Watermark Market Neutral Fund Limited v Equity Trustees Limited, in the matter of Watermark Market Neutral Fund Limited

YATES J: 1 On 5 March 2019, I made orders providing for the convening of a meeting of the plaintiff's (WMK's) members to be held on 8 April 2019 to consider, and if thought fit approve, a scheme of arrangement with WMK: Watermark Market Neutral Fund Limited v Equity Trustees Limited, in the matter of Watermark Market Neutral Fund Limited [2019] FCA 315 (my earlier reasons). 2 The meeting has been held and the members have approved the scheme. WMK now seeks the Court's approval of the scheme under s 411(4)(b) of the Corporations Act 2001 (Cth). In these reasons I will adopt the abbreviations and defined expressions used in my earlier reasons. 3 The affidavits read in support of the application to convene the meeting are identified in my earlier reasons at [14]. The additional affidavits that have been read in support of the orders now sought are: Michael Jools, affirmed 9 April 2019; Geoffrey Noonan, affirmed 10 April 2019; Matthew Kidman, affirmed 10 April 2019; Tim Bolger, affirmed 10 April 2019; and Michael Jools, affirmed 11 April 2019. 4 Based on this evidence, I am satisfied that the meeting was duly convened and held in accordance with the orders made on 5 March 2019. The Scheme Booklet, which includes the explanatory statement required by s 412(1) of the Act, was registered with ASIC on 7 March 2019, prior to its dispatch to the members on 8 March 2019: s 412(6). 5 At the meeting, the resolution proposing the members' approval to the scheme was passed by 99.9% of the votes cast on the resolution, with 98.7% of the members present in person or by proxy voting in favour. The statutory majorities referred to in s 411(4)(a)(ii) of the Act have therefore been attained. 6 The present hearing has been advertised in accordance with Order 2 made on 5 March 2019. No person has come forward to oppose the scheme. The Scheme Booklet incorrectly stated that the envisioned second court hearing would take place on 10 April 2019 although, in a table of important dates, this was shown as an indicative date only. Members were informed in that section of the Scheme Booklet that any changes to dates would be announced to the ASX and would be available on ASX's website. 7 At the scheme meeting, the chairperson (Mr Kidman) announced that the second court hearing would be held on 11 April 2019, and not on the indicative date given in the Scheme Booklet. When announcing the results of the scheme meeting to the ASX, WMK referred to the fact that the second court hearing would be held on 11 April 2019. 8 It is unfortunate that the correct date of the second court hearing was not shown in the Scheme Booklet. However, in the particular circumstances of this case, I do not think that this creates any particular difficulty. Apart from the announcements made at the scheme meeting and published to the ASX, the published notice of the second court hearing required by r 3.4(2) of the Federal Court (Corporations) Rules 2000 gave the correct date and no person has given notice of an intention to appear, whether on 10 April 2019 or the actual date of the second court hearing, 11 April 2019. 9 ASIC has provided a letter stating that it has no objection to the scheme. The requirement of s 411(17) of the Act has therefore been satisfied. 10 The conditions precedent to the scheme coming into force and effect, other than in relation to the Court's approval and its approval order coming into effect, have been either satisfied or waived. 11 There are no discretionary reasons why the scheme should not receive the Court's approval under s 411(4)(b). In arriving at this conclusion, I have taken into account: (a) the provisional view I expressed in my earlier reasons, which has not changed; (b) the recommendation of the directors; (c) the opinion of the independent expert; (d) the views of the members, expressed through their voting at the scheme meeting; and (e) the fact that no person has come forward to oppose the Court's approval being given. 12 WMK also seeks an order pursuant to s 413(1) of the Act that its Assets (as defined in the scheme) be transferred to the defendant, Equity Trustees, in its capacity as responsible entity for the Watermark Absolute Return Fund. 13 Section 413(1) provides: Where an application is made to the Court under this Part for the approval of a compromise or arrangement and it is shown to the Court that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of a Part 5.1 body or Part 5.1 bodies or the amalgamation of 2 or more Part 5.1 bodies and that, under the scheme, the whole or any part of the undertaking or of the property of a body concerned in the scheme (in this section called the transferor body) is to be transferred to a company (in this section called the transferee company), the Court may, either by the order approving the compromise or arrangement or by a later order, provide for all or any of the following matters: (a) the transfer to the transferee company of the whole or a part of the undertaking and of the property or liabilities of the transferor body; (b) the allotting or appropriation by the transferee company of shares, debentures, policies or other interests in that company that, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person; (c) the continuation by or against the transferee company of any legal proceedings pending by or against the transferor body; (d) if the transferor body is a company - the deregistration by ASIC, without winding up, of the transferor body; (e) the provision to be made for any persons who, within such time and in such manner as the Court directs, dissent from the compromise or arrangement; (f) the transfer or allotment of any interest in property to any person concerned in the compromise or arrangement; (g) such incidental, consequential and supplemental matters as are necessary to ensure that the reconstruction or amalgamation is fully and effectively carried out. 14 The fact that such an order would be sought was foreshadowed at the first court hearing. At that hearing, WMK submitted (with respect to the WMK scheme and the WGF scheme): Clause 4.2(d) of each Scheme will be backed up by s 413 orders transferring the designated assets specified in each Scheme to the defendant as trustee of the Fund. Section 413 can apply where there is a scheme for reconstruction of Part 5.1 bodies. Each scheme company and the RE is a Part 5.1 body and what is contemplated is the transfer of part of the undertaking and property of each scheme company to the RE (a concept contemplated by s 413(1)(a)). The reconstruction relevantly consists of the reconstitution of the economic interest of the shareholders so that it is held via an MIS structure rather than a shareholder/company structure with the shareholders departing the scheme company and moving to become beneficiaries under the MIS structure. 