FEDERAL COURT OF AUSTRALIA Premium Income Fund Action Group Incorporated v Wellington Capital Limited [2011] FCA 698 Citation: Premium Income Fund Action Group Incorporated v Wellington Capital Limited [2011] FCA 698 Parties: PREMIUM INCOME FUND ACTION GROUP INCORPORATED (NSW INCORPORATED ASSOCIATION NO. 9894759) and MARK ROBERT HODGES AND CHARLES ROBERT HODGES AS CUSTODIAN FOR PREMIUM INCOME FUND ACTION GROUP INCORPORATED (NSW INCORPORATED ASSOCIATION NO. 9894759) v WELLINGTON CAPITAL LIMITED (ACN 114 248 458), SYDNEY ROBERT PITT, JENNIFER JOAN HUTSON and MARY ANNE GREAVES File number: VID 516 of 2011 Judge: GORDON J Date of judgment: 20 June 2011 Catchwords: CORPORATIONS – managed investment scheme – modification of constitution – Corporations Act 2001 (Cth) s 601GC(1)(b) – adversely affect – rights of unitholders Legislation: Corporations Act 2001 (Cth), Pt 5C Cases cited: Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339 Australian Securities and Investments Commission (ASIC) v Letten (No 5) (2010) 273 ALR 264 Australian Securities and Investments Commission (ASIC) v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561 Australian Securities and Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778 Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403 Australian Securities and Investments Commission v Letten [2010] FCA 140 Australian Securities and Investments Commission v Takaran Pty Ltd (2002) 170 FLR 388 Australian Securities and Investments Commission v West (2008) 100 SASR 496 Australian Securities Commission v AS Nominees Limited (1995) 62 FCR 504 Australian Softwood Forests Pty Ltd v Attorney-General (NSW); ex rel Corporate Affairs Commission (1981) 148 CLR 121 Daniels v Anderson (1995) 37 NSWLR 438 Eagle Star Trustees Ltd v Heine Management Ltd (1990) 3 ACSR 232 ING Funds Management Ltd v ANZ Nominees Ltd (2009) 228 FLR 444 Kadian v Richards [2004] NSWSC 382 McPherson v Dodd and Anor [2004] VSC 153 Mier v FN Management Pty Ltd [2006] 1 Qd R 339 National Australia Bank Ltd v Norman (2009) 74 ACSR 561 Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) (1998) 195 CLR 1 Investa Properties Ltd, Re (2001) 187 ALR 462 Timbercorp Securities Limited (in liq), Re (2010) 77 ACSR 291 Seabrook; Re Takeovers Panel and the Corporations Act (2002) 21 ACLC 82 Smith v Permanent Trustee Australia Ltd (1992) 10 ACLC 906 Date of hearing: 14 June 2011 Date of last submissions: 16 June 2011 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 53 Counsel for the Plaintiffs: A P Young Solicitor for the Plaintiffs: DLA Piper Australia Counsel for the Defendants: M J Colbran QC and R L Moore Solicitor for the Defendants: McCullough Robertson Counsel for the Australian Securities and Investments Commission: D Crennan (amicus curiae) Solicitor for the Australian Securities and Investments Commission: Australian Securities and Investments Commission (amicus curiae) IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 516 of 2011 BETWEEN: PREMIUM INCOME FUND ACTION GROUP INCORPORATED (NSW INCORPORATED ASSOCIATION NO. 9894759) First Plaintiff MARK ROBERT HODGES AND CHARLES ROBERT HODGES AS CUSTODIAN FOR PREMIUM INCOME FUND ACTION GROUP INCORPORATED (NSW INCORPORATED ASSOCIATION NO. 9894759) Second Plaintiffs AND: WELLINGTON CAPITAL LIMITED (ACN 114 248 458) First Defendant SYDNEY ROBERT PITT Second Defendant JENNIFER JOAN HUTSON Third Defendant MARY ANNE GREAVES Fourth Defendant JUDGE: GORDON J DATE OF ORDER: 20 JUNE 2011 WHERE MADE: MELBOURNE IN THESE DECLARATIONS AND ORDERS: The phrase "Rights Issue" means the rights issue referred to in the first defendant's: 1. National Stock Exchange Releases dated 6, 10, 17, 19 and 27 May 2011; and 2. the Rights Issue information booklet dated 19 May 2011. THE COURT DECLARES THAT: 1. In relation to the Rights Issue, the modification of the Constitution of the Premium Income Fund (ARSN 090 687 577) (PIF) dated 15 October 2008 (the PIF Scheme Constitution) which the first, third and fourth defendants purported to make by deed poll dated 9 May 2011 was and is contrary to s 601GC(1)(b) of the Corporations Act 2001 (Cth) (the Act). 2. In relation to the Rights Issue, the modification of the PIF Scheme Constitution which the first, third and fourth defendants purported to make by deed poll dated 16 May 2011 was and is contrary to s 601GC(1)(b) of the Act. AND THE COURT ORDERS THAT: 3. The defendants and each of them, whether by themselves, their servants and agents or howsoever otherwise, are restrained from allotting or issuing to any person any unit in PIF pursuant to the Rights Issue. 4. The defendants pay the plaintiffs' costs of the proceeding, such costs to be taxed in default of agreement. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 516 of 2011 BETWEEN: PREMIUM INCOME FUND ACTION GROUP INCORPORATED (NSW INCORPORATED ASSOCIATION NO. 9894759) First Plaintiff MARK ROBERT HODGES AND CHARLES ROBERT HODGES AS CUSTODIAN FOR PREMIUM INCOME FUND ACTION GROUP INCORPORATED (NSW INCORPORATED ASSOCIATION NO. 9894759) Second Plaintiffs AND: WELLINGTON CAPITAL LIMITED (ACN 114 248 458) First Defendant SYDNEY ROBERT PITT Second Defendant JENNIFER JOAN HUTSON Third Defendant MARY ANNE GREAVES Fourth Defendant JUDGE: GORDON J DATE: 20 JUNE 2011 PLACE: MELBOURNE REASONS FOR JUDGMENT INTRODUCTION 1 The Premium Income Fund (ARSN 090 687 577) (PIF) was registered as a managed investment scheme pursuant to Ch 5C of the Corporations Law on 22 December 1999 (the PIF Scheme). Since the commencement of the Corporations Act 2001 (Cth) (the Act), the PIF Scheme has been registered as a managed investment scheme under Ch 5C of the Act. On 20 March 2009, the first defendant, Wellington, became the responsible entity for the PIF Scheme. Each of the second, third and fourth defendants are directors of Wellington (the directors). 