4 Proposed key legislative reforms
This chapter considers the need for legislative reforms concerning the identification and recording of the affairs and property of each scheme, as well as the rights of parties dealing with the scheme.
4.1 Current position
4.1.1 Problems in practice
Much of the complexity, disputation, delay and costs that have surrounded the external administration of some common enterprise schemes in recent years can be traced to earlier failure by REs to ensure:
• adequate separation and recording of the affairs of each of the schemes that they operate
• clear identification of scheme property and its separation from the proprietary interests of scheme members utilised in the schemes.
Legal complexity has also arisen where investment arrangements involve REs operating a number of schemes, which, in turn, may form part of a more complex scheme/corporate ‘stapled’ arrangement. The more complex the structure of these arrangements, the greater the risk of entanglement of the affairs of different schemes and of confusion over the relative rights of scheme members and external parties.
The difficulties that can arise in disentangling the affairs of different schemes, and identifying the various property interests and remedial rights involved, point to the need to ensure, from the time each scheme is established, that its affairs, as well as its property, can be clearly identified and that persons dealing with an RE as operator of a particular scheme can have a clear understanding of their legal position. Recent experience points to the shortcoming of waiting until schemes encounter financial stress before attempting to deal with these issues.
4.1.2 Sole‐function and multi‐function REs
The current legislative structure for schemes in Chapter 5C of the Corporations Act tends to focus on a single scheme operated by its RE, with some recognition that an RE may operate more than one scheme. The legislation is drafted principally from the perspective of the scheme, with the provisions relating to the role of its RE focusing primarily on the RE’s conduct of that scheme.
An RE may be incorporated solely for the purpose of operating a single scheme, with all of its dealings attributable to its operation of that scheme (sole-function RE). However, it is common for an RE to operate a number of schemes, and possibly also in its own right conduct other activities that have no relationship to the operation of any of its schemes (multi-function RE). A multi-function RE may therefore, over time, enter into a series of agreements, including as operator of different schemes.
The majority of registered REs are multi-function REs, with approximately:
• 39% of REs operating one scheme
• 32% of REs operating more than one, but less than 5, schemes
• 26% of REs operating 5 or more, but fewer than 50, schemes
• 3% of REs operating 50 or more schemes.182
A multi-function RE may be an ‘internal’ RE, set up for the purpose of operating a commercial venture that involves a number of related schemes. There are also multi-function ‘external’ REs, which operate schemes in a range of different enterprises. In addition, an RE may be part of an interconnected series of schemes (with different REs involved on behalf of one or more of the other schemes) that are all part of one operation or transaction (‘interconnected schemes’).
182 This statistical information was provided in July 2012 by ASIC, which also indicated that in July 2012 there were 487 REs, with some 3950 registered and operational schemes.
The legislation gives only limited recognition to these more complex types of RE arrangement.183
4.2 Need for reform
Clear identification of the affairs and property of each scheme is essential to the effective day-to-day operation of a scheme, the transfer of the RE of a viable scheme, the restructuring of a financially stressed but potentially viable scheme, or the winding up of a scheme.
The potential for problems to arise in achieving this identification and separation can be heightened where, for instance, a multi-function RE is operating a common enterprise scheme. In that case:
• a clear separation will have to be drawn between the affairs and property of each scheme operated by the RE, and, in turn, how the affairs and property of each scheme are distinguished from any affairs or property of the RE through any other dealings
• the contractual and proprietary rights of scheme members, and how they intersect with the affairs and property of the scheme, will have to be identified.
4.2.1 Affairs and property of each scheme
An RE is obliged to keep separate the property of each scheme that it operates.184 However, an RE has no statutory obligation to identify and record for which scheme (if any) it is acting when it enters into agreements as principal, though it may choose to do so.
The need for clear and accurate information on the affairs and property of each scheme can arise in various contexts. For instance, a multi-function RE may wish to transfer responsibility for operating one of its schemes to a new RE, or the members of a particular
183 See, for instance, ss 601FC(1)(i), 601PB(1)(d)(ii) in relation to the duties of an RE and ss 601HA(1)(a) and 601HB in relation to compliance plans. See also the following footnote.
184 Paragraph 601FC(1)(i) obliges an RE to ensure that scheme property for each scheme that it operates is ‘clearly identified’ and held separately from the property of any other scheme or the property of the RE.
scheme may seek to replace the RE. In either case, it is necessary to determine which of the accumulated rights, obligations and liabilities of the outgoing RE under the various agreements into which it may have entered attach to the affected scheme, given that, under the current legislative structure for schemes, those rights etc will transfer to the incoming RE of that scheme.185 The legislation simply assumes that it is possible to identify the relevant documentation for each scheme, for the purpose of a deemed novation of the contracting parties.186
4.2.2 The rights of creditors of each scheme
Parties who have entered into agreements with an RE will be concerned to know against what assets held by the RE they can claim, particularly when the RE goes into external administration.
Counterparties who have dealt with the RE as operator of a particular scheme have direct rights against the personal assets of the RE (unless they have agreed to having only limited recourse rights), in the same manner as other creditors of the RE.187 However, they do not have a direct right against any property of that scheme, which is held on trust by the RE. Instead, they may seek subrogation to any unexercised indemnity rights of the RE against that property. These indemnity rights may be lost (and therefore the remedy of subrogation rendered nugatory) where the RE has acted beyond power or otherwise improperly.188 The same limitation on recovery against scheme property applies to counterparties seeking to exercise limited recourse rights.
Uncertainty also remains about who can claim against property of a scheme recovered by any external administrator of an RE under any previously unexercised indemnity rights of the RE. Taking into account some conflicting trust law authority, one view is that all creditors of the RE can claim against that property, while another
185 As observed in Investa Properties Ltd  NSWSC 1089 at , where the RE of a scheme changes, the effect of s 601FS is ‘to cause an incoming responsible entity to step into the shoes of its predecessor’ concerning the rights, obligations and liabilities of the former RE in regard to that scheme.
186 s 601FT.
187 See further Section 2.3.1 of this report.
188 See further Section 2.3.3 of this report.
view is that the right to claim is confined to those creditors who have dealt with the RE as operator of that scheme.189
4.2.3 Reform proposals
The CAMAC discussion paper proposed a series of reform to:
• identify and record the affairs and property of each scheme that an RE operates
• place controls on the use of scheme property
• set out the rights of creditors of each scheme in relation to scheme property.
It was also intended that:
• the reform proposals would apply regardless of any contrary provision in a scheme constitution, and
• any general law principles that are inconsistent with the reform proposals would cease to apply in the context of schemes.
The reform proposals, set out in the following sections of this report, were originally formulated, and submissions were received, before the SLE Proposal was developed. Respondents therefore considered the proposals in the context of the current legal framework for schemes. The CAMAC position on each of the proposals includes an analysis of the implications of adopting the SLE Proposal.
4.3 Identification and recording of the affairs of each scheme
The affairs of a scheme can involve various types of agreements:
• those entered into by the RE, as operator of the scheme, with scheme members or external parties
• those entered into by the RE, as agent for one or more scheme members, with external parties
189 See further Section 2.3.3 of this report.
• those entered into by scheme members themselves, pursuant to the operation of the scheme, with external parties.
4.3.1 Agreements with scheme members or external parties entered into by the RE itself as operator of a scheme
To operate a scheme, an RE may enter into a series of agreements with external parties, including for the provision of goods or services relevant to the scheme. The RE may also enter into agreements with scheme members including, with common enterprise schemes, agreements concerning proprietary or other rights or interests that the scheme member may have and how those rights or interests will be recognised or employed as part of the enterprise.
Identification of agreements
Whenever an RE enters into an agreement as operator of a scheme, the RE must specify that this is the case and identify the scheme to the counterparty. The RE must include that information in any document constituting that agreement. Where the agreement involves more than one identified scheme, the RE must identify what part, or proportion, of the agreement is attributable to each scheme.
Recording of agreements
From the commencement of a scheme, the RE (including any replacement RE) must maintain an ongoing register of all relevant agreements for that scheme.
The agreements register must be divided into a ‘continuing agreements’ section and a ‘completed agreements’ section. Details of each agreement (and any material variations to that agreement) must be included in the former section, until such time as all rights, obligations and liabilities of any party under that agreement have been discharged, after which the details of the agreement must be transferred to the latter section.
The agreements register must be maintained throughout the life of a scheme. No agreement, whether or not still on foot, may be deleted from the register (except where recorded by mistake).
Should this reform proposal be enacted?
Should the agreements register be a definitive statement of all agreements entered into by an RE as operator of a particular scheme?
• how could counterparties ensure that their agreements are included in the register? For instance, should they have a right of access to the register? Also, in what circumstances, if any, should they have a means to have the register amended?
• what remedies should affected parties have for failure to include an agreement in the register and against whom?
This reform proposal sought to ensure that agreements entered into by an RE in operating a scheme, either with scheme members or external parties, are clearly identified and recorded.
The agreements register would provide a means to trace the way an RE has operated a scheme, including for the purpose of any external investigation of the conduct of the RE. It would also assist a potential TRE or replacement RE in undertaking due diligence on the affairs of a scheme, while also providing key information in the event of the scheme going into external administration.
The process of changing the RE of a scheme would also be assisted if a TRE or prospective new RE could rely on the register as a definitive record of all agreements involving any former RE, for the purpose of the transfer of rights, obligations and liabilities under s 601FS. The implications of an RE failing to record an agreement in an agreements register would also need to be taken into account in any move to introduce such a register.
A number of submissions supported the principle of a register of all agreements entered into by the RE as operator of a scheme, either for
all schemes or at least for common enterprise schemes.190 The register could assist scheme members, creditors, regulators, external administrators and the courts in determining the range of agreements forming part of a scheme, which can otherwise be difficult to identify, particularly with some common enterprise schemes.
Other submissions opposed this form of register.191 Some respondents considered that the current requirements under ss 286 (obligation to keep financial records), 601FC(1)(i) (obligation to identify and separately hold scheme property) and 601HA(1)(e) (compliance plan to ensure adequate records of the scheme’s operations are kept) ensure sufficient recording and disclosure of relevant agreements, without the need for an additional agreements register.
Various respondents gave full or qualified support to the register of agreements, if introduced, being a definitive record of the agreements entered into by the RE as operator of the scheme.192
Some other respondents argued that, while this outcome would be beneficial to a TRE or a new RE, it could adversely affect the position of a counterparty where the RE has not properly recorded the agreement on the register.193
Some respondents supported a right of inspection of an agreements register, if introduced, similar to the right of inspection of a scheme members’ register (s 173).194 Other respondents favoured restrictions on access to an agreements register, as it could contain commercially sensitive information.195
The CAMAC position is set out in Section 4.3.4.
190 IPA, McCullough Robertson, Alan Jessup, Baker & McKenzie, ASIC, Property
Council of Australia, AAR, Clarendon Lawyers, McMahon Clarke Legal.
191 Henry Davis York, Freehills, Ashurst Australia, Property Funds Australia, The
Trust Company, Primary Securities Ltd, Financial Services Council.
192 IPA, Alan Jessup, Clarendon Lawyers (very qualified).
193 Freehills, Henry Davis York, Baker & McKenzie, McCullough Robertson, Property
Council of Australia, AAR, McMahon Clarke Legal.
194 Alan Jessup, Clarendon Lawyers.
195 AAR, Freehills.
4.3.2 Agreements with external parties entered into by the
RE as agent for scheme members
Should an RE be required, from the commencement of an MIS, to establish a register of all arrangements entered into by the RE as agent of one or more scheme members?
Who should have access to that register and through what process?
An RE, as agent for scheme members, may enter into agreements with external parties. This is more likely with some common enterprise schemes, which may involve scheme members being more directly involved in the enterprise than under pooled schemes, where the scheme members are passive investors. For this purpose, an RE may be given a power of attorney to act for a member pursuant to the terms of the scheme.196
It would assist the process of identifying the full scope of agreements involved in the affairs of a scheme if an RE is required to include these agreements in any register of agreements.
The majority of submissions supported the concept a register of agreements including agreements entered into by the RE as agent for scheme members.197 The register would contain this information in one place and overcome any problem of inability to locate key contractual documents executed by the RE as agent for scheme members. Respondents supported controls on access to this register, given its potential commercial sensitivity.
The CAMAC position is set out in Section 4.3.4.
196 See, for instance, Re Elders Forestry Management Ltd  VSC 287 at .
197 Clarendon Lawyers, McCullough Robertson, Baker & McKenzie, IPA, Alan
4.3.3 Agreements with external parties entered into by scheme members themselves
Scheme members may themselves enter into agreements with external parties during the course of a scheme, typically under the terms of some common enterprise scheme arrangements.
The CAMAC position is set out in Section 4.3.4.
4.3.4 CAMAC position
The CAMAC proposal concerning an agreements register should apply whether or not the SLE Proposal is adopted.
Ambit of an agreements register for each scheme
CAMAC considers that the RE of each pooled or common enterprise scheme, whether a sole-function or multi-function RE, should have an obligation to establish and maintain an agreements register for each scheme that it operates. Each agreements register should be divided into three discrete categories:
• agreements entered into by the RE, as operator of the scheme, with scheme members or external parties
• agreements entered into by the RE, as agent for one or more scheme members, with external parties
• agreements entered into by scheme members themselves with external parties, pursuant to the operation of the scheme.
Each of the three categories in the agreements register for each scheme should be subdivided into a ‘continuing agreements’ section (where any rights, obligations or liabilities under the agreement are still on foot) and a ‘completed agreements’ section (where all rights, obligations and liabilities under the agreement have been discharged). The register should also include any material changes to recorded agreements.
The agreements register should be maintained throughout the life of a scheme. No agreement, whether or not still on foot, should be deleted from the register (except where recorded by mistake). The
purpose is to ensure a complete and available record of the affairs of each scheme.
Nature of the obligation
The obligation on the RE should apply to all continuing agreements and all future agreements, from the time of commencement of the statutory provisions regarding the agreements register. Completed agreements at the commencement date of the legislation should be exempt, given the potential administrative costs that this may involve, particularly for schemes that have been in operation for many years. The completed agreements section of agreements registers would build up over time.
The RE should be obliged to record details on the register within a reasonable time of any agreement being entered into by the RE as principal or agent, or the RE becoming aware of an agreement entered into by a scheme member as principal.
CAMAC notes that the compliance plan must ensure that adequate records of the scheme’s operations are kept.198 An agreements register would introduce standard requirements consistent with this obligation and have broad application to agreements forming part of a scheme, rather than this matter being left to the terms of each compliance plan.
CAMAC favours a requirement that the obligation on an RE to establish and maintain an agreements register be included in each scheme constitution.199 This would ensure that the register is subject to the compliance plan and the annual audit. The requirement could be reinforced through the licensing requirements for the RE, backed up by ASIC audits and the possibility of revocation of the AFSL of the RE in the event of material failure to comply. In addition, there should be legislative sanctions against an RE for any material breach of its obligation to maintain the register, subject to an exemption from liability for failure to register an agreement that did not involve the payment of a material amount in the context of the scheme.
198 s 601HA(1)(e).
199 Under s 601GA(1).
As well as sanctions for breach, the RE of a scheme should not be entitled to exercise an indemnity right against particular scheme property unless and until:
• that particular property is included in the register of scheme property (see Section 4.4.3), and
• where the indemnity right arises in consequence of the RE entering into an agreement as principal in operating the scheme (under the current legal framework for schemes), that particular agreement is included in the register of agreements.200
CAMAC notes the concerns expressed in some submissions that an agreements register could pose a ‘significant compliance challenge’, particularly for agreements that cover multiple schemes, where the terms of agreements may change from time to time, or where agreements contemplate a series of further agreements. In CAMAC’s view, this points to the complexity that can arise, particularly under some common enterprise arrangements, and reinforces the need for each scheme to have an agreements register that provides a complete and accurate record of these affairs of the scheme.
Notification to affected parties
As part of the obligation to maintain the agreements register, the RE should have an obligation to inform any party to a registrable agreement when the agreement has been entered on the register, and any subsequent material change to the information on the register concerning that agreement.
Right to apply for agreements to be entered on the register
Parties to registrable agreements should have the right to apply to the RE to have their agreements included in the register, any material changes recorded, or any omissions or mistakes rectified, with the right to seek a court order if the RE does not comply. However, the right to seek a court order would no longer apply after
200 Under the current legal framework, an RE has indemnity rights against scheme property for its costs and remuneration and also for liabilities and obligations it incurs as principal in operating the scheme (see Section 2.3.2). Under the SLE Proposal, an RE would have indemnity rights against scheme property for its costs and remuneration: see Section 3.5 of this report.
a TRE or a new RE is appointed, or the scheme goes into external administration (see Agreements register definitive, below).
Access to the agreements register
Access to the agreements register should not be unrestricted, given that it may include commercially sensitive information. It should therefore be an exception to the general right of access to registers under s 173. Rather, access should only be given to:
• external administrators
• counterparties to agreements, in regard to those agreements
• prospective REs, subject to specified conditions, including confidentiality and, for instance, either consent of the current RE or prior approval to that access by a special resolution of the scheme members actually voting
• any other person approved by the court (for instance a scheme member or prospective TRE) and pursuant to the terms of the court order.
Agreements register definitive
The agreements register should be definitive, in the sense that where there is a change of RE (through the appointment of a TRE or a new RE), or an external administrator dealing with the affairs of the scheme is appointed, the appointee can treat the register as a complete statement of the agreements involved in the scheme that bind the appointee (including for the purpose of s 601FS under the current legal framework). This would assist a new appointee to determine the ambit of its new responsibilities.
To provide flexibility, a TRE, a new RE, or an external administrator should have a general discretion, but not an obligation, to adjust the register for unrecorded agreements, or changes to recorded agreements, entered into before their appointment.
