Disclosure
appropriate (for instance, where the entity is aware that a significant number of investors might not have ready access to the Internet).919
Possible reform
Disclosure of information could be enhanced by taking advantage of developments in technology for PDSs, periodic statements and continuous disclosure notices. This approach would reflect a growing trend to website disclosure. In addition to ASIC’s approach in RG 198, the proposed third edition of the ASX Corporate Governance Council Corporate Governance Principles and Recommendations provides for disclosure on a company’s website as an alternative to disclosure in its annual report.920
However, CAMAC is reluctant to specify a particular form of electronic or other technological disclosure (such as disclosure on a website), given the tendency for rapid technological change.
The best approach may be for the Corporations Act to contain a general requirement that disclosing entities provide information in a manner that makes it available to all existing and potential investors. If it would assist industry, ASIC could publish guidance from time to time about optimal ways to do this. Members might also be given an option to be alerted by email of any change to the PDS or continuous disclosure material.
Whether this additional disclosure obligation should replace or merely supplement the current disclosure requirements is a separate question. A single location for disclosure would avoid duplication and the possibility of accidental divergence in the timing of disclosure, with the attendant possibility of disadvantage to some investors. If any new form of disclosure supplements existing disclosure requirements, the various forms of disclosure could be required to draw attention to the availability of the other forms of disclosure.
Regardless of any use of technology to provide alternative methods for making disclosures, it may be desirable to retain a requirement for disclosure to be available in paper form as an alternative to any permitted forms of electronic disclosure.921
The issues relating to the methods for making disclosure apply equally to companies.
Question 10.7.1. Should any matters currently required to be included in the scheme constitution instead be disclosed in the PDS (or any document that replaces it) (for instance, the consideration to be paid to acquire an interest in the scheme)?
Question 10.7.2. Should any additional matters specified as requiring disclosure to investors in response to Question 10.4.11 be included in the scheme constitution as well as being disclosed in the PDS (or any document that replaces it) and why?
919 RG 198.27.
920 See at 5, 6, 17, 21, 27, 30, 31, as well as the definition of ‘disclose’ in the glossary at 35. The CLERP 9 paper Corporate disclosure: Strengthening the financial reporting framework (2002) raised the possibility of listed entities being required to post materially price-sensitive information on their websites at the same time that this information is first released by the relevant market operator, as well as being required to provide facilities for investors to be electronically alerted through real time electronic messaging systems such as email or SMS (Section 8.5.4).
921 See the comments of ASIC in Regulatory Guide 107 Fundraising: Facilitating electronic offers of securities
(March 2014) Table 1 Principles 5 and 6, RG 107.5, RG 107.31, RG 107.92-RG 107.97.
Disclosure
Question 10.7.3. Should prospective investors be given a copy of the scheme constitution and/or should there be an express obligation for the PDS (or any document that replaces it) to summarise the key features of the constitution?
Question 10.7.4. Should greater use of technology be permitted for satisfying the various disclosure requirements and, if so, in what way?
Question 10.7.5. Should any amendments permitting greater use of technology replace, or merely supplement, the current disclosure requirements?
Takeovers and reorganizations of schemes
11 Takeovers and reorganizations of schemes
This chapter discusses whether there should be statutory provisions governing the takeover of unlisted schemes or the reorganization of schemes.
11.1 Scheme takeovers
The issue
Is there any need to change the takeovers provisions for managed investment schemes, for instance to extend them to unlisted schemes having more than a certain number of members (large unlisted schemes)?
Current position
Control of the management of a scheme is exercised by the RE of the scheme, in a manner analogous to the control of a company by its board of directors.
A change of RE can only occur with the agreement of the scheme’s members922 or, in limited circumstances, with ASIC relief (a condition of which, however, is that scheme members have the opportunity to vote on the change).923 The relevant members’ resolution need only be an ordinary resolution if the scheme is listed, but must be an extraordinary resolution (requiring at least 50% of the total votes that can be cast by members entitled to vote, whether or not cast) if the scheme is unlisted.924 The RE and its associates are entitled to vote on the resolution if the scheme is listed, but not if it is unlisted.925
A change of RE with the agreement of a sufficient majority of scheme members can take place through a contested takeover of the scheme, where the bidder seeks to acquire sufficient voting interests in the scheme to enable it to pass a resolution at a meeting of members to remove the current RE.
The takeovers provisions in Chapter 6 of the Corporations Act apply to the acquisition of interests in listed managed investment schemes, so that takeovers of listed schemes are
922 When the RE retires, it must call a meeting of members to choose a new RE (s 601FL).
The members may also remove an RE and appoint a new RE (s 601FM). CAMAC has recommended that provisions concerning the continuation of a particular party as the RE of a scheme, or approval of a replacement RE, should be enforceable only if they do not unreasonably inhibit the right of scheme members to replace the RE (2012 CAMAC Report Section 5.3.3).
923 ASIC has granted relief to permit a change of RE without a meeting, for instance where the existing RE was to be replaced with a related body corporate (ASIC Report 34, Overview of decisions on relief applications from financial service providers (October 2003 to August 2004), para 4.22).
The standard relief typically requires that:
• members entitled to vote on the proposal who together hold at least 5% of the total value of the interests held by members, or
• at least 100 members entitled to vote on the proposal
be given the right to seek a vote on the change of RE. Such a vote is taken either by post or by the convening of
a meeting.
924 ss 601FL, 601FM, definition of ‘extraordinary resolution’ in s 9. ASIC has provided relief to ensure that members of a listed registered scheme can request or call a meeting to consider and vote on an ordinary resolution to change the RE: see ASIC Regulatory Guide 9 Takeover bids at RG 9.570-9.574, Class Order [CO 13/519]. This ASIC relief overcomes a technical deficiency in the Corporations Act.
925 s 253E. In Section 8.4 of this paper, CAMAC raises the question whether the voting exclusion should apply regardless of whether the scheme is listed or unlisted.
Takeovers and reorganizations of schemes
regulated in the same way as takeovers of listed companies or companies with more than
50 members. Chapter 6 applies to a listed scheme as if:
• the scheme were a listed company
• interests in the scheme were shares in the company
• voting interests in the scheme were voting shares in the company
• a meeting of the members of the scheme were a general meeting of the company
• the obligations and powers that are imposed or conferred on the company were imposed or conferred on the RE
• the directors of the RE were the directors of the company
• the appointment of an RE for the scheme were the election of a director of the company
• the scheme’s constitution were the company’s constitution.926
Similarly, the compulsory acquisition provisions in Chapter 6A of the Corporations Act extend to the acquisition of interests in a listed scheme as if:
• the scheme were a company
• interests in the scheme were shares in the company
• voting interests in the scheme were voting shares in the company.927
Chapters 6 and 6A do not regulate the acquisition of interests in an unlisted scheme.
The application of Chapters 6 and 6A to listed schemes results in the application of the ancillary provisions in Chapter 6B. The substantial holding provisions in Part 6C.1 and the provisions for tracing beneficial ownership in Part 6C.2 also apply to listed registered schemes.
A change of control of a scheme may also in effect take place through a change of control of the RE, which may occur:
• by agreement between the person seeking control of management of the scheme (the bidder) and the shareholders and directors of the RE
• through a takeover of the RE by the bidder without the support of the directors of the
RE.
926 s 604. See also s 12(3) for the application of the definition of ‘associate’ to the managed investment provisions and s 610(5) for voting power in a managed investment scheme.
927 s 660B. The compulsory acquisition provisions apply to an unlisted registered scheme that was listed at the end of a bid or at the time a compulsory acquisition notice is lodged (s 660B(2), (3)). ASIC relief may be required to adapt the compulsory acquisition provisions for managed investment schemes: see ASIC Regulatory Guide 10
Compulsory acquisitions and buyouts at RG 10.98.
Takeovers and reorganizations of schemes
The latter situation may not arise very frequently, given that many REs do not have a broad shareholding base. It may, however, arise in some contexts, for instance internally managed stapled schemes where the scheme members also hold the shares in the RE.
A variation on these situations would be where the RE is a subsidiary of which a bidder gains control through an agreed or hostile takeover of the parent company.
Unlike corporations, the members of the scheme have no role to play in a change of control of the RE unless they are also members of the RE.
Analysis and discussion
The takeover and compulsory acquisition provisions in Chapters 6, 6A and 6B of the Corporations Act were extended to the acquisition of interests in listed schemes by the Corporate Law Economic Reform Program Act 1999.928 The reasons that the Explanatory Memorandum gave for extending the takeover provisions to listed schemes, but not to any unlisted schemes (regardless of size), were:
• the redemption facility of a listed scheme is suspended and units trade at a price set by the market. This provides an opportunity and an incentive for a bidder to pay a premium over the market price for control parcels of undervalued units
• by contrast, for most unlisted schemes the manager provides investors with a withdrawal facility at a price reflecting the net asset backing of the units. This would be a strong disincentive for a bidder, who must pay a premium for the units above the value for which they can be redeemed
• in the case of open-ended schemes, new interests are issued on a continuous basis as investments are made.929 While the potential effect of this could be overcome by the imposition of ‘freezes’ on the issue of new interests when a takeover bid is launched, this would appear to amount to an unwarranted interference in the ordinary operation of the scheme.930
Other possible reasons for not extending the takeover provisions to listed schemes are:
• the value of control of the scheme may be seen as belonging to the RE that operates
(and may also have established) the scheme
928 For the law relating to scheme takeovers before Chapter 6 was extended to takeovers of listed managed investment schemes by the Corporate Law Economic Reform Program Act 1999, see HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at [23.142].
929 For more detail about open-ended schemes and closed-end schemes, see CCH Managed Investments Law and
Practice (looseleaf) at ¶90-200.
930 Explanatory Memorandum to the Bill for the Corporate Law Economic Reform Program Act 1999, paras 7.47-7.49.
The ALRC/CASAC report recommended a comprehensive review of takeovers of managed investment schemes (para 11.30). The CLERP reforms followed on from policy work carried out by the Corporations Law Simplification Task Force and by the Financial System Inquiry that was established by the then Treasurer, the
Hon Peter Costello MP, in 1996 (the Wallis Committee).
The Simplification Task Force paper Takeovers: Proposal for simplification (1996) pp 20-21 raised as an issue for consideration whether the Chapter 6 takeover rules should apply to listed schemes, with an ordinary resolution being sufficient to change the RE (Issue for consideration 27B). However, its primary proposal was that a change of RE be approved by an absolute majority (by value) of the disinterested members of the scheme, with both the RE to be removed and the proposed new RE (together with their associates) being precluded from voting (Proposal 27). The Task Force also raised as an issue whether there should be a lower approval threshold (Issue for consideration 27A).
The Financial System Inquiry Final Report (1997) (the Wallis report) recommended takeover provisions modelled on Chapter 6 of the Corporations Law for public unit trusts (rec 87).
Takeovers and reorganizations of schemes
• attempts to enable members to appropriate a control premium could prove futile, as the RE could use deferred management fees or long-term service contracts with related parties to make becoming the RE of the scheme unattractive (though this may constitute unacceptable conduct if unlisted schemes came within the jurisdiction of the Takeovers Panel).
An argument for extending the takeover provisions to unlisted schemes is that such provisions allow the market to work efficiently by providing a mechanism for removing bad management from larger entities that are experiencing difficulties.
Extension of the statutory takeover procedure to unlisted schemes would also enable a party who has acquired a substantial proportion of the interests in the scheme to compulsorily acquire the outstanding interests.931 The economic and administrative benefits of compulsory acquisition include facilitating financial restructuring and reducing administrative and reporting costs.932 A statutory procedure for compulsory acquisition may be particularly useful for illiquid unlisted schemes that do not have a withdrawal facility (either because they were designed that way or because the withdrawal facility has been suspended).
