FEDERAL COURT OF AUSTRALIA Australian Securities & Investments Commission v Aboriginal Community Benefit Fund Pty Ltd [2004] FCA 178 CORPORATIONS – prohibition on unsolicited offering of financial products – prohibition not operative if product a funeral expenses policy – funeral expenses policy defined by reference to a scheme or arrangement – scheme or arrangement to be for the sole purpose of meeting funeral or burial expenses – meaning to be given to phrase 'scheme or arrangement' – whether scheme or arrangement limited to terms of trust deed – extent to which a scheme or arrangement regulated by a trust deed can be subsequently modified – scheme or arrangement not limited to terms of deed – modification only possible to the extent permitted by the deed – purported modification ineffective – original provisions of deed caused products to fall within legislative prohibition Corporations Act 2001 (Cth) s 761A, 762A, 763A, 765A(1)(w), 765A(1)(y), 992A Corporations Amendment Regulations 2003 (No 1) (Cth) Regulation 7.1.07D Funeral Funds Act 1979 (NSW) Life Insurance Act 1995 (Cth) s 11(1), 11(3), 11(3)(e) Federal Court Rules Order 29 r 2 Australian Securities & Investment Commission v Takaran (2003) 43 ACSR 46 cited Australian Securities Commission v Su (1994) 17 ASCR 94 distinguished Australian Softwood Forests Pty Ltd v Attorney-General for the State of NSW; ex relatione Corporate Affairs Commission (1981) 148 CLR 121 cited Corporate Affairs Commission (NSW) v Lamb and Nash International (No 2) (1987) 9 NSWLR 497 distinguished Newton v Federal Commissioner of Taxation (1958) 98 CLR 1 cited Re British Basic Slag Ltd's Agreements [1963] 2 All ER 807 cited Fords Principles of Corporations Law [22.472], [22.490] AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION v ABORIGINAL COMMUNITY BENEFIT FUND PTY LTD AND ANOR N 3056 OF 2003 HELY J 5 MARCH 2004 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 3056 OF 2003 BETWEEN: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION APPLICANT AND: ABORIGINAL COMMUNITY BENEFIT FUND PTY LTD FIRST RESPONDENT ABORIGINAL COMMUNITY BENEFIT FUND NO 2 PTY LTD SECOND RESPONDENT JUDGE: HELY J DATE OF ORDER: 5 MARCH 2004 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to Order 29 rule 2 of the Federal Court Rules the following questions be decided separately from and before any trial or further trial of all other issues in the proceedings: (a) was or is the product of the First Respondent comprising membership of ACBF a funeral expenses policy under Regulation 7.1.07D of the Corporations Regulations 2001 at the following dates: (i) 11 March 2003; (ii) September 2003; (iii) 5 February 2004; and (b) was or is the product of the Second Respondent comprising membership of ACBF No 2 a funeral expenses policy under Regulation 7.1.07D of the Corporations Regulations 2001 at the following dates: (i) 11 March 2003; (ii) September 2003; (iii) 5 February 2004. 2. Question 1(a) is answered: No Question 1(b) is answered: No 3. The matter should be listed for further directions at a convenient date. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 3056 OF 2003 BETWEEN: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION APPLICANT AND: ABORIGINAL COMMUNITY BENEFIT FUND PTY LTD FIRST RESPONDENT ABORIGINAL COMMUNITY BENEFIT FUND NO 2 PTY LTD SECOND RESPONDENT JUDGE: HELY J DATE: 5 MARCH 2004 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The first respondent is the Trustee of the Aboriginal Community Benefit Fund constituted by a trust deed dated 9 May 1994 ('ACBF'). The second respondent is the Trustee of the Aboriginal Community Benefit Fund No 2 constituted by a trust deed executed in 1993 ('ACBF No 2'). The evidence is that ACBF No 2 was 'settled' on 9 May 1993. 2 Section 992A of the Corporations Act 2001 (Cth)('the Act') provides that a person must not offer financial products for issue or sale in the course of, or because of, an unsolicited meeting with another person. This provision was part of a set of amendments to the Act that became effective on 11 March 2002. Division 3 of Part 7.1 of the Act contains a number of sections which respond to the question posed at the beginning of the Division: 'What is a financial product?' It is unnecessary to examine those sections in any detail. It is sufficient for present purposes to record that Subdivision D lists a number of specific exclusions from the notion of financial products. One such exclusion is contained in s 765A(1)(y), namely: 'A facility, interest or other thing declared by regulations made for the purpose of this subsection not to be a financial product'. 3 The Corporations Amendment Regulations 2003 (No 1) (Cth)('the Regulations') include the following Regulation 7.1.07D: '7.1.07D Specific things that are not financial products: funeral expenses policy (1) For paragraph 765A(1)(y) of the Act, a funeral expenses policy is not a financial product. (2) In this regulation: "funeral expenses policy" means a scheme or arrangement for the provision of a benefit consisting of the payment of money, payable only on the death of a person, for the sole purpose of meeting the whole or part of the expenses of, and incidental to the person's: (a) funeral; and (b) burial or cremation.' 4 Regulation 7.1.07D came into effect on 11 March 2003. The respondents admit for the purposes of these proceedings: (a) that but for Regulation 7.1.07D of the Regulations each of the respondent's products would be a financial product, and (b) that from time to time those products have been sold in the course of or because of an unsolicited meeting with another person within the meaning of s 992A of the Act. 5 It is common ground that in the period 11 March 2002 to 11 March 2003 each respondent was guilty of one or more contraventions of s 992A. By agreement between the parties, examination of the detail of those contraventions in that period and consideration of whether any, and if so, what relief should be granted in respect thereof, was deferred pending determination of the question whether Regulation 7.1.07D applied to offers for issue or sale of the financial products made after 11 March 2003. 