Remedies where agreements not recorded
In proposing that an agreements register be definitive, in the sense described above, CAMAC also proposes that the rights of parties to
agreements that should have been, but were not, recorded in the register, be protected. For this purpose:
• a counterparty should retain the right to enforce an agreement under which an RE is personally liable or a scheme member is the principal, whether or not the agreement is recorded on the register. An RE or scheme member should not be entitled to rely on the absence of an agreement from the register to avoid personal liability
• a counterparty should have a claim against an RE personally for any loss or damage incurred by the counterparty in consequence of that RE not recording the agreement etc in the agreements register before a TRE or a new RE was appointed or the scheme went into external administration.
4.4 Identification and recording of scheme property
Particularly with common enterprise schemes, it is necessary to keep in mind the distinction between scheme property and other property involved in the operation of the scheme. Not all property used in relation to a scheme is scheme property. For instance, some agribusiness schemes have involved scheme members holding proprietary or other rights over various assets used in the common enterprise.
The RE of a scheme must hold scheme property ‘separately from property of the responsible entity and property of any other scheme’.201 What constitutes scheme property is set out in the legislation.202
A clear determination of what is scheme property is important for a number of reasons. For instance, under the current legal framework, an RE who enters into an agreement as operator of a scheme (rather
201 s 601FC(1)(i). The compliance plan of a scheme must set out the arrangements for ensuring that the requirement for separation of scheme property from other property is complied with (s 601HA(1)(a)).
202 Definition of ‘scheme property’ in s 9.
than as agent for one or more scheme members) has indemnity rights against scheme property.203 Counterparties to those agreements have indirect rights of recovery against scheme property through the subrogation remedy.204 Under the SLE Proposal, those counterparties would have direct rights against scheme property.205
Also, a TRE or new RE would need to have a clear understanding of what is the property of the scheme that it has undertaken to operate. Likewise, in the VA or winding up of a scheme,206 the external administrator would need clearly to separate scheme and non-scheme property.
In addition to any accounting requirement, should an RE be required, from the commencement of a scheme, to establish a comprehensive register of scheme property, to be kept up-to-date by whoever is the RE from time to time?
Who should have access to that register and through what process?
A number of respondents saw a requirement for the RE to maintain a register of scheme property as worthwhile, though some of those respondents questioned whether the accuracy of the register could be guaranteed.207
Some other respondents considered that the current requirements under s 601FC(1)(i), that the RE ensure that scheme property is clearly identified and separately held, sufficed, without the need for a register of scheme property.208
203 See Section 2.3.2 of this report.
204 See Section 2.3.3 of this report.
205 See Section 3.4 of this report.
206 See chapters 6 and 7 of this report.
207 Alan Jessup, IPA, Clarendon Lawyers.
208 Baker & McKenzie, ASIC, McCullough Robertson, Freehills, Financial Services
Council, Property Funds Association, AAR, Primary Securities Ltd.
The predominant view in submissions was that, if a register of scheme property were introduced, access to it should be restricted, given its potential commercial sensitivity.209
4.4.3 CAMAC position
The CAMAC proposal concerning a register of scheme property should apply whether or not the SLE Proposal is adopted.
Duty to maintain a register of scheme property
CAMAC considers that the RE of either a common enterprise or a pooled scheme, whether a sole-function or multi-function RE, should have an obligation to establish and maintain a register of scheme property for each scheme that it operates.
For existing schemes, the register should identify all scheme property as at, and from, the date of commencement of the statutory requirement to establish the register. This obligation should apply to subsequent new schemes as at, and from, the date of their establishment. A register should be amended thereafter as scheme property is acquired or disposed of.
CAMAC favours a requirement that the obligation on the RE to maintain the register of scheme property be included in each scheme constitution.210 This would ensure that the register is subject to the compliance plan and the annual audit. The requirement could be reinforced through the licensing requirements for the RE, backed up by ASIC audits, and the possibility of revocation of the AFSL of the RE in the event of material failure to comply. In addition, there should be legislative sanctions against an RE for any breach of its obligation to maintain the register, with an exemption from liability for de minimis breaches.
The RE of a scheme should not be entitled to exercise an indemnity right against particular scheme property unless and until:
• that particular property is included in the register of scheme property, and
209 AAR, IPA, Alan Jessup.
210 Under s 601GA(1).
• where the indemnity right arises in consequence of the RE entering into an agreement as principal in operating the scheme (as under the current legal framework), that particular agreement is included in the register of agreements (see Section 4.3.4).211
Access to the register
CAMAC considers that the principles for access to the register of scheme property should, in general, be similar to those for access to the agreements register (see Section 4.3.4), given the potentially commercially sensitive nature of what constitutes scheme property.
A register of scheme property would include the portfolio assets of the scheme. The Parliamentary Joint Committee on Corporations and Financial Services report Inquiry into the collapse of Trio Capital (May 2012) has recommended that the government release a consultation paper to investigate the best mechanism for an RE to disclose scheme assets at the asset level.212
Register of scheme property definitive
The register should be definitive in the same way as with the agreements register, namely that any TRE, new RE or external administrator is entitled to treat the register of scheme property, as at the date of their appointment, as an exhaustive statement of scheme property (subject to the appointee permitting adjustments). Given this, affected parties (for instance, persons who dispute that certain property on the register is scheme property) should have comparable rights to inspect the register of scheme property, and apply for an amendment to the register, as with the register of agreements (see Section 4.3.4).
211 Under the current law, an RE has indemnity rights against scheme property for its costs and remuneration and also for liabilities and obligations that it incurs as principal in operating the scheme (see Section 2.3.2). Under the SLE Proposal, an RE would have indemnity rights against scheme property for its costs and remuneration (see Section 3.5).
212 Recommendation 9.
4.5 Use of scheme property
4.5.1 Reform proposal
The property of a particular scheme can be used only for the purposes of that scheme.
Should this policy approach be enacted?
Should there be any exceptions? If so, in what circumstances and for what reasons?
4.5.2 Explanatory note
Under general trust law principles, it is a breach of fiduciary duty for a trustee to use property of the trust for purposes unrelated to that trust.
The constitution of a scheme must make adequate provision for various matters, including the powers of the RE in relation to
‘making investments of, or otherwise dealing with, scheme property’.213 A view has been taken that an RE may validly deal with property of a scheme in any manner permitted in the scheme’s constitution, including by using scheme property to pay debts incurred by the RE in operating another scheme. The reform proposal sought to make clear that scheme property could only be used for the purposes of that scheme, regardless of what was permitted in the scheme constitution.
Various respondents supported the principle in the reform proposal, though sometimes qualified with exceptions, such as for use of scheme property for value or with the approval of scheme members.214
213 s 601GA(1)(b).
214 Alan Jessup, Henry Davis York, IPA, McCullough Robertson, Property Funds
Association, AAR, Clarendon Lawyers, Primary Securities Ltd.
Other respondents questioned the need for the reform proposal, arguing that the current law suffices or that the proposal could have unintended consequences, for instance for schemes whose constitutions have a broad investment mandate that would ordinarily permit an RE to lend funds on commercial terms to another scheme operated by the same RE.215
4.5.4 CAMAC position
CAMAC observes at the outset that determining what constitutes scheme property is important for various reasons, including to assess the propriety of certain conduct. For instance, pre-payments by investors to an RE for its services become the personal property of the RE, not scheme property, unless otherwise stipulated. The RE is not obliged to set those payments aside as scheme property, to be drawn on only as and when the RE provides the services.
If the SLE Proposal is adopted
The SLE Proposal would overcome any property-commingling problem, as each MIS would hold its own scheme property. Also, the SLE Proposal would impose an obligation on the RE and its officers, in their managerial role, to act in the interests of the MIS and consistently with the constitution of the scheme. Likewise, the compliance committee has a role in safeguarding the interests of the scheme members. In light of these considerations, a legislative statement that the property of a particular scheme can be used only for the purposes of that scheme would not appear necessary as an additional safeguard.
If the SLE Proposal is not adopted
CAMAC supports the principle behind the reform proposal that property of a scheme can be used only for the purposes of that scheme. However, taking into account the existing statutory obligations of the RE, its officers and employees under ss 601FC-601FE, it is difficult to justify additional legislative controls, unless these provisions prove to be ineffective.
215 ASIC, Freehills, Baker & McKenzie, Property Council of Australia, McMahon
Clarke Legal, Financial Services Council.
4.6 Informing scheme creditors of a change of RE
4.6.1 Reform proposal
Where the RE of a scheme changes, the new RE must give notice of that change to all counterparties included in the ‘continuing agreements’ section of the agreements register and to any other counterparty of which the new RE is aware.
Should the policy approach in the reform proposal be enacted?
What, if any, consequences should follow where an RE fails to inform a counterparty?
4.6.2 Explanatory note
This proposed reform would help to ensure that persons who have transacted with an RE as the operator of a particular scheme are notified of any change of RE of that scheme where any rights, obligations or liabilities under an agreement with the RE in relation to the scheme are still on foot.
Various respondents supported, or did not oppose, the reform proposal, though one view was that failure to notify a change of RE should not affect the validity of any relevant agreement.216
Other respondents questioned whether there was evidence of a problem that justified the reform proposal, commenting that the costs associated with notification may outweigh any regulatory benefit, while the obligation to notify may be difficult to enforce. It may be unduly onerous on a new RE for no practical benefit.217
216 Clarendon Lawyers, McMahon Clarke Legal, Henry Davis York, IPA, Baker & McKenzie, Primary Securities Ltd, Property Council of Australia.
217 ASIC, AAR, McCullough Robertson, Financial Services Council, Freehills, Alan
Jessup, Ashurst Australia, Property Funds Association.
4.6.4 CAMAC position
Who is the RE or TRE
An initial general question affecting counterparties is who is the RE or TRE of a scheme at any particular time, for the purpose of entering into agreements with the RE or TRE.
Subsection 601FJ(1) states that the company named in the ASIC record of registration as the RE or TRE remains so until the record is altered. However, doubts on whether this record is definitive have arisen from the Federal Court decision in Huntley Management Ltd v Australian Olives Ltd (No 2).218 The Court ruled that the provision does not, on its proper construction, defeat the requirements for the valid appointment of an RE or a TRE under ss 601FK-601FQ, as operated upon by s 601FJ(2). Rather, s 601FJ(1) depends on, and assumes the existence of, an otherwise effective appointment, or change, of RE or TRE.219
While acknowledging this judicial reasoning, CAMAC considers that counterparties to agreements need certainty as to who is the RE or TRE of a scheme and who therefore can enter into agreements as operator of the scheme. In principle, counterparties should be entitled to a conclusive presumption that the RE or TRE at a particular time is the person named as such on the ASIC record of registration at that time, even if it is subsequently determined that the entity was not then validly appointed.
The language of s 601FJ should be amended to place this outcome beyond doubt. This amendment should be made whether or not the SLE Proposal is adopted.
The following comments on whether additional measures to inform scheme creditors of a change of RE are necessary are based on the assumption that an amendment to this effect will be made.
218  FCA 686.
219 This issue was noted in the submission by Alan Jessup.
A change of RE
If the SLE Proposal is adopted
Under the SLE Proposal, the RE would be the agent of the MIS (which would be the principal), with a change of RE constituting a change of agent.
Counterparties would be protected at the time of entry into an agreement by the proposed ‘indoor management rule’ under the SLE Proposal, which provides that where an RE purports to act as agent for an MIS and the counterparty is bona fide and has no notice of any relevant limitation on the RE’s so acting, the RE would be deemed to be acting within the scope of its authority. The counterparty could claim directly against the scheme property, held by the MIS.
Counterparties to a particular agreement would have no need to be informed of a subsequent change of RE, given that their remedies are directly against the property of the scheme, held by the MIS. Therefore, the reform proposal would not be necessary.
If the SLE Proposal is not adopted
The most efficient and effective way to keep external parties informed of the identity of the RE or TRE is to make the ASIC record of registration in s 601FJ(1) definitive, in the way proposed above. A counterparty could check that ASIC record before entering into agreements with the RE.
This reliance on a publicly accessible record would be more straightforward than imposing an obligation on a new RE to notify existing counterparties, with questions arising as to the means of notification and the penalties for non-compliance. Therefore, the reform proposal would not be necessary.
4.7 Rights of scheme creditors against scheme property
4.7.1 Current position
Under the current legal framework, counterparties to agreements entered into with the RE as operator of a scheme, while having direct rights against the personal assets of the RE220 (unless they have agreed to limited recourse rights only), cannot make a direct claim on the property of that scheme. Any claims concerning scheme property, under either the subrogation remedy or under limited recourse rights, are limited to the lawful indemnity claims that the RE can make against scheme property.221
Counterparties with limited recourse rights have, in effect, agreed to the risk that their claims may be affected by any improper conduct of the RE that affects its indemnity claims against scheme property. However, the subrogation remedy arises by operation of trust law, not by agreement. A counterparty may find that its rights of recovery under the subrogation remedy have been adversely affected by the improper conduct of an RE, over which it has no control.
4.7.2 The reform proposal
Counterparties to agreements entered into by the RE as operator of a particular scheme will have the right to claim directly against the property of that scheme, except to the extent that they agree otherwise.
4.7.3 Explanatory note
The reform proposal would give counterparties to agreements where the RE has acted as principal a direct right against scheme property, not dependent on the RE having acted within its powers and otherwise properly. In this respect, the reform would be analogous to the corporate indoor management rule222 and more closely align the rights of counterparties with those of corporate creditors. The
220 See Sections 2.3.1 and 2.3.3 of this report.
221 See Section 2.3.3 of this report.
222 ss 128,129.
rationale for this change is the typically entrepreneurial nature of many schemes.
The reform proposal, while protecting counterparties, would not affect the limitations on the RE’s own exercise of its indemnity rights against scheme property.223
A number of respondents supported the creation of a right for counterparties to agreements with the RE as operator of a scheme to claim directly against the property of that scheme, rather than having to rely on subrogation to the RE’s right of indemnity against scheme property.224 It was argued that this direct right of recovery for counterparties would assist the process of entering into agreements, including the speed with which agreements could be negotiated.
Various respondents opposed the reform proposal.225 Concerns were expressed that it involved a fundamental alteration to the application of trust law principles to schemes and that replacement of the subrogation remedy against scheme property with direct rights of recovery against that property may have the potential to reduce the protection currently afforded to scheme members, given that the RE must hold scheme property on trust for scheme members.226
4.7.5 CAMAC position
If the SLE Proposal is adopted
Under the SLE Proposal, counterparties would have direct rights against scheme property (held by the MIS) for agreements entered into by the RE as agent of the MIS, including under the proposed indoor management rule. The need for a reform proposal would not arise.
223 See Section 2.3.2 of this report.
224 IPA, McCullough Robertson, AAR, Freehills (qualified support).
225 Ashurst Australia, Alan Jessup, ASIC, Baker & McKenzie, Property Council of Australia, Financial Services Council, Property Funds Association, The Trust Company, McMahon Clarke Legal, Clarendon Lawyers, Primary Securities Ltd.
226 s 601FC(2).
If the SLE Proposal is not adopted
CAMAC considers that the current trust law based procedure for scheme counterparties to gain access to scheme property, involving subrogation to the RE’s indemnity rights, while preserving that property for the benefit of scheme members where the RE has acted improperly, is inappropriate for schemes as commercial vehicles.
Providing counterparties with a direct right of recovery against scheme property, without that right being lost through the improper conduct of the RE, would create greater consistency in approach for parties dealing with schemes and companies as alternative forms of investment and entrepreneurial activity.
Adoption of this direct right of recovery would call into question the further use of limited recourse rights clauses in agreements between an RE as operator of a scheme and a counterparty.
The RE would retain its current indemnity rights against scheme property, with the limitations that apply to the exercise of those rights, including that the RE has properly performed its duties. Those limitations would only affect the recovery rights of the RE against scheme property and not the recovery rights of scheme creditors against that property.
4.8 Tort claims and statutory liability
4.8.1 Outline of the issues
In some cases, persons may suffer injury or other detriment giving rise to a potential claim in tort. This could arise in circumstances related to the operation of a particular scheme. For instance:
• a person having no legal relationship with the RE may be injured while upon land that is scheme property
• an owner of real property that is adjacent to land that is scheme property may suffer detriment in consequence of activities undertaken on that scheme property.
An RE may also breach worker health and safety, consumer protection or other laws in operating a scheme.
An RE may be personally liable where, for instance, it can be established that an injury, loss or other detriment was suffered in circumstances where the RE had breached a common law duty or a statutory obligation. The RE may be entitled to be indemnified for that liability from the property of the scheme, provided its conduct was not a breach of the ‘proper performance’ of its duties.227 An RE has specific duties in operating a scheme.228 However, questions may arise about the circumstances in which breaches by an RE of other general or statutory laws would constitute failure properly to perform its duties, for the purpose of denying the indemnity right of the RE against scheme property.229
Is it necessary to clarify the circumstances in which an RE should, or should not, be entitled to obtain an indemnity from scheme property in consequence of some common law or statutory breach by the RE?
In what circumstances, if any, and for what reasons, should tort claimants have direct rights against scheme property?
Various respondents were of the view that the general law principles concerning indemnity rights were sufficient, with parties relying on established case law, with judicial guidance where necessary.230
Some other respondents supported a legislative clarification of indemnity rights.231
227 s 601GA(2)(b).
228 s 601FC.
229 In Gatsios Holdings v Kritharas Holdings (in Liquidation)  NSWCA 29, damages were awarded against the trustee of a trading trust in consequence of the trustee having breached consumer protection laws in the course of carrying on the
business of the trust. The Court held that the trustee’s breach did not deny it the
right to claim against trust property to cover the damages.
