(d). If TFML is successful on these grounds, by its cross-appeal MacarthurCook seeks judgments against RFML for these liabilities which, in that event, remained with it. 23Accordingly, the following issues arise in the appeal and cross-appeal: (1)Whether any redemption of units pursuant to cl 2.4 of the facility agreements was subject to compliance with the provisions of Part 5C.6? (2)If yes to (1), whether the entry into facility agreements containing cl 2.4 was a sufficient compliance with the relevant requirements of Part 5C.6 and the scheme's constitution? (3)If yes to (1) and no to (2), whether RFML was subject to an express or implied obligation to make a withdrawal offer or withdrawal offers to MacarthurCook, in compliance with those requirements, during the period commencing six months after the start of the relevant Subscription Period? (4)If yes to (2) or (3), whether RFML was required, as and when funds were received from the public offer, to redeem the number of units equal to the dollar amount of the funds received. If not, did the suspension of withdrawals from 29 September 2008 have the consequence that RFML was not in breach of any obligation under cl 2.4 to make withdrawal offers? (5)Whether, by the operation of s 601FS(1), RFML's liabilities to MacarthurCook for damages for breach of cl 2.6 and for failure to pay the conversion fee instalments, became liabilities of TFML?

Was any redemption of units pursuant to cl 2.4 subject to compliance with the provisions of Part 5C.6? 24The primary judge held that in agreeing and giving effect to the provisions of cl 2.4, RFML was allowing MacarthurCook to withdraw from the scheme: [69]. For that reason, it was prohibited from doing so other than in accordance with the scheme's constitution and ss 601KB to 601KE which applied because the scheme was not liquid. It did not matter that RFML's agreement to allowing that withdrawal to occur had been given by its entry into the relevant facility agreements. RFML had to make a withdrawal offer which had to be accepted by MacarthurCook. 25MacarthurCook submits that this conclusion was wrong. The expression "to withdraw from the scheme" used in s 601GA(4) and in ss 601KA(1), (2) and (3) describes an action which includes an element of volition or consensual involvement on the part of the scheme member who is withdrawing. It does not describe an action which the member is required or obliged to take, as would be the case where a redemption is the result of the exercise by a responsible entity of a power for compulsory redemption. The provisions in cll 17.3(a) and 33.7(b) of the scheme's constitution are examples of such powers. The exercise of those powers will result in a redemption of the relevant units, but not a "withdrawal" in the sense in which that word is used in Part 5C.6. That Part is not a code regulating all the ways in which a person may cease to be a member of a scheme. It is only concerned with regulating "rights to withdraw". A redemption which occurs in accordance with cl 2.4 also is compulsory and automatic in the sense that it must occur to the extent that application moneys are received in the relevant period. 26MacarthurCook points out that under cl 4.2(b) of the scheme's constitution RFML had power to issue a class of units subject to such rights as it determined. It argues that the Founder Units were issued subject to the terms of cl 2.4. By that clause it became obliged to redeem the number of units equivalent to the dollar amount received as a result of accepted applications. It further argues that RFML had the power by cl 7.4 of the scheme's constitution to redeem units without the need for a "withdrawal request". This power permitted a compulsory redemption, irrespective of whether the member agreed in that course, and could be exercised by the entry into a clause such as cl 2.4 and the redemption of units under it. 27The obligation to redeem in cl 2.4 is expressed to be subject to compliance with "any requirements under the Corporations Act" and the scheme's constitution. The question cl 2.4 poses is whether there are any such requirements. That question is to be addressed in circumstances where it was common ground that at no relevant time was the scheme "liquid" within s 601KA(4). 28The requirements of the Act in relation to members withdrawing from a scheme are contained in Part 5C.6 (ss 601KA to 601KE). The notion of "withdrawing" from a scheme is not defined. However the sense in which it is used in these provisions is clear. A managed investment scheme is a collective investment scheme in which members contribute money or money's worth which is pooled or used in a common enterprise. In return the members receive interests which entitle them to share in the financial or other benefits of the scheme (s 9). The ways in which an investor may exit a collective investment scheme include redeeming his or her interests, requiring the scheme operator to buy his or her interests, selling the interests on a recognised exchange or by private arrangement, or terminating the scheme and liquidating its assets. In Part 5C.6 "withdrawing" describes exiting the collective investment scheme during its continued operation by receiving a payment of money out of the scheme funds in exchange for the extinguishment of the interest held in the scheme. That is clear from provisions such as ss 601KB and 601KD. 29Chapter 5C was introduced into the Corporations Law by the Managed Investment Act 1998 (Cth). The enactment of those provisions followed Report No 65 of the Law Reform Commission and The Companies and Securities Advisory Committee titled "Collective Investments: Other People's Money". That Report undertook a review of the legal framework for collective investment schemes and the proper level of regulation of those schemes, including with respect to the availability of capital and liquidity. One issue considered was "how investors leave investment schemes" and whether modifications to "exit mechanisms" were necessary to improve the efficiency and enhance the stability of the collective investment schemes: Report No 65, para 7.1. The four mechanisms for exiting a collective investment scheme, which are referred to above, were identified. They included "redeeming his or her interests from the scheme": Report No 65, para 7.2. In relation to that mechanism, the Report recognised both the need for investors to have a means of exiting from collective investment schemes and the disadvantages which their being freely able to do so present to continuing investors and possibly the future of the scheme itself. Those disadvantages were considered more likely to be present when the assets of the scheme were illiquid, either in whole or part. The Report observed that any "redemption regime must balance the interests of the applicants for redemption, both amongst themselves and against the interests of remaining investors": Report No 65, para 7.20. Ultimately, the Report recommended that a scheme that is not entirely liquid "should not be allowed to make redemption offers other than in accordance with rules prescribed in the Corporations Law": Report No 65, paras 7.21, 7.22. 30The rules recommended by that Report differed from those enacted in Part 5C.6: cf Report No 65, para 7.21. In regulating the procedure for withdrawals from a scheme, a distinction is made between liquid and non-liquid schemes. The Act requires that the scheme's constitution specify rights and procedures dealing with withdrawals. It also lays down rules by reference to which withdrawals from non-liquid schemes must occur. 31Section 601GA requires that any "right to withdraw" be set out in the scheme's constitution. It provides: "601GA(4) If members are to have a right to withdraw from the scheme, the scheme's constitution must: (a) specify the right; and (b) if the right may be exercised while the scheme is liquid (as defined in section 601KA) - set out adequate procedures for making and dealing with withdrawal requests; and (c) if the right may be exercised while the scheme is not liquid (as defined in section 601KA) - provide for the right to be exercised in accordance with Part 5C.6 and set out any other adequate procedures (consistent with that Part) that are to apply to making and dealing with withdrawal requests. The right to withdraw, and any provisions in the constitution setting out procedures for making and dealing with withdrawal requests, must be fair to all members." The responsible entity's duties under Part 5C.2 include ensuring that the scheme's constitution meets the requirements of s 601GA: s 601FC(1)(f). 32Subsections 601KA(1) and (2) regulate the provisions which the scheme's constitution may make for members to withdraw depending on whether that may occur while the scheme is liquid or not liquid. Withdrawal from a scheme which is liquid may be offered at any time as provided for in the scheme's constitution. Withdrawal from a scheme which is not liquid must be in accordance with Part 5C.6 and the scheme's constitution, which in turn must be consistent with those provisions. Section 601KA(3) provides: "601KA(3) The responsible entity must not allow a member to withdraw from the scheme: (a) if the scheme is liquid - otherwise than in accordance with the scheme's constitution; or (b) if the scheme is not liquid - otherwise than in accordance with the scheme's constitution and Sections 601KB to 601KE." 33The procedure for withdrawals from a scheme which is not liquid requires that a withdrawal offer be made to all members of the scheme, or to all members of a particular class: s 601KB(2). Only one withdrawal offer may be open at any time in relation to a particular interest in the scheme: s 601KC. That offer must remain open for a period of at least 21 days (s 601KB(3)) and must be cancelled by the responsible entity before it closes if "it is in the best interests of members to do so": s 601KE(1). An offer which has been accepted and which has closed must be satisfied within 21 days after it closed: s 601KD. Most significantly, a withdrawal offer may only be made by the responsible entity "to the extent that particular assets are available and able to be converted to money in time to satisfy withdrawal requests": s 601KB(1). The offer must also specify the assets that "will be used to satisfy withdrawal requests" and the amount of money that is expected to be available "when those assets are converted to money": s 601KB(3). 