Reported Decision : 40 ACSR 116 New South Wales Supreme Court CITATION : HOMEMAKER RETAIL MANAGEMENT [2001] NSWSC 1058 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 4789/01; 4790/01 HEARING DATE(S) : 19/11/01 JUDGMENT DATE : 19 November 2001 PARTIES : Homemaker Retail Management Ltd - Plaintiff JUDGMENT OF : Barrett J COUNSEL : Mr M.B. Oakes SC - Plaintiff Mr L.B. Hastings, Solicitor - GPT Management Ltd SOLICITORS : Mallesons Stephen Jaques - Plaintiff Freehills - GPT Management Ltd CATCHWORDS : CORPORATIONS - arrangements and reconstructions - "stapled securities" - Part 5.1 scheme of arrangement between company and members - provision allowing company to vary scheme after approval by court - attempt to confer jurisdiction on ASIC in relation to variation procedure - provision allows any variation whatsoever which does not adversely affect rights of security holders - provision undesirable - provision omitted - EQUITY - trustees - judicial advice - advice may be given to responsible entity of managed investment scheme - advice concerning implementation of plan requiring approval by votes of unitholders is appropriately given after voting completed. Australian Securities and Investments Commission Act 2001 (Cth) Corporations Act 2001 (Cth) LEGISLATION CITED : Trustee Act 1925 Trustees Act 1962 (WA) Jurisdiction of Courts (Cross-Vesting) Act 1987 Co-operatives Act 1992 Smith v Permanent Trustee Australia Ltd (1992) 10 ACLC 906 Re Buka Minerals NL (1983) 8 ACLR 507 Re Leamon Consolidated (Vic) Pty Ltd (1985) 10 ACLR 263 Re R M Eastmond Pty Ltd (1972) 14 ACLR 801 Eagle Star Trustees Ltd v Heine Management Ltd (1990) 3 ACSR 232 Re Mirvac Ltd (1999) 32 ACSR 107 Re NRMA Ltd (2000) 33 ACSR 595 CASES CITED : Re NRMA Ltd (2000) 34 ACSR 261 MTM Funds Management Ltd v Cavalane Holdings Pty Ltd (2000) 35 ASCR 440 Re AGL Gas Networks Ltd (2001) 37 ACSR 441 Re Australian Co-operative Foods Ltd (2001) 38 ACSR 71 Minister for Health v Ancient Order of Foresters Friendly Society (No 2) (1985) 61 ALR 302 Re Price Mitchell Pty Ltd [1984] 2 NSWLR 273 Re Slade Constructions Pty Ltd [1970] SASR 561 Re Adelaide Air Conditioning and Domestic Engineers Ltd (1972) 6 SASR 603 Re Gresham Partners Management Ltd (WASC No CIV 1175 of 2001, 11 April 2001) DECISION : Refer paragraphs 26 and 27 7 IN THE SUPREME COURT REVISED OF NEW SOUTH WALES EQUITY DIVISION BARRETT J MONDAY, 19 NOVEMBER 2001 4789/01 – RE HOMEMAKER RETAIL MANAGEMENT LTD 4790/01 – APPLICATION OF HOMEMAKER RETAIL MANAGEMENT LTD JUDGMENT HIS HONOUR: 1 Before the court are two applications in relation to an overall proposal or plan under which all securities issued by Homemaker Retail Management Ltd ("the Company") will become vested in GPT Management Ltd. Under the proposal or plan, the former holders of those securities will receive from that corporation cash at the rate of $1.59 per security. 2 The securities concerned are "stapled securities" which means that each security holder holds both shares in the capital of the Company and units of a managed investment scheme known as the Homemaker Retail Property Trust of which the Company is the responsible entity under Chapter 5C of the Corporations Act 2001 (Cth). I shall refer to this managed investment scheme as "the Trust". Shares and units are held by each holder subject to provisions in the constitutions of both the Company and the Trust intended to ensure that shares and units remain linked in such a way that securities of one description may not be transferred except as part of a parcel consisting of an appropriate number of securities of both descriptions. 3 The overall proposal or plan to which I have referred is to be implemented by means of provisions sanctioned pursuant to the constitution of the Trust in such a way as to be binding upon holders of units, provisions made binding upon the Company and its members through scheme of arrangement under Part 5.1 of the Corporations Act and provisions of contracts made between relevant parties including, of course, GPT Management Ltd. Further elements are supplied by amendments to the constitutions of both the Company and the Trust. Meetings of holders of securities, in their capacities as shareholders and unitholders, are a central feature of the process. 4 One of the applications now before the court is an application for an order under s.411(4) of the Corporations Act approving the Part 5.1 scheme of arrangement between the Company and its members. The other is an application under s.63 of the Trustee Act 1925 for the opinion advice or direction of the court that the Company, as responsible entity of the Trust, is justified in acting upon resolutions of the members of the Trust and in putting into effect in accordance with its terms the proposal approved by those resolutions. 