E S GORDON PTY LTD and ANOR v IDAMENEO (No 123) PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL GLEESON CJ, MASON P and MEAGHER JA 23 October 1997, 17 December 1997 [1997] NSWCA 98 TRUSTS — UNIT TRUST — notice of issue of additional units — construction of notice. TRUSTS — UNIT TRUST — invalid issue of additional units to unit holders in a unit trust — acquiescence by unit holders — dispute as to meaning of terms of issue of additional units — question of construction of notices of issue — HELD — trial judge did not err in construing notices. Gleeson CJ The issue in this appeal concerns the construction of certain notices issued by the trustee of a unit trust to unit holders. It is not in dispute in the appeal that the action of the trustee to which the notices related was beyond power. However, it is also not now in dispute that the appellants, who were two of the unit holders, subsequently acquiesced in the conduct of the trustee and, for that reason, the notices, as between the trustee and the appellants, had legal affect according to their terms. The argument is about the meaning of those terms. The point which is the subject of the appeal was only one of a number of matters in dispute in proceedings commenced in the Equity Division. Some of those matters were settled between the parties. Others were resolved by Young J in a series of judgments. The point presently in question was resolved by Young J adversely to the appellants. Because of the limited nature of the appeal it is possible to summarise the background to the litigation relatively briefly. The respondent, Idameneo (No123) Pty Ltd, was the trustee of a unit trust established for the purpose of providing various services to a group of medical practitioners. The trust was known as the Artlu Unit Trust. The two appellants, E S Gordon Pty Ltd and Thomas Bateman Pty Ltd, are companies controlled by two of those medical practitioners. They subscribed for units in the trust. A number of other practitioners also subscribed for units, but they are not, at least at this stage, in dispute with the respondent. The respondent is a company controlled by Dr Edmund Bateman. Another company controlled by him was also a unit holder in the trust. The Unit Trust Deed, which was dated 12 September 1985, empowered the trustee from time to time to issue additional units, in certain circumstances. The relevant provisions will be set out below. Under the Unit Trust Deed the trustee was empowered to redeem units upon payment of their fair value. During 1993 the respondent fell into disagreement with the appellants about matters relating to the administration of the unit trust. The merits of that dispute are not presently relevant. On 31 May 1993 each appellant served the respondent with a formal notice, described as a transfer notice, indicating a desire to transfer all its units pursuant to certain provisions of the Unit Trust Deed. Those notices did not result in transfers, but they had another consequence to which reference 2 UNREPORTED JUDGMENTS will be made below. On 15 June 1993 the respondent exercised its power to redeem the appellant's units. The appellants thereupon ceased to be unit holders. A major aspect of the subsequent litigation concerned the value to be placed upon the units of the appellants. There were related questions as to the state of accounts between the parties. For some years prior to June 1993, the respondent had adopted a practice of issuing units in fractional numbers. Young J held that this was not authorised by the Unit Trust Deed, but he also held that it was acquiesced in by all the unit holders, including the appellants. In June 1993 the first appellant held 11.33 units in the trust. (The total units issued at the time amounted to 234.84). The first appellant's units comprised 11 units which it held prior to 22 June 1992, 0.11 additional units which were issued on 22 June 1992 and 0.22 additional units which were issued on 26 May 1993. As at June 1993 the second appellant held 14.16250 units. Of those units, 13.760 were held by the second appellant prior to 22 June 1992. On 22 June 1992, 0.13750 additional units were issued to the second appellant. On 26 May 1993, 0.2750 additional units were issued to the second appellant. The dispute in the appeal concerns one aspect of the issue of units which took place on 22 June 1992 and 26 May 1993. In their original proceedings the appellants challenged the validity of those issues. They argued, amongst other things, that the Unit Trust Deed did not authorise such issues without the consent of the unit holders. There had been no consent at the time of either of the issues in question but, rather, a unilateral decision of the trustee. Young J held that argument to be correct. However, he also held that, by their transfer notice of 31 May 1993, which covered the additional units in question, both appellants had acquiesced in the issues of 22 June 1992 and 26 May 1993. Neither party to this appeal challenges those conclusions. The appeal has been argued on the basis that the number of units that were redeemed by the respondent was, in the case of the first appellant, 11.33 and, in the case of the second appellant, 14.16250. Nor is there an issue in the appeal about the valuation of the units that were redeemed. The Unit Trust Deed contained the following provisions which were, in the pleadings, asserted by the respondent trustee to be the provisions pursuant to which the additional units were issued. "5. The trustee may from time to time issue units of any class in such manner and at such price as the trustee shall think fit provided that no Units shall be issued unless the issue is made in accordance with these provisions or is approved by a Special Resolution or where the units are divided into more than one class by a separate Special Resolution of the unit holders of each class: (a) the trustee shall give notice to the then unit holders specifying the number and classes (if any) of the units being offered for issue and limiting the time within which the offer, if not accepted, will be deemed to be declined AND after the expiration of that time, or on receipt of any intimation from a person to whom the offer is made that he declines to accept that units offered, the trustee may dispose of those units in such manner as it thinks fit; (b) the trustee may satisfy any payment due to be made to the holders of units of any class by the issue to such holders (in proportion to their respective holdings of such units) of additional units of any class at such price and on such terms as the trustee shall determine; (c) units shall be offered in the first instance to existing unit holders of that class, as nearly as may be to their existing holdings of units of that class and without involving fractions; URE S GORDON PTY LTD and ANOR v IDAMENEO (No 123) PTY LTD (Gleeson CJ) 3 (d) the trustee may likewise so dispose of any new units which (by reason of the ratio which the new units bear to units held by persons entitled to an offer of new units) cannot in the opinion of the trustee be conveniently offered under para(c) of this clause. 