2 The PIF Scheme has a constitution within the meaning of Pt 5C.3 of the Act (the PIF Scheme Constitution). From 24 October 2006, the PIF Scheme Constitution provided, among other things, that: Beneficial Interest in the Scheme 2.1 The beneficial interest in the Scheme is to be divided into Units. … Offering and Issue of Units 3.1 The Responsible Entity may, in accordance with the provisions of the Corporations Act and this Constitution, cause the issue of Units or issue a PDS in relation to Units. Issue Price 3.2 The Issue Price of a Unit under the PDS shall be: 3.2.1 one dollar ($1.00) for the first Quarter of the Scheme; 3.2.2 thereafter, the Issue Price shall be one dollar ($1.00) per Unit unless the Responsible Entity considers the total net value of all Scheme Property, divided by the number of issued Units in the Scheme ('Variable Price') is less than one dollar and the Responsible Entity is unable to access further funds under the MFS Support Mechanism to increase the total net value of Scheme Property in which case the Issue Price of the Unit shall be the Variable Price. … (Emphasis added.) 3 Each italicised word above is defined in Sch 1 of the PIF Scheme Constitution. I have adopted the same defined terms in these reasons for decision. "Scheme" means the Premium Income Fund established by this Constitution (referred to in these reasons as "the PIF Scheme"). "Scheme Property" means all the cash, mortgages and other investments of the Scheme (including the authorised investments) for the time being held by the responsible entity for the Unit Holders. "Unit Holder" means a person whose name is for the time being entered in the register as the holder of a Unit(s) and includes persons jointly so registered. "Unit" means an undivided unit in the Scheme as provided in cl 2.1. "Issue Price" of a Unit means the issue price of a Unit determined by reference to cl 3.2. "PDS" means the Product Disclosure Statement issued by the responsible entity in respect of the Scheme. 4 On 15 October 2008, there was a meeting of Unit Holders which, among other things, "resolved to modify the [PIF Scheme] Constitution so as to … list the [PIF Scheme's] units on the National Stock Exchange" (the NSX). The Units listed on the NSX on 16 October 2008. The Units are not listed on the Australian Stock Exchange. The Units have been thinly traded on the NSX and have recently traded at about 8.1¢ per Unit, being less than 25% of their net asset backing. 5 Prior to May 2011, there were approximately 755,032,768 Units on issue held by in excess of 10,729 Unit Holders. Most of the Unit Holders are retail investors or DIY superannuation funds controlled by retail investors. As at 20 May 2011, PIF's website described the PIF Scheme's net asset backing as being 35.1¢ per Unit as at 30 June 2010 and 34¢ per Unit as at 31 December 2010. As at 6 May 2011, the net asset backing of issued Units was approximately 34¢ per Unit. 6 On 6 May 2011, Wellington announced a Placement and a Rights Issue. The Placement contemplated a placement of 113,000,000 Units at 10¢ per Unit to raise $11.3 million. The Rights Issue contemplated a non-renounceable rights issue to eligible Unit Holders on the basis of one Unit for every three Units held (a total of 251,677,598 Units) at 10¢ per Unit to raise up to $22.6 million. The effect of the Placement and Rights Issue was to increase the number of issued Units to 1,119,710,357. Ultimately, 75,000,000 Placement Units were issued and allotted to professional and sophisticated investors (for example, brokers) on 13 May 2011. Some of the Placement Units have since been transferred from broker to client via the CHESS sub-register. 7 The position with the Rights Issue is different. Although it was also announced on 6 May 2011, the timetable for the allotment of these new Units has been revised on a number of occasions as recorded in NSX Releases dated 10, 17, 19 and 27 May and the Rights Issue information booklet dated 19 May 2011. Most recently, in the NSX Release dated 27 May 2011, Wellington stated that the allotment under the Rights Issue would take place on 9 June 2011. That did not occur. On 8 June 2011, an undertaking was provided to the Court by the defendants, through their Counsel, that they would not proceed with any issue or allotment of new Units in the PIF Scheme before the hearing and determination of this proceeding. 8 On 9 May 2011, Wellington purported to modify the PIF Scheme Constitution by deed poll executed by Ms Hutson and Ms Greaves (9 May Deed Poll). The 9 May Deed Poll stated that: BACKGROUND A. The Premium Income Fund ('Scheme') was originally constituted as the MFS Capital Insured Income Fund under a Deed Poll dated 20 November 1999 and has been amended from time to time by the Responsible Entity ('Constitution'). B. Section 601GC(1)(b) of the Corporations Act provides that the Constitution of a registered managed investment scheme may be modified by the Responsible Entity if the Responsible Entity reasonably considers the change will not adversely affect members' rights. C. The Responsible Entity wishes to amend the Constitution as set out in this Deed Poll. D. The Responsible Entity reasonable [sic] considers that the amendments to the Constitution contained in this Deed Poll will not adversely affect Unit Holders' rights. E. In accordance with section 601 GC(2) of the Corporations Act, the amendments to the Constitution contained in this Deed Poll will take effect when a copy of this Deed is lodged with the Australian Securities and Investments Commission. OPERATIVE PROVISIONS 1. CLAUSE 3.2 ISSUE PRICE Clause 3.2 is deleted and the following is inserted in its place: The Issue Price of a Unit under the PDS shall be: (a) one dollar ($1.00) for the first Quarter of the Scheme; (b) thereafter, the Issue Price shall be one dollar ($1.00) per Unit unless the Responsible Entity considers the total net value of all Scheme Property, divided by the number of issued Units in the Scheme is less than one dollar and the Responsible Entity is unable to access further funds under the MFS Support Mechanism to increase the total net value of Scheme Property in which case the Issue Price of the Unit shall [be] no less than the 90 day volume weighted average price on the National Stock Exchange. (Emphasis added.) 