FEDERAL COURT OF AUSTRALIA

Waters v Mercedes Holdings Pty Limited [2012] FCAFC 80

THE COURT ORDERS THAT:

1.    Leave to appeal is granted to the Applicants.

2.    The appeal is dismissed.

3.    The Applicants for leave to appeal pay the Respondents’ costs of and incidental to their application for leave to appeal and the appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

The Court:

1    In April 2009 a representative proceeding pursuant to Pt IVA of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act) was commenced in respect of the collapse of a registered managed investment scheme, the Premium Income Fund (formerly called “the MFS Premium Income Fund”) (the Fund). The respondents to that proceeding are Ms Waters, a partner of KPMG, other partners of KPMG, the former responsible entity of the Fund and a number of former officers of that responsible entity. Ms Waters was the compliance plan auditor of the Fund for the financial years ended 30 June 2005, 30 June 2006 and 30 June 2007. She commenced in that role in May 2003.

2    The proceeding has not progressed smoothly. The applicants in the proceeding (the investors) have attempted to re-plead their case on a number of occasions. The most recent attempt was the subject of a judgment given by the primary judge on 14 December 2011: Mercedes Holdings Pty Ltd v Waters (No 5) [2011] FCA 1428. The primary judge permitted some amendments to be made to the Amended Application and to the Amended Statement of Claim. Orders giving effect to his Honour’s reasons were made on 31 January 2012.

3    Leave is now sought to appeal from part of the orders made on 31 January 2012. The applicants for leave (the auditors) are Ms Waters and the other named partners of KPMG. The other respondent parties in the proceedings below are not parties to the auditors’ leave application.

4    The question sought to be resolved should leave to appeal be granted concerns the correct construction of one provision of the Corporations Act 2001 (Cth) (the Corporations Act). The resolution of that question, it is contended, will have important practical consequences for the preparation of the matter for hearing and for the conduct of the hearing.

5    It is concluded that leave to appeal should be granted but that the appeal should be dismissed.

The Relevant Statutory Provisions

6    Those provisions of the Corporations Act which assume present relevance are contained within Pt 5C.7. That part is titled “Related party transactions”. Chapter 5C deals with managed investment schemes.

7    “Related party transactions” are first addressed in the Corporations Act in Ch 2E. Within that Chapter, s 207 expresses the “purpose” of Ch 2E as follows:

The rules in this Chapter are designed to protect the interests of a public company’s members as a whole, by requiring member approval for giving financial benefits to related parties that could endanger those interests.

Part 2E.1, which comprises ss 208 – 227, is titled “Member approval needed for related party benefit”. Division 1 of Pt 2E.1 is headed “Need for member approval”. Section 208, which is the first section in Div 1 of Pt 2E.1, provides, inter alia, for the need for member approval to be given before a company can give a financial benefit to a related party. Section 103 and s 209 provide for the consequences of a contravention of s 208. Sections 210 to 216 set out exceptions to the general prohibition in s 208. Those sections are found in Div 2 of Pt 2E.1—“Exceptions to the requirement for member approval”.

8    Part 5C.7 modifies certain provisions contained within Ch 2E and in circumstances where a “financial benefit” is provided to a related party out of the funds of a registered managed investment scheme. Within Pt 5C.7, s 601LA provides that Ch 2E is to apply to registered schemes “with the modifications set out in sections 601LB to 601LE …”. Section 601LB modifies the “purpose” of Ch 2E as it applies to registered schemes as if s 207 were replaced by the following section:

The rules of this Chapter, as they apply to a registered scheme, are designed to protect the interests of the scheme’s members as a whole, by requiring member approval for giving financial benefits to the responsible entity or its related parties that come out of scheme property or that could endanger those interests.

9    Section 208, as modified by s 601LC to apply to a registered scheme, provides as follows:

208    Need for member approval for financial benefit

(1)    If all the following conditions are satisfied in relation to a financial benefit:

(a)    the benefit is given by:

(i)    the responsible entity of a registered scheme; or

(ii)    an entity that the responsible entity controls; or

(iii)    an agent of, or person engaged by, the responsible entity

(b)    the benefit either:

(i)    is given out of the scheme property; or

(ii)    could endanger the scheme property

(c)    the benefit is given to:

(i)    the person or a related party; or

(ii)    another person referred to in paragraph (a) or a related party of that person;

then, for the person referred to in paragraph (a) to give the benefit, either:

(d)    the person referred to in paragraph (a) must:

(i)    obtain the approval of the scheme's members in the way set out in sections 217 to 227; and

(ii)    give the benefit within 15 months after the approval; or

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

(2)    If:

(a)    the giving of the benefit is required by a contract; and

(b)    the making of the contract was approved in accordance with subparagraph (1)(d)(i) as a financial benefit given to the entity or related party; and

(c)    the contract was made:

(i)    within 15 months after that approval; or

(ii)    before that approval, if the contract was conditional on the approval being obtained;

member approval for the giving of the benefit is taken to have been given and the benefit need not be given within the 15 months.

(3)    Subsection (1) does not prevent the responsible entity from paying itself fees, and exercising rights to an indemnity, as provided for in the scheme’s constitution under subsection 601GA(2).