34The provisions of cl 7 of the RP Trust's constitution which regulate a withdrawal in the event that the scheme is not liquid are cll 7.1(b), 7.3(b) and 7.8. Those clauses are consistent with the provisions of s 601KB. Clause 7.1(b) provides that a unitholder in the scheme once registered has no right to withdraw other than in accordance with cl 7. Clause 7.8(a) provides that a unitholder has no right to withdraw when the scheme is not liquid unless there is a withdrawal offer currently open for acceptance and cl 7.3(a) provides that if the scheme is not liquid, a unitholder may make a request for withdrawal "in accordance with a withdrawal offer made by the Trustee and the Act". 35MacarthurCook argues that the restriction in s 601KA(3)(B) does not apply to a redemption under cl 2.4 because the expression "not allow a member to withdraw from the scheme" presupposes that there is an element of volition or voluntariness on the part of the member in doing so. This argument, which seeks to characterise a redemption under cl 2.4 as compulsory from MacarthurCook's perspective, does not take account of the facility agreements made between RFML and MacarthurCook. Clause 2.4 of each agreement sought to create an entitlement or right in MacarthurCook to have redeemed in the Subscription Period that number of the Founder Units as corresponded to the amount of the funds received. By issuing these units subject to that right, and the correlative obligation on its part, RFML bound itself to allow or permit MacarthurCook to withdraw from the scheme on the happening of certain events. 36Neither the language nor context of s 601KA suggest that when addressing whether a proposed redemption would involve the responsible entity allowing a member to withdraw from the scheme, regard should not be had to whether the responsible entity has bound itself to do so, including by the terms of issue of the interest in question. The Act requires that a right to withdraw be specified in the constitution and that if it may be exercised while the scheme is not liquid, the constitution provide for it to be exercised in accordance with Part 5C.6. Section 601KA(3) prevents withdrawal from a scheme which is not liquid, other than in accordance with the constitution and ss 601KB to 601KE. In its terms it applies irrespective of whether any right to withdraw is specified in the constitution. If the position was otherwise, the restriction and the protection it seeks to provide for the financial security of the scheme might be avoided by any anterior agreement with a member which obliges the responsible entity to redeem in specified circumstances. 37The primary judge was right to conclude that the Act required the responsible entity to comply with the provisions of ss 601KB to 601KE as well as the scheme's constitution before redeeming any Founder Units. The relevant provisions of the scheme's constitution are those referred to above. 38It was not argued by TFML that cl 2.4 conferred a right to withdraw on MacarthurCook which was not specified in the scheme's constitution in accordance with s 601GA(4) and, for that reason, that the conferral of that right was void or of no effect. That makes it unnecessary to consider the application of s 601GA(4) to a clause, such as cl 2.4, which by its terms does not allow a withdrawal from the scheme absent compliance with the scheme's constitution and ss 601KB to 601KE. It also makes it unnecessary to consider the argument made by ground 3 of MacarthurCook's amended notice of contention that in the event cl 2.4 was held to be unenforceable or of no effect, it was entitled to damages for misrepresentation or breach of warranty.

Was the entry into facility agreements containing cl 2.4 sufficient compliance with the requirements of Part 5C.6 and the scheme's constitution? 39The relevant provisions of Part 5C.6 and the constitution require that a withdrawal offer be made by the responsible entity to the relevant member or members of the scheme, that the offer be in writing, that the offer be open for at least 21 days, and that the offer specify the assets that "will be used" to satisfy withdrawal requests. More significantly, s 601KB(1) provides that the responsible entity may only offer members an "opportunity" to withdraw "to the extent that particular assets are available and able to be converted to money". 40The primary judge held that these requirements were substantially complied with and that to the extent that there was non-compliance, it was "immaterial": [81]. In particular, he held that the requirements for a withdrawal offer, and withdrawal request made in response to such an offer, were satisfied by the execution of the facility agreements containing cl 2.4: [78], [83]. 