9 As the 9 May Deed Poll records, the amendment to cl 3.2 of the PIF Scheme Constitution was said to have been made in accordance with s 601GC(1) of the Act (and, in particular subs (b)) which provides that: (1) The constitution of a registered scheme may be modified, or repealed and replaced with a new constitution: (a) by special resolution of the members of the scheme; or (b) by the responsible entity if the responsible entity reasonably considers the change will not adversely affect members' rights. (Emphasis added.) 10 At the meeting of directors on 9 May 2011, the matters considered by the directors of Wellington were recorded in the minutes of meeting as follows: … 5. In order to give effect to the proposed amendments under Section 601GC(1)(b), the amendment must not be adverse to members' rights – the section does not require that the amendments not be adverse to members (sic) interests. Legal commentary suggests that a 'right' is clearly narrower than an 'interest', as an 'interest' carries the notion of commercial interest. Accordingly, 'rights' would be limited to the following types of rights: (a) the right to vote at meetings of members; (b) the right to receive distributions (the focus being on receiving distributions, not the quantum of the distribution); (c) the right to receive statutory information under the Corporations Act; (d) the right to a beneficial interest in scheme property; (e) the right to withdraw from the scheme where the scheme offers withdrawal rights; (f) the right to participate in a surplus on a winding up, in appropriate circumstances. The defendants accept that they did not take into account, in making the assessment of whether the change did not adversely affect members' rights, any matters not identified in the extract from the minutes. Put another way, in effecting the change to the PIF Scheme Constitution by the 9 May Deed Poll the defendants did not consider whether the Unit Holders' rights to have new Units issued only on the basis fixed by cl 3.2.2 of the PIF Scheme Constitution could be characterised as a right which was not adversely affected by the amendments effected to it by the 9 May Deed Poll. The requirement to do so is explained in Re Timbercorp Securities Limited (in liq) (2010) 77 ACSR 291 at [15] and ING Funds Management Ltd v ANZ Nominees Ltd (2009) 228 FLR 444 at [87] and [100]. 11 On 16 May 2011, Wellington purported to further modify the PIF Scheme Constitution by deed poll executed by Ms Hutson and Ms Greaves (16 May Deed Poll). The 16 May Deed Poll included Background provisions substantively the same as 9 May Deed Poll and then stated: OPERATIVE PROVISIONS 1. AMENDMENT OF CLAUSE 3.1 – OFFERING AND ISSUE OF UNITS Clause 3.1 of the Constitution is deleted and replaced with the following: Offering and Issue of Units 3.1 The Responsible Entity may, in accordance with the provisions of the Corporations Act and this Constitution, cause the issue of Units or issue a PDS or other offer document in relation to Units. Placement 3.1A While the Scheme is listed on the National Stock Exchange (NSX), the Responsible Entity may at any time issue Units to any person, whether by way of a placement or otherwise, at a price which is determined by the Responsible Entity, in accordance with clause 3.2.2(b). 2. AMENDMENT OF CLAUSE 3.2 – ISSUE PRICE Clause 3.2 of the Constitution (as amended) is deleted in its entirety and replaced with the following: Issue price 3.2 The Issue Price of a Unit under a PDS or other regulated or unregulated offer document issued pursuant to the Corporations Act or otherwise in accordance with ASIC relief, shall be: 3.2.1 one dollar ($1.00) for the first Quarter of the Scheme; 3.2.2 thereafter, the Issue Price shall be one dollar ($1.00) per Unit unless the Responsible Entity considers the total net value of all Scheme Property divided by the number of issued Units in the Scheme (Variable Price) is less than one dollar ($1.00), in which case the Issue Price of a Unit shall be: (a) the Variable Price; or (b) while the Scheme is listed on the NSX, the Issue Price will be determined by the Responsible Entity who may determine an Issue Price which is more than or less than the then current trading price on NSX, provided that any discount will not exceed a maximum discount of 5% to the 30 day volume weighted average price (VWAP) of Units traded on the NSX (30 Day VWAP). Where applicable, fractions will be rounded up to the nearest cent. Again, the defendants accept that they did not take into account, in making the assessment of whether the change did not adversely affect members' rights, any matters not identified in paragraph 10 above. ISSUE FOR DETERMINATION 12 The central question identified by the plaintiffs may be simply stated – was the amendment to the PIF Scheme Constitution by the 9 May Deed Poll and further or alternatively, the 16 May Deed Poll, a change which would not adversely affect members' rights? The plaintiffs say no. The defendants say yes. In addition, however, the defendants submitted that even if the 9 May and/or 16 May Deeds Poll provided for a change which did adversely affect members' rights, the plaintiffs should not have any relief which affects the entitlement of new Unit Holders to exercise rights associated with that Unit holding because the issue of those Units is complete and, indeed, some of the new Units have been traded on the NSX. STRUCTURE OF REASONS FOR DECISION 13 The balance of these reasons for decision is structured as follows. First, the plaintiffs' standing to bring these proceedings. Second, the legislative framework. Third, the parties' respective positions. Fourth, the position of the Australian Securities and Investments Commission (ASIC) and, finally, whether the relief sought by the plaintiffs should be granted. STANDING TO BRING THE PROCEEDING 14 There is now no dispute that the plaintiffs have standing to bring this proceeding. The title to the proceeding was amended by consent. 