10    The short point sought to be raised on appeal is whether a party who claims a contravention of s 208 (as modified) must plead and therefore bear the onus of proving that none of the exceptions “set out in ss 210 to 216” (as modified) apply. Insofar as Ch 2E applies to registered schemes, ss 213, 214 and 224 are omitted and, instead of s 224, the prohibition in s 253E is to apply (ss 601LD and 601LE). Section 213 addresses the giving of “small amounts” and s 214 addresses the giving of a financial benefit to or by a “closely-held subsidiary”. Section 210 provides in part, by way of example, that member approval is “not needed to give a financial benefit on terms that would (a) be reasonable …” as part of an arms-length dealing. Section 211 provides that member approval is “not needed to give a financial benefit if the benefit is remuneration … and (b) to give the remuneration would be reasonable …”. Section 212 addresses indemnities, exemptions, insurance premiums and legal costs for officers of the corporation; s 215 addresses financial benefits that do “not discriminate unfairly” and s 216 addresses benefits paid “under an order of a court”. Each of those exceptions commences with the words: “Member approval is not needed …”.

11    Division 3 of Pt 2E.1, which comprises s 217 to s 227, is modified as appropriate and made applicable to managed investment schemes by s 601LA, save that s 224 is omitted and s 225(1) is modified by deleting the reference in that section to s 224(1) and by substituting for that reference a reference to s 253E (s 601LE). Division 3 of Pt 2E.1 lays down in some detail the procedure for obtaining member approval for a related party transaction.

12    Part 2E.2 (ss 228 and 229) defines “related party” and the concept of “giving a financial benefit”.

13    Part 2E.3 (s 230) provides that, notwithstanding the terms of ss 207–229, the general duties of directors still apply.

14    It must be recognised at the outset that the interpretation of s 208 is not without difficulty. Although for the purposes of Pt 5C.7, s 601LC replaces s 208 as it appears in Pt 2E with a modified provision, it does so in a manner which is productive of uncertainty. Thus, for example, s 208(1)(e) (as modified) provides that, in order to be lawful (on the assumption that conditions (a) to (c) are satisfied), the giving of a “benefit must fall within an exception set out in sections 210 to 216” yet s 601LD immediately thereafter provides (in part) that “Chapter 2E applies as if sections 213 [and] 214 … were omitted”. More importantly, the express inclusion within s 208(1) of s 208(1)(e) gives rise to further ambiguity. In the absence of s 208(1)(e), such exceptions as were elsewhere contained within Pt 2E.1 (as modified) would presumably have operated according to their own terms. Further ambiguity and uncertainty is occasioned by the words which introduce both s 208(1)(d) and (e) (as modified) – namely, the words “… then for the person referred to in paragraph (a) to give the benefit, either” s 208(1)(d) or (e) must be satisfied. Such words only create ambiguity and uncertainty as to whether, as is disputed in this appeal, s 208(1)(a) to (c) constitute a complete statement of the “conditions” to be satisfied or whether s 208(1)(a) to (d) are to be regarded as a complete statement of the circumstances in which a financial benefit can be given with the consequence that s 208(1)(e) addresses exceptions. The term “exception” is, of course, the term employed in s 208(1)(e) (as modified) and also in s 208(1)(b) in its unmodified form.

15    Notwithstanding such ambiguity and uncertainty, the task of the Court is to construe the words in fact employed by the Parliament to give effect to the natural meaning of those words and in a manner which promotes and gives effect to the purpose of Pt 5C.7 being the purpose specified in s 207 (as modified by s 601LB).

16    The general principles to be applied when considering a statutory provision which imposes an obligation subject to a qualification have been explained by the High Court on a number of occasions. McHugh J in Avel Proprietary Limited v Multicoin Amusements Proprietary Limited (1990) 171 CLR 88 at 119 summarised these principles as follows:

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. If it is, the onus rests on the party alleging a 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 party alleging that he falls within the qualification, excuse or proviso: Vines v Djordjevitch [(1955) 91 CLR 512 at 519–520 ]. Whatever form the statute takes, the question has to be determined as one of substance: …

The reference to Vines v Djordjevitch (1955) 91 CLR 512 at 519–520 was a reference to the following observations of Dixon CJ, McTiernan, Webb, Fullagar and Kitto JJ:

But whether the form is that of a proviso or of an exception, the intrinsic character of the provision that the proviso makes and its real effect cannot be put out of consideration in determining where the burden of proof lies. When an enactment is stating the grounds of some liability that it is imposing or the conditions giving rise to some right that it is creating, it is possible that in defining the elements forming the title to the right or the basis of the liability the provision may rely upon qualifications exceptions or provisos and it may employ negative as well as positive expressions. Yet it may be sufficiently clear that the whole amounts to a statement of the complete factual situation which must be found to exist before anybody obtains a right or incurs a liability under the provision. In other words it may embody the principle which the legislature seeks to apply generally. On the other hand it may be the purpose of the enactment to lay down some principle of liability which it means to apply generally and then to provide for some special grounds of excuse, justification or exculpation depending upon new or additional facts. In the same way where conditions of general application giving rise to a right are laid down, additional facts of a special nature may be made a ground for defeating or excluding the right. For such a purpose the use of a proviso is natural. But in whatever form the enactment is cast, if it expresses an exculpation, justification, excuse, ground of defeasance or exclusion which assumes the existence of the general or primary grounds from which the liability or right arises but denies the right or liability in a particular case by reason of additional or special facts, then it is evident that such an enactment supplies considerations of substance for placing the burden of proof on the party seeking to rely upon the additional or special matter: …

