Supreme Court New South Wales Medium Neutral Citation: The Trust Company (RE Services) Limited [2015] NSWSC 617 Hearing dates: 20 May 2015 Date of orders: 22 May 2015 Decision date: 22 May 2015 Jurisdiction: Equity Division - Duty List Before: Darke J Decision: Advice given in relation to question of construction of trust instrument. Catchwords: EQUITY – trusts and trustees – applications to court for advice – responsible entity of managed investment scheme – question involving construction of constitution of trust Legislation Cited: Trustee Act 1925 (NSW) s 63 Cases Cited: Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253 Electricity Generation Corporation v Woodside Energy Limited [2014] HCA 7; (2014) 251 CLR 640 Category: Principal judgment Parties: The Trust Company (RE Services) Limited as responsible entity for the Paperlinx SPS Trust (plaintiff) Paperlinx Limited (interested party) Coastal Capital International Limited (interested party) Representation: Counsel: M B Oakes SC (plaintiff) P M Wood (Paperlinx Limited) I M Jackman SC (Coastal Capital International Limited) Solicitors: Watson Mangioni Lawyers Pty Limited (plaintiff) Arnold Bloch Leibler (Paperlinx Limited) Clifford Chance (Coastal Capital International Limited) File Number(s): 2015/147870 Publication restriction: Nil. Judgment 1. The plaintiff, The Trust Company (RE Services) Limited, is the responsible entity of the Paperlinx SPS Trust ("the Trust"). The Trust is registered as a managed investment scheme under Chapter 5C of the Corporations Act 2001 (Cth). By a Summons filed on 18 May 2015, the plaintiff seeks the opinion, advice and direction of the Court pursuant to s 63(1) of the Trustee Act 1925 (NSW) in respect of two questions that are identified in the accompanying Statement of Facts. 2. As some urgency attends the first question, that aspect of the matter was listed for hearing in the Duty List on 20 May 2015. On that occasion, Mr Oakes SC appeared for the plaintiff. Paperlinx Limited ("Paperlinx"), which is the Ordinary Unit Holder in the Trust, appeared as an interested party, as did Coastal Capital International Ltd ("Coastal") which is an SPS Holder (that is, a holder of units in the Trust known as Paperlinx SPS). Both Paperlinx and Coastal had been given notice of the proceedings by the plaintiff. Neither Paperlinx nor Coastal was formally made a party to the proceedings. Mr Wood appeared for Paperlinx and Mr Jackman SC appeared for Coastal. 3. The plaintiff seeks advice as to whether it is justified in proceeding on the basis that on the true construction of clause 7 of the Paperlinx SPS Terms, as contained in Schedule 1 of the Constitution of the Trust, it may only give an Issuer Realisation Notice under clause 7.4 if it has received notice from Paperlinx Limited or Paperlinx LLC under clause 7.7. 4. The plaintiff has hitherto proceeded on the basis that the terms of clause 7.7 fetter the powers which might otherwise appear to exist under the terms of clause 7.4. However, Mr Oakes informed the Court that in circumstances where Paperlinx and Coastal were to advance opposing views on the question of construction, the plaintiff would essentially take a neutral stance. Mr Oakes did, however, provide a supplementary submission that principally dealt with clause 7.4(c). 5. The urgency arises in circumstances where any Issuer Realisation Notice that might be given by the plaintiff under clause 7.4(d) in relation to the next Distribution Payment Date would need to be given by 25 May 2015. 6. The Trust was established by a Constitution dated 7 February 2007. That Constitution was effectively superseded by a Deed, dated 21 February 2007 between the plaintiff (as Issuer) and Paperlinx, which deleted clauses 1 to 29 of the Constitution, inserted new clauses 1 to 29, and added Schedules 1 to 3. The new provisions inserted by the Deed will be henceforth be referred to as the Constitution. 7. The following provisions of the Constitution should be noted in particular: 8. Clause 2.3 describes the purpose of the trust as "a single non-operating trust" established solely for the purpose of investing in certain preference shares in Paperlinx LLC. These shares are the LLC Preference Shares issued pursuant to the LLC Preference Share Terms. 9. Clause 3.1 provides that the beneficial interest in the Trust is divided into Units, being the Ordinary Unit and SPS. 10. Clause 8.1(a) provides that SPS Holders have no right to require Redemption of their SPS. However, clause 8.1(b) provides that SPS Holders have the right to request the Realisation of their SPS in accordance with the SPS Terms. The SPS Terms are contained in Schedule 1 to the Constitution. 11. Clause 8.2 provides that the Issuer may Redeem or Exchange SPS in accordance with the SPS Terms and the Constitution. 12. Clause 8.4 provides that the Issuer may only Exchange or Redeem SPS if an Assignment Event occurs. (That is an event which, under the LLC Preference Share Terms, there is a transfer of LLC Preference Shares from the Issuer to Paperlinx or at its direction). 13. Clause 12.7 provides that, subject to the Constitution, the Issuer may in its absolute discretion decide how and when to exercise its powers. 