15 On 16 May 2011, the first plaintiff, which holds 50 Units in the PIF Scheme, wrote to members of the PIF Scheme convening a meeting of members of the PIF Scheme seeking to remove Wellington as the responsible entity of the PIF Scheme and seeking to replace it with Castlereagh Capital Limited pursuant to s 601FM of the Act. That meeting was to be convened at 11:00 am on 16 June 2011. By consent, that meeting has been adjourned to 23 June 2011. LEGISLATIVE FRAMEWORK - MANAGED INVESTMENT SCHEMES 16 Part 5C of the Act provides the legislative framework for managed investment schemes. The history of the law leading to the present legislative framework is discussed in Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339 at [38] – [44]. 17 Section 601ED(5) of the Act provides that "[a] person must not operate in this jurisdiction a managed investment scheme that this section requires to be registered under section 601EB unless the scheme is so registered". 18 Section 601ED(1) of the Act provides that a managed investment scheme must be registered under s 601EB, relevantly, if: (a) it has more than 20 members; or (b) it was promoted by a person, or an associate of a person, who was, when the scheme was promoted, in the business of promoting managed investment schemes … 19 Features of the legislative framework have been considered in numerous cases: see by way of example, Australian Securities and Investments Commission (ASIC) v Letten (No 5) (2010) 273 ALR 264 at [6] – [12]; Australian Securities and Investments Commission v Letten [2010] FCA 140 at [11] – [13] and [22]; National Australia Bank Ltd v Norman (2009) 74 ACSR 561 at [118] – [158]; Australian Securities and Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778 [53] – [58] and Australian Securities and Investments Commission v Enterprise Solutions 2000 Pty Ltd (1999) 33 ACSR 403 at [3] – [7]. Some features of the legislative framework should be noted. 20 First, the Act does not define a "scheme". The phrase "program or plan of action" has been adopted as the conventional meaning of the word "scheme": Mier v FN Management Pty Ltd [2006] 1 Qd R 339 at 350 (fn 29), Australian Softwood Forests Pty Ltd v Attorney-General (NSW); ex rel Corporate Affairs Commission (1981) 148 CLR 121 at 129; Australian Securities and Investments Commission v Takaran Pty Ltd (2002) 170 FLR 388 at 393; Australian Securities and Investments Commission v West (2008) 100 SASR 496 at 529. 21 Secondly, s 9 of the Act defines a "managed investment scheme" as: (a) a scheme that has the following features: (i) people contribute money or money's worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not); (ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders); (iii) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or … 22 "Scheme property" of a registered scheme is defined in s 9 of the Act to mean: (a) contributions of money or money's worth to the scheme; and (b) money that forms part of the scheme property under provisions of this Act or the ASIC Act; and (c) money borrowed or raised by the responsible entity for the purposes of the scheme; and (d) property acquired, directly or indirectly, with, or with the proceeds of, contributions or money referred to in paragraph (a), (b) or (c); and (e) income and property derived, directly or indirectly, from contributions, money or property referred to in paragraph (a), (b), (c) or (d). 23 As a result, the definition of "managed investment scheme" makes clear that investors contribute "money or money's worth" to a "program or plan of action" and those contributions are pooled to produce benefits for those who made contributions. It is the property contributed to the scheme or obtained in connection with such contributions to the scheme which is the scheme property. 24 Next, the responsible entity (in this case, Wellington) must "operate the scheme and perform the functions conferred on it by the scheme's constitution and [the] Act": s 601FB. Section 601FC prescribes Wellington's statutory duties and powers and the manner in which they are to be exercised. Those powers and duties include, by way of example: 1. to "act in the best interests of the members and, if there is a conflict between the members' interest and its own interests, give priority to the members' interests": s 601FC(1)(c); 2. to "treat the members who hold interests of the same class equally and members who hold interests of different classes fairly": s 601FC(1)(d); 3. to ensure that scheme property is clearly identified as scheme property and held separately from property of the responsible entity and property of any other scheme: s 601FC(1)(i); 4. to ensure that all payments out of scheme property are made in accordance with the scheme's constitution and the Act: s 601FC(1)(k); and 5. to carry out or comply with any other duty, not inconsistent with the Act, that is conferred on the responsible entity by the scheme's constitution: s 601FC(1)(m). 25 The requirement that the responsible entity ensure that scheme property is clearly identified as scheme property and held separately from other property (s 601FC(1)(i)) is reinforced in s 601FC(2) which provides that the responsible entity holds scheme property on trust for scheme members: Re Investa Properties Ltd (2001) 187 ALR 462 at 465. 26 Section 601FD prescribes the duties of officers of responsible entities. So far as is relevant, the duties mirror those of the responsible entity under s 601FC. 27 For present purposes, reference should also be made to Pt 5C.3 of the Act dealing with the constitution. It provides that the constitution of a registered scheme must make adequate provision for, among other things, "the consideration that is to be paid to acquire an interest in the scheme": s 601GA(1)(a). Changing the constitution is addressed in s 601GC of the Act: see [9] above. 