41In my view the requirements of s 601KB were not satisfied in any relevant respect. There was no written offer for withdrawal made to MacarthurCook as a member of the scheme in respect of interests then held by it. Each facility agreement contained an agreement with respect only to the redemption of the units subscribed for under that agreement. Those units had not been issued at the time the agreements were made. It is common ground that if an offer was made, it was not made on terms which remained open for a specified period of at least 21 days. 42Nor were the assets which were to be used to satisfy any withdrawal requests assets of the scheme at the time the withdrawal offers were said to have been made. The power to offer members an opportunity to withdraw conferred by s 601KB(1) is only to make offers to the extent that "particular assets are available and able to be converted to money in time to satisfy withdrawal requests that members may make". MacarthurCook argues that this limitation refers to a position which must exist at the time the withdrawals take place and not at the time the withdrawal offers are made. Accordingly, it says that this limitation was satisfied because the redemptions were only to be made from the proceeds of applications which when received would be sufficient to satisfy the requests which may be made. This argument as to the construction of s 601KB does not take account of its clear language or the mischief which the limitation was intended to address. 43The limitation requires that the particular assets to be used to satisfy the withdrawal requests be identified. They must be assets which "are available" and which "are able to be" converted into money by the time the offer is to be satisfied. The use of the present tense and the reference to the conversion to cash at a later point in time make clear that the assets are to be available at an earlier time than when withdrawals are to be satisfied. That time can only sensibly be the time when the offer is made. Section 601KB(3) also uses language which describes existing assets rather than assets which may be acquired. The offer must specify the assets that "will" be used to satisfy any withdrawal requests and the amount of money expected "when" they are converted. Each of those descriptions is unconditional. 44So understood, the limitation introduced by the words "to the extent that" describes a state of affairs at the time the offer is made rather than at the time the offer may be required to be satisfied. Reference to the Explanatory Memorandum to the Managed Investments Bill 1997 confirms that the text is to be understood in this way. Paragraph 12.7 notes: "Before making a withdrawal offer, the responsible entity must identify the liquid assets of the scheme which are available to meet any withdrawal requests which result from the offer (proposed subsection 601KB(1)). To make a withdrawal offer, the responsible entity must either follow the procedure for giving notice to members set out in the scheme constitution, or give a copy of the offer, in writing, to all members of the scheme or to all members of a class of members of the scheme (proposed subsection 601KB(2))." 45By requiring that the responsible entity identify at the outset existing assets which are to be used to satisfy withdrawals, these provisions make it less likely that the ongoing financial stability of the scheme may be threatened by the offering to investors of the opportunity to withdraw. The risk that the assets to be used will not materialise is removed by this requirement. The risk that the identified existing assets might not generate sufficient cash is recognised and required to be addressed in advance by the offer specifying the method for dealing with that possibility: s 601KB(3)(d). 46There having been no compliance with the requirements of s 601KB, and specifically no withdrawal offer and request, RFML was not in breach of any obligation to redeem either under cl 2.4 or under any agreement made by such an offer and acceptance. 47The conclusion that there was no offer and acceptance makes it unnecessary to address MacarthurCook's argument that although there may not have been strict compliance with the requirements of Part 5C.6, that did not render void the agreement made by the withdrawal offer and its acceptance. The primary judge accepted this argument: [81]. In doing so he relied upon the principles in Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd [1978] HCA 42; (1978) 139 CLR 410; and Hurst v Vestcorp Ltd (1988) 12 NSWLR 394. In my view those principles have no application in the circumstances of this case. The facility agreements do not seek to contract out of or circumvent the requirements of Part 5C.6. On the contrary, the redemption obligation was made subject to compliance with those requirements and not merely to the making of an offer and acceptance. The relevant question is whether those requirements were complied with. It was conceded that a number of them were not. The consequence was that the obligation to redeem did not arise. 48It remains necessary to consider, as did the primary judge, whether RFML was in breach of any anterior obligation to make a withdrawal offer or withdrawal offers as contended by MacarthurCook.