What is clear from both of these decisions is that the question of statutory construction is to be resolved as a matter of substance rather than as a matter of form. Indeed, the form of the legislation in Vines was such that it would have indicated that the burden was cast upon the defendant – rather than the plaintiff – to prove that the proviso had not been satisfied. In that case, Ms Djordjevitch had been injured whilst crossing a street in Ballarat. She was unable to identify the motor vehicle that struck her. She relied upon s 47 of the Motor Car Act 1951 (Vic) which provided that she could proceed against a nominal defendant named by the Minister. Section 47 further provided that she could so proceed “[p]rovided that” she gave notice to the Minister “… as soon as possible after [she] knew that the identity of the motor car could not be established …”. Notwithstanding the form in which s 47 was expressed, the High Court concluded that the giving of notice was a condition precedent to the cause of action and that Ms Djordjevitch, as the plaintiff, bore the onus of proving that the requisite notice had been given.

17    The emphasis placed upon the question being resolved as a matter of substance and not form is not surprising. In his earlier decision in Dowling v Bowie (1952) 86 CLR 136 at 139–140 Dixon CJ had dealt with criticism of that distinction as follows:

The argument treats the case as governed by the common law doctrine that where a statute having defined the grounds of some liability it imposes proceeds to introduce by some distinct provision a matter of exception or excuse, it lies upon the party seeking to avail himself of the exception or excuse to prove the facts which bring his case within it. The common law rule distinguishes between such a statutory provision and one where the definition of the grounds of liability contains within itself the statement of the exception or qualification, and in the latter case the law places upon the party asserting that the liability has been incurred the burden of negativing the existence of facts bringing the case within the exception or qualification. ….. The distinction has been criticized as unreal and illusory and as, at best, depending on nothing but the form in which legislation may be cast and not upon its substantial meaning or effect. The question, however, where in such cases the burden of proof lies may be determined in accordance with common law principle upon considerations of substance and not of form. A qualification or exception to a general principle of liability may express an exculpation excuse or justification or ground of defeasance which assumes the existence of the facts upon which the general rule of liability is based and depends on additional facts of a special kind. If that is the effect of the statutory provisions, considerations of substance may warrant the conclusion that the party relying on the qualification or exception must show that he comes within it ...

18    The correct construction of s 208(1) (as modified) is thus to be resolved as a matter of substance and not form.

19    Where “… the form or structure of the legislation does not give definite guidance on the question of burden of proof …”, one commentator has said that “the courts will have regard to considerations of policy and convenience”: C R Williams, ‘Burdens and Standards in Civil Litigation’ (2003) 25 Sydney Law Review 165 at 179. The author there went on to observe that “[t]he fact that a matter is ‘peculiarly within the knowledge of one party’, or that it will be easier for that party to prove the matter than her or his opponent, may be significant”.

20    Although s 208(1) (as modified) has not been the subject of specific consideration in this Court, s 208 in its unmodified form was considered by Barker J in Leawell Pty Ltd v Watershed Premium Wines Ltd (No 2) [2009] FCA 1145, 180 FCR 392. There the respondents sought to strike out various paragraphs of the applicants’ statement of claim. In that statement of claim, the applicants sought, inter alia, a declaration that Watershed Premium Wines Ltd had contravened s 208 by reason of the company paying the legal costs of its directors. Section 212(2)(d) provides that the approval of members is not necessary where the giving of the benefit “would be reasonable in the circumstances”. The company contended that the applicants bore the onus of proving that the payments were not reasonable. Barker J agreed. In doing so his Honour referred to the observations of McHugh J in Avel Proprietary Limited and to the terms of s 208(1) and continued as follows:

[34] The company contends on the plain language of s 208(1), that, it provides that a financial benefit may be given and may only be given to a related party with either (a) applicable member approval or (b) pursuant to an exception under ss 217 to 227 of the CA. The conditions are all contained within the body of s 208 and so, if these conditions are not negatived, there is no contravention of s 208.

[35] The company therefore contends that s 208 falls within the first limb of the test in Avel and requires the applicants to plead material facts why the exception is inapplicable.

[36] This approach to the pleading of the cause of action that relies on s 208 is supported by authority: Westchester Pty Ltd v Triton Resources Ltd [2001] WASC 57 at [9]-[12]; Randall v Aristocrat Leisure Ltd [2004] NSWSC 411 at [567].

His Honour then referred to the “different view” expressed by Habersberger J in Orrong Strategies Pty Ltd v Village Roadshow Ltd [2007] VSC 1, 207 FLR 245 and continued:

[40] The company, supported by the other respondents, submits that the elements in s 208 of the CA are concurrent. It is not true to say that there has been a contravention of s 208 if an exception applies — the section itself creates a prohibition only when all the exceptions, including member approval, are not satisfied.

[41] Counsel for the company further submits that the exceptions may constitute a large, if not the better part of dealings with the related parties, comprising as they do:

•    arms length transactions (s 211);

•    indemnities, exceptions, insurance premiums and payments for legal costs for officers (s 212);

•    small amounts (s 213);

•    benefits to closely held subsidiaries (s 214);

•    benefits that do not discriminate unfairly (s 215);

•    benefits awarded pursuant to court order (s 216).

