MacarthurCook Fund Management Limited v TFML Limited [2014] HCA 17

What the court decided

The appeal concerned whether redeeming certain interests in a managed investment scheme was a withdrawal within the meaning of Part 5C.6 of the Corporations Act 2001 (Cth) (the Act) [1]. Under section 601KA(3)(b), the responsible entity of a registered scheme that is not liquid must not allow a member to withdraw otherwise than in accordance with the constitution and a statutory procedure for withdrawal offers made to all members [6].

RFML Ltd (RFML), the responsible entity of an unlisted unit trust (the Trust) that was a registered scheme, was later replaced by TFML Ltd (TFML) [7]. MacarthurCook Fund Management Ltd (MacarthurCook) underwrote a public offer of units in the Trust [11]. Under three facility agreements, RFML issued MacarthurCook 15 million units of a separate class (Subscription Units), of which MacarthurCook was the only holder, held by Sandhurst Trustees Ltd (Sandhurst) as custodian and agent [13]. A term of issue required RFML, subject to compliance with any requirements of the Act and the constitution, to redeem the units during a 12 month subscription period from funds raised by the offer [14]. By 29 September 2008 the offer had raised $12,347,079 but RFML had redeemed none of the units, and on that date it gave notice that it had suspended all "withdrawals" [15]. The scheme was not liquid throughout the suspension [16].

MacarthurCook and Sandhurst sued TFML for damages for breach of the term [17]. Hammerschlag J held that section 601KA(3)(b) applied, but that RFML had sufficiently complied with the constitution and the statutory procedure by entering into the facility agreements or, if not, had breached an obligation to do what was necessary to comply; he assessed damages at $10,809,868 [18]. The Court of Appeal (Meagher JA, with whom McColl and Macfarlan JJA agreed) held that the section applied and had not been complied with, so RFML had not breached the term, which was subject to the Act [19]. It also reversed the primary judge's finding that RFML had breached a further obligation [19].

In joint reasons, French CJ, Crennan, Kiefel, Bell and Gageler JJ allowed the appeal [33]. The Court refused to let TFML argue for the first time that redeeming after 29 September 2008 would have breached RFML's duty to act in the best interests of unitholders, as that argument relied on a "contestable, and contested, view of the facts" [21].

The Court said that the structure of Part 5C.6 and section 601GA(4) indicates that the withdrawal it regulates involves an act of choice by the member [22]–[23]. That reading was reinforced by the legislative purpose of Part 5C.6, as revealed by its legislative history, which addressed investors choosing to exit a scheme, not exits without choice or the performance of a responsible entity's duties [24], [28]. A member withdraws if the member acts so as to result in the responsible entity returning the whole or part of the member's contribution [29]. A member does not withdraw merely because the responsible entity performs an obligation to redeem arising under the terms of issue of a class of interests, if those terms require it to be performed independently of any act of the member [29].

TFML argued that redemption at a stipulated time was no different from redemption at the member's call [30]. The Court rejected it: the argument postulated a separate contractual obligation to redeem, but here the obligation formed part of the terms of issue [31]. The necessary volition is not found merely in subscribing on agreed terms of issue, or in a choice whether to sue to enforce them [31]. The responsible entity's general duties still apply, but Part 5C.6 adds no further obligation in performing such an obligation [32]. Redemption of the Subscription Units therefore was not withdrawal, section 601KA(3)(b) had no application and the appellants' argument that RFML had breached its obligation to redeem was accepted [20], [33].

The Court set aside paragraphs 1 to 4 of the Court of Appeal's order and, in their place, set aside paragraphs 2 and 3 of the primary judge's order, ordered judgment for MacarthurCook and Sandhurst against TFML for $10,809,868 plus pre-judgment interest and otherwise dismissed the appeal to the Court of Appeal [34]. TFML was ordered to pay the appellants' costs in all three courts, and the parties had leave to seek a variation of the orders within 14 days [34]. Agreed orders affecting Zhaofeng, the renamed RFML, were not made as it was not a party to the appeal [7], [34].

Why it matters

The Court left open how a separate contractual obligation to redeem, as distinct from one in the terms of issue, is to be treated [31]. On the Court's test, a redemption following a request the holder makes after issue is likely to be a withdrawal regulated by Part 5C.6 [22], [29]. Nor did the Court decide whether the best interests duty, which still applies, could justify not redeeming while a scheme is not liquid; that argument was not open on appeal [21], [32]. Readers should check the current text of the provisions.

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.