7 Winding up a scheme
This chapter considers the questions in the terms of reference concerning the adequacy of the current provisions regarding the winding up of solvent and insolvent schemes.
Part 5C.9 of the Corporations Act sets out who can initiate the winding up of a scheme, and in what circumstances. It envisages a scheme being wound up by its RE in accordance with the terms of the scheme constitution. There is no statutory guidance about the content of the scheme constitution in this regard, other than it must make ‘adequate provision’ for winding up the scheme.441 There is some recognition of other circumstances that may need to be taken into account, such as where the scheme constitution is inadequate or impracticable442 or the RE has ceased to exist or is not properly discharging its obligations in relation to the winding up.443 Beyond that, there is no statutory direction, particularly on the procedures to be followed if the scheme is insolvent.
A possible reason for this lack of legislative guidance is that, when the current scheme provisions were introduced, the focus may still have been on pooled schemes, which tended to lose value if their investments were unprofitable, rather than become insolvent. The extent to which common enterprise schemes would develop as vehicles for conducting business enterprises, with all the commercial and solvency risks that this could entail, may not have been contemplated.
Within this context, this chapter considers issues arising in relation to:
• winding up a solvent scheme (Section 7.2)
441 s 601GA(1)(d).
442 s 601NF(2).
443 s 601NF(1).
• winding up an insolvent scheme that has been in VA (if that procedure is introduced) (Section 7.3)
• winding up an insolvent scheme that has not been in VA (Section 7.4).
It also discusses some key procedural issues where an insolvent scheme is to be wound up separately from its RE (Section 7.5).
7.2 Winding up a solvent scheme
The SLE Proposal does not affect this matter.
7.2.1 Concept of a solvent scheme
A scheme is not a legal entity and therefore technically cannot be solvent or insolvent, as it does not incur debts in its own right. However, applying the insolvency definition adopted in this report,444 a scheme would be solvent if the scheme property is sufficient to meet all the claims that can be made against that property as and when those claims become due and payable. A scheme that could not meet this test would be insolvent.
The winding up of a solvent scheme may be less complicated than that of an insolvent scheme, given the absence of outstanding claims on scheme property.
7.2.2 Initiating a solvent winding up without the need for a court application
The constitution of a scheme may set out circumstances where the scheme is to be wound up (for instance, at a specified time, in specified circumstances or on the happening of a specified event). However, any attempt in the scheme constitution to entrench a particular RE by requiring that the scheme be wound up if that entity ceases to be the RE is of no effect.445
444 See Section 6.3.2.
445 s 601NA.
The members of a scheme may, at any time, by extraordinary resolution (which requires that it be passed by at least 50% of the total votes that may be cast by members entitled to vote on the resolution, whether or not cast), direct the RE to wind up the scheme.446 The meeting can be called at the request of at least 100 members entitled to vote or members with at least 5% of the total votes.447
An RE may initiate the winding up of a scheme where it considers that the purpose of the scheme ‘has been accomplished or cannot be accomplished’.448 To proceed, the RE must first give notice of its intention to the scheme members and ASIC, with:
• an explanation of the proposal to wind up the scheme (including how the purpose of the scheme has been accomplished or why that purpose cannot be accomplished)
• an indication to scheme members of their right to call a meeting of members on this proposal
• a statement that the RE is permitted to wind up the scheme if a meeting of scheme members is not called within 28 days.449
The onus is placed on scheme members to request the meeting.450 If members call a meeting, the scheme can be wound up only if they pass an extraordinary resolution approving the winding up.451
An alternative avenue for the RE is to apply to the court to have the scheme wound up on the ‘just and equitable’ ground.452
Also, the RE of a scheme ‘must ensure that the scheme is wound up’
if the members pass a resolution removing the RE but do not, at the
446 ss 601NB, 601NE(1)(b) and definition of ‘extraordinary resolution’ in s 9.
447 s 252B.
448 s 601NC.
449 s 601NC(2). The provisions governing the calling of a meeting of members are contained in Part 2G.4 Divs 1 and 2.
450 s 601NC(2)(b), (3).
451 Definition of ‘extraordinary resolution’ in s 9.
452 s 601ND.
same meeting, pass a resolution choosing as the new RE a company that consents to be RE.453
One respondent454 was concerned that a scheme constitution could permit an RE unilaterally to wind up a scheme without consulting scheme members, as is otherwise necessary where an RE seeks to wind up a scheme.
Some respondents455 supported the current extraordinary resolution threshold for scheme members to initiate a scheme winding up. They considered that an ordinary or special resolution threshold may enable a small but active minority of members to force a premature winding up of the scheme for their own benefit. Other respondents456 proposed a revised threshold, namely 75% of the votes cast by scheme members at a meeting, provided that the votes cast in favour constitute at least 25% of the total votes of scheme members.
One respondent457 submitted that the current 28 day period for members to call for a meeting following notification by an RE of its intention to wind up a scheme458 has not proved to be sufficient (particularly for schemes with a large number of members) and suggested that either:
• the 28 day period be extended, or
• members be allowed to inform the RE directly within a certain timeframe whether they would like a meeting.
453 s 601NE(1)(d).
455 McCullough Robertson, Property Funds Association.
456 IPA, Clarendon Lawyers.
458 s 601NC(2).
Another respondent459 proposed that an RE be permitted to wind up the scheme if the scheme members call a meeting, but fail to pass an extraordinary resolution directing the RE not to wind up the scheme.
CAMAC notes the concern about the possibility of a scheme constitution allowing an RE to bypass the consultation process with scheme members, and the concern about the adequacy of the current
28 day period for members to call a meeting where the RE seeks to wind up a scheme. While not convinced at this stage that there are sufficient instances of problems arising in practice to justify immediate reform, CAMAC suggests that amendment to the law be considered if problems in this area develop.
In regard to the process where a meeting of scheme members is called following notification by an RE of its intention to wind up a scheme, CAMAC considers that to place an onus on scheme members to pass an extraordinary resolution to block an intention of an RE to wind up a scheme could make it too easy for an RE to wind up a scheme.
The passing of any resolution by scheme members to terminate a scheme, under either s 601NB or s 601NC, should require the involvement of a significant proportion of the members. However, the current extraordinary resolution requirement under both these provisions, that the resolution be approved by at least 50% of the total votes that may be cast by members entitled to vote on the resolution (whether or not cast) may in practice make it impossible for members to approve the winding up of a scheme, particularly a pooled scheme involving large numbers of passive investors.
CAMAC considers that the threshold for scheme members to approve the winding up of their scheme under either s 601NB or s 601NC should be amended to:
• 75% of the votes cast on the resolution, provided that
459 Alan Jessup proposed that an RE be permitted to wind up the scheme ‘if the members do call a meeting but at that meeting no extraordinary resolution that the members propose about the winding up of the scheme is passed other than that the scheme be wound up’.
• the votes cast in favour of the winding up constitute at least 25%
of the total votes of scheme members.460
While less stringent than the current threshold, the proposed threshold for members to wind up a scheme is still higher than the threshold proposed by CAMAC for scheme members to change the RE of an unlisted scheme.461 The rationale for the proposed higher threshold is that winding up a scheme is a much more serious step than changing the RE of an unlisted scheme.
An RE that fails to get a scheme wound up under s 601NC could seek, where appropriate, to have the scheme wound up under the current ‘just and equitable’ ground (see below) or under the additional ‘insolvency’ ground proposed by CAMAC.462
Alternatively, that RE could notify its intention to retire from that position.463
7.2.3 Initiating a winding up by court order
Just and equitable ground
A court may, on application by the RE, a director of the RE, a scheme member or ASIC, direct the RE to wind up a scheme where it ‘thinks it is just and equitable to make the order’.464 This is a broad general ground which, applying the approach for companies, enables the court to consider any aspect of the internal or external functioning of a scheme in determining whether it should be
460 This amendment would require some consequential amendments, for instance, to s 601NE(1)(b), which refers to scheme members passing an extraordinary resolution directing the RE to wind up the scheme, and to Part 2G.4.
461 In Section 5.4.3 of this report, CAMAC proposes that a resolution to change the RE of an unlisted scheme require a simple majority of the votes cast on the resolution, provided that the total of the votes cast on the resolution (for and against) constitute at least 25% of the total votes of scheme members.
