ASIC v Wellington Capital Ltd [2013] FCAFC 52

Introduction

For those who work with managed investment schemes (MIS) or, indeed, trading trusts structured as unit trusts, the decision of the Full Court of the Federal Court in ASIC v Wellington Capital Ltd [2013] FCAFC 52 (28 May 2013) is troubling. The Court held that, despite the presence in a MIS constitution of a universal or plenary powers clause of the type commonly seen in the Australian market, a responsible entity did not have power to distribute trust assets in specie to the unit holders. In overturning an ex tempore decision of Jagot J at first instance1 the Court took a narrow interpretation of the terms of the universal powers clause. However, beyond the interpretation question, the Court appeared to conflate trustees’ powers with the duties incumbent upon them in exercising their powers. There is also some puzzling analysis, at first instance and in argument in the appeal, of the relationship between universal powers clauses in an MIS constitution and s124(1) of the Corporations Act 2001 (the Act), which gives companies the legal capacity and powers of an individual.

The decision means that parties should review their constitutions to ensure they contain an express power to distribute assets in specie, but responsible entities may also need to approach the court for forgiveness in relation to past distributions in specie where there was no such express power2. The case also raises the broader question of the operational scope and effect of universal powers clauses generally; if distributions in specie are not included, what else is not? Should parties now consider enumerating in detail all of the things they wish to empower a responsible entity or trustee to do, mimicking the pre-s124 situation with companies and their long-form memoranda of association?

In this article it is argued that universal powers clauses mean what they say and should, as a matter of commercial construction, be given the widest possible scope of operation, consistent with market expectations. Investors are protected not by a restricted interpretation of their meaning but by the inbuilt control imposed on all trustees, ie an obligation to discharge their fiduciary burden, at the core of which is the duty to act in the best interests of the beneficiaries.

The facts

A company known as Wellington Capital Ltd was the responsible entity of a managed investment scheme structured as a unit trust known as the Premium Income Fund (the Fund). Following certain transactions by which some of the Fund’s assets were transferred to a company in exchange for shares in that company, those shares were distributed in specie to the unit holders of the Fund in proportion to their unit holdings. The units were not redeemed and so unit holders ended up with both the shares and their original units (the value of which was diminished accordingly).

The Fund’s constitution contained a universal powers clause, clause 13.1, in the following terms:

The Responsible Entity shall have all the powers in respect of the Scheme that is legally possible for a natural person or corporation to have and as though it where [sic] the absolute owner of the Scheme Property and acting in its personal capacity.

The constitution also contained in clause 13.2 the usual follow-on provision setting out certain express powers, which are stated not to limit the plenary power. These did not include an express power to make distributions in specie but, in clause 13.2.5, did include the power to:

dispose of … or otherwise deal with Scheme Property as if the Responsible Entity were the absolute and beneficial owner.

Finally, there was a power to make distributions of income or capital in clause 16, but only in cash. The interpretation question turned in part on whether the reference to cash in clause 16 limited the otherwise broad powers in clauses 13.1 and 13.2 when it came to making distributions.

The Court at first instance held that the responsible entity did have sufficient power to make the distributions. On appeal this was overturned by the Full Court.