The Relevant Statutory Provisions
6 Those provisions of the Corporations Act which assume present relevance are contained within Pt 5C.7. That part is titled "Related party transactions". Chapter 5C deals with managed investment schemes.
7 "Related party transactions" are first addressed in the Corporations Act in Ch 2E. Within that Chapter, s 207 expresses the "purpose" of Ch 2E as follows:
The rules in this Chapter are designed to protect the interests of a public company's members as a whole, by requiring member approval for giving financial benefits to related parties that could endanger those interests.
Part 2E.1, which comprises ss 208 - 227, is titled "Member approval needed for related party benefit". Division 1 of Pt 2E.1 is headed "Need for member approval". Section 208, which is the first section in Div 1 of Pt 2E.1, provides, inter alia, for the need for member approval to be given before a company can give a financial benefit to a related party. Section 103 and s 209 provide for the consequences of a contravention of s 208. Sections 210 to 216 set out exceptions to the general prohibition in s 208. Those sections are found in Div 2 of Pt 2E.1 - "Exceptions to the requirement for member approval".
8 Part 5C.7 modifies certain provisions contained within Ch 2E and in circumstances where a "financial benefit" is provided to a related party out of the funds of a registered managed investment scheme. Within Pt 5C.7, s 601LA provides that Ch 2E is to apply to registered schemes "with the modifications set out in sections 601LB to 601LE …". Section 601LB modifies the "purpose" of Ch 2E as it applies to registered schemes as if s 207 were replaced by the following section:
The rules of this Chapter, as they apply to a registered scheme, are designed to protect the interests of the scheme's members as a whole, by requiring member approval for giving financial benefits to the responsible entity or its related parties that come out of scheme property or that could endanger those interests.
9 Section 208, as modified by s 601LC to apply to a registered scheme, provides as follows:
208 Need for member approval for financial benefit
(1) If all the following conditions are satisfied in relation to a financial benefit:
(a) the benefit is given by:
(i) the responsible entity of a registered scheme; or
(ii) an entity that the responsible entity controls; or
(iii) an agent of, or person engaged by, the responsible entity
(b) the benefit either:
(i) is given out of the scheme property; or
(ii) could endanger the scheme property
(c) the benefit is given to:
(i) the person or a related party; or
(ii) another person referred to in paragraph (a) or a related party of that person;
then, for the person referred to in paragraph (a) to give the benefit, either:
(d) the person referred to in paragraph (a) must:
(i) obtain the approval of the scheme's members in the way set out in sections 217 to 227; and
(ii) give the benefit within 15 months after the approval; or
(e) the giving of the benefit must fall within an exception set out in sections 210 to 216.
(2) If:
(a) the giving of the benefit is required by a contract; and
(b) the making of the contract was approved in accordance with subparagraph (1)(d)(i) as a financial benefit given to the entity or related party; and
(c) the contract was made:
(i) within 15 months after that approval; or
(ii) before that approval, if the contract was conditional on the approval being obtained;
member approval for the giving of the benefit is taken to have been given and the benefit need not be given within the 15 months.
(3) Subsection (1) does not prevent the responsible entity from paying itself fees, and exercising rights to an indemnity, as provided for in the scheme's constitution under subsection 601GA(2).
10 The short point sought to be raised on appeal is whether a party who claims a contravention of s 208 (as modified) must plead and therefore bear the onus of proving that none of the exceptions "set out in ss 210 to 216" (as modified) apply. Insofar as Ch 2E applies to registered schemes, ss 213, 214 and 224 are omitted and, instead of s 224, the prohibition in s 253E is to apply (ss 601LD and 601LE). Section 213 addresses the giving of "small amounts" and s 214 addresses the giving of a financial benefit to or by a "closely-held subsidiary". Section 210 provides in part, by way of example, that member approval is "not needed to give a financial benefit on terms that would (a) be reasonable …" as part of an arms-length dealing. Section 211 provides that member approval is "not needed to give a financial benefit if the benefit is remuneration … and (b) to give the remuneration would be reasonable …". Section 212 addresses indemnities, exemptions, insurance premiums and legal costs for officers of the corporation; s 215 addresses financial benefits that do "not discriminate unfairly" and s 216 addresses benefits paid "under an order of a court". Each of those exceptions commences with the words: "Member approval is not needed …".