462 See Section 7.4.1 of this report.
463 s 601FL. Where an RE wishes to retire from that position, but a new RE is not available, a court can appoint a TRE to operate the scheme on an interim basis while a new RE is sought: s 601FP and Corp Reg 5C.2.02. See further chapter 5.
464 s 601ND.
terminated.465 In this context, the court could consider, but would not be confined to, the financial state of the scheme, its assets and future prospects.466
Failure to choose new RE after appointment of TRE
The court may direct a TRE to wind up the scheme if a meeting to choose a new RE is not called within three months of the appointment of the TRE467 or the meeting was called but did not result in the members choosing a new RE that consented to act in that role.468 Where a new RE has not been appointed under this process, the TRE must make a winding up application to the court. If the TRE does not apply, application may be made by ASIC or a scheme member.469
It was suggested that, in addition to its existing powers, a court should be permitted to wind up a scheme where it is satisfied that the scheme’s purpose cannot be accomplished.470
The courts have given a broad ambit to the just and equitable ground for winding up a scheme, which can include the internal processes of the scheme as well as its overall financial position, its assets and its future prospects. CAMAC elsewhere recommends that the court be given an additional express power to wind up a scheme where it is satisfied that the scheme is insolvent.471 Given this, a further ground that the court considers that scheme’s purpose cannot be accomplished may be unnecessary and could require the court to
465 A winding up on the just and equitable ground might be permitted where ‘the administration and original arrangement had broken down’: Capelli v Shepard  VSCA 2 at , citing Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd  WASC 339 at . See also Re PWL; ex parte PWL Ltd (formerly Palandri Wines Ltd) (administrators appointed) [No 2]  WASC 232 at , cited in Capelli v Shepard  VSCA 2 at .
The case law on the winding up of corporations on the just and equitable ground informs the application of this section: Capelli v Shepard  VSCA 2 at .
466 See the discussion of the application of the just and equitable grounds at
Section 7.4.1 of this report.
467 s 601FQ(5)(a).
468 s 601FQ(5)(b).
469 s 601FQ(5).
471 See Section 7.4.1.of this report.
reach commercial decisions which are beyond its judicial role. This is a matter for consideration by scheme members under the procedure in s 601NC.
7.2.4 Person to conduct the winding up
The responsibility for winding up a scheme rests in the first instance with the RE.472 As observed in Re Environinvest Ltd:473
Winding up the scheme is plainly part of the business of the responsible entity.
By contrast, all company windings up, including for solvent companies, are under the control of an external liquidator. However, the corporate structure has no equivalent of an RE.
The court, upon application by the RE, a director of the RE, a member of the scheme, or ASIC, may make an order appointing a person other than the RE to take responsibility for ensuring that a scheme is wound up in accordance with its constitution and any directions that the court makes.474 There is no statutory restriction on whom the court can appoint for that purpose. The court may act if it
‘thinks it necessary to do so (including for the reason that the responsible entity has ceased to exist or is not properly discharging its obligations in relation to the winding up)’.
472 s 601NE.
473  VSC 33 at .
474 s 601NF.
The general view of respondents was that the RE should conduct the winding up of a solvent scheme, subject to the court appointing another party for this purpose.475
The current position should continue, whereby the winding up of a solvent scheme is conducted by the RE, with provision for the court to appoint another person for that purpose if the court thinks it necessary to do so.
7.2.5 The winding up process
The Corporations Act does not provide guidance on the process of winding up a solvent scheme, once that decision has been made. The only legislative requirement is that the winding up be conducted in accordance with the constitution of the scheme and any orders of the court.476
A scheme constitution may set out the prerequisites for the scheme to be wound up and the winding up procedure to be adopted. Typically, a scheme constitution provides for members to receive a pro rata share of scheme property after all creditors have been paid.
In addition to the terms of a scheme constitution, the person conducting the winding up can look for guidance to general law and trust principles:
Where the scheme is a trust, what is envisaged by the winding-up of a scheme is the realisation of its property, the payment by the responsible entity of liabilities incurred on behalf of the scheme or the retention by it of funds with which to meet its liabilities, the ascertainment of the members’ entitlements, and the distribution of the trust
475 Financial Services Council, Property Funds Association, Baker & McKenzie, AAR, Clarendon Lawyers, McCullough Robertson. The IPA considered it arguable that all scheme windings up should be undertaken by a suitably qualified third party, being a registered liquidator, but recognised that it may be reasonable for an RE that is not itself insolvent to attend to the winding up where all creditors will be paid in full.
476 ss 601NE, 601NF.
assets to the members in accordance with their entitlements. The winding-up of a trust involves the performance of the trust, by the trustee’s accounting to the beneficiaries for trust property in accordance with the terms of the trust, and its termination.477
Respondents that commented478 generally considered that legislative prescription concerning the winding up process for a solvent scheme was unnecessary. Reasons given included:
• the trustee duties at general law and statutory RE duties provide the flexibility necessary to deal with the multiple types of scheme trust arrangements
• the method for winding up a scheme will depend on its particular structure.
One of those respondents479 saw merit in expanding (or otherwise clarifying) the requirement480 that a scheme constitution must make adequate provision for ‘winding up the scheme’, for instance, by adding the words ‘including the process by which the scheme will be wound up’.
It is unnecessary to prescribe detailed legislative provisions for the winding up process of a solvent scheme, given the variety of scheme structures, and the lack of external creditors. Also, the existing requirement that a scheme constitution ‘make adequate provision’ for the winding up of a scheme would imply that the scheme constitution include a process by which the scheme will be wound up.
If a scheme constitution does not provide adequate detail to deal with the circumstances of the winding up, or applicable general law principles do not satisfactorily resolve an issue, the party conducting the winding up should be able to seek directions from the court (see Section 7.2.6, below).
477 Stacks Managed Investments Ltd  NSWSC 753 at .
478 Financial Services Council, Baker & McKenzie, AAR.
480 s 601GA(1)(d).
7.2.6 Court supervision power
The court, upon application by the RE, a director of the RE, a scheme member or ASIC, may give directions about how a scheme is to be wound up ‘if the Court thinks it necessary to do so’.481 If the court appoints another person to take responsibility for the winding up of a scheme, the legislation does not give that person standing to seek directions.482 However, the court may provide judicial advice or direction under its inherent powers, for instance in relation to schemes in the form of trusts.483
The statutory power of the court to give directions has been interpreted as being subject to certain limitations, namely that the court:
• cannot give directions of its own motion484
• probably can only give directions concerning an actual conflict, not potential conflicts485
• cannot use the directions power to affect the rights of, or impose duties on, external parties.486
This position, which applies to the winding up of registered schemes, can be contrasted with the position for unregistered schemes, where the court has a more widely drawn discretion, namely, to ‘make any orders it considers appropriate for the winding up of the scheme’.487
481 s 601NF(2), (3).
482 By comparison, in a corporate winding up, the liquidator may apply to the court for directions in relation to any particular matter arising under the winding up: s 479(3).
483 See, for instance, Re Westfield Holdings Ltd (2004) 49 ACSR 734 at , Re Abacus
Funds Management Ltd  NSWSC 1309, Macquarie Private Capital A Ltd  NSWSC 323 at , Re Macquarie Capital Alliance Ltd  NSWSC 745 at , Re Macquarie Communications Infrastructure Group  NSWSC 487 at , Re Elders Forestry Management Ltd  VSC 287 at -.
484 Re Orchard Aginvest Ltd  QSC 2.
486 Stacks Managed Investments Ltd  NSWSC 753 at  and , Capelli v
Shepard  VSCA 2 at .
487 s 601EE(2).
Various respondents488 considered that the court should have a general discretionary power to make orders or give directions, to enable the court to deal with the breadth and variety of structures, arrangements and relationships that may be involved with some complex schemes.
Some submissions argued that, in addition to the person conducting the winding up, a range of other persons could be given standing to apply to the court for the exercise of its discretionary powers (including ASIC or scheme members) or a more generic test of standing could be adopted, such as ‘any interested person’.489
Some respondents490 did not favour a wide court power to give directions.
To ensure that the court has sufficient power to give directions concerning the winding up of a scheme (whether solvent or insolvent), s 601NF(2) should be amended to enable the court to give directions whenever it thinks it appropriate to do so, including in relation to any particular matter arising under the winding up of a solvent or insolvent scheme.
