MacarthurCook Fund Management Limited v TFML Limited [2014] HCA 17

The High Court has held that redemption of units in a managed investment scheme did not constitute “withdrawal” within the meaning of Part 5C.6 of the Corporations Act 2001.

The High Court has held that the creation of an obligation for a responsible entity of a managed investment scheme to redeem an interest as part of the terms of issue of that interest is not a “withdrawal” from a managed investment scheme for the purposes of Part 5C.6 of the Corporations Act 2001 (the Act)

Part 5C.6, and specifically section 601KA, of the Act provides that if a scheme is not liquid, a responsible entity must not allow a member to withdraw from the scheme otherwise than in accordance with the scheme’s constitution and sections 601KB to 601KE of the Act. 

The defendants at trial were the two responsible entities of a unit trust comprising a registered managed investment scheme.   They were sued by two entities which had subscribed to units in the trust.  The plaintiffs argued that the defendants were required to redeem the units in accordance with the terms of their issue.  The primary judge held that such redemption did comprise a ‘withdrawal’ for the purposes of Part 5C.6, and specifically section 601KA of the Corporations Act 2001.  Accordingly, his Honour held that the withdrawal had to be in accordance with the scheme’s constitution and sections 601KB to 601KE of the Act.  The trial judge was satisfied that the constitution and those provisions of the Act had been complied with, and therefore ordered that the plaintiffs were entitled to damages for the defendants’ failure to redeem the units.

The New South Wales Court of Appeal agreed with the trial judge that the circumstances amounted to a “withdrawal” for the purposes of Part 5C.6 of the Act.  However, the Court of Appeal disagreed with the trial judge’s finding that the provisions of the constitution and sections 601KB to 601KE of the Act had been complied with.  Therefore, the appeal was allowed.

The plaintiffs at trial were, therefore, the appellants to the High Court.  The High Court considered the meaning of “withdrawal”.  The Court held that the meaning of “withdrawal” for the purposes of Part 5C.6 is that “a member withdraws from a registered scheme if the member acts so as to result in the responsible entity returning the whole or some part of the member’s contribution.”

It was further held that a withdrawal does not occur in the following two scenarios:

  1. where the responsible entity exercises a power compulsorily to redeem the interest of a member; and
  2. where the responsible entity performs an obligation to redeem which arises under the terms of issue of a class of interests, if that obligation is required by those terms to be performed independently of any act on the part of the member.

Those two circumstances do not constitute “withdrawals”, as the redemption of interests occurs without volition on the part of the member.

In the present case, the High Court held that the redemption of interests was not a “withdrawal” for the purposes of Part 5C.6, as there was an obligation to redeem as part of the terms of the issue of those interests.  Accordingly, the requisite “volition” on the part of the members was not present.  Consequently, the requirements of section 601KA(3) did not apply to the redemption.

The decision of the Court of Appeal was overturned; the appeal was allowed.