6 It follows that the central issue for determination at this stage of the proceedings is whether since 11 March 2003 memberships of ACBF and/or ACBF No 2 have been removed from the definition of 'financial products' because such memberships fall within the definition of 'funeral expenses policy' given in Regulation 7.1.07D. Background 7 ACBF commenced operation in 1992. By December 1992 there were approximately 1500 members. On 15 December 1992 an injunction was granted by the Supreme Court of NSW restraining the continued operation of ACBF. 8 ACBF No 2 was set up in May 1993 to deal with the problem caused by the injunction obtained by the NSW Department of Consumer Affairs that caused the cessation of ACBF's operations. ACBF No 2 was set up with the backing of a group life policy with National Mutual as the insurer. ACBF No 2 was not intended to be a substitute for ACBF because at that time life cover could only be obtained for healthy individuals who signed a declaration to that effect, and cover could not be obtained for children under the age of 10 years. 9 On 20 December 1993 the first respondent obtained an exemption from the application of s 11 of the Funeral Funds Act 1979 (NSW) ('the Funeral Funds Act') on the basis that it intended to amend its business practices in a number of ways, and in particular by 'dispensing with provisions relating to interest free loans' (MJC 1 p 180). The exemption became effective when published in the NSW Government Gazette on 15 April 1994. 10 ACBF recommenced operating in 1994 after the grant of the exemption. On 20 June 1994 the injunction granted on 15 December 1992 was vacated. 11 On 6 July 1999 the applicant commenced proceedings against the first respondent, the second respondent and other companies in the ACBF group in the Federal Court of Australia ('the 1999 proceedings'). The issues in the 1999 proceedings related to the manner in which it was alleged by the applicant that memberships in ACBF and ACBF No 2 had been marketed to Aboriginal persons in the Northern Territory. 12 On 24 September 1999 consent orders were made in the 1999 proceedings which, amongst other things, required the first and second respondents to modify the promotion of their respective Funds so as to advise prospective customers that the first and second respondents are private companies not connected with any governmental or similar body or an Aboriginal institution. Undertakings were also given on behalf of the respondents to devise and implement a 'compliance program'. The compliance program was to be developed with the assistance of external consultants with expertise in consumer protection law and in indigenous culture. 13 A compliance program was prepared and utilised by the first and second respondents in accordance with those undertakings (MJC 1 p 197). The program required the development of a Policy and Procedures Manual and for checking mechanisms such as the review of work sheets completed by sales consultants. The program also requires a compliance officer to make random telephone contact with clients who had recently joined either fund to ask a number of questions including (MJC 1 p 220): 'Did the sales consultant explain that your membership is just for you and no one else? Did the sales consultant explain that when you pass away the payout will be paid to the person you have chosen – for funeral and related expenses?' A Policies and Procedures Manual was prepared. The version in evidence is endorsed with the date September 2003, but it is common ground that a similar document was in existence in March 2002. Under the heading of 'Nominated Payee' the Manual states (MJC 1 p 230): 'The person nominated in the membership application form is the payee who has the say as to how the payout amount is to be used in payment of funeral and incidental expenses. Accordingly, the member should feel comfortable that the person nominated will deal with the money paid in accordance with the member's wishes.' 14 The Policies and Procedures Manual also includes the following (MJC 1 p 245): '21. What should a family do if a death occurs? The sales consultant should advise the member that the person nominated to receive the payout ('the payee') should contact Head Office upon that member's death. Management will request the payee to send a copy of the death certificate. Neither Fund will make a payment without this document. The Trustee cannot commence payment procedures until it has received a copy of the death certificate. Once the death certificate has been received and verified and the claim has been accepted (and, in the case of Fund 2, once the insurer has accepted and paid the claim), the Trustee will make a payment. Generally, an amount will be paid to the relevant funeral director. The Trustee will ascertain the payout amount and pay, up to that amount, costs of and incidental to the funeral. Any amount remaining will be paid to the payee on receipt by the Trustee of a written undertaking from the payee to use the relevant amount for the purpose of paying funeral and incidental expenses. The payee might be the person nominated in the membership application form or an alternative person may have been nominated during the period of membership. The most recently nominated person (payee) will be paid. 22. Loans for family members Some early versions of the Fund 2 membership application form provided that members were eligible to apply for an interest-free loan to assist with funeral costs associated with the death of an immediate family member. This discretionary loan facility was of very limited application as these loans were only available in respect of the death of a member. In addition, they were subject to any terms and conditions the Trustee wished to apply. The loan facility was never available in Fund 1 as the result of a requirement imposed by the New South Wales Department of Fair Trading. Any client querying this loan facility should be directed to the Loans Department at Head Office. Under absolutely no circumstances should a sales consultant discuss loans with a client unless advised to do so by Head Office.' (emphasis in original) 15 There is room for doubt whether earlier versions of this Manual included the undertaking referred to in the last paragraph of par 21, as the cross-examination of Mr Conry, the Chief Executive Officer of the company responsible for the management of the funds, suggests that the practice of requiring an undertaking to that effect commenced in September 2003. 