Was RFML subject to an express or implied obligation to make a withdrawal offer or withdrawal offers to MacarthurCook? 49RFML's power to make withdrawal offers to MacarthurCook was subject to the qualification in s 601KB(1), which operated as a limitation on the circumstances in which that power was able to be exercised. The exercise of the power also was subject to s 601FC(1), which among other things, required that RFML exercise the degree of care and diligence that a reasonable person would exercise in the responsible entity's position and that it act in the best interests of the members: s 601FC(1)(b), (c). 50By agreeing to redeem the units held by MacarthurCook "subject to compliance" with these requirements, either as a matter of implication or construction of cl 2.4, RFML was obliged to do what was reasonably necessary to be done on its part to comply with those requirements so that the object of cl 2.6 - the redemption of the units - might be achieved: Mackay v Dick (1881) 6 App Cas 251 at 263; Secured Income Real Estate (Australia) Ltd v St Martin's Investments Pty Ltd [1979] HCA 51; 144 CLR 596 at 607; Byrne v Australian Airlines Ltd [1995] HCA 24; 185 CLR 410 at 448-449. Subject to its doing so in accordance with its duties as responsible entity, that required that RFML exercise the power conferred by s 601KB(1) to offer MacarthurCook opportunities to withdraw from the scheme using funds received as a result of accepted applications in the public offer. The making of a promise in those terms did not require the exercise of that power other than in accordance with s 601KB(1) and s 601FC(1): cf Ansett Transport Industries (Operations) Pty Ltd v The Commonwealth [1977] HCA 71; 139 CLR 54 at 74-76 (Mason J). The primary judge was correct to so conclude: [86], [87], [97]. 51MacarthurCook maintains that RFML breached this obligation by failing to make withdrawal offers commencing six months after the Subscription Date using funds received to that time, and thereafter as and when further funds were received. Accepting for the purposes of argument that it had an obligation to make any necessary withdrawal offers, TFML says that obligation required that it make whatever withdrawal offers were necessary for redemptions using the funds received from acceptances under the public offer. The latest date on which it could have performed that obligation in relation to FAT3 was 10 October 2008. That offer would have remained open for 21 days, closed on 31 October 2008 and could have been satisfied on 1 November 2008, the last day of the Subscription Period. Compliance with the scheme's constitution and the suspension notice issued on 29 September 2008 required that it not make any withdrawal offer after that date. For these reasons TFML argued that RFML was not in breach of any obligation which required it to make a withdrawal offer before 29 September 2008 and had no obligation to make such an offer after that date. 52The correctness of this proposition turns on whether cl 2.4, properly construed, required redemptions to commence and continue through the second six months of the Subscription Period. If cl 2.4 is to be construed as contended for by TFML, there was no breach of any relevant obligation on the part of RFML.

Was RFML required to redeem as and when funds were received and did the suspension of withdrawals on 29 September 2008 have the consequence that RFML was not in breach of any obligation under cl 2.4? 53On 29 September 2008 TFML determined with effect from that date to suspend "all withdrawals (including the payment of withdrawal requests which remain unpaid)" until further notice. Clause 7.6 of the constitution permitted TFML to suspend withdrawals for a period of time if it was not "in the best interests of unitholders for withdrawals to be made". It was not suggested by MacarthurCook that this decision was not justified or not a proper exercise of that power. 54The power to "suspend withdrawals" given by cl 7.6 is able to be exercised whether or not the scheme is liquid. If the scheme is not liquid, s 601KE(1) requires that the responsible entity "must cancel" a withdrawal offer "before it closes if it is in the best interests of members to do so". The condition which enlivens the power in cl 7.6 is that "it is not in the best interests of unitholders for withdrawals to be made". 55There is a question as to whether the power to suspend "withdrawals" conferred by cl 7.6 is to be understood as limited to suspending the making of "withdrawal offers". MacarthurCook submits that it should be read in this way so as to avoid the inconsistency which might otherwise arise between the grant of a power which would permit the suspension of the operation of withdrawal offers which were open for acceptance in circumstances which were likely also to enliven the obligation imposed by s 601KE(1)(b). There are also difficulties with the notion of suspending an offer because of s 601KD, which requires that requests in response to an offer which has closed "must" be satisfied within 21 days after it had closed. Unless the suspension prevented the offer period from closing after the effluxion of the relevant period, that provision would apply and require satisfaction of any withdrawal request. 56In the end this question does not need to be resolved. TFML's argument was advanced on the basis that the suspension only operated on the making of withdrawal offers after 29 September 2008 and MacarthurCook does not argue that the notice did not operate at least to that extent. 57MacarthurCook contends that RFML's obligation under cl 2.4 was to redeem units commencing six months after the Subscription Date, or within a reasonable time after that date, using funds received to that time and thereafter to do so on, or within a reasonable time after, the receipt of further funds. In other words, as senior counsel for TFML suggested, after the first six months the obligation was said to be to "redeem to the largest extent possible as soon as possible". 