On 26 July 2016, the Supreme Court of New South Wales – Court of Appeal – dismissed an appeal by AMP Life Ltd from the orders made by Brereton J on 27 June 2016.1 The orders dealt with the construction of section 253E of the Corporations Act 2001(Cth) (Act). Bathurst CJ and Meagher JA concurred with Barrett AJA who endorsed Brereton J’s interpretation of section 253E. His Honour held that none of the responsible entity (RE) or any of its associates can vote on a resolution where any of them has an interest other than as a member in the relevant resolution (except for a resolution to change the RE of a listed scheme).
AMP Capital Funds Management Ltd (AMP Capital) is the RE of the AMP Capital China Growth Fund, a registered, listed managed investment scheme. A meeting of members had been convened for 28 July 2016 to consider two resolutions: one to restructure the fund; the other to wind it up. AMP Life is a member of the Fund and was determined, by reference to section 12 of the Act, to be an associate of AMP Capital. AMP Capital applied to the Court for judicial advice, and in the alternative for declaratory relief, on whether section 253E of the Act prohibited AMP Life from voting on the resolutions. At first instance, Brereton J interpreted section 253E broadly and held that it prevented AMP Life from voting. AMP Life appealed the decision.
Interpretation of section 253E of the Act
There has been uncertainty about the interpretation of section 253E for some time. Section 253E provides:
“The responsible entity of a registered scheme and its associates are not entitled to vote their interest on a resolution at a meeting of the scheme’s members if they have an interest in the resolution or matter other than as a member. However, if the scheme is listed, the responsible entity and its associates are entitled to vote their interest on resolutions to remove the responsible entity and choose a new responsible entity.”
On the narrow interpretation of the provision, it is only the person(s) that has the interest in a resolution other than as a member that is prohibited from voting. On the broader interpretation, if any one of the RE or an associate has an interest in a resolution other than as a member, the RE and all of its associates are prohibited from voting.
In Re Great Southern Managers Australia Ltd (ACN 083 825 405) (recs and mngrs apptd) (in liq) and Others - (2009) 76 ACSR 146 Davies J [at para 25] said that “I read the words “if they have an interest” as a reference only to the interest of the entity voting and not as including the interest of the RE.”
However, Brereton J favoured the broader approach. The Court of Appeal agreed: as a matter of “grammar and syntax”, the reference to the “RE and its associates” in the provision should be interpreted as a “single block”, not “individual entities”.
Brereton J also referred to the “prophylactic purpose” of the provision to remove the potential for a conflict of interest:
“As it seems to me, the purpose of s253E is to preclude the risk that, if a responsible entity or any of its associates has an extraneous interest in a resolution, any of them might vote by reference to that interest regardless of which of them has it. It advances that purpose to construe s253E as operating, in circumstances where the responsible entity itself has an extraneous interest other than as a member, to disentitle it and all of its associates from voting on the resolution; it would detract from that purpose to adopt the narrower construction. The provision would not achieve its purpose if it only disqualified an associate where that associate had an interest.”
Even on a narrow interpretation of section 253E, AMP Life could have been prohibited from voting. This is because the Court could have held that, due to the nature of the association – the common ownership by AMP Limited – AMP Life had an indirect interest in the income of AMP Capital.
There will, however, be other resolutions where an RE will have an interest other than as a member, but its associates do not. Not only will the associate not have an interest in the resolution other than as a member, it may be under a contractual obligation to vote in accordance with the directions of a completely unrelated party. The Courts’ interpretation of section 253E will prevent the associate from doing so. Whether an entity is an associate will depend on, among other things, whether the RE (or an entity that controls it) controls it or vice versa.2
Consider the example of two companies within the same group: one acts as an RE and the other, as a custodian. The custodian provides services to unrelated third parties, and, under its contract with those third parties, the custodian must act, and may only act, in accordance with the directions of the third party. The custodian would, nevertheless, not be able to vote interests in schemes if the RE is an associate with an interest in the resolution other than as a member of the scheme. Similarly, where a trustee invests in a scheme, the trustee will not be able to vote its interests if the scheme’s RE is an associate of the trustee and has an interest in the resolution other than as a member of the scheme. This is the case even though the trustee’s prevailing duty is to act in the interests of the trusts’ beneficiaries and not its corporate group’s interests. The voting right of the custodian/trustee will, therefore, depend on whether it is an associate of the RE under the relevant provisions of the Act, including sections 12 and 50AA. An application of these provisions will require consideration of who has the capacity to determine the outcome of decisions about the financial and operating policies of a custodian/ trustee and whether a distinction can be drawn between the company’s general financial and operating policies and (at least) its operating policies as custodian/trustee.
The case will, no doubt, give cause for responsible entities to consider the implications for their registered schemes and investment structures. It may be of particular interest to those larger corporate groups that have custodians, platforms and registered schemes where the custodians and platforms invest in the schemes or otherwise have inter