If it were decided to extend the takeover provisions to large unlisted schemes, consideration might be given to including in any takeover procedure applicable to those schemes a freeze on the issue of new interests on commencement of a takeover bid, notwithstanding the reservations expressed about such an approach when the current takeover provisions for listed schemes were introduced. However, this approach may impose undue pressure on a target scheme.
The difficulties for unlisted scheme takeovers go beyond the mere absence of a statutory takeover mechanism. The Corporations Act presents obstacles to parties who want to make a bid for an unlisted scheme. For instance, there is a prohibition on making unsolicited offers to purchase scheme interests off-market.933
Where the effective control of a scheme changes through a change of control of the RE, different considerations apply. On one view, it is not appropriate for the members of a scheme who are not also members of the RE to have any role in a change of control of the RE. Control of the RE should be a matter for members of the RE only. The members of the RE, but not the members of the scheme, would have an interest in any premium for control of the RE. Scheme members who are not satisfied with the new controllers of the RE can propose a resolution of members to replace the RE. Members may also choose to replace an RE for reasons unrelated to any change in control of the RE.
Question 11.1.1. Are the legislative procedures for the takeover of listed managed investment schemes appropriate? If not, what legislative amendments are needed?
931 The current statutory compulsory acquisition threshold for listed companies, unlisted companies with more than
50 members and listed schemes is 90% by number of the securities in the bid class, provided that the bidder and its associates acquired at least 75% (by number) of the securities that the bidder offered to acquire under the bid (whether the acquisitions happened under the bid or otherwise): s 661A. Similarly, a bidder who has acquired at least 90% of the securities (by number) in the bid class at the end of the offer period must offer to buy out the remaining holders of bid class securities (s 662A).
932 CAMAC report, Compulsory Acquisitions (1996) para 1.11.
933 Part 7.9 Div 5A.
Takeovers and reorganizations of schemes
Question 11.1.2. Should there be takeover provisions for large unlisted schemes in all circumstances or in some circumstances and, if so, what (for instance, where a scheme is part of a larger commercial enterprise, other elements of which are being taken over)?
Question 11.1.3. If a takeover procedure for large unlisted schemes is adopted, what features should that procedure have (for instance, should there be a freeze on the issue of new interests when a takeover bid is launched)?
11.2 Reorganization of schemes
The issue
Should there be a statutory procedure for the reorganization of managed investment schemes?
Current position
A reorganization of a company may be achieved through a scheme of arrangement under Part 5.1 of the Corporations Act. A scheme may be between members and/or creditors of a company. The voluntary administration provisions in Part 5.3A of the Corporations Act can also be used in the reorganization of the affairs of an insolvent company.
Neither Part 5.1 nor Part 5.3A is available for managed investment schemes.934
One means of reorganizing schemes, whether solvent or insolvent, is by use of the scheme’s constitution. This may be either with the agreement of members under the existing constitution or by amendment of the constitution by special resolution of members.935 A scheme constitution can also be amended by the RE where the RE
‘reasonably considers the change will not adversely affect members’ rights’.936 In that case, the RE is bound by a duty to ‘treat the members who hold interests of the same class
equally and members who hold interests of different classes fairly’.937
Another approach to the reorganization of managed investment schemes is the use of trust scheme arrangements. A scheme reorganization by amendment of the scheme’s constitution can be carried out independently of, or in conjunction with, a trust scheme.938
Trust schemes rely on the court’s inherent jurisdiction and the provisions of the State-based trust legislation and usually involve amendment of the scheme’s constitution by special resolution of members.939 A trust scheme is similar to a members’ scheme of arrangement but, being a non-statutory procedure, does not involve the equivalent of the judicial and other procedural protections applicable to corporate schemes of arrangement under Part 5.1. However, the proponents of a trust scheme may choose to seek judicial
934 The scheme of arrangement provisions only apply to a ‘Part 5.1 body’, defined under s 9 as meaning a company or a registrable body under Part 5B.2 of the Act. The voluntary administration provisions are only available for companies that are insolvent or likely to become insolvent (s 436A).
For the possibility of encompassing a scheme in the voluntary administration of its RE, see the 2012 CAMAC Report at Section 6.3.4.
935 s 601GC(1)(a).
936 s 601GC(1)(b).
937 s 601FC(1)(d).
938 The court has regularly given directions in relation to the reconstruction of insolvent schemes by constitutional amendment: see Re Elders Forestry Management Ltd [2012] VSC 287 at [6]-[7].
939 s 601GC.
Takeovers and reorganizations of schemes
direction or advice on its implementation, in which case the trust scheme may involve elements analogous to those applicable to schemes of arrangement.940
A trust scheme merger of two or more managed investment schemes may be:
• a redemption scheme, whereby all units, other than those held by the intending controller, are cancelled for a cash and/or other consideration,941 or
• a transfer scheme, whereby all units are transferred to the intending controller for a cash and/or other consideration. Transfer schemes for listed managed schemes also require a resolution of unitholders to permit the intending controller to acquire more than 20% of the units.942
While there is no specific statutory procedure for trust schemes that involves an equivalent supervisory role for ASIC and the court that is inherent in a Part 5.1 scheme of arrangement, ASIC nonetheless performs a supervisory role in connection with its consideration of relief applications and associated meeting materials necessary to facilitate the trust scheme process for listed schemes.943
The Takeovers Panel has issued a Guidance Note that recommends various disclosure, voting and other procedures for trust schemes that involve listed trusts.944 As is the case for members’ schemes of arrangement, these procedures are similar to those in Chapter 6 of the Corporations Act.945
The reorganization of a commercial structure that consists of one or more trusts and one or more related companies can be dealt with through a combination of a trust scheme and a Part 5.1 scheme of arrangement.946
The court can use its winding up powers in relation to managed investment schemes947 to give directions to achieve the reorganization of an insolvent scheme.
The reorganization of a scheme may also involve a buy-back of interests in the scheme. Buy-backs of scheme interests are discussed in Section 9.4 of this paper.
940 For instance, in Australand Holdings Limited [2005] NSWSC 835, the trust scheme involved two approaches to the court for advice, similar to the first and second hearings that are involved in a corporate scheme of arrangement (see at [14]-[15], [28]). Also, in Mirvac and Mirvac Funds [1999] NSWSC 457, the trust scheme involved an explanatory statement that covered the trust scheme as well as the corporate scheme of arrangement (see at [21]). See also Sydney Airport Holdings Limited as responsible entity of Sydney Airport Trust 2 [2013] NSWSC 1665 at [6], Sydney Airport Holdings Limited as responsible entity of Sydney Airport Trust 2 [2013] NSWSC 2012 at [8].
941 Under a redemption scheme, the scheme redeeming interests can be delisted before any units in it are issued to the intending controller, to avoid a breach of the takeover provisions in Chapter 6 of the Corporations Act: see Takeovers Panel Guidance Note 15 Trust scheme mergers para 5(a).
942 Item 7 of s 611. Listed managed investment schemes are subject to the takeover provisions in Chapter 6 of the Corporations Act: s 604; see also Section 11.1 of this paper. A trust scheme merger relying on Item 7 of s 611 requires an ASIC modification or exemption as, under that Item, votes cannot be cast in favour by persons
proposing to acquire or dispose of interests: see Takeovers Panel Guidance Note 15 Trust scheme mergers
para 5(b).
943 ASIC Regulatory Guide 74 Acquisitions approved by members, Section D.
944 Takeovers Panel Guidance Note 15 Trust scheme mergers.
945 Takeovers Panel Guidance Note 15 Trust scheme mergers para 8, which refers to the policy that courts apply when considering s 411(17) in connection with a members’ scheme of arrangement. See also ASIC Regulatory Guide 74 Acquisitions approved by members at RG 74.65.
946 See, for instance, Mirvac and Mirvac Funds [1999] NSWSC 457, Australand Holdings Limited [2005] NSWSC
835, Abacus Funds Management Ltd [2006] NSWSC 80.
947 ss 601ND, 601NF(2).
Takeovers and reorganizations of schemes
Analysis and discussion
None of the current methods for reorganizing solvent and insolvent schemes is completely satisfactory.
The viability of a scheme reorganization through the use of procedures in a scheme constitution depends on the specific terms of that constitution (though amendment of a scheme constitution may be used as the first step in a reorganization process).
Also, while it may be possible to reorganize a scheme through the use of a court-ordered trust scheme, the jurisprudence for applying this procedure to the reorganization of managed investment schemes is still in an early stage of development and does not provide a certain basis for scheme reorganizations.
Furthermore, the lack of available mechanisms for the reorganization of a failed scheme may result in the winding up of such a scheme, where a compromise is difficult to achieve and an application to the court is necessary to provide certainty.
CAMAC’s general approach is that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently.
Given this, in CAMAC’s view, there should be an integrated holistic process for managed investment schemes along the lines of Part 5.1, with provision for disclosure to ASIC, and a right for ASIC to comment, and the involvement of the court. This reorganization procedure should be available to insolvent as well as solvent schemes. In the case of insolvent schemes, creditors would be involved in considering whether to approve the reorganization, as is currently the case with creditors’ schemes of arrangement for companies.
Extension of the Part 5.1 scheme of arrangement provisions to managed investment schemes has been supported by several policy reviews, including the CAMAC report Members’ schemes of arrangement (2009).948 The 2009 CAMAC report considered that Part 5.1 should be available for listed and unlisted schemes. CAMAC maintains this view, given that Part 5.1 is available for listed and unlisted companies.
CAMAC also believes that there should also be a voluntary administration procedure for insolvent schemes, comparable to Part 5.3A for companies. The 2012 CAMAC report recommended a VA procedure for schemes.949 It provided details of how such a procedure might be implemented if the SLE Proposal is, and if it is not, adopted. It also discussed various implementation issues that would arise in either case.
Question 11.2.1. Should the provisions governing schemes of arrangement in Part 5.1 of the Corporations Act be extended to, or adapted for, managed investment schemes? If so, what changes would need to be made to cater for the managed investment scheme structure?
948 Sections 7.2 and 7.6.2. The Financial System Inquiry Final Report (1997) (the Wallis report) recommended streamlined merger and reconstruction provisions for collective investment schemes for public unit trusts (rec 87).
949 See Chapter 6 of that report.
External administration
12 External administration
This chapter discusses the ability of those conducting the winding up of a scheme to claim remuneration and expenses, as well as what external supervision there should be of a scheme winding up. It also examines issues relating to the disclaimer of leases by the liquidator of an RE, the position of external administrators of an RE and the notification requirement when a receiver is appointed to property of an RE.
12.1 Remuneration and expenses in the winding up of a scheme
The issue
Should the Corporations Act make provision for meeting remuneration and expenses in relation to the winding up of a scheme along the lines of the provisions applicable to companies?
Current position
The constitution of a registered scheme must make adequate provision for winding up the scheme.950 There is no legislative guidance on what constitutes ‘adequate provision’, including whether the scheme constitution should provide for remuneration and expenses in relation to the winding up, including the remuneration of the person conducting the winding up.
The court may make directions about remuneration and expenses in the exercise of its power to make directions about how a registered scheme is to be wound up.951
There is no detailed legislative provision for remuneration and expenses in relation to the winding up of an insolvent scheme to supplement these broad provisions.
The basis for claiming remuneration and expenses in relation to the winding up of a scheme depends on who is administering the winding up of the scheme.
Winding up conducted by the RE
In the first instance, the responsibility for winding up a registered scheme belongs to the RE. The RE may initiate a winding up if it considers that the purpose of the scheme has been accomplished or cannot be accomplished.952 Where the court or the members initiate the winding up, they do so by directing the RE to wind up the scheme.953 Where the RE
950 s 601GA(1)(d).
951 s 601NF(2), (3).
952 s 601NC. A scheme can also be wound up at a specified time or in specified circumstances or on the happening of a specified event where the scheme constitution so provides (s 601NA): the RE would be responsible for the winding up, though s 601NA does not stipulate that this is the case.
953 ss 601NB (members), 601ND (the court).
