Supreme Court New South Wales Medium Neutral Citation: In the matter of National Australia Bank Limited [2020] NSWSC 1761 Hearing dates: 16 November 2020 Date of orders: 16 November 2020 Decision date: 08 December 2020 Jurisdiction: Equity - Corporations List Before: Black J Decision: Orders made validating transfers of shares or units of shares. Catchwords: CORPORATIONS — Shares — Dealings in shares — Issues or transfers of shares to controlled entities — Crossing and special crossing transactions not covered by s 259C exception or ASIC exemption — Application for s 1322 validation — Honest mistake — No prejudice — Prejudice to subsequent acquirers if not validated. Legislation Cited: - Corporations Act 2001 (Cth), ss 295C, 259E, 1322 Cases Cited: - Cordiant Communications (Australia) Pty Ltd v The Communications Group Holdings Pty Ltd (2005) 55 ACSR 185 - Re ANZ Banking Group Ltd (2010) 272 ALR 400 Re Commonwealth Bank of Australia (2005) 57 ACSR 28 - Re Macquarie Group Ltd [2010] FCA 1507 - Re Macquarie Securities (Australia) Ltd [2014] FCA 455 - Re MLC Limited (2006) 60 ACSR 187 - Re Westpac Banking Corporation (2004) 53 ACSR 288 Category: Principal judgment Parties: National Australia Bank Limited (Plaintiff) Antares Capital Partners Ltd (First Defendant) MLC Investments Limited (Second Defendant) National Nominees Limited (Third Defendant) MLC Limited (Fourth Defendant) Representation: Counsel: I Jackman SC and I Ahmed (Plaintiff) Solicitors: King & Wood Mallesons (Plaintiff) File Number(s): 2020/284311 Judgment 1. By Originating Process filed on 1 October 2020, National Australia Bank Limited ("NAB") seeks orders under s 1322(4) of the Corporations Act 2001 (Cth) that certain transfers of shares (or interests in shares) in NAB to the Defendants are not void by reason of a contravention of s 259C(1) of the Corporations Act. The Defendants are several entities that are, or were, controlled by NAB at the time that they acquired the NAB shares or units in NAB shares that are the subject of the application, and each of them has filed a submitting appearance. 2. NAB gave notice of the application to the Australian Securities & Investments Commission ("ASIC"), which advised that it neither supported nor opposed the application and did not intend to appear at the hearing. 3. I made the orders sought at the conclusion of the hearing of the application on 16 November 2020. These are my reasons for doing so. I have substantially drawn, in this judgment, on the written submissions of Mr Jackman SC and Mr Ahmed who appeared for NAB in the application. Background to the application 1. NAB relies on an affidavit dated 11 September 2020 of Mr Jonathan Armitage; an affidavit dated 17 September 2020 and a supplementary affidavit dated 6 November 2020 dated of Mr Bruce Rose; an affidavit dated 17 September 2020 of Mr Kyle MacIntyre; an affidavit dated 17 September 2020 of Mr Duncan Burns; and an affidavit dated 23 September 2020 of Ms Ling Ling Oh. 2. As I noted above, several of the Defendants are subsidiaries of NAB (Armitage 11.11.20, [11], [15], [18]) and the Fourth Defendant, MLC Limited ("MLCL") is a former subsidiary of NAB (Armitage 11.11.20, [27]). The Defendants were at the relevant time "controlled entities" of NAB within the meaning of s 259E of the Corporations Act since NAB had the capacity to determine the outcome of decisions about their financial and operating policies. Section 259C of the Act in turn voids the issue or transfer of shares (or units of shares) of NAB to an entity that is controlled by NAB unless certain conditions are met. NAB accepts that none of those conditions apply to the acquisitions that are the subject of this application and, subject to any further order of the Court, that section would void the transfer of the shares that are the subject of the application. ASIC has also granted NAB, or members of the NAB Group, various exemptions from the operation of section 259C in specified circumstances (Armitage 11.11.20 [31]-[32]). NAB also accepts that none of those exemptions cover the acquisitions that are the subject of the application (Armitage 11.11.20 [39(d)]). Acquisitions by ACP 1. The factual background to this aspect of the application is largely set out in Mr Armitage's affidavit and arises from the functions of several of the Defendants. The First Defendant, Antares Capital Partners Ltd ("ACP") is the responsible entity and an investment manager for managed investment schemes including, relevantly, the Antares High Growth Shares Fund and the Antares Elite Opportunities Fund (together the "Antares Managed Investment Schemes") (Armitage 11.11.20 [11], [14]). The Second Defendant, MLC Investments Limited ("MLCI") is a responsible entity for managed investment schemes, trustee of unregistered managed investment schemes and operator of investor directed portfolio services and is trustee for an unregistered managed investment scheme known as the WM Pooling Equities Trust No. 49 ("WM Trust") for which MCLI has appointed ACP as investment manager (Armitage 11.11.20 [15], [17(a)]). As I noted above, MLCL is a former subsidiary of NAB, and it ceased to be a subsidiary of NAB on 3 October 2016 (Armitage 11.11.20 [27]). 