Waters and Others v Mercedes Holdings Pty Limited & Ors [2012] HCATrans 255 (5 October 2012)

Last Updated: 10 October 2012

[2012] HCATrans 255

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S162 of 2012

B e t w e e n -

ANDREA JANE WATERS AND OTHERS NAMED IN SCHEDULE A

Applicant

and

MERCEDES HOLDINGS PTY LIMITED (ACN 086 169 422)

First Respondent

MAX INVESTMENTS (AUST) PTY LIMITED (ACN 069 137 202)

Second Respondent

MANSTED ENTERPRISES PTY LTD AS TRUSTEE OF THE MANSTED ENTERPRISES SUPERANNUATION FUND (ACN 070 291 986)

Third Respondent

MICHELLE O’GARR AS TRUSTEE OF THE O’GARR SUPERANNUATION FUND

Fourth Respondent

JM CUSTOMS & FREIGHT SERVICES PTY LIMITED AS TRUSTEE OF THE JM CUSTOMS & FREIGHT SUPER FUND (ACN 003 992 569)

Fifth Respondent

OSVON PTY LIMITED (ACN 067 427 418)

Sixth Respondent

ADAM JOHN THORN & GRAHAM DEAN AS EXECUTORS AND TRUSTEES OF THE ESTATE OF THE LATE MR JOHN LEWIS THOM

Seventh Respondent

MARK ROBERT HODGES & JANET ANNE HODGES AS TRUSTEES OF THE CHARLES ROBERT HODGES SUPER TRUST FUND

Eighth Respondent

Application for special leave to appeal

GUMMOW J
HAYNE J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 5 OCTOBER 2012, AT 10.24 AM

Copyright in the High Court of Australia

____________________

MR S.G. FINCH, SC: If the Court pleases, I appear with my learned friend, MR J. A. ARNOTT, for the applicants. (instructed by Allens Lawyers)

MR N.C. HUTLEY, SC: If your Honours please, I appear with my learned friend, MR R.D. GLOVER, for the respondent. (instructed by Johnson Winter & Slattery)

GUMMOW J: Yes, Mr Finch.

MR FINCH: Your Honours, the issue in this case is a short one of statutory construction of section 208 of the Corporations Act, specifically insofar as that section has its form adapted to responsible entities of managed investment schemes. The effect of the decision of the Full Court of the Federal Court is confined but important. Subsections 208(1)(d) and (e) respectively provide for two alternative sets of circumstances where a responsible entity may give a financial benefit to a related party. The circumstance in (d) is where there is member approval of the benefit and the alternative circumstance in (e) is where the giving of the benefit falls into a nominated list of exceptions. The trial judge and the Full Court unanimously found that the requirement to plead and the onus of establishing the second alternative set of circumstances, that is, the exceptions, fell not on the party alleging contravention, but on the party denying contravention. We say that was an error of construction. It is a short point because there are - - -

HAYNE J: Well, the party denying contravention and alleging engagement of one of the exceptions.

MR FINCH: We say the second half of that proposition does not necessarily follow, your Honour. That encapsulates the error. We say that because the structure of the section was that there were two ways in which contravention might not occur, that the essential error was to give primacy to the first of those ways, that is, member approval, and secondary importance in effect elevating subsection (e) to a matter of affirmative defence rather than simply another way which was necessary to negative before the contravention occurred.

HAYNE J: But if the Full Court is not right, does not the action then proceed with the plaintiff setting up a series of straw dummies and knocking them over or attempting to do so?

MR FINCH: Yes, it negatives the existence of each of the exceptions, that is, as your Honours probably know, the exceptions devolve mostly on considerations of the reasonableness of the benefit in question and the applicant would have to say (a) there is no member approval within (d); and (b) none of the exceptions are engaged because the benefit is not reasonable. I am summarising, of course, the effect of the exceptions. The reason I say the point is short, your Honours, is because, as your Honours may have observed - - -

GUMMOW J: It might be short, but the question is, was the Full Court wrong?