The court has the power to order the winding up of a scheme if it thinks it is just and equitable to do so or if there is unsatisfied execution or other court process (s 601ND). The 2012 CAMAC Report recommended that the court also have a power to order the winding up of a scheme where satisfied that the scheme is insolvent (Section 7.4.1). Such a power would make redundant the current unsatisfied execution ground, which could then be repealed.
External administration
remains in control of the scheme during the winding up process, it has a right to be indemnified out of scheme property for liabilities or expenses incurred in relation to the performance of its duties, if two conditions are satisfied:
• the right is specified in the scheme’s constitution, and
• the RE has properly performed its duties.954
Winding up conducted by a person appointed by the court
The court has the power to appoint a person other than the RE to take responsibility for ensuring that a registered scheme is wound up in accordance with its constitution and any orders of the court (including for the reason that the RE has ceased to exist or is not properly discharging its obligations in relation to the winding up).955
When the court exercises this power (for instance, where the RE is insolvent or unable to continue in the role and a new RE has not been appointed), it can give directions that the person act as a receiver of the property of the scheme.956
The court order of appointment may provide for the receiver’s right to be indemnified out of the scheme’s assets for proper expenses and for remuneration (the order may also provide for the receiver’s powers).957 In the absence of appropriate provision in the court order, the receiver must rely on trust law to recover its remuneration and expenses, given that the RE holds scheme property on trust for scheme members.958 Trust law principles on which a receiver might rely in seeking remuneration include:
• the equitable principle of salvage in Re Universal Distributing Company Limited (In Liquidation)959 (which permits remuneration for work done in the care, preservation and realisation of scheme property to be charged against that property)
• the inherent power of the court to require an allowance to be made for costs that fall outside the salvage principle but are incurred for beneficial work done by an insolvency practitioner in relation to trust property (including scheme property).960
Winding up conducted by the liquidator of the RE
Where an RE and a scheme that it operates are both being wound up, the winding up of the scheme may be conducted by the liquidator of the RE.
The members of the scheme have the power by extraordinary resolution to direct the RE to wind up the scheme (s 601NB). An extraordinary resolution requires that it be passed by at least 50% of the total votes that may be cast by members entitled to vote on the resolution, whether or not cast (definition of ‘extraordinary resolution’ in s 9).
954 s 601GA(2). This right of indemnity is discussed in Section 7.2 of this paper.
955 s 601NF.
956 s 601NF(2). See Re Equititrust Ltd [2011] QSC 353 at [52], [54], [72]-[79]. The court also has the power to appoint a receiver under s 1101B where there has been a contravention of the financial services provisions in
Chapter 7 of the Corporations Act: see Re Equititrust Ltd [2011] QSC 353 at [35], [76].
957 See, for instance, the Court’s orders covering these matters in the orders annexed to the reasons in Re Equititrust
Ltd [2011] QSC 353. The powers conferred by the Court were those set out in ss 420 and 1101B(8)(a)-(c).
958 s 601FC(2).
959 [1933] HCA 2; (1933) 48 CLR 171 at 174-175. The scope of the principle in that case was discussed in
Thackray v Gunns Plantations Limited [2011] VSC 380 at [40]-[51].
960 Thackray v Gunns Plantations Limited [2011] VSC 380 at [52]-[58]. See also Thackray v Gunns Plantations Ltd (No 2) [2011] VSC 417. Other possible sources of power include s 511 (in the case of a voluntary liquidation) and the court rules (for instance, Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 54.02): Re Gunns Plantations Limited (No 4) [2013] VSC 595 at [2].
External administration
A claim for remuneration by the liquidator of the RE may:
• be derived from the RE’s right of indemnity961
• be based on the salvage principle in Re Universal Distributing Company Limited (In
Liquidation)962
• depend on the exercise by the court of its inherent jurisdiction.963
A claim by the liquidator of a company for remuneration is one of various types of specified claims that have priority over other unsecured debts in the liquidation of the company.964 The right to claim remuneration is available for the performance of trust duties by a corporate trustee such as an RE.965
In determining the entitlement of the RE’s liquidator to recover out of scheme property his or her remuneration and expenses in relation to the liquidation of the scheme, a distinction must be drawn between the liquidator’s remuneration and expenses in:
• administering the scheme, and
• conducting the liquidation of the RE.966
The liquidator of an RE can only claim indemnity from scheme property (as distinct from the personal assets of the RE) for remuneration and expenses in relation to work that can be fairly categorized as administering the scheme.967 This process may be relatively
961 In Re Suco Gold Pty Ltd (1983) 33 SASR 99 at 110 (cited in Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008 at [202]), the Court said:
It is part of the duty of the trustee company to incur debts for the purposes of the trust businesses and, of course, to pay those debts. Upon winding up those debts can only be paid in accordance with the provisions of the Companies Act. This requires necessarily that there be a liquidator and that he incur costs and expenses and be paid remuneration.
962 [1933] HCA 2; (1933) 48 CLR 171 at 174-175. This principle was cited as a possible ground for allowing the remuneration of the liquidator of a corporate trustee in Re Suco Gold Pty Ltd (1983) 33 SASR 99 at 110, Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008 at [202].
963 The Court in Application of Sutherland [2004] NSWSC 798 at [14] said that the cases in this area ‘implicitly accept that the inherent jurisdiction of the Court to allow remuneration in connection with the administration of a trust fund is one which can apply so as to allow remuneration not only to a trustee, but also to someone who is for practical purposes controlling a trustee’.
964 s 556(1)(de), definition of ‘deferred expenses’ in s 556(2).
965 Re Suco Gold Pty Ltd (1983) 33 SASR 99 at 110, Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008 at [202]-[204].
966 Bastion v Gideon Investments [2000] NSWSC 939 at [69], GB Nathan & Co Pty Ltd (In Liq) (1991) 24 NSWLR
674 at 688.
967 Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008 at [194]-[217], Re Application of
Sutherland [2004] NSWSC 798.
The type of activities covered were identified in the broader trust context in 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144 at [34]:
identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; distributing trust assets to the persons beneficially entitled to them.
See also Bastion v Gideon Investments [2000] NSWSC 939 at [69], GB Nathan & Co Pty Ltd (in liq) (1991) 24
NSWLR 674 at 688-689.
Given that the liquidator’s rights derive from those of the RE, the right of indemnity must be specified in the scheme’s constitution: s 601GA(2). The RE’s right of indemnity is discussed in Section 7.2 of this paper.
External administration
straightforward for the liquidator of a sole-function RE.968 However, for the liquidator of a multi-function RE:
The liquidator is not entitled to charge the beneficiaries of one trust with the costs and expenses incurred in relation to the other trust. Accordingly, it will be necessary for the liquidator to estimate the costs and expenses incurred insofar as they relate to each trust and only charge those costs to the trust on whose behalf the work was performed. If that estimate is not possible then a pari passu distribution of the costs and expenses will be in order … .969
It has been recognised that the distinction between remuneration and expenses that relate to a particular trust and other amounts claimable by a corporate trustee (including expenses incurred in relation to other trusts) is not always easy to draw.970 The general expenses of liquidation include expenses that a liquidator incurs in performing his or her duty to identify the assets of the company for the purposes of the winding up. However, this duty involves ascertaining whether particular assets under the control of the company are beneficially owned by the company or by others: the liquidator cannot disregard the fact that the company holds property in trust for others.971
Analysis and discussion
CAMAC’s general approach is that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently.
The Corporations Act contains detailed provisions regarding the winding up of companies.972 The 2012 CAMAC report recommended that the Corporations Act should regulate the winding up of an insolvent scheme in a manner comparable to the regulation of the winding up of an insolvent company.973 It also contemplated that the winding up of insolvent registered schemes would be conducted only by a registered liquidator.974
The salvage principle and other general law rules governing entitlement to remuneration and expenses for work done in conducting a winding up may not provide persons charged with winding up a scheme with sufficient certainty about recovering these amounts and may make it difficult to find insolvency practitioners willing to accept appointment to a scheme. It may be preferable for the scheme winding up provisions to provide a clear right for the scheme liquidator to claim remuneration and expenses for its work in conducting the winding up.
In the winding up of a company, the following provisions give creditors an incentive to assist the liquidator to meet the expenses of winding up:
968 Bastion v Gideon Investments [2000] NSWSC 939 at [70], GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR
674 at at 685-686, Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008 at [201], [205], In Re Suco Gold Pty Ltd (in liquidation) (1983) 33 SASR 99, Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158.
969 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144 at [37], Re French Caledonia
Travel Service Pty Ltd (in liq) [2003] NSWSC 1008 at [213].
970 Bastion v Gideon Investments [2000] NSWSC 939 at [69], GB Nathan & Co Pty Ltd (In Liq) (1991) 24 NSWLR
674 at 688, Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008 at [209].
971 ibid.
972 Chapter 5 of the Corporations Act.
973 Section 7.5.3.
974 Sections 7.2.7, 7.3.2, 7.4.3. This is the case whether or not the SLE Proposal is adopted (see Section 7.3.2). For a discussion of whether the scheme winding up should be separate from, or combined with, the winding up of the scheme’s RE if the RE is also insolvent, see the 2012 CAMAC report at Sections 7.3.1 and 7.4.2.
External administration
• a company liquidator is not liable to incur any expense in relation to the winding up of the company unless there is sufficient available property975
• the court or ASIC may direct a liquidator to incur an expense where a creditor is willing to indemnify the liquidator and, if necessary, give security for the expense976
• the court can make such orders as it deems just with respect to the distribution of property whose recovery, protection or preservation has been assisted by money contributed by particular creditors, with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.977
Similar provisions may assist a person charged with winding up a registered scheme to conduct the winding up. If the recommendation in the 2012 CAMAC report were to be adopted, that person would be a registered liquidator if a scheme is insolvent. However, provisions along the lines of those designed to assist company liquidators may be appropriate regardless of who is in charge of the winding up, given that the initiative for their use would come from the creditor, rather than the person charged with the winding up.
Question 12.1.1. Should a scheme liquidator, or other person charged with the winding up of a registered scheme, be given a statutory right to claim remuneration and expenses of winding up the scheme and, if so, what form should it take?
Question 12.1.2. Should the Corporations Act provide that the liquidator of a registered scheme (or other person charged with the winding up of the scheme) is not liable to incur any expense in relation to the winding up of the scheme unless there is sufficient available property?
Question 12.1.3. Should the court or ASIC have a power to direct a liquidator of a registered scheme (or other person charged with the winding up of the scheme) to incur an expense where a creditor is willing to indemnify that person and, if necessary, give security for the expense?
Question 12.1.4. Should the court have a power to make such orders as it deems just with respect to the distribution of scheme property whose recovery, protection or preservation has been assisted by money contributed by particular creditors?
Question 12.1.5. What, if any, other provisions might assist a liquidator or other person charged with the winding up of a registered scheme in meeting the expenses of the winding up?
12.2 External supervision of a scheme winding up
The issue
An auditor of a registered managed investment scheme ceases to hold office when the scheme is wound up. This leaves no external supervision during a winding up by an RE.
975 s 545(1).
976 s 545(2). This provision also applies where a shareholder is willing to indemnify the liquidator.
977 s 564.
External administration
Current position
An auditor of a registered scheme ceases to hold office if the scheme is to be wound up.978
This is similar to the situation for companies.979 However, unlike company windings up, which are generally under the control of a registered liquidator, the winding up of a managed investment scheme is conducted by the RE.980
Analysis and discussion
The Turnbull Report recommended that further consideration be given to:
• repealing the current law terminating the appointment of an auditor so that an auditor’s appointment would continue until the winding up is completed
• including a specific legislative requirement that the winding up process be audited.981
There needs to be some external supervision of the winding up of a scheme. However, any decision on whether the appointment of the auditor should continue during the winding up of a scheme needs to take into account existing potential sources of external supervision.