Standing to seek court directions under s 601NF(3) should be extended to any person conducting the winding up of a scheme, whether solvent or insolvent.
See also Section 7.5.4 of this report.
7.2.7 Transition from solvent to insolvent winding up
Given that there is no specific legislative distinction between solvent and insolvent scheme windings up, there is no provision for a transition from a solvent to an insolvent winding up of a scheme.
488 ASIC, McCullough Robertson, Baker & McKenzie, Property Funds Association, Clarendon Lawyers.
489 McCullough Robertson, Clarendon Lawyers, Baker & McKenzie.
490 IPA, AAR.
A corporate voluntary winding up is carried out as a members’ voluntary winding up (a solvent winding up) if the directors make a written declaration of solvency.491 This type of corporate winding up involves only the company’s members.492
However, if the liquidator appointed to carry out the members’ voluntary winding up forms the opinion at any time that the company will not be able to pay its debts in full, the liquidator must:
• apply to the court for a winding up in insolvency,493 or
• appoint an administrator,494 or
• convene a meeting of the company’s creditors, by a notice conveying the names, addresses and estimated amounts of claims of the creditors and notifying them of their right to appoint a new liquidator at the meeting.495 The liquidator must lay before the meeting a statement of the assets and liabilities of the company.496
There should be provision for the solvent winding up of a scheme to become an insolvent winding up of the scheme, along the lines of the provisions applicable to companies. The person conducting the winding up of a scheme, who would be best placed to determine whether all creditors can or cannot be paid, should have powers and obligations comparable to those of a corporate liquidator, as set out above.
To avoid potential conflicts of interest where a scheme transfers from a solvent to an insolvent winding up, only a registered liquidator should be permitted to conduct the insolvent winding up of a scheme.497
491 s 494.
492 Part 5.5 Div 2.
493 ss 496(1)(a), 459P.
494 ss 496(1)(b), 436B.
495 s 496(1)(c), (2)-(7).
496 s 496(4).
497 The nature of these potential conflicts of interest is discussed in Section 7.3.2 of this report.
7.3 Winding up an insolvent scheme that has been in VA
This Section deals with winding up procedures if a VA regime for schemes is introduced (see chapter 6 of this report).
As earlier indicated, this report defines a scheme as insolvent if the scheme property is insufficient to meet all the claims that can be made against that property as and when they become due and payable.498
7.3.1 Combined or separate winding up
If a VA regime is introduced under the current legal framework
If a scheme has gone into VA, that VA procedure will determine whether it will immediately or eventually be wound up, and whether it is wound up as part of the winding up of its RE (if insolvent) or through a separate winding up process.499
If a VA regime is introduced under the SLE Proposal
Likewise, under the SLE Proposal, if a scheme has gone into VA, that VA procedure will determine whether it will immediately or eventually be wound up. However, given the separation of the affairs of the scheme from those of the RE in this case, a separate winding up procedure for an insolvent scheme would generally be required.500
7.3.2 Who should conduct any separate scheme winding up
Solvent RE and other persons
In some circumstances, under the current legal framework, a scheme may be insolvent while its RE remains solvent. For instance, a multi-function RE may be solvent from its other dealings, while the only creditors of the scheme are parties with limited recourse rights (which are limited to the available property of that scheme).
498 See Section 6.3.2 of this report.
499 See Section 6.3 of this report.
500 See Section 6.4 of this report.
Likewise, under the SLE Proposal, an RE (being only an agent when operating a scheme) may remain solvent though a scheme that it operates has become insolvent. Only in some cases might the insolvency of the scheme lead to the insolvency of its RE.501
The current legislation does not prohibit a solvent RE from winding up an insolvent scheme that it has operated. The court, however, upon application by various parties, has the power to appoint a person other than a solvent RE to ‘take responsibility’ for the winding up of a scheme.502 There is no statutory restriction on whom the court may appoint for that purpose.
Some respondents supported a solvent RE being left with the responsibility to wind up an insolvent scheme.503 Several other respondents considered that only a registered liquidator should wind up an insolvent scheme.504
To permit a solvent RE to wind up an insolvent scheme that it has operated could create potential conflicts of interest for that RE, both under the current legal framework and under the SLE Proposal. For instance, the RE may have preferred some creditors over others in disposing of scheme property prior to the scheme going into winding up, or may have continued to trade on behalf of the scheme after it became insolvent (relevant under the SLE Proposal505). The RE may be reluctant to take any action over these matters if it were conducting the winding up.
To avoid any conflicts of this nature, and to ensure that an independent assessment can be made of the conduct of the RE as operator of the scheme, the winding up of an insolvent scheme, whether under the current legal framework or the SLE Proposal, should be conducted only by a registered liquidator.
501 For instance, a sole-function RE may become insolvent following the insolvency of the scheme that it operates where it depends on the profitability of the scheme for its own financial survival.
502 s 601NF.
503 Financial Services Council, Baker & McKenzie, AAR.
504 IPA, McCullough Robertson, Clarendon Lawyers.
505 See Section 3.6 of this report.
A standard requirement of this nature would be preferable to leaving the court to decide, on a case by case basis, whether to replace the RE as liquidator of an insolvent scheme.
7.3.3 Other matters
Some other key issues in developing a separate winding up procedure for insolvent schemes are examined in Section 7.5.
7.4 Winding up an insolvent scheme that has not been in VA
If a VA procedure for schemes is not introduced or, if introduced, is not used in a particular case, consideration needs to be given to:
• who can initiate the winding up of an insolvent scheme
• whether a combined or separate winding up should be adopted if the RE also is insolvent
• who should conduct any separate scheme winding up.
As earlier indicated, a scheme is defined as insolvent if the scheme property is insufficient to meet all the claims that can be made against that property as and when those claims become due and payable.506
7.4.1 Initiating the winding up of an insolvent scheme
Scheme members or the RE
The current legislative provisions for the initiation of a scheme winding up, by scheme members507 or by the RE,508 apply whether the scheme is solvent or insolvent. An RE may seek to initiate the winding up of a financially stressed scheme where it considers that the purpose of that scheme cannot be accomplished because the
506 See Section 6.3.2 of this report.
507 s 601NB.
508 s 601NC.
scheme is no longer financially viable.509 The RE can proceed to wind up the scheme unless a meeting of scheme members is called, in which case the scheme can only be wound up if the members pass an extraordinary resolution to that effect.510
In contrast to the winding up of a company,511 there is no express legislative power of the court to direct the winding up of a scheme on the basis that it is insolvent. However, the courts have considered the concept of a scheme being insolvent in the context of the general
‘just and equitable’ winding up ground.
Just and equitable ground. The RE, a director of the RE, a scheme member or ASIC can apply to the court to have a scheme wound up on the basis that the court ‘thinks it is just and equitable’ to make the winding up order.512 The courts have considered the question of the insolvency of a scheme when applying this ground. The general approach, when applied in the context of insolvency, has been to consider the overall financial position of the scheme, its assets and its future prospects. For instance, in Ex parte PWL Ltd,513 in assessing whether any of several schemes was insolvent or unviable for the purposes of the just and equitable winding up ground, the Court adopted a broad ‘first principles’ approach and considered evidence going to various factors, including operating expenses, operating losses, future income, capital expenditure that would be required to make the scheme commercially viable, the prospects of the scheme being able to trade profitably in the future, and the ability of the RE to fund necessary capital requirements from existing or new members or creditors.514
Unsatisfied execution. The court may order the RE to wind up a scheme on application by a creditor with an unsatisfied execution on
509 RI Barrett, ‘Insolvency of registered managed investment schemes’, Paper delivered at the Conference of the Banking and Financial Services Law Association, Queenstown, July 2008, p 11.
510 s 601NC(2), (3).
511 s 459A.
512 s 601ND(1)(a).
513 Re PWL ACN 084 252 488 Ltd; Ex parte PWL Ltd (formerly Palandri Wines Ltd) (admin apptd) (No 2)  WASC 232.
514 This summary of the decision is provided by N D’Angelo, ‘When is a trustee or responsible entity insolvent? Can a trust or managed investment scheme be “insolvent”?’ (2011) 39 Australian Business Law Review 95 at 102.
a court order.515 As observed in Capelli v Shepard,516 this ground for winding up:
obliquely suggests insolvency, as an execution returned unsatisfied in favour of a creditor echoes a traditional act of bankruptcy or its corporate equivalent.