A more restricted approach to the right of indemnity was taken in Nolan v Collie & Merlaw Nominees Pty Ltd (in liq)  VSCA 39. The Court expressed a concern (at ) that ‘mischievous trustees might seize upon an almost unfettered right to indemnity as justifying improper depredations of trust funds, contrary to their obligation not to abuse their position’.
230 IPA, Baker & McKenzie, ASIC, Freehills, Henry Davis York, The Trust Company, McCullough Robertson.
231 AAR, Clarendon Lawyers, Property Funds Australia.
No respondent supported legislative initiatives concerning tort claims.
4.8.3 CAMAC position
RE duty to the scheme
An RE should not be entitled to contract out of any breach of its duties properly to manage a scheme. Any provision in a scheme constitution, or otherwise, that affords an RE an indemnity for any form of maladministration on its part in relation to that scheme should be unenforceable. This should apply whether or not the SLE Proposal is adopted.
RE duty to external parties
If the SLE Proposal is adopted
Under the SLE Proposal, in any situation where the RE was acting as agent of the MIS, or the indoor management rule applied, tort claimants would have direct rights against scheme property, held by the MIS. In other circumstances, claimants dealing with the RE would have direct remedies against the RE.
If the SLE Proposal is not adopted
Under the current legal framework for schemes, an external party would sue the RE as operator of the scheme. The RE would be entitled to be indemnified from scheme property for any liability incurred, provided the conduct of the RE was not in breach of the proper performance of its duties. CAMAC does not see any need to amend this principle.
5 Changing the RE of a viable scheme
This chapter discusses the question in the terms of reference concerning the effectiveness of the temporary responsible entity (TRE) framework in the transfer of the RE of a viable scheme. It considers this issue in the broader context of the various means by which the RE of a viable scheme may be replaced, possible impediments to achieving that transfer, and the role of the TRE in that process.
5.1 Problems in practice
5.1.1 Position of the RE
A scheme cannot be registered, or continue to operate, without an RE, which must be a public company that holds an AFSL authorising it to operate a scheme.232 The RE operates the scheme according to the terms of the scheme constitution and subject to the powers and duties given to it under the Corporations Act and relevant common law principles.
An RE may be operating a scheme that is financially sound. However, for various reasons, the RE may no longer be eligible to be an RE,233 or may, through its insolvency or otherwise, be unable to continue operating the scheme.234 An RE may also, for various reasons, wish to retire from that position. Also, scheme members may wish to change the RE.
The RE of a scheme can, at any time, be replaced by vote of scheme members.235 In addition, a court may appoint a TRE as an interim body while a new RE is being sought.236 However, experience over
232 ss 601EB(1)(d), 601FA, 601FK.
233 For instance, the RE may have acted in breach of the terms of its AFSL, leading to loss of that licence.
234 For instance, an RE may become insolvent for reasons unrelated to its role as operator of a particular scheme and therefore no longer be capable of operating the scheme.
235 s 601FM.
236 s 601FP and Corp Reg 5C.2.02.
recent years, particularly with some common enterprise schemes, points to difficulties that have arisen with the procedures for replacing an RE, or appointing a TRE, and the need for some adjustments to the regulatory structure.
5.1.2 Replacing the RE
An entity approached to become a TRE or new RE of a scheme will typically first conduct due diligence on the viability of the scheme, and the financial and legal consequences of accepting that role.
The ability to conduct due diligence, and the time involved, can be affected by the degree to which the incumbent RE is willing to provide assistance. Lack of cooperation can impede that process. Also, there may be disincentives to changing an RE, such as remuneration or other arrangements designed to favour or entrench the incumbent RE, or having that effect.
Even where a suitable entity agrees to be put forward as a new RE, the ability of scheme members to change the RE can be affected by the voting requirements, in particular the high approval threshold for members of an unlisted scheme to remove an incumbent RE.
These matters are further discussed in Sections 5.2-5.4 of this chapter.
5.1.3 Appointing a TRE
Where it is necessary to replace the RE or the RE wishes to retire from that position, but a new RE is not available, the court can appoint a TRE to operate a scheme on an interim basis while a new RE is sought.237
Few TREs have been appointed. To some extent this may reflect possible limitations on the court power to appoint a TRE, and the restrictions on who can be a TRE. However, the principal reason for the low utilisation of the TRE procedure appears to be the disincentives under the current legal framework for entities to undertake the role of TRE, in particular that a TRE (like a new RE) becomes subject to the outstanding obligations and liabilities, as well
237 s 601FP and Corp Reg 5C.2.02.
as the rights, of the former RE in operating the scheme,238 while also being subject to various statutory duties as the new operator of the scheme.239
Particularly where the need to appoint a TRE is urgent, the continuation of a viable scheme may be jeopardised by the lack of a willing and suitable entity to take up the office of TRE on short notice.
These, and other, matters specifically affecting a TRE are further discussed in Sections 5.5-5.11 of this chapter.
5.2 Conducting due diligence
5.2.1 Obtaining assistance
Eligible entities will seek to conduct due diligence on a scheme before indicating their willingness to accept the position of TRE or new RE.
The proposed register of agreements related to the scheme240 and the proposed register of scheme property241 would assist a prospective TRE or new RE in this due diligence exercise. As proposed by CAMAC, those registers would constitute a definitive statement of the relevant agreements and property of the scheme that would bind a TRE or new RE.
In addition, an incumbent RE may choose to assist the due diligence process, but is under no statutory obligation to do so. A former RE is required to provide reasonable assistance to facilitate the change of RE only after a new RE is appointed.242
238 s 601FS.
239 The s 9 definition of ‘responsible entity’ includes a specific reference to a TRE. The reasons for the reluctance of parties to undertake the role of TRE are also discussed in D Walter, ‘Managed investment schemes’ (2011) 23(1) Australian Insolvency Journal 12.
240 See Section 4.3.4 of this report.
241 See Section 4.4.3 of this report.
242 s 601FR.
In what circumstances, if any, should an existing RE have an obligation to assist a prospective new RE or TRE to conduct due diligence?
Most respondents supported an obligation on an RE to assist a prospective TRE or new RE, but with appropriate controls to prevent abuses such as spurious investigations by outside parties or competitors. Possible controls included that the obligation would only arise pursuant to a court order or at the request of a minimum threshold number of scheme members, and that those receiving the information should be subject to confidentiality obligations.243 Some other respondents considered that current law and practice sufficed, or were concerned about forcing assistance in a ‘contested’ situation.244
5.2.3 CAMAC position
If the SLE Proposal is adopted
The due diligence exercise, while still needing to cover the overall financial position of the scheme, would otherwise be simplified. The RE would be the agent of the MIS in entering into agreements forming part of the scheme and therefore would not itself incur any rights, obligations and liabilities under these agreements that would need to pass to a TRE or new RE.
CAMAC supports an incumbent RE having an obligation to provide reasonable assistance to a prospective TRE or new RE in its due diligence exercise, in the same manner as if the SLE Proposal is not adopted (see below)
If the SLE Proposal is not adopted
The due diligence exercise may need to be extensive. In addition to developing an understanding of the financial position of the scheme,
243 ASIC, Henry Davis York, Primary Securities Ltd, Clarendon Lawyers, McMahon
Clarke Legal, The Trust Company, AAR, IPA, Alan Jessup.
244 Financial Services Council, McCullough Robertson.
close consideration would need to be given to the implications for a TRE or new RE of s 601FS, being the statutory transfer to it of the rights, obligations and liabilities personally incurred by the incumbent RE in operating the scheme. For instance, agreements entered into by the RE as operator of the scheme would need to be reviewed to determine which of them impose personal liability on the RE and which provide only limited recourse rights to the counterparty.
In some cases, such as where the current RE is seeking to retire from that position, it may willingly offer assistance in the due diligence exercise. However, in a contest for the position of RE, an incumbent RE may be reluctant to assist an entity that it considers to be its competitor.
To balance these considerations, and avoid possible abuse, an incumbent RE should only have an obligation to provide reasonable assistance to a prospective TRE or new RE:
• upon request from at least 5% of scheme members, or
• when directed by court order (for instance, a court may give directions to assist the due diligence exercise of a prospective TRE).
The prospective TRE or new RE should also be obliged to treat any commercially sensitive information obtained in the due diligence exercise as confidential, other than for its reasonable use in that process.
5.3 Disincentives to replacing an RE
5.3.1 The issues
The willingness of an eligible entity to stand for election as the new RE of a scheme can be affected by pre-existing arrangements concerning how remuneration is to be paid to an RE.
Also, some agreements forming part of the scheme may discourage members from changing an RE in that there would be detrimental consequences for the scheme if an incumbent RE is replaced.
5.3.2 Remuneration arrangements
The scheme constitution must set out the rights of the RE to be paid fees out of scheme property.245 The legislation preserves any rights of a former RE to be paid fees for the performance of its functions before it ceased to be the RE.246 However, the legislation does not deal with the respective remuneration rights of the former and new RE where there is a transfer of responsibilities during a financial period. Rather, this matter is left to the terms of individual scheme constitutions.
In Huntley Management Limited v Australian Olives Limited,247 an RE was replaced during the course of a financial year. The new RE claimed an entitlement to be paid on a pro rata basis for that part of the annual management fees for the financial year that was referable to the period that it operated the scheme during that year. The former RE, which had been paid the entire management fees for the financial year at the commencement of that year, claimed to be entitled to retain all those fees under the terms of the constitution of that scheme.
The Full Federal Court determined that under the relevant terms of the constitution of the scheme:
a debt in favour of [the former RE] for the whole of the management fee payable by the investors in those projects in respect of each year comes into existence at the beginning of each year. … Once the annual amount was paid, the investors’ debts to [the former RE] as the responsible entity of Projects 1 and 2 were discharged. There was nothing to which [the new RE] could accede upon its appointment as the new responsible entity for those projects.248
Accordingly, no pro rata portion of the management fees paid to the former RE was recoverable by the new RE.
Likewise, in Saker, in the matter of Great Southern Managers
Australia Ltd (Receivers and Managers Appointed) (in
245 s 601GA(2)(a).
246 s 601FS(2)(a).
247  FCAFC 98.
248 at .
liquidation),249 the relative rights of the former RE and the replacement RE to certain funds turned on the terms of the constitution of the scheme, which provided the former RE with priority rights.
As observed by one commentator:
There is a real risk that, if the constitution [of a scheme] is in similar terms to those of the projects considered in Huntley Management, management fees will not be able to be received until the next annual payment period arrives.
Great Southern Managers and Huntley Management both make it clear that it is permissible for incumbent responsible entities to receive and retain substantial benefits out of
‘scheme property’ even after their removal.250
It is arguable that leaving all matters concerning the remuneration of the RE to the terms of a scheme’s constitution provides an opportunity to draft that constitution in a manner that gives an incumbent RE unearned benefits in the event of being replaced. Members of a viable scheme may also find it more difficult to change an incumbent RE if the management fee relating to a significant period of future time has already been paid to that RE.
The Review of the Managed Investments Act 1998 (2001) (the Turnbull Report) recommended that the legislation ensure that payment of fees or a right to an indemnity cannot be claimed in advance of an RE’s proper performance of its duties.251
What, if any, statutory controls should be placed on RE remuneration arrangements to cover the situation where an RE is replaced during a financial year, and for what reasons?
249  FCA 1080.
250 D Walter, ‘Developments in the replacement of responsible entities for managed investment schemes’ (2010) 11(4) Insolvency Law Bulletin 79.
251 rec 6.
There was general support for the principle that an RE should only be entitled to claim remuneration for the period that it had performed its duties,252 though some respondents questioned whether legislation was necessary to give effect to this principle.253 Various proposals were put forward to implement this approach, including an express prohibition on an RE receiving fees in advance, or an obligation on an RE to repay any advance fees received for any period during which the RE was no longer in that role.
The SLE Proposal does not affect this matter.
An RE should receive remuneration only for the period during which it performs that role. There should be a statutory prohibition on an RE being paid any remuneration in advance for more than a limited period, say, three months. Also, where an RE retires or is replaced, it should be under a statutory obligation to refund the portion of any advance remuneration that relates to the period after it ceased to be the RE.
5.3.3 Arrangements between an RE and external parties
Some arrangements between an RE and an external party may, in effect, inhibit scheme members from replacing the RE. For instance, an RE may enter into an agreement whereby the counterparty will lend funds to the scheme provided that the RE does not change or any such change is approved in advance by the counterparty.
The consequence of entering into such a debt covenant may be that, while scheme members are legally entitled to change the RE, they may be discouraged from doing so if the result, for instance, is that the debt facility is withdrawn or the loan becomes immediately repayable.
252 ASIC, IPA, Alan Jessup, Clarendon Lawyers, Primary Securities Ltd.
253 McCullough Robertson, Property Funds Association, Financial Services Council, AAR.
What, if any, statutory controls should be placed on agreements that are conditional on a particular RE remaining as operator of a particular scheme?
A majority of respondents who considered this matter supported a prohibition on agreements that place direct or indirect restrictions on the exercise of the statutory rights of scheme members to replace the RE.254 Examples of indirect restrictions would include ‘poison pills’, such as constitutional provisions that require the RE to be paid a large sum out of scheme property if that entity is replaced.
The SLE Proposal does not affect this matter.
CAMAC recognises that in some circumstances there may be good commercial reasons for counterparties to include provisions concerning the continuation of a particular party as the RE of a scheme, or approval of a replacement RE. However, such provisions, whether arising in scheme constitutions or in private agreements, should be enforceable only if they do not unreasonably inhibit the right of scheme members to replace the RE.
5.4 Voting requirements for members to change an RE
5.4.1 Current position
Scheme members holding at least 5% of the total voting rights of members may call a meeting of members255 to consider and vote on a resolution that the RE be removed and a resolution to choose a new RE.
The RE of a listed scheme may be replaced by two ordinary resolutions of scheme members, being a simple majority of votes
254 ASIC, Clarendon Lawyers, Alan Jessup, Primary Securities Ltd, The Trust
255 s 252D.
cast by members entitled to vote on the resolutions.256 The RE and its associates may vote any interests they hold as members on those resolutions.257
The replacement of an RE of an unlisted scheme requires two
‘extraordinary resolutions’ of scheme members, being the approval of at least 50% of the total votes that can be cast by members entitled to vote, whether or not cast258 (excluding any votes by the RE and its associates, which are ineligible to be voted on the resolutions259). The extraordinary resolution formula for unlisted schemes makes it impossible for RE replacement resolutions for these schemes to be passed unless at least 50% of the total votes held by members of the scheme are involved in the voting process.
The Turnbull Report raised the question whether the current requirement for extraordinary resolutions to remove an RE of an unlisted scheme and to appoint a new RE of that scheme should be replaced with simple special resolutions (75% of votes cast at the meeting) or, alternatively, special resolutions with the added requirement that votes cast in favour must constitute at least 25% of the total votes of scheme members.260
What changes, if any, should be made to the current voting requirements concerning the replacement of an RE of an unlisted scheme by the members of that scheme, and why?
Various respondents supported a change to the current extraordinary resolution voting requirement for unlisted schemes, noting that it is a
256 See ss 601FM(1), 252L(1B)(c) and 253J(2).
257 Where a scheme is listed, the RE and its associates are entitled to vote their interests on resolutions to remove the RE and to choose a new RE: s 253E.
258 s 601FM and the definition of ‘extraordinary resolution’ in s 9.
259 For an unlisted scheme, the RE and its associates are not entitled to vote their interests on resolutions to remove the RE and choose a new RE, as they would have an interest in those resolutions: s 253E. That provision specifically allows the RE and its associates to vote on those resolutions where the scheme is listed.
260 rec 2.
very high barrier to changing an RE of such schemes.261 Various alternative formulae were proposed such as:
• simple resolutions, provided at least 25% of total votes of scheme members are cast
• special resolutions
• special resolutions, provided at least 25% of total votes of scheme members are cast.
Also, excluded votes (that is, votes that are ineligible to be voted) should not be counted for the purpose of determining the total votes of scheme members.
Some respondents supported the current voting requirements, arguing, for instance, that the current threshold was deliberately set high due to the possible consequences of changing the RE.262
5.4.3 CAMAC Position
The SLE Proposal does not affect this matter.
The current ‘extraordinary resolution’ voting requirements for scheme members to replace the RE of an unlisted scheme are out of step with general voting requirements in the Corporations Act and can make it extremely difficult for members of these schemes to replace an RE.
The voting requirements to replace the RE of an unlisted scheme should be changed to simple majorities of the votes of scheme members cast at the meeting (in person or otherwise), provided that the total of the votes cast (for and against) on each of the resolutions constitutes at least 25% of the total votes of scheme members (excluding votes that are ineligible to be voted on the resolution263).
This amended voting test would reduce the barrier to changing an
RE of an unlisted scheme, while still ensuring that the votes cast at
261 ASIC, Henry Davis York, Alan Jessup, IPA, Clarendons Lawyers, Ashurst
Australia, Primary Securities Ltd.
262 McCullough Robertson, Property Funds Association, McMahon Clarke Legal, Property Council of Australia, AAR.
263 s 253E.
the scheme meeting reflect a significant proportion of the votes held by scheme members as a whole.
5.5 Appointing a TRE
5.5.1 Current position
A court may appoint a TRE to operate a scheme as an interim measure while a new RE is sought. The court may act where:
• application is made by the RE, a scheme member or ASIC
• there is an eligible entity264 willing to act as the TRE, and
• the court is satisfied that the appointment of that entity as the TRE is necessary to protect scheme property or that it is in the interests of scheme members.265
Application by the RE
An RE may wish to retire from that role. It can initiate the replacement process by calling a meeting of scheme members, but cannot unilaterally resign in the absence of a willing and eligible replacement RE that has been approved by those members.266
In the absence of a replacement RE, the current RE (through its external administrator if the RE is in external administration) can apply to the court for the appointment of a TRE to the scheme. 267
The court may make this appointment (assuming there is an eligible entity willing to undertake that role) where it is satisfied that the appointment is necessary to protect scheme property or is in the interests of scheme members.
