Westpac Banking Corporation (ABN 33 007 457 141) [2004] FCA 1792

REASONS FOR JUDGMENT 1 The plaintiffs have applied to the Court for orders under s 1322(4) of the Corporations Act 2001 (Cth) ('the Act') as to the operation of s 259C of that Act in relation to the issue or transfer of shares in the first plaintiff, Westpac Banking Corporation ('Westpac'). Section 259C(1) provides that the issue or transfer of shares or units of shares of a company to an entity it controls is void, subject to certain exceptions. 2 Westpac was established as the 'Bank of New South Wales' in 1850 by a deed of settlement. It was constituted as a body politic and corporate by the Bank of New South Wales Act, No 14 of 1850 (NSW). 3 On 1 October 1982, the name of Bank of New South Wales was changed to its present name. By the Westpac Banking Corporation Act 1995 (NSW) ('the 1995 Act'), which commenced on 12 December 1995, certain provisions of the Corporations Law of New South Wales were to be applied to Westpac. Section 9 of the 1995 Act provided that regulations could be made with respect to giving effect to the Act. The Westpac Banking Corporation Regulation 1996, which commenced on 1 January 1996, provided, amongst other things, that certain divisions of the Corporations Law, as in force on 1 January 1996, would apply to Westpac. The 1995 Act was repealed on 20 December 2002. 4 The Westpac Banking Corporation (Transfer of Incorporation) Act 2000 (NSW) commenced on 6 September 2000 and provided that Westpac could apply to be registered under the Corporations Law as a public company limited by shares. That Act was amended by item 4.73 of Schedule 4 to the Corporations (Consequential Amendments) Act 2001 (NSW). Westpac was deemed to be registered as a public company limited by shares for the purpose of s 5H of the Corporations Act on the date specified by the Attorney-General in an order made under s 5A. Such an order was made on 23 August 2002. As a consequence Westpac was deemed to be registered as a public company limited by shares and s 259C applied to Westpac on and from 23 August 2002. 5 Shares in Westpac are listed for quotation by Australian Stock Exchange Limited ('ASX') and, as at 6 October 2004, there were 1,777,914,840 shares on issue. At that date, there were approximately 227,000 registered holders of shares in Westpac and the total market capitalisation of its issued capital was approximately $33.5 billion. Westpac is ranked in the top ten listed companies by market capitalisation on ASX and its shares are, on average, among the top twenty most traded shares on ASX. The average daily volume of Westpac shares traded on ASX in the period 1 July 1998 to 30 November 2004 was 4,589,939. 6 Westpac is one of Australia's largest banks with branches and affiliates throughout the Pacific region. Westpac's principal operations comprise five key areas of business through which it serves over 8 million customers. The BT Financial Group is part of Westpac's wealth management business, being one of those five key areas. The BT Financial Group includes Westpac Life Insurance Services Ltd ('Westpac Life'), BT Life Limited ('BT Life'), BT Funds Management Limited ('BT No. 1'), BT Funds Management No 2 Limited ('BT No 2') and Westpac Financial Services Limited ('BT No 3'). The BT Financial Group provides a range of wholesale and retail financial services, and has more than $42 billion in assets under management as at 30 November 2004. 7 The second, third, fourth, fifth, sixth and seventh plaintiffs, Westpac Life, BT Life, BT No 1, BT No 2, BT No 3 and Westpac Custodian Nominees Ltd ('WCN') are controlled entities of Westpac. As at 31 October 2004, WCN, as custodian for Westpac Life, held 2,737,001 shares in Westpac, having a market value of $51,674,578.88. 8 Since 23 August 2002, WCN, as custodian for Westpac Life has acquired, by issue or transfer, 1,937,724 shares in Westpac with a market value of in excess of $36 million as at 31 October 2004. Many, if not all, of the shares acquired by Westpac Life since 23 August 2002 have been on-sold. As at 31 October 2004, the custodian of funds of which BT No 1, BT No 2, and BT No 3 is the responsible entity or trustee, held nearly 25 million shares in Westpac, having a total market value of in excess of $471,500,000. 9 Since 23 August 2002, the custodian of those funds acquired by issue or transfer in excess of 30 million shares in Westpac, which would have a current value of in excess of $570 million as at 31 October 2004. Many, if not all, of the shares that were acquired in that period have been on-sold. 10 The identification of each individual transaction that could be affected by the operation of s 259C is complicated by a number of factors as follows: (1) Some of the relevant entities were not controlled entities of Westpac throughout the entire period but became controlled entities at different times during the period. (2) During the relevant period, Westpac integrated the funds management businesses of Rothschild and BT, with the effect that the record keeping systems of some of the entities have changed. (3) All of the BT Group funds have a custodian and there have been changes to custodian arrangements during the relevant period. (4) In accordance with common market practice, there is a high degree of cross holding of units between the relevant funds. 11 In an affidavit sworn on 10 December 2004, Mr Richard Willcock, the Group Secretary and general counsel of Westpac, described in considerable detail the kinds of transactions that could be affected by the operation of s 259C. Mr Wilcock also explained the circumstances in which investigations were conducted once it was realised that there may have been consequences from the operation of s 259C(1). 