5 The second application arises from the circumstance that, under s.601FC(2) of the Corporations Act, the responsible entity of a managed investment scheme holds the scheme property on trust for the scheme members. Such a responsible entity may accordingly seek judicial advice under the Trustee Act in an appropriate case: Re Mirvac Ltd (1999) 32 ACSR 107; MTM Funds Management Ltd v Cavalane Holdings Pty Ltd (2000) 35 ACSR 440. But, as Austin J emphasised in the former case, it is unwise for judicial advice of the kind now sought to be given at too early a stage. In the context of an overall proposal or plan similar in structure to that now before me, his Honour declined to give such advice before the relevant meetings had been held: "The application also seeks judicial advice which would go further by stating that the responsible entities would be justified in giving effect to and implementing the proposals set out in the explanatory memorandum. In my opinion it would be unwise to give advice of that kind at the present stage. In this case, the matter comes before me ex parte in conjunction with the scheme proposals which I have described. Those proposals will be put to meetings of shareholders, optionholders and unitholders respectively for consideration. There is bound to be a further hearing with respect to the two schemes of arrangement, and in the present proceedings I am asked to make orders having the effect that any unitholder who wishes to make any application may do so when the matters return to the court. In those circumstances judicial advice broadly to the effect that all implementation steps may be taken seems to be premature and too widely expressed." 6 Mr Oakes SC, who appeared for the Company upon the applications, has drawn to my attention orders made by Parker J of the Supreme Court of Western Australia, in a similar case, under both s.92 of the Trustees Act 1962 (WA) and (apparently with the aid of s.4 of the Jurisdiction of Courts (Cross Vesting) Act 1987) s.63 of the Trustee Act 1925 (NSW): Re Gresham Partners Management Ltd (WASC No CIV 1175 of 2001, 11 April 2001). Those orders were made after the relevant meetings of security holders had been held. The remarks of Austin J quoted above and the orders made by Parker J indicate, and I accept, that the present application under s.63 of the Trustee Act is appropriately brought before the court at this point when the wishes of security holders, expressed through voting at the relevant meetings, have been made known following both circulation of appropriate explanatory material with the notices convening the meetings and debate and consultation at those meetings. 7 The present applications are made ex parte (although Mr Hastings did appear for GPT Management Ltd to convey its consent to a variation of the scheme to be mentioned presently). There is affidavit evidence that no one present at the various meetings held for the purpose of approving the overall plan and its constituent elements expressed an intention of seeking to be heard on the applications. There is likewise evidence that no holder of securities has made any such intention known to the Company. The applicable advertising requirements have been complied with in relation to the Company's intention to seek today the order now sought for approval of the Part 5.1 scheme. The material sent to security holders in advance of the meetings also identified today as the day on which the present applications were likely to come before this court. No holder of securities appeared this morning when the matter was called on for hearing. 8 The evidence shows that all appropriate procedural steps have been properly taken in relation to the overall proposal or plan and the particular component consisting of the Part 5.1 scheme. The evidence also shows that security holders' votes were very substantially in favour of what is proposed. Mr Nock, the chairman of the meeting convened in accordance with the court's order in relation to the Part 5.1 scheme, deposes that positive votes were cast by 90.18% of the persons voting and that the shares held by those casting positive votes represented 96.45% of the shares held by all persons voting. The requirements of s.411(4)(a)(ii) (A) and (B) are thus clearly met. The aspect to which s.411(17) directs attention is covered by production to the court, as an annexure to one of the affidavits of Mr Lawson, of a written statement by the Australian Securities and Investments Commission in terms of paragraph (b) of that section, with the result that the section does not operate as a barrier to the court's approving the scheme of arrangement. 9 Apart from one matter, the way is clear for the court to make the orders sought. Ventilation of that one matter at the hearing has resulted in a provision of the scheme of arrangement being omitted. I should explain the reservations which caused me to question the appropriateness of that provision. 