28 Finally, it should be noted that in addition to the Act and the PIF Scheme Constitution, the PIF Scheme is regulated by the NSX Listing Rules. ANALYSIS 29 The plaintiffs submitted that the modifications to the PIF Scheme Constitution which the defendants purported to make by the 9 May and 16 May Deeds Poll were and are contrary to s 601GC(1)(b) of the Act because the first defendant could not have reasonably considered that the change would not adversely affect members' rights. 30 The phrase "members' rights" in s 601GC(1)(b) of the Act was considered by Barrett J in ING Funds Management at [92] – [105]. Both the plaintiffs and the defendants placed considerable reliance upon this judgment and, in particular, the following paragraphs. "Members' rights" 92 Counsel have referred to only one decided case in which the expression "members' rights", as used in s 601GC(1)(b), has received direct attention. In Seabrook; Re Takeovers Panel and the Corporations Act (2002) 21 ACLC 82, Conti J expressed a preference for adoption of the approach taken by Young J in Smith v Permanent Trustee Australia Ltd (1992) 10 ACLC 906 to the expression "rights of the unitholders" in an amendment clause in a unit trust deed. Young J said at 913-914: There are a series of cases in the reports dealing with what are the rights attached to a class of shares ... These cases hold that where the shareholder is personally affected in a commercial sense by a scheme, such as a watering down of the value of shares in a particular class by increasing the number of shares of that class or reducing capital, etcetera, one cannot say that the rights attached to the shares are affected. 93 Young J drew a sharp and clear distinction between the rights of unitholders and the interests of unitholders as a whole. In the context with which I am concerned, that distinction appears clearly on the face of the statute: while s 601GC(1)(b) refers to "members' rights", s 601FC(1)(c) requires a responsible entity, in exercising its powers and carrying out its duties, to "act in the best interests of the members". Mr Dick pointed out numerous other provisions of the Corporations Act referring to the "interests of members as a whole", whether of a company or of a managed investment scheme. He did so in order to emphasise the distinction the legislation makes between "rights" and "interests". 94 Young J accepted a submission that the "rights of unitholders" referred to "the contractual and equitable rights conferred on unitholders by the deed". This is consistent with the earlier decision of J D Phillips J in Eagle Star Trustees Ltd v Heine Management Ltd (1990) 3 ACSR 232 where, in circumstances similar to those now before me, the right of unitholders to have their units repurchased was seen as a central component of "the rights of unitholders" for the purposes of an amendment provision denying the trustee ability to act alone if of the opinion that "the rights of unitholders may be adversely affected". 95 The company law cases to which Young J referred are those considered by the Court of Appeal in Wilson v Meudon Pty Ltd [2006] ANZ ConvR 93. They are concerned with modification of class rights or, to quote the provision under consideration in White v Bristol Aeroplane Co Ltd [1953] Ch 65, modification or abrogation of "the rights or privileges attached to any class of shares". The test applied by the English Court of Appeal in that case (and by the same court some two months later in Re John Smith's Tadcaster Brewery Ltd [1953] Ch 308) was whether the rights of persons holding relevant shares, as created by the company's constitution, remained the same, not whether enjoyment of the rights was impaired or diluted. 96 It is consistent with what was said by Young J in Smith v Permanent Trustee Australia Ltd (above) and approved by Conti J in Seabrook (above) to apply this test to s 601GC(1)(b). The task of the responsible entity, when approaching that provision, is first to ascertain the rights of members created by the constitution, as they exist immediately before the modification. The responsible entity must then decide whether those rights – as distinct from the enjoyment of them or their value – will be changed or impinged upon by the modification. If that question is answered in the affirmative, the responsible entity must undertake a process of comparison and assessment in order to decide whether the impact is within the "adversely affect" description. … 98 It is possible to argue that "members' rights" include a right to have the managed investment scheme operated and administered according to the constitution as it stands. If that is so, any modification of the constitution involves an invasion of that right that is arguably adverse. I am not persuaded that this is a correct approach. It denies all efficacy to s 601GC(1)(b) and must, for that reason, be rejected. Because the power to modify is concerned with the constitution, the focus is on rights created or secured by the constitution itself. "Adversely affect" … 100 The task of a responsible entity under s 601GC(1)(b) … is to assess members' rights as they exist before the modification and members' rights as they will exist after the modification and, if the rights afterwards are different from the rights beforehand, to decide whether the difference in the rights will be, from a member's perspective, unfavourable. To put this another way, the responsible entity must decide whether the change will remove, curtail or impair existing rights in a way that is disadvantageous to the persons whose holdings of units cause them to possess and enjoy the rights. No particular degree of affectation is contemplated by the legislation. Any adverse affectation at all, however slight, is sufficient to deny the responsible entity the modification power. 