12 The matter first came to Mr Willcock's attention on 3 September 2004 in a conversation with Counsel and Head of Legal at Westpac Corporate Core. During September and October 2004, various investigations were initiated. From those preliminary investigations, Mr Willcock formed the view that further investigation and advice was necessary concerning the possible operation of s 259C in respect of countless transactions that had occurred after 23 August 2002. Eight different types of circumstance have been identified by Mr Willcock. Some of those circumstances have internal variations. All of the circumstances, however, can be categorised into two possible classes upon which s 259C would operate. 13 The first class is where an entity controlled by Westpac, in its capacity as a trustee, has a right to be indemnified out of a trust fund that includes shares in Westpac. That right of indemnity is secured by a lien or charge arising by operation of law. That lien or charge, and right of indemnity, gives the trustee a proprietary interest in the trust fund, including the shares in Westpac. To the extent that there was an issue or transfer of shares that gave rise to such an interest, there may well have been a circumstance upon which s 259C(1) operated. 14 The second class concerns the statutory funds of one or other of the plaintiffs that are engaged in life insurance business within the meaning of the Life Insurance Act 1995 (Cth). A company that carries on life insurance business is required by the Life Insurance Act to establish and maintain statutory funds. All amounts received by a company in respect of the business of a fund must be credited to the fund. All assets and investments related to the business of a fund must be included in the fund. All liabilities, including policy liabilities of the life company arising out of the conduct of the business of a fund, must be treated as liabilities of the fund, and the assets of a fund are only available for expenditure related to the conduct of the business of the fund. Profits and losses of a statutory fund may only be dealt with in accordance with Part 6, Divisions 5 and 6 of the Life Insurance Act. 15 The object of those requirements of the Life Insurance Act is to ensure that such profits and losses are dealt with in a manner that protects the interests of policy holders and is consistent with prudent management of the statutory fund. Statutory funds may not be restructured or terminated without the approval of the Australian Prudential Regulation Authority ('APRA'). The net effect of the provisions is, in a sense, to quarantine statutory funds in a way that is analogous to their being treated as separate legal entities. They are, however, not separate legal entities and remain as assets of the life company. To the extent that there are shares in Westpac held by statutory funds of any of the relevant plaintiffs, there is a real possibility that the issue or transfer of shares in Westpac to that statutory fund attracted the operation of s 259C. 16 On 10 December 2004 the Australian Securities and Investments Commission ('the Commission') granted an exemption pursuant to s 259C(2). Under that provision, the Commission may exempt a company from the operation of s 259C. However, the Commission has quite properly taken the view that an exemption can only be granted in futuro and cannot be granted in respect of a transaction rendered void in the past by the operation of s 259C(1). By letter of 9 December 2004, the Commission confirmed that it takes the view that it does not have power to grant an exemption that would validate void issues or transfers. The Commission has also confirmed that, had it been asked prior to 23 August 2002, it would have likely granted a similar exemption to Westpac under s 259C(2) effective from 23 August 2002. 17 By the exemption of 10 December 2004, the Commission exempted Westpac from compliance with s 259C of the Act in respect of the issue or transfer of shares or units of shares of Westpac to or in trust: '(a) for the statutory funds of Westpac Life Insurance Services Limited… and BT Life Limited… which carry on the life insurance business of providing investment linked benefits…, including the shareholders['] retained profits accounts of these statutory funds; and (b) for any controlled entity of Westpac which is a trustee of a superannuation fund regulated under the Superannuation Industry (Supervision) Act 1993; and (c) for any managed investment scheme which has a Westpac controlled entity as a trustee or responsible entity. This exemption does not exempt from section 259C of the Act any issue or transfer of shares or units of shares of Westpac to, or in trust for, any portion of a shareholder retained profits account of any of its statutory funds which is in excess of solvency requirements.' The exemption was given subject to certain conditions, which it is not necessary for me to recite. 18 By letter of 13 December 2004, APRA confirmed that it is not aware of any injustice that might be caused should the relief sought by Westpac and the other plaintiffs in this proceeding be granted. APRA also confirmed that it does not object to the granting of the relief sought. 19 I do not consider that the circumstances that have been described by Mr Willcock, and which I have categorised into the two classes that I have mentioned, were intended to be covered by the operation of s 259C. The evil to which that provision is directed would not arise in the circumstances that I have described. The fact that the Commission is prepared to grant an exemption for the future, confirms that position. I am firmly of the view that, if the Court has power to validate the transactions in question, this is an appropriate case in which to exercise that power. The question, therefore, is whether the Court has power to make the orders sought by Westpac. 