The insolvent winding up of a scheme is likely to be in the hands of a receiver. Also, where the RE of a scheme is insolvent as well as the scheme itself, the winding up of the scheme is likely to be in the hands of a liquidator. The 2012 CAMAC report recommended that all insolvent scheme windings up be conducted by a registered liquidator.982
Furthermore, the Corporations Act requires that a scheme constitution have adequate provisions about winding up the scheme.983 ASIC considers that part of having adequate provision for winding up a scheme includes that the scheme constitution provide for an independent audit of the final accounts by a registered company auditor or audit firm after winding up.984
Question 12.2.1. Should there be external supervision of the winding up of a managed investment scheme and, if so, in what circumstances and by whom?
978 This may be because prerequisites in the scheme’s constitution that result in the winding up of the scheme are satisfied, the members or the court direct the RE to wind up the scheme or the members vote to remove the RE without appointing a new one at the same meeting (ss 331AD, 601NE(1)(d)).
979 s 330.
980 Turnbull Report Section 5.3.4.
981 ibid.
982 Sections 7.2.7, 7.3.2, 7.4.3. This is the case whether or not the SLE Proposal is adopted (see Section 7.3.2). For a discussion of whether the scheme winding up should be separate from, or combined with, the winding up of
the scheme’s RE if the RE is also insolvent, see the 2012 CAMAC report at Sections 7.3.1 and 7.4.2.
983 s 601GA(1)(d).
984 Regulatory Guide 134 Managed investments: Constitutions (February 2014) at RG 134.200-RG 134.203.
In the Consultation Paper that preceded the major revisions to RG 134, Consultation Paper 188 Managed investments: Constitutions—Updates to RG 134 (September 2012) (CP 188), ASIC noted (at para 146) that there had been instances of scheme constitutions containing ‘clauses that provide responsible entities with the discretion to arrange either an independent audit or a review of the final accounts of the managed investment scheme by a registered company auditor after winding up the scheme’. In ASIC’s view (CP 188 at para 147):
a review provides a lesser level of assurance of the final accounts of a managed investment scheme and only involves an auditor making inquiries (primarily of the persons responsible for financial and accounting matters) and applying analytical and other review procedures … a review has substantially less scope than an audit, and does not enable an auditor to obtain the same level of assurance that would be obtained under an audit – an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the accounts.
External administration
12.3 Disclaimer of leases
The issue
Is it appropriate for the liquidator of an RE that is a lessor of property to have a power to disclaim the lease?
Current position
As with any other company, where an RE goes into liquidation, the liquidator can disclaim any property held by the RE that falls within one of the specified categories of onerous property.985 Property of a company includes a contract.986 The High Court in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation) held, by majority, that a lease is a species of contract that can be disclaimed by a liquidator (whether of a lessor or of a lessee) and that the effect of disclaimer by a lessor company is to bring the lease to an end, including the interest of the lessee in the leased property.987
The liquidator of a lessor RE must notify the lessee of the disclaimer988 and the lessee has the right to challenge the disclaimer, but must do so within 14 days of the notification being made.989 The court may only set aside a disclaimer if satisfied that the disclaimer
‘would cause, to persons who have, or claim to have, interests in the property, prejudice that is grossly out of proportion to the prejudice that setting aside the disclaimer would cause to the company’s creditors’.990
The lessee, as ‘a person aggrieved by the operation of a disclaimer’, ‘is taken to be a creditor of the company to the extent of any loss suffered by the person because of the disclaimer and may prove such a loss as a debt in the winding up’.991
Analysis and discussion
CAMAC notes that the law of disclaimer applies to the liquidation of companies generally and therefore has an effect outside the context of the winding up of an RE of a scheme.
Scheme members who have rights as lessees of property may have an expectation that their interests in the scheme are property interests that should have a favoured position in the winding up of a scheme, as do the interests of secured creditors. That expectation is not met under the present law where the lease can be disclaimed by a liquidator of the RE. To avoid disclaimer, member lessees would need to show that the prejudice to them is grossly out of proportion to the prejudice to the RE’s creditors generally. This issue is particularly relevant for agricultural schemes, where leases of land and trees are often an integral part of the scheme structure.
985 s 568.
986 s 568(1)(f).
987 [2013] HCA 51. The decision of the Court of Appeal in this litigation is discussed in O McCoy, ‘Disclaimer by Liquidators: Divesting a Company of Continuing Obligations’ (2013) 25(1) Australian Insolvency Journal 14 and K Bhindi, ‘Disclaimer of contracts’ 2013 13(9) Insolvency Law Bulletin 208. On the interpretation of the law adopted by the Court at first instance, the liquidator could disclaim the lease, but the effect of the disclaimer was very limited (O McCoy, ‘Disclaimer by Liquidators: Divesting a Company of Continuing Obligations’ (2013) 25(1) Australian Insolvency Journal 14 at 15).
988 s 568A.
989 s 568B.
990 s 568B(3).
991 s 568D(2).
External administration
CAMAC notes that the insolvency of the RE of a scheme that involves the RE leasing property to members of the scheme will not always result in disclaimer of the leases by the liquidator of the RE. A lease may be beneficial to the lessor by reason of the rent that it generates992 or the liquidator may decide that long-term leases enhance the potential resale value of the scheme property.
If the current law remains, there is a question whether those who intend to become lessee investors should have the benefit of disclosure of the possible consequences of a liquidation of the scheme in relation to the interests that they intend to acquire in the scheme.
Question 12.3.1. Should the liquidator of an RE that is a lessor of property have the power to disclaim a lease of property under which scheme members are the lessees?
Question 12.3.2. If the liquidators of lessor REs continue to have the power to disclaim leases with member lessees, should those who intend to become lessee investors have the benefit of disclosure of the possible consequences of a liquidation of the RE in relation to the interests that they intend to acquire in the scheme?
12.4 Duties and obligations of officers of an RE in financial difficulties
The issue
Should external administrators be treated as officers of the RE?
Current position
‘Officers’ of an RE have various duties. They have the same duties as are owed by any officers of a company (for instance, the duties in ss 180-184 and their general law equivalents). In addition, they have duties under s 601FD that they owe specifically in the capacity of officer of an RE. These duties require that they:
• act honestly993
• exercise care and diligence994
• act in the best interests of the members and, if there is a conflict between the members’ interests and the interests of the RE, give priority to the members’ interests995 (the ‘best interests’ duty)
• not misuse information or their position996
• take reasonable steps to ensure that the RE complies with the Corporations Act, its licence conditions and the scheme’s constitution and compliance plan997 (the compliance duty).
992 See the dissenting judgment of Keane J in Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation) [2013] HCA 51 at [133].
993 s 601FD(1)(a).
994 s 601FD(1)(b).
995 s 601FD(1)(c).
996 s 601FD(1)(d), 601FD(1)(e).
External administration
In addition to the compliance duty under s 601FD, the duty of care and diligence that officers of an RE have both under the general directors’ duty provision998 and under the equivalent provision for officers of an RE in s 601FD999 requires that those officers facilitate the RE’s compliance with its statutory obligations.1000
Other obligations of ‘officers’ under Chapter 5C include:
• an obligation, also imposed on the RE itself, to assist ASIC in carrying out a surveillance check1001
• an obligation to allow the auditor of the compliance plan to have access to the books of the scheme and to give the auditor information and explanations for the purposes of the audit.1002
Under paragraphs (c)-(g) of the definition of ‘officer of a corporation’ in s 9, various external administrators of a corporation are ‘officers of the corporation’.1003 However, that definition applies ‘unless the contrary intention appears’.1004 The courts have found that there is a contrary intention in the case of external administrators of an RE of a scheme.
In Norman, in the matter of Forest Enterprises Australia Ltd (admin apptd) (recs and mgrs apptd) v FEA Plantations Ltd (admin apptd) (recs apptd),1005 the Court, in considering whether the duties of officers of an RE in s 601FD applied to ‘a receiver, or receiver and manager, of the property of the corporation’ (para (c) of the definition of
‘officer of a corporation’), found that there was a ‘contrary intention’ in s 601FD. The Court referred1006 to the ALRC/CASAC report, which provided a draft provision for what has become s 601FD. The draft provision contained the following definition of ‘officer’ that was to apply in this context:
232AA(8) In this section:
‘officer’, in relation to a body corporate, means a director, secretary or other executive officer of the body corporate.
This draft provision was reflected in the original managed investment amendments introduced by the Managed Investments Act 1998. Under s 9 as amended by that Act,
‘officer’:
(a) in relation to the responsible entity of a registered scheme — means a person who is a director, secretary or executive officer of the responsible entity; or
(b) in any other case — has the meaning given by section 82A.
997 s 601FD(1)(f).
998 s 180.
999 s 601FD(1)(b).
1000 This principle was applied, for instance, in ASIC v Vines [2005] NSWSC 738 at [1182]-[1183] in relation to the continuous disclosure obligation of a company that was not an RE.
1001 s 601FF.
1002 s 601HG(6).
1003 These are a receiver, or receiver and manager, of the property of the corporation (para (c)), an administrator of the corporation (para (d)), an administrator of a deed of company arrangement executed by the corporation (para (e)), a liquidator of the corporation (para (f)) and a trustee or other person administering a compromise or arrangement made between the corporation and someone else (para (g)).
1004 s 9.
1005 [2010] FCA 1274.
1006 See particularly at [23]-[34].
External administration
The definition of ‘officer’ in s 82A included receivers and managers of property of a body corporate, as well as the other categories of external administrator.
Subsequently, the Corporate Law Economic Reform Program Act 1999 repealed the definition of ‘officer’ in s 9 and replaced it with a definition that made no special provision for the meaning of ‘officer’ in relation to the RE of a scheme and included the current references to ‘a receiver, or receiver and manager, of the property of the corporation’ and other external administrators.1007
Against this background, the Court in the Norman case considered it ‘clear that the new legislation did not intend to bring about a change in the regulation of managed investment schemes’.1008 It also pointed out that the CLERP amendments did not concern the effectiveness of the operation of managed investment schemes.1009
The Court added:1010
the conclusion is confirmed by what I see as the object of s 601FD(1). The object is to complement the duties owed by the responsible entity. That is achieved by imposing duties on persons who control the responsible entity’s activities in the administration of a managed investment scheme and its dealings with scheme assets. A receiver, particularly a receiver who is not also a manager, plays no part in the administration of a scheme nor in the decisions regarding the investment of scheme assets.
A party appointed receiver has different functions. They are, as I have said, to take possession of the charged assets (which in this case do not include scheme assets) and realise them to pay out the debt due to the chargee. There is no reason to bring such a person under the operation of s 601FD(1). A fortiori in the case of court appointed receivers and liquidators who, being court officers, owe their duties to the court that appointed them. Indeed those duties may be in conflict with the duties set out in s 601FD(1).
Later, the Court commented:1011
even if, contrary to my view, the receivers are under the duties imposed by s 601FD(1), that would not assist growers. A duty to act in the best interests of the growers cannot, in my opinion, be used as a justification for the responsible entity or its officers to ignore bargains freely entered into. Put bluntly, neither s 601FC nor s 601FD permits a responsible entity to breach, or its officers to procure a breach of, obligations that the responsible entity or a related company owes to a third party. It follows that s 601FD(1) does not prevent a receiver from realising charged assets (including putting those assets into a proper condition for sale) to enable payment of the debt due to the secured creditor.
I accept that the duty (if there be one) could come into play if the receiver has available to him/her alternative courses of action; one that would advantage and the other that would disadvantage investors. In that event the receiver would be required to take the course that would avoid harm to investors. This, however, is not one of those cases.
Similarly, the Court in Owen, in the matter of RiverCity Motorway Pty Limited
(Administrators Appointed) (Receivers and Managers Appointed) v Madden (No 3),
1007 Item 113 of Part 3 of Schedule 3. This amending legislation was discussed in the Norman case at [35]-[40].
1008 at [40].
1009 ibid.
1010 at [41]-[42].
1011 at [45].