11.7 The trustee may determine to pay apply or set aside any amounts for any unit holder by: (a) placing such amount to the credit of the unit holder in the books of the Trust Fund; (b) drawing a cheque in respect of such amount made payable to or for the credit or benefit of the unit holder; (c) paying such amount in cash to or for the benefit of the unit holder; or (d) issuing additional units to the unit holder as provided in the New Units Section." On 22 June 1992 the respondent sent a notice to the first appellant in the following terms: "Dear Unit Holder, There is to be a new issue of 2.28 Units in the above Trust. This is to be non renouncable, at a price of $550,000 per Unit and will be funded by income from Units. Issue to be effective immediately. Your current holding is 11 Units. New Units this issue to you will be.1100 Units, taking your total holdings to 11.11 Units." A notice in similar terms was send to the first appellant of 26 May 1993, referring to a new issue of 4.56 units in the trust, once again at a price of $550,000 per unit. On this occasion the entitlement of the first appellant was 0.22 units. Similar notices went to the second appellant on 22 June 1992 and 26 May 1993 respectively, although, as appears from what was said above, the number of additional units being issued to the second appellant was different from the number issued to the first appellant on each occasion. All unit holders received such notices. Apart from the sending of the above notices to the unit holders, what was done to give effect to the issue of additional units was the making of entries in the accounts of the trust, showing that each unit holder was debited with the price of the additional units (or fractions of units) issued. Both the first and second appellants ceased to be unit holders on 15 June 1993. Thus, they were not entitled to participate in the final income of the trust in the year ended 30 June 1993, although there were interim distributions which they were entitled to retain. In the accounts of the trust, the trustee debited each of the appellants, in respect of each issue of additional units, with the price of the additional units. The appellants argue that they were not indebted to the trustee for the full price of the additional units, calculated in the manner described, but that, by reason of the terms of the notices sent out in respect of the issue of the additional units, they were only liable to the trustee to the extent to which there was income from the units available to be applied in payment of the price. If that argument, which was rejected by Young J, were to be upheld on appeal, there would be a subsidiary issue as to what was to be treated as income available to be applied in payment of the price of the additional units. The respondent contends that, in the events that occurred, the balance of income for the year ended 30 June 1992 to which the appellants were entitled was more than sufficient to pay the price of the 1992 additional units, and was so applied. In respect of the 1993 additional units, a 4 UNREPORTED JUDGMENTS similar position applied to an extent, but there is a dispute as to the balance. It is only necessary to resolve that dispute if the appellants succeed on the primary issue. It is common ground that the outcome of this appeal turns upon the true construction of the notices sent out by the trustee. The critical portion of the notice is the second sentence and, in particular, the concluding words of that sentence. The third sentence is also important. The competing contentions may be summarised as follows. The appellants submit that the price of the additional units specified in the notices sent out by the trustee, and the obligation to pay the price, must be taken to be qualified by the statement that the price will be funded by income from units. Leaving to one side for the moment the disagreement as to what might constitute available income, the argument is that there is only an obligation to pay the price of the additional units to the extent to which there is income from units available to unit holders. By ceasing to be unit holders following redemption on 15 June 1993, the appellants ceased to be entitled to income from their units, and that limited their liability to pay the price of the additional units. The argument for the respondent, which was accepted by Young J, was that the price of the additional units was specified in the notices sent to the unit holders, that they were liable to pay the full price so specified, and that the reference to funding in the concluding words of the second sentence of the form of notice, whilst it was a statement of the expectation of the trustee as to the source of the money that would be used to pay for the additional units, did not limit either the price or the obligation to pay the price. As to the lastmentioned matter, it was acknowledged that, in other circumstances, there could possibly have arisen a question as to the entitlement of the trustee to sue a unit holder who remained in the trust and had an expectation of future income from units, but had not yet paid the full price. However, it was submitted that where, as here, a unit holder ceased to have an interest in the trust, and therefore had no expectation of further income from units, the unit holder was liable to pay the trustee any unpaid balance of the price for the additional units. It was pointed out on behalf of the respondent that, if the construction contended for by the appellants were correct, it would produce inequities as between the unit holders in the trust. For example, a unit holder who had not yet paid the price of the additional units, and whose units were the subject of transfer, or transmission, to a third party, would thereby cease to be liable for the unpaid balance of the price of the additional units. Similarly, if the trust were wound up, the extent of the liability of the various unit holders to pay for their additional units would depend upon the state of the individual balances