Application by a scheme member or ASIC
Where the RE is ineligible to continue in that role
If the RE of a scheme no longer meets the statutory requirements to be an RE (for instance, if the AFSL of the RE is withdrawn for any
264 A TRE, like any other RE, must be a public company that holds an AFSL to operate a scheme: ss 601FA, 601FK.
265 s 601FP.
266 s 601FL(1).
267 s 601FL(3).
reason, including that the RE has gone into external administration268), ASIC or a scheme member may apply to the court for the appointment of a TRE.269 The court may make this appointment (assuming there is an eligible entity willing to undertake that role) where it is satisfied that the appointment is in the interests of scheme members.
ASIC or a scheme member may apply to the court for the appointment of a TRE if the applicant:
reasonably believes that the appointment is necessary to protect scheme property or the interests of members of the scheme.270
For instance, an RE may become financially distressed for reasons unrelated to its role with a particular scheme, but this may impinge on its ability to continue to operate the scheme effectively.
A matter that has not been considered by the court is an application by ASIC or a member under the general provision to appoint a TRE where the members have voted to remove an RE, but there is no suitable new RE ready to take the appointment. The problem lies with the statutory obligation on an RE to wind up a scheme that it operates where members resolve to remove the RE but do not, at the same meeting, pass a resolution to appoint a new RE.271 On one view, that explicit statutory obligation to wind up the scheme in the absence of a new RE having been approved by scheme members would negate the right of the court to appoint a TRE under the general provision. A contrary view is that the appointment of a TRE by the court would overcome the rationale behind the statutory obligation to wind up the scheme (namely, that a scheme cannot operate in the absence of an RE).
268 For instance, ASIC has the discretion to suspend or cancel the AFSL of an RE that has gone into external administration: s 915B(3)(b). ASIC may allow the AFSL to continue for a specific period or for a specified purpose: s 915H.
269 s 601FN.
270 Corp Reg 5C.2.02. This general provision does not include a power for the court to make an order based on the application. This creates some doubt about the court’s powers if such an application were made.
271 s 601NE(1)(d).
The ALRC/CASAC report envisaged a role for the TRE in these circumstances:
If the investors agree to remove the scheme operator but cannot agree on a replacement operator, the current operator should be obliged to apply to the court for a temporary scheme operator. An investor or the ASC may apply for appointment of a temporary scheme operator if the removed operator does not act.272
What changes, if any, should be made to the power of the court to appoint a TRE and why?
Respondents supported the court having a general power to appoint a TRE, including where scheme members have voted to remove the RE but without a new RE having been appointed.273
5.5.3 CAMAC position
The SLE Proposal does not affect this matter.
The court should have a general and unqualified power to appoint an eligible and willing entity to be the TRE of a scheme whenever the court considers that this appointment is in the interests of scheme members or is necessary to protect scheme property. Appointment of a TRE will allow a scheme to continue to operate while a replacement RE is sought or other options are considered. The power of the court should not be read down by the terms of s 601NE(1)(d) or otherwise.
The RE, ASIC or any scheme member should have standing to make the application.
CAMAC elsewhere recommends that a scheme administrator or scheme deed administrator (if a VA procedure for schemes is
272 vol 1 para 11.17. See also vol 2 draft s 183C (p 116).
273 ASIC, McMahon Clarke Legal, Clarendon Lawyers, Alan Jessup, Property Council of Australia, Henry Davis York, McCullough Robertson, The Trust Company, AAR, IPA.
introduced) also have standing to apply to the court for the appointment of a TRE.274
5.6 Eligibility to be a TRE
5.6.1 Current position
Currently, a TRE, like any other RE, must be a public company that holds an AFSL authorising it to operate a scheme.275
A TRE has the same general powers to operate a scheme, as given under the Corporations Act and the constitution of the scheme, as any other RE of the scheme.276 A TRE may also seek to become the new RE, provided it continues to meet the AFSL requirements.277
5.6.2 The eligibility criteria
There are various views on whether the eligibility criteria for being a
TRE should be adjusted.
One view is that to require that a TRE hold an AFSL that has the relevant authorisation may unduly restrict the classes of suitable persons willing to act as a TRE. One possibility would be to allow registered liquidators, or even any entity or individual, to act as a TRE, if approved by the court.278 In considering whether to appoint a person that does not hold an appropriate AFSL, the court could ensure that the candidate (whether an individual or corporate entity) was suitable for the role of TRE in the particular circumstances of the scheme.
A contrary view is that the role of a TRE, like any other RE, is to operate the scheme, albeit on a temporary basis. Arguably, a TRE should be subject to the same licensing requirements as any other RE.
274 Section 6.10.3.
275 ss 601FA, 601FK.
276 s 601FB.
277 s 601FQ(3).
278 The Turnbull Report recommended that potential TREs should include official liquidators: rec 3.
Should the eligibility criteria for being a TRE be amended and, if so, in what way and for what reason?
Some respondents supported amending the criteria for eligibility to be a TRE, to include registered liquidators or to allow the court to appoint anyone it considers appropriate.279 Other submissions considered that the current criteria should be maintained, as they reflect skills that an RE should have.280
5.6.4 CAMAC position
The SLE Proposal does not affect this matter.
The court should have the power to appoint as a TRE anyone it considers appropriate in the circumstances, including a registered liquidator or other individual. However, this potentially broader category should only apply to the role of TRE. Anyone (including a TRE) seeking to become a replacement RE should be subject to the AFSL requirements applicable to all REs.
5.7 Outstanding obligations and liabilities of the outgoing RE
5.7.1 Current position
Any move to widen the pool of candidates to be appointed as a TRE, while it may be beneficial, does not deal with a central reason for the unwillingness of eligible entities to undertake that role, namely that, under the current legal framework, an RE acts as principal in operating a scheme and that, by virtue of s 601FS, a TRE, upon appointment, generally becomes liable for the outstanding obligations and liabilities, as well as acquiring the rights, of any former RE as operator of the scheme. An RE is personally liable for
279 Clarendon Lawyers, Alan Jessup, Property Council of Australia, ASIC, IPA, AAR.
280 Primary Securities Ltd, McMahon Clarke Legal, The Trust Company, Henry Davis
York, McCullough Robertson, Property Funds Association.
agreements it enters into as operator of a scheme except where the counterparty has agreed to have only limited recourse rights.
As stated in Huntley Management Limited v Timbercorp Securities Limited,281 the effect of the current legislative structure for schemes is that:
Once a right, obligation or liability of the corporation that was the former responsible entity or a document to which it was party, can be seen to have the character of being “in relation to the scheme”, it is novated to the new responsible entity by force of ss 601FS and 601FT.
A TRE is a new RE for this purpose.282
A rationale behind the transfer of liabilities and obligations of an RE under s 601FS is to protect those scheme creditors who have rights of recovery against the personal assets of the RE under agreements entered into with the RE as operator of the scheme.283 These claims of counterparties should not be extinguished or reduced merely through change of an RE.284 However, a TRE may find itself in debt if its indemnity rights against the property of the scheme are insufficient to cover the obligations and liabilities that it has inherited. An entity may therefore be cautious about agreeing to become a TRE until these matters are assessed through due diligence. That entity could review the register of agreements and the register of scheme property (if those registers are introduced285) to determine the extent of personal liability for the RE under those agreements and the available scheme property to meet that liability.
There can also be considerable uncertainty about what rights and liabilities remain with the former RE, rather than being
281  FCA 576 at .
282 The definition of ‘responsible entity’ in s 9 makes specific reference to the TRE.
See also the reference to the TRE in s 601FJ.
283 A counterparty to the RE as principal would have rights of recovery against the personal assets of the RE unless it agreed to have only limited recourse rights. See further Sections 2.3.1 and 2.3.3 of this report.
284 ASIC has indicated that it will not exercise its powers under s 601QA to grant a new RE an exemption for the effect of s 601FS. In BOSI Security Services Ltd v ANZ Banking Group  VSC 255, one of the proposed replacement REs had unsuccessfully sought from ASIC an exemption under s 601QA from the operation of s 601FS.
285 See Sections 4.3.4 and 4.4.3 of this report.
transferred,286 with consequences both for the TRE and external parties. As observed in Stacks Managed Investments Ltd:287
The effect of [s 601FS(2)(d)] is that the former responsible entity is discharged from its liability to a creditor unless it “could not have been indemnified out of the scheme property if it had remained the scheme’s responsible entity”.
… the section appears to mean that the creditor will not know whether he should sue the former responsible entity or the
new responsible entity for his debt, unless he can determine whether the former responsible entity is entitled to an indemnity. A court will not be able to determine which
entity is liable for the debt without resolving the question whether it was properly incurred by the former responsible entity, and the new responsible entity has to make the same
5.7.2 Policy options
Any move to review the current law under s 601FS concerning the transfer of liabilities and obligations upon the appointment of a TRE needs to strike a balance between protecting the interests of creditors of the scheme and recognising that, without some protection from personal liability, suitable entities may be reluctant to come forward when a TRE is being sought.
The policy options outlined below have been developed within the current legal framework whereby an RE acts as the principal in agreements forming part of the scheme and, in consequence, incurs personal obligations and liabilities to the counterparty under those agreements (as well as having rights) except where a counterparty has agreed to have only limited recourse rights. Those policy options deal only with the position of a TRE. They are not intended to apply to the appointment of a new RE, which would remain subject to the effect of s 601FS.
Under the SLE Proposal, an RE would only act as agent for the MIS, in effect making s 601FS (and s 601FT) redundant in relation to those agreements (as an agent does not incur the obligations and liabilities of its principal) and therefore irrelevant where a TRE or new RE is appointed.
286 See s 601FS(2).
287  NSWSC 753 at .
Option 1 Election by the TRE
Under this policy option, the TRE could elect, either before appointment or within a certain time thereafter, whether to be bound by all or some of the outstanding obligations and other liabilities of the outgoing RE.
A TRE might elect to be bound where it considers that there is sufficient scheme property to cover the obligation or liability and to do so would be in the ongoing interests of the scheme. Where the TRE elects not to be bound by a particular agreement of the former RE, the counterparty would still have remedies against that former RE (which would retain its indemnity rights against the property of the scheme in relation to that agreement).
A possible difficulty with the application of this option is the time needed by a TRE to make an informed election.
Option 2 Limited liability of incoming TRE
This policy option would impose personal liability on an incoming
TRE (with indemnity rights against scheme property) only for:
• obligations and liabilities incurred by the TRE itself in agreements it entered into as operator of the scheme (which would be reduced to the extent that counterparties to those agreements agreed to have only limited recourse rights), with indemnity rights against scheme property
• pre-existing personal obligations and liabilities of the former RE, up to the value of the scheme property still available to the TRE after satisfaction of the indemnity rights of the TRE in operating the scheme.
The TRE’s indemnity rights against scheme property would have priority over other claims, including any indemnity claim by the former RE.
Obligations and liabilities incurred by the TRE. The personal liability of the TRE for obligations and liabilities that it incurs in that capacity may assist the continuation of the scheme during the interim period by providing comfort to counterparties of the TRE
about the payment of their debts.288 A TRE would have indemnity rights against the scheme property for such obligations and liabilities, in the same manner as all REs. The TRE would itself have to meet any shortfall where its indemnity rights were insufficient to cover the obligations and liabilities it incurred.
In some instances, an external party may be prepared to enter into an agreement with the TRE only if that party’s outstanding debts are paid beforehand. If the TRE’s indemnity rights are insufficient to cover these outstanding debts, a question arises about the viability of the scheme. This may be an instance where the most appropriate next step is for the scheme to go into external administration (see chapters 6 and 7).
Obligations and liabilities of a former RE. The TRE would be personally liable only to the extent that there was sufficient scheme property available to the TRE to cover those obligations and liabilities. This would ensure that a TRE would not have to cover a deficiency in assets left by the outgoing RE.
Pre-existing creditors would retain the right of recovery against the former RE for any outstanding amounts (with the former RE maintaining its indemnity rights against the property of the scheme for those amounts, but postponed to the indemnity rights of the TRE). The residual right of creditors against the former RE would, in effect, mean that an RE could not avoid liability as operator of the scheme simply through the appointment of a TRE. It would eliminate any incentive for an RE to seek appointment of a TRE for that purpose.
Option 3 Court power
Currently, in appointing a TRE, the court has the power to make any further orders ‘that it considers necessary’.289
There is uncertainty about the ambit of the court’s discretion under this power. On one view, a court may interpret this power more
288 Cf the personal liability of the administrator of a company under ss 443A, 443B,
289 s 601FP(2).
narrowly than, say, its broad power to ‘make any orders it considers appropriate’ for the winding up of an unregistered scheme.290
A more broadly stated power may permit the court, where it appoints a TRE, to adjust the obligations and liabilities between the outgoing RE and the TRE if the court considers this to be appropriate. The court could tailor these matters to the circumstances of the particular scheme, with a view to giving some protection to scheme creditors, while not creating too great a disincentive for any suitable entity to agree to act as a TRE. However, having the court adjust obligations and liabilities where it considers this to be ‘appropriate’ may take time, which might delay the appointment of a TRE (who may be unwilling to consent to becoming a TRE until these matters are settled).
Option 4 Moratorium
A further policy option would be a mandatory moratorium on the enforcement against the TRE of pre-existing obligations and liabilities, either during the period of a TRE (up to three months, unless extended by the court) or some other prescribed or court-determined time. Those obligations and liabilities would remain with the former RE (although frozen during the TRE period), to be transferred to any new RE (replacing the TRE), once appointed.
A moratorium would protect a TRE. However, the ostensible purpose of appointing a TRE is to maintain a viable scheme, which should not need a moratorium (which is more applicable to an entity in financial stress). A moratorium may also place the solvency of some creditors in jeopardy.
290 s 601EE(2).
What, if any, changes should be made to the current provisions concerning the transfer of obligations and liabilities of the outgoing RE to the TRE, and for what reasons?
• Option 1: election by the TRE
• Option 2: limited liability of the TRE (only for (i) obligations and liabilities incurred by the TRE in that role and (ii) pre-existing obligations and liabilities to the value of scheme property after satisfaction of the obligations and liabilities under (i))
• Option 3: court power
• Option 4: moratorium on the enforcement of pre-existing obligations and liabilities
No respondents supported Option 1.
Various respondents supported Option 2 (or Option 3 in combination with Option 2), arguing, for instance, that imposing personal liability on a TRE under the current law is unduly burdensome and that Option 2 may make acting as a TRE more palatable.291
There was support for a grace period from pre-existing liabilities (Option 4), as a means, for instance, to achieve an optimum balance of interests.292 Another respondent proposed a power for ASIC to determine the terms of the appointment of a TRE.293
5.7.4 CAMAC position
If the SLE Proposal is adopted
The SLE Proposal is intended to make s 601FS (and s 601FT)
redundant, thereby avoiding the need for any of the policy options.
291 ASIC, G Bigmore QC, S Hopper and M Kennedy, Henry Davis York, IPA, Alan
Jessup, AAR, Primary Securities Ltd.
292 McMahon Clarke Legal, McCullough Robertson, Property Council of Australia, The Trust Company, Clarendon Lawyers, Primary Securities Ltd.
293 Baker & McKenzie.
The rights, obligations and liabilities under agreements lawfully entered into by an RE as agent of the MIS, or where the ‘indoor management rule’ applies, would remain with the MIS (as the principal to those agreements), with counterparties having direct rights of action against the property of the scheme held by the MIS. The RE would incur no personal obligations or liabilities pursuant to those agreements in those circumstances, and therefore there would be no obligations or liabilities that would need to be transferred to a TRE or new RE.
Where an RE acted beyond its agency powers and the indoor management rule did not apply, only that RE would be personally liable to the counterparty. That personal liability would not transfer to a TRE or new RE.
If an RE, under an additional arrangement as operator of the scheme, undertook personal liability in some respect, that undertaking should only bind that RE, not a TRE or new RE.294
If the SLE Proposal is not adopted
From one perspective, persons dealing with an RE as operator of a scheme should not have their rights affected by a change of RE. At the same time, it may be detrimental to all affected parties, including scheme members and counterparties generally, if a potentially viable scheme has to be placed in liquidation through failure to attract a TRE in consequence of the disincentive that s 601FS creates for undertaking that role.
Taking these competing matters into account, CAMAC prefers
Option 2, namely that a TRE is personally liable only for:
• obligations and liabilities that the TRE itself has incurred in that role, with indemnity rights against scheme property, and
• pre-existing obligations and liabilities, limited to the value of scheme property, after satisfaction of the indemnity rights of the TRE in operating the scheme.
294 See further Section 3.4 of this report.
General power of the court
Whether or not the SLE Proposal is adopted, s 601FP(2) should be amended to give the court a power to make further orders ‘that it considers appropriate’ on the appointment of a TRE or during the period that the scheme is operated by the TRE. This broader formulation of the court’s power is intended to provide a means for the court to deal with the specific, and sometimes competing, considerations and factors that can arise where a TRE to a scheme is being sought, or following the appointment of a TRE.
5.8 Matters covered in the transfer of obligations and liabilities
5.8.1 The issue
As discussed above, any entity considering whether to become a TRE (or new RE) under the current legislative structure for schemes must take into account the consequences of s 601FS regarding the transfer to it of any outstanding obligations and liabilities, as well as rights, of any former RE.