MR FINCH: Yes, indeed. I should have drawn to your attention, your Honours, though that pleadings have not even closed in the matter yet. The defence is not even filed, and we do not suggest that the Full Federal Court stated the tests wrongly; we simply say that they got the answer wrong. As your Honour knows, perhaps a short piece of background is marginally important. They are representative proceedings commenced by unit holders of a fund. The responsible entity of the fund is a firm called MFSIM. It is said to have breached section 208 on a number of occasions over a number of years. The respondents sued were of various types. They included KPMG, one of whose partners was a compliance auditor of the compliance plan as it affected the managed investment scheme. That is a very limited role.

I will not take your Honours through it, but it is set out in application book 102 and 103. Importantly, though, the effect of that is KPMG is not said itself to have contravened section 208. It is said – and I am summarising again – to have been negligent for not spotting during the course of the compliance audit that MFSIM had breached section 208. So that, if your Honours turn for a moment to paragraphs 30 and 31 of the judgment in application book 103, if your Honours would be good enough to turn to 103, the point arises this way. Your Honours see at paragraph 30 an extract from the pleading which pleads MFSIM’s failure to comply with section 208 and, as the Full Court correctly noted then, at about lines 38 and following:

The concern raised by the auditors is that while there is a pleading as to:

• the conditions set forth in s 208(1)(a) to (c) –
  

which I will come to, and the absence of the approval, which is the matter in (d):

there is no pleading that:

• the exceptions . . . do not apply”.
  

That is a correct statement, with respect, of the question that arises. If your Honours have the bundle of authorities convenient, I will go straight to the structure of the relevant sections. I hope under tab 1 of that bundle, your Honours find some extracts from the Corporations Act. Do your Honours have that? Your Honours will have noticed perhaps that section 208 appears in a couple of different forms. I should out of courtesy to my learned friend just take your Honours through the forms which are not strictly relevant for the moment because the Full Court did refer to them.

Your Honours see the first page I hope has the section 207 which is in its form relevant to the application of section 208 to public companies. If your Honours would pause there for a moment, your Honours will see that there is a purpose said to be given to the Chapter:

to protect the interests of a public company’s members as a whole, by requiring member approval for giving financial benefits that could endanger those interests.

As your Honours may have seen, the Full Court gave particular weight to the mention there of member approval. What we would ask this Court to observe just for the moment though, of course, is that, while that is mentioned, the structure of the section makes it absolutely plain that member approval is one of two ways in which the financial benefit may be given. The second is that the expression “endanger those interests” is shorthand for the type of concepts which are contained in the exceptions which are later set out.

I will not spend any time, if your Honours turn over the page, to the public company form of section 208. We say that the Federal Court rightly said in paragraph 21 that there was no material difference between that form and the later form which I will come to which gives the case some wider application.

Your Honours see that the consequences of breach are set out in section 209. That is in a form which is common both to the responsible entity format of 208 and the public company format of 208 and then, importantly for today’s purposes, your Honours see starting at section 210 is a list of exceptions to the requirement for member approval. They stay in the same form mutatis mutandis as set out later on in respect of responsible entities except that your Honours should note, although it does not really affect today’s argument, that sections 213 and 214 do not apply in the incarnation of section 208 as it applies to responsible entities. That does not really affect today’s argument.

If your Honours would then turn through the bundle to section 601LA which appears, if one looks at the bottom right-hand corner of the pagination of the Act itself at page 37, these are the adaptions that are necessary to that structure insofar as the public company form is then altered for the purposes of dealing with managed investment schemes. Your Honours will notice at the bottom of that page that the purpose section is slightly enlarged, but not materially differently. The same two remarks that I made earlier about section 207 continue to apply there.

Then your Honours see over the page 601LC replaces the earlier form of 208 in its public company form with a form which is now relevant and was relevant for the purposes of the trial judge in the Full Court’s consideration. Can I just step your Honours very briefly through the structure and form of 208? Your Honours see that subsection (1) says:

If all the following conditions are satisfied in relation to a financial benefit –

Pausing there, the expression “all the following conditions” must be a reference to (a), (b) and (c), because the prefatory word “if” is then followed by a “then” which your Honours see halfway down the page which follows (c). So that, as it were, there are three what one might call gateway provisions to the rest of the section.

