The High Court has reminded Responsible Entities (REs) of managed investment schemes to ensure that the actions they take are authorised by the constitution of the scheme.
Implications for Responsible Entities
The scheme constitution is the primary source of the powers and duties of an RE, subject to theCorporations Act. When determining whether an action is within power the constitutional provision relied upon should not be considered in isolation, but must be construed in the context of the scheme as a whole.
The Court said that power to make in specie distributions of scheme assets in this case was not conferred by universal or plenary power clauses commonly seen in the Australian market. The case serves as a warning that in drafting a constitution, specific power may need be conferred to enable such distributions to be made. In the case of an existing scheme, an amendment is possible.
Wellington Capital (Wellington) is the RE of a managed investment scheme now known as the Premium Income Fund (Scheme). Wellington sold approximately 41% of the assets of the Scheme to Asset Resolution Ltd (ARL) in exchange for the entire issued share capital of ARL. The ARL shares were then transferred to the unit holders of the Scheme in specie.
Wellington considered that cll 13.1 and 13.2.5 of the constitution gave it the power to make the in specietransfer. Clause 13.1 provided that the RE had:
“all the powers in respect of the Scheme that is legally possible for a natural person or corporation to have and as though it were the absolute owner of the Scheme Property and acting in its personal capacity.”
Clause 13.2.5 provided that the RE had the power to:
“acquire, dispose of, exchange, mortgage, sub-mortgage, lease, sub-lease, let, grant, release or vary any right or easement or otherwise deal with Scheme Property as if the Responsible Entity were the absolute and beneficial owner”.
The Court held that the two clauses, when read in context, were merely enabling provisions. They enabled dealings with Scheme property with third parties, but did not authorise such dealings as between the RE and unit holders. There were two other clauses which provided for return of Scheme property by way of capital, and the Court said that these were the only clauses which dealt with return of assets to unit holders. These clauses provided for return of capital by payment in cash. The Court thus held that the in specie transfer of ARL shares to unit holders was beyond power.
The Court did not answer whether the in specie transfer would have been possible with the consent of all unit holders. Nor did the Court answer whether there is a constraint upon reduction of the capital of a managed investment scheme analogous to the principle of the maintenance of capital in relation to corporations, though it observed that lower Courts had tended to answer that question in the negative.