of their accounts. In determining the issue of construction referred to above it is material to note the way in which the issue arose, and was dealt with, in the proceedings before Young J. The appellants, in their Statement of Claim, contended that the purported issues of new units were invalid and of no effect because they were made without the consent of the unit holders. In the Defence, the respondent trustee contended that the consent of the unit holders was not necessary because the units were issued in accordance with cl5(b) of the Trust Deed. Reliance was also placed on cll 1.7. URE S GORDON PTY LTD and ANOR v IDAMENEO (No 123) PTY LTD (Gleeson CJ) 5 Dr Edmund Bateman swore an affidavit in the proceedings which threw some light upon the circumstances in which the additional units were issued, and the power upon which the trustee was relying. He said, in relation to the issue of 22 June 1992, that in or about June 1992, the trustee made a policy decision that the trust should "retain some of its cash" for use in capital maintenance and improvement of the trust property. The amount to be retained was $1.254 million. The purpose of retaining the funds was to buy new equipment needed by the trust, and to put aside funds for future expansion and equipment acquired. He said the trustee decided to issue one new unit for each one hundred units held, and explained how the price of the units was calculated. Similarly, in relation to the issue of additional units on 26 May 1993, he said that in or about May 1993, the trustee decided that the trust needed to retain a further amount of $2.508 million for capital maintenance and improvement. Once again, the purpose of retaining the funds was to buy new equipment needed by the trust, and to put aside the funds for future expansion and capital acquisitions. There was a dispute, which was resolved by Young J in favour of the appellants, as to whether the trustee needed the consent of the unit holders before making an issue of additional units under cl5(b). Young J held that the trustee required such consent. It was only by reason of the acquiescence, which occurred on 31 May 1993, that the issues became binding on the appellants. It was in the course of dealing with the acquiescence argument that Young J dealt with the question of construction raised in the present appeal. The way the matter came up was explained as follows. The respondent asserted that the units were issued to the appellants, and accepted by them, without any protest, and that subsequently, on 31 May 1993, the appellants had served transfer notices. At least by 31 May 1993, they knew all the facts relevant to the issues of additional shares, and they adopted the issues. The judgment records that counsel for the appellants sought to avoid that consequence by saying that the appellants did not know that they were going to be billed for the price of the units, and, in particular that the price was going to be debited to their loan account. It was in answer to that proposition that Young J referred to the terms of the notices relating to the issue of additional units. His Honour referred to the standard form of notice, and went on as follows: "This shows that the issue was to be funded by income from units. It is possible to make a contract for the selling of property that the price will only be paid from a particular fund and that if there is nothing in that fund then there is no obligation to pay.... However, the courts do not, without clear evidentiary material or unless the matter is clear on the face of the contract, assume that people are making such special contracts. Normally, if the word "price" is used in a contract one expects the buyer to be liable to pay the price. If a particular fund is nominated as the fund from which the price is to be payable, the normal construction is that that is the primary fund out of which the price will be paid, but that if that fund is not sufficient then the general assets of the buyer may be resorted to to fund the transaction. It seems to me that on the proper construction of (the notice) this is what it means. Accordingly, the facts, being (the notice) and the other material which was in the possession of the plaintiffs, were sufficiently known the consequences were sufficiently known, and in the light of this the plaintiffs elected to give notice of transfer of all the units, including the so-called bonus units, and this, in my view, amounts to acquiescence." 6 UNREPORTED JUDGMENTS Although the appellants do not, on this appeal challenge the finding of acquiescence, they point out that they can only be taken, and were only taken by Young J, to have acquiesced in whatever the notices relating to the issue of additional units, on their true construction, meant. If, on their true construction, the notices did not have the meaning accepted by Young J, the finding of acquiescence cannot alter their true meaning. Although the trustee professed to be issuing the additional units under cl5(b) of the Unit Trust Deed, Young J held that the power given by cl5(b) did not justify the issues. Furthermore, the language in the form of notice was somewhat inconsistent with that of cl5(b). The notice said that the issue was to be "effective immediately". This is inconsistent with the idea that the issues were being made in satisfaction of future income entitlements of the unit holders. C15(b) refers to issuing units in satisfaction of payments "due to be made". This is yet another reason why, but for the acquiescence, the issues would have been invalid. According to the notices, the additional units were issued at a specified price. The issue was to be effective immediately. That supports the view that an obligation to pay the specified price arose immediately. There was no provision for cancelling the issue, in whole or in part, if the expected source of funding became unavailable. Nor is there anything in the specification of price which qualifies it by reference to availability of funding. Like Young J, I am unable to read the reference to the anticipated source of funding as a qualification of the stipulated price of the additional units. I agree with his Honour's conclusion on the issue of construction of the notices. For that reason, I would dismiss the appeal with costs. Mason P I agree with Gleeson CJ. Meagher JA I agree with the Chief Justice. Appeal dismissed with costs. Counsel for the appellant: Mr Carnovale Solicitors for the appellant: Toomey Pegg & Drevikovsky Counsel for the respondent: Mr Foster Solicitors for the respondent: Allen Allen & Hemsley