Some submissions517 favoured a specific insolvency ground for the court to wind up a scheme, arguing, for instance, that use of the just and equitable ground to wind up a scheme has not been applied consistently where a scheme is not financially viable.
Other respondents518 questioned the need for a specific insolvency ground on the basis that the courts have been willing to apply the general ‘just and equitable’ ground to wind up an ‘insolvent’ scheme.
One respondent519 suggested that the administrator or liquidator of an RE should have standing to apply to the court for the winding up of a scheme.
515 s 601ND(1)(b), (3).
Under the ALRC/CASAC recommendation, this was a presumption of insolvency rather than a separate ground for winding up: vol 2, draft s 581AD(5) (p 219).
RI Barrett, ‘Insolvency of registered managed investment schemes’, Paper delivered at the Conference of the Banking and Financial Services Law Association, Queenstown, July 2008, pp 3-4 expressed doubts about how this ground can be sensibly applied, observing that:
• trust property itself cannot be taken in execution by the creditors of a trustee
(Octavo Investments Pty Ltd v Knight  HCA 61; (1979) 144 CLR 360 at
• the trustee’s equitable interest in the whole of the trust assets is inseparable from the trustee’s obligations and therefore cannot be taken in execution (even in jurisdictions where statute empowers the sheriff to take equitable interests in specific property under the common law process of execution of a writ of attachment)
• an unsuccessful attempt at execution at law says nothing about the sufficiency of the trustee’s rights against the trust property to meet the creditor’s claim established by judgment or the financial health of the scheme (though the trustee’s lack of non-trust assets may indicate that the RE itself is financially stressed and perhaps should be replaced).
516  VSCA 2 at .
517 McCullough Robertson, AAR, Clarendon Lawyers.
518 Baker & McKenzie, Alan Jessup.
Some submissions520 suggested that unsatisfied execution should be removed as a ground for winding up.
In addition to the general power to wind up a scheme on the just and equitable ground, the court should be given a specific power to wind up a scheme where satisfied that the scheme is insolvent. This would avoid the court having to use the general just and equitable ground as a de facto insolvency ground. A separate insolvency ground would be particularly important under the SLE Proposal where the RE and its directors may be personally liable for any insolvent trading by a scheme operated by the RE.521
Persons entitled to apply to the court for the winding up of a scheme on the basis of its insolvency should be:
• the RE or a director of the RE
• a scheme member
• a scheme creditor (including a contingent or prospective creditor)
• an administrator or liquidator of the RE (more relevant under the current legal framework than under the SLE Proposal)
Introduction of a specific insolvency ground would make redundant the current unsatisfied execution ground, which could then be repealed.
7.4.2 Combined or separate winding up
In some cases the insolvency of a scheme (or schemes) may lead to, or coincide with, the insolvency of the RE of the scheme (or schemes). Where this occurs, consideration needs to be given to whether it would be preferable to include the winding up of one or
520 ASIC, AAR. The latter respondent is unaware of this ground having been used by a creditor of the scheme, given that it would require obtaining judgment against the RE and the RE then failing to satisfy that judgment.
521 See Section 3.6 of this report.
more schemes in the winding up of its RE (a combined winding up) or whether separate winding up procedures for a scheme and the RE should be adopted.
Submissions took varying views on whether the liquidations of an RE and one or more of the schemes that it operates should be separate522 or combined.523
In some circumstances, a combined winding up may be the most expeditious and cost effective means to finalise the affairs of one or more schemes and the RE. Some legal clarification may be necessary to ensure that the combined winding up option is available.524
In other instances, a combined winding up may create conflicts between competing interests in the winding up. An example may be where a claim by the RE based on the exercise of its indemnity rights against scheme property is subject to dispute. For a liquidator in those circumstances to admit or reject the claim may affect various creditors in different ways. Arguably, this possible conflict could be avoided through separate liquidations, with, for instance, the indemnity rights claim of the RE against scheme property being determined in the winding up of the scheme.
522 IPA (this respondent also commented that a combined liquidation, with the appointment of a special purpose liquidator to attend to the matters of conflict, may be a more cost effective solution), Property Funds Association, Clarendon Lawyers. McCullough Robertson also supported separate liquidations as the default position, but with a right for members and creditors of the RE and the scheme to agree on joint liquidations.
523 IPA suggested (as an alternative to requiring separate liquidations) combining the liquidations, but having a special purpose liquidator to attend to any areas of
524 In Silvia, in the matter of FEA Plantations Ltd (Administrators Appointed)  FCA 468, the Court considered that the affairs of a scheme being managed by the RE could, in principle, be dealt with under a VA of the RE, given the wide definition of ‘affairs of a body corporate’ in s 53. By contrast in Owen, in the matter of RiverCity Motorway Pty Limited (Administrators Appointed) (Receivers and Managers Appointed) v Madden (No 3)  FCA 313 at , the Court expressed doubts about whether the VA of an RE would properly extend to any scheme that it operates.
Where the winding up of an insolvent scheme is commenced by court order, the question of whether there should be a combined or separate winding up where the RE is also being wound up could be a matter for the court to determine in light of the particular circumstances of the case.
Where the winding up of an insolvent scheme is commenced by any party other than the court, and the RE is also being wound up, the liquidator of the RE should administer a combined scheme and RE winding up, unless or until the liquidator determines that in the circumstances it would be preferable to have separate windings up for one or more of the schemes. ASIC or any affected party should have standing to apply to the court to review the approach being taken by the liquidator of the RE.
7.4.3 Who should conduct any separate scheme winding up
For the same reasons as set out in Section 7.3.2, the winding up of an insolvent scheme should be conducted only by a registered liquidator.
7.4.4 Other matters
Some other key issues in developing a separate winding up procedure for insolvent schemes are examined in Section 7.5.
7.5 Procedural issues where an insolvent scheme is to be wound up separately from its RE
Where a scheme and its RE are in a combined insolvent winding up, the liquidator of the RE is subject to detailed provisions in Chapter 5 of the Corporations Act regarding the winding up of the RE (being a public company), whose affairs should include the affairs of the scheme.525
525 See CAMAC position in Section 7.4.2.
However, there is no legislative guidance on the procedures to be followed in the separate winding up of an insolvent scheme. It is unlikely that the provisions of a scheme constitution would provide adequate, or necessarily appropriate, guidance, particularly in regard to dealing with outstanding creditor claims. The only assistance may come from the power of the court to give directions about how a scheme is to be wound up.526
This Section discusses some implementation issues that would arise in developing legislative direction or guidance concerning the separate winding up an insolvent scheme.
7.5.2 Ambit of the winding up
For the reasons set out below, CAMAC considers that the ambit of a scheme winding up should be narrower than the ambit of a scheme VA.
As proposed earlier in this report, each scheme should have a register of agreements and a register of scheme property, which various parties, including a liquidator of a scheme, could treat as definitive.527
CAMAC envisages that the winding up of a scheme, like the proposed scheme VA procedure, would cover all property on the register of scheme property. However, unlike under a scheme VA, where the moratorium would cover all agreements on the agreements register,528 a scheme winding up should only cover agreements in so far as they involve scheme property. Under the current legal framework, this would cover agreements containing limited recourse rights, and all claims under the subrogation remedy. Under the SLE Proposal, this would cover all agreements by counterparties with the RE as agent for the MIS (including agreements coming within the indoor management rule).
A scheme winding up should not cover claims that counterparties may have against the personal assets of the RE, or scheme members, under agreements entered into with them as principals. The rights of these counterparties should be determined according to the terms of
526 s 601NF(2), (3).
527 Sections 4.3.4 and 4.4.3.
528 See Section 6.5.1 of this report.
each agreement (which, for instance, may include a clause that the agreement will terminate automatically if the scheme is wound up).529
7.5.3 General procedures for conducting the winding up
The ALRC/CASAC report envisaged a series of procedural powers and obligations for the liquidator in the winding up of a scheme. These included:
• provisions relating to the protection of scheme property530
• a power for the liquidator of a scheme to apply to the court for the compulsory examination of persons in relation to the scheme, in the same way as the liquidator of a company531
• duties of the liquidator, including to report to ASIC on any wrongdoing by relevant persons532 and to keep proper books,533
529 An agreement might provide that certain rights or obligations given in the agreement are to be extinguished or adjusted if the scheme goes into external administration. For instance, in Re Elders Forestry Management Ltd  VSC
287 at , the Court noted that the vast majority of sub-lease agreements by scheme members in an agribusiness common enterprise scheme stated that the agreements would terminate automatically if the scheme is wound up.