16 A Training Manual is used by the first and second respondents to train their sales consultants. The 'Introduction' explains that it is to be read in conjunction with the Policies and Procedures Manual and the consent orders made in the 1999 proceedings. Paragraph 1.1 of the Training Manual includes the following (MJC 1 p 278): 'The Funds provide a payout, which is payable on the death of a member, for the purpose of ensuring that money is available to pay for or put towards a proper and dignified funeral and to meet incidental expenses. Membership of the Funds is restricted to members of the Aboriginal community.' 17 Paragraph 1.3 of the Training Manual is as follows (MJC 1 p 278-279): '1.3 The Need for the Funds – Aboriginal funerals The costs of a dignified and culturally appropriate funeral for an Aboriginal person and the incidental costs involved are potentially substantial because a number of cultural issues are relevant which result in additional costs being incurred. Burial: Aboriginal funerals almost invariably involve burial rather than cremation. The costs associated with burial are greater than those associated with cremation. In addition to the costs that relate to the funeral service, there will almost certainly be the cost of erecting a headstone. Coffin painting: Traditionally, Aboriginal people believe everything possible has to be done for the deceased to commence a journey and complete the journey to the after life and the place where they need to rest. The belief that the person's spirit will not arrive at its destination without assistance ranks highly. As a result, the casket is painted in traditional colours with the life story of the deceased depicted. It is believed that without the story the journey could be altered and the deceased might never get to the intended destination, in which case the spirit will float around aimlessly. The coffin would normally be supplied by the funeral director and those responsible for the funeral would commission an artist at a fee to carry out the painting. Transportation of body back to homelands: If a person dies away from his or her usual place of residence, the body must be taken back to the family. It should not be buried in a town that is not the deceased's own. The family needs to be able to visit at the grave site and talk with the deceased throughout the years. If required – and depending on the distance involved and method of transportation (road or air), the costs involved can amount to many thousands of dollars. The funeral service: It is expected that all members of the deceased's extended family will attend the funeral service and that the males in attendance will wear appropriate formal clothing. A card with a coloured photo depicting a happy moment in the life of or the smiling face of the deceased and containing a eulogy is prepared and sent out or given to every person who is to attend the funeral. This is distributed to every member of the deceased's extended family – often to many hundreds of people. Smoking ceremony: Traditionally the house where the deceased passes away a smoking ceremony is performed to remove and guide the spirit home. The "smoker" is an elder of the community where the person originated. Smoking is believed to promote the removal of the spirit to be guided back to the homeland where the spirit will rest. This involves an agreed service fee. Welcoming ceremony: One of the elders from the area where the death occurs is required to welcome the elders of another area in a ceremony to be able to enter their land and perform the "smoking ceremony". This involves an agreed service fee. Wailing ceremony: This ceremony is where the extended family meets after the funeral. It is a time for farewell and elation combined. Such ceremonies can last for 3 to 5 days. Returning home ceremony: Following a standard funeral conducted by a funeral director and clergyman, a second traditional funeral on the deceased's homeland – the "returning home ceremony" – might occur, with the deceased's remains being returned to his or her homeland. The wake 1 year later: Some communities have a wake 1 year later where extended family gathering to honour the deceased. Those who can make it do so. It is not considered mandatory to attend.' 18 Paragraph 2.3 of the Training Manual is as follows (MJC 1 p 283): '2.3 Amounts Payable On the death of a member, Fund 1 currently pays up to $10,000 and Fund 2 currently pays up to $15,000. $15,000 is, of course, more than the present cost of an "average" funeral. In this regard, the following matters need to be remembered: 1. The purpose of the Funds is not just to provide a payout for funeral expenses but also to meet – or at least partially meet – expenses incidental to the funeral and burial or cremation. As to what constitutes "incidental expenses", these could be expected to include transportation of the body of the deceased, the purchase of a burial plot and memorial expenses. 2. For cultural reasons, Aboriginal persons almost invariably wish to be buried rather than cremated. The costs associated with burial are significantly higher than those associated with cremation. 3. When fixing the maximum amount payable, it is necessary to take account of the fact that the payout amount is paid on death. This might take place many years in the future and funeral and incidental expenses are likely to continue to rise. Accordingly, the amounts that the Funds pay need to be set at a level which will, at least in the majority of instances, provide a payout amount that will cover the cost of a funeral and incidental expenses in the foreseeable future.' 19 Section 5 of the Training Manual includes the following (MJC 1 p 300): 'After the initial introduction you should give an overview of the Funds to the potential members. This overview should outline the purpose of the Funds (ie to provide a payment made on death for the purpose of covering or contributing to the member's funeral and burial or cremation and incidental expenses) and summarise the benefits and features of the Funds. … The payout is not limited to the cost of the funeral and burial or cremation. It is also to cover incidental expenses. These might include transportation of the body or the cost of erecting a plaque or headstone. Payments are made fortnightly, taken out of your Centrelink payment if you choose. … Also make sure that the person realises the importance of choosing the person to whom the payout will be made. That person will be responsible for the application of the payout. It is therefore important for the member to appoint someone who can be trusted to put into effect the member's wishes about how the money is to be spent in relation to his/her funeral and burial or cremation.' 