Then, if those three gateway provisions and each of them are satisfied then, for the person referred to in paragraph (a) – and there are three perhaps types of persons but that does not matter today – for the person to give the benefit, either – and that is a very important word today – either (d) or (e), and (d) simply says either the persons must “obtain the approval”, and there are certain time stipulations; or (e):

the giving of the benefit must fall within an exception set out in sections 210 to 216.

Your Honours might observe in passing if you look across the page at 601LD that, notwithstanding the nomination of 210 to 216, relevantly 213 and 214 come out. It is less than elegant. For our purposes, what we would ask this Court to observe is this - and this is our simple point – the structure and substance of that section as set out there is that there are two different but equally weighted ways in which the benefit may be given. There is no primacy given by this Act to either way. Neither comes first in any sense.

It is not the case, for instance, that there is a trigger for contravention constituted by the failure to obtain member approval which is then subject to an exculpatory exercise constituted by establishing one of the exceptions nominated because, if one of the exceptions is live, then there is simply no need to get member approval at all. That simply does not apply. That is simply a working out of what we say is the equally weighted two alternative ways in which the benefit may be given.

In the words of the authorities - and, as I said, we do not suggest that the court got the authorities wrong – I will only take your Honours momentarily to it, a complete statement of the rule of contravention of 208 must deal with (e). It cannot stop at (d) because the section does not stop at (d), nor does the section say the section is contravened if there is no member approval unless you get one of the exceptions. It simply says the person may give a financial benefit in two sorts of ways. One of the ways is (e).

The Full Court’s reasoning appears in particular detail at paragraphs 37 and 38 at application book 105, if your Honours would be good enough to turn up that. Perhaps before I get there I should pause. I said I would not go through the authorities because their Honours, we say, got the tests right. Would your Honours just recall back at application book 97 what his Honour Justice McHugh said in Avel? It is in paragraph 16. Your Honours have seen this many times before, but the reason why I am using this form of words and the reason the Full Court used this form of words is that extract from Justice McHugh’s remarks in Avel:

When a statute imposes an obligation which is the subject of a qualification, exception or proviso, the burden of proof concerning that qualification, exception or proviso depends on whether it is part of the total statement of the obligation.

That phrase is why the Full Court was using that terminology and why I do –

If it is, the onus rests on the party alleging the breach of the obligation. If, however, the qualification, exception or proviso provides an excuse or justification for not complying with the obligation, the onus of proof lies on the part alleging that he falls within the qualification –

I do not need to go any further because the rest of the authorities simply say the same thing, sometimes in different words. If your Honours turn to paragraph - - -

HAYNE J: That has to be applied to an Act which is speaking in this form of “if then”, but speaking to the future, not looking to past events.

MR FINCH: Yes. Their Honours’ judgment is admirably concise. It starts under the heading “The Necessity to Plead” at paragraph 36. The four dot points are four of the conceptual ways in which they supported their remarks, but for brevity today can I go straight to paragraph 37 because the heart of the error is the error as I have stated it, that is, the giving of primacy to one of two alternative means. If I am wrong about that, the rest of it is just different ways of saying the same thing, and if I am wrong about that I have no other real way of challenging the matter. Your Honours see that if your Honours pick out the last two lines on page 105 of the application book:

it is considered that s 208(1)(a) to (d) constitutes a complete statement of the general rule.

That, with respect, is the essential error. The reason their Honours used that language is, as they correctly say, they are picking up Justice McHugh’s language. We have dealt in our written submissions with why we say that is an error. I have already said pretty much what I want to say about that. Can I just pick out a couple of matters of emphasis about that, your Honours?

We have already stated our principal point which is that there is no contravention of section 208 on the face of section 208 if either of (d) or (e) applies. To say that the general rule of the section stops after one of those two permitted ways is the core error.

GUMMOW J: What would follow from it?

MR FINCH: What would follow from it is that it is for - - -

GUMMOW J: As to the construction of this onus problem?