14. Clause 12.9 envisages an application for the Trust to be listed and for SPS to be quoted on the official list of the ASX. 15. Clause 29.4 provides that the Constitution binds the Issuer, Paperlinx and each present and future unitholder as if each of them had been a party to the Constitution. 16. Clause 29.5 provides that the SPS Terms and the Undertakings given by Paperlinx to the Issuer (contained in Schedule 3) apply and the Constitution is to be read as subject to them. It is further provided that, subject to clause 27 concerning statutory provisions, the SPS Terms and Undertakings prevail over all other provisions of the Constitution. 17. As noted earlier, Schedule 1 to the Constitution contains the terms of issue of the SPS ("the SPS Terms"). 18. Clause 7, which is the central focus of the controversy, deals with Realisation. Realise is defined to mean "Redeem, Exchange for Ordinary Shares or Resell" and "Realisation" has a corresponding meaning. There are thus three methods of Realisation (see the definition of Realisation Method, and see also clauses 8, 9 and 10 of the SPS Terms). 19. Clause 7 deals with Realisation by an SPS Holder in clauses 7.1 to 7.3, and Realisation by the Issuer in clauses 7.4 to 7.8. 20. Under clause 7.1, SPS Holders may give a Holder Realisation Notice to the Issuer following a Change of Control Event (that is, a takeover bid being made for Paperlinx, or an order being made for a meeting to approve a Scheme of Arrangement in respect of Paperlinx). After receipt of such a notice, the Issuer must provide a Holder Realisation Response under clause 7.3 which specifies, inter alia, which Realisation Method will apply. Clause 7.3 states that the Realisation Method is to be determined in accordance with clause 7.7. 21. Clause 7.4 provides that in various circumstances and at various times the Issuer "may elect" to Realise Paperlinx SPS (and, where clause 7.4(c) applies, must Realise Paperlinx SPS) by giving an Issuer Realisation Notice to Holders in accordance with clause 7.5. The various circumstances are set out in paragraphs (a) to (h). 22. Save for the time element, the provisions of paragraphs (a) to (h) are mirrored in relation to the LLC Preference Shares in paragraphs (a) to (h) of clause 6.1 of the LLC Preference Share Terms (which concerns the giving by Paperlinx of a Paperlinx Trigger Notice). Where a time is specified, the time occurs two days earlier under clause 6.1 of the Preference Share Terms than it does under clause 7.4 of the SPS Terms. 23. Clause 7.5 provides that the Issuer Realisation Notice must specify certain matters, including the Realisation Method. It is provided in its second paragraph that: "The Realisation Method (or combination of methods) is to be determined in accordance with clause 7.7 ("Issuer Realisation and Realisation Method determined by Paperlinx")." 1. Clause 7.7 provides: "If Paperlinx or Paperlinx LLC resolves to require the Issuer to: (a) give an Issuer Realisation Notice following one or more of the events specified in clause 7.4 ("Realisation by the Issuer") specifying a Realisation Method (or combination of those methods); or (b) specify in a Holder Realisation Response a Realisation Method (or combination of Realisation Methods), and Paperlinx or Paperlinx LLC: (1) notifies the Issuer of that resolution; and (2) has given a notice in corresponding terms to the Issuer under the LLC Preference Share Terms, then the Issuer must give the Issuer Realisation Notice or Holder Realisation Response accordingly. The Issuer must not give the Issuer Realisation Notice or a Holder Realisation Response contrary to or inconsistent with a notice received in accordance with this clause 7.7 ("Issuer Realisation and Realisation Method determined by Paperlinx") and must not otherwise give an Issuer Realisation Notice or a Holder Redemption Response." 1. The reference to Holder Redemption Response is clearly an error. The reference should have read "Holder Realisation Response". 2. Mr Wood submitted that whilst Holders of SPS have a right of Realisation in circumstances where there has been a change of control, there is no entitlement to Realisation at the instigation of the Issuer, and any such Realisation requires the consent of Paperlinx. He submitted that clause 7.7 unambiguously states that the Issuer must not give an Issuer Realisation Notice otherwise than in accordance with a notice given to it by Paperlinx (or Paperlinx LLC) under clause 7.7. This, it was submitted, is consistent with the requirements of clause 7.5 that an Issuer Realisation Notice must specify the applicable Realisation Methods and that such method is to be determined in accordance with clause 7.7. Clause 7.4 itself provides that an Issuer Realisation Notice given under that clause is to be in accordance with clause 7.5. 3. Mr Wood accepted that there was tension between the construction he propounded and the opening words of clause 7.4, but submitted that the tension should be resolved by treating clause 7.7 as paramount. 