11 Division 3 of Pt 2E.1, which comprises s 217 to s 227, is modified as appropriate and made applicable to managed investment schemes by s 601LA, save that s 224 is omitted and s 225(1) is modified by deleting the reference in that section to s 224(1) and by substituting for that reference a reference to s 253E (s 601LE). Division 3 of Pt 2E.1 lays down in some detail the procedure for obtaining member approval for a related party transaction.
12 Part 2E.2 (ss 228 and 229) defines "related party" and the concept of "giving a financial benefit".
13 Part 2E.3 (s 230) provides that, notwithstanding the terms of ss 207-229, the general duties of directors still apply.
14 It must be recognised at the outset that the interpretation of s 208 is not without difficulty. Although for the purposes of Pt 5C.7, s 601LC replaces s 208 as it appears in Pt 2E with a modified provision, it does so in a manner which is productive of uncertainty. Thus, for example, s 208(1)(e) (as modified) provides that, in order to be lawful (on the assumption that conditions (a) to (c) are satisfied), the giving of a "benefit must fall within an exception set out in sections 210 to 216" yet s 601LD immediately thereafter provides (in part) that "Chapter 2E applies as if sections 213 [and] 214 … were omitted". More importantly, the express inclusion within s 208(1) of s 208(1)(e) gives rise to further ambiguity. In the absence of s 208(1)(e), such exceptions as were elsewhere contained within Pt 2E.1 (as modified) would presumably have operated according to their own terms. Further ambiguity and uncertainty is occasioned by the words which introduce both s 208(1)(d) and (e) (as modified) - namely, the words "… then for the person referred to in paragraph (a) to give the benefit, either" s 208(1)(d) or (e) must be satisfied. Such words only create ambiguity and uncertainty as to whether, as is disputed in this appeal, s 208(1)(a) to (c) constitute a complete statement of the "conditions" to be satisfied or whether s 208(1)(a) to (d) are to be regarded as a complete statement of the circumstances in which a financial benefit can be given with the consequence that s 208(1)(e) addresses exceptions. The term "exception" is, of course, the term employed in s 208(1)(e) (as modified) and also in s 208(1)(b) in its unmodified form.
15 Notwithstanding such ambiguity and uncertainty, the task of the Court is to construe the words in fact employed by the Parliament to give effect to the natural meaning of those words and in a manner which promotes and gives effect to the purpose of Pt 5C.7 being the purpose specified in s 207 (as modified by s 601LB).