External administration
adopting the reasoning in the Norman decision, held that an administrator of an RE was not an ‘officer’ for the purposes of Chapter 5C and, in particular, s 601FD.1012
Analysis and discussion
CAMAC’s general approach is that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently.
However, whether that principle should be applied so as to classify an external administrator of an RE as an officer of that RE may depend on:
• the type of duty or obligation, and
• the type of external administrator.
Type of duty
There is a clear policy rationale for excluding external administrators of an RE from being officers of that RE in relation to the ‘best interests’ duty.
Officers of a company must place the interests of the company above their own where there is a conflict between the two sets of interests. Where a company is solvent, the company’s interests are reflected in the interests of the company’s members. However, when the company is insolvent or likely to become insolvent, the company’s interests are reflected in the interests of the company’s creditors.1013 There is therefore no problem if external administrators are treated as officers of an insolvent company, given that their duties in both roles focus on the interests of creditors.
By contrast, for schemes, in addition to the duties that officers of an RE have in that capacity (including to prefer the RE’s interests to their own):
• the RE has duties to scheme members (s 601FC)
• the officers of the RE have duties to scheme members that are similar to, and thus reinforce, those of the RE (s 601FD)1014
• the RE’s officers (as well as the RE itself) must prefer the interests of scheme members to those of the RE when there is a conflict between the two sets of interests (ss 601FC and 601FD).1015
As indicated in the Norman and Owen cases, this legislative structure does not readily lend itself to treating external administrators of the RE as officers of the RE. External
1012 [2012] FCA 313. The Court in the Owen decision (at [40]) said that the comment of the Full Court of the Federal Court in Norman; Re Forest Enterprises Ltd v FEA Plantation Ltd [2011] FCAFC 99 (at [208]) that it was ‘not persuaded that [the judge at first instance] erred in the ultimate conclusion to which he came’ was neutral, neither expressly supporting nor expressly refuting the reasoning of the Court at first instance.
1013 Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722.
1014 The ALRC/CASAC report (at para 10.16) said that investors should be able to take action to enforce their rights against the officers of the RE directly, without first proceeding against the RE itself. The Court in Norman, in the matter of Forest Enterprises Australia Ltd (admin apptd) (recs and mgrs apptd) v FEA Plantations Ltd (admin apptd) (recs apptd) [2010] FCA 1274 at [41] saw the object of the imposition of duties on officers of the RE in s 601FD(1) as being ‘to complement the duties owed by the responsible entity’. This observation was quoted in Owen, in the matter of RiverCity Motorway Pty Limited (Administrators Appointed) (Receivers and Managers Appointed) v Madden (No 3) [2012] FCA 313 at [30].
1015 s 601FD(1)(c).
External administration
administrators of the RE would encounter a conflict between their duties to creditors of the
RE and their duties, as officers of the RE, to members of the scheme.
However, it is not clear why external administrators should not be subject to the duties to act honestly, exercise care and diligence and not misuse information or their position or why they should not have obligations to assist ASIC and the auditor of the compliance plan.1016 In relation to compliance, the external administrator may be the only person in a position to act, given that directors often resign on the appointment of the external administrator and, where an administrator or a liquidator is appointed, the powers of directors and other officers are suspended.1017 Compliance may involve ensuring that the RE complies with its general legal obligations in respect of the scheme (such as the preparation of scheme accounts and reporting to scheme members) as well as ensuring compliance with the scheme requirements in Chapter 5C.
One approach to the potential for conflict inherent in applying the ‘best interests’ duty to external administrators of the RE is to ensure that an external administrator of the RE is not an officer of the company in this context. If necessary, the approach adopted by the courts could be confirmed by legislative amendment.
An alternative approach is to treat an external administrator of the RE as an officer of the
RE, but ensure that there is no potential for conflict arising out of the ‘best interests’ duty.
If the SLE Proposal is adopted,1018 the treatment of schemes would be aligned with that of companies in that the ‘best interests’ duty would be owed to the MIS (which is the separate legal entity under that Proposal and has rights and obligations analogous to those of a company), rather than to scheme members. In that case, the duty of the RE and its officers to the MIS would operate in the same way as a director’s duty to the company: it would focus on the interests of members while the scheme was solvent and on the interests of creditors when the scheme was, or was likely to become, insolvent.1019 There would therefore be no problem in treating an external administrator of the RE as an officer of the RE.
A similar result could be achieved if the SLE Proposal is not adopted, though in a less straightforward manner. A possible approach would be to modify the ‘best interests’ duty, though the modified duty would need to distinguish between solvent schemes and insolvent schemes, so that:
• while the scheme is solvent the duty would be owed to the members
• when the scheme is insolvent (or likely to become insolvent), the officers would have to take into account the interests of creditors of the RE in relation to the scheme to the extent (if any) that the RE has recourse to scheme property to meet the debts.1020
A modification of the ‘best interests’ duty along these lines may enable officers of the RE, including external administrators if they came within that definition, to respond more
1016 ss 601FF, 601HG(6).
1017 ss 437C (administrators), 471A(liquidators).
1018 The SLE Proposal is summarised in Section 1.1.1 of this paper.
1019 CAMAC proposed in the 2012 CAMAC report (Section 6.3.2) that 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.
1020 The suggested operation of the ‘best interests’ duty, whether under the SLE Proposal or the alternative approach, is consistent with Section 7.5.7 of the 2012 CAMAC report, which did not favour the liquidator of a scheme having any statutory duty to scheme members.
External administration
appropriately to the circumstances of the scheme. They could have regard to the interests of scheme creditors when the scheme was insolvent. Equally, they could protect the interests of scheme members in those situations where the RE is in external administration but the scheme itself is solvent.
Type of external administrator
It may be appropriate to treat administrators and liquidators of an RE as officers of the RE, as:
• the powers of other company officers are suspended when an administrator or liquidator is appointed to the company1021
• they have control over all the RE’s affairs.
Similarly, it may be appropriate to treat as an officer of the RE a receiver and manager appointed to take control of the whole, or substantially the whole, of the RE’s property,1022 given the control that such a person has over the RE’s affairs.
By contrast, it may not be appropriate to treat a receiver appointed only to some of the
RE’s property as an officer of the RE, given that:
A receiver, particularly a receiver who is not also a manager, plays no part in the administration of a scheme nor in the decisions regarding the investment of scheme assets.1023
If a voluntary administration procedure is introduced for managed investment schemes,1024 there may also be a potential for conflict of duties for an administrator who is appointed to the RE and to one of the schemes that it operates. This potential conflict would be avoided by a requirement that each newly-established scheme be operated by a sole-function RE.
Question 12.4.1. Should the definition of ‘officer of a corporation’ be amended to clarify whether an external administrator of the RE of a managed investment scheme is, or is not, covered by the definition?
Question 12.4.2. If it is made clear that the definition extends to external administrators of an RE:
• should it apply to all provisions affecting officers of the RE and, if not, which provisions should be excluded and why
• should it apply to all external administrators of the RE and, if not, which categories of external administrator should be excluded and why?
Question 12.4.3. Should the duty of officers of the RE to act in the best interests of members be modified to allow for the situation where the scheme is, or is likely to become, insolvent?
1021 ss 437C (administrators), 471A(liquidators).
1022 cf s 441A.
1023 Norman, in the matter of Forest Enterprises Australia Ltd (admin apptd) (recs and mgrs apptd) v FEA Plantations Ltd (admin apptd) (recs apptd) [2010] FCA 1274 at [41], quoted in Owen, in the matter of RiverCity Motorway Pty Limited (Administrators Appointed) (Receivers and Managers Appointed) v Madden (No 3) [2012] FCA 313 at [30].
1024 2012 CAMAC report Chapter 6.
External administration
12.5 Notification of appointment of receiver
The issue
The provisions requiring notification of the appointment of a receiver to property of a company may give a misleading impression of the financial condition of some companies and may cause particular problems when applied to the RE or a corporate custodian of a managed investment scheme.
Current position
When a person appoints a receiver to property held by a company:1025
• the person must lodge with ASIC a form giving notice of the appointment within
7 days.1026 Once ASIC has processed the form, the letters ‘EXAD’ (indicating that an external administrator has been appointed) appear against the company’s name when a
search of the company name is done on the ASIC website
• the company must set out in every public document and negotiable instrument, after its name first appears, that a receiver or receiver and manager has been appointed.1027
These notification requirements apply in the context of a managed investment scheme:
• whether the receiver is appointed to all of the property held by an RE or by a corporate custodian or to a particular item or particular items of property
• whether the receiver is appointed to personal assets of the RE or a corporate custodian or to scheme property that is held on trust for scheme members by the RE or by a corporate custodian.1028
Analysis and discussion
The notification requirements do not provide any means for indicating:
• how much of the property of the company is affected by the appointment of a receiver
(the partial appointment issue), or
• the capacity in which the company holds the property to which a receiver has been appointed (the capacity issue).
The partial appointment issue can affect any company that has had a receiver appointed to some of its property, even though other company property is unaffected and the company remains solvent.
The capacity issue affects any company that holds property on trust. This issue is particularly relevant to an RE, which must hold scheme property on trust for scheme
1025 The notification requirements refer to ‘a corporation’. ‘Corporation’ includes a company: s 57A. The discussion in this section of this paper refers to a ‘company’, as an RE must be a public company: s 601FA.
1026 s 427, Form 504.
1027 s 428.
1028 The RE (or a custodian if one is engaged by the RE) holds the legal title to scheme property. The definition of
‘property’ in s 9 extends to a legal or equitable estate or interest (whether present or future and whether vested or contingent) in any real or personal property.
External administration
members.1029 The notification requirements do not enable a distinction to be drawn between:
• an appointment to scheme property of a scheme that the RE operates, and
• an appointment to the RE’s personal assets due to financial difficulties that the RE is experiencing in relation to its own affairs.1030
In the case of an appointment to scheme property, there is no means of indicating that the RE is not itself insolvent or otherwise in financial difficulties and that the property to which the receiver has been appointed is scheme property held on trust for scheme members. The notification requirements may therefore mislead creditors or investors about the financial state of the RE.
Conversely, in the case of an appointment to the RE’s personal assets, the notification requirements may mislead the market about the financial state of a scheme for which it is the RE.
This lack of detail may not unduly affect a sole-function RE, whose affairs are identical to those of the scheme that it operates. If a receiver is appointed to the scheme property, public notification that a receiver has been appointed to property held by the RE would not be misleading (unless the partial appointment issue is relevant).
However, the capacity issue is more likely to affect a multi-function RE. If a receiver is appointed to property held by a multi-function RE in relation to one of its schemes, there is no scope for the notification to specify that the appointment relates to property of that scheme and not to property that the RE holds for other schemes or to the RE’s personal assets. A multi-function RE that has sufficient assets of its own may choose to prevent the appointment of a receiver (and any consequential reputational damage to itself and to the other schemes that it operates) by paying the relevant debt. However, a multi-function RE that only operates schemes, and does not own any substantial property apart from sufficient capital to satisfy the minimum capital requirements of its licence, may not be in a position to pay the debt.
In addition, in most cases, REs enter into transactions on a limited recourse basis, so that their personal liability for the relevant debts is limited to the amount that they are entitled to recover out of the scheme property under their indemnity rights.1031 The notification requirements may detract from the benefits of using limited recourse financing, as a secured creditor who has not been paid in full may appoint a receiver to the relevant property, thus triggering the notification requirements, even where the RE is solvent.1032
This factor affects any company that utilises limited recourse financing, including sole-purpose REs as well as multi-purpose REs.
Similar problems to those discussed above may affect corporate custodians who hold scheme property on behalf of the RE.
1029 s 601FC(2).
1030 These affairs include the RE’s right to be the RE of the scheme and the right of indemnity that goes with that role.
1031 Depending on the terms of the financing agreement, the limitation of the RE’s liability may be to the amount that can be realised from a particular asset or assets or to the RE’s indemnity rights against all of the scheme property for the relevant scheme.