20 Various brochures promoting the Funds are in evidence. One, Exhibit RF 9, includes the following: 'Who can Join Fund 2 Members of the Aboriginal Community between the ages of 10 and 64 who are in good health. Fund 1 All members of the Aboriginal Community regardless of age or health. Benefits Fund 2 Up to $15,000 Fund 1 Up to $10,000 These benefits are paid in addition to any other entitlement that might exist as a result of a member's death. The benefit is not tied to the cost of the funeral. Any benefit over funeral costs is paid to the Beneficiary.' 21 On the second page of Exhibit RF 9 the following appears: 'A funeral can cost from $3,000 to $7,000 and even more. Meeting this cost can sometimes put severe financial strain on our loved ones. You can nominate the Beneficiary of your choice. The Funds provide a way of eliminating or reducing this potential financial burden. Depending on your level of cover at the time, the Funds will pay to your Beneficiary the balance if any after the costs of the funeral have been met. You or your Beneficiary will have the option to choose the funeral director, as the Funds are not linked to any funeral organisation.' 22 The current brochure used to promote the Funds includes the following: 'The most basic funeral currently costs approximately $3,000. Most funerals cost a great deal more. When associated expenses are taken into account, the total cost can be considerable. Meeting this cost can sometimes put severe financial strain on loved ones. The Funds provide a way of eliminating or reducing this potential financial burden. They are designed to provide a payment, made following death, for the purpose of covering or contributing to the cost of a member's funeral and burial/cremation and where possible paying incidental expenses. As the Funds provide a cash benefit and are not linked to any funeral organisation, a member's family can choose the funeral director and service of their choice.' 23 On 18 March 1993 ACBF's solicitors wrote to the Minister for Consumer Affairs (MJC 1 p 125-126). That letter included the following: 'Our client does not wish to register as a funeral fund, as registered funeral funds are limited in making payments of $1,000.00 only to members for funerals, whereas our client's scheme provides for payments of up to $6,000.00 with no obligation for any of that money to be used for a funeral or for any specified purpose. $1,000.00 is not enough to cover the average cost of a funeral today, whereas $6,000.00 will cover the cost of a funeral plus other immediate financial commitments.' On 29 April 2002 ACBF's solicitors forwarded a submission to the NSW Department of Fair Trading (Exhibit B). That submission included the following: 'The Fund is not a "funeral fund" in the sense that such term is generally understood. It does not provide or arrange for the provision of funeral services. Instead it pays a specified cash benefit following a member's death. Whilst the purpose of the scheme is to ensure that funds are available to meet or put towards the costs of a funeral, the benefit is not payable to the funeral director but rather to a person nominated by the member. The amount payable by ACBF on a member's death is not governed by the cost of the funeral. Indeed, there is no requirement on the beneficiary to use the money for a funeral.' The Trust Deeds 24 The members of the ACBF Fund consist of those persons who became members of the Fund prior to the date of the Trust Deed and who have not terminated their membership, as well as persons who became members of the Fund after that date. Members of the Aboriginal community may apply to become a member of the Fund by completing the membership application form annexed to the Trust Deed, or such other form as may be the current membership application form from time to time. The Trustee is not to amend the membership application form without the prior written approval of the Registrar of Funeral Funds ('the Registrar') (Cl 2.1). 25 Applications for membership on the form of the application for membership attached to the Trust Deed were not received after 15 December 1992 by reason of the injunction granted on that date. On 31 January 2000 the Registrar consented to specified amendments to the membership application form (Exhibit 1). 26 Clause 2.2 of the Trust Deed provides that upon their membership application form being accepted by the Trustee, applicants for membership of the Fund shall become members and shall be deemed to have approved of and shall be bound by the provisions of the Trust Deed. Persons who become registered as members are entitled to the benefit of and shall be bound by the terms and conditions of the Trust Deed (Cl 24). 27 The Trust Fund is held upon trust for the members of the Trust Deed. Members contributions to the Fund are calculated by reference to the membership application form (Cl 5.1), and the contributions are to be held in trust and applied by the Trustee in accordance with the provisions of the Trust Deed (Cl 5.2). Clause 8 of the Trust Deed is as follows: '8. BENEFITS PAYABLE Upon receipt of a document (or a copy thereof) of the type specified in Section 27(1) of the Registration of Births, Deaths and Marriages Act, 1973, the trustee shall pay, within fourteen (14) days, to the Next of Kin of that Member from the Fund such payment as is calculated by reference to the Membership Application Form signed by that Member, depending on whether that Member is or is not a Non-Qualifying Contributing Member.' 'Next of Kin' means the next of kin nominated by the member on the membership application form, or if such person(s) predecease the member, then such spouse, child, parent, brother or sister or remoter issue or relative as the Trustee shall in its absolute discretion decide. A 'Non-Qualifying Contributing Member' is one who suffers from specified conditions, or any other serious medical condition in the five years immediately prior to becoming a member, or a member who commits suicide. 