In some instances, what is transferred pursuant to s 601FS, and the related deeming provision, s 601FT, can become a matter of uncertainty or dispute. The courts have considered the ambit of these sections on a number of occasions.
In one case, the Court considered whether these sections, combined with the provision stating that the RE ‘holds scheme property on trust for scheme members’,295 caused incoming REs to ‘acquire property that is subject to a charge’.296 The Court observed that:
Sections 601FS(1) and 601FT(1) are drafted in a particularly economical way. They appear intended to cause an incoming responsible entity to step into the shoes of its predecessor … . Yet nowhere does one find in those two sections any reference to property. There is a reference to “rights”, being rights “in relation to the scheme”, and there can be no doubt that certain “rights” (although not all) are property. The sections do not seem to effect a form of statutory vesting or
295 s 601FC(2).
296 Former s 264(1) of the Corporations Act, now repealed.
assignment of property generally in such a way that the incoming responsible entity “acquires property that is subject to a charge” (as mentioned in s 264) except, perhaps, to the extent that the subject matter of the charge is a species of property which clearly involves no more than a “right”. An example might be the kind of property involved in a charge made registrable by s 262(1)(f) referring to “a charge on a book debt”. A debt as a chose in action falls quite comfortably within the concept of “right”. But even then, there is a question whether a chose in action forming part of the assets of a scheme is a right “in relation to the scheme”. These last words are perhaps intended to cover only rights vis à vis parties such as members of the scheme, being rights arising from or forming part of the matrix of legal relationships making up the scheme, including rights derived
from the scheme’s constitutional documents.297
In a subsequent decision,298 the Court made a number of general observations about the ambit of ss 601FS and 601FT:
It is vital that the words “rights, obligations and liabilities” in Div 3 of Pt 5C.2 be given a broad construction so as to achieve the evident legislative purpose of facilitating an immediate and seamless change of the responsible entity of a scheme whenever ASIC records the new entity’s name in its record of a registered scheme.
[The defendant] argued that the words “in relation to the scheme” in s 601FS(1) covered only rights arising from or forming part of the matrix of legal relationships making up the scheme, including those derived from its constitutional documents. It suggested that those words should not be given too broad a reach and that s 601FT(1), because it worked with s 601FS(1), was implicitly confined to documents concerning the scheme.
I reject that argument. The expression “in relation to” is of wide and general import and should not be read down in the absence of some compelling reason to do so: Fountain v Alexander  HCA 16; (1982) 150 CLR 615 at 629 per Mason J. In Syncap Management (Rural) Australia Ltd v Lyford  FCA 1352; (2004) 51 ACSR 223 at  RD Nicholson J held that “in relation to” as used in
297 Investa Properties Ltd  NSWSC 1089 at .
298 Huntley Management Ltd v Timbercorp Securities Ltd  FCA 576 at -.
See also Syncap Management (Rural) Australia Ltd v Lyford  FCA 1352 at
 ff, and Primary RE Limited v Great Southern Property Holdings Limited (recs
& mgrs apptd) (in liq)  VSC 242 at  ff.
s 601FS(1) was an expression of wide import and signified no more than some relationship or connection. As Lindgren J noted, however, the rights, obligations and liabilities of the former responsible entity to which each of ss 601FS(1) and 601FT(1) apply, are impliedly limited to those capable of having an ongoing operation after the change in responsible entity: Re Huntley Management Ltd; Australian Olive Holdings Pty Ltd v Huntley Management Ltd (2009) 76 ACSR 256 at .
Ordinarily, the scheme would give the responsible entity a legal, and possibly a larger, right to hold scheme property, such as land, in its name. But, by force of ss 601FJ,
601FS(1) and 601FT(1) that right necessarily passes to the new responsible entity on a change becoming effective. In
most cases one could expect that control and ownership of scheme property finds its ultimate source in the scheme
constitution. Ordinarily, that will identify the basis on which scheme property is held by the responsible entity.
I am of opinion that ss 601FS(1) and 601FT(1) create a means of ensuring that rights to hold, and rights “in relation to”, scheme property pass to and vest in the new responsible entity. This is because ss 601FJ, 601FS(1) and 601FT(1) cause all rights of the former responsible entity “in relation to the scheme” to pass to the new one once changed: cf City Pacific Ltd (in liq) v Ballandean Investments Pty Ltd  QCA 113 at , , per Holmes JA with whom McMurdo P and Chesterman JA agreed and Capelli v Shepard  VSCA 2; 264 ALR 167 at ,  per Dodds-Streeton and Mandie JJA and Byrne AJA; Treecorp Australia Ltd (in liq) v Dwyer  FCA 278; (2009) 175
FCR 373 at ,  per Gordon J. Likewise, those sections novate obligations and liabilities of the former responsible entity “in relation to scheme property” in the new responsible entity. The language of those provisions suggests that the Parliament had novation, not merely assignment, in mind: Olsson v Dyson  HCA 3; (1969)
120 CLR 365 at 388-391 per Windeyer J especially at 388; see too Goodridge v Macquarie Bank Ltd  FCA 67; (2010) 265 ALR 170 at - where I discussed the distinction between novation and assignment in contract.
Here, the statutory scheme in Div 3 of Ch 5C.2 is clearly intended to apply to a change of, and effect a transfer between, responsible entities in all situations so as to ensure that the incoming one has the fullest and most effective control of the whole of the scheme and scheme property at the instant that s 601FJ gives effect to the change. This will be achieved by giving a purposive and broad construction to
the expression “in relation to the scheme” in applying ss 601FS and 601FT.
Another case queried the extent to which rights under a validly terminated agreement are transferred to a new RE.299
What, if any, amendments are needed to clarify the operation of ss 601FS and 601FT, and for what reason?
A number of submissions observed that ss 601FS and 601FT can have unintended consequences, such as automatically activating change of ownership default provisions concerning scheme property. Various proposals were put forward to overcome these unintended effects, including an express provision that, upon appointment of a TRE or a new RE, scheme property automatically vests in, and becomes property of, the TRE or new RE, without that constituting any transfer of property from the outgoing RE.300 Another submission raised matters concerning property law.301
5.8.3 CAMAC position
If the SLE Proposal is adopted
Under the SLE Proposal, issues concerning the interpretation and application of ss 601FS and 601FT would no longer arise for
299 Primary RE Limited v Great Southern Property Holdings Limited (recs & mgrs apptd) (in liq)  VSC 242 at -.
300 Freehills, Clarendon Lawyers, Alan Jessup, Baker & McKenzie, IPA, AAR, Primary Securities Ltd.
301 The submission from G Bigmore QC, S Hopper and M Kennedy raised the question whether s 601FS permits a TRE or new RE to seek relief against forfeiture of a
lease that was terminated during the period that the scheme was operated by a
former RE. The submission referred to Primary RE Limited v Great Southern Property Holdings Limited (recs & mgrs apptd) (in liq) & Ors  VSC 242, which held that this right to seek relief provided for under s 146 of the Property Law Act 1958 (Vic) arises at the time a lease is terminated and is not capable of being assigned. Applying that approach, a new RE cannot seek relief to revive a previously terminated lease. The submission argued that an inability of a TRE or new RE to seek relief could impede the possibility of reconstructing an otherwise viable scheme. CAMAC considers that this submission raises matters concerning property law legislation.
agreements that form part of the scheme. The RE (including a TRE or a new RE) would act as agent in entering into those agreements, with the rights, obligations and liabilities under them remaining with the MIS as the principal (or with the members if the RE was acting as their agent). Any personal agreements that the RE might enter into in the course of operating the scheme would only bind the parties. Sections 601FS and 601FT would be redundant.
If the SLE Proposal is not adopted
It is necessary to prevent ss 601FS and 601FT from having unintended consequences, even if merely by default, such as automatically triggering pre-emptive rights or default events. The legislation could state that a transfer of property rights, obligations or liabilities under these provisions from an RE to a TRE or new RE shall not, of itself, be taken to be a change of ownership of that property for the purposes of triggering pre-emptive rights or default events.
It would still be open to parties to specify particular circumstances when pre-emptive rights or default events would occur, such as if a named RE is replaced, or is replaced without the consent of the counterparty. This report elsewhere deals with such arrangements.302
5.9 Duties of the TRE
5.9.1 Current position
A TRE, its officers and its employees have statutory duties in operating the scheme, in the same manner as any other RE and its personnel.303
Particularly where the appointment of a TRE is required as a matter of urgency, it may be difficult for an entity to determine the implications of the statutory and other duties that would arise if it agreed to take on that role.
What may be required of a TRE to comply with its duties in relation to a particular scheme can be affected by the conduct of the former RE. For instance, an RE and its officers have a duty to maintain, and
302 Section 5.3.3.
303 ss 601FC-601FE.
comply with, the compliance plan of the scheme.304 The former RE may have failed in various respects to fulfil this obligation. The TRE may then be faced with the task of implementing steps to ensure compliance with the plan. Similar issues may arise with other obligations of an RE or a TRE, including to ensure that the scheme’s constitution meets certain statutory requirements,305 or to consider whether civil action should be taken against the former RE.306
The magnitude of the task facing the TRE in fulfilling various duties may be in direct proportion to the level of default of the former RE in relation to these matters.307
A TRE is an interim body appointed by the court to operate a scheme until a replacement RE can be found or the decision is reached to have the scheme placed in external administration. Arguably, it should not be incumbent on a TRE, in that interim period, to undertake a full review of the scheme to discern what needs to be done to ensure full compliance by the TRE with its duties as the operator of the scheme and to ensure that the TRE does not attract personal liability for any of its officers.308
Not all the statutory duties on a TRE may call for adjustment. For instance, a TRE, like any other RE, has a duty to report to ASIC any breach of the Corporations Act that relates to the scheme and that has had, or is likely to have, a materially adverse effect on the interests of members.309 That reporting obligation arises for an RE
‘as soon as practicable after it becomes aware of the breach’.310
Arguably, this awareness requirement would not impose an investigative obligation on the TRE to review the conduct of the former RE for the purpose of checking for irregularities.
304 The RE: s 601FC(1)(g), (h). Officers of the RE: s 601FD(1)(f)(iv).
305 s 601FC(1)(f).
306 An RE is civilly liable to members for loss or damage that they suffer because of conduct of the RE that contravenes the managed investment provisions: s 601MA.
One of the roles of a replacement RE (and its officers), as part of the duty to act in the best interests of members (ss 601FC(1)(c), 601FD(1)(c)), may be to consider whether an action against the former RE on these grounds is called for.
307 See further D Walter, ‘Managed investment schemes’ (2011) 23(1) Australian
Insolvency Journal 12.
308 See, for instance, the potential liability under s 197.
309 Compare the reporting obligation on corporate voluntary administrators under s 438D(1), and on liquidators under s 533(1).
310 s 601FC(1)(l).
One policy option to avoid the duties of a TRE, its officers and its employees becoming unduly burdensome would be to give the court the power to adjust those duties, either at the time of appointment of the TRE or at any subsequent time, taking into account the particular circumstances of the scheme. The court, in appointing a TRE, has the power to make such further orders as it considers ‘necessary’.311
A question is whether this power would suffice to allow the court to make suitable orders concerning these duties, or whether a broader court power to cover these matters would be appropriate.
What, if any, changes should be made to the current provisions concerning the duties and consequential liabilities of the TRE and its officers and employees, and for what reasons?
Respondents proposed various ways to adjust the duties of a TRE to the particular circumstances of the scheme, including a restricted statement of duties, a grace period where a TRE is not personally liable while it evaluates the scheme, or a more general power for the court to make appropriate orders.312
5.9.3 CAMAC position
The SLE Proposal does not affect this matter.
There may be considerable disincentives to assuming the position of TRE in consequence of the duties for the TRE, its officers and its employees, which arise immediately upon appointment. It may be very difficult in some cases accurately to assess the implications of these duties before accepting the appointment. Also, the uncertainty for the prospective TRE may be exacerbated by the possibility of liabilities immediately coming into effect with that appointment, through past and unresolved compliance failures of the former RE.
311 s 601FP(2).
312 Henry Davis York, McCullough Robertson, Clarendon Lawyers, ASIC, IPA, Baker
& McKenzie, AAR, Financial Services Council, Primary Securities Ltd, Property
The legislation should contain a more explicit statement of the duties of a TRE as manager of a scheme, as well as the duties of its officers and employees. The duties of these parties should be commensurate with the temporary nature of the office of TRE and should not include an obligation to rectify breaches or failures to comply that occurred before the TRE took office.
To provide further flexibility, the court should be given a general power to adjust those duties and liabilities to particular circumstances. This could be achieved by amending s 601FP(2) to give the court a general power to make any further orders ‘that it considers appropriate’ on the appointment of a TRE or during the period that the scheme is operated by the TRE.
5.10 Remuneration of the TRE
5.10.1 The issue
One consideration for a prospective TRE would be the likelihood of receiving remuneration (including expenses), for services to be provided. An entity may be reluctant to become a TRE unless there is some certainty that adequate funds are available for this purpose, free of competing claims by other parties.
In making an order to appoint a TRE, the court has the power to make any further orders that ‘it considers necessary’.313
There is a question whether this power is wide enough to cover matters concerning the remuneration of the TRE. One possibility, to add greater certainty, is to give the court an explicit power to make orders setting out the remuneration arrangements for a TRE.314
What, if any, statutory or other provision should be made in regard to the remuneration of the TRE, and for what reasons?
313 s 601FP(2).
314 cf s 473(10) for companies.
There was support in submissions for the court having the power to determine the remuneration of the TRE, either generally or in the event that the scheme members fail to agree on the amount.315 It was also suggested that priority be given to any unpaid TRE fees in any subsequent winding up of the scheme.316
5.10.3 CAMAC position
The SLE Proposal does not affect this matter.
The court should have a general power to determine the remuneration of a TRE of any scheme. The court could use that power when appointing the TRE or at any later time upon application. Priority should attach to any TRE fees in any subsequent winding up of the scheme.317
5.11 The role of the TRE regarding the future of a scheme
5.11.1 Current position
A TRE is intended to be an interim body only. One of its key functions is to take steps for the appointment of a new RE. For this purpose, the TRE is required to call at least one meeting of scheme members to vote on any proposed new RE (if there is an eligible candidate) as soon as practicable and, in any event, within three months of becoming the TRE (subject to the court granting an extension of this period).318 A TRE may itself offer to become the new RE.319
Where a meeting of scheme members is not held within the requisite period (as there may be no suitable entity willing to become the new RE), or any meeting within that period has not resulted in a new RE being chosen by members, the TRE must apply to the court for the
315 ASIC, Baker & McKenzie, IPA, AAR, Clarendon Lawyers, Primary Securities Ltd, Alan Jessup, Financial Services Council.
316 Clarendon Lawyers, Financial Services Council.
317 See further Section 7.5.5 of this report.
318 s 601FQ(1), (2).
319 This right is recognised in s 601FQ(3).
winding up of the scheme.320 ASIC or any scheme member may make this winding up application if the TRE fails to do so.321
A TRE, like any RE, can seek to wind up the scheme if it considers that the purpose of the scheme has been, or cannot be, accomplished.322 Similarly, a TRE may apply to the court for the winding up of the scheme on the ‘just and equitable’ ground.323
Conflict of interest
During the course of operating a scheme, a TRE may consider offering to become the new RE.
The decision on the appointment of a new RE rests with the scheme members. There is specific statutory recognition of the right of members to appoint the TRE as the new RE, if the TRE is willing.324
However, given the central role of the TRE in the process for appointing a new RE, there is the potential for a conflict of interest between the desire of a TRE to be chosen as the new RE and its role in seeking expressions of interest from other parties who may, in effect, compete with the TRE for the position of new RE.
Placing a scheme in voluntary administration
The proposals discussed in chapter 6 to introduce procedures for the voluntary administration of a scheme also have implications for the TRE of a scheme that is under financial stress but is nevertheless potentially viable. These questions arise:
• should the TRE have a role in appointing an administrator to the scheme
• if so, should the TRE be able to make that appointment on its own initiative, or only have the right to apply to the court for such an appointment
320 s 601FQ(5).
321 s 601FQ(5).
322 s 601NC. See further Section 7.2.2 of this report.
323 s 601ND(1)(a), (2)(a). See further Section 7.2.3 of this report.
324 s 601FQ(3).
• if the TRE has a unilateral right to appoint an administrator to the scheme:
– should the exercise of that power be subject to some legislative constraints, for instance that the TRE ‘thinks that the scheme is insolvent, or is likely to become insolvent at some future time’325
– should there be a prohibition on the TRE appointing itself as the scheme administrator (assuming it is eligible to so act) without creditor or court approval?326
Assisting an external administrator
In the event of an external administrator (whether an administrator or a liquidator) being appointed to the scheme, the appointee will most likely seek assistance from officers and employees of the TRE.
In the absence of some right for the TRE to recover its costs in assisting the administrator or liquidator, entities may be reluctant to undertake the role of TRE where there is a real doubt about the ongoing viability of the scheme. However, any priority given to the TRE for its costs in assisting an external administrator would also impinge on the recovery rights of other parties with a financial interest in the assets of the scheme. In particular, there is an issue concerning the respective priorities to be accorded to the costs incurred by the TRE and those of any external administrator seeking the assistance of the TRE.
Are any changes regarding the role of the TRE in the future of a scheme necessary or beneficial and, if so, for what reasons?
In this regard, what, if any, legislative initiatives should there be, and for what reasons, in regard to:
• a possible conflict of interest faced by the TRE
• the interaction between the TRE provisions and a procedure for voluntary administration of a scheme (if introduced)
325 cf s 436B(1) for companies.
326 cf s 436B(2) for companies.
• a TRE providing assistance to an external administrator?
