In Shao v One Funds Management Ltd [2024] VSCA 231 the Victorian Court of Appeal resolved a priority dispute between two classes of unitholders in an insolvent managed investment scheme. The decision clarified the interpretation of redemption clauses in trust deeds and unit terms and examined the admissibility of extrinsic materials, such as information memoranda. The case is important reading for trustees, fund managers, and investors in managed investment schemes.
Facts
The iProsperity JY Hotel Fund (“the Fund”) was established to acquire and operate the Novotel hotel in Glen Waverley, Melbourne. Two relevant classes of units were issued by the Fund:
- Class A Units: Issued with a 6-year term and a 6.5% annual coupon.
- Class C Units: Issued subsequently as "mezzanine" finance, with a 1-year term and a 13% annual coupon.
The Fund’s assets became insufficient to repay all unitholders, giving rise to a dispute concerning payment priority between the Class A and Class C unitholders.
Key Legal Principles
Interpretation of Commercial Contracts: The Court reaffirmed the principles from Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104, emphasising an objective approach considering text, context, and purpose from a reasonable businessperson's perspective.
Use of Extrinsic Materials: Following Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1, the Court emphasised caution in using extrinsic materials for interpreting publicly marketed investment schemes.
Unitholders’ Rights: Following MSP Nominees Pty Ltd v Commissioner of Stamps (1999) 198 CLR 494, the rights of unitholders in a managed investment scheme depend on the specific terms of the trust deed and unit terms.
Interpretation of Redemption Clauses: The Court affirmed the Associate Judge's application of principles from ING Funds Management Ltd v ANZ Nominees Ltd [2009] NSWSC 404. Specifically:
- Automatic Obligation: The Court held that the redemption obligation arises automatically on the specified Redemption Date, without requiring any further action by the trustee.
- Nature of Obligation: On the Redemption Date, the trustee becomes obligated to pay the Redemption Amount, and unitholders gain an absolute right to receive this payment.
- Effect on Trust Assets: The Court affirmed that once the redemption obligation arises, the amount due is effectively separated from the general trust assets, even if not yet paid out.
- Ongoing Relationship: Despite the redemption obligation, the Court confirmed that the relationship between the trustee and unitholders remains one of trustee and beneficiary, not debtor and creditor.
Decision
The Court unanimously dismissed the appeal by the Class A unitholders. It upheld the Associate Judge’s decision, affirming that Class C unitholders had priority for payment of their Redemption Amount.
Reasoning
Redemption of Class C Units:
The Court upheld the Associate Judge's interpretation of clause 7.1 of the Class C Terms, which created an obligation for One Funds Management (OFM) to pay the Redemption Amount on the Redemption Date, without requiring any further action by the trustee. This interpretation aligned with the textual analysis of the Class C terms and commercial common sense.
Use of the Information Memorandum:
The Information Memorandum (IM) gave hope to Class A unitholders primarily because it contained statements suggesting they would have priority in certain circumstances. Specifically:
- The IM stated that Class A unitholders were entitled to Coupon payments "in priority to any distributions of income or capital to the holders of any other Unit class."
- It also mentioned that Class A unitholders were "entitled to the return of capital in respect of their Class A Units upon a winding up of the Fund in priority to other Unit classes."
However, the Court took a strict approach to the use of extrinsic materials in interpreting the terms of this publicly marketed investment scheme:
- For Class C Terms: The Court held that the Information Memorandum could not be used to interpret the Class C Terms, as it was not part of the contractual framework for Class C unitholders and was not provided to them.
- For Class A Terms: While the Information Memorandum was provided to Class A unitholders, the Court expressed significant caution about using it to interpret even the Class A Terms. This caution was due to the public nature of the scheme and the potential for creating ambiguity or inconsistency with the formal contractual documents.
This approach reflects the Court's preference for relying on the express terms of the Constitution and Terms of Issue when interpreting rights and obligations in managed investment schemes, especially where multiple classes of unitholders are involved.
Priority of Payments:
The Court upheld the Associate Judge's interpretation of the Fund's Constitution and unit terms regarding payment priorities. Key points included:
- Definition of Assets: The Court ruled that the Class C Redemption Amount fell under the category of "proceeds from withdrawals which have not yet been paid". This categorisation meant it was excluded from the Fund's general assets.
- Nature of Redemption Amount: The Court distinguished between the Class C Redemption Amount and unpaid coupons. While the Redemption Amount included unpaid coupons, it was of a different legal character than the standalone unpaid coupons due to Class A unitholders.
- Priority Clauses: The Court interpreted the priority clauses in both the Class A and Class C Terms. It found that these clauses, which dealt with the priority of coupon payments, did not apply to the Redemption Amount.
As a result, the Court concluded that Class C Unitholders had priority for payment of their Redemption Amount over Class A Unitholders' claims.
Nature of Class C’s Rights:
Following the Associate Judge's reasoning, the Court confirmed that the amounts due to Class C Unitholders upon redemption are held in trust by OFM, rather than creating a creditor relationship. This was based on the concept of redemption as a process that effectuates, fulfills, or realises the unitholder's rights or interests in respect of the trust fund. This interpretation maintains the integrity of the trust structure during the redemption process.
Significance
This decision offers critical guidance on the interpretation of redemption clauses and the hierarchy of payment priorities within managed investment schemes. The Court emphasised the paramount importance of the precise terms of trust deeds and unit terms in determining the rights of unitholders. Additionally, the case highlighted the limited role of extrinsic materials, like information memoranda, in such interpretative exercises, particularly in publicly marketed schemes. Finally, the case clarifies the legal status of unitholders during the redemption process, confirming that they retain a beneficial interest in the Redemption Amount, rather than becoming mere trust creditors.