530 Court powers relating to prohibiting officers from removing relevant property from the jurisdiction, appointing a receiver and surrendering passports are dealt with in
vol 2, draft s 486AA (pp 214-215) (cf s 486A(1), (2) for companies).
A court power to issue an arrest warrant is dealt with in draft replacement s 486B(1)(a), (3)(a), (b), (c) (p 216), which apply to schemes as well as companies and replace the current provisions that apply to companies only.
531 vol 2, draft amendments to ss 596A, 596B of the corporations legislation (p 229).
The liquidator would have to give notice of an examination to as many of the creditors of the scheme as reasonably practicable: vol 2, draft amendment to s 596E of the corporations legislation (p 229).
532 vol 2, draft s 581DI (pp 227-228). For companies, cf s 533. The liquidator would have qualified privilege in performing this function: vol 2, draft s 581DK (p 228)
(cf s 535 for companies).
533 vol 2, draft s 581DJ (p 228). Cf s 531 for companies. A liquidator of a company must keep books containing entries or minutes of proceedings at all meetings and any other matters required to give a complete and correct record of the liquidator’s administration of the company’s affairs (s 531; Corp Reg 5.6.01). The liquidator must make the books available for inspection at the liquidator’s office, in the absence of a court order (s 531; Corp Reg 5.6.02).
Other possible duties are to have regard to directions given by creditors (cf s 479(1) for companies in a court winding up) and to convene meetings of creditors in certain circumstances (cf s 479(2) for companies in a court winding up).
as well as certain requirements relating to money received by a liquidator534
• a requirement for officers of the RE to give assistance to the liquidator535
• court powers to make various orders, including for the delivery of property to the liquidator,536 to make such orders as are just537 and to make appropriate orders concerning persons guilty of misconduct causing loss to a scheme538
• public notification requirements539
• a prohibition on an RE of a scheme that has been terminated issuing or accepting new subscriptions related to a particular scheme without the leave of the court or carrying on business of the scheme except so far as the scheme liquidator permits for the better winding up of the scheme540
• provisions voiding an enforcement action against scheme property541 or a transfer of interests or alteration in the status of scheme investors.542
What legislative procedures should there be for the winding up of an insolvent scheme?
While views differed as to the extent that procedural prescription for winding up an insolvent scheme was necessary or beneficial, there was significant support for the liquidator of an insolvent scheme
534 cf s 538 for companies.
535 vol 2, draft ss 581DG (p 226), 581DH (pp 226-227). For companies, cf ss 475, 494,
536 For companies, cf s 483.
537 vol 2, draft s 581DL (p 228). Eligible applicants would be ASIC, the liquidator or an interested person.
538 vol 2, draft amendment to s 598 of the corporations legislation (p 229).
539 vol 2, draft s 581BI (p 222). For companies, cf ss 537, 541.
540 vol 2, draft s 581DB (p 225). For companies, cf s 471A.
541 vol 2, draft s 581DD (p 225). For companies, cf s 471B.
542 vol 2, draft s 581DE (p 225). For companies, cf s 468A.
having information-gathering and other investigative powers, as well as an obligation to report possible misconduct to ASIC.543
The Corporations Act should regulate the winding up of an insolvent scheme in a manner comparable to the regulation of the winding up of an insolvent company, including by:
• suspending the powers of the RE to operate the scheme
• giving the liquidator of the scheme powers, rights and obligations comparable to those of the liquidator of an insolvent company, including a power to operate the scheme for the purpose of its winding up.
The ALRC/CASAC report provides useful guidance on the content of legislative procedures for the winding up of an insolvent scheme. Some key implementation issues are also considered below.
7.5.4 Court power to supervise the winding up of an insolvent scheme
Upon the application of the RE, a director of the RE, a scheme member or ASIC, the court may give directions about how a scheme is to be wound up ‘if the court thinks it necessary to do so’.544 If the court appoints a person other than the RE to take responsibility for the winding up of a scheme, the legislation does not give that person standing to seek directions.
The court may also provide judicial advice or directions under its inherent powers.545 Courts have provided directions on a number of occasions in the context of the insolvency of a scheme.546
543 IPA, Baker & McKenzie, McCullough Robertson, Clarendon Lawyers, Alan Jessup. Baker & McKenzie said that the information-gathering and other investigative powers should be subject to court or ASIC supervision to prevent abuse.
544 s 601NF(2), (3).
545 See, for instance, Re Elders Forestry Management Ltd  VSC 287 at -.
Should there be any changes to the current provisions by which the court can give directions in relation to the winding up of a scheme, and, if so, what and why?
In this context, should there be a general discretionary power along the lines of s 447A for the court to make such orders as it thinks appropriate about how the scheme liquidation provisions are to operate in relation to a particular scheme? If so, who should be entitled to apply?
The submissions summarised in Section 7.2.6 also apply to this matter.
CAMAC elsewhere recommends:
• expansion of the current legislative power for the court to give directions in the winding up of a solvent or insolvent scheme, by replacing the power to act where the court considers that this is
‘necessary’ with a power to act where the court considers that
this is ‘appropriate’
• a statutory right for anyone conducting the winding up of a solvent or insolvent scheme to seek those directions.547
7.5.5 Rights of priority creditors
There is no provision for an order of priority for the distribution of scheme property in the winding up of an insolvent scheme.548
546 Re Timbercorp Securities Ltd (No 2)  VSC 411; Re Timbercorp Securities
Ltd  VSC 50; Re Great Southern Managers Australia Ltd (No 1)  VSC
557; Re Great Southern Managers Australia Ltd (No 2)  VSC 627; Re
Willmott Forests Ltd (No 2)  VSC 125.
547 Section 7.2.6.
548 In Stacks Managed Investments Ltd  NSWSC 753 at , the Court said:
By contrast, the Corporations Act stipulates that debts and claims in the winding up of a company rank equally,549 subject to certain priority payments.550
The issue of priority of payments can create difficulties in practice. For instance, problems have arisen where the court has sought to appoint someone other than the liquidator of an RE as the liquidator of a scheme that it operates. In Re Environinvest Ltd,551 the court ordered that a separate liquidator be appointed to a scheme, even though it considered that the liquidator of the RE could ‘discharge the responsibility of winding up the schemes, provided adequate measures were put in place to ensure that any possibility for conflict could be dealt with by appropriate undertakings and directions’. However, the court also ordered that the liquidator of the RE and its receivers be indemnified for their costs and expenses from the assets of the RE in priority to those of the liquidator of the scheme.552
When no-one was prepared to become liquidator of the scheme on those terms, the court appointed the liquidator of the RE as the liquidator of the scheme.553
Should there be a statutory order of priority in the winding up of a scheme? If so, what should it include (for instance, the remuneration and costs incurred by the liquidator of the scheme)?
There can be no question of settling an order of priority of “scheme creditors”, or of precluding “scheme creditors” from taking or continuing proceedings for the recovery of their debts, or requiring them to submit to a process of lodgement of proof of debts with consequent appeals to the court from a decision on the acceptance or rejection of proofs.
The ALRC/CASAC report envisaged that property of a scheme being wound up would be distributed first in payment of scheme liabilities and then to scheme members (vol 1, para 8.11; vol 2, draft s 581DF (pp 225-226)). The report observed that provisions for proofs of debt, based on those in the corporations legislation, would be required: vol 1, p 78, footnote 32.
549 s 555.
550 s 556.
551  VSC 33 at .
552 id at .
553 J Ball & J Moutsopoulos, ‘The Ultimate Intangible: ‘Insolvent’ Unit Trusts in
Australia’ Insol World (First Quarter 2011) 10 at 11.
Several submissions554 favoured a statutory order of priority, which would include the remuneration and costs incurred by the liquidator of the scheme in relation to that scheme. Most of those respondents555 considered that the priority for the liquidator’s or administrator’s fees and costs in a liquidation of an insolvent scheme or a winding up of a scheme in VA should be as similar as possible to,556 or the same as,557 that for companies.