58Focussing on the language of cl 2.4, it requires that the redemptions occur during the Subscription Period, commencing six months after the Subscription Date. It also requires that the units be redeemed using funds received as a result of acceptances under the public offer. The measure of the obligation to redeem is that amount of the funds received which was capable of being used for redemption within that six month period. If the Subscription Period ended on 1 November 2008, as it did under FAT3, 10 October 2008 was the last day on which an offer which complied with s 601KB(3)(a) could have been made to redeem units equal in number to the funds received. 59It is argued that the closing words of cl 2.4, "such redemptions commencing six months from the Subscription Date", express a command that subscriptions are to commence from that time. The use of the present participle "commencing" is said also to imply that the redemptions continue during the remainder of the period using funds as they are received. 60The redemptions to which the adjective "such" refers are those which are to occur "during the Subscription Period". So understood, the closing expression requires that the redemptions which are to occur "during the Subscription Period" commence six months from the start of that period. It says nothing about when in that period those redemptions are to occur or as to whether their occurrence must bear a relationship to the date of receipt of funds under the public offer. The obligation remains simply that the redemptions must occur during that second six month period. 61The context suggests that these words should be given this meaning. Each facility agreement provided a guaranteed return to MacarthurCook equal to an annualised rate of 10.5 per cent on the funds advanced on the basis that they would be repaid (by redemption) after 12 months. There is no obvious commercial advantage or purpose secured by MacarthurCook receiving the funds at any particular time during the second six month period. Furthermore, the amounts and timing of receipts of funds from the public offer were not known. Funds could have been received continuously throughout the Subscription Period. The parties are not likely to have proposed that RFML issue a withdrawal offer on or within a reasonable time of each receipt of funds. Compliance with such an obligation also would have faced difficulties because of the provisions of s 601KC, which permitted only one withdrawal offer to be open at any time. 62These considerations do not suggest that the language should be given other than its ordinary meaning. In its terms cl 2.4 does not require that redemptions commence and continue using funds received during the balance of the Subscription Period. It follows that RFML could not have been in breach of any obligation to redeem or make an offer of withdrawal before 29 September 2008. After that date it had no obligation to make a withdrawal offer because of the suspension notice issued on that date. The primary judge should have held that RFML was not liable to MacarthurCook for breach of any obligation arising under cl 2.4.

Did RFML's liabilities became liabilities of TFML by the operation of s 601FS(1)? 63It is conceded that RFML was in breach of its obligation under cl 2.6 of the facility agreements to "purchase" the units held by MacarthurCook and also in breach of its obligation under cl 2.4 of the Unit Conversion Agreement Tranche 1 to pay three conversion fee instalments. Each of those obligations was expressed to be undertaken by RFML "in its personal capacity" as distinct from in its capacity as responsible entity. 64The primary judge held that these liabilities became liabilities of TFML by the operation of s 601FS. That section relevantly provides: "601FS (1) If the responsible entity of a registered scheme changes, the rights, obligations and liabilities of the former responsible entity in relation to the scheme become rights, obligations and liabilities of the new responsible entity. (2) Despite subsection (1), the following rights and liabilities remain rights and liabilities of the former responsible entity: ... (d) any liability for which the former responsible entity could not have been indemnified out of the scheme property if it had remained the scheme's responsible entity." 65The primary judge rejected TFML's arguments that these liabilities were not "in relation to" the scheme and were not liabilities for which RFML could not have been indemnified out of scheme property. In so concluding the primary judge reasoned as follows. TFML could not by purporting to contract in two different capacities ("as responsible entity" and "in its personal capacity") produce the consequence that two different legal personalities undertook the obligations in cll 2.4 and 2.6 of the facility agreements. The "effect" of those agreements was that RFML undertook obligations as responsible entity. The purpose of each was to record the terms on which RFML, as responsible entity, agreed to issue units in the scheme to MacarthurCook. Even if the obligation undertaken by cl 2.6 was "personal", there was a sufficient connection between that obligation and the scheme for it to be "in relation to the scheme". Although the primary judge did not expressly address the application of s 601FS(2)(d), these observations are consistent with his conclusion being that the obligation to "purchase" was undertaken in the performance of the trust so as to entitle RFML to an indemnity out of scheme property: [115]-[121]. 