4. Mr Wood also submitted that his construction was supported by the commercial purpose of the instrument, particularly when viewed in the light of cognate documents such as the LLC Preference Share Terms. He put that the purpose of the Trust was the raising of funds to be invested in LLC Preference Shares to enable Paperlinx LLC to on-lend to members of the Paperlinx Group. It was submitted that against that background, it was understandable that a Holder of SPS would have an entitlement to Realisation in the event of a change of control, but in other circumstances power over Realisation (which may be by way of Redemption) would rest with Paperlinx, especially when SPS were expected to be listed securities. 5. Mr Wood took me in detail through the provisions of related instruments, including the LLC Preference Share Terms, which in important respects mirror the terms applicable to the SPS (notably clause 6.1, which, as mentioned above, mirrors clause 7.4 of the SPS Terms). Mr Wood drew attention to clause 8.4 of the Constitution which provides that the Issuer may only Exchange or Redeem SPS if an Assignment Event occurs, and clause 5.1 of the LLC Preference Share Terms which defines an Assignment Event. It was submitted that Assignment Event was defined in such a way that the giving by Paperlinx of a notice under clause 7.7 of the SPS Terms (specifying the Realisation Method) must take place before such an event occurs. In short, it was submitted that those provisions illustrated that, outside a change of control situation, no Realisation can occur without the consent or concurrence of Paperlinx. Moreover, Paperlinx, by virtue of notices given under clause 7.7 of the SPS Terms, dictates the Realisation Method. Mr Wood submitted that it would be a commercially surprising result if the Issuer (which owes fiduciary duties to the SPS Holders) could itself decide upon the Realisation Method, especially as one applicable method involves an issue of shares by Paperlinx. 6. It followed, so it was submitted, that the opening words of clause 7.4 of the SPS Terms should not be read as giving the Issuer a power to give an Issuer Realisation Notice in the absence of a notice by Paperlinx or Paperlinx LLC under clause 7.7 of the SPS Terms, and the question should therefore be answered in the affirmative. 7. Mr Jackman contended to the contrary. He submitted that clause 7.7, which commences with "If", should not be construed in such a way that Paperlinx would effectively be able to stultify the mandatory process under clauses 7.1 to 7.3. Equally, clause 7.7 should not be construed so as to enable Paperlinx to stultify the process under clause 7.4 which, at least to the extent of paragraph 7.4(c), was itself mandatory. 8. Mr Jackman submitted that the last sentence of clause 7.7 required the Issuer to act consistently with any notice given by Paperlinx under the clause, but the word "otherwise" should be construed as "in a way different from" a notice received under the clause, rather than "in circumstances other than those already referred to". 9. It was put that clause 7.4 should be construed as paramount to clause 7.7 such that, as its opening words suggest, the Issuer had the power to give an Issuer Realisation Notice even if no notice had been given to it under clause 7.7. 10. Mr Jackman accepted that an Issuer Realisation Notice had to be in accordance with clause 7.5. In that regard, he submitted that the second paragraph of clause 7.5 should be read as providing that the Realisation Method is to be determined in accordance with clause 7.7 "if applicable". 11. Finally, Mr Jackman pointed to certain parts of the Product Disclosure Statement dated 7 March 2007. He said that this document was available as an aid to construction either because it pre-dated the contracts made when the SPS were issued to the Holders, or because it could be inferred that there had been no material change from the initial Product Disclosure Statement dated 22 February 2007. Mr Jackman referred me to parts of the Product Disclosure Statement (including section 1.9 in respect of Risks) where there was nothing to suggest that a resolution or notice under clause 7.7 was a condition precedent to the giving of an Issuer Realisation Notice. Mr Jackman also pointed to statements to the effect that the Issuer had the right to Realise SPS in certain events, and references to the Issuer electing to Realise SPS (see, for example, at pages 46 and 62). 12. The applicable principles of construction are not in doubt. The principles that apply to the construction of contracts apply also to trusts (see Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253 at [102]-[116]). As stated in Electricity Generation Corporation v Woodside Energy Limited [2014] HCA 7; (2014) 251 CLR 640 at [35]: "The meaning of the terms of a commercial contract is to be determined by what a reasonable business person would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating"." 1. There are obvious difficulties inherent in the language employed in clauses 7.4, 7.5 and 7.7 of the SPS Terms. The competing constructions both run into linguistic hurdles. Mr Wood's construction encounters the opening words of clause 7.4 which, on their own, suggest that the Issuer has a discretion to give an Issuer Realisation Notice whenever circumstances as described in the clause arise. Mr Jackman's construction runs into the problem that any such notice must be in accordance with clause 7.5 which expressly stipulates that the Realisation Method is to be determined in accordance with clause 7.7. 