101 The question is not a general question whether members will be "worse off" if the change is made (to use language found in the judgment of J D Phillips J in Eagle Star Trustees Ltd v Heine Management Ltd (above)). Nor is it a general question of prejudice or disadvantage. It is a specific question that goes wholly and exclusively to the much narrower matter of members' rights. Their interests are, as stated, another thing altogether. So is the value of their rights. "Reasonably considers" 102 The s 601GC(1)(b) power is available to a responsible entity only if it "reasonably considers" that the modification will not adversely affect members' rights. This form of words has the same meaning as "considers on reasonable grounds" or "believes on reasonable grounds". The requirement is twofold: first, that the relevant belief or opinion be actually held by the responsible entity; and, second, that facts exist that are sufficient to induce the belief or opinion in a reasonable person. This is the approach indicated by Gummow J, Hayne J, Heydon J and Kiefel J in Gypsy Jokers Motorcycle Club Inc v Commissioner of Police (2008) 243 CLR 532 at [28]. Their Honours referred with approval to George v Rockett (1990) 170 CLR 104 where all seven members of the High Court said (at 112): When a statute prescribes that there must be 'reasonable grounds' for a state of mind – including suspicion and belief – it requires the existence of facts which are sufficient to induce that state of mind in a reasonable person. … 105 In the present case, attention is directed to whether the responsible entity "reasonably" considered, so that inquiry must be made into the basis on which the decision was made and the rationale for the decision; in other words, what were the considerations that led the responsible entity to the conclusion reached? It is the basis for the decision and rationale for the decision, as they actually existed in the mind of the decision-maker, that must be found to conform to the standard of reasonableness. (Emphasis added.) 31 The most recent decision to have considered constitutional amendment under s 601GC(1)(b) of the Act is Re Timbercorp Securities. It concerned an amendment to the relevant constitution which empowered the responsible entity to assign or terminate any licence agreement to which members of the scheme were a party. Before the amendment, the licence agreements could only be terminated in limited circumstances. There was no provision for the responsible entity to terminate the licence agreements at will. There was no dispute that there was a change to members' rights. At issue was the conduct of the responsible entity in assessing whether the impact of the change would not "adversely affect" those rights. 32 Against that background, I turn to consider the changes affected by the 9 May and 16 May Deeds Poll. 33 The approach to be adopted in the present case may be summarised as follows. The task of Wellington (as the responsible entity) when approaching s 601GC(1)(b), was first to ascertain the rights of members created by the PIF Scheme Constitution as they existed immediately before the proposed modification. Wellington then had to decide whether those rights – as distinct from the enjoyment of them or their value – would be changed, or impinged upon, by the modification. Only if that question was answered in the affirmative, was Wellington then required to undertake a process of comparison and assessment in order to decide whether the impact would not "adversely affect" members' rights. 34 I will take each step in turn. First, the rights of members created by the PIF Scheme Constitution as they existed immediately before the modification. The defendants submitted that cl 3.2.2 of the PIF Scheme Constitution did not constitute a right but "merely affected the circumstances and price at which Units could be issued". I reject that submission. As Barrett J stated in ING Funds Management at [94], the "rights of unitholders" refers to "the contractual and equitable rights conferred on unitholders by the deed": see Smith v Permanent Trustee Australia Ltd (1992) 10 ACLC 906 at 913-914 and Eagle Star Trustees Ltd v Heine Management Ltd (1990) 3 ACSR 232. Here, each unitholder had the right to have any new units issued in the PIF Scheme issued on the terms that were fixed by the PIF Scheme Constitution and not otherwise. Any dilution of their interest was to be a dilution in accordance with the PIF Scheme Constitution, unless of course agreement to modify the PIF Scheme Constitution was achieved by special resolution of the Unit Holders: see s 601GC(1)(a) of the Act. 35 Here, the contractual right conferred on Unit Holders was that the Issue Price of a Unit would be determined by reference to cl 3.2: see [8] and [11] above. For the first quarter of the PIF Scheme, the Issue Price would be $1.00 per Unit and thereafter $1.00 per Unit unless Wellington considered that the total value of all Scheme Property, divided by the number of issued Units ('Variable Price') was less than one dollar and Wellington was unable to access further funds under the MFS Support Mechanism to increase the total net value of Scheme Property, in which case the Issue Price of the Units would be the Variable Price. The Variable Price reflected the net asset backing of the Units at the time any further Units were to be issued. 36 That it is a right is not surprising. As noted above (see [21] – [23]), investors contribute "money or money's worth" to a "program or plan of action" and those contributions are pooled to produce benefits for those who made contributions. It is the property contributed to the scheme or obtained in connection with such contributions to the scheme which is the scheme property. And it is the scheme property which is held on trust for the unit holders: see s 601FC(2) at [25] above. 37 I accept that where the shareholder is simply personally affected in a commercial sense (such as a watering down of the value of shares in a particular class by increasing the number of shares of that class or by reducing capital), it cannot be said that the rights attached to the shares are affected. In cases where that has occurred (eg Seabrook; Re Takeovers Panel and the Corporations Act (2002) 21 ACLC 82 at [36] and Smith at 913-914), a distinction was drawn between the incidents or character of a legal right and the value of that right in a monetary sense. 