10 The relevant provision (clause 7.6) was in the following terms: "The Company may subsequently vary the Scheme, so long as: (a) the variation does not adversely affect the rights of Securityholders; (b) a Senior Counsel of not less than three years' standing confirms that in his or her opinion, the variation does not adversely affect the rights of Securityholders; (c) the variation is approved by ASIC; (d) the variation is lodged with ASIC." 11 It was acknowledged that the four paragraphs (a) to (d) were intended to be cumulative in their operation and that "and" would appropriately have been added after paragraph (c) to make this clear. That is a revision which could have been made in accordance with s.411(6). But there were more substantial issues arising from the fact that, as the word "subsequently" confirms, the provision for variation of the scheme terms was intended to operate after the scheme had become binding through the making of the court's order under s.411(4). Furthermore, it would have so operated indefinitely. 12 Mr Oakes explained to me that clause 7.6 had been included with the intention that it be a "slip rule" to avoid the kind of difficulty which came before the court in Re AGL Gas Networks Ltd (2001) 37 ACSR 441. In that case, a deadline set by scheme provisions governing the post-approval implementation phase was missed by a few minutes and there was no mechanism, short of seeking relief from the court, for the trifling and inconsequential non-compliance with the terms of the scheme to be rectified. I was informed that, with a view to avoiding such difficulties, a provision similar to clause 7.6 had been included in a scheme approved under analogous provisions of the Co-operatives Act 1992 in Re Australian Co-operative Foods Ltd (2001) 38 ACSR 71. Indeed, this is made clear by the judgment of Santow J in that case: "The recent decision in Re AGL Gas Networks Ltd (formerly AGL Sydney Ltd) (2001) 37 ACSR 441 illustrates the circumstances in which a post-scheme approval amendment may need to be made which is no way prejudicial to members; in that case through an inadvertent non-fulfilment of a condition precedent, though fulfilled in substance. I would readily agree that s.411(6) of the Corporations Law and its counterpart s.344(3) of the Co-operatives Act are not available to permit the court to amend the scheme after its approval; Re BTS Bearings and Transmission Supplies Pty Ltd (1983) 8 ACLR 287 per Needham J and more recently Re Gasweld Pty Ltd (1986) 5 NSWLR 494 per McLelland J. However, here there is not an amendment in any way reliant upon those statutory provisions. Nor is it instigated or approved by the court, should those statutory provisions cover such a field. Here, rather, the scheme approved itself contemplates that very flexibility outside of further court discretion. It does so in a manner which could not be said to be inimical to the interests of members, given the safeguards that attend any post-approval variation and the fact that this is to be made clear in the scheme booklet. In saying that, I do not need to re-visit the reasoning in Re AGL Gas Networks Ltd , above, and the particular features that attended that case." 13 But the clause 7.6 proposed in this case would have gone far beyond any "slip rule". It would have had a very broad operation, accommodating any variation whatsoever which fell within the specification defined by the words "does not adversely affect the rights of Securityholders". This specification is modelled on s.601GC(1)(b) of the Corporations Act concerning alteration of the constitution of a managed investment scheme. It was submitted that decided cases on that form of words might provide a useful measure of certainty, although when one looks at the two cases mentioned – Eagle Star Trustees Ltd v Heine Management Ltd (1990) 3 ACSR 232 and Smith v Permanent Trustee Australia Ltd (1992) 10 ACLC 906 – it is by no means possible to conclude that the words have a settled meaning and operation. 14 The breadth of the proposed clause 7.6 is illustrated by an example I put to Mr Oakes in the course of the hearing. It is arguable that the specification modelled on the s.601GC(1)(b) wording would accommodate a change which substituted for the current provision requiring the payment of $1.59 cash per security upon implementation of the scheme a provision for the payment of some significantly higher sum in a year's time with interest at a generous rate in the meantime. It might well be concluded that such a change would not "adversely affect" the "rights" of security holders, even though altering them. Yet an essential feature of the expectations engendered by the scheme and its explanatory statement (receipt of money immediately upon implementation) would have been varied in a way which, from a commercial viewpoint, was radical. Although not, by comparison, adverse so far as rights are concerned, such a substituted provision might have caused some members to take a different commercial view of the scheme. 