One respondent suggested as an alternative to a legislative order of priorities that each scheme constitution be required to contain an order of priority on winding up.558
One respondent559 said that it would be necessary to resolve the relative priority between amounts due to the previous (now insolvent) RE under its right of indemnity and amounts due to any liquidator, administrator or new RE of the scheme. Possible approaches to this issue include:
• the scheme liquidator recovering costs and expenses from scheme property and the RE liquidator recovering costs and expenses from the assets of the RE560
• each liquidator having her or his remuneration and expenses paid pro rata from the scheme property.561
One respondent raised the impact of the Sons of Gwalia decision562 on schemes. The main issue would be whether scheme members should have their interests postponed behind other scheme creditors, as is the case for shareholders since the enactment of the Corporations Amendment (Sons of Gwalia) Act 2010.
554 IPA, McCullough Robertson, Alan Jessup, Baker & McKenzie, Financial Services
555 IPA, Baker & McKenzie, McCullough Robertson, Financial Services Council.
ASIC and Clarendon lawyers also considered that there should be some statutory priority for the fees of liquidators and administrators appointed to schemes.
556 IPA, Baker & McKenzie.
557 McCullough Robertson, Financial Services Council.
560 IPA, McCullough Robertson.
561 Baker & McKenzie.
562 Sons of Gwalia Ltd v Margaretic  HCA 1.
The legislation should provide for a statutory order of priorities in the winding up of a scheme, based on that provided for companies in s 556 and adjusted, where necessary, for schemes.
Some of the priorities in s 556 would be less applicable to schemes than to companies. For instance, employees would be engaged by the RE and their rights to priority payment would be determined in the winding up of the RE (if insolvent).
The claims of any scheme administrator, scheme deed administrator, or scheme liquidator should share the same priority and rank equally among themselves, as in a corporate liquidation.563
However, claims of the TRE for its fees and any costs in assisting an external administrator should have priority over the claims of any external administrator of the scheme. Without this further priority, any entity contemplating the role of a TRE would have to consider the likelihood of the scheme going into external administration before accepting the appointment. By contrast, an external administrator would be aware that the scheme is in financial stress when taking up the appointment, and that the priority provisions for payment of its costs and remuneration would apply.
A former RE or a new RE with claims against scheme property under its indemnity rights should be treated as an unsecured, non-priority, creditor of the scheme.
The position of scheme members, in relation to their procedural and statutory rights as scheme members, should be comparable to that of shareholders in a company.
7.5.6 Voidable transactions
The voidable transaction provisions,564 which apply to insolvent companies in liquidation, empower the court to set aside transactions
563 Paragraph 556(1)(a) gives equal priority in a corporate liquidation to expenses properly incurred by a ‘relevant authority’, defined in s 556(2) as any liquidator, provisional liquidator, administrator or deed administrator of the company.
564 Pt 5.7B Div 2.
that were entered into by the company before the winding up began and that may give an undue advantage to counterparties or beneficiaries of those transactions over other creditors in obtaining payment out of corporate assets.565
Is there a need for voidable transaction provisions specifically applicable to the winding up of insolvent schemes and, if so, what should be the content of those provisions?
Various respondents566 supported specific voidable transaction provisions for schemes, based on those applicable to companies.
Some other submissions567 were less supportive, raising, for instance, concerns that such provisions could add to the complexity of winding up insolvent schemes.
There should be voidable transaction provisions applicable in the winding up of an insolvent scheme, based on the exiting provisions applicable to companies. These provisions will help ensure an equitable distribution of available scheme assets.
7.5.7 Position of scheme members
The Parliamentary Joint Committee on Corporations and Financial Services Inquiry into aspects of agribusiness managed investment schemes (September 2009) noted the concern expressed by members of some failed agribusiness schemes that in the liquidation of their schemes no person was charged solely with representing their interests.568
565 V Jewell, ‘Corporate law’ in I Freckelton & H Selby (eds), Appealing to the
Future: Michael Kirby and his Legacy (ThomsonReuters, Sydney, 2009) at 160.
566 IPA, McCullough Robertson, Financial Services Council, Clarendon Lawyers.
567 Alan Jessup, Baker & McKenzie, AAR.
568 Paragraphs 3.103 and 3.104.
What provision, if any, should be made for scheme members in the winding up of their scheme?
Should the liquidator of a scheme have any statutory duty to members of that scheme and, if so, what and why?
Provision for members in a winding up
Most submissions that commented569 considered that the interests of members of an insolvent scheme should be subordinated to the interests of the creditors of that scheme, in a similar way to the subordination of shareholders’ interests to those of a company’s creditors.
However, one respondent570 proposed that a committee of scheme members should be appointed in a scheme liquidation to oversee the conduct of the liquidator and represent members’ interests.
Statutory duty of the liquidator
Submissions that commented571 did not favour the scheme liquidator having a specific statutory duty to members of the insolvent scheme, arguing, for instance, that:
• the liquidator should not owe members any specific duty beyond his or her general fiduciary duties in that role
• if the scheme is insolvent, the primary duty of the liquidator should be to the creditors of the scheme.
Members of an insolvent scheme may have property or contractual rights or claims, particularly in common enterprise schemes. It is for the liquidator to assess these matters in determining whether, or in what respect, a scheme member has rights and claims as a creditor of the scheme.
569 IPA, Alan Jessup, McCullough Robertson, Baker & McKenzie, Property Funds
570 Clarendon Lawyers.
571 IPA, Alan Jessup, Baker & McKenzie.
Beyond that, appointing a person to represent scheme members in the winding up of a scheme would be out of step with comparable corporate liquidation practice. Where a company goes into liquidation, no-one is appointed specifically to look after shareholder interests.
8 Other matters
This chapter discusses the request in the terms of reference to examine proposals concerning convening scheme meetings, cross-guarantees entered into by REs and statutory limited liability of scheme members.
8.1 PST request
The PST letter asked CAMAC to:
examine other proposals to improve Chapter 5C of the Corporations Act, including in relation to: convening scheme meetings; cross-guarantees entered into by REs on behalf of other group members; and statutory limited liability.
This chapter covers:
• scheme meetings
• cross-guarantees and indemnities provided by an RE
• limited liability of scheme members.
The SLE Proposal does not affect any of these matters.
The chapter does not deal with other proposals to improve Chapter 5C of the Corporations Act that were raised in submissions. Included in the submissions were matters considered in a series of papers in 2001-2002 on schemes by Mr M Turnbull,572 Treasury573 and the Parliamentary Joint Committee on Corporations and Financial Services.574 These other proposals will be separately considered by CAMAC in a further review.
572 Review of the Managed Investments Act 1998 (December 2001).
573 Review of the Managed Investments Act 1998: Consultation Paper (April 2002).
574 Report on the Review of the Managed Investments Act 1998 (December 2002).
8.2 Convening scheme meetings
8.2.1 Current position
An RE has various powers to call a meeting of scheme members.575
Likewise, members can require the RE to call, or themselves call, a meeting of members to consider special or extraordinary resolutions.576 However, possibly by oversight, members do not have this power in relation to ordinary resolutions, notwithstanding that some matters, in particular the removal of the RE of a listed scheme, are determined by ordinary resolution.577 Similarly, the power of the court to call a meeting of members only applies to a proposed special or extraordinary resolution.578
ASIC does not have the power to convene meetings of scheme members.
The Turnbull Report recommended that provision be made in the legislation for members to request the RE of a registered scheme to call a general meeting.579
There is no provision for an annual general meeting of scheme members.
Should there be any changes to the provisions concerning the calling of meetings of scheme members and, if so, for what reasons?
For what purposes, if any, should ASIC be granted the power to convene meetings of scheme members?
575 ss 252A, 601FL. Also, any related party transactions require the approval of members at a scheme meeting: s 601LC.
576 ss 252B-252D.
577 Under s 601FM(1), members of a listed scheme who wish to remove the RE may take action under Part 2G.4 Div 1 for the calling of a members’ meeting. However, the relevant provisions under this Division, being ss 252B-252D, only refer to calling a members’ meeting to consider proposed special or extraordinary resolutions.
578 s 252E.
579 rec 7.
Should there be provision for an annual general meeting of scheme members and, if so, should the purposes of such meetings be stipulated?