20 Section 1322(4)(a) of the Act relevantly provides that, subject to the succeeding provisions of s 1322, but without limiting the generality of any other provision of the Act, the Court may make an order declaring that any act, matter or thing purporting to have been done, in relation to a corporation, is not invalid by reason of any contravention of a provision of the Act. Section 1322(5) provides that an order may be made under that provision, notwithstanding that the contravention resulted in the commission of an offence. That clearly contemplates that there may be an order, notwithstanding that a contravention did not constitute an offence. 21 Section 1322(6) relevantly provides that the Court must not make an order under s 1322(4)(a) unless it is satisfied: 1. that the relevant act, matter or thing, or the proceeding is essentially of a procedural nature; 2. that the person or persons concerned in or party to the contravention or failure acted honestly; or 3. that it is just and equitable that the order be made; and that no substantial injustice has been, or is likely to be caused to any person. 22 Three possible difficulties concerning the operation of those provisions in the present circumstances have been drawn to the Court's attention by senior counsel for Westpac. The first question is whether, where there is a purported issue or transfer, it can be said that there is a contravention of a provision of the Act. There is no specific prohibition in s 259C of the issue or transfer of shares of a company to an entity it controls. Rather, the provision simply renders void any such issue or transfer. There is no doubt that there have been issues and transfers of shares in Westpac to entities it controls that do not fall within the exceptions in s 259C(1). Those issues and transfers of shares have been treated as effective, both by the plaintiffs and innumerable other entities and persons. 23 Notwithstanding that s 259C does not prohibit such an issue or transfer, it is implicit, in my view, that the rendering of such an issue or transfer void, is a sanction imposed for contravention. A statute might prohibit a juridical act and the sanction might be both a penalty and invalidation of the act. Such a provision used to be characterised as a lex perfecta. Alternatively, there may be a prohibition that does not invalidate the prohibited act, but simply penalises it. Such a provision was characterised as a lex minus quam perfecta. There are also circumstances where there is a prohibition which carries neither sanction, described as a lex imperfecta. In a sense, s 259C does not, in its terms, fall within any of those categories. I consider, however, that it is clearly intended to be a prohibition, with the sanction of invalidation for contravention. That is, it is a variant of a lex minus quam perfecta. It invalidates a prohibited transaction. 24 The power conferred by s 1322 should be liberally construed. It is directed to removing technical objections that often arise under the Act. The provision is of a remedial character, and that therefore justifies a liberal interpretation. Notwithstanding that there is no express prohibition on the issue or transfer of shares of a company to an entity it controls, I consider that where such a purported issue or transfer occurs, there is a contravention of s 259C within the meaning of s 1322(4)(a) of the Act. 25 The second possible difficulty in the way of the relief sought is whether an order under s 1322 can have the effect of validating a transaction that is otherwise void. I do not see any concern in that regard. Invalidity and voidness are similar concepts. Section 1322(4)(a) clearly operates in relation to any act, matter or thing that might be invalid, by reason of a contravention. Whether an issue or transfer of shares is void or invalid does not seem to me to make any difference of substance in the circumstances. I consider that s 1322(4)(a) has application notwithstanding the use of the word 'invalid'. 26 The third possible difficulty relates to the operation of s 1322(6). My attention has been drawn to the decision of the Full Court of this Court in Deputy Commissioner of Taxation v Comcorp Australia (1996) 21 ACSR 590, at 606 where there could be a suggestion that the Court must be satisfied, before making an order under s 1322(4)(a), that the act, matter or thing is essentially of a procedural nature. It is by no means certain that that is what the Court was saying and it was not necessary for that question to be decided. 27 I consider that the syntax of s 1322(6)(a) is quite clear in contemplating that only one of the three paragraphs of s 1322(6)(a) needs to be satisfied in order to authorise the making of an order. That is to say, the Court must be satisfied that the act, matter or thing is of a procedural nature or that the person or persons acted honestly or that it is just and equitable that an order be made. In any of those cases of course, the Court must also be satisfied that no substantial injustice has been or is likely to be caused to any person. I am satisfied that it is just and equitable that an order be made in this case and that no substantial injustice has been or is likely to be caused to any person by the validation of the transactions in question. I am satisfied that the Court has power to make an order under s 1322(4)(a) in the circumstances of this case. 28 The form of the order that would be appropriate would be one along the lines of the exemption granted by the Commission and I will make an order accordingly.