28 Clause 10 of the Trust Deed provides for loans to members to defray the cost and expenses of the funeral, cremation or burial of a deceased person in the immediate family of the member. The applicant did not rely upon the provisions of this clause as giving rise to a contravention of s 992A of the Act. Rather, the applicant's submission was that the limitation in Cl 10 to the loan funds being used to defray funeral and cremation or burial expenses is to be contrasted with Cl 8, which contains no such limitation. 29 Clause 12.2 of the Trust Deed provides that the Trustee shall apply the income of the Trust Fund only for the provision of funeral benefits as 'provided herein' and meeting the expenses of the funeral benefit business conducted by the Trustee. There is no other provision in the Trust Deed in relation to 'funeral benefits'. 30 The Trust Deed may be amended by the Trustee with the prior written consent of seventy five per cent of the members, and the consent of the Registrar (Cl 19). 31 The Trust Deed for ACBF No 2 is in a similar, but not identical, form to the Trust Deed for ACBF. Clause 23 of the ACBF No 2 Trust Deed provides that persons registered as members shall be entitled to the benefit of and shall be bound by the terms and conditions of the Trust Deed. Clause 8 of the ACBF No 2 Trust Deed provides as follows: '8. BENEFITS PAYABLE Upon receipt of a document (or a copy thereof) of the type specified in Section 27(1) of the Registration of Births, Deaths and Marriages Act, 1973, the Trustee shall, subject as hereinafter provided, pay, within twenty-eight (28) days, to the Next of Kin of that Member from the Fund such payment as is calculated by reference to the Membership Application Form signed by that Member. No benefits shall be payable in the event of death by suicide or as a consequence of intentional self-injury. Furthermore, no benefit shall be payable in respect of a Member should the Insurer under the Group Life Policy referred to in Clause 13.5 hereof not pay the Trustee in respect of that Member's death.' The ACBF No 2 Trust Deed does not contain a provision corresponding to Cl 12.2 of the ACBF Trust Deed. Nor does this Deed contain a provision corresponding to Cl 2.1 of the ACBF Trust Deed requiring the prior written approval of the Registrar to any amendments to the membership application form. 32 With the possible exception of Cl 12.2 of the ACBF Trust Deed, neither Trust Deed contains any stipulation that the benefits payable under it must be applied to any particular purpose. 33 Neither party submitted that such differences as there are between the form of the Trust Deeds are material for the purposes of the present application. The Membership Application Form 34 Application forms for ACBF apparently prepared in October 2001, July 2002 and September 2003 are in evidence. The Registrar did not give his written approval to any changes made in the membership forms after October 2001. Application forms for ACBF No 2 apparently prepared at the same times were also tendered. All of the application forms contain a notification that the rules of the fund are set out in the Trust Deed, and that members are bound by those rules. Provision is made in the forms for nomination of the person to whom payment is to be made as a result of the member's death. Each form has a section headed 'benefits and exclusions' which describe the benefit payable by the Trustee. In the membership application form for ACBF of September 2003 under the heading 'benefits and exclusions', the following appears: 'When a financial member dies, the Trustee will pay a maximum of $10,000. Payment is made to or as directed by a member to be used to meet expenses of and incidental to the member's funeral and burial or cremation.' None of the other application forms contain the words which I have emphasised. 35 Each of the application forms has a section headed 'Application for Membership'. In the September 2003 version of the form for ACBF and ACBF No 2 the following appears in that section: 'I wish any payment made by the Trustee as a result of my death to be paid to or as directed by the following person to be used to meet the whole or part of the expenses of and incidental to my funeral and burial or cremation.' Earlier versions of this section of the form simply provided: 'I wish any payment made as a result of my death to be paid to' followed by the details of the person nominated. Payment of claims 36 Prior to paying out the amount of a benefit the respondents require the person entitled to receive payment to sign a release form. The form currently in use includes the following: 'If the payout is less than the amount owing to the funeral director who conducts the member's funeral, I authorise and direct you to pay the payout to the funeral director in part payment of the amount owing. If the payout is equal to or greater than the amount owing to the funeral director, I authorise and direct you to pay any amount owing to the funeral director and to pay any balance that remains to me. If no amount is owing to the funeral director, I authorise and direct you to pay the payout to me. I undertake that I will use any amount paid to me in payment or reimbursement of the expenses of and incidental to the deceased's funeral and burial or cremation.' On the basis of Mr Conry's evidence I find that the release form was introduced into the respondent's procedures in about September 2003. Since that time the respondents have required this form to be executed even if the funeral costs of the deceased member have already been paid for, whether by the intended recipient of the payment or a third party. 