Scheme members calling a meeting of scheme members
One respondent noted that, while the only ordinary resolution of scheme members specified in the Corporations Act is to change the RE of a listed scheme, scheme constitutions may provide that certain decisions are to be determined by an ordinary resolution of members. Scheme members have no statutory power to have a meeting of scheme members called to determine any such matter in the scheme constitution.580
ASIC calling a meeting of scheme members
One view in submissions was that ASIC should be permitted to call a meeting of scheme members if it has a compelling reason to do so and it reasonably considers that this is in the best interests of scheme members.581
However, most respondents did not support ASIC being given a specific power to call a meeting of scheme members, considering, for instance, that there is not sufficient evidence of any need that would warrant giving ASIC such a power.582
Annual general meeting of scheme members
Various respondents considered that an annual general meeting of scheme members should be mandatory, noting that this is required for public companies, and that it would provide scheme members with an opportunity to raise with the RE matters concerning the operation of the scheme.583
Other respondents opposed a mandatory annual general meeting of scheme members, pointing to costs and the fact that scheme
580 McCullough Robertson.
581 The Trust Company, Richard Wilkins.
582 ASIC, Alan Jessup, McCullough Robertson, Property Funds Association, Financial
583 Freehills, Alan Jessup, Richard Wilkins, Primary Securities Ltd.
members already receive product disclosure, continuous disclosure and periodic statements.584
8.2.3 CAMAC position
Scheme members can have a meeting of members called to consider a permitted special or extraordinary resolution. However, they have no statutory power to have a meeting of members called to consider an ordinary resolution.
To overcome this limitation on members’ rights, ss 252B-252D should be amended to enable members who satisfy the threshold tests in those provisions to direct the RE to call, or themselves to call, a meeting of scheme members for the purpose of considering any ordinary resolution on which scheme members are entitled to vote, including under any provision in the scheme constitution. These statutory provisions already deal with the question of costs where a meeting of scheme members is called at the request, or direction, of scheme members.
Likewise, the court power to order a meeting585 should be amended to extend the court’s power so that it covers a meeting to consider and vote on an ordinary resolution.
If the powers of scheme members and the court to call scheme meetings are expanded in this way, it is unnecessary also to give ASIC the power to convene a meeting of scheme members, or to mandate an annual meeting of scheme members. If sufficient scheme members are not prepared to call a meeting on a matter on which they are entitled to vote, there does not seem to be a need for ASIC to be given this power or to require that all schemes convene an annual meeting of scheme members.
584 ASIC, McCullough Robertson, Property Funds Association, Financial Services
585 s 252E.
8.3.1 Current position
An RE that is in a corporate group may be requested, as part of the group’s activities, to provide guarantees or indemnities for various transactions by other entities in that group. These types of financial accommodation may take one of two forms:
• guarantees or indemnities provided by the RE in a capacity other than as operator of a scheme and involving only its personal assets
• guarantees or indemnities provided by the RE in its capacity as the operator of one or more schemes. This could involve permitting an external party to take a security interest over scheme property.
RE acting in non-scheme capacity
There are currently no significant restrictions in regard to an RE entering into guarantees or indemnities concerning the group that involve its personal assets. However, these forms of financial commitment can expose the RE to financial risk from other activities in the group, with the possibility of the RE becoming insolvent or otherwise no longer capable of performing its functions as a scheme operator. This can cause disruption to the operation of any scheme that the RE operates, including the need to attract and appoint a TRE or a new RE to each affected scheme to avoid the liquidation of the scheme.
RE acting as scheme operator
An RE that, in its capacity as operator of a scheme, enters into a guarantee or indemnity that involves scheme property and is unrelated to the activities of that scheme may thereby commit a breach of trust as operator of the scheme, unless the RE is expressly permitted to do so in the constituent documents of the scheme.586
586 Paragraph 601GA(1)(b) requires that the constitution of a scheme make adequate provision for the powers of the RE in relation to making investments of, or otherwise dealing with, scheme property.
ASIC Consultation Paper 140 Responsible entities: Financial requirements (September 2010) proposed that the licensing requirements for REs be amended so that an RE:
• is prohibited from providing guarantees in its capacity as the RE
of a scheme
• where the RE manages more than one scheme, is prohibited from providing guarantees in its personal capacity
• is restricted from providing indemnities in its capacity as the RE of a scheme, other than indemnities in relation to the scheme’s default.
Following a period of consultation on that Consultation Paper,587
ASIC released new financial requirements for REs, to apply from November 2012. They will impose revised minimum standards for REs to have available adequate financial resources to provide the financial services covered by their AFSL.588
In lieu of the controls proposed in ASIC Consultation Paper 140 on REs providing guarantees and indemnities, there will be a requirement that each RE estimate the maximum liability under any guarantee it provides (with some exceptions) and exclude this amount from its net tangible asset (NTA) calculation.589 The purpose of this approach is to enable the NTA better to reflect the operational risk of the RE, while maintaining flexibility for REs to provide such guarantees, where appropriate.
587 ASIC REP 259 Response to submissions on CP 140 Responsible entities: Financial requirements highlights the key comments received in the submissions on Consultation Paper 140 Responsible entities: Financial requirements.
588 Class Order 11/1140 Financial requirements for responsible entities. Updated ASIC Regulatory Guide 166 Licensing: Financial requirements and Pro Forma 209 (PF 209) are also to apply from November 2012, in line with CO 11/1140.
589 See the November 2011 draft of RG 166 Licensing: Financial requirements at subparagraph (f) of paragraph 162.
From November 2012, to meet the NTA capital requirements, REs must hold the greater of:
• $150,000, or
• 0.5% of the average value of scheme property (capped at $5 million), or
• 10% of the average RE revenue (uncapped).
In view of the ASIC initiative, should there be any further form of regulation concerning the provision of cross-guarantees or indemnities by REs and, if so, for what reasons?
Various respondents were critical of any attempt to prohibit an RE from providing cross-guarantees or indemnities in its personal capacity.590 It was argued, for instance, that this form of financial arrangement is a necessary and important business activity for most group-based commercial entities. Prohibiting an RE from giving a guarantee or indemnity involving its personal assets would prohibit many standard financing arrangements within stapled group or other structures that include schemes.
8.3.3 CAMAC position
RE acting in non-scheme capacity
Permitting an RE to enter into cross-guarantees or indemnities involving its personal assets, and not as operator of any particular scheme, may increase the risk of the RE becoming insolvent in its own right and therefore being unable to continue to operate schemes. This may place a scheme itself at risk, as it cannot continue without an RE.
CAMAC has put forward proposals in earlier chapters of this report to assist the process of replacing an RE that cannot fulfil its obligations as RE for whatever reason, including its insolvency. These proposals include removing disincentives under the current law to a suitable entity agreeing to act as the TRE of a scheme until a new RE is found.591 Also, the SLE Proposal would assist in the task of finding a TRE or a suitable new RE, as an RE, being an agent, not a principal, in operating a scheme, would not in that capacity incur liabilities and obligations that would pass on to a TRE or a new RE.592
590 Freehills, Henry Davis York, Alan Jessup, Financial Services Council.
591 See chapter 5.
592 See chapter 3.
CAMAC considers that implementation of these proposals to assist a change of RE of a viable scheme will help to protect a scheme from the consequences of the insolvency of its RE.
Imposing prohibitions or requirements (additional to the foreshadowed ASIC capital requirements) on the ability of the RE to provide guarantees or indemnities in its personal capacity and involving its personal assets may reduce the likelihood of an RE becoming insolvent. However, there was little support in the submissions for restricting the activities that an RE undertakes in its personal capacity so as to reduce the likelihood that the RE will fail, even where (as in the case of some common enterprise schemes) scheme members have prepaid the RE for services or expenses in connection with the scheme and those prepayments form part of the personal assets of the RE (not scheme property held on trust for scheme members) and therefore are lost to scheme members if the RE fails.593 Accordingly, CAMAC does not favour the introduction of this restriction, subject to an ongoing evaluation of ASIC’s ability to manage appropriately the risk of RE failure through implementation of its financial requirements policy.
RE acting as scheme operator
CAMAC considers that an outright prohibition on an RE providing guarantees or indemnities involving scheme property may unduly inhibit an RE in operating a scheme for the benefit of scheme members. An RE that provides guarantees or indemnities using scheme property, but without some commercial or financial benefit to the scheme, could be in breach of its statutory and common law obligations as operator of the scheme.