16 The general principles to be applied when considering a statutory provision which imposes an obligation subject to a qualification have been explained by the High Court on a number of occasions. McHugh J in Avel Proprietary Limited v Multicoin Amusements Proprietary Limited (1990) 171 CLR 88 at 119 summarised these principles as follows:
When a statute imposes an obligation which is the subject of a qualification, exception or proviso, the burden of proof concerning that qualification, exception or proviso depends on whether it is part of the total statement of the obligation. If it is, the onus rests on the party alleging a breach of the obligation. If, however, the qualification, exception or proviso provides an excuse or justification for not complying with the obligation, the onus of proof lies on the party alleging that he falls within the qualification, excuse or proviso: Vines v Djordjevitch [(1955) 91 CLR 512 at 519-520 ]. Whatever form the statute takes, the question has to be determined as one of substance: …
The reference to Vines v Djordjevitch (1955) 91 CLR 512 at 519-520 was a reference to the following observations of Dixon CJ, McTiernan, Webb, Fullagar and Kitto JJ:
But whether the form is that of a proviso or of an exception, the intrinsic character of the provision that the proviso makes and its real effect cannot be put out of consideration in determining where the burden of proof lies. When an enactment is stating the grounds of some liability that it is imposing or the conditions giving rise to some right that it is creating, it is possible that in defining the elements forming the title to the right or the basis of the liability the provision may rely upon qualifications exceptions or provisos and it may employ negative as well as positive expressions. Yet it may be sufficiently clear that the whole amounts to a statement of the complete factual situation which must be found to exist before anybody obtains a right or incurs a liability under the provision. In other words it may embody the principle which the legislature seeks to apply generally. On the other hand it may be the purpose of the enactment to lay down some principle of liability which it means to apply generally and then to provide for some special grounds of excuse, justification or exculpation depending upon new or additional facts. In the same way where conditions of general application giving rise to a right are laid down, additional facts of a special nature may be made a ground for defeating or excluding the right. For such a purpose the use of a proviso is natural. But in whatever form the enactment is cast, if it expresses an exculpation, justification, excuse, ground of defeasance or exclusion which assumes the existence of the general or primary grounds from which the liability or right arises but denies the right or liability in a particular case by reason of additional or special facts, then it is evident that such an enactment supplies considerations of substance for placing the burden of proof on the party seeking to rely upon the additional or special matter: …
What is clear from both of these decisions is that the question of statutory construction is to be resolved as a matter of substance rather than as a matter of form. Indeed, the form of the legislation in Vines was such that it would have indicated that the burden was cast upon the defendant - rather than the plaintiff - to prove that the proviso had not been satisfied. In that case, Ms Djordjevitch had been injured whilst crossing a street in Ballarat. She was unable to identify the motor vehicle that struck her. She relied upon s 47 of the Motor Car Act 1951 (Vic) which provided that she could proceed against a nominal defendant named by the Minister. Section 47 further provided that she could so proceed "[p]rovided that" she gave notice to the Minister "… as soon as possible after [she] knew that the identity of the motor car could not be established …". Notwithstanding the form in which s 47 was expressed, the High Court concluded that the giving of notice was a condition precedent to the cause of action and that Ms Djordjevitch, as the plaintiff, bore the onus of proving that the requisite notice had been given.
17 The emphasis placed upon the question being resolved as a matter of substance and not form is not surprising. In his earlier decision in Dowling v Bowie (1952) 86 CLR 136 at 139-140 Dixon CJ had dealt with criticism of that distinction as follows:
The argument treats the case as governed by the common law doctrine that where a statute having defined the grounds of some liability it imposes proceeds to introduce by some distinct provision a matter of exception or excuse, it lies upon the party seeking to avail himself of the exception or excuse to prove the facts which bring his case within it. The common law rule distinguishes between such a statutory provision and one where the definition of the grounds of liability contains within itself the statement of the exception or qualification, and in the latter case the law places upon the party asserting that the liability has been incurred the burden of negativing the existence of facts bringing the case within the exception or qualification. ….. The distinction has been criticized as unreal and illusory and as, at best, depending on nothing but the form in which legislation may be cast and not upon its substantial meaning or effect. The question, however, where in such cases the burden of proof lies may be determined in accordance with common law principle upon considerations of substance and not of form. A qualification or exception to a general principle of liability may express an exculpation excuse or justification or ground of defeasance which assumes the existence of the facts upon which the general rule of liability is based and depends on additional facts of a special kind. If that is the effect of the statutory provisions, considerations of substance may warrant the conclusion that the party relying on the qualification or exception must show that he comes within it ...
18 The correct construction of s 208(1) (as modified) is thus to be resolved as a matter of substance and not form.
19 Where "… the form or structure of the legislation does not give definite guidance on the question of burden of proof …", one commentator has said that "the courts will have regard to considerations of policy and convenience": C R Williams, 'Burdens and Standards in Civil Litigation' (2003) 25 Sydney Law Review 165 at 179. The author there went on to observe that "[t]he fact that a matter is 'peculiarly within the knowledge of one party', or that it will be easier for that party to prove the matter than her or his opponent, may be significant".