37 The following statistics have been provided in relation to payment of claims made upon the Funds since 1 January 2002 (Exhibit C): 'Fund 1 1. Number of claims paid: 177 2. The total amount paid: $ 533,212.46 4. The number of claims paid in respect of which a benefit was paid direct to a funeral director: 149 5. The total amount paid to funeral directors: $ 381,238.92 Fund 2 1. Number of claims paid: 85 2. The total amount paid: $ 783,048.10 3. The number of claims paid in respect of which a benefit was paid direct to a funeral director: 80 4. The total amount paid to funeral directors: $ 368.605.20 5. The total number of members of the Fund at 31 December 2003 (including non financial): 15,760 6. The total payments received from members 1 January 2003 to 31 December 2003: $3,466,668.30' 38 Claims paid where the benefit was not paid to a funeral director may or may not have been used, in whole or in part, by way of reimbursement of the funeral director's costs. The brochures earlier referred to suggest that, in the ordinary course, the monies payable from the Fund would exceed the funeral director's costs, and that there would be a surplus available to meet 'incidental expenses'. The Life Insurance Act 1995 (Cth) ('the LIA') 39 Section 11(1) of the LIA contains a definition of the term 'life insurance business'. Section 11(3) of the LIA lists a number of activities which do not constitute life insurance business for the purposes of the LIA. One such exclusion is that referred to in s 11(3)(e), which is as follows: '(e) business in relation to a scheme or arrangement for the provision, by a person other than a life company, of benefits consisting of: (i) the provision of funeral, burial or cremation services, with or without the supply of goods connected with such services; or (ii) the payment of money, on the death of a person, for the purpose of meeting the whole or part of the expenses of and incidental to the funeral, burial or cremation of a person; and no other benefits, except benefits incidental to the scheme or arrangement.' 40 Section 765A(1)(w) of the Act provides that a 'funeral benefit' is not a financial product for the purposes of Chapter 7 of the Act. 'Funeral benefit' is defined in s 761A of the Act in terms equivalent to the first limb of s 11(3)(e) of the LIA. The Explanatory Memorandum issued in connection with the Regulations include the following: 'Funeral benefits are excluded from the operation of the Act under section 765A(1). The definition of funeral benefit in section 761 of the Act is based on the definition used in section 11(3)(e) Life Insurance Act 1995 (LIA). However, the Act did not include the second limb of the LIA definition, which related to the payment of money for the purpose of a funeral. This regulation extends the exemption from the Act to cover this second limb – the payment of money solely for the purpose of financing a person's funeral. The rationale for relief is that a funeral expense policy, where provided for the sole purpose of paying in the future for a funeral, does not warrant regulation by the licensing and disclosure provisions of the Corporations Act.' The parties' submissions Applicant 41 This section outlines the relevant submissions made by the applicant. 42 First, that the language of Regulation 7.1.07D is narrower than that of the second limb of s 11(3)(e) of the LIA from which it has been derived, in that the regulation stipulates that the payment of the benefit must be for the sole purpose of meeting expenses of and incidental to the deceased person's funeral and burial or cremation. 43 Second, that whether a benefit is payable for the requisite purpose is to be determined objectively as at the time of entry into the scheme or arrangement by reference to the elements which constitute the scheme or arrangement. In the case of each of ACBF and ACBF No 2, the scheme or arrangement is constituted by the Trust Deed and such other documents (including the membership application forms) which together embody the rules, binding on both Trustee and members, of the scheme or arrangement. 44 Third, that the Trust Deeds, and in particular Cl 8 of each Deed, do not require any of the benefits paid to be paid solely for the purpose of meeting funeral, burial or cremation expenses. It is not the case that benefits paid by the Trustees pursuant to the Trust Deed are paid for the purpose of meeting funeral, burial or cremation expenses and no other. A beneficiary entitled to receive payment under Cl 8 of either Trust Deed is not bound to apply any portion of the benefit to such purposes. It is not to the point that in many cases such benefits may in fact be applied to meet expenses of that character. 45 Finally, that the respondents are not entitled, having regard to the provisions of the Trust Deeds, to extract the undertaking referred to in par 36 above from an intended recipient of a payment, and any such undertaking is not effective to modify the terms of the antecedent scheme or arrangement. Respondents 46 This section outlines the relevant submissions made by the respondents. 47 First, that 'scheme' is a word of very wide import, and all that it requires is that there should be some program or plan of action: Australian Softwood Forests Pty Ltd v Attorney-General for the State of NSW; ex relatione Corporate Affairs Commission (1981) 148 CLR 121 at 129. 48 Second, that an 'arrangement' involves something which is in the nature of an understanding between two or more persons, which is less than a binding contract or agreement and which may not be enforceable at law: Newton v Federal Commissioner of Taxation (1958) 98 CLR 1 at 7-8. The kind of understanding between two or more parties that may properly be characterised as giving rise to an arrangement involves each of the parties intentionally arousing in others an expectation that he will act in a certain way such that he incurs at least a moral obligation to do so. Under such an arrangement, the parties to it accept mutual rights and obligations: Re British Basic Slag Ltd's Agreements [1963] 2 All ER 807 at 814. 49 Third, that the documents and conduct which comprise the scheme or arrangement in relation to each Fund are therefore: (a) the relevant Trust Deeds; (b) the consent orders made in the 1999 proceedings, and in particular the consent to, the adoption of, and the carrying out of the compliance program required by orders 4 and 8; (c) the compliance program which requires the sale of memberships in each Fund to be in a disciplined and specific manner; (d) the Policy and Procedures Manual, and in particular the statements made on pp 230 and 245 thereof quoted in pars 13 – 14 above; (e) the Training Manual, and in particular the statements made at MJC 1 p 278 (quoted in par 16 above) and at p 300 (quoted in par 19 above); (f) the membership application; (g) the checklist for claims; (h) the release form (see par 36 above); and (i) the sales brochures (see pars 20 – 22 above). 50 In the case of the ACBF, the documents and conduct referred to in the preceding paragraph should be supplemented by the power contained in Cl 12.2 of the Trust Deed, the exemption granted by the first respondent under the Funeral Funds Act, and the proposed amendments to the first respondent's business practices noted in par 9 above. 