MR FINCH: If we are right about it, it would follow that it is for the applicant to plead that none of the exceptions applied and to prove in due course that none of the exceptions applied and, if a respondent were brave enough, it could wait to see whether they did so and point to the failure to do so as a complete answer, and it would be - - -

HEYDON J: An onus of proof to establish a negative. That is an unusual thing.

MR FINCH: Not impossible though, your Honour, and we say the form of the section mandates it.

GUMMOW J: Well, that is the question. Why would you strain for it to mandate it?

MR FINCH: We do not need to strain, your Honour. We say that the section simply says a related - - -

GUMMOW J: When there is another and perhaps more sensible view of the matter?

MR FINCH: Well, particularly in the circumstances of this case, we would take issue with that, your Honour, because for instance here KPMG is not the contravener. One can imagine that it is easy to fall into a cast of mind which says a contravener is the person who must naturally know whether or not any of the exceptions are enlivened and it is easier for them to do it. Whether or not it is easier does not answer the question of what the statute says about whose job it is.

Secondly - and I admit this is of less relevance – in a case like this where KPMG is not the contravener but is said to be negligent in not spotting that somebody else has contravened, it does not follow at all that KPMG is the natural person who might and should be able to shoulder the burden of establishing that the exceptions did apply. It is just as difficult, we say, for a third party like that to establish that somebody else fell within an exception as it might be for an applicant to negative the same concept. So that there is an equally weighted difficulty on both sides of the equation, particularly in this case.

HAYNE J: But even if that were so – and I am by no means certain that it is – is it not important to identify that (d) speaks of a positive step - obtaining approval - and (e) is expressly cast in terms of exception?

MR FINCH: Yes, I accept that entirely, your Honour.

HAYNE J: Is not the essence of your point that (d) and (e) are relevantly indistinguishable?

MR FINCH: Indistinguishable in terms of they are both alternative equally weighted ways in which the benefit can be given. In that sense, yes, they are indistinguishable. Conceptually of course they are quite different, but I take it that is not your point.

HAYNE J: No.

MR FINCH: So, your Honour, I think I agree with what your Honour says. What we say is that, leaving aside what might first appear to be the natural forensic conclusion, that is, if there is an exception, surely it is for the person who wants to rely upon the exception to prove it, if one pulls back from that, firstly one observes here that KPMG is not the natural contradictor - - -

HAYNE J: But why drive the construction by consideration of the ancillary party? I understand what you say about KPMG being off stage right.

MR FINCH: Yes, I do not; in fact that is exactly what we do not do and, as I said, that is of less relevance generally. Generically it cannot be relevant that my client in particular is an observer of the contravention. We rely on the structure and substance of 208 which says a related party can give a benefit – sorry, a responsible entity, I apologise, can give a benefit to a related party in two ways: one, they can get approval; two, in certain exceptional circumstances.

The word “exception” does not import that it is for somebody else to establish if it is exceptional. It simply is another route which ensures compliance with 208, and it is simply wrong to say that as soon as there is no member approval there is a trigger of non-contravention of 208. That is simply another – and that is the way the Full Court puts it.

That is not conceptually different from their central error though. That is simply a product of the central error, which is to read the exceptions as conceptually different from member approval. In a sense, it is correct to observe that the applicants always have to prove a negative. They have to prove the absence of member approval as well; that is a negative. One can see that factually and forensically one is a lot easier to do than the other.

HEYDON J: It is a simple thing to do, though.

MR FINCH: It is, but the fact that it is simple does not make it conceptually different from (d) to (e). Your Honours, I do not want to go on too long about it because most of what follows from there on in 37 and 38 are workings out of that same conceptual error and if I am wrong about that, not much of what I say thereafter is persuasive. But your Honours might note, for instance, at application book 106 in the course of paragraph 37, if your Honours look about four or five lines from the top, their Honours say:

The use of the disjunctive “or” immediately after sub-par (d)(ii) of s 208(1) (as modified) also marginally assists –

but their Honours do not recite the word “either” which happens before that, and that is crucial because it sets up the equally weighted point that I have made. The red light has come on, your Honours. There are some

conceptually different but smaller points which are not going to be decisive for your Honours which I do not need to go - - -

GUMMOW J: It seems to come back to that second sentence in paragraph 37 on page 105, “a complete statement of the general rule”.