1032 The RE can be solvent even though the full amount of the debt is not paid, as the limited recourse rights agreed to by the lender mean that the RE is not liable for any shortfall remaining after realisation of the security property.
External administration
The problems for REs and corporate custodians would be resolved if the notification requirements in relation to the appointment of a receiver enabled a notification to make clear the capacity in which the receiver had been appointed.
One way to achieve this goal, at least in relation to the capacity issue, would be through adoption of the SLE Proposal,1033 as the scheme property to which a receiver is appointed would be held by the MIS, not by the RE, and any notification requirements would apply to the MIS, not to the RE. The RE would be an agent only and neither its personal assets nor the property of any other schemes that it operates would be affected.
If the SLE Proposal is not adopted, a requirement that each newly-established scheme be operated by a sole-function RE would avoid the capacity issue (but not the partial appointment issue).
Question 12.5.1. Should the public notification requirements on appointment of a receiver to property of a corporation be amended and, if so, how?
Question 12.5.2. How significant is the problem identified in this section in practice?
1033 The SLE Proposal is summarised in Section 1.1.1 of this paper.
Regulatory powers and enforcement
13 Regulatory powers and enforcement
This chapter discusses ASIC’s powers in relation to schemes. It also examines the consequences for transactions of contraventions of the managed investment provisions.
13.1 Modification and exemption powers
The issue
Should ASIC’s discretionary exemption and modification powers in relation to schemes be expanded?
Should ASIC have the power in all instances to extend the period for doing an act after that period has ended?
Current position
ASIC has the power to:
• exempt a person from some or all of the provisions of Chapter 5C of the Corporations
Act in relation to some or all persons
• modify the operation of specified provisions in Chapter 5C in relation to some or all persons.1034
ASIC also has a range of other modification powers that are relevant to registered schemes.1035
However, ASIC does not have modification powers in relation to:
• the provisions governing meetings of members of registered managed investment schemes (except in very limited circumstances)1036
• the ‘disclosing entity’ provisions in Part 1.2A of the Corporations Act, which are relevant to the continuous disclosure requirements1037
1034 s 601QA. Regulatory Guide 136 Managed investments: Discretionary powers and closely related schemes gives guidance on when ASIC will give relief.
1035 For instance, Part 2M.6 (financial reports and audit), s 655A (takeovers)
1036 Most of the provisions governing scheme meetings are in Part 2G.4. ASIC has no modification and exemption powers in relation to these provisions.
ASIC can use its Chapter 5C modification powers where the requirement for a meeting is in Chapter 5C itself. For instance, under s 601FL, an RE that wants to retire must call a meeting of members to explain its reasons
and to enable the members to vote on a resolution to choose a new RE. Similarly, a meeting is required to pass a
special resolution to effect a change to the scheme’s constitution under s 601GC. If ASIC is exercising its powers under s 601QA to modify s 601FL or s 601GC, it could, as part of the modification, impose procedural requirements that would change what would otherwise occur under Part 2G.4. This approach requires the drafting of unduly complex instruments.
1037 ASIC has exemption and modification powers in relation to the ‘disclosing entity provisions’: Part 1.2A Div 4.
However, the expression ‘disclosing entity provisions’ is defined to cover only Chapter 2M (financial reports and audit) as it applies to disclosing entities and ss 674 and 675 (the continuous disclosure provisions), not Part 1.2A itself. The absence of any ASIC modification powers in relation to the disclosing entity provisions in Part 1.2A is discussed in Section 14.1 of this paper in relation to recognised New Zealand schemes.
Regulatory powers and enforcement
• the registers provisions in Chapter 2C of the Corporations Act
• the mutual recognition provisions in Chapter 8 of the Corporations Act (discussed further in Section 14.1 of this paper).
In addition, there may be limitations on ASIC’s ability to extend the period for doing an act required by the Corporations Act. Section 70 of the Corporations Act provides:
Where this Act confers power to extend the period for doing an act, an application for the exercise of the power may be made, and the power may be exercised, even if the period, or the period as last extended, as the case requires, has ended.
Many of the statutory obligations in the Corporations Act do not include a power for ASIC to extend the period for complying with the obligation.1038 Section 70 may therefore not enable a person to make, or ASIC to deal with, an extension application after the end of the statutory period.
Analysis and discussion
The limitations on ASIC’s ability to provide relief through the exercise of its exemption and modification powers arise regardless of whether the powers relate to companies or schemes, though the difficulties experienced to date have related to schemes.
It may be particularly desirable for ASIC to have the same administrative flexibility in relation to companies and schemes, especially where an exemption or modification application relates to a stapled entity.1039
The need for ASIC to have relief powers may currently be greater for schemes than for companies in relation to the provisions governing meetings, given that some of the meetings provisions for companies can be overridden by a company’s constitution,1040 whereas equivalent schemes provisions cannot be altered by a scheme’s constitution. However, CAMAC has raised for consideration whether the meeting provisions for companies and schemes should be brought into alignment (see Chapter 8 of this paper).
Question 13.1.1. Should ASIC have powers to make modifications and exemptions in relation to:
• the provisions governing meetings
• the ‘disclosing entity’ provisions in Part 1.2A of the Corporations Act
• the registers provisions in Chapter 2C of the Corporations Act
• the mutual recognition provisions in Chapter 8 of the Corporations Act
• any other provisions where it currently lacks this power?
Question 13.1.2. Should these powers apply equally to schemes and companies and, if not, why not?
1038 For instance, s 315 (deadline for financial reporting to members).
1039 In a stapled structure, investors hold shares in a company (which usually takes the active role of operating the enterprise) and interests in a scheme (through which the property of the enterprise is held) and the company shares and scheme interests can only be purchased and sold together.
1040 The relevant provisions are categorized as replaceable rules (s 135).
Regulatory powers and enforcement
Question 13.1.3. Should ASIC have the power in all instances to extend the period for doing an act after that period has ended?
13.2 Supervisory and enforcement powers
The issues
What, if any, additional powers should ASIC have?
What, if any, breaches not currently covered by the civil penalty regime should be covered by that regime (for instance, breaches of the withdrawal provisions in Part 5C.6)?
Current position
ASIC has a range of surveillance, information-gathering, investigative and enforcement powers that it can use in relation to schemes. These powers are contained in the Corporations Act (the managed investment scheme provisions in Chapter 5C, the licensing provisions in Chapter 7 and various provisions concerning offences and court powers1041) and in the ASIC Act (Parts 3 and 3A).1042
ASIC’s enforcement powers include the power to apply for a declaration of contravention, a pecuniary penalty order or a compensation order.1043 These civil penalties, which came into effect in 1993, provide a more expeditious means of enforcing some parts of the Corporations Act than a criminal prosecution. Civil penalties are available on proof to the civil standard that a contravention has occurred.
When the court is satisfied that a person has contravened one of the civil penalty provisions, it must make a declaration of contravention.1044 A declaration of contravention opens the way to a range of further regulatory options. Once a declaration of contravention has been made in relation to a person, a court can also order the person to pay a pecuniary penalty.1045 The court may also disqualify a person from managing corporations if a declaration of contravention has been made in relation to the person.1046
The range of provisions that are ‘civil penalty provisions’1047 was expanded in 1998 (including by adding to the list of civil penalty provisions some provisions in the newly introduced Chapter 5C dealing with managed investments) and 2001.1048 In relation to schemes, the relevant regulatory requirements that attract the civil penalty provisions are:
1041 For instance, ss 1315 (power to commence proceedings), 1317J (power to apply for a declaration of contravention, a pecuniary penalty or a compensation order for breach of a civil penalty provision) and 1323,
1324 and 1325 (powers to seek preservative orders, injunctions, and orders affecting contracts or requiring the payment of damages).
1042 See further CCH Managed Investments Law and Practice (looseleaf) at ¶70-300-¶70-400.
1043 s 1317J.
1044 s 1317E.
1045 s 1317G. The court can also make a compensation order if a civil penalty provision has been contravened, whether or not a declaration of contravention has been made: s 1317H.
1046 s 206C.
1047 s 1317E(1).
1048 Company Law Review Act 1998, Managed Investments Act 1998, Financial Services Reform Act 2001. See further HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at [3.400].
Regulatory powers and enforcement
• the related party provisions1049
• the duties of the RE and its officers and employees1050
• the provision governing acquisition of an interest in a scheme by its RE1051
• the duties of members of a compliance committee1052
• the financial records requirements and the financial reporting requirements1053
• the continuous disclosure provisions1054
• various market offences.1055
Analysis and discussion
Some additional enforcement powers may assist ASIC in regulating managed investment schemes.
For instance, the scheme’s constitution and compliance plan are key elements of the governance framework for schemes (see Sections 5.2.2 and 5.3.1 of this paper). ASIC has the power to check whether an RE is complying with the constitution and compliance plan.1056 This power might be complemented by powers:
• to require production of any document
• to require disclosure of information known to an agent (or former agent) or other person engaged by the RE.
Also, Product Disclosure Statements and periodic statements are important elements of the disclosure framework for schemes (see Sections 10.4.3 and 10.6, respectively, of this paper). It may be beneficial for ASIC to have the power to require additional content for these documents.
Furthermore, it may assist effective enforcement if provisions applicable to schemes that are not currently subject to the civil penalty regime are made subject to that regime. For instance, the provisions governing withdrawal from a scheme (Part 5C.6) are not civil penalty provisions. By contrast, the various provisions relating to share capital transactions attract the civil penalty regime.1057 These share capital provisions can provide a means for a company shareholder to withdraw from the company.
1049 ss 601LA (which applies the related party transaction provisions in Chapter 2E to a registered scheme), 209(2) (which is the civil penalty provision) and 1317E(1)(b).
1050 ss 601FC(5), 601FD(3), 601FE(3), 1317E(1)(f)-(h).
1051 ss 601FG(2), 1317E(1)(i).
1052 ss 601JD(3), 1317E(1)(j).
1053 ss 344, 1317E(1)(d).
1054 ss 674(2), 674(2A), 675(2), 675(2A), 1317E(1)(jaab).
1055 ss 1041A (market manipulation), 1041B(1) (false trading and market rigging – creating a false or misleading appearance of active trading), 1041C(1) (false trading and market rigging – artificially maintaining market price), 1041D (dissemination of information about illegal transactions), 1043A(1), (2) (insider trading),
1317E(1)(jb)-(jg).
1056 s 601FF.
1057 ss 254L(2), 256D(3), 259F(2), 260D(2), 1317E(1)(c).
Regulatory powers and enforcement
CAMAC’s general approach is that the regulatory regime for managed investment schemes should be aligned with that for companies, unless there are compelling reasons for treating schemes differently. On that basis, the withdrawal provisions might constitute civil penalty provisions if they are seen as performing a capital management function similar to that performed by the company share transaction provisions, at least in certain respects.
Question 13.2.1. What, if any, additional powers should ASIC have in relation to managed investment schemes and why?
Question 13.2.2. Should the withdrawal provisions in Part 5C.6 be governed by the civil penalty regime?
Question 13.2.3. Should any other provisions in Chapter 5C not currently subject to the civil penalty regime be governed by that regime and, if so, what provisions?
13.3 Consequences of contraventions for transactions
The issue
The Corporations Act does not specify the consequences of a contravention of particular provisions in Chapter 5C for relevant transactions. This may lead to commercial uncertainty or require litigation to determine whether a transaction that involves a contravention is valid or enforceable.
Current position
Some Corporations Act provisions specify whether a transaction that contravenes a particular provision is or is not invalid.1058 However, none of the managed investment provisions state whether or not a contravention of those provisions causes invalidity.
Also, s 103 of the Corporations Act provides that an ‘act, transaction, agreement, instrument, matter or thing is not invalid merely because of a contravention of’ certain provisions. However, these provisions do not include any of the managed investment provisions in Chapter 5C.