38 In this case, the incidents or character of a legal right (and not just the value of a right in a monetary sense) has been modified. The legal right was to have new Units issued at a particular price: see [35] above. 39 The modifications on 9 and 16 May 2011 effected a change to that legal right. No longer would Units be issued at $1.00 or the Variable Price but instead, relevantly: 1. as at 9 May 2011, Units could be issued at an Issue Price no less than the 90 day volume weighted average price on the NSX; and 2. as at 16 May 2011, while the PIF Scheme is listed on the NSX, the Issue Price could be determined by Wellington who may determine an Issue Price which is more than or less than the current trading price on NSX, provided that any discount would not exceed a maximum discount of 5% to the 30 day volume weighted average price (VWAP) of Units traded on the NSX. 40 This is not a case where a responsible entity has simply, consistent with an existing power in a constitution, issued shares of the same class where such a power is not limited by terms about the issue price. I accept that the exercise of a general power in those circumstances could not, absent other facts and matters, contravene s 601GC(1) because no right was modified – the power to issue units was simply exercised. As is apparent, that is not this case. As the defendants conceded, the changes affected the circumstances and price at which the Units could be issued. As Young J identified in Smith, at least in some, if not most contexts, the incidents or character of a legal right is to be distinguished from the value of that right in any monetary sense. Here, the incident or character of the legal right that was changed was the right conferred on Unit Holders that the Issue Price of a Unit would be determined by reference to cl 3.2: see [8] and [11] above. 41 Having formed the view that cl 3.2.2 was a contractual right and that the right was changed or impinged by the modification, the next question to be asked is whether the impact was within the "adversely affect" description of s 601GC(1)(b) of the Act. As Barrett J stated in ING Funds Management at [102], Wellington had to actually consider and decide whether the change would remove, curtail or impair existing rights in a way that was disadvantageous to Unit Holders who possessed and enjoyed the rights, and that decision had to be reasonable. No particular degree of affectation is contemplated by the legislation. Any adverse affectation at all, however slight, was sufficient to deny Wellington the modification power. I accept that the question is not a general question about whether members would be worse off if the change was made or a general question about prejudice or disadvantage (Timbercorp at [7]; ING Funds Management at [101]) but a specific question about being satisfied that the change would not adversely affect members' rights. 42 Here, the defendants accept that their consideration of whether the changes to cl 3.2.2 of the PIF Scheme Constitution would not adversely affect members' rights was limited to considering the "rights" listed in paragraph 5 of the minutes of meeting of both 9 May and 16 May 2011: see [10] above. As is apparent, the list was limited to "rights of members regarding votes, distributions, information access, interests in scheme property etc". The right with which we are concerned is the right conferred on Unit Holders that the Issue Price of a Unit would be determined by reference to cl 3.2. It was not considered. That is of itself sufficient for the defendants and, in particular, Wellington, to fall foul of s 601GC(1)(b). Furthermore, in my view, it is apparent that given the modification on 9 May 2011 and also on 16 May 2011, it cannot be said that the change would not adversely affect members' rights. It removed or impaired existing rights in a way that was disadvantageous to Unit Holders. The affectation was adverse to them and, accordingly, that adverse affectation was sufficient to deny Wellington the modification power absent a special resolution of the members of the PIF Scheme. 43 During the course of argument, Counsel for the defendants submitted that if the construction of cl 3.2.2 outlined above was adopted it would lead to the result that Wellington, in the current financial climate, would be unable to raise capital for development projects. I reject that submission. This proceeding is concerned with the exercise by Wellington of the power of modification of a constitution under s 601GC(1)(b). It does not concern, and does not preclude, modification of the PIF Scheme Constitution (in whole or in part) by special resolution of the members of the PIF Scheme under s 601GC(1)(a). In relation to the PIF Scheme Constitution, it was the method adopted by the responsible entity in 2008. There was nothing to prevent Wellington adopting the same course here. 44 Given the views I have formed, it is unnecessary to consider the further arguments advanced by the plaintiffs that the defendants sought to make that the placement and the rights issue of new Units in the PIF Scheme was for an improper purpose. ASIC'S POSITION 45 On the morning of the hearing, ASIC was granted leave to appear as amicus curie. The application was unopposed. ASIC's submissions were limited to the scope and content of the obligations of the responsible entity under s 601FC and the associated provisions under s 601FD: see [24] – [26] above. 