15 Clause 7.6 and its effect were not referred to in the explanatory statement sent to security holders in advance of the scheme meeting. Members were therefore not on notice of its potentially far reaching operation. That brings to the fore a particular aspect of the court's function in approving a scheme of arrangement. In the context of a creditors' scheme, the aspect to which I refer was described by McLelland J in Re Price Mitchell Pty Ltd [1984] 2 NSWLR 273 as follows: "Those creditors who agree to a scheme are likely to be influenced largely by their perception of the broad economic consequences of the scheme, with particular reference to what proportion of their debts are seen as recoverable under a scheme as compared with a winding up, and perhaps to pay little attention to the technical or machinery aspects. It cannot be assumed that creditors will seek advice on, or fully appreciate the implications of, what they may well regard as the minutiae of a scheme, as opposed to its dominant commercial elements. They may rely on the approval of the court as a sufficient safeguard against defects at the technical or machinery level. For that reason, as well as for the purpose of protecting the interests of creditors who have not agreed to the scheme and yet will be bound by it, the court will ordinarily seek to ensure … that the scheme does not without sufficient reason include provisions which may create inroads upon, or modify, the benefits which a creditor bound by it might legitimately expect to obtain under it." 16 I do not read this passage as suggesting that the court will or should assume a role of examining the "minutiae" in detail to see whether some feature inconsistent with the "dominant commercial elements" has somehow crept in. But when it is on notice of an apparently machinery provision which is capable of altering those "dominant commercial elements", even if in the context of safeguards cast in language of the kind in paras (a) and (b) of the clause 7.6 proposed in this case, the court is bound to consider, at the least, whether the material which has been placed before members has sufficiently brought to their attention the possibility of such alteration. This was confirmed by Santow J at the end of the above passage in his judgment in Australian Co-operative Foods. His Honour regarded it as important that the scope and effect of any variation provision "be made clear in the scheme booklet". 17 Even if the possibility of alteration has been sufficiently identified and explained, there is still a clear and firm predisposition of the court not to favour provisions allowing schemes to be changed after they have received court approval. The point was made in stark terms by Street J (as he then was) in Re R M Eastmond Pty Ltd (1972) 4 ACLR 801: "No scheme compulsorily imposed under the authority of the court under s.181 should be capable of amendment by machinery internal to the scheme itself." 18 The effect and rationale of the relevant cases are conveniently summarised in the judgment of Santow J in Re NRMA Ltd (2000) 33 ACSR 595. After discussing the circumstances in which conditions subsequent (that is, conditions to be satisfied after scheme approval) might be an acceptable element of a Part 5.1 scheme, his Honour said: "The use of conditions subsequent to bring about termination of a scheme of arrangement needs to be distinguished from a scheme containing machinery which could lead to variation of its terms. Courts will generally not approve schemes which carry within themselves machinery for variation of their own terms: see, eg, Re R M Eastmod Pty Ltd (1972) 4 ACLR 801; Re Telford Inns Pty Ltd (1985) 10 ACLR 312; 3 ACLC 660; Re Leamon Consolidated (Vic) Pty Ltd (1985) 10 ACLR 263. The reason for that is stated in Leamon (at 265): 'In my opinion, a scheme … ought not to be approved unless the creditors and the court can see very clearly at the time that the scheme is proposed what it is that they are being asked to accept, and, in the case of the court, what it is that it is being asked to approve.' Clarity and certainty are thus the touchstones. Provided that clarity and certainty are present on the face of the scheme and no new decision making process intrudes after court approval, it does not matter that different results may emerge in different (but clearly identified) eventualities. A key question is whether the scheme is, according to its own terms, self-executing in the sense that certain results follow in certain defined events." 19 Clause 7.6 clearly and unambiguously contemplated the intrusion of a "new decision making process". It was, as I have said, a provision of broad operation carrying within it the potential to bring about alterations to what, in light of the explanatory statement and debate at the scheme meeting, was properly regarded as the defined commercial transaction. And those alterations would have come from decisions of the Company alone. It is not sufficient, in my judgment, for members to have an assurance that any change made will not adversely affect their rights. As I have already outlined, there may well be changes not adversely affecting rights which, for one reason or another, members may still have good reasons not to favour. They are entitled to know that the arrangement which has been presented to them will be the arrangement that is implemented – or, as it was put in Re Leamon Consolidated (Vic) Pty Ltd (1985) 10 ACLR 263, to know when they vote precisely what it is that they are asked to accept. In the extract from NRMA just quoted, Santow J identified clarity and certainty as the touchstones. Both clarity and certainty would, to my mind, have