Conflict of interest
One view in submissions was that, as the TRE owes fiduciary duties to scheme members, there is no need for further prescription.327
Another view was that a TRE should be obliged to take all reasonable steps to facilitate the consideration by members of alternative REs, including assisting any potential replacement REs in conducting due diligence.328
Placing a scheme in voluntary administration
Various respondents supported the TRE having a power to appoint an administrator, for instance where the TRE forms the view that the scheme is insolvent, or is likely to become insolvent at some future time.329
Assisting an external administrator
There was support for the TRE having an obligation to assist any external administrator of the scheme.330
5.11.4 CAMAC position
The SLE Proposal does not affect this matter.
Conflict of interest
A TRE that is seeking to become the new RE may be reluctant to assist an entity that it considers to be a competitor for this position. To protect the interests of scheme members, a TRE should have an obligation to provide reasonable assistance to a prospective new RE in conducting due diligence:
• upon request from at least 5% of scheme members, or
327 Baker & McKenzie.
328 Clarendon Lawyers.
329 Clarendon Lawyers, IPA, The Trust Company, McCullough Robertson. Alan
Jessup, Property Funds Association, and Baker & McKenzie preferred no change.
330 McCullough Robertson.
• when directed by court order.
Placing a scheme in voluntary administration
A TRE should have the same unilateral power as an RE to put a scheme into VA, namely where it considers that:
• the scheme is insolvent or is likely to become insolvent at some future time, or
• the purpose of the scheme cannot be accomplished in its current form.331
This power would allow for the situation where a TRE forms the view that, given the level of financial stress of the scheme, it is not appropriate to place the scheme under the management of a new RE, but it is also premature to appoint a liquidator.
A TRE who is a registered liquidator332 should not have the unilateral right to appoint himself or herself, or an associate, as the administrator, but could seek court approval for such an appointment.333
Assisting an external administrator
A TRE should have an obligation to assist an external administrator (whether an administrator or a liquidator), with payment to the TRE being an expense of the VA and having a priority in any winding up of the scheme.334
331 See further Section 6.3.3 of this report.
332 See Section 5.6.4 of this report where CAMAC recommends that the court should have the power to appoint as a TRE anyone it considers appropriate, including a registered liquidator.
333 cf s 436B(2).
334 See further Section 7.5.5 of this report.
6 Restructuring a financially stressed
This chapter discusses the question in the terms of reference whether an RE can restructure a financially viable scheme and whether voluntary administration procedures, comparable to the procedures that currently apply to companies, should be introduced for schemes.
This chapter deals with schemes in financial stress that possibly could be restored to financial viability. It considers whether this goal might be achieved by the introduction into the scheme provisions of a voluntary administration (VA) procedure, based on Part 5.3A of the Corporations Act, which applies to companies. A VA procedure for schemes was recommended in the ALRC/CASAC report, but was not implemented when the current provisions in Chapter 5C of the Corporations Act were introduced.
• describes the nature of a corporate VA (Section 6.2)
• examines how a scheme VA might be constructed under the current legal framework (Section 6.3)
• examines how a scheme VA might be constructed under the SLE Proposal (Section 6.4)
• examines some key implementation issues relevant to a scheme VA (Sections 6.5-6.10). In other respects concerning the VA process, a scheme VA would follow the model of a corporate VA.
CAMAC recommends the introduction of a VA procedure for schemes, as part of implementing the SLE Proposal. It also supports a VA procedure for schemes if the SLE Proposal is not adopted, but
notes that this procedure would necessarily be more complex under the current legal framework.
6.2 Nature of a corporate VA
The VA provisions currently apply to companies. An RE, being a public company,335 can be placed in VA.
The principal purpose of a corporate VA under Part 5.3A is to provide for the business, property and affairs of a company that is insolvent, or is likely to become insolvent at some future time, to be administered in a way that either maximises the chances of the company, or as much as possible of its business, continuing in existence or, if that is not possible, results in a better return for the company’s creditors and members than would result from its immediate winding up.336 A company is insolvent if it cannot pay all its debts as and when they become due and payable (the cash flow test).337
The VA provisions are facilitative, not mandatory. Where the directors of a company form the opinion that the company is insolvent, or is likely to become insolvent at some future time, they may initiate the VA process by appointing an administrator, who must be a registered liquidator.338 A liquidator or holder of a security over all or substantially all the company’s property may also place a company in VA in some circumstances.339 None of these parties require court approval to appoint the administrator. The ability to act quickly when a company is in financial stress is seen to be an important advantage of the VA procedure. Company directors may be motivated to act to avoid the possibility of being personally liable for the insolvent trading of the company if it continued its operations without going into VA.340
335 s 601FA.
336 The objects of voluntary administration are set out in s 435A.
337 s 95A.
338 s 436A.
339 ss 436B, 436C.
340 ss 588G (director’s duty to prevent insolvent trading by the company) and 588H (the defences).
From its commencement, a VA imposes a general moratorium on the rights of creditors of the company341 in order to permit the administrator to assess the potential viability of the company and to convene a creditors’ meeting to consider whether:
• to enter into a deed of company arrangement (DOCA), binding the company and its creditors and involving some form of adjustment of creditors’ rights, that would allow the company to continue to operate, rather than to be wound up, or
• to have the company wound up, or
• the administration should end, and the company continue in operation as before the VA.342
Where a DOCA is agreed by resolution of creditors, it is common to appoint the administrator as the deed administrator. If the creditors resolve that the company go into liquidation, the usual practice is for the administrator to become the liquidator of the company.
6.3 Scheme VAs under the current legal framework
6.3.1 Role of a scheme VA procedure
A scheme, not being a company, cannot currently be placed in VA.
The present procedures for dealing with a financially stressed scheme can vary, depending on whether a voluntary arrangement is entered into with its creditors, or a receiver343 or liquidator is appointed. An alternative approach is to attempt to include a scheme in the external administration of its RE.
341 An exception applies to substantial security holders, who may choose, within a specified time period, whether to enforce their security interest: s 441A, definition of ‘decision period’ in s 9.
342 s 439A.
343 A receiver is not an officer of the RE (Owen, in the matter of RiverCity Motorway Pty Limited (Administrators Appointed) (Receivers and Managers Appointed) v Madden (No 3)  FCA 313) and is therefore not subject to the duties of an officer of the RE in the exercise of receivership powers.
Introducing a facilitative VA procedure, specifically designed for schemes, may assist a scheme to recover financial viability, where possible, and where there is sufficient support from affected parties.
6.3.2 Factors in designing a VA procedure
Introducing a VA procedure for schemes within the current legal framework is not a straightforward exercise, given that the structural and liability arrangements for schemes can be more complex than for companies.
Insolvency of a scheme
The key concept in the initiation of a corporate VA is whether the company is insolvent, or is likely to become insolvent. A scheme is not a legal entity and therefore technically cannot become insolvent, as it does not incur debts in its own right. However, the courts have sought to develop the concept of an insolvent scheme. For instance, in Capelli v Shepard,344 the Court observed that:
a scheme may colloquially be characterised as insolvent in the sense that … the liabilities referable to it cannot be satisfied as they fall due from its income or readily realisable assets.345
CAMAC proposes that a definition of an insolvent scheme be included in the legislation. Adopting a commercial cash flow perspective, a scheme should be 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.
While useful as a general concept, the concept of an insolvent scheme does not suffice as a basis for developing a VA regime for schemes under the current legal framework. Such a regime also needs to take into account that counterparties to agreements entered into by an RE as operator of a scheme can look to the personal assets
344  VSCA 2 at .
345 Other cases that use the concept of insolvency in relation to managed investment schemes are Re Orchard Aginvest Ltd  QSC 2, Re PWL; ex parte PWL Ltd (formerly Palandri Wines Ltd) (administrators appointed) [No 2]  WASC
232 at , Rubicon Asset Management Limited  NSWSC 1068 at , .
of the RE for payment (regardless of the state of solvency of the scheme) unless they have only limited recourse rights.
For counterparties with recovery rights against the personal assets of the RE, the state of solvency of that RE is an important, if not a key, factor in whether they would be willing to compromise their rights in a VA of a scheme. This means that under the current legal framework a VA for a scheme cannot be considered without taking into account the financial state of its RE and the claims that can be made against the personal assets of the RE. This situation may be further complicated by whether the RE is a sole-function or a multi-function RE.
Accordingly, a VA procedure for schemes under the current legal framework needs to be considered in two distinct contexts:
• when the RE is solvent
• when the RE is insolvent.
6.3.3 Scheme VA where the RE is solvent
Currently, an RE is personally liable for all the liabilities and obligations arising from agreements into which it enters as operator of a scheme, unless the counterparty has only limited recourse rights. To avoid its own insolvency, an RE must pay all debts for which it is personally liable, as and when they become due and payable. This obligation applies whether or not the RE has sufficient funds available to it from its indemnity rights against scheme property to cover those debts.
An RE of a scheme that is, or is likely to become, insolvent has several options presently open to it. It may:
• choose to continue operating the scheme for some time (with the RE paying debts for which it is personally liable from its personal assets, and not seeking to recover those funds, or its costs and remuneration entitlements, from scheme property), while seeking to restore the scheme to financial viability. This
may include the RE selling some scheme assets to generate revenue346
• seek to have the scheme wound up.347 The adequacy of the current provisions concerning an RE placing a scheme in liquidation is considered in chapter 7 of this report. However, the winding up of the scheme does not relieve the RE of any outstanding personal liabilities it has incurred as operator of that scheme.
Alternatively, an RE may seek to restructure the scheme in some way, with a view to making it viable in the longer term. The RE may, depending on the circumstances:
• seek to amend the scheme constitution in some manner (which would require approval of scheme members unless the amendment would not adversely affect their rights348)
• seek to enter into some form of informal ‘workout’ with all relevant stakeholders (see below under ‘effect on creditors’ and
‘role of other affected parties’). Any such arrangement would only bind those parties who had expressly so agreed.
A further option to assist a financially stressed scheme in these circumstances would be to introduce a legislative VA procedure for schemes. It would differ from an informal ‘workout’ in that it would allow a majority of stakeholders to bind a minority under a scheme deed (analogous to a DOCA).
346 In selling assets of the scheme, the RE and its officers must comply with their statutory duties (ss 601FC, 601FD) and any relevant terms of the scheme constitution (s 601GA).
347 An RE can seek to have a scheme wound up on the basis that the scheme’s purpose
‘cannot be accomplished’: s 601NC(1)(b). Scheme members have rights to be informed and to meet to consider the winding up proposal: s 601NC(2). Members may agree to have the scheme wound up or, alternatively, may seek to have the scheme continue under a new RE if a suitable entity is willing to undertake that role: s 601FM.
348 s 601GC(1). The relevant principles concerning the exercise of this power by the
RE are set out in ING Funds Management Ltd v ANZ Nominees Ltd  NSWSC
404, and summarised in Re Elders Forestry Management Ltd  VSC 287 at
If a scheme VA were to adopt a similar approach to a corporate VA, the RE or the holder of a security over all, or substantially all, the scheme property, would have power to initiate the scheme VA.
However, a VA procedure for schemes where the RE is solvent would differ from a corporate VA procedure in various key ways:
• grounds for commencement: the grounds for a solvent RE to initiate a scheme VA would need to reflect the various reasons why that process might be appropriate:
– the scheme is insolvent or is likely to become insolvent at some future time. This insolvency ground, which focuses on the adequacy of scheme property to cover all the claims that can be made against that property, as and when those claims become due and payable, would be particularly relevant to the position of parties with only limited recourse rights, or
– the purpose of the scheme ‘cannot be accomplished in its current form’. This more general ground may have particular application to common enterprise schemes, which may have little scheme property. It contemplates the possibility of using the VA procedure to adjust various rights of affected parties, to allow the scheme to continue with a view to its purpose being accomplished.349
The grounds for a person holding a security over the whole, or substantially the whole, of the property of a scheme to initiate a VA of that scheme should be that the security interest has become enforceable350
• position of the RE: the administrator of the scheme would assume the power to operate that scheme, without becoming its RE. The existing RE, being solvent, would not itself be placed in VA and could continue its other affairs, which may include operating other schemes
349 For instance, an agribusiness common enterprise scheme may need to be restructured where its crops are growing more slowly than expected due to prolonged adverse weather conditions. Existing contractual arrangements involving the RE, scheme members and third parties may not have allowed for this longer period for conducting the scheme.
350 cf s 436C.
• effect of the moratorium: placing a scheme in VA would freeze all relevant agreements, including those imposing personal obligations and liabilities on the RE in its capacity as operator of the scheme,351 even though the RE is solvent and retains its capacity to operate other schemes. This issue does not arise in a corporate VA, which only affects the obligations and liabilities of the insolvent company itself
• effect on creditors: the effect of a proposed scheme deed on the legal rights and entitlements of persons with recovery rights against the personal assets of the RE may be sufficiently different from the effect on persons with only limited recourse rights that consideration may need to be given to introducing class voting in this form of scheme VA.352 Corporate VAs generally do not allow for class voting353
• role of other affected parties: the structure of some schemes, particularly various common enterprise schemes, may involve scheme members, and sometimes external parties, having proprietary or other interests which are utilised as part of the enterprise. To be effective, a scheme deed may need to deal with these interests, thereby expanding the categories of involved parties and having implications for the voting arrangements on a deed.354 These matters do not arise in a corporate VA
• effect of a deed: any compromise or other arrangement under a scheme deed could reduce the personal obligations and liabilities incurred by the RE in its capacity as operator of that scheme, even though the RE is solvent. This issue does not arise in a corporate VA, which only affects the obligations and liabilities of the insolvent company itself.
It would be a matter for relevant stakeholders whether to agree to a proposed scheme deed. For instance, some creditors may have long-term contracts involving the scheme, which they might prefer
351 See further Section 6.5 of this report.
352 The CAMAC report Members’ schemes of arrangement (2009), at Section 5.1, discusses the class voting tests in the context of s 411 schemes of arrangement.
353 The exception is that, where a DOCA proposal put to the creditors of a company will have the effect of varying the priority entitlements of eligible employee creditors under ss 556, 560 and 561, there is a requirement for a separate meeting, statement and resolution by those employee creditors: s 444DA.
354 See further Section 6.6 of this report.
to be continued, even if it means postponing or reducing their rights in some manner, including any rights they may have against a solvent RE.
One factor that parties might consider in deciding whether to vote for a scheme deed is whether they might be better placed if the scheme were wound up instead. For instance, if the voidable transaction provisions that apply to companies in liquidation355 were also applied to the winding up of schemes, it may be possible to recover certain funds paid from scheme property, with a view to their more equitable distribution to scheme creditors, including parties with limited recourse rights. Such transactions would not be able to be challenged if the scheme entered a deed. These parties could look to the report of the administrator356 for details of prior payments from scheme property in deciding how to vote on the future of the scheme.
6.3.4 Scheme VA where the RE is insolvent
An RE, being a public company, can be placed in VA. The directors of an RE can resolve to put the RE into VA if they are of the opinion that the RE is insolvent or is likely to become insolvent at some future time.357 Alternatively, an insolvent RE may be placed in liquidation.
The financial viability of a sole-function RE is directly linked to the performance of the scheme that it operates. For instance, a sole-function RE may be insolvent if there is insufficient scheme property to cover the personal obligations and liabilities that the RE has incurred in operating the scheme and for which it has lawful indemnity rights against that property.
In some instances, a sole-function RE may be insolvent, though its scheme remains solvent. This could occur, for instance, where the RE is unable to exercise indemnity rights against scheme property through some improper conduct on its part and this lack of recovery
355 Pt 5.7B Div 2.
356 cf s 439A(4) for companies.
357 s 436A.
undermines the revenue base of the RE. In those circumstances, a
TRE or a new RE might be appointed to operate the scheme.358
Where the insolvency of a sole-function RE arises from the insolvency of its scheme, the external administration of the RE would encompass the affairs of the scheme that it has operated, as this is its only business. This would obviate the need for a separate VA or winding up procedure for the scheme other than in exceptional circumstances, such as where the RE has indemnity claims against scheme property that could be disputed. The administrator of the RE should administer the scheme as part of the external administration of the RE, except where the administrator determines that in the circumstances it would be preferable to have separate VAs. Any interested party should have standing to apply to the court to challenge the existence of a joint or separate administration.
A multi-function RE may become insolvent for various reasons, which may or may not reflect on the viability of a particular scheme that it operates. For instance:
• the RE may become insolvent from its activities unrelated to any scheme that it operates, and/or
• the RE may become insolvent from its operation of one or more schemes.
A multi-function RE that is at risk of insolvency could seek to retire from its role as RE of one or more viable schemes.359 Alternatively, members of a scheme who are aware that the RE is financially stressed may seek to appoint a new RE, or have the court appoint a TRE.360 Having a TRE appointed, or appointing a new RE, would remove the scheme from the consequences of any subsequent insolvency of its former RE.
Where an insolvent multi-function RE goes into external administration, the administrator or liquidator has control of its
358 See chapter 5.
359 s 601FL.
360 See chapter 5.
‘affairs’. There is some difference of view in the case law about whether the affairs of an RE, for the purpose of its external administration, include the schemes that it operates.361 If it were placed beyond doubt that the ‘affairs’ of an RE have this broader application, this would permit the affairs of all schemes still being operated by a multi-function RE at the time the RE goes into external administration to be included in the external administration of the RE, at least initially, with a view to a determination of:
• which, if any, schemes are viable in their own right and should no longer be part of the external administration of the RE
• how to deal with financially stressed schemes, namely:
– which, if any, of those schemes should be included in any
VA of the RE
– which, if any, of those schemes could benefit from a separate scheme VA
– which, if any, of those schemes should be wound up. The issue of a separate winding up procedure for schemes is discussed in chapter 7.