[42] Counsel submits it will usually be apparent which exception is applicable. So it was in the present case, that in relation to the alleged unapproved giving of financial benefits pleaded in [15], [38], [55], [59](e) of the substituted statement of claim, the plea was that the exceptions provided for in “sections 210 to 216” did not apply and so the payment was contrary to s 208 of the CA.

[43] In my view, these submissions should be accepted. On the proper construction of s 208 I consider that the section imposes consequences for a public company only if certain exceptions (being a meeting of members or any of the matters in ss 211 to 216) are not satisfied. Thus, it falls within the “exception” limb, not the “proviso” limb of the dichotomy explained in Vines and Avel. The obligation to negative the exemption therefore falls upon the applicants.

[44] In these circumstances, I consider that [54] of the substituted statement of claim should be struck out, because as currently pleaded, it is ambiguous and therefore embarrassing. It is not plainly pleaded that certain benefits have been given in a manner not provided for by s 208. The current reference to those benefits being “contrary to s 212(2) of the Corporations Act” amplifies the ambiguity. I would, however, give leave to replead in that regard.

21    Although the decision of Barker J was a decision which related to s 208, and not to s 208 as modified by s 601LA to s 601LE, there is no relevant distinction between the two versions of s 208. Indeed, it would be an odd result if the provisions were construed such that s 208 imposed no onus upon those relying on an “exception” and that s 208 (as modified) did. If there is no relevant distinction, the decision of Barker J is not consistent with that of the primary judge in the present proceeding.

The Reasoning of the Primary Judge

22    The learned primary judge concluded that it was not for the investors to prove that the benefits were not covered by an exception described in ss 210, 211, 212, 215 and 216. His Honour held that the onus of proving that the exceptions were engaged fell upon the auditors. Those relying upon an exception, his Honour concluded, bore the onus of proving that the facts fell within one or more of those exceptions.

23    In so concluding his Honour incorporated part of his reasoning process given in relation to an earlier interlocutory application: Mercedes Holdings Pty Ltd v Waters (No 2) [2010] FCA 472, 186 FCR 450. In the reasons for decision now under consideration his Honour said:

[57] These exceptions are varied but include, for example, a transaction with a related party which was on arm’s length terms (s 210). The auditors submit that the pleading is defective because the related party particulars do not allege that the exceptions in ss 210-216 did not apply; by contrast, the applicants submit that if the auditors wish to say the transactions fall within the exceptions this is a matter for them to plead as a defence if they wish.

[58] Those who pass the hours reading Federal Court judgments will experience a certain sense of déjà vu (and in all likelihood ennui) in reading this submission. In Mercedes (No  2) at 467-468 [73]-[75] I said this:

[73] The auditors claim that the proposed pleading does not allege that the related party transactions required member approval. This, they say, is not a trivial point because not every related party transaction does require member approval.

[74] Whether the related party transactions required approval turns upon the application of Ch 2E as modified by s 601LA of the Act. Section 208 requires member approval for the giving of a financial benefit to a related party unless the giving of the benefit is governed by ss 210 to 216. A question arises as to whether the person who alleges that a breach of s 208 has occurred is bound to prove that the benefit in question did not fall within ss 210 to 216 or whether instead the onus lies on the opposing party to show that the exemptions apply. That question was answered by McColl JA in Forge v Australian Securities and Investments Commission (2004) 213 ALR 574 at [301] (Handley and Santow JJA agreeing) where her Honour accepted that the onus of proof lay upon the party asserting the applicability of the exemption under the related party provisions of the former Corporations Law. The same conclusion was reached in Orrong Strategies Pty Ltd v Village Roadshow Ltd (2007) 207 FLR 245 at [713]-[715] per Habersberger J.

[75] It follows that it is not for the plaintiffs to prove that the benefits are not covered by ss 210 to 216 but rather for the auditors. The suggested pleading deficiency is not established.

[59] Of the proposition that this issue had already been resolved against them, the auditors said:

A similar objection was made by Ms Waters and KPMG to the form of the pleading considered in [Mercedes (No 2)] and, at [73]-[75] of the judgment, the objection was not accepted. However, the circumstances of the current pleading are different. Now, the applicants directly allege a construction of the Corporations Act which is not correct.

[60] The incorrect construction is said to be the failure of the particulars set out above to refer to the exceptions in ss 210-216. That has no relevant impact, however, on the reasoning in [73]-[75] of Mercedes (No 2) which remains applicable. This issue has already been determined and should not, therefore, have been raised.

Notwithstanding reliance upon his earlier reasons for decision, being reasons given in May 2010, it was common ground between the parties that the decision now under consideration was the first occasion where the auditors could challenge the conclusions of the primary judge on the construction of s 208 (as modified). In the May 2010 decision, the auditors had been successful; there was thus nothing against which they could then seek leave to appeal.

Leave to Appeal

24    The question of construction sought to be raised on appeal can only be resolved if the Court grants leave to appeal. The decision of the primary judge is clearly an “interlocutory decision” and hence falls within s 24(1A) of the Federal Court Act.

25    The question of statutory construction arises because the Amended Statement of Claim alleges, inter alia, a breach of an alleged duty of care and an alleged statutory duty owed by the auditors as auditors of the Fund’s compliance plan. It is alleged that, in the proper discharge of those duties, the auditors should have detected and reported a number of contraventions of s 208 (as modified) and that the auditors breached the pleaded duties by failing to do so.