2. On 2 October 2010, while it was still a subsidiary of NAB, MLCL acquired the life insurance business and statutory fund assets of Norwich Union Life Australia Limited. ACP was then appointed as investment manager for the statutory fund assets (Armitage 11.11.20 [27]). MLCL also owned a portfolio of assets known as the MLC Elite Opportunities Portfolio, which were owned by several statutory funds, namely the MLCL Statutory Fund No 2; MLCL Statutory Fund No 3; and MLCL Statutory Fund No 4 ("Statutory Funds") (Armitage 11.11.20 [28]. 3. Prior to 30 September 2009, ACP managed interests for Navigator Australia Limited and WM Life Australia Limited (Rose [10]). At that time, those entities were not controlled by NAB. On 30 September 2009, NAB also acquired Navigator Limited and WM Life Australia Limited, which then came to be controlled by NAB (Rose [9]). 4. NAB accepts that acquisitions of shares in NAB that were made for the Managed Investment Schemes, the Statutory Funds and the WM Trust were not within the statutory trustee exception in s 259C(1)(b) of the Act, as they occurred at a time when NAB controlled entities held a beneficial interest in those schemes and trusts (Armitage [41]). NAB also accepts that exemptions to s 259C of the Act granted by ASIC in the period up to 27 September 2012 did not extend to transactions that were effected by way of a crossing or a special crossing and that exemptions to s 259C granted by ASIC since 27 September to date extended to transactions effected by way of crossings, but not by way of a special crossing (Armitage [39(b), (c)-(d)]. NAB accepts that acquisitions by crossings or special crossings in the period up to 27 September 2012, and by special crossings in the period after 27 September 2012, would be void by reason of s 259C, if no other exception was available. 5. Messrs Armitage's and Rose's evidence is that, from 30 September 2009, ACP erroneously believed that its conduct in causing the acquisition of NAB shares for the Managed Investment Schemes, WM Trust and Statutory Funds through crossings and special crossings complied with s 259C of the Act and the applicable exemptions because ACP did not directly acquire NAB shares by crossings or special crossings (in the sense that it was not on both sides of a special crossing or crossing by being both the buyer and seller); and ACP believed it did not need to concern itself with whether brokers used crossings or special crossings to fill orders placed by ACP if ACP did not specifically request the use of crossings or special crossings (Rose [11]; Armitage [43]). Between 30 September 2009 and 7 March 2019, ACP provided NAB with numerous attestations as to its compliance with s 259C of the Act and that it had put in place adequate systems to monitor and ensure compliance with that section (Rose [14]-[16]). 6. It appears ACP first identified an issue of non-compliance with s 259C in the context of an investigation into a separate non-compliance with s 259C, in respect of which the Court made orders in separate proceedings in November 2019. When that issue was identified, ACP gave instructions to brokers in February 2019 to prevent any further special crossings from occurring, with the aim of ensuring that any further transactions for the relevant entities fell within the exemptions granted by ASIC (Rose [27]). Mr Rose's evidence is that, since that time, NAB has taken steps to investigate and attempt to identify the transactions that may have been affected by this issue, in which it has sourced trading data from brokers, analysed that data and sought to isolate affected transactions (Rose [29]-[49]). It appears that data is incomplete, including because some brokers have ceased operation and it is not possible to reconstruct their data (Rose [36(b)]), some brokers were able to provide only limited trade history (Rose [36(d)]) and one broker had lost the relevant data (Rose [36(e)]). Attempts were also made to obtain that data from alternative sources (such as IRESS), which also encountered difficulties, (Rose [44]) and Mr Rose believes that ACP has been able to identify 82.18% of individual executions relevant to the application. 