For a viable scheme (but where the RE is insolvent), the most suitable course would be to appoint a TRE or a new RE, thereby removing the scheme from the external administration of its former RE.362 If the insolvent RE is promptly replaced, the period of disruption to the operation of this viable scheme in consequence of the RE going into external administration would be minimal.
Subsequent to appointment, a TRE may form the view that, given the level of financial stress of the scheme or that the purpose of the
361 If the RE goes into external administration, one line of judicial authority suggests 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: Silvia, in the matter of FEA Plantations Ltd (Administrators Appointed)  FCA 468. Another line of authority expresses doubts about whether the VA of an RE would properly extend to any scheme that it operates: Owen, in the matter of RiverCity Motorway Pty Limited (Administrators Appointed) (Receivers and Managers Appointed) v Madden (No 3)  FCA 313 at .
362 This process is dealt with in chapter 5 of this report.
scheme cannot be accomplished in its current form, it is not appropriate to place the scheme under the management of a new RE, but it is also premature to appoint a liquidator. In those circumstances, the TRE should have the same power as a solvent RE to place the scheme in VA (see Section 6.3.3).363
Financially stressed schemes
In some circumstances, there may be good reason for having a separate VA for one or more financially stressed schemes that are still being operated by a multi-function RE when it goes into external administration.
In other circumstances, to include the affairs of some schemes in the
VA of their REs could pose particular difficulties, including:
• it may place the RE administrator in a position of conflict between the duty of the RE (and therefore the administrator of the RE, as an officer of the RE364) to act in the best interests of scheme members365 and the general law duty of the administrator of the RE to act in the interests of the creditors of the RE
• it may prove unworkable, unduly complex or time-consuming to devise a DOCA for the RE that, in addition to covering the circumstances of the RE, satisfactorily deals with the particular circumstances of one or more schemes that the RE operates, taking into account the possible differences in the level of financial stress of different schemes366
• it may be anomalous if some creditors of the RE could vote on that part of a proposed DOCA for the RE that deals with a particular scheme in which those creditors have no direct
363 See also Section 5.11.4 of this report, where CAMAC recommends that, to avoid a possible conflict of interest, a TRE who is otherwise eligible (a registered liquidator) should not have the unilateral right to appoint himself or herself, or an associate, as the scheme administrator, but could seek court approval for such an appointment.
364 See paragraph (d) of the definition of ‘officer of a corporation’ in s 9.
365 s 601FD(1)(c).
366 As observed in the submission from G Bigmore QC, S Hopper and M Kennedy, one source of concern for investors in some agribusiness schemes has been the perception that the external administrator appointed to the various insolvent REs of these schemes may have considered the viability of all schemes together and not have adequately considered the solvency of each scheme separately.
financial interest. With one exception (which would not be relevant in the context of a scheme VA),367 the corporate VA provisions generally do not allow for separate votes of different classes of creditors with different types of interests and rights368
• an administrator of the RE may not have an automatic right to draw on scheme property to pay the costs for any work that he or she may do in investigating the affairs of that scheme, given that the administrator’s appointment is to the RE, not to the scheme, and the RE holds scheme property on trust for scheme members.369
The grounds for the external administrator of the RE, or the court (on application by ASIC, a scheme member or any other party whose interests are affected), to initiate a separate VA for a scheme that had been operated by the insolvent RE could be the same as those proposed for where the RE is solvent, namely that:
• the scheme is insolvent or
• the purpose of the scheme cannot be accomplished in its current form370
together with an additional element to take into account that the RE
is in external administration, namely that:
• the interests of affected parties would be better served by a separate scheme VA, rather than its affairs being included in the VA of the RE.
In addition, a party that is entitled to enforce a security interest over the whole, or substantially the whole, of the property of the scheme
367 If a DOCA proposal put to the creditors of a company will have the effect of varying the priority entitlements of eligible employee creditors under ss 556, 560 and 561, there is a requirement for a separate meeting, statement and resolution by those employee creditors: s 444DA. A scheme, not being a separate legal entity, would not have employees.
368 Creditors in the VA of an RE may include creditors whose claims relate to the operation by the RE of a particular scheme as well as creditors of the RE whose claims relate to other activities of the RE (including other schemes operated by the RE). All creditors of the RE would vote as one class on any proposed DOCA.
369 s 601FC(2).
370 See Section 6.3.3.
should be entitled to commence a separate VA of that scheme if the security has become enforceable.371
In some cases, the most efficient and effective course, particularly where the affairs of the scheme form the principal or only part of the affairs of the RE, may be to have the same person as administrator of the RE and of the scheme. In other circumstances, the better course may be to have different persons conduct the VAs of the scheme and of the RE. It would be inappropriate to place an outright prohibition on the same person conducting both VAs. Rather, as in a corporate VA, the person initiating the VA should determine in the first instance who is the administrator, with the right of parties at the first meeting to change the administrator.372
Under this approach, a scheme deed (or deeds) could be proposed that:
• relates to a particular scheme only
• is to be voted on only by the relevant stakeholders of that scheme, and
• if approved, is binding on those stakeholders (the terms of a deed may be conditional: for instance, they may be subject to the approval of deeds for other affected schemes).
The definitive register of scheme agreements and the definitive register of scheme property (as proposed in chapter 4 of this report) would indicate what agreements relate to that particular scheme, who are the stakeholders of that scheme and what property is involved. If a deed (or deeds) for a particular scheme is approved, the scheme could continue under its terms, which may require the appointment of a TRE as an interim measure while a new RE is sought.
6.3.5 CAMAC position
A VA regime for schemes could assist in restoring the viability of financially stressed schemes or provide an orderly means for their
371 cf s 436C.
372 cf s 436E(4).
administration prior to their winding up. The concept of a scheme
VA also received in-principle support from respondents.373
In practice, VAs for schemes may more often be employed for common enterprise schemes, but this should not preclude their use, if beneficial, for pooled schemes.
If the SLE Proposal is adopted
CAMAC prefers VAs for schemes being introduced within the context of the SLE Proposal, as described in Section 6.4. A VA procedure for schemes under the SLE Proposal would be considerably less complex than a VA procedure under the current legal framework.
If the SLE Proposal is not adopted
A VA regime for schemes under the current legal framework would need to distinguish between situations where an RE is solvent and where it is insolvent. It would also need to deal with the situation where a scheme is being operated by a TRE.
CAMAC supports a VA procedure for schemes where the RE is solvent, as described in Section 6.3.3. As indicated in that Section, a scheme VA in these circumstances would have various elements that materially distinguish it from a corporate VA.
CAMAC supports a VA procedure for schemes where the RE is insolvent, as described in Section 6.3.4. As indicated in that Section, where an RE goes into external administration, each scheme being operated by the RE would form part of that external administration, with a view to determining which schemes, if any, should be separately dealt with, including through their own VA.
CAMAC elsewhere recommends that a TRE should have the right to place a scheme in VA.374
373 IPA, ASIC, Ashurst Australia, McCullough Robertson, The Trust Company, Property Council of Australia, Property Funds Association, McMahon Clarke Legal, Clarendon Lawyers. Some other respondents raised concerns about possible complexity and cost.
The CAMAC positions on various key implementation issues that apply to any form of scheme VA, whether under the current legal framework or under the SLE Proposal, are set out in Sections 6.5-6.10.
6.4 Scheme VAs under the SLE Proposal
Compared with the difficulties of designing scheme VAs within the current legal framework, as described in Section 6.3 above, scheme VAs under the SLE Proposal would be relatively straightforward.
Definition of insolvency
Under the proposed definition, a scheme would be insolvent where:
the scheme property is insufficient to meet the claims that can be made against that property as and when those claims become due and payable.375
Separation from affairs of the RE
Counterparties to agreements entered into by the RE as operator of a scheme would have direct rights against scheme property. They would have no rights against the personal assets of the RE, unless the parties had so agreed, which would involve a separate private liability.376 Equally, placing an RE in external administration would not affect the property of any scheme that it operates, which would be held by the MIS. In consequence, the state of solvency of an RE of a scheme, and whether the RE is a sole-function RE or a multi-function RE, while having to be taken into account under the current legal framework (see Section 6.3), are irrelevant under the SLE Proposal.
374 See Section 5.11.4 of this report.
375 cf s 95A.
376 See Section 3.4 of this report.
Initiating a scheme VA
The grounds for initiating a scheme VA (comparable to the grounds for VAs under the current legal framework) could be that:
• the scheme is, or is likely to become, insolvent, or
• the purpose of the scheme cannot be accomplished in its current form.
If a scheme VA were to adopt a similar approach to a corporate VA, the RE or a person entitled to enforce a security interest over all, or substantially all, the scheme property, would have power to initiate the VA. The proposal that the RE and its directors be liable for any insolvent trading by the scheme377 would act as a strong incentive for them to place an insolvent scheme in VA. Likewise, the RE, as operator of a scheme, would be best placed to determine whether the purpose of the scheme cannot be accomplished in its current form. CAMAC elsewhere recommends that a TRE also have the right to place a scheme in VA.378
Effect of a scheme VA
The appointment of an administrator of a scheme would transfer the power to operate the scheme from the RE to the administrator. The future of the RE would depend upon whether it has other functions to perform (for instance, operating other ongoing schemes) and its own financial viability.
While under the SLE Proposal the insolvency of an RE cannot result in a scheme that it operates going into insolvency, the opposite could happen. The insolvency of a scheme could lead to the insolvency of its RE, particularly where the RE depends on remuneration received from that scheme for its own financial viability. In some cases, there may be a practical benefit in the same person being the administrator of the scheme and of the RE. The identity of the administrator should be left for determination under each VA process, without placing an outright prohibition on the same person conducting both VAs.
377 Section 3.6 of this report.
378 See Section 5.11.4 of this report.
An alternative to placing a scheme in VA would be to have it wound up. The adequacy of the current powers to initiate the winding up process, and the need for a scheme winding up procedure, under the SLE Proposal, are discussed in chapter 7.
6.4.2 CAMAC position
Preference for scheme VAs under the SLE Proposal
CAMAC prefers the VA procedure for schemes under the SLE Proposal, as outlined in Section 6.4.1. That procedure would be relatively straightforward, compared with what may be required under the current legal framework. It would provide an opportunity to rehabilitate a potentially viable scheme where there was sufficient support from stakeholders.
The CAMAC positions on various key implementation issues that apply to any form of scheme VA, whether under the current legal framework or under the SLE Proposal, are set out in Sections 6.5-6.10.
6.5 Ambit of a scheme VA
6.5.1 Wide moratorium
In a corporate VA, a moratorium applies, from the time of appointment of the administrator, to all actions or proceedings by creditors of the company. Its purpose is to give the administrator time to prepare advice to the creditors on the future of the company. Shareholders have no right to be consulted in this process or to vote on a DOCA.
As with a company, the appointment of an administrator to a scheme would initiate a moratorium. The experience with some recent failures of common enterprise schemes points to the need to give the moratorium a wide ambit, to:
• stabilise all aspects of a scheme while the likelihood of its financial rehabilitation and future viability, and the steps necessary to achieve this, can be determined and voted on in an orderly manner, and
• to overcome attempts at rehabilitation being frustrated by individuals seeking to assert claims in other forums and thereby interfering with this process.
CAMAC considers that, to be effective, a scheme moratorium should freeze any actions, proceedings or assertions of rights related to the affairs of the scheme, by the following classes of persons:
• the RE, in relation to its indemnity rights as operator of the scheme
• scheme members holding proprietary or contractual rights, in relation to rights, obligations or liabilities that they have incurred in that capacity379
• external parties in relation to any interest that they may have in connection with the scheme or any claim that they may have against:
– the RE in its capacity as operator of the scheme
– scheme members in that capacity,380 or
– scheme property381
subject to an exemption for a substantial security holder (see below)
379 Some common enterprise schemes, particularly in the agribusiness sector, have involved the scheme members having a form of property interest in ‘allotments’ of land used for the particular agricultural purposes of the scheme, with those members having certain property or contractual rights to the products of that land (for instance, trees or crops). The intention was that proceeds from the sale of products, after deduction of costs and fees charged by scheme operators, be pooled and distributed to investors in proportion to the number of allotments of land they hold.
380 For instance, property owned by a scheme member and not forming property of the scheme could be provided as security to an external party for some aspect of the operations of the scheme, with the consent of the scheme member.
381 One respondent, Clarendons Lawyers, considered that the VA should also bind external parties who have an interest in the subject matter of the scheme or who have claims against the RE as operator of the scheme, or against scheme members or against property that may be scheme property. In the experience of that respondent, actions such as the termination of head leases have had irreparable effects on the ability of a potentially viable scheme to be restructured and to continue.
• members in their capacity as members in relation to any redemption, voting, or other procedural rights given to them in the legislation or pursuant to constituent documents of the scheme.382
CAMAC elsewhere recommends the introduction of an agreements register383 and a scheme property register.384 Under those proposals, the administrator could treat the agreements register as definitive of all the agreements that form part of the scheme, for the purpose of the moratorium. Likewise, the administrator could treat the register of scheme property as definitive of scheme property, for the purpose of the moratorium.
The moratorium could operate for a stipulated period (subject to extensions being granted by the court385) to provide an opportunity for the scheme administrator to investigate the affairs of the scheme and to prepare proposals for consideration by affected parties, where appropriate. Any time for doing acts under agreements subject to the moratorium would not run during that period.386
6.5.2 Exemption for substantial security holder
In a corporate VA, a party holding a security over the whole, or substantially the whole, of the property of a company may choose to enforce the security interest within a certain period, thereby
382 These rights, and any other procedural rights provided for under a scheme constitution, are comparable to shareholder rights, which are frozen in a corporate VA, with shareholders generally having no rights to participate in the VA: see s 600H for exceptions to this general proposition, introduced by the Corporations Amendment (Sons of Gwalia) Act 2010.
383 Section 4.3.4 of this report.
384 Section 4.4.3 of this report.
385 cf s 439A(5), (6) for companies.
386 cf s 451D.
exempting that security interest from the moratorium.387 Other secured creditors are bound by the initial moratorium, but all secured creditors have the right to choose not to be bound by the DOCA.388
On one view, the VA of a scheme may be easier to implement if a complete moratorium could be imposed from the outset, with no
‘opt-out’ capacity for any substantial security holder at that stage. Instead, that type of secured creditor, like all other secured creditors would be protected by the right to choose not to be bound by any scheme deed.
CAMAC considers that it is difficult, in principle, to justify a different enforcement regime for a secured creditor depending upon whether that party is dealing with a company or a scheme. Failing to give secured creditors in a scheme VA comparable rights in the moratorium period to those that they have in a corporate VA may create a disincentive for them to deal with a scheme, or lead to them imposing more burdensome terms.
6.5.3 Administrator’s power to grant exemption from moratorium
In a corporate VA, the administrator may agree to certain arrangements, otherwise subject to the moratorium, being enforceable, where this is necessary to protect the company’s property.389 Likewise, a scheme administrator should have a power to determine that agreements coming within the scheme moratorium be kept on foot in order for the scheme to survive. An example would be an agreement between an RE or a scheme member and an
387 A party that holds a security over the whole, or substantially the whole, of the property of a company that goes into VA can enforce that security interest within a
13 business day decision period after the appointment of an administrator: s 441A, definition of ‘decision period’ in s 9. Property of a scheme may be used as security for funding to support the operations of the scheme, with, for instance, the secured party having the right to appoint a receiver to the property in the event of default. The ALRC/CASAC approach envisaged the scheme administrator being required to notify his or her appointment to any holder of a substantial security over scheme property: vol 2, draft s 458RA(3), (4) (p 211) (cf s 450A(3), (4) for companies). Upon notification, the secured party would be permitted to enforce the security interest, either itself or through a receiver or other agent, within a specified time: vol 2, draft s 458GA (pp 188-189) (cf s 441A, s 9 definition of ‘decision period’ for companies).
388 s 444D(2).
389 Part 5.3A Div 6.
external party for that party to tend crops forming a major part of an agribusiness common enterprise scheme. Failure to tend the crops during the moratorium period may lead to the loss of a principal asset of the scheme.
6.6 Scheme deeds
6.6.1 Width of proposed deeds
Given the proposed width of the moratorium (see above), the scheme administrator may propose one or more scheme deeds, which may involve a range of parties, with possibly diverse interests. For instance, a proposed deed or deeds could cover:
• the rights of persons who have dealt with the RE as operator of the scheme
• the rights of persons who have entered into agreements with scheme members
• the proprietary or contractual rights of scheme members or any related rights of external parties.390
A proposed deed might also affect the distribution or other rights that scheme members may have as contributors to the scheme.
390 In Great Southern Managers Australia Limited (Receivers and Managers appointed) (in liq)  VSC 557, and in the absence of a scheme VA procedure, the Court considered that it was reasonable to call meetings of scheme members to consider and vote on resolutions intended to effect changes to their agreements as
‘growers’ without the need to obtain a separate agreement to those changes from each member grower. However, the Court’s view depended on the specific terms of the documentation involved, including a power of attorney granted by the member growers when they signed the application form for an interest in the scheme. Furthermore, even the power of attorney would not be sufficient to support the required changes if the scheme member who granted the power had died or revoked the power (at ). The Court also acknowledged arguments that the use of the power of attorney for this purpose may not have the desired result, but considered that ‘it is by no means clear that such arguments must succeed’ (at ). A VA for a scheme could overcome the need to rely on such grounds to adjust rights.
If the VA of a scheme is to involve classes other than scheme creditors:
• in relation to any voting on any proposed scheme deed:
– how should the classes entitled to vote on the scheme deed be determined? For instance, should it be left to the administrator to determine those classes, taking into account the extent to which the deed affects their interests
– where classes vote on the deed, should they be entitled to vote on the whole deed or only that part that affects their interests
– should the approval of all voting classes be required for the scheme deed to come into force, or should the deed apply to those classes that have approved it
• in what circumstances, if any, should a scheme deed be able to override the rights of scheme members under the scheme constitution or impose new obligations on those members?