been compromised had clause 7.6 as proposed remained part of the scheme in the present case. 20 A further concern about the proposed clause 7.6 was the role it envisaged for the Australian Securities and Investments Commission. It was contemplated that ASIC would both approve a variation of the scheme (paragraph (c)) and accept lodgment of a document in relation to it (paragraph (d)). I do not see how this would or could have worked. ASIC's powers and functions are those conferred upon it by statute, principally the Australian Securities and Investments Commission Act 2001 (Cth). The statutory scheme from which ASIC derives its jurisdiction does not contemplate that it may undertake functions which parties to contracts or other binding stipulations (including those made binding by s.411 of the Corporations Act) may choose to confer upon it. 21 In Re Slade Constructions Pty Ltd [1970] SASR 561, the Supreme Court of South Australia was asked to approve a scheme containing provisions purporting to allow the scheme manager to apply to the court for directions and to allow any party aggrieved by an act or determination of the scheme manager to apply to the court for review. The reaction of Mitchell J was as follows: "It seems to me that in each of these paragraphs there is an attempt to confer jurisdiction upon the Court. Such attempt is, of course, otiose and the words may be regarded merely as surplusage. In my view, however, the Court should not sanction a document which may be construed as conferring jurisdiction upon the Court by persons who are obviously powerless to confer jurisdiction." (See also Minister for Health v Ancient Order of Foresters Friendly Society (No 2) (1985) 61 ALR 302). 22 The remarks of Mitchell J are equally applicable to attempts to confer jurisdiction upon ASIC. A scheme of arrangement, once approved by the court, is, by force of s.411(4), "binding … on the members … of the body and on the body". It does not and cannot bind ASIC or any other outsider: see Re Buka Minerals NL (1983) 8 ACLR 507. The parts of clause 7.6 contemplating approval by and lodgment with ASIC would therefore be otiose and surplus in the sense to which Mitchell J referred. The reality that ASIC would, in all probability and with complete justification, decline to perform the contemplated supervisory function would have been another factor going to the distinct possibility of a material discrepancy between the message an uninformed reader may have gained from a close perusal of the scheme provisions and the true legal situation. 23 The position of ASIC in a similar context was adverted to by Santow J in Re NRMA Ltd (2000) 34 ACSR 261. His Honour was there concerned to find a mechanism to ensure that a particular representation made by an outsider to the scheme was given some binding effect. One possibility involving ASIC was dealt with as follows: "I also considered whether the representation should be converted to an undertaking and, if so, to whom. ASIC were unwilling to receive it as an undertaking because it considered that it was unclear what powers it would have to enforce such an undertaking." This is a reflection of the limits to the functions and powers of ASIC to which I have referred. 24 I should say finally in relation to clause 7.6 that it would not have been in any sense saved by the fact that the criterion in its paragraphs (a) and (b) was one which plays a part in s.601GC(1)(b) of the Corporations Act. The "will not adversely affect members' rights" specification is one by reference to which the responsible entity may alter the constitution of a managed investment scheme without the need for a resolution of members. Acquiring by a conscious decision units of a scheme governed by that legislative provision is, to my mind, quite different from being subjected compulsorily to such a provision by the means provided for in Part 5.1. 25 The scheme of arrangement in this case is not a complex one. The potential for "slips" is very remote. In the end, the decision to omit clause 7.6 was the appropriate and proper course. It is also a course which can easily be achieved through s.411(6) which is a section accommodating at this point in the statutory sequence of events alterations of a minor kind not affecting the substantive operation of the scheme: Re Adelaide Air Conditioning and Domestic Engineers Ltd (1972) 6 SASR 603. 26 In proceedings 4790 of 2001 concerning the Trust, I make orders in terms of the short minutes which have been handed up and which I sign and date for identification. These include the order under s.63 of the Trustee Act. 27 In proceedings 4789 of 2001 relating to the Part 5.1 scheme of arrangement, I make orders in terms of the separate short minutes which have been handed up and which I sign and date for identification, having added at the end of order 1 "with the alteration appearing therein" and having deleted clause 7.6 from the annexure "A" to the short minutes. 28 I direct that these orders may be taken out forthwith. ********** Last Modified: 11/22/2001 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.