Section 103 ‘has been taken not to imply that contravention of other sections does involve invalidity’.1059 Where there is no indication of whether a contravention of a provision causes invalidity, ‘it is necessary to apply the principles of the general law of contract dealing with illegal contracts’.1060 There are various factors relevant to a determination of whether Parliament ‘has shown an intention to invalidate a contract associated with a contravention’, ‘none of which by itself is determinative’:1061
• whether the provision is for the protection of the public (or a section of the public) or something else, such as the revenue — if not, invalidation was not intended
• whether a penalty is prescribed — absence of a penalty points to invalidation
1058 See, for instance, ss 125, 191, 192, 195, 201M, 204E.
1059 HAJ Ford, RP Austin, IM Ramsay, Ford’s Principles of Corporations Law (LexisNexis Butterworths, looseleaf) at [3.430], citing Re Macro Constructions Pty Ltd [1994] 2 Qd R 31; (1992) 8 ACSR 719; 10 ACLC
1722.
1060 ibid.
1061 ibid.
Regulatory powers and enforcement
• the type of any prescribed penalty
• the size of any penalty relative to loss arising from invalidation
• the effect of invalidation — whether it would create a public mischief outweighing the public benefit of invalidation.
In MacarthurCook Fund Management Limited v Zhaofeng Funds Limited,1062 the Court resolved this question in relation to one area of the managed investment provisions. It held that an offer to withdraw from a non-liquid scheme that breaches the legislation (by virtue of failing to satisfy the requirement to specify the period during which the offer would remain open1063) is not for that reason alone invalid.1064
Analysis and discussion
Uncertainty about the validity of a transaction entered into in contravention of one of the managed investment scheme provisions in Chapter 5C may cause legal and therefore commercial uncertainty. For instance, an RE may purport to amend a scheme constitution unilaterally on the basis that the RE ‘reasonably considers the change will not adversely affect members’ rights’.1065 Outside parties may be reluctant to enter into transactions that depend on the amendment if there is a risk that litigation may be necessary to determine the validity of those transactions.
Although a court may be reluctant to find that transactions are invalid in some circumstances (particularly where third parties have obtained rights1066), the risk of invalidity remains in the absence of a clear legislative statement about the consequences of a contravention.
Question 13.3.1. Should the consequences of contravention of any of the managed investment provisions for relevant transactions be stipulated in the Corporations Act?
Question 13.3.2. In particular, should certain provisions state that a contravention will not render any associated transactions invalid? If so, which provisions?
1062 [2012] NSWSC 911.
1063 s 601KB(3)(a).
1064 See further CCH Managed Investments Law and Practice (looseleaf) at ¶13-300.
1065 s 601FC(1)(b). This amendment power of the RE is discussed in Section 6.3 of this paper.
1066 In Premium Income Fund Action Group Incorporated v Wellington Capital Limited [2011] FCA 698, the Court refused to hold that an issue of units was invalid, in view of the fact that it may not be possible to identify or trace the purchasers of newly traded units for the purpose of preventing the exercise of their rights as unit holders (at [50]).
International aspects
14 International aspects
This chapter discusses the provisions that facilitate the marketing of New Zealand schemes in Australia. It also raises for consideration the possible implementation in Australian law of international principles for the regulation of managed investment schemes and whether the Australian regulatory framework should be expanded to accommodate alternative managed investment structures.
14.1 Recognised New Zealand schemes
The issues
Should a dispute resolution procedure be available at all times to persons who invest in recognised New Zealand schemes, regardless of whether any of those investors continue to reside in Australia?
Is it appropriate that a New Zealand entity that is listed in Australia is regulated as an unlisted disclosing entity?
Current position
Overview of the provisions
Chapter 8 of the Corporations Act (in combination with Chapter 8 of the Corporations Regulations) enables securities that comply with the New Zealand securities law to be marketed in Australia without having to comply with the substantive requirements of the securities, fundraising and licensing provisions of the Corporations Act.1067 New Zealand has reciprocal provisions for Australian schemes.1068
Where an offer of interests in a New Zealand scheme meets the requirements of Chapter 8,1069 the New Zealand scheme does not need to apply to be registered by ASIC and the trustee of that scheme does not need to prepare a Product Disclosure Statement or hold an Australian financial services licence for the purposes of an initial public offer or any secondary offer.
1067 s 1200F. Chapter 8, introduced by the Corporations (NZ Closer Economic Relations) and Other Legislation Amendment Act 2007, provides a general mechanism for mutual recognition of securities offers by entities registered in other jurisdictions. So far New Zealand is the only other jurisdiction to be recognised: definition of
‘recognised jurisdiction’ in s 1200(1), Corp Reg 8.1.03. However, the provisions ‘are drafted in such a way that they could be extended to other countries if comparable arrangements were reached with them’ (Explanatory Memorandum to the Bill for the Corporations (NZ Closer Economic Relations) and Other Legislation Amendment Act 2007, para 1.7; see also paras 5.7, 5.36-5.41).
Chapter 8 implements the Agreement between the Government of Australia and the Government of New Zealand in relation to Mutual Recognition of Securities Offerings, agreed between Australia and New Zealand in February 2006. The initiative is ‘consistent with the Australia-New Zealand Closer Economic Relations Trade Agreement which has shaped the economic and trade relationship between the two nations since 1983’ (Explanatory Memorandum para 1.3).
1068 Securities Act 1978 (NZ) Part 5.
1069 Part 8.2 Div 1.
International aspects
A New Zealand issuer who wants to make an offer of interests in a managed investment scheme in Australia under the Chapter 8 regime (a ‘recognised offer’1070) must:
• prepare disclosure required under Part 2 of the Securities Act 1978 (New Zealand),1071
and
• lodge with ASIC a written notice of the intention to make the offer, including an offer document that is accompanied by a warning statement.1072 The issuer must also notify the New Zealand Companies Office.
Requirement to have a dispute resolution scheme
A New Zealand offeror of interests in a managed investment scheme1073 who comes within Chapter 8 of the Corporations Act must have the same type of dispute resolution process as a person who is required to give a Product Disclosure Statement.1074 That process must consist of:
• an internal dispute resolution procedure that complies with ASIC-approved standards and covers complaints by retail clients, and
• membership of an external dispute resolution scheme that is approved by ASIC and covers complaints by retail clients.
The New Zealand offeror must have this process ‘at all times when the person’s records indicate that someone who resides in this jurisdiction holds securities in the class of securities that was the subject of the recognised offer’.1075
ASIC can exempt a person from the requirement to have a dispute resolution process, subject to any conditions that ASIC may impose.1076 A person to whom ASIC has given an exemption has no express statutory obligation to comply with any conditions imposed by ASIC. This contrasts with ASIC’s exemption and modification power in relation to the managed investment provisions in Chapter 5C.1077
Application of the continuous disclosure provisions
A New Zealand scheme is only a disclosing entity (and therefore subject to the continuous disclosure requirements in Chapter 6CA of the Corporations Act) if 100 or more people who reside in Australia have held interests in the scheme at all times as a result of a recognised offer since the interests were issued.1078
1070 For the concept of ‘recognised offer’, see s 9 definition of recognised offer, ss 1200B and 1200C and
Corp Regs 8.1.03 and 8.2.01.
1071 This Act will eventually be replaced by the Financial Markets Conduct Act 2013 (New Zealand). It will be necessary to amend Chapter 8 of the Corporations Regulations.
1072 s 1200D.
1073 This covers offers of primary and secondary interests in those schemes. See Section 16.3 of this paper for a discussion of the concepts of ‘primary’ and ‘secondary’ interests.
1074 s 1200J (the Chapter 8 dispute resolution requirement), s 1017G(2) (the PDS dispute resolution requirement).
1075 s 1200J(1).
1076 s 1200J(3).
1077 s 601QA(3).
1078 s 111AFA(2). This provision refers to people who reside ‘in this jurisdiction’. Section 9 defines ‘this jurisdiction’ as referring to the geographical area consisting of each of the States, the Australian Capital Territory, the Northern Territory and, in some circumstances, an external Territory.
International aspects
A New Zealand scheme cannot be a listed disclosing entity: it can only be an unlisted disclosing entity, even if it is listed on an Australian exchange (and on the New Zealand Stock Exchange).1079
New Zealand schemes, whether or not they are listed, are therefore required to lodge their continuous disclosure notices with ASIC.1080 Currently, there is only one listed New Zealand scheme in this situation: it is the only listed entity that is not required by the Corporations Act to lodge its continuous disclosure notices with the exchange on which it is listed. ASIC has no power to modify the disclosing entity provisions in Part 1.2A of the Corporations Act to overcome this situation.
Analysis and discussion
Requirement to have a dispute resolution scheme
The requirement for a New Zealand offeror to maintain a dispute resolution process does not apply where the only persons holding interests in the scheme are not resident in Australia,1081 even if they were in Australia when they received the recognised offer. The policy rationale for linking continuing residence and Australian dispute resolution requirements is unclear. It may be that a dispute resolution process is seen as being primarily for the benefit of resident investors. However, if that is the case, it is curious that investors who reside outside Australia have access to a dispute resolution procedure if they
This is the only category of disclosing entity that could apply to a recognised New Zealand scheme. A scheme is a disclosing entity if any interests in the scheme are ED securities: s 111AC(2). The possible categories of ED security are set out in s 111AD(1). The category covered by the 100 person test in s 111AFA(2) is one of those categories. The other categories do not apply to recognised New Zealand schemes for various reasons:
• s 111AE(1A) (managed investment products of a scheme that is included in the official list of a prescribed financial market) only applies to managed investment products of registered schemes. A recognised New
Zealand scheme is not a registered scheme for the reasons set out in the next footnote. Also, the concept of
‘managed investment product’ relates only to registered schemes (definitions of ‘managed investment product’ in ss 9 and 761A, s 764A(1)(b))
• s 111AF only applies to companies. It contains a 100 person test that is the equivalent of s 111AFA
• s 111AG (securities issued as consideration for an acquisition under an off-market takeover bid or Part 5.1 compromise or arrangement) only applies to ‘securities of a body’, which does not include interests in a
scheme. The continuous disclosure provisions refer to interests in a scheme as being ‘issued by a body’ rather than as being securities ‘of a body’ (see s 111AFA). Also, the scheme provisions in Part 5.1 only apply to a ‘Part 5.1 body’, which is defined under s 9 as a company and a registrable body under Part 5B.2 of the Act
• s 111AI only applies to debentures.
1079 A New Zealand scheme listed on an Australian exchange is not a ‘listed disclosing entity’ as defined in the
Corporations Act, as:
• an entity is a ‘listed disclosing entity’ if ‘all or any ED securities of the entity are quoted ED securities’ (definition of ‘listed disclosing entity in s 9, s 111AL(1))
• securities are only ‘quoted ED securities’ if they are ED securities because of s 111AE (definition of
‘quoted ED securities’ in s 9, s 111AM)
• the part of s 111AE relating to managed investment schemes (s 111AE(1A)) applies only to ‘registered schemes’
• a ‘registered scheme’ is one that is registered under s 601EB of the Corporations Act (definition of
‘registered scheme’ in s 9)
• schemes not registered in Australia, including those making a recognised offer under Chapter 8, are not
‘registered schemes’ under the Corporations Act.
Therefore, a recognised New Zealand scheme can only be a disclosing entity, if at all, as an unlisted disclosing entity, given that ‘a disclosing entity that is not a listed disclosing entity is an unlisted disclosing entity’ (s 111AL(2)).
1080 s 675. See, however, the discussion of ASIC Regulatory Guide 198 in Section 10.7.2 of this paper. That Regulatory Guide allows disclosure on a website for unlisted disclosing entities as an alternative to lodgement of a continuous disclosure notice with ASIC.
The continuous disclosure requirement for listed disclosing entities is in s 674.
1081 The section refers to the client not being in ‘this jurisdiction’. Section 9 defines ‘this jurisdiction’ as referring to the geographical area consisting of each of the States, the Australian Capital Territory, the Northern Territory and, in some circumstances, an external Territory.
