On 14 July 2016, the Full Federal Court allowed the appeals of five former Directors of Australian Property Custodian Holdings Limited, the responsible entity (RE) of the Prime Retirement and Aged Care Property Trust, setting aside pecuniary penalties imposed against the Directors by the trial judge.
On 19 July 2006, the Directors resolved to amend the Trust’s constitution to provide for substantial new and increased fees to become payable to the RE in its personal capacity. This included, among other fees, a new listing fee to be payable to the RE if the Trust was listed on the ASX. Following this Board meeting on 19 July 2006, two of the Directors signed an amending deed containing the relevant amendments to the Trust’s constitution. On 22 August 2006, the Directors resolved to lodge the amended constitution with ASIC. On or about 23 August 2006, the RE lodged with ASIC a consolidated constitution containing those amendments. The units in the Trust were then officially quoted on the ASX and over the period 26 June 2007 to 27 June 2008 the Listing Fee was paid out of scheme property to the RE and then to entities associated with one of the Directors, Mr Lewski.
Please see our publication on the trial judgment for further background on the Trust here.
At first instance, Murphy J held:
- In passing the resolution to lodge the constitution amendments with ASIC, the Directors breached their duties to act in the best interests of the Trust members under section 601FD(1) of the Corporations Act 2001 (Cth) (“the Act”).
- The payment of the listing fee involved a contravention by the RE of the related party benefits restrictions in section 208 of the Act (as modified by Part 5C.7) and contraventions by the Directors of section 209(2) (as modified by Part 5C.7) in that they were involved in the RE’s contravention of section 208.
- The resolution of the Directors to pay the listing fee involved contraventions of section 601FD of the Act.1
Pecuniary penalties were imposed on the Directors as a result of these contraventions.2 The Directors then appealed to the Full Federal Court.
Power of responsible entity to amend the constitution of a registered scheme under section 601GC(1) of the Act
On appeal, the Court considered section 601GC(1) of the Act and held that the Directors did not have the power to amend the constitution as described. Under section 601GC(1), the constitution of a registered scheme may be modified, or repealed and replaced with a new constitution, either by special resolution of the members of the scheme or by the responsible entity if the responsible entity reasonably considers the change will not adversely affect members’ rights. The amendments to the Trust’s constitution were adverse to members’ rights as they involved the payment of additional fees out of the scheme to the RE in its personal capacity.
In determining whether a change to the constitution will adversely affect members’ rights under section 601GC(1)(b), the Court endorsed the approach in 360 Capital Re Ltd v Watts (2012) 36 VR 507 (“360 Capital”) over that of Barrett J in ING Funds Management Ltd v ANZ Nominees Ltd and Others(2009) 228 FLR 444 (obiter dicta) and in Re Centro Retail Ltd (2011) 255 FLR 28.3 Specifically, as per 360 Capital, the Court considered that “members’ rights” include a member’s right to have the managed investment scheme managed according to the constitution. However, it does not follow that any change to the constitution will be adverse to members’ rights.
The Court also considered the operation of section 601GC against clauses 25.1 and 34.1 of the Trust’s constitution which together prohibited any amendment of the constitution in favour of the RE. The Court regarded section 601GC as a freestanding provision providing the statutory power to amend the constitution of a registered scheme, irrespective of any limitation upon the power to amend within the constitution.
Validity of the Deed and the amended constitution once lodged with ASIC under section 601GC(2)
Notwithstanding that the RE and the Directors did not have the power to amend the constitution as described, the Court considered that the Deed amending the constitution was valid and binding on and from the day it was signed until it was subsequently declared invalid by a court. On execution of the Deed, clause 4(a) imposed an instantly binding obligation on the RE to lodge the amended constitution with ASIC as soon as practicable. The Court then held that the amended constitution was effective under section 601GC(2) once the Deed was lodged with ASIC on or about 23 August 2006, and the RE and its Directors could rely on the amended constitution as lodged until it was set aside by the Court.
Duties of officers of a responsible entity under section 601FD(1)
The Court then considered whether the Directors had breached their duties under section 601FD of the Act in passing the lodgement resolution on 22 August 2006. In determining whether the Directors had contravened section 601FD, ASIC could not rely on the 19 July 2006 resolution as constituting any contravention because the relevant limitation period had expired under section 1317K. The Court had to consider what the issue for determination was on 22 August 2006, what considerations became relevant to making that decision and the responsibilities of each Director.
The Court proceeded on the basis that the Directors’ resolution on 19 July 2006 approved the amendments to the constitution and the Directors resolved on 22 August 2006 to lodge the consolidated constitution with ASIC. The Courtconsidered that the relevant Deed to amend the constitution had been purportedly made on 19 July 2006 and the lodgement resolution did not, and did not need to, re-visit what the Directors honestly believed was a valid resolution at the 19 July 2006 meeting. On that basis, the Court held that the Directors did not contravene their duties in section 601FD(1) by passing the lodgement resolution on 22 August 2006.
With regard to one of the Directors, Mr Clarke, there was insufficient evidence to demonstrate that he voted or assented to the vote for the lodgement resolution. The Full Court noted in its reasoning that it may have been prudent for him to ensure his abstention was clearly recorded.
Contravention of section 208 regarding financial benefits
On appeal the Court also considered whether the RE contravened section 208 (as modified by section 601LC) in relation to the payment of the listing fee and whether the Directors were involved in any such contravention by the RE. Under section 208 any financial benefit given out of scheme property to the responsible entity requires members’ approval. However, this does not apply to the payment of fees to a responsible entity payable under the constitution. Therefore, on the assumption that the lodgement resolution and the Deed amending the constitution were already in place when the decision was made to pay the Listing Fee, it was held there was no relevant contravention under section 208.
- The rights of members of a managed investment scheme include the right to have the scheme administered according to the scheme constitution (see 360 Capital). Thus any proposed amendment to a scheme’s constitution will affect members’ rights, but it does not follow that any change to the scheme constitution will be adverse to members’ rights under section 601GC(1)(b).
- Amendments to a scheme constitution, once lodged with ASIC, will be valid until set aside.