26    A registered managed investment scheme must have a compliance plan which specifies procedures and protocols that the responsible entity is obliged to apply in operating the scheme in order to ensure that the scheme complies with the Corporations Act and the scheme’s constitution. Under s 601EA of the Corporations Act, a person seeking to register a managed investment scheme must lodge with its application for registration several documents. One such document is the scheme’s compliance plan. That plan must comply with s 601HA.

27    Section 601HG provides for the regular audit of the scheme’s compliance plan. Section 601HG(3) specifies the functions of the auditor of the compliance plan as follows:

(3)    Within 3 months after the end of a financial year of the scheme, the auditor of the compliance plan must:

(a)    examine the scheme’s compliance plan; and

(b)    carry out:

(i)    if the scheme has only had one responsible entity during the financial year—an audit of the responsible entity’s compliance with the compliance plan during the financial year; or

(ii)    if the scheme has had more than one responsible entity during the financial year—an audit of each responsible entity’s compliance with the compliance plan during that part of the financial year when it was the scheme’s responsible entity; and

(c)    give to the scheme’s current responsible entity a report that states whether, in the auditor’s opinion:

(i)    the responsible entity, or each responsible entity, complied with the scheme’s compliance plan during the financial year or that part of the financial year when it was the scheme’s responsible entity; and

(ii)    the plan continues to meet the requirements of this Part.

28    The auditor of a registered scheme’s compliance plan may commit a contravention of s 601HG (see ss 601HG(4), 601HG(4A) and 601HG(4B)).

29    The compliance plan auditor is not primarily responsible for compliance with the compliance plan. That responsibility rests with the responsible entity (s 601FC(1) especially s 601FC(1)(h)).

30    The Amended Statement of Claim relevantly contains the following particular at [70] (without alteration):

MFSIM failed to comply with clauses 2.7 and 19 of the Compliance Plan in making each of the transactions set out in paragraphs (b) to (r) below [which are defined as the Related Party Transactions] in that:

(i)    a financial benefit was given by MFSIM out of the Fund property to an entity which was a related party of MFSIM within the meaning of s .228 (as modified by s 601LA) of the Act;

(ii)    without the approval of the members of the Fund in the way set out in s 217 to 227 (as modified by s. 601LA) of the Act,

and therefore, each of the Related Party Transactions was also made in contravention of s 208(1) (as modified by s 601LC) of the Act.    

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) (as modified); and

    the absence of those matters set forth in s 208(1)(d) (as modified)

there is no pleading that:

    the exceptions described in s 208(1)(e) (as modified) do not apply.

31    The correct construction of s 208 (as modified) is fundamental to the manner in which this part of the case is to be advanced at the hearing.

32    The principles to be applied when a party seeks leave to appeal are well settled. It is generally recognised that considerations relevant to the exercise of the discretion are:

    whether in all the circumstances the judgment of the primary judge is attended by sufficient doubt to warrant it being reconsidered by the Full Court; and

    whether substantial injustice would result if leave were refused supposing the decision to be wrong.

That test, so formulated, is cumulative and is not satisfied unless each limb is made out: Rawson Finances Pty Ltd v Deputy Commissioner of Taxation [2010] FCAFC 139, 81 ATR 36 at [5] per Ryan, Stone and Jagot JJ. But the two elements of the test are not unrelated: Cabcharge Australia Ltd v Australian Competition and Consumer Commission [2010] FCAFC 111 at [20] per Kenny, Tracey and Middleton JJ. The “… sufficiency of the doubt in respect of the decision and the question of substantial injustice should not be isolated in separate compartments”: Sharp v Deputy Commissioner of Taxation (NSW) (1988) 19 ATR 908 at 910, 88 ATC 4184 at 4186 per Burchett J.

33    Notwithstanding the oft-repeated reference to these two generally recognised considerations, it is also well recognised that the discretion to grant leave is not constrained by rigid rules: Seven Network Ltd v News Ltd [2005] FCAFC 125 at [5], 144 FCR 379 at 380 per Branson J (Allsop and Edmonds JJ agreeing). “No rigid or exhaustive criteria should be laid down; the circumstances of different cases are infinitely various”: Sentry Corporation v Peat Marwick Mitchell & Co (A Firm) (1990) 24 FCR 463 at 488 per Lockhart J.

34    Leave to appeal may thus be granted where, for example, the questions posed for resolution on appeal “… have general importance beyond the concerns of the parties”: Australian Securities and Investments Commission v P Dawson Nominees Pty Ltd [2008] FCAFC 123 at [10], 169 FCR 227 at 230 per Heerey, Moore and Tracey JJ. Leave may also be granted where the interlocutory orders have a serious effect upon a party’s position and where there are seriously arguable questions to be resolved: Sentry Corporation at 488 per Lockhart J. In Wesfarmers Premier Coal Ltd v Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union (No 3) [2005] FCA 40, 138 IR 394 French J (as his Honour then was) concluded:

[7] I conclude that there is a seriously arguable case in support of the grounds of appeal. The formulation which would express that conclusion in terms of “doubt” attending the decision in my opinion sets the bar too high in a case such as the present.

[8] The second factor which I have to take into account is a question essentially of case management. It is put by the applicant in terms of prejudice. That is to say if the proceeding were to go ahead to assessment of damages and penalties there would be considerable preparation, witness proofing and documentation involved in getting ready for the assessment hearing. In the event that an ultimate appeal against the first finding relating to the July action were upheld such work might have to be, at least in part, duplicated. The applicant submits that it is preferable to proceed to determine all issues which, as it were, go to liability, at the appellate level, before proceeding to damages assessment.