15 At the first court hearing, I was also taken to various passages in Buckley J's reasons for judgment in In Re South African Supply and Cold Storage Company [1904] 2 Ch D 268 (South African Supply and Cold Storage) and Lindgren J's reasons for judgment in In the matter of Stork ICM Australia Pty Ltd; Stork ICM Australia Pty Ltd v Stork Food Systems Australasia Pty Ltd [2006] FCA 1849 (Stork). 16 In South African Supply and Cold Storage, when dealing with the meaning of "reconstruction" and "amalgamation", Buckley J said at 281: The only question I have to determine is whether, in the case of each of these two companies, there has or has not been a winding-up "for the purpose of reconstruction or amalgamation." Neither of these words, "reconstruction" and "amalgamation," has any definite legal meaning. Each is a commercial and not a legal term, and, even as a commercial term, bears no exact definite meaning. In each case one has to decide whether the transaction is such as that, in the meaning of commercial men, it is one which is comprehended in the term "reconstruction" or "amalgamation." 17 Later, at 286, Buckley J said: Then it remains to consider whether what was done was for the purpose of "reconstruction" or "amalgamation." What does "reconstruction" mean? To my mind it means this. An undertaking of some definite kind is being carried on, and the conclusion is arrived at that it is not desirable to kill that undertaking, but that it is desirable to preserve it in some form, and to do so, not by selling it to an outsider who shall carry it on - that would be a mere sale - but in some altered form to continue the undertaking in such a manner as that the persons now carrying it on will substantially continue to carry it on. It involves, I think, that substantially the same business shall be carried on and substantially the same persons shall carry it on. But it does not involve that all the assets shall pass to the new company or resuscitated company, or that all the shareholders of the old company shall be shareholders in the new company or resuscitated company. Substantially the business and the persons interested must be the same. Does it make any difference that the new company or resuscitated company does or does not take over the liabilities? I think not. I think it is none the less a reconstruction because from the assets taken over some part is excepted provided that substantially the business is taken, and it is immaterial whether the liabilities are taken over by the new or resuscitated company or are provided for by excepting from the scheme of reconstruction a sufficient amount to answer them. It is not, therefore, vital that either the whole assets should be taken over or that the liabilities should be taken over. You have to see whether substantially the same persons carry on the same business; and if they do, that, I conceive, is a reconstruction. 18 In Stork, Lindgren J referred to the above passages and accepted the submission that a restrictive interpretation should not be placed on the term "reconstruction" or the term "amalgamation". His Honour preferred an approach which simply requires the Court to enquire whether or not the circumstances of a particular case fall within one or other or both of the words, without first attempting to delineate their respective boundaries of meaning: see at [76]. 19 Section 413(1) is obviously intended to be a beneficial provision to facilitate the transfer of assets in transactions involving compromises or arrangements between a Pt 5.1 body and its members or its creditors. I accept that, in its application, s 413(1) and its analogues are to be given a broad scope of operation. I am satisfied that the order WMK proposes falls within the intendment of the provision. 20 It is true that, under the order proposed, WMK's Assets are to be transferred to a body that, in one sense, could be considered to be an "outsider", to use Buckley J's description. But, in another sense, it is not. When alluding to an "outsider", Buckley J was seeking to explain that a mere sale of assets by one company to another, absent other circumstances, would not be a "reconstruction" according to a broad commercial understanding of that term. 21 A mere sale is not proposed here. As a matter of substance, the members of WMK who will participate in the scheme have an economic interest in the undertaking carried on by WMK. It is a listed investment company and the vehicle through which investments, ultimately for the benefit of its members through their shareholding, are made. By their compromise or arrangement with WMK, to be implemented through the scheme, the members will give up their shares in WMK's capital for units of equivalent value in the Watermark Absolute Return Fund that will be issued by the Fund's responsible entity, Equity Trustees, with the object that the investment undertaking carried on for the members by WMK (a Pt 5.1 body) will now be carried on for the members by the Fund through Equity Trustees. The reason this is being done is to address the issues referred to in my earlier reasons at [7] - [11]. In my respectful view, this involves a "reconstruction" within the notion described in South African Supply and Cold Storage and "a scheme for the reconstruction of a Part 5.1 body" within the intendment of s 413(1). To enable the investment undertaking to be continued, WMK's assets (the means by which the undertaking is carried on) must be transferred to Equity Trustees as the responsible entity. Section 413(1) provides a facility by which the transfer can be accomplished conveniently, without the need for further formality. I therefore propose to make the order that WMK seeks. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.