7. On that basis, NAB has identified transactions affected by s 259C as including at least the acquisition of 4,843,355 NAB shares for the Antares High Growth Shares Fund in the period from 25 February 2010 to 1 June 2018; 153,627 NAB shares for the Antares Elite Opportunities Fund in the period from 24 February 2012 to 6 December 2012; 344,503 NAB shares for the AM Trust in the period from 22 August 2012 to 23 November 2018; and 7,371 NAB shares for the MLC Elite Opportunities Mandate during the period from 24 February 2012 to 8 August 2012 (Rose [49]). Mr Armitage's evidence is that a large number of these shares have subsequently been disposed of, under the belief that the relevant entities had title to them at the time of disposal (Armitage [46]). 8. Mr Armitage's evidence is that, since these issues were identified, ACP has made efforts to improve its compliance systems and control environment, and has introduced programs of additional training, issued formal instructions to brokers and held conferences with them to address this issue, and reviewed and monitored the effectiveness of additional controls; Mr Armitage believes that ACP now has effective controls in place to ensure compliance with s 259C and applicable exemptions; and a review of the processes and controls in respect of MLCI has also been undertaken (Armitage [57]-[60]). Acquisitions by the Firetrail Trusts 1. NAB also seeks relief in respect of the acquisition of NAB shares for the benefit of the JANA Diversified Share Trust and the WM Pool Equities Trust No 11 (together "Firetrail Trusts"). MLCI is the trustee of the Firetrail Trusts (MacIntyre [6]) and Firetrail Investments Pty Ltd ("Firetrail") is the investment manager for a portion of the assets of the Firetrail Trusts (MacIntyre [9]-[10]). Mr McIntyre's evidence is that Firetrail has entered into a shared services agreement with Pinnacle Investment Management Limited ("Pinnacle") for the provision of compliance and risk management services (MacIntyre [19]); and Pinnacle uses an order management system to assist Firetrail with compliance, portfolio management, trading and operations which applies pre-trade compliance rules, including in relation to the exemptions granted by ASIC as to s 259C of the Act (MacIntyre [20]). Firetrail in turn provides Pinnacle with pre-trade rules to be applied in the order management system and Pinnacle administers those rules on Firetrail's behalf (MacIntyre [21]). 2. Mr MacIntyre's evidence is that pre-trade rules must be activated within the order management system for that system to detect trades that are not in compliance with the rules; and once the pre-trade rule is activated, the portfolio manager at Firetrail will receive a warning on screen from the order management system on entering an order for trades that do not comply with the pre-trade rules and that order and will not be processed for the relevant mandate (MacIntyre [24]-[25]). 3. Mr MacIntyre's evidence is that, between 10 July 2019 and 15 July 2019, Firetrail caused the acquisition of NAB shares for the Firetrail Trusts in breach of s 259C of the Act when two brokers were instructed to acquire NAB shares for the Firetrail Trusts, where the pre-trade rules in the order management system that were to be applied in respect of s 259C were set to "inactive"; that it is unclear why this rule was set to "inactive", although it appears to be inadvertent; and that, when this issue was detected on 19 July 2019, the rules were immediately set to "active" (MacIntyre [28]-[29]). 4. Mr MacIntyre's evidence is also that an investigation undertaken to determine the extent of trading that not in compliance with s 259C of the Act indicated that 488,200 NAB shares were purchased in respect of the JANA Diversified Share Trust, and 120,718 of these shares were purchased by way of special crossings, and were not in compliance with s 259C or the then current exemption granted in respect of it; and 363,900 NAB shares were purchased in respect of the WM Pool Equities Trust No 11, and 89,982 of these shares were purchased by way of special crossings, and were not in compliance with s 259C or the then current exemption granted in respect of it (MacIntyre [31]-[32]). His evidence is also that Firetrail has taken steps to ensure the activation of the relevant pre-trade rule and has implemented a system that, when new client instructions are obtained, the execution team at Firetrail, with Pinnacle, will test the rule in the order management system to ensure that a potential breach is triggered prior to trading, and confirmation of this test will be sent to Firetrail's Managing Director (MacIntyre [36]). Acquisitions by Vanguard Trusts 1. An issue has also arisen in respect of the acquisition of NAB shares for the benefit of the JANA Passive