One view in submissions was that the administrator acting alone should determine whether voting on a scheme deed should be done by classes and who should be in each class.391 A contrary view was that the administrator should require court approval to determine classes.392
One respondent considered that classes voting on a deed should vote on the whole deed,393 while another respondent was of the view that classes should vote only on that part of a deed that affected their interests.394
391 McCullough Robertson (though this respondent only favoured the VA of a scheme involving creditors and was therefore only referring to the administrator determining different classes of creditors), Property Funds Association.
392 IPA, Clarendon Lawyers.
394 Clarendon Lawyers.
One submission considered that the approval of all voting classes should be required for the scheme deed to come into force.395
Another submission considered that it should be permissible to implement a deed in relation to the classes that approve it.396
One respondent397 proposed a provision to prevent members from being treated as creditors in respect of debts related to their investment, referring, by way of comparison, to s 563A of the Corporations Act, introduced by the Corporations Amendment (Sons of Gwalia) Act 2010.
Another respondent398 considered that a scheme deed should not be able to override the rights of members under the constitution of the scheme or impose new obligations on those members unless members approve the relevant aspects of the scheme deed by resolutions at a members’ meeting by the same majority as would be required to effect those changes in the absence of a deed.
6.6.3 CAMAC position
A corporate VA involves creditors voting on a single proposed DOCA.399 However, taking into account the proposed width of the moratorium in a scheme VA, and the possible complexity of some common enterprise schemes, an administrator should have the flexibility to prepare one or more draft scheme deeds, which may covers all or only some matters relevant to the future of the scheme, and which may involve the interests of all, or only some, of the parties affected by the moratorium.
In the first instance, it should be a matter for the administrator to decide, in relation to any proposed scheme deed, who should have voting rights, whether there should be two or more voting classes, and who should be included in each class. The administrator could be guided by the principles applicable to secured and unsecured creditors in corporate VAs and the voting class principles applied in a members’ or creditors’ scheme of arrangement.400 The
396 Clarendon Lawyers.
398 Clarendon Lawyers.
399 s 439C.
400 See further the CAMAC report Members’ schemes of arrangement
(December 2009), Section 5.1.
administrator should have the right to seek court directions on any aspect of the matter, including class voting.
Parties whose interests would be affected by a decision of the administrator concerning voting should have standing to appear on any application to the court by the administrator, or otherwise make their own court application. The court should have a broad power to make any modifications to the proposed voting arrangements (including class voting) that are required in particular circumstances.
Approval of a scheme deed by a stipulated majority should bind the minority of those who were entitled to vote.401 Affected parties should have the right to challenge a scheme deed on the ground that it is unfairly prejudicial to, or discriminatory against, them.402
The approval process for any scheme deed should, however, be subject to the right of secured creditors to choose not to be bound by any deed affecting their interests, as in a corporate VA.403
Parties should be entitled to make their approval of a deed conditional on other matters. For instance, approval may be conditional on approval of other scheme deeds, or scheme members approving certain changes to the scheme constitution, which might include loss of rights, or new obligations, for scheme members. This raises the question whether the current legislative voting rules, such as the requirement for a special resolution of scheme members to change the scheme constitution,404 might be relaxed in this context, for instance, by requiring only an ordinary resolution for members to amend the constitution. While any such voting relaxation could assist the VA process, it would also represent a fundamental change to the procedural rights of scheme members, and would require, at a minimum, a provision to prevent the majority of scheme members oppressing other scheme members. Currently, the oppression provisions in Part 2F.1 of the Corporations Act do not apply to schemes. On balance, CAMAC is of the view that the current voting requirements for scheme members to amend the constitution should
401 cf a corporate VA, where a resolution of creditors requires the support of a majority by number, as well as by value, of creditors: Corp Reg 5.6.21(2), (3).
402 cf s 445D(1)(f)(i) for companies. See also s 600A for the court’s power where the outcome of a vote has been determined by a related entity.
403 s 444D(2).
404 s 601GC.
remain, with these requirements to be taken into account in designing draft scheme deeds.
6.7 Winding up or end of administration
6.7.1 Options with some schemes
In some circumstances, a scheme administrator may propose that the scheme be wound up or, conversely, that the administration come to an end and the scheme continue to operate without a scheme deed.
If the VA of a scheme is to involve classes other than scheme creditors:
• what should be the voting rules for any proposal that:
– the scheme be wound up, or
– the scheme administration end and the scheme continue as before?
Some respondents considered that approval of a winding up, or the termination of an administration and continuation of the scheme, should be by a simple majority by number and value for each class.405 One of those respondents took the view that, if a resolution accepting a deed proposal or ending the administration is not passed, the default position should be the winding up of the scheme.
Another respondent considered that the voting requirements and voting rules should be left to the administrator.406
6.7.3 CAMAC position
The same general approach concerning discontinuance of a VA, or winding up, should apply to schemes and companies, with all
405 IPA, Clarendon Lawyers.
406 McCullough Robertson. That respondent favoured the VA of a scheme involving creditors only.
involved parties voting on the resolution.407 However, parties involved in a scheme VA may have differing, sometimes conflicting, interests. The situation may arise where parties cannot agree on one or more scheme deeds, but also cannot agree to discontinue the VA or have the scheme wound up.
CAMAC considers that, where a resolution put forward by the administrator to discontinue the VA or wind up the scheme is defeated, the administrator should have standing to approach the court to make an order. Any affected party should be entitled to appear on the application.
6.8 Matters affecting the scheme administrator
6.8.1 Who can be a scheme administrator
Only a registered liquidator can be the administrator of a company or the administrator of a DOCA.408
One possibility is to give the court the power to appoint any person it considers suitable to conduct the VA of a scheme, whether or not that person is a registered liquidator or would be eligible to be the RE of the scheme.409 This wider category of potential administrators may assist in ensuring that a scheme administrator has any specialist skills needed to conduct the administration of a particular scheme.
A contrary view is that such a court power is unnecessary. In practice, administrators of insolvent companies employ persons with specialist skills to operate the company, or some aspect of it, where necessary.410 The same approach could be adopted by a scheme administrator.
407 For companies, see s 439C.
408 s 448B.
409 Section 601FA provides that the RE must be a public company holding an AFSL to operate the scheme.
410 For instance, Principle 13 of the IPA Code of Professional Practice for Insolvency Practitioners states: ‘When accepting an appointment the Practitioner must ensure that their firm has adequate expertise and resources for the type and size of the Administration, or the capacity to call in that expertise and those resources as needed.’
In the context of a scheme administration, should there be any change to the current requirement that only a registered liquidator can be an administrator or a deed administrator and, if so, why?
Most submissions411 considered that scheme administrators should be limited to registered liquidators. This is consistent with the VA of a company. The administrator can engage any expert assistance as and when required. Also, registered liquidators must have professional indemnity insurance.
One respondent412 considered that any administrator should be required to have skills and experience commensurate with the size and complexity of, and relevant to, the business of the scheme.
CAMAC considers that who should be permitted to be an administrator should be consistent between corporate and scheme VAs. On that basis, only registered liquidators should be able to be scheme administrators or scheme deed administrators, as they have the necessary skills and are required to have the appropriate insurances. Where necessary, they can seek expert assistance on particular matters pertaining to the scheme.
6.8.2 Functions, powers and liabilities of the scheme administrator
The willingness of suitable persons to accept the role of scheme administrator may depend in large measure on the powers that they can exercise to fulfil their function, and the potential liability to which they are exposed in that role.
411 IPA, McCullough Robertson, Baker & McKenzie, Clarendon Lawyers, ASIC.
412 Clarendon Lawyers.
The administrator of a company has control of the company’s business, property and affairs and has a range of statutory powers, including:
• to carry on that business and manage that property and those affairs
• to terminate or dispose of all or part of that business
• to dispose of any of that property
• to perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration.413
The ALRC/CASAC report proposed that a scheme administrator have similar powers.414
The ALRC/CASAC approach also proposed that a scheme administrator, in the exercise of those powers, would only be liable for contractual or other liabilities that the administrator incurs while acting in that role. That would cover, for instance, services rendered to the administrator, goods bought or property hired, leased, used or occupied by the administrator or rental payments for property that the administrator intends to continue using.415 This personal liability of the scheme administrator would protect the interests of the counterparty to any transaction with the scheme administrator and in this way help maintain the operations of the scheme during the administration period.
The ALRC/CASAC approach envisaged the administrator having an indemnity out of the scheme property for the debts he or she lawfully incurred in that role.416 That indemnity right would take priority over any indemnity rights of the RE over that property.417
413 s 437A.
414 vol 2, draft s 458CA (p 179).
415 vol 2, draft ss 458JA, 458JB, 458JC (pp 194-195) (cf ss 443A, 443B, 443BA, 443C
416 vol 2, draft s 458JD (p 196) (cf s 443D for companies).
417 vol 2, draft s 458JE (pp 196-197) (cf s 443E for companies).
Should a scheme administrator have similar powers to those of the administrator of a company?
For what liabilities, if any, should a scheme administrator be personally liable, and what, if any, rights of indemnity should the administrator have against scheme property?
The view was expressed that a key function of an administrator, particularly if administering a common enterprise scheme, would be to put options to the scheme members about the future of the scheme.418
There was support for scheme administrators having powers comparable to those of company administrators.419
Liabilities and indemnity
Several respondents supported scheme administrators having similar liabilities and rights (including the right of indemnity) to those of the administrator of a company.420 One of those respondents421 said that the right of indemnity should have priority over any direct claims of pre-appointment unsecured creditors of the scheme.
It should be made clear that in a scheme VA, the administrator, not the RE, would operate the scheme, with the RE (even if itself under external administration) formally remaining in office, without powers, as every scheme must have an RE.422 This arrangement
419 ASIC (common enterprise schemes only), IPA, Clarendon Lawyers.
420 ASIC, IPA, McCullough Robertson, Property Funds Association, Clarendon
422 cf s 437C, which suspends the powers of directors and other corporate officers during the period that a company is in voluntary administration. Also, during that period, only the administrator can deal with the company’s property: s 437D. The ALRC/CASAC report recommended similar provisions for the VA of a scheme: vol 2, draft ss 458CC, 458CD (pp 179-180).
would also ensure that entry into a scheme VA under the current legal framework would not activate the transfer to the administrator of the obligations and liabilities, as well as rights, that accompanies the replacement of an RE.423
The functions, powers and liabilities of the administrator of a scheme should be comparable to those of the administrator of a company, subject to the particular additional powers for the administrator in relation to putting forward one or more scheme deeds and determining the voting arrangements on the deed.424 Also, as earlier indicated, an administrator should have the power to exempt particular agreements from the moratorium where the administrator considers that this is necessary to ensure the continuation of the scheme.425
A scheme administrator, in the exercise of his or her functions and powers, should only be liable for contractual or other liabilities that the administrator incurs while acting in that role, with a right of indemnity out of the scheme property for the debts lawfully so incurred. That indemnity right should take priority over any indemnity rights of the RE over scheme property.
6.8.3 Remuneration of the scheme administrator
Under the corporate VA provisions, the remuneration of a company administrator is determined:
• by agreement between the administrator and the committee of creditors (if any); or
• by resolution of the company’s creditors; or
• if there is no such agreement or resolution—by the court.426
A similar procedure applies to the determination of the remuneration of a deed administrator.427
423 Stated another way, the appointment of an administrator would not constitute a change of RE for the purposes of s 601FS.
424 See Section 6.6.3.
425 See Section 6.5.3.
426 s 449E(1). This section incorporates reforms recommended by CAMAC: Corporate Voluntary Administration (1998) rec 38, Rehabilitating large and complex enterprises in financial difficulties (2004) rec 18.
The remuneration of administrators and deed administrators has priority in a corporate winding up.428
On one view, the legislation could provide a similar procedure for determining the remuneration of a scheme administrator and a scheme deed administrator, with comparable provisions for the priority that this remuneration has on winding up.
Who should determine the remuneration of a scheme administrator or a scheme deed administrator?
What, if any, classes of persons in addition to the scheme creditors should be involved and in what manner and for what reasons?
What priority provisions should there be for the remuneration of a scheme administrator or a scheme deed administrator if the scheme goes into winding up?
Respondents identified various parties who might perform the function of supervising the remuneration of an administrator, including the court,429 scheme creditors (excluding the RE),430 scheme members431 and, more generically, whoever is entitled to vote for the deed.432
Several submissions suggested that the remuneration of a scheme administrator should have the same priority rights as the remuneration of a company administrator.433
427 s 449E(1A).
428 s 556(1)(a). The winding up priority provisions also apply to payments under a
DOCA unless the deed provides expressly to the contrary: s 444A(5), Corp Reg 5.3A.06, Schedule 8A cl 4.
429 ASIC, McCullough Robertson, Baker & McKenzie, Property Funds Association (if the constitution does not provide for sufficient remuneration), Clarendon Lawyers (taking into account the support, or otherwise, for that remuneration from the committee of scheme creditors and/or the committee of scheme members).
430 McCullough Robertson, Baker & McKenzie.
433 IPA, McCullough Robertson, Clarendon Lawyers.
The remuneration of a scheme administrator or a scheme deed administrator should be determined by simple resolution of those persons whose rights are affected by the moratorium (or by agreement between any committees of these persons and the relevant administrator) or, in the event of failure to agree by resolution, by the court. Approved remuneration should have the same priority rights as in a corporate VA, with a priority arrangement if the scheme goes into winding up.434
6.9 Court powers
6.9.1 Possible court power
The ALRC/CASAC approach envisaged the court having the power, similar to its general discretionary power under s 447A in a corporate VA,435 to make such orders ‘as it thinks appropriate’ about how the scheme administrator provisions are to operate in relation to a particular scheme, on application by various stipulated parties or any other interested person.436
What powers should the court have in any VA of a scheme, and who should be entitled to apply to the court for this purpose?
Submissions supported the ALRC/CASAC approach concerning the court having a power, similar to s 447A for companies, to make such orders as it thinks appropriate about how the VA provisions for a scheme should apply, on application by:
434 See Section 7.5.5 of this report.
435 Section 447A permits a court to make such orders ‘as it thinks appropriate’ about how Part 5.3A is to operate in relation to a particular company whose affairs are being administered under that Part.
436 vol 2, draft s 458NA (pp 204-205) (cf s 447A for companies). G Bigmore & N Hannan, ‘Issues arising out of winding up managed investment schemes’ (2010)
11(3) Insolvency Law Bulletin 42 at 44 consider that the introduction of the equivalent of s 447A would assist in taking account of the diversity of industries in which schemes operate.
• the RE/TRE
• a creditor of the RE
• the administrator of the scheme
• ASIC, or
• any other interested party.437
6.9.3 CAMAC position
The powers of the court in relation to the VA of a scheme should include the equivalent of s 447A. That section was a deliberate approach by the legislature to allow the court to assist parties in what was, when Part 5.3A was introduced in 1993, a novel approach to company insolvency and reconstruction. The section has frequently been used by the courts to resolve matters of statutory or procedural detail that would otherwise have impeded a successful corporate VA.
A similar provision would assist the voluntary administration of schemes. The sometimes complex structure of common enterprise schemes, and the difficulties experienced by the courts in trying to deal with the factual and legal circumstances that can arise, support the court having a broad power of this nature in scheme VAs. The administrator or any other interested party (including ASIC or any party whose interests are affected by the moratorium) should have standing to apply to the court to exercise that power.
6.10 Need for an ongoing RE
6.10.1 Replacing the RE
The future of a scheme may depend not only on the outcome of the VA process but also on the willingness and ability of the existing RE to continue in that role or finding a suitable replacement RE.
437 ASIC, IPA, McCullough Robertson, Property Funds Association, Clarendon Lawyers (which also suggested a scheme member and the scheme deed administrator as possible applicants), Baker & McKenzie (the latter submission, however, did not support the introduction of a VA procedure for schemes).
Any entity considering taking on the role of replacement RE would need to undertake due diligence, including to evaluate the financial and commercial circumstances and prospects of the scheme. These matters are further discussed in Section 5.2. The terms of a scheme deed may assist by reducing the obligations and liabilities of a new RE under the current legal framework to manageable proportions. Also, the administrator of the scheme could assist a potential new RE to conduct the necessary due diligence.
Where a scheme deed has been accepted, but the existing RE is no longer able to perform that role438 and no other party is willing to become the RE, the scheme would need to be wound up. One possibility, where a longer time may be necessary to attract a suitable new RE, would be to confer on a scheme or deed administrator, or the court, a power to appoint a TRE to operate the scheme, for some time at least. Any TRE appointed in those circumstances would be in the same position as a TRE appointed to a viable scheme (see further chapter 5).
In what circumstances, if any, should there be a power to appoint a TRE to operate a scheme in the context of its VA, and who should be able to exercise any such power?
There was support for the court having the power to appoint a TRE on the application of the scheme administrator or deed administrator.439
One respondent favoured the deed administrator being able to appoint a TRE to a scheme that is subject to a deed without the need for a court appointment.440
438 For instance, one effect of an RE going into insolvency is that it may lose its AFSL, which is a prerequisite to being an RE: s 601FA.
439 McCullough Robertson, Clarendon Lawyers.
6.10.3 CAMAC position
A scheme administrator or a scheme deed administrator would be well placed to see whether it is in the interests of scheme members, or necessary to protect scheme property, that a TRE be appointed to a scheme. Either party should have standing to apply to the court to make that appointment if a suitable person is willing to undertake that role. Issues concerning a TRE are further considered in chapter 5 of this report.