8.4 Limited liability of scheme members
8.4.1 Current position
Inquiries conducted by the Companies and Securities Law Review Committee (1984), the ALRC and CASAC in their collective investments review (1993) and CASAC in its review of the liability of members of managed investment schemes (2000) recommended
593 However, in Section 5.3.2 of this report CAMAC recommends controls on advance payments of remuneration to the RE.
statutory provisions to the effect that (except under arrangements whereby the RE is acting as agent for the scheme members) the members of a scheme should have limited liability for scheme debts that remain outstanding on the winding up of the scheme, in the same manner as shareholders of a company limited by shares.594
Further information on these reviews, and the full details of the recommendations by CASAC, are found in the CASAC 2000 report Liability of Members of Managed Investment Schemes (March 2000).595
The recommendation in the 2000 CASAC report to introduce limited liability for members of registered and ASIC-exempt schemes (but not other unregistered schemes) was based on these persons being passive investors, who, in principle, should have similar protections against personal liability, whether they invest in schemes or in limited liability companies.
However, in some agribusiness common enterprise schemes, the scheme members have sought to be characterised, for taxation and other reasons, as playing a much more active role as ‘growers’ carrying on their own individual businesses, and with proprietary interests in the agricultural land or its produce. This raises the question whether, or in what circumstances, they should not have the protection of limited liability.
Except where the RE is acting as the agent of the scheme members, should statutory limited liability of scheme members be introduced for all or some schemes?
If so, should distinctions be drawn between different classes of passive or active scheme members, and for what purposes?
Should the limited liability principle be subject to any contrary provision in the scheme constitution?
594 See also the discussion at Section 2.6.2 of the Turnbull Report.
595 The CASAC 2000 report can be found on the CAMAC website
www.camac.gov.au by going to Publications, and then to Reports.
Respondents considered that, except where the RE is acting as the agent for scheme members, members of a scheme should have statutory limited liability.596 Respondents noted that most scheme constitutions seek to do this, but it would be beneficial if limited liability were to be confirmed by statute.
Active and passive scheme members
One view in submissions was that no distinction should be drawn between active and passive scheme members.597 One respondent commented, however, that limited liability may sit uneasily with some agribusiness common enterprise schemes where scheme members were described as ‘growers’ with direct rights to cultivate their trees, which concept underpinned the tax effectiveness of their investment.
Some respondents supported limited liability of scheme members being subject to any contrary provision in the scheme constitution, with an obligation that the product disclosure statement clearly disclose any such provision to potential investors.598
Other respondents opposed a scheme constitution being able to override limited liability of scheme members.599 It was pointed out, for instance, that if appropriate disclosure of a contrary provision is not made to scheme members, they may be unaware that they do not have the benefit of limited liability. Also, members who join schemes may, contrary to their wishes, be exposed to personal liability if scheme members by special resolution subsequently approve an amendment to the scheme constitution to override limited liability.600
596 Alan Jessup, ASIC, McCullough Robertson, Henry Davis York, Freehills, Property Funds Association, The Trust Company, Financial Services Council, Primary Securities Ltd, Ashurst Australia.
597 McCullough Robertson, Freehills.
598 Alan Jessup, Financial Services Council.
599 McCullough Robertson, Henry Davis York.
600 s 601GC(1)(a).
8.4.3 CAMAC position
As scheme members, by definition601 (which applies to common enterprise schemes as well as pooled schemes), do not have day-to-day control over the operation of the scheme, they should not be personally liable for debts incurred by the RE as operator of the scheme. Their liability in the event of the insolvency of the scheme should be limited to any unpaid portion of the amount that they had agreed to contribute to the scheme.602
Current industry practice is to provide for limited liability of scheme members in the scheme constitution. Statutory limited liability would give greater protection to scheme members and provide greater certainty to scheme creditors.
Statutory limited liability would not apply to agreements into which
‘active’ scheme members (as in some common enterprise schemes) enter on their own behalf or through the RE acting as their agent. Members who are principals to agreements are personally liable according to their terms.
The principle of limited liability should not be subject to any contrary provision in the scheme constitution. The benefits of protection for individual scheme members and certainty for scheme creditors would be undermined if the position could be reversed in the scheme constitution, particularly where that occurs by subsequent amendments to that constitution.
601 See subparagraph (a)(iii) of the definition of managed investment scheme in s 9.
602 cf s 516 for companies.
Appendix Terms of reference
The regulation of managed investment schemes
Since the passage of the Managed Investments Act 1998, collective investments, known as managed investment schemes, have been regulated by Chapter 5C of the Corporations Act 2001 (the Corporations Act). The Corporations Act provides that the main features of a [scheme] are that:
• people are brought together to contribute money to get an interest in the scheme;
• money is pooled together with that of other members or used in a common enterprise; and
• members do not have day to day control over the operation of the scheme.
While the overwhelming majority of funds under management in Australian [schemes] are placed in schemes structured as unit trusts, where investors hold units in the scheme property, the [scheme] structure has also been applied in the agribusiness sector where the members (known as ‘growers’) operate their own individual businesses.
The recent global financial crisis highlighted the difficulties that arise for responsible entities (REs), scheme members, and creditors where a [scheme] comes under financial stress in a credit constrained environment. Those difficulties were evidenced initially through the freezing of investor redemptions in the mortgage fund sector, and then through the collapse of a number of significant participants in the agribusiness [scheme] market.
The collapse of Great Southern Limited and Timbercorp Group led the Parliamentary Joint Committee on Corporations and Financial Services (PJC) to initiate an inquiry into agribusiness managed investment schemes. Submissions to the inquiry highlighted a range of concerns relating to the regulation of agribusiness, including in relation to: the provision of narrow sales recommendations; the ‘one
size fits all’ licensing model; the accuracy of disclosure material available to investors, especially in relation to predicted scheme performance; the appointment of temporary REs; and better investor education. The PJC released its report, Aspects of agribusiness managed investment schemes, on 7 September 2009.
In that report, the PJC made three recommendations relating to agribusiness [schemes].
• Recommendation 1 related to the tax treatment of agribusinesses.
• Recommendation 2 was that the Government amend the Corporations Act to require ASIC to appoint a temporary RE when a registered [scheme] becomes externally administered or a liquidator is appointed.
• Recommendation 3 related to ASIC requirements for agribusiness [schemes] to disclose the qualifications and accreditation of third parties that provide expert opinion on likely scheme performance.
As part of its Financial products and services in Australia report released on 23 November 2009, the PJC also recommended that, as part of their licence conditions, ASIC require agribusiness [scheme] licensees to demonstrate that they have sufficient working capital to meet current obligations (Recommendation 7).
While the recommendations made by the PJC were limited in scope, the PJC Inquiry highlighted the current lack of certainty with respect to the arrangements for dealing with unviable [schemes]. While the corporate insolvency provisions in the Corporations Act provide creditors and directors with certainty about their rights and obligations, the Corporations Act sets out very few specialised rules regarding the administration of insolvent trusts or trustees. Instead, the administrations of such are determined by a mix of legislation, common law and equitable principles. The lack of clarity has led liquidators to resort often to the Court in order to obtain advice about the legality of future actions.
It is therefore not clear whether the legislative arrangements contained in the Corporations Act are adequate to maintain the confident participation of retail investors in [schemes] because of
deficiencies in the way the Act deals with: resolving the consequence, for otherwise viable schemes, of the insolvency of their RE; and what is to occur when the RE is insolvent and the scheme itself has failed. Informal stakeholder consultations have also raised issues with the general operation of the [schemes] regime, which has not been reviewed since 2001.
I request that CAMAC:
• examine whether the current statutory framework is adequate for the winding up of [schemes], and agribusinesses in particular, and whether it provides the necessary guidance for liquidators, creditors, investors and growers;
• advise what legislative amendments should be made if the current legislative framework does not provide the necessary legislative tools with respect to the arrangements for dealing with non-viable [schemes];
• examine whether the current temporary RE framework enables the transfer of viable scheme businesses where the original RE is under financial stress, and if not whether it should be reformed or replaced;
• examine whether REs are unable to restructure a financially viable [scheme] and advise if the current legislative methods available to companies under the Corporations Act should be adapted to managed schemes; and
• examine other proposals to improve Chapter 5C, including in relation to: convening scheme meetings; cross-guarantees entered into by REs on behalf of other group members; and statutory limited liability.