The amendment of the Federal Court Act in 2009 to include s 37M only reinforces the relevance of taking into account, in an appropriate case, considerations such as case management.

35    In the circumstances of the present proceeding, it is concluded that leave to appeal should be granted. The general importance of settling the correct construction of s 208 (as modified) and the specific importance of the correct construction of that section to the present proceeding were not put in issue.

The Necessity to Plead and Prove the Exceptions Mentioned in Section 208(1)(e)

36    Notwithstanding accepted difficulties in the construction of s 208(1) (as modified), it is considered that the legislative intent is discernible. So much, it is considered follows from:

    the legislative statement of purpose in s 207 (as modified by s 601LB);

    the terms employed in s 208(1) (as modified), including the heading to s 208 and the other headings used in Pt 5C.7 and Ch 2E (these headings are part of the Corporations Act: see s 13 of the Acts Interpretation Act 1901 (Cth));

    the terms employed in s 208(1)(e) (as modified) and, in particular, the use of the term “exception”; and

    the manner in which the remaining exceptions to s 208 (as modified) are expressed, being ss 210–216 but not ss 213 and 214 which are excluded in the context of a registered scheme by s 601LD.

37    The statement of purpose as the protection of “the interests of the scheme’s members as a whole, by requiring member approval …” assists considerably in arriving at the correct construction of s 208(1) (as modified). When regard is had to the purpose of Pt 2E.1 as it relates to registered schemes specified in s 207 (as modified), it is considered that s 208(1)(a) to (d) constitutes a complete statement of the general rule. To use the language of McHugh J in Avel Proprietary Limited “the total statement of the obligation” is to be found within s 208(1)(a) to (d). That conclusion is reinforced by the language of s 208(1)(e) which expressly recognises that there may be an “exception” to what is otherwise a “total statement of the obligation”. The use of the disjunctive “or” immediately after sub-par (d)(ii) of s 208(1) (as modified) also marginally assists in reaching the same conclusion: namely, that, in the absence of member approval a financial benefit cannot be provided out of scheme property unless one or more of the available exceptions can be invoked. Again, to use the language of McHugh J in Avel Proprietary Limited, s 208(1)(e) (as modified) provides “an excuse or justification for not complying with the obligation …”. That an available “exception” embraced by this subsection is truly “… an excuse or justification for not complying with the obligation …” is further reinforced by the introductory words to each of the exceptions that remain applicable, namely “[m]ember approval is not needed to give a financial benefit …”. Each exception begins with the premise that, if the benefit to be given to the related party is to be lawful, the approval of the scheme members is required.

38    So construed, s 208(1) (as modified) creates a prohibition upon the giving of a financial benefit to a related party of the responsible entity without first obtaining the approval of the scheme’s members unless the circumstances of giving the benefit falls within an “exception”. Differently expressed, unless one of the exceptions mentioned in s 208(1)(e) (as modified) applies, a benefit which falls within s 208(1)(a) to (c) (as modified) which has not been approved by the scheme members cannot be given to a related party. Section 208(1)(a) to (d) (as modified) is therefore a “total statement” of the prohibition and the onus rests upon those alleging that one or more of the exceptions apply in the circumstances of the particular case to plead and to prove the necessary facts, matters and circumstances that engage the exception or exceptions relied upon. Proof of the inapplicability of the exceptions described in s 208(1)(e) (as modified) is not a condition precedent to the imposition of the prohibition on giving the relevant benefit.

39    Nor is there any persuasive reason why a person who seeks to invoke one or other of the exceptions should not plead – and prove – that the facts fall within one or more of the specified exceptions. The party seeking to rely upon one or more of the exceptions is more likely to have knowledge of facts within its own store of information which will permit it to engage the relevant exceptions.

40    This conclusion is further supported by each of the two decisions relied upon by the primary judge – namely the decision of the Court of Appeal of New South Wales in Forge v Australian Securities and Investments Commission [2004] NSWCA 448, 213 ALR 574 and the subsequent decision of Habersberger J in Orrong Strategies.

41    It may be accepted that the primary judge, and indeed this Court on appeal, “should not depart from” an interpretation of the New South Wales Court of Appeal in relation to a matter where there is concurrent jurisdiction unless “convinced that that interpretation [was] plainly wrong”: Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at 492 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ.

42    Before this Court, however, there was considerable debate as to what the Court of Appeal had, in fact, decided. Senior Counsel for the auditors contended that the Court in Forge had no occasion to address the question of who bore the onus of proving that facts fell within an exception to the counterpart provision to s 208 under consideration in that case and accordingly did not resolve the question. Senior Counsel for the investors, on the other hand, submitted that the question of who bore the onus was indeed addressed and resolved by both the judge at first instance (ASIC v Forge [2002] NSWSC 760) and again on appeal.

43    The decision of the New South Wales Court of Appeal in Forge at [301], on one reading of the manner in which the case proceeded, perhaps says little that is conclusive as to onus of proof. However the case is to be interpreted, it unquestionably supports the ultimate conclusion reached by the primary judge.