International aspects
invested under a recognised offer received in Australia as long as there is at least one resident investor, but cease to have this access once all investors are non-resident.
In CAMAC’s view, a dispute resolution procedure should continue to be available while there are investors who have invested in a New Zealand scheme under a recognised offer, whether or not the scheme has any investors who reside in Australia.
Also, the absence of an express statutory obligation for a person who has been given an exemption from the Chapter 8 mutual recognition provisions to comply with conditions to which that exemption is subject appears to be an oversight and should be rectified.
Application of the continuous disclosure provisions
It is desirable that a listed New Zealand scheme be treated as a listed disclosing entity for the purpose of the continuous disclosure provisions.
This result could be achieved by a legislative amendment to the disclosing entity definitions or by giving ASIC the power to modify those definitions in appropriate cases. The chosen solution would need to take into account that the current continuous disclosure obligations for a listed disclosing entity are imposed on the RE of a registered scheme.1082
A New Zealand scheme is not a registered scheme and does not have an RE (given that only a registered scheme has an RE, as defined).1083
Question 14.1.1. Should the dispute resolution requirement for recognised New Zealand schemes be changed so that it applies regardless of whether any scheme members are resident in Australia?
Question 14.1.2. Where ASIC has given an exemption from the requirement for an offeror of interests in a recognised New Zealand scheme to have a dispute resolution procedure, should there be an express statutory obligation for that offeror to comply with any condition that ASIC imposes on the exemption?
Question 14.1.3. Should overseas schemes operating in Australia under Chapter 8 of the Corporations Act and listed on an Australian exchange be treated as listed disclosing entities for the purpose of the continuous disclosure provisions and, if so, how (for instance, by amendment of the disclosing entity definitions or by giving ASIC a power to modify those definitions in appropriate circumstances)?
Question 14.1.4. Are there any other aspects of the Chapter 8 provisions that require modification?
14.2 Implementation of IOSCO principles
The issue
There are internationally recognised standards of securities regulation, including for the regulation of managed investment schemes.
Some of these standards are not reflected in Australia’s regulatory framework for schemes. The issue is whether the Corporations Act should be amended to implement these standards.
1082 s 674(3).
1083 Definition of ‘responsible entity’ in s 9.
International aspects
Current position
The International Organization of Securities Commissions (IOSCO) has published
Objectives and Principles of Securities Regulation (June 2010), which sets out 38
Principles of securities regulation. These Principles are based on three Objectives:
• protecting investors
• ensuring that markets are fair, efficient and transparent
• reducing systemic risk.
Members of IOSCO are expected ‘to cooperate in developing, implementing and promoting adherence to internationally recognised and consistent standards of regulation, oversight and enforcement’ to achieve these objectives.
Tests for assessing implementation of the IOSCO Objectives and Principles are set out in Methodology For Assessing Implementation of the IOSCO Objectives and Principles of Securities Regulation (September 2011).
ASIC is a member of IOSCO.
Items for consideration
Possible amendments to the Corporations Act to bring it more clearly into line with
IOSCO principles include:1084
• Item 1: introduction of a specific requirement for an RE’s website to disclose the identity of agents or other persons engaged in the operation of the scheme and any unusual and significant terms of their engagement1085
• Item 2: introduction of a specific requirement to disclose the form and structure of a registered managed investment scheme and information about any material risks arising from that form and structure1086
• Item 3: introduction of a specific requirement to disclose all information necessary to understand how the scheme property and assets of registered schemes are valued and information about the methodology for valuing each asset, subject to a confidentiality carve-out1087 (issues relating to valuation are discussed in Section 15.1 of this paper)
• Item 4: extend the requirement for a PDS to contain ‘any other information that might reasonably be expected to have a material influence on the decision of a reasonable person, as a retail client, whether to acquire the product’1088 so that it covers a simple
1084 The footnote to each possible area for amendment identifies the relevant IOSCO Principle and the relevant part of the Methodology For Assessing Implementation of the IOSCO Objectives and Principles of Securities Regulation (‘Methodology’).
1085 IOSCO Principle 24, Methodology Key Question 16(d).
1086 IOSCO Principle 25, Methodology Key Questions 1 and 2 (also the second paragraph of the commentary on
Principle 25).
1087 IOSCO Principle 26, Methodology Key Questions 1 and 5(e). This would build on the current s 300(13)(e), which requires that the annual report of a registered scheme include details of the value of the scheme’s assets at the end of the financial year and the basis for the valuation.
1088 s 1013E.
International aspects
managed investment scheme1089 (the disclosure requirements for simple managed investment schemes are discussed in Section 10.4.3 of this paper)
• Item 5: introduction of a specific disclosure requirement in relation to documents that confer a right on members of registered schemes1090
• Item 6: introduction of a specific requirement to disclose who is holding the scheme property or other assets of registered schemes1091
• Item 7: introduction of a specific requirement to disclose the investment policies to apply for a registered scheme1092 and a requirement to comply with the policy1093 (requirements for investment guidelines, including disclosure, are discussed in Section 5.7 of this paper)
• Item 8: introduction of a specific requirement to disclose the appointment of any external administrator or investment managers or advisers who have a significant role in relation to a registered scheme1094
• Item 9: introduction of a specific requirement for regular publication of net asset value
(NAV) per unit based on accounting standards1095 and price of interests.1096
Question 14.2.1. For each of the above items, should the Corporations Act be amended to bring it into line with the relevant IOSCO standard and, if so, how?
14.3 UCITS‐type regulatory structure for Australian funds
The issue
The current statutory regime for publicly offered managed investment schemes in Australia does not provide for the operation of certain alternative forms of collective investment vehicles that are common in overseas jurisdictions, such as UCITS funds that currently operate under a European Union (EU) Directive.1097
Current position
Managed investment schemes regulated under Chapter 5C of the Corporations Act have become one of the main forms of non-superannuation collective investment vehicle in Australia. Other collective investment vehicles operating in Australia include substantial investment funds that operate as life insurance company funds and relate to investment-linked life insurance, and investment companies.
1089 IOSCO Principle 26, Methodology Key Question 4. Section 1013E does not apply to simple managed investment schemes because of Schedule 10A Item 5C.3 of the Corporations Regulations.
1090 IOSCO Principle 26, Methodology Key Question 5(c).
1091 IOSCO Principle 26, Methodology Key Question 5(h).
1092 IOSCO Principle 26, Methodology Key Question 5(i).
1093 IOSCO Principle 26, Methodology Key Question 12.
1094 IOSCO Principle 26, Methodology Key Question 5(k).
1095 IOSCO Principle 27, Methodology Key Questions 1 and 2.
1096 IOSCO Principle 27, Methodology Key Question 7.
1097 Directive 2009/65/EC. Further obligations for UCITS are imposed under Directive 2010/42/EU, Directive
2010/43/EU, Regulation (EU) No 583/2010 and Regulation (EU) No 584/2010.
International aspects
A UCITS (Undertakings for Collective Investment in Transferable Securities) investment fund structure was introduced by a Directive of the European Economic Community in
1985.1098 A UCITS fund cannot be registered as a managed investment scheme under the
Corporations Act, as the UCITS structure does not include the equivalent of the single responsible entity. Conversely, it is not possible for a registered scheme (that is, a managed investment scheme registered under Chapter 5C of the Corporations Act) to be a UCITS fund. Additionally, the UCITS Directive constitutes a prescriptive regulatory regime, where structural requirements for a UCITS are embedded in the law for a UCITS. Essentially, the managed investment scheme regime in Chapter 5C of the Corporations Act does not contain equivalent requirements.
Analysis and discussion
Purpose of an alternative regulatory structure
An additional alternative form of investment structure may enhance access by the Australian funds industry to foreign markets and offer more product choice for Australian investors. A structure that is modelled on an established and globally recognised structure (such as UCITS funds with their specific investor protection features) may attract investors that prefer highly regulated investments and enhance the ability of industry to compete for fund-related business from foreign investors.
Features of UCITS funds
The UCITS framework has been developed to provide investor protection in the structure of the fund and marketability across EU countries. Once registered (authorised) in one EU country, a UCITS fund can be freely marketed across the EU.
UCITS have proven to be successful and widely used by European households. UCITS have also attracted investors from various other regions such as Asia and are widely recognised by professional and retail investors in the asset management industry. A key feature of UCITS that attracts investors is the favourable tax treatment that is available in the country in which UCITS are based (for example, Luxembourg).
In summary, some of the key EU requirements for a UCITS fund are that it:
• must be authorised by the home country of the fund
• must have a separate depositary, which has certain asset holding and supervisory functions1099 and must be established or have its registered office in the home country of the fund. This requirement is different from the Australian requirements for a registered scheme, which do not mandate a separate custodian. Also, where an RE chooses to engage a custodian, the custodian does not perform supervisory functions
• must only invest in:
– certain securities traded on a market
– certain money market instruments, and
1098 Directive 85/611/EEC, which was superseded by Directive 2009/65/EC.
1099 Under the European UCITS regime, an independent depositary has safekeeping duties and supervisory functions and is a central feature of the UCITS framework. While the fund manager makes investment decisions for the fund, the depositary is responsible for holding the fund’s assets in custody on behalf of investors, and such assets are segregated from those of the manager.
International aspects
– derivatives subject to certain risk limitations
• is required to have at least a degree of portfolio diversification (for instance, there are limits on the percentage of assets permitted to be invested in a single issuer or group of issuers)
• must be intended to be an open fund (that is, it must offer a redemption facility)
• must provide annual and half–yearly reports containing specified information
• must provide certain disclosure to investors when promoted, and
• in order to be promoted in another EU country, must first be approved by the home country, which must notify the other EU country of the approval.
For the UCITS framework to be operational, each country must adopt the EU requirements into its domestic law, as well as amending the domestic law, as necessary, to allow for the operation and marketing of UCITS funds.
The UCITS framework has evolved since its inception. The European Parliament and the European Council have backed a European Commission proposal to strengthen the rules for UCITS,1100 including in relation to:
• depositary functions
• remuneration policies
• administrative sanctions.
The European Commission is currently considering other changes to the UCITS
framework,1101 including in relation to:
• efficient portfolio management (in particular, transparency and best practice requirements and liquidity management) to facilitate redemption
• valuation requirements, and
• the requirements for money market instruments in which a UCITS fund can invest.
Question 14.3.1. Should the current regulatory structure for managed investment schemes in Australia be broadened to permit registration of an alternative regulatory structure that is modelled on the regulatory requirements that apply to UCITS?
Question 14.3.2. Would the ability to register a UCITS-like structure enhance the marketability of Australian investment funds to domestic and foreign investors?
Question 14.3.3. What would be the benefits, costs and risks to investors and investment managers of operating a UCITS-like structure in Australia?
1100 European Commission statement 25 February 2014. The European Commission proposal was announced in
Press Release IP/12/736 released on 3 July 2012.
1101 Consultation Document Undertakings for Collective Investments in Transferable Securities published by the
European Commission on 26 July 2012.
Other matters
15 Other matters
This chapter discusses the valuation of scheme assets, the definition of ‘financial market’ and the exception from the insider trading provisions for withdrawals from registered managed investment schemes. It also raises a general question about the alignment of corporate and scheme law.
15.1 Valuation of scheme assets and liabilities
The issue
Currently, the valuation of scheme assets and liabilities is used for two purposes:
• reporting the value of assets and liabilities in the annual financial reports and directors’ reports of schemes required under the Corporations Act1102
• the RE’s compliance with its obligations in operating the scheme, including:
– the pricing of units in the scheme, both when the units are being issued to investors and when investors apply to have their units redeemed.1103 Proper pricing of units is an important element of the RE’s duty to ‘treat the members who hold interests of the same class equally and members who hold interests of different classes fairly’1104
– the measurement of a scheme’s investment performance1105
– the determination of entitlements of the RE, as well as the entitlements of others (for instance, the entitlement of members to distributions) under the scheme constitution1106
– the determination of other expenses payable from scheme assets.1107