The Responsible Entity's power to amend Scheme Constitutions without member approval

With Barrett J's judgment in Re Centro Retail Limited and Centro MCS Manager Limited [2011] NSWSC 1175 (Centro Case) following the judgment in Premium Income Fund Action Group Inc v Wellington Capital Ltd [2011] FCA 698 (PIF Case) handed down in June of this year, many responsible entities are breathing a sigh of relief. In the Centro Case, Justice Barrett gave judicial advice to the effect that member approval was not required in order to amend the provisions of the constitution that governed the calculation of the issue price of units. The pricing amendment in that case was considered to be one that could be made by the responsible entity itself.

In the PIF Case, Gordon J had to consider a similar question to Justice Barrett: was member approval required in order to amend the provisions of the constitution that governed the calculation of the issue price of units? Her Honour held that member approval was required because:

• each member had a right to have any new units issued in the scheme on the terms that were fixed by the constitution as the constitution existed (or as amended in accordance with the restrictions in section 601GC);
• the way in which the purported amendments to the constitution operated were adverse to members rights; and
• the responsible entity hadn't considered this right when considering what rights members had, and if the responsible entity had considered this right and the change to it, the responsible entity could not have reasonably considered that the rights would not be adversely affected, and so would not meet the requirement in order for the responsible entity to amend the constitution without member approval.

In the Centro Case Justice Barrett distinguished Gordon J's judgment on the basis that Her Honour had held that the responsible entity in the PIF Case had not considered the right at issue and, on his basis, could not have reasonably considered that the right was not adversely affected by the amendment.  Whilst this was part of Justice Gordon's ratio, Her Honour also considered that members of registered managed investment schemes have a right for units to be issued in accordance with the terms of the constitution.

This is a matter that has not received a great deal of consideration by the Courts, and there are now two different cases indicating different outcomes. Responsible entities should not assume too broad an authorisation to amend the constitution as a result of the Centro decision. In particular, in that case the amendment to the pricing mechanism was only going to apply once for a particular merger purpose. There may be several grounds on which a Court may distinguish the Centro and PIF Cases when applied to different fact situations in the future. 

First, a Court could further particularise the approach to defining the scope of the "rights" that must not be adversely affected by an amendment to the constitution if the responsible entity is not to put the matter to a members' resolution. The approach to considering rights that was adopted in both the PIF Case and the Centro Case was that set out by Justice Barrett in ING Funds Management Ltd v ANZ Nominees Ltd [2009] NSW 243 (ING Case). In the ING Case, Justice Barrett held that these rights were restricted to those conferred on a member by the constitution. The result was that a member had no right to have the scheme operated in accordance with the constitution. Justice Barrett reasoned that, if a member had such a right, then the responsible entity could never amend the constitution without member approval and there would be no room for the operation of the provision that gives the responsible entity the power to amend a constitution where it will not adversely affect the rights of members. This proposition has not, to our knowledge, been contested, and it therefore appears to remain open for argument. What constitutes a lawful amendment is the very question at issue in these cases.   

Second, a Court could hold, on a particular set of facts, that as members have an interest in the assets as a whole this right must not be adversely affected by amendments which directly enable interests to be diluted by additional interests being issued at a discounted price. Such a holding would be consistent with Justice Barrett's reasoning on the scope of rights set out in the ING Case, given that this right could be seen to be a right that exists under the constitution. It would also give efficacy to the operation of section 601GA(1)(a) of the Corporations Act, the provision that requires the constitution to make adequate provision for the consideration that is to be paid to acquire an interest in the scheme.

Finally, neither the PIF Case nor the Centro Case, as reported, deals with submissions that company law ought not be used, by analogy, to resolve trust law cases. If such submissions were made in the Centro Case, Justice Barrett did not refer to them in his published advice. Instead, His Honour refers to the body of company case law which distinguishes between shareholders' rights, on the one hand, and the enjoyment of those rights, the value of those rights and shareholders' interests, on the other hand. In the PIF Case, ASIC made submissions to the effect that company case law ought not be used.  Justice Gordon referred to the submissions, but noted that she had decided the case on different grounds and left these arguments to be considered in a future case.

The differences between companies and trusts and in particular the interests in assets conferred and obligations of operators are not academic. As Clarke and Sheller JJA observed in Daniels v Anderson (1995) 37 NSWLR 438 "while the duty of a trustee is to exercise a degree of restraint and conservatism in investment judgments, the duty of a director may be to display entrepreneurial flair and accept commercial risks to produce a sufficient return on the capital invested."  

Although there are those that would argue to the contrary there is a long line of cases that stands for the proposition that company law ought not be applied to cases involving trusts, most notably the difference in approach to amendments as seen in the differences between the company and trust merger cases (cp Gambotto v WCP Limited (1995) 182 CLR 432 and Cachia v Westpac Financial Services Ltd (2000) 18 ACLC 293). Whether these differences are considered relevant in the future remains to be seen. Much is likely to depend on the facts of a case, for indeed, it is only when one thinks of the differences in the facts of the Centro Case and the PIF Case that one can reconcile the different results.