44    The facts in Forge may relevantly be summarised as follows. During the period between April and November 1998 CTC Resources NL (CTC) had, by a series of transactions, disbursed $3,596,348.90. The payments were said to be either the payment of management and consultancy fees or the provision of unsecured loans to Kamanga Holdings Pty Ltd and to Bisoya Pty Ltd. Kamanga Holdings Pty Ltd was a “family company of the Endresz family”. Mr and Mrs Endresz and their son (Allan Endresz) were at different times directors of CTC. The payments were said to be uncommercial, not in the interests of CTC or its shareholders and in breach of the related party provisions of the Corporations Law then in force. The reasons for the decision at first instance of Foster AJ state in part as follows:

[92] Quite plainly, the purpose of this lengthy material was to establish justification for the payment to Kamanga for past services, allegedly performed, and for the failure to obtain shareholder approval for such payment. It is noteworthy that these detailed matters had not been put to Ernst & Young in relation to the audit queries, nor, indeed, were they put to Mr Walsh in cross-examination. The same comments apply to the material in relation to the other transactions. They also apply to the material provided in the affidavits of the first, second and third defendants.

Later in his reasons, Foster AJ also referred to some of the evidence:

[123] Allan Endresz's justification of the payment to Kamanga in transaction 1 and, presumably, the payment to Bisoya in transaction 2 and the subsequent payments and advances to those entities in the other transactions, appears to be summed up in the passage in his written submissions, which reads as follows:-

"Aren't people who continue to nurture a company in the face of great difficulties, and who forgo fees during those years in order to keep faith with the shareholders, entitled to fees when the opportunity presents itself in the interests of the company? That opportunity being not just the liquidity of the company but the fact that they honestly believed that the matters they had been working on for some time would now come to fruition."

Reference was also made to the following observations of Foster AJ:

[135] I am left with the overwhelming impression from the evidence of these four defendants that, in circumstances where CTC had had no significant income for many years, the receipt of the $6 million was seen as a golden opportunity for the payment to the director-related entities of Kamanga and Bisoya of significant sums of money for the benefit, ultimately, of the defendants themselves. I am of the view that the claims made in their affidavit and oral evidence that payments were made for the benefit of the company and its shareholders are no more than colourable afterthoughts. I do not accept their evidence in this regard. In particular, I am totally unpersuaded that any of these matters of justification for the payments were in the minds of the first, second and third defendants at the time the resolutions of 20 April 1998 were passed if, in fact, they were passed at a properly constituted meeting.

These were some of the observations relied upon by Senior Counsel for the investors to support their contention that “… the findings made by the trial judge in Forge are inconsistent with his Honour approaching the matter as if the burden rested on ASIC …”.

45    When the matter proceeded on appeal, McColl JA helpfully identified the “[s]cope of the appeal” at 578 as follows:

Scope of the appeal

[8]    The key issues raised by the appeal are:

(a)    Whether the proceedings were validly continued under the Corporations Act; (the “transitional provisions argument”).

(b)    Whether the primary judge erred in concluding that Allan Endresz was an “officer” of CTC for the purposes of s 232 of the Corporations Law.

(c)    Whether the primary judge had found the appellants had contravened the Corporations Law on a basis not advanced by ASIC at the trial.

(d)    Whether the primary judge erred in concluding that the appellants had contravened the Corporations Law.

(e)    Whether the contraventions of the Corporations Law could be, and were, cured by the purported ratification of the transactions by CTC’s shareholders in June 2003.

(f)    Whether a court hearing civil penalty proceedings should, in the event that it makes declarations of contravention, hold a separate penalty hearing.

Her Honour, when addressing the related party transaction and the alleged contravention of s 243ZE of the Corporations Law said at 640-641:

[293] The appellants’ challenge to the primary judge’s conclusion that they had breached s 243ZE of the Corporations Law … was:

7. On the evidence, his Honour erred in holding that the transactions contravened the statutory provisions and did not fall within the statutory exceptions and that no acceptable explanation had been given for them and that they could not properly be described as arms length transactions.

[294] The appellants did not dispute the primary judge’s conclusion that Kamanga and Bisoya were related parties. They complained, however, that his Honour had not addressed the questions posed by ss 243K and 243N, whether the terms and conditions of the financial benefit were no more favourable to the related party than those on which it was reasonable to expect CTC would give the benefit directly if dealing with the related party at arm’s length in the same circumstances.

[295] The appellants made two complaints about the primary judge’s conclusions that neither the s 243K or the s 243N exceptions had been established.

[296] First, they argued that his Honour misconstrued s 243K on the basis that the reference to “a person in a capacity as an officer” was apposite to apply to a corporate service entity which the officer controlled. They relied upon the definition of “person” in s 85A of the Corporations Law which included a “body politic or corporate as well as an individual”.

[297] ASIC submitted that the word “person” in s 243K could not be read in isolation from the words in “a capacity as an officer of the body …”. It referred to the definition of an officer of a corporation in s 82A of the Corporations Law which relevantly includes “a director, secretary, executive officer or employee of the body or entity …” but does not include either a “body politic or corporate”.

[298] ASIC also submitted that the primary judge’s conclusion that the appellants had failed to satisfy the s 243K exception was entirely correct in circumstances where they had failed to adduce any evidence to support the proposition that transactions 1–4 constituted “reasonable remuneration”.