20 Although s 208(1) (as modified) has not been the subject of specific consideration in this Court, s 208 in its unmodified form was considered by Barker J in Leawell Pty Ltd v Watershed Premium Wines Ltd (No 2) [2009] FCA 1145, 180 FCR 392. There the respondents sought to strike out various paragraphs of the applicants' statement of claim. In that statement of claim, the applicants sought, inter alia, a declaration that Watershed Premium Wines Ltd had contravened s 208 by reason of the company paying the legal costs of its directors. Section 212(2)(d) provides that the approval of members is not necessary where the giving of the benefit "would be reasonable in the circumstances". The company contended that the applicants bore the onus of proving that the payments were not reasonable. Barker J agreed. In doing so his Honour referred to the observations of McHugh J in Avel Proprietary Limited and to the terms of s 208(1) and continued as follows:
[34] The company contends on the plain language of s 208(1), that, it provides that a financial benefit may be given and may only be given to a related party with either (a) applicable member approval or (b) pursuant to an exception under ss 217 to 227 of the CA. The conditions are all contained within the body of s 208 and so, if these conditions are not negatived, there is no contravention of s 208.
[35] The company therefore contends that s 208 falls within the first limb of the test in Avel and requires the applicants to plead material facts why the exception is inapplicable.
[36] This approach to the pleading of the cause of action that relies on s 208 is supported by authority: Westchester Pty Ltd v Triton Resources Ltd [2001] WASC 57 at [9]-[12]; Randall v Aristocrat Leisure Ltd [2004] NSWSC 411 at [567].
His Honour then referred to the "different view" expressed by Habersberger J in Orrong Strategies Pty Ltd v Village Roadshow Ltd [2007] VSC 1, 207 FLR 245 and continued:
[40] The company, supported by the other respondents, submits that the elements in s 208 of the CA are concurrent. It is not true to say that there has been a contravention of s 208 if an exception applies - the section itself creates a prohibition only when all the exceptions, including member approval, are not satisfied.
[41] Counsel for the company further submits that the exceptions may constitute a large, if not the better part of dealings with the related parties, comprising as they do:
• arms length transactions (s 211);
• indemnities, exceptions, insurance premiums and payments for legal costs for officers (s 212);
• small amounts (s 213);
• benefits to closely held subsidiaries (s 214);
• benefits that do not discriminate unfairly (s 215);
• benefits awarded pursuant to court order (s 216).
[42] Counsel submits it will usually be apparent which exception is applicable. So it was in the present case, that in relation to the alleged unapproved giving of financial benefits pleaded in [15], [38], [55], 59 of the substituted statement of claim, the plea was that the exceptions provided for in "sections 210 to 216" did not apply and so the payment was contrary to s 208 of the CA.
[43] In my view, these submissions should be accepted. On the proper construction of s 208 I consider that the section imposes consequences for a public company only if certain exceptions (being a meeting of members or any of the matters in ss 211 to 216) are not satisfied. Thus, it falls within the "exception" limb, not the "proviso" limb of the dichotomy explained in Vines and Avel. The obligation to negative the exemption therefore falls upon the applicants.
[44] In these circumstances, I consider that [54] of the substituted statement of claim should be struck out, because as currently pleaded, it is ambiguous and therefore embarrassing. It is not plainly pleaded that certain benefits have been given in a manner not provided for by s 208. The current reference to those benefits being "contrary to s 212(2) of the Corporations Act" amplifies the ambiguity. I would, however, give leave to replead in that regard.
21 Although the decision of Barker J was a decision which related to s 208, and not to s 208 as modified by s 601LA to s 601LE, there is no relevant distinction between the two versions of s 208. Indeed, it would be an odd result if the provisions were construed such that s 208 imposed no onus upon those relying on an "exception" and that s 208 (as modified) did. If there is no relevant distinction, the decision of Barker J is not consistent with that of the primary judge in the present proceeding.