MR FINCH: Yes.

GUMMOW J: But then if that is not so, what then follows from the presence of the disjunctive before (e)?

MR FINCH: What happens is that they have left out as a complete statement the other half of the either/or.

GUMMOW J: Yes, suppose they have, but how does that deny their conclusion as to the first half?

MR FINCH: I am not sure I understand the import of your Honour’s question. What we say is that the Full Court has decided that it is not necessary for the applicant itself to establish the negative in (e) as well as the negative in (d). That is the error that they have made. Effectively, they have ruled a line under (d) and said that (e) is a matter of affirmative defence. We say that is the conceptual error. If I am wrong about that, I think the rest of the points that we have raised are not going to be particularly persuasive.

There are other, as I say, smaller points, particularly about, as I say, taking into account whether it might be expected that somebody who is a respondent might be in a position to establish the exceptions but, as I have said, that will not always be true and cannot be determinative of the construction. Unless your Honours need anything further, I see my time has run out.

GUMMOW J: Thank you. Yes, Mr Hutley, what do you say about this last point Mr Finch was just explaining to us?

MR HUTLEY: Your Honour, in effect it just asserts the ultimate issue. It does not explain the process of reasoning through to the ultimate issue. The Full Court were apprised of the fact that there was the question which is developed in the authorities, is there a complete statement of the relevant offence in certain words or, for a complete statement, does one have to include the provision which is argued to be either part of the complete statement or a defence?

That was the question of construction which confronted the court. The principles are agreed to have been correctly stated by cases in this Court and the question was, what was the answer? Did you have to go beyond (d) to (e) to get the complete statement? The court found no. It did that by having regard to a number of matters, not least the.....of central purpose in 207, not least the fact of the reference to “exception” and the fact that when one goes to what those exceptions are, one moves from (e) back to the actual provisions with which one is dealing, and those provisions your Honours will find behind tab 1 in the material at page 304 in the bottom left-hand corner. They commence straight after with the division – Chapter 2E. If your Honours move to 304 your Honours will see 210.

GUMMOW J: Yes.

MR HUTLEY: The heading is “Exceptions to the requirement for member approval”, and in each of these sections – and it is important to note the quality of the sections:

Member approval is not needed to give a financial benefit on terms that –

So, in effect, each of these provisions which are said to be part of the essential definition of the offence on our learned friend’s argument commence by saying that which is what we say is the essential requirement, “is not needed if”. They then go on – and 210 is a good example – to set out a number of qualitative requirements:

Member approval is not needed to give a financial benefit on terms that:

(a) would be reasonable in the circumstances if the public company or entity and the related party were dealing at arm’s length; or

(b) are less favourable to the related party than the terms referred to in paragraph (a).

One stops for a moment as this being an example of the problems of proving a negation of that. It is immensely difficult. Then one moves on to the - - -

HEYDON J: It would be a very wasteful inquiry if in fact no one was ever going to try and run an argument of that type.

MR HUTLEY: Precisely, and when one goes through all the other – I will use the term “exceptions” – 211, 212, 213 and 214 are out for the particular operation, but if one sees that this is really in effect cognate with 208 - one can be informed by 213 and 214 – you can just imagine the glee of being a

defendant to a case like this, just sitting there crossing one’s fingers that one had failed to negate every one of the possible internal alternatives in every one of these sections, and be able to stand up at the end of the day. They have not called - - -

HEYDON J: Calm down, Mr Hutley.

MR HUTLEY: It is his Honour’s last day and your Honours indicated that ours was going to be quick.

GUMMOW J: It is not my colleague’s last day. Now, we do not need to hear you any more, Mr Hutley.

MR HUTLEY: If your Honour pleases.

MR FINCH: Your Honours, I think in reply I would be repeating myself.

GUMMOW J: The Court is of the view that there is no reason to doubt the correctness of the conclusion reached by the Full Court of the Federal Court in this matter. Accordingly, special leave is refused with costs.

We will adjourn to reconstitute.

AT 10.51 THE MATTER WAS CONCLUDED