51 Fourth, that in determining the purpose of the provision of a benefit the critical issue is what is sought to be achieved by the provision of the benefit, rather than what, in fact, is achieved. In other words, the sole purpose test looks to the reason why the benefit was brought into existence. The purpose is to be judged subjectively at the time when a member is accepted into the relevant Fund. Here, the purpose is not to enrich the payee, but to provide a means whereby an Aboriginal person can have a dignified funeral and burial or cremation. Both the member and the respondents understood this to be so, and the nominated recipient of the payment was a person chosen by the member as being a person likely to comply with his wishes. It is irrelevant that a 'dishonest payee' may not use the payment in accordance with the member's wishes. 52 Finally, even if 'purpose' is to be determined by the application of an objective test, then taking into account how each respondent operates the relevant scheme or arrangement, the sole purpose of the provision of benefits is the purpose specified in the Regulations. Decision The construction of 'scheme or arrangement' 53 A scheme or arrangement which might otherwise fall within the definition of a financial product is not a financial product if it is a funeral expenses policy. A funeral expenses policy is a scheme or arrangement which has particular characteristics. It must be a scheme or arrangement: (i) for the provision of a benefit consisting of the payment of money; (ii) payable only on the death of a person; and (iii) for the sole purpose of meeting the whole or part of the expenses of and incidental to the person's funeral and burial or cremation. 54 Whether a scheme or arrangement has these characteristics must be capable of determination when the scheme comes into effect, and at that point the characteristics must be elements of the scheme. The appropriate method of identifying the scheme or arrangement is, by necessity, an objective investigation into whether the scheme or arrangement can be said to have the requisite characteristics. 55 Australian Securities & Investment Commission v Takaran (2003) 43 ACSR 46 provides an example of the practical application of this method. In that case, Barrett J made the following comments at 51: 'The essence of a "scheme" is a coherent and defined purpose, in the form of a "programme" or "plan of action", coupled with a series of steps or course of conduct to effectuate the purpose and pursue the programme or plan. In some cases, the scope of the scheme will readily be gathered from some constitutive document in the nature of a blueprint setting out all relevant matters. In others, there may be no writing or such as there is may tell only part of the story, leaving the remainder to be supplied by necessary implication from all the circumstances.' 56 'Arrangement' is also a word of wide signification and is defined in s 761A of the Act as a contract, agreement, understanding, scheme or other arrangement (as existing from time to time): (a) whether formal or informal, or partly formal and partly informal, and (b) whether written or oral, or partly written and partly oral; and (c) whether or not enforceable, or intended to be enforceable by legal proceedings and whether or not based on legal or equitable rights. 57 If the scheme or arrangement contains no provision as to the purpose for which money payable pursuant to the scheme or arrangement is to be applied, then it is not a funeral expenses policy. It is only a scheme or arrangement for the provision of a benefit in a particular form, payable on death, for a stipulated purpose that is excluded from what would otherwise be the operation of s 992A of the Act. 58 As a scheme or arrangement need not itself have contractual force, it follows that whilst a scheme or arrangement must provide that payments made under it must be made for the requisite purpose if it is to qualify as a funeral expenses policy within the meaning of the Regulations, the scheme or arrangement is not necessarily outside the notion of a funeral benefits policy if that provision is informal or is not enforceable. 59 However, whilst I accept that an 'arrangement' may be in the nature of an understanding, which may be less than a binding contract and which may not be legally enforceable, in the present case a legally enforceable trust relationship came into existence between the members of ACBF and ACBF No 2 and one or other of the respondents. That fact cannot be left out of account when determining what are the elements of the scheme or arrangement. On death of the member, the person nominated as Next of Kin becomes entitled to receive the payment for which the relevant Trust Deed provides, irrespective of the purpose for which the funds are intended to be used. It may be that the membership of one or other Trust was promoted on the basis that the benefits payable upon death of the member would enable the deceased member to have a dignified funeral and burial or cremation, and it may also be that the respondents' employees made statements to putative members in accordance with the instructions contained in the Training Manual referred to in par 19 above. But it does not follow that the arrangement between the parties, when concluded, was that Fund benefits would only be provided for the purpose of meeting the relevant expenses, particularly in the light of the supervening provisions of the Trust Deeds. If the provisions of the Trust Deeds override any prior understanding between the respondents and the Members to a different effect, then that prior understanding cannot meaningfully be said to be part of the arrangement through which the financial investment is made. 60 The arrangement between the parties is to be found in the Trust Deeds and membership application forms. It is an exaggeration of the factual situation to regard the other documents on which the respondents rely as forming part of or evidencing the terms of the arrangement between the parties with respect to the provision of benefits from the Funds. They may provide a general explanation of the rationale for the establishment of the Funds, or describe the respondents' business methods, but they are not part of the definition of the relevant arrangement. The documents emanating from the respondents' solicitors referred to in par 23 above appear to accept that