Recent development

On 5 November 2014, the High Court of Australia handed down judgment in the case Wellington Capital Limited v Australian Securities & Investments Commission [2014] HCA 43 finding that the responsible entity of a managed investment scheme did not have the power under its constitution or under the Corporations Act to distribute scheme property by way of a transfer of shares in specie to unit holders.

An in specie transfer of shares or any property under a managed investment scheme is effected when the transfer is made without selling the underlying investment.

Case overview

Wellington Capital Ltd (the responsible entity) sold assets of the Scheme to Asset Resolution Ltd (ARL) in consideration of the issue of 80,532,768 shares to the scheme's agent. Wellington then instructed its agent to transfer the ARL shares to the unit holders.

ASIC commenced proceedings seeking declarations that the distribution was beyond Wellington's power under the Scheme's constitution and contravened section 601FB(1) of the Corporations Act.

The scheme's constitution, similar to many other MIS constitutions, conferred on the responsible entity all powers legally possible for a natural person or corporation to have as though it were the absolute owner of the scheme property as well as other powers to deal with scheme property.

The High Court undertook a detailed consideration of the terms of the constitution and the Corporations Act provisions relating to managed investment schemes to conclude that the Full Federal Court was correct in making the declarations sought by ASIC.

The law

In reaching its decision, the High Court found that:

  • responsible entities cannot rely on the power under section 124 of the Corporations Act permitting a company to distribute the company's property among members because a "member" of a company is different to a "member" of a scheme; 

  • the clauses in the constitution granting the responsible entity all legal powers and other powers in relation to dealings with property were, when considered in the context of the constitution as a whole, not related to the circumstances in which assets or capital forming part of the scheme property could be returned to unit holders. In this case, there were specific clauses dealing with periodic distributions of cash to unit holders and other circumstances where there would be distributions, being the winding up of the scheme;

  • the Full Court of the Federal Court's position that absent consent of all beneficiaries it is not open to the trustee to simply transfer the trust property was too broad in the context of this case; and

  • a responsible entity's powers in relation to disposing of scheme property are determined by "the terms of the scheme constitution in light of such enhancements or constraints as are provided by statute and, subject to statute, the general law relating to trusts to the extent that it is applicable".

What do I need to do?

If your company is the responsible entity of a managed investment scheme:

  • ensure that the constitution of the scheme is sufficiently clear regarding the circumstances in which a distribution of the scheme property can be made and if not, take steps to address the issue;

  • consider whether there have been any prior distributions of property which may have been beyond your power; and

  • be aware that even if there are provisions in the scheme's constitution that suggest the responsible entity has absolute power and unfettered discretion to deal with the scheme's property, it is likely those provisions will be constrained by general trust law and Chapter 5C.2 of the Corporations Act and will be construed in the context of the constitution as a whole.