2. Ultimately, I have come to the conclusion that Mr Wood's construction is to be preferred. In my view, it better accords with the language of clauses 7.4, 7.5 and 7.7 when such is read in the context of the SPS Terms and Constitution as a whole, and in the light of the related instruments, notably the LLC Preference Share Terms. 3. I agree that clause 8.4 of the Constitution is an important provision. It makes it clear that the Issuer may only Exchange or Redeem SPS if an Assignment Event has occurred. Moreover, where such an event does occur, Paperlinx is bound to perform its obligations in connection with the event in accordance with the LLC Preference Share Terms and the SPS Terms. It is true that the third method of Realisation, namely, Resale, is not mentioned, but that method itself involves Redemption if the SPS are not able to be sold to a third party. 4. It is noteworthy that, under the LLC Preference Share Terms, where the Assignment Event involves Realisation (as opposed to a Preference Share Exchange), the giving by Paperlinx of a notice under clause 7.7 of the SPS Terms must take place. 5. Assignment Events under clause 5.1(a) and 5.1(b) involve Realisation whereas Assignments Events under clause 5.1(c) and 5.1(d) involve a Preference Share Exchange (as to which, see clause 11 of the SPS Terms.) 6. Where an Assignment Event occurs under clause 5.1(a), there must be a Realisation Direction under clause 6.3. That is a reference to a notice given under clause 7.7 of the SPS Terms. Where an Assignment Event occurs under clause 5.1(b), there must be a Paperlinx Trigger Notice in accordance with clause 6.2 (given in the events described in clause 6.1). That notice must itself specify the Realisation Method to apply to the Realisation of SPS, and require the Issuer under clause 7.7 of the SPS Terms to give a notice in corresponding terms to SPS Holders. 7. As submitted by Mr Wood, these provisions indicate that, outside the change of control situation dealt with in clauses 7.1 to 7.3 of the SPS Terms, Realisation (at least insofar as it concerns Exchange or Redemption) can only occur where a notice has been given by Paperlinx under clause 7.7 of the SPS Terms. 8. The language of clause 7.4 indicates, and in my opinion the parties should be taken to have understood, that any Issuer Realisation Notices given under clause 7.4 would be in accordance with clause 7.5. A notice in accordance with clause 7.5 must specify the Realisation Method and such method "is to be" determined in accordance with clause 7.7. That is to say, the Realisation Method is to be that specified in a notice given by Paperlinx or Paperlinx LLC under clause 7.7. 9. Accordingly, the last sentence of clause 7.7 should be read as providing not only that the Issuer must not give an Issuer Realisation Notice inconsistent with a notice given under clause 7.7, but also that the Issuer, in the absence of a notice given under clause 7.7, must not give an Issuer Realisation Notice. 10. The opening words of clause 7.4, insofar as they might suggest that the Issuer may give an Issuer Realisation Notice in the absence of a notice given under clause 7.7 must in my view be read down accordingly. 11. I do not think that the above construction gives rise to any risk of stultification of rights by Paperlinx. Where a Holder seeks Realisation by the giving of a Holder Realisation Notice under clause 7.1 of the SPS Terms, Paperlinx is bound by clause 6.3 of the LLC Preference Share Terms to give a notice to the Issuer under clause 7.7 of the SPS Terms. 12. I also do not think that the above construction is undermined by the terms of the Product Disclosure Statement (which I will assume is available to be considered as an aid to construction). The Product Disclosure Statement, which by its nature is merely a summary of a complex set of provisions, does not shed much light on the issue. It does not in terms deal with clause 7.7 of the SPS Terms. It is true that it contains some statements that are perhaps supportive of, or at least consistent with, Coastal's construction. However, there are also statements that seem to support the Paperlinx construction. For example, in section 1.5 Maturity and Realisation (on page 8) it is stated that Paperlinx elects how SPS are to be Realised. 13. For the above reasons, I have concluded that the plaintiff would be justified in proceeding on the basis that, on the true construction of clause 7 of the Paperlinx SPS Terms, as contained in Schedule 1 of the Constitution of the Paperlinx SPS Trust, it may only give an Issuer Realisation Notice under clause 7.4 if it has received notice from Paperlinx or Paperlinx LLC under clause 7.7. 14. The Court, pursuant to s 63 of the Trustee Act, advises the plaintiff accordingly. 15. I should add that Mr Jackman raised an alternative argument in the event that clause 7 was so construed. He submitted that in those circumstances, clause 17.4 of the Constitution could be called in aid to require Paperlinx to issue a notice under clause 7.7. This submission raises issues that go beyond the particular question about which the plaintiff sought advice, and such issues were not fully argued. I therefore do not propose to deal with the alterative argument. ********** 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: 22 May 2015