Australian Share Trust and the WM Pool Equities Trust No 30 ("Vanguard Trusts"). MLCI is the trustee of those trusts. Vanguard Investments Australia Limited ("Vanguard"), which is not controlled by NAB, is the investment manager for the trusts (Armitage [17(c)], [24]). Mr Burns' evidence is that Vanguard has programs and systems designed to ensure that it does not cause transactions that do not comply with s 259C of the Act, including an order management system that applies pre-trade compliance rules when Vanguard places orders on behalf of the Vanguard Trusts (Burns [20]-[21]). In May 2020, that system was configured so that it generated a one-time alert at the point of order generation regarding the trading restrictions in respect of acquiring NAB shares for the Vanguard Trusts, including a reminder that NAB securities could not be crossed for the purposes of the mandate in respect of the Vanguard Trusts (Burns [22]). 2. On 5 May 2020, a portfolio manager at Vanguard generated an order to buy 4,572,820 NAB shares, including 102,297 shares for the JANA Passive Australian Share Trust and 212,954 shares for the WM Pool – Equities Trust No 30 and Vanguard's compliance system generated a trading alert confirming that the order was not to be effected by way of special crossing insofar as it related to the Vanguard Trusts (Burns [28]-[29]), so as to comply with the exemption granted by ASIC from s 259C that was then in place. That trading alert was noted by the portfolio manager and was closed on the basis that the order would be placed on market, and that order was sent for execution in the closing auction. As a result of differing price limits in the order, 70% of the order was filled on 5 May 2020 and the remaining 30% was not (Burns [30]). On 6 May 2020, a different portfolio manager was responsible for filling the remaining 30% of the order; and a new alert to the s 259C restriction was not generated on 6 May because the trading alert was a one-time alert and had already been raised (Burns [32]). The remaining order was filled by both on and off market transactions and Vanguard acquired 621,873 NAB shares by way of three special crossing transactions (Burns [33]). The portion of these shares that related to the Vanguard Trusts were acquired contrary to s 259C and without the benefit of the exemption that was then in place. Mr Burn's evidence is that the shares acquired in this way were 15,115 NAB shares in respect of the JANA Passive Australian Share Trust and 31,465 NAB shares in respect of the WM Pool – Equities Trust No 30 (Burns [35]). That issue was detected on 7-8 May 2020, an investigation was undertaken and on 12 May 2020, a direction was given that these shares were not to be further traded (Burns [41]). 3. Mr Burns' evidence is that Vanguard has now made two further system enhancements with respect to the Vanguard Trusts, so that orders for the Vanguard Trusts cannot be aggregated in Vanguard's order management system, and an alert is given that orders for NAB securities cannot be sent to the execution management system and must be sent directly to a broker with an instruction not to cross NAB securities and instead to trade on market; and Mr Burns considers that these additional steps will prevent any recurrence of this issue in Vanguard (Burns [43]-[44]). Submission and determination 1. Mr Jackman, with whom Mr Ahmed appears for NAB, rightly submits that the Court has power to make an order under s 1322(4)(a) of the Corporations Act that validates the acquisition of shares in a manner contrary to s 259C of the Act. Section 1322(4)(a) relevantly provides that: "(4) Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes: (a) an order declaring any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation …" 1. Mr Jackman observes that that section permits the Court to make an order validating an act which is done in "contravention" of the Corporations Act, and the issue or transfer of shares in a corporation to an entity that it controls, in a manner contrary to s 259C of the Act, is a contravention of the Act for the purposes of that section: Re Westpac Banking Corporation (2004) 53 ACSR 288 at [24]. Mr Jackman also points out that there are now many cases in which the Courts have made orders to validate the acquisitions of shares (or interests in shares) which would otherwise be void by reason of s 259C of the Act, generally arising in respect of large financial institutions such as NAB: Re Westpac Banking Corporation above; Re Commonwealth Bank of Australia (2005) 57 ACSR 28; Re MLC Limited (2006) 60 ACSR 187; Re ANZ Banking Group Ltd (2010) 272 ALR 400; Re Macquarie Group Ltd [2010] FCA 1507; Re Macquarie Securities (Australia) Ltd [2014] FCA 455. Mr Jackman also points out that s 1322 is a remedial provision and should be given a liberal construction: Re Westpac Banking Corporation above at [24]. 