this is so. What is offered to members of the Aboriginal community is membership of one or other of the trusts constituted by the applicable Trust Deed, rather than participation in some narrower, or more closely defined scheme. Prior judicial consideration 61 In earlier times, companies legislation regulated the offering of prescribed interests to the public for subscription or purchase. A prescribed interest included an interest in any profits, assets or realisation of any financial or business undertaking or scheme. In that context, it has been held that attention is to be directed to the rights which are offered to putative investors rather than the legal rights which actually flow from the investment, since investors need protection against offers of unenforceable rights or interests: Corporate Affairs Commission (NSW) v Lamb and Nash International (No 2) (1987) 9 NSWLR 497; Fords Principles of Corporations Law [22.472], [22.490]. In that context, it was the subject matter of the offer which was important. If what was offered to the potential investor was a prescribed interest, it was beside the point that when the transaction was ultimately documented the offeror obtained something less than he actually bargained for. Thus in Australian Securities Commission v Su (1994) 17 ASCR 94 the Full Court of the Supreme Court of South Australia found that there was a single scheme to market the relevant products which the public were invited to join, even though three trusts were later set up as part of the detailed machinery to give effect to the single overall strategy. 62 Here, the relevant legislative provision is s 992A of the Corporations Act, which places a restriction on the offering of 'financial products'. Section 763A of the Act defines 'financial product' as a 'facility through which … a person … makes a financial investment'. In turn 'facility' is defined (s 762A) so as to include 'an arrangement or a term of an arrangement'. 63 The 'facility' through which an investment is made in the present case is by way of membership of one or other of the trusts. That is the 'financial product' (unless excluded by the Regulations) which is not to be offered in contravention of s 992A of the Act. And it is that product which must exhibit the features of a 'funeral expenses policy' if it is to fall within the exclusion provided by the Regulations. 64 As a consequence, the authorities referred to above are of little assistance in the resolution of the current problem, because the legislation requires that trust membership be the determinant of whether the exclusion in Regulation 7.1.07D is satisfied. Documents such as training manuals, release forms and sales brochures, although linked to the business of operating the funds, do not have any bearing on trust membership, and hence are irrelevant to the operation of the regulatory exclusion. Have the provisions of the Trust Deeds been modified? 65 Clause 12.2 of the ACBF Trust Deed does not have the effect that benefits are payable for the sole purpose of meeting expenses of and incidental to the deceased's funeral and burial or cremation expenses. Clause 12.2 can only operate in accordance with its terms if provision is elsewhere made in the Trust Deed for the provision of 'funeral benefits'. No such provision is to be found anywhere in the Trust Deed. 66 Nor can the practice adopted by the respondents in September 2003 of requiring an undertaking from the intended recipient of a payment as to the application of the funds to be paid to that person affect the outcome. That procedure is not authorised by the provisions of the Trust Deeds, and cannot alter the arrangement which exists between the respondents and fund members. 67 The position after the amendments made to the membership application forms in September 2003 is more complicated. Both parties accept that the application forms are part of the scheme or arrangement at least to the extent that they are incorporated as part of the scheme or arrangement by the provisions of the Trust Deeds. The alterations made to the Application Form for ACBF were made without the prior approval of the Registrar, as required by the ACBF Trust Deed, but that does not mean that they should be ignored. 68 However, the membership application forms do not purport to alter the provisions of the Trust Deeds, nor could they successfully do so. In particular, the statement in the ACBF application form of September 2003 referred to in par 34 above cannot, having regard to the terms of the Trust Deed, operate to amend or alter the rules of that Fund. It was not submitted that the expression of a wish by a member in the application form that payments made as a result of his death should be used in a particular way created a precatory trust. And if the expression of this wish does not qualify the obligation of the Trustee to pay, or the entitlement of the nominee to require payment of a benefit from the Fund, then the arrangement between the respondents and the fund members is not one for the provision of a benefit for the sole purpose of meeting the relevant expenses. Conclusion 69 Pursuant to Order 29 rule 2 of the Federal Court Rules I order that the following questions be decided separately from and before any trial or further trial of all other issues in the proceedings: 1(a) was or is the product of the First Respondent comprising membership of ACBF a funeral expenses policy under Regulation 7.1.07D of the Corporations Regulations 2001 at the following dates: (i) 11 March 2003; (ii) September 2003; (iii) 5 February 2004; and (b) was or is the product of the Second Respondent comprising membership of ACBF No 2 a funeral expenses policy under Regulation 7.1.07D of the Corporations Regulations 2001 at the following dates: (i) 11 March 2003; (ii) September 2003; (iii) 5 February 2004. 2. Question 1(a) is answered: No Question 1(b) is answered: No 70 The matter should be listed for further directions at a convenient date. I certify that the preceding seventy (70) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hely. Associate: Dated: 5 March 2004 Counsel for the Applicant: Mr R Darke SC, Mr J Stoljar Solicitor for the Applicant: Australian Securities & Investments Commission Counsel for the Respondents: Mr J Wheelhouse SC, Mr P Fury Solicitor for the Respondents: Thomas and Company Date of Hearing: 5 February 2004 Date of Judgment: 5 March 2004