66In my view the liabilities of RFML for damages for breach of cl 2.6 and for non-payment of the conversion fee instalments did not become liabilities of TFML. Consideration of that question first requires an understanding of the position under the general law concerning the liabilities of a trustee. 67As the primary judge correctly observed, the liability of a trustee to third parties is not limited or quantified by reference to the extent of the trust assets. Liabilities incurred in transactions entered into in discharge of the trust are liabilities of the trustee: Vacuum Oil Co Pty Ltd v Wiltshire [1945] HCA 37; 72 CLR 319 at 324, 325; Glennon v Federal Commissioner of Taxation [1972] HCA 52; 127 CLR 503 at 511-513; Octavo Investments Pty Ltd v Knight [1979] HCA 61; 144 CLR 360 at 367. 68The trustee is entitled to be indemnified out of the assets of the trust for liabilities incurred in performance of the trust. If the trustee has discharged such a liability out of non-trust property, it is entitled to reimbursement. If it has not discharged that liability, it is entitled to apply the trust property in discharging it: Vacuum Oil at 324; Octavo at 367; Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; 192 CLR 226 at [47]. At the same time creditors of the trustee have limited rights in relation to the trust property in the event of a bankruptcy or insolvency of the trustee. Those rights enable the value of the trustee's right of indemnity to be realised and brought to account: Ex parte Garland (1803) 10 Ves Jun 111 at 120; 32 ER 786 at 789; Savage v Union Bank of Australia Ltd [1906] HCA 37; 3 CLR 1170 at 1186; Octavo at 367-368. 69A trustee entering into a contractual obligation in the performance of the trust may limit its liability in respect of that obligation to the extent of its right of indemnity from the trust assets. Whether it has done so will depend upon the proper construction of the language by which it has sought to do so: Muir v City of Glasgow Bank (1879) 4 App Cas 337; Helvetic Investment Corporation Pty Ltd v Knight (1984) 9 ACLR 773. 70In summary, a legal personality which is a trustee may incur liabilities and acquire rights other than in the performance of the trust. If it does so it has no right of indemnity and its creditors have no claim in relation to the trust assets. Whether the trustee has incurred a liability in the performance of the trust depends on that being the correct legal characterisation of what occurred. That characterisation cannot be determined by the label or description given to the relevant conduct by the parties to it. Rather it depends upon whether the conduct or action was, or must be taken to have been, undertaken in the proper execution of the trust. 71The constitution of the scheme recognises that RFML may incur liabilities and acquire rights other than in the performance of the trust. It expressly acknowledges that RFML may be interested in any contract or transaction which involves the trust in a capacity other than as trustee; and that it may act as trustee of another managed investment scheme (cl 11.3(a)). It also acknowledges that RFML may hold units in the scheme "in any capacity" (cl 15). The constitution also makes express provision for the trustee's right of indemnity. Clause 21.2 provides for a right of indemnity out of the assets of the trust in respect of "any liability incurred ... by the Trustee in the performance of its duties in respect of the Trust". That indemnity does not apply "where there has been any negligence, deceit, breach of duty, fraud or breach of trust on the part of the Trustee". 72The application of these principles had the following potential consequences for dealings between RFML and MacarthurCook in relation to the underwriting of the public offer of units in the scheme. The corporate legal personality, RFML, would be liable for breach of any contractual promise made to MacarthurCook. That liability could be undertaken by RFML in the proper execution of the trust or, to adopt the language of the constitution, in another "capacity". If it was undertaken in the performance of the trust, MacarthurCook as a creditor would have access to RFML's non-trust assets and the benefit of the trustee's right of indemnity. RFML and MacarthurCook could agree to limit the amount of RFML's liability to the assets of the trust. If the liability was not undertaken in the performance of the trust, MacarthurCook would have access to RFML's non-trust assets but would not have access to the assets of the trust or the benefit of the trustee's right of indemnity. 73This analysis shows that the extent of RFML's liability in respect of any contractual liability owed to MacarthurCook, and the assets which might be available to satisfy that liability, depended upon two things; first, the capacity in which that obligation was undertaken and, secondly, whether there was agreement that RFML's liabilities as trustee were limited to the extent of its right of indemnity from trust assets. 74As one might have expected, each of these matters was addressed in the facility agreements. In the description of the parties to the agreement a distinction was made between RFML "in its capacity as responsible entity" and "in its personal capacity". Each of those references is not to be understood as an attempt to identify different legal personalities, as was suggested by the primary judge. Each is to be understood as a statement that in undertaking a particular obligation or receiving the benefit of a particular promise, RFML was purporting to do so as trustee in the performance of the trust or in some other capacity. 