2. Section 1322(6) sets out the circumstances in which the Court may exercise its power under section 1322(4), which require that the Court be satisfied that the act done in contravention of the Corporations Act is essentially of a procedural nature (section 1322(6)(a)(i)); or the person or persons concerned in or party to the contravention acted honestly (section 1322(6)(a)(ii)); or it is just and equitable that the order be made (section 1322(6)(a)(iii)). It is only necessary that one of the three paragraphs in s 1322(6)(a) need be satisfied for the Court to make an order under that section: Cordiant Communications (Australia) Pty Ltd v The Communications Group Holdings Pty Ltd (2005) 55 ACSR 185 at [99], [134]; Re Westpac Banking Corporation above at [27]; Re ANZ Banking Group Ltd above at [61]. Under s 1322(6)(c), the Court must also be satisfied that no substantial injustice has been or is likely to be caused to any person before making an order under the section. 3. Mr Jackman submits, and I accept that the acquisitions of NAB shares set out in the affidavits of Mr Armitage, Mr Rose, Mr MacIntyre and Mr Burns should be validated on the basis that the persons concerned in or a party to the transactions acted honestly and also that to do so would be just and equitable. 4. Mr Jackman submits, and I accept, that the making of the order sought in the Application does not undermine the policy embodied in s 259C of the Corporations Act, which at least includes the maintenance of a company's capital: Re HIH Insurance Ltd (2002) 41 ACSR 72 at [164(xii)(b)]; Austin and Black's Annotations to the Corporations Act [2J.259A]. The validation of the relevant acquisitions in this case will also plainly not adversely affect NAB's creditors, and the relevant acquisitions relate to only a small number of shares when compared to the total market capital of NAB, and many of the shares (particularly in respect of ACP) have since been disposed of in any case. Mr Jackman submits and I also accept, that the orders sought regularise a past difficulty without interfering with the rationale which underlies the section. Mr Jackman also points out that ASIC has been, appropriately, informed of the fact that this application will be made and has been provided with copies of the Originating Process and affidavits, and has indicated that it neither supports nor opposes the orders sought and did not intend to appear at the hearing. 5. Mr Jackman submits, and I again accept, that the evidence explains the errors that gave rise to the issues underlying the application, which reflect the difficulty of operationalising the requirements of the section in complex financial groups. I accept that none of these errors involve any dishonesty or intent to trade in a manner inconsistent with s 259C of the Act. In each case, systems were in place to ensure compliance with the applicable provisions, but that was not achieved because of errors that reflect the risk of complexity and human fallibility. I accept that the persons concerned in or a party to the contraventions acted honestly within the meaning of s 1322(6)(a)(ii) of the Act. The case for relief is supported by the fact that the relevant parties have taken steps to "ensure" that these issues do not occur again, although history might suggest that expectation may be disappointed in time, and new errors will arise as old errors are addressed. I accept that these steps have included review of existing compliance systems as well as the implementation of new compliance systems directed to the issues that allowed these issues to first arise. 6. Mr Jackman also submits, and I accept, that no prejudice would be occasioned to any person by validating the relevant acquisitions and that order will avoid the prejudice that would result from invalidity of the acquisitions were not validated; and this consideration supports the making of the order and also satisfies the jurisdictional precondition to the making of the order in s 1322(6)(c). As Mr Jackman points out, and earlier cases in this area have recognised, any invalidity in transactions of this character has the capacity to prejudice third parties, so far as the relevant shares would not have been validly acquired and subsequent disposals of those shares will or may also have been ineffective, and this problem may have significant scope where shares may be traded in the market many times over. 7. For these reasons, I made the orders sought by NAB at the hearing on 16 November 2020. ********* DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 December 2020