Earlier this month, the High Court of Australia dismissed an appeal by Wellington Capital Limited (Wellington), affirming the Full Federal Court’s decision regarding the powers of a responsible entity.
The Full Federal Court’s decision concerned the actions of Wellington, as a responsible entity of a Premium Income Fund (PIF) – specifically addressing whether Wellington could make a distribution of shares to unit holders, in absence of such a power being granted to Wellington, as the responsible entity, under the PIF’s constitution.
By way of background, in September 2012, Asset Resolution Limited (ARL) had acquired $90.75 million in assets of the PIF, in return for which the PIF acquired all issued shares in ARL. Wellington also announced that immediately after the issuing of ARL shares to the PIF, Wellington took steps to have the ARL shares distributed to PIF unit holders, in specie. Wellington did this without any express or implied power under the PIF’s constitution and without obtaining the consent of unit holders prior to undertaking such transactions.
Later in 2012, ASIC unsuccessfully challenged the distribution of the ARL shares to the PIF unit holders in the Federal Court of Australia. ASIC subsequently appealed the initial decision, with the Full Federal Court ruling in 2013 that Wellington had in fact acted without power in distributing the ARL shares to the PIF unit holders.
In dismissing Wellington’s appeal, the High Court found that it was beyond Wellington’s powers and in contravention of the Corporations Act 2001 to distribute the ARL shares to unit holders. The High Court noted that a responsible entity’s powers in relation to its dealings with unit holders are in fact constrained by the Corporations Act. The High Court went on to say that since the necessary power did not exist under the constitution, no such agreement could be imputed.
The High Court said:
“A reading of [the plenary power provisions], in the context of the Scheme Constitution as a whole, leads to the conclusion that they had nothing to do with the circumstances in which assets or capital forming part of the Scheme Property could be returned to unit holders. They were facultative. They equipped Wellington to deal with the Scheme Property, in accordance with its duties, in the interests of Scheme members. [They] allowed third parties to have confidence that things done by the responsible entity with respect to the Scheme Property were within power and authorised by the Scheme Constitution. The conferral upon the responsible entity of power to act ‘as though’ it was the absolute owner of the property facilitated extramural dealings, which might have been by way of sale, purchase of property or investment of Scheme Funds. It did not authorise the responsible entity to undertake intramural dealings involving non-consensual transfers of Scheme Property to unit holders…”
The relevance of this case is particularly important to the broader funds management industry, as it highlights the limitations of the responsible entity as a protection measure for investors. It also highlights the need for responsible entities to be familiar with their scheme’s constitution and the powers contained therein as well as the broader laws under the Corporations Act. ASIC have taken the High Court’s dismissal as a major win and no doubt will be reviewing similar transactions going forward.