75Clause 9 of each agreement limits RFML's liability, whilst acting as trustee, to the amount in which it was "actually indemnified out of the assets of the Trust": cl 9.3(b). That limit does not apply to any liability for fraud, breach of trust or negligence which causes a loss or reduction of RFML's rights to an indemnity out of the assets. In that event, RFML is said to be "liable in its personal capacity" for such fraud, breach of trust or negligence: cl 9.2. That reference to being liable "in its personal capacity" is to be understood as being to a liability which may be enforced against RFML, and therefore its non-trust assets, but without recourse to the trustee's right of indemnity, which is lost by reason of the fraud or other defined conduct. 76In cl 2 of each facility agreement, four obligations are described as undertaken by RFML "in its personal capacity". They are the obligations in cll 2.3, 2.6, 2.7 and 2.8. Those obligations are to purchase units not redeemed and to pay a "subscription fee" for the Subscription Period, a "buy-back default fee" in the event that units are not purchased and interest on any distribution made by the scheme which is not paid within seven days of the end of each relevant quarter. The object of these obligations is to assure that MacarthurCook is repaid after 12 months, receives an annualised income return of 10.5 per cent on the monies subscribed for Founder Units during the 12 months and an annualised return of 12.5 per cent in the event that the units are not purchased by RFML at the end of the Subscription Period. Clause 2.8 requires the payment of interest on outstanding quarterly distribution payments made from the scheme at a rate of 15 per cent in the event that those interest payments are not made from the scheme within the prescribed time. 77Each of these obligations secures an outcome to MacarthurCook as underwriter which is over and above that to which it would be entitled as a member of the scheme, and each is undertaken by RFML in its "personal" capacity. The language adopted is the same as that used in the scheme's constitution to draw a distinction between something undertaken in a capacity other than as trustee of the scheme and something undertaken as trustee in the performance of the trust. None of these obligations, by its nature, had to be undertaken by RFML as trustee. Each could have been undertaken by a third party as guarantor or sponsor of the public offer. In addition, the obligation in cl 2.6 to purchase units could only have been undertaken by RFML as responsible entity if it complied with the provisions of s 601FG(1) which limits the circumstances in which the responsible entity may acquire and hold units in that capacity. 78MacarthurCook's argument that the description "in its personal capacity" means in its capacity as trustee in the performance of the trust but with the benefit of recourse to non-trust assets must be rejected. The reference to "capacity" in this context is not to liability but to the position or relation by reference to which the obligation is undertaken. The adjective "personal" indicates that the obligation was not undertaken by RFML in its position as trustee in the discharge of the trust. It follows that it was not entitled to an indemnity under cl 21.2 of the constitution in respect of any liability for breach of cl 2.6. That has the consequence that each of those liabilities was within s 601FS(2)(d). For that reason each remained with RFML. The primary judge erred in concluding otherwise. It is unnecessary to consider whether those liabilities were "in relation to the scheme" within s 601FS(1). 79The position is the same in relation to the liability for breach of the obligation undertaken by RFML in its personal capacity in cl 2.4 of the Unit Conversion Agreement Tranche 1.

Conclusion 80MacarthurCook fails in its claims to enforce against TFML liabilities of RFML which it was argued became liabilities of TFML as new responsible entity. Those are the claims for breaches by RFML of cll 2.4 and 2.6 of the facility agreements and cl 2.4 of the Unit Conversion Agreement Tranche 1. MacarthurCook also fails in its claim to damages against RFML for breach of cl 2.4 of the facility agreements. It succeeds, however, against RFML for breach of its obligations under cl 2.6 of the facility agreements and cl 2.4 of the Unit Conversion Agreement Tranche 1. 81The primary judge entered judgment in favour of MacarthurCook on 17 August 2012. The amount for which judgment is to be entered against RFML (now Zhaofeng Funds Management Ltd) on the cross-claim is the sum of the amounts claimed for breach of cl 2.6 and the failure to pay the conversion fee instalments plus pre-judgment interest on those amounts to that date. Those principal amounts are $13,132,500 and $131,250 and the pre-judgment interest on those amounts to 17 August 2012 is $4,068,479. 82As is recorded by the primary judge at [13] and [15], it was not ultimately in issue in the Court below that those were and remained liabilities of RFML if they did not become liabilities of TFML. For that reason it is not appropriate that there be any order for payment of costs incurred as between RFML and MacarthurCook, either in this Court or in the Court below. 83Accordingly, the orders I propose are: (1)Appeal allowed. (2)Orders 1, 2 and 3 made by the Court below on 17 August 2012 set aside. (3)Claims of the first and second respondents against the appellant dismissed. (4)First and second respondents pay the appellant's costs of the proceedings in the Court below and of the appeal. (5)Cross-appeal allowed. (6)Judgment for the cross-appellants against the second cross-respondent in the sum of $17,332,229, that judgment to take effect on 17 August 2012. (7)No order between the second cross-respondent and the cross-appellants as to the costs of the proceedings in the Court below and of the appeal.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 September 2013