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Australia – Amending Scheme Constitutions Unilaterally.

10 October, 2012

 

Appellate decision affirms principles in Watts v 360 Capital

 

In brief

 

  • In the recent decision of 360 Capital RE Limited v Watts and Others [2012] VSCA 234, the Court of Appeal of the Supreme Court of Victoria considered an appeal by the responsible entity of a fund in relation to a decision (namely, Watts & Watts & Others v 360 Capital Re Limited & Another [2012] VSC 320), where the Court held that certain unilateral amendments it made to the constitution of the fund were invalid because the responsible entity did not follow the procedure set out in s 601GC(1)(b) of the Corporations Act 2001 (Cth).
  • The Court of Appeal dismissed the responsible entity’s appeal and in so doing affirmed the principles of the first instance decision of Watts v 360 Capital.
  • In coming to its view, the Court disagreed with the approach taken in two authoritative decisions of the Supreme Court of New South Wales, thus opening up a potential divergence of legal positions between the Courts of Victoria and New South Wales.
  • The decision continues to highlight the importance of a responsible entity turning its independent mind to members’ rights before invoking its statutory power to unilaterally amend a scheme’s constitution.

 

Background

 

In the decision of Sifris J in Watts & Watts & Others v 360 Capital Re Limited & Another [2012] VSC 320, the Court considered an application by members of the 360 Capital Industrial Fund (the “Fund“) that challenged the validity of purported amendments made to the constitution of the fund by the responsible entity and declared (among other orders) that the purported amendments were invalid for want of compliance with s 601GC(1)(b) of the Corporations Act 2001 (Cth) (“Corporations Act“). The responsible entity’s contentions The responsible entity, 360 Capital RE Limited (“360 Capital RE“), appealed that decision to the Court of Appeal of the Supreme Court of Victoria. The responsible entity made the following key arguments on appeal:

 

  • that the judge was wrong to hold that the rights of members to have the Fund operated and administered according to the constitution as it stands are “members’ rights” within the meaning of s 601GC(1)(b) of the Corporations Act;
  • that the judge was wrong to hold that the changes purportedly made by the two supplemental deed polls of 31 May 2012 and 5 July 2012 adversely affected members’ rights;
  • that the judge erred in finding that the directors of 360 Capital RE failed to undertake the reasonable consideration, required by s 601GC(1)(b), as to whether the purported amendments set out in both deed polls would adversely affect members’ rights;
  • that the judge erred in holding that, because of the invalidity of the purported amendments of 31 May 2012, the 360 Noteholders are not members of the Fund; and
  • that, inasmuch as the judge erred in holding that the purported amendments of 31 May 2012 and 5 July 2012 were invalid, his Honour also erred in holding that the Notice of Meeting of 8 August 2012 was invalid.

 

Counsel for 360 Capital also submitted that, because the 360 Noteholders were not parties to the earlier proceedings and had not been joined as parties to the appeal, Sifris J’s observations as to whether they were members of the Fund are not binding on them and, therefore, the preferable course would be to remit the proceeding to the Commercial and Equity Division of the Supreme Court of Victoria to enable the 360 Noteholders to be joined and thereafter for a further trial to be heard on the question of whether they were members of the Fund. Counsel for the first respondents (Watts and others) and the Note Trustee (The Trust Company (Australia) Ltd) supported that submission.

 

The appellate decision

 

The Court of Appeal dismissed 360 Capital RE’s contentions and remitted the matter to the Commercial and Equity Division of the Supreme Court of Victoria for further consideration of the question of whether the 360 Noteholders are members of the Fund.

 

In dismissing 360 Capital RE’s contentions, the Court of Appeal made the following observations about the operation of s 601GC(1)(b) of the Corporations Act:

 

  • Right to have the constitution administered – the Court affirmed the principle espoused by Gordon J, of the Federal Court of Australia, in Premium Income Fund Action Group Inc v Wellington Capital Ltd [2011] FCA 698 (“Premium Income Fund“) that members’ rights includes the right to have the fund managed and administered in accordance with the constitution of the fund. In taking this view, the Court respectfully disagreed with the position of Barrett J, of the Supreme Court of New South Wales, in Re Centro Retail Ltd [2011] NSWSC 1175 (“Centro”). The Court of Appeal arguably went further than the decision in Premium Income Fund by stating that “the right of a member to have a managed investment scheme administered according to the constitution of the scheme is fundamentally the most important right of membership”;
  • Right versus value – the reasoning of Barrett J in Centro regarding the distinction to be drawn between something that affects members’ rights as such and something that affects the enjoyment or value of members’ rights or their capacity to turn them to account, is not “persuasive” and, “although plainly a valid distinction, is essentially beside the point.” Rather, the focus should be on the “nature and quality” of a right, as set out in the constitution, as opposed to the value and enjoyment of that right; and
  • Review of board’s decision – while it is open to the board of a responsible entity to act on the basis of legal advice on questions of law, and it is the board’s decision (not the court’s) to determine whether the proposed changes would adversely affect members’ rights, this does not mean that the board’s determination is unexaminable. The Court of Appeal held that “[i]f the board did not address itself to the question which s 601GC(1)(b) formulates, if the board’s conclusion were affected by a mistake of law, if the board took some extraneous reason into consideration or excluded from consideration some factor which should affect its determination, its conclusion was liable to review” and “[i]f the board commits an error of law in making a determination under s 601GC(1)(b), it is open to an aggrieved party to seek declaratory and injunctive relief against the consequences of the error.”

 

Is the law broken?

 

It was suggested that is hard to reconcile the reasoning of the various cases on s 601GC(1) of the Corporations Act and that this area of law may be ripe for reform.

The appellate decision we have considered in this Update further suggests that this area of law may be broken. Our reason for suggesting this is because it would appear that on the same set of facts in respect of a responsible entity’s power to amend scheme constitutions unilaterally, a litigant in the Supreme Court of New South Wales may obtain a different outcome from a litigant in the Supreme Court of Victoria, because the legal principles in those Courts have evidently diverged.

 

The discrepancy between the line of cases could be particularly troubling if ASIC presses ahead with its proposal in Consultation Paper 188, Managed investments: Constitutions—Updates to RG 134 to require responsible entities to amend constitutions to meet ASIC’s enhanced standards for the contents of scheme constitutions. Given this most recent case, it may be even more difficult for a responsible entity to comfortably form the view that a change is not adverse to members’ rights, even those changes which ASIC is suggesting be made in its consultation paper.

 

 

For further information, please contact:

 

Lisa Simmons, Partner, Ashurst

lisa.simmons@ashurst.com

 

Vince Battaglia, Ashurst

vince.battaglia@ashurst.com

 

Ashurst Dispute Resolution Practice Profile in Australia

 

Homegrown Dispute Resolution Law Firms in Australia

 

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