[299] I do not accept ASIC’s submission in its entirety. The appellants did seek to justify transactions 1–4 on the basis that the management fees were “reasonable remuneration” in the circumstances of their hard labours on behalf of CTC, however, the primary judge rejected that explanation: at [120]–[125]. He accepted Mr Walsh’s statement that he had never received evidence which established that the fees were either validly incurred or commercial.

[300] In my view the primary judge was entitled to accept that evidence and conclude that the s 243K exception had not been established.

[301] In so far as s 243N is concerned ASIC submitted that the appellants did not elicit any evidence that any of the transactions was provided to the related parties “on terms and conditions no more favourable to the related party than those on which it [was] reasonable to expect [CTC] … would give the benefit directly if dealing with the related party at arm’s length in the same circumstances”. In my view, that submission is correct. That, in essence, is what the primary judge said when he held (at [122], [136], [137] and [139]) that there was “nothing that satisfies me that the transactions could be regarded as at arm’s length”.

[302] In the light of my conclusion that the primary judge was correct in concluding that the appellants had not established transactions 1–4 constituted “reasonable remuneration” or were at “arm’s length” it is not necessary to determine the question whether the appellants’ submission that “person” in s 243K can include a body corporate is correct.

[303] Ground 7 should be rejected.

Handley and Santow JJA agreed with McColl JA. Senior Counsel for the investors relied upon these conclusions to support their contention that “McColl JA’s endorsement of the manner in which the trial judge approached the question stands as authority for the proposition that it is for the party seeking to rely on the exception to establish that it applies”.

46    That contention should not be accepted without reservation. For whatever reason, it would appear that the question of who bore the onus of proof of establishing that the facts engaged at least one of the exceptions to the statutory provision prohibiting a related party transaction did not arise before Foster AJ. And, on appeal, the scope of the appeal, as identified by McColl JA, did not include any question regarding onus of proof. The conclusions of her Honour go no further perhaps than a general “endorsement” of the findings made by Foster AJ. On any view of the decision in Forge, the question of onus was not explicitly argued.

47    Properly understood, Forge (at first instance and on appeal) does not unequivocally support the investors’ contention. On any view of the two decisions however, they are at least consistent with the conclusion that the onus of proving an exception falls upon those who seek to rely on that exception.

48    In Orrong Strategies, Habersberger J concluded that that decision in Forge should be followed. His Honour there referred to the Court of Appeal’s decision in Forge and the observations of McHugh J in Avel Proprietary Limited and continued:

[715] … It seems to me that the sections in question were "an excuse or justification" for the giving of a financial benefit to a related party, rather than "part of the total statement of the obligation". In any event it is appropriate that I follow the approach adopted by the New South Wales Court of Appeal. Therefore, I hold that the onus was on Orrong to establish that the statutory exceptions applied. In a sense this conclusion is not that important because wherever the onus lies I am satisfied to the requisite standard of proof that the relevant prohibitive section, and none of its exceptions, applied.

The fact that his Honour concluded that the question of who bore the onus did not affect the outcome does not detract from his separate finding that the onus lay with those who sought to bring themselves within an exception. It is not apparent whether his Honour was taken through the decision of Foster AJ at first instance and the issues resolved by the Court of Appeal with the same degree of assistance as the parties to the present appeal provided.

49    The investors contend that this Court should follow the decision of the Court of Appeal in Forge.

50    Given the uncertainty as to whether the question of where the onus of proof lay was indeed decided by the Court of Appeal, the approach which has been undertaken in the present proceeding is to consider s 208 (as modified) afresh.

51    The conclusion has been reached that those who seek to rely upon an exception to the prohibition in s 208 (as modified) need to both plead and prove facts which engage that exception. This conclusion is consistent with the decision of the Court of Appeal in Forge. Given this, it is unnecessary to consider whether that decision should, in any event, be followed by this Court. Certainly, it cannot be concluded that the decision in Forge is “plainly wrong”. In fact, to the extent that that decision is authority for the proposition that those who seek to rely upon an exception bear the onus of proving that the exception applies, it is concluded that that decision is plainly correct.

52    It is strictly unnecessary to consider whether the decision of Barker J in Leawell Pty Ltd is inconsistent with the present decision. Although it may be a curious result if s 208 and s 208 (as modified by s 601LA) were to be interpreted in a different manner, that argument should be left to another day. To the extent that the decision in Leawell is inconsistent with the present conclusion, the decision should not be followed.

Conclusions

53    The proper construction of s 208 (as modified by s 601LC) of the Corporations Act requires those who seek to rely upon an “exception” referred to in s 208(1)(e) (as modified) to plead and prove the facts which bring the case within the “exception” relied upon. That is to say, the party who claims a contravention of s 208(1)(e) (as modified) is not required to plead and bear the onus of proving that the exceptions set out in ss 210 – 216 as modified apply.

54    It was faintly suggested on behalf of the auditors that a distinction is to be drawn between a case where the cause of action relied upon was a contravention of s 208(1) (as modified) and the case where the causes of action relied upon are negligence and breach of statutory duty by failing to detect and to report the alleged contraventions of s 208 (as modified) (as here). That is a distinction without substance.

55    Although leave to appeal from the decision of the primary judge should be granted, the appeal itself should be dismissed.

56    There is no reason why the auditors should not bear the costs of the present appeal and the application for leave to appeal. Although successful in obtaining leave, the auditors have ultimately been unsuccessful in having the decision of the primary judge set aside.

57    There will be orders accordingly.

Associate:

Dated:    31 May 2012