46 ASIC submitted that the relationship between a responsible entity and a member was analogous to the relationship between a trustee and a beneficiary and different from the relationship between a director and a company. Unsurprisingly, ASIC placed particular emphasis on those sections that refer to scheme property being held on trust for members of the scheme: for example, see ss 601FC(1)(i) and 601FC(2). Next, ASIC submitted that if the relationship between a responsible entity and a member was analogous to the relationship between a trustee and a beneficiary, then it carried with it a different character of obligation than a mere director/company obligation. In support of this latter submission, ASIC referred to the decision of Finn J in Australian Securities Commission v AS Nominees Limited (1995) 62 FCR 504 at 516-518. AS Nominees was not concerned with managed investment schemes. It was concerned with the standard expected of trustee companies and of their directors in the conduct of the trust business: at 516. 47 Finn J found that the directors of the companies the subject of the applications had breached the directors duties provisions. His Honour went on to say, by way of obiter, that although it was unnecessary to do so in that case, he would have been prepared to apply to trustee companies a standard of care higher than that of the ordinary prudent business person: at 518. The conclusion reached by Finn J was said to be best encapsulated by his Honour's reference (at 517) to the passage in Daniels v Anderson (1995) 37 NSWLR 438 at 494 where Clarke and Sheller JJA observed: While the duty of a trustee is to exercise a degree of restraint and conservatism in investment judgments, the duty of a director may be to display entrepreneurial flair and accept commercial risks to produce a sufficient return on the capital invested. 48 ASIC's submission has not been the subject of prior judicial determination. Given the manner in which I have resolved the issues between the parties to the proceedings, it is unnecessary to determine the merits of these contentions in these proceedings. In my view, this proceeding is not the appropriate vehicle to determine these issues. That view is fortified by the concessions properly made by Counsel for the defendants that the matters in issue had not been considered at the time of the 9 May and/or 16 May 2011 amendment to the PIF Scheme Constitution. SHOULD RELIEF BE GRANTED? 49 The substantive relief that the plaintiffs seek is, in effect, declarations that the Units that were issued after 9 and 16 May 2011 were issued invalidly together with orders that would prevent Wellington, as the responsible entity, from recognising or giving effect to the rights which would ordinarily attach to the holding of the newly issued Units. As noted above, there are in fact two separate bundles of units – those units the subject of the Placement and those proposed to be issued under the Rights Issue. 50 In my view, relief of the kind sought by the plaintiffs should not now be granted in relation to the Units that have been issued and allotted as a result of the Placement. The power to grant an injunction should be exercised only when it appears that the injunction would serve a useful end: Australian Securities and Investments Commission (ASIC) v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561 at [114]. Some of the Placement Units have been traded on the NSX. It may not be possible to identify or trace the purchasers of the newly traded Units for the purposes of preventing the exercise of their rights as Unit Holders. Leaving aside the fact that there is no separate representation of any of the holders of those newly issued Units, the fact that the rights of third parties have now intervened is reason enough to require the conclusion that the relief of the kind now sought by the plaintiffs should not be granted: see, by way of example, Kadian v Richards [2004] NSWSC 382 at [98] and the authorities cited; McPherson v Dodd and Anor [2004] VSC 153 at [21] – [22]; Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) (1998) 195 CLR 1 at 41-2. That conclusion is fortified by the fact that the plaintiffs were aware of Wellington's intention to make the Placement as early as 6 May 2011 (before any issue or allotment of the Units) but did not institute proceedings in this Court until 6 June 2011. If, as here, the plaintiffs sought relief other than damages, they should have moved earlier. 51 The position in relation to the Rights Issue is different. No Units have been issued or allotted: see [7] above. Indeed, as noted earlier, on 8 June 2011 an undertaking was provided to the Court by the defendants, through their Counsel, that they would not proceed with any issue or allotment of new Units in the PIF Scheme before the hearing and determination of the application. In those circumstances, it is appropriate for relief of the kind sought by the plaintiffs to be granted in relation to the Rights Issue. CONCLUSIONS AND ORDERS 52 Although the plaintiffs are not entitled to all of the substantive relief that they seek, I consider that the costs of the proceedings should fall on the defendants because the steps they took were steps contrary to s 601GC(1)(b) of the Act. Whether the defendants, or any of them, has any right to indemnity for these costs from or against PIF is not a question that is raised in this proceeding and one I expressly do not decide. 53 For those reasons, I consider that the appropriate declarations and orders are as follows: 1. in relation to the Rights Issue, a declaration that the modification of the PIF Scheme Constitution which the first, third and fourth defendants purported to make by deed poll dated 9 May 2011 was and is contrary to s 601GC(1)(b) of the Act; 2. in relation to the Rights Issue, a declaration that the modification of the PIF Scheme Constitution which the first, third and fourth defendants purported to make by deed poll dated 16 May 2011 was and is contrary to s 601GC(1)(b) of the Act; 3. an order restraining the defendants and each of them, whether by themselves, their servants and agents or howsoever otherwise, from allotting or issuing to any person any Unit in PIF pursuant to the Rights Issue. 4. the defendants pay the plaintiffs' costs of the proceeding, such costs to be taxed in default of agreement. I certify that the preceding fifty-three (53) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon. Associate: Dated: 20 June 2011