In this case, the Supreme Court of Victoria found that the fact that land was owned by the former responsible entity (RE) of a forestry scheme its own right (and was not scheme property) and that the rights of the RE to use the land were not fully documented, did not derogate from the rights of the replacement RE to continue to use the land for the purposes of the Scheme.In coming to its decision, the Court made some useful observations on the definition of scheme property and the position of a replacement RE under sections 601FS and 601FT of the Corporations Act 2001 (Cth).This case serves as a useful reminder that firstly, care should be taken in establishing a scheme to ensure that property which is intended to be scheme property (rather than property of the RE in its own right) is in fact scheme property and secondly, that to avoid uncertainty and potential dispute, arrangements between an RE and the owners of property used by the Scheme should be documented in writing (even where they may in the first instance be the same party).
Willmott Forests Ltd (WFL) was both the responsible entity (RE) of a forestry managed investment scheme (Scheme) and the registered proprietor of the land on which the Scheme operated. Investors leased land from WFL and entered into an agreement whereby WFL would carry out the forestry operations. Following the financial collapse of WFL, the Scheme members passed a resolution to replace WFL with Primary Securities Ltd (Primary) as the RE. The liquidators of WFL sought a declaration that WFL owns the land in its own right, not in its capacity as former RE (such that the land was not ‘scheme property’) and Primary sought declarations and orders that would enable it to exercise rights in respect of the land to enable it to carry out its obligations as RE.
After an extensive analysis of the facts and the relevant law, the Court found that the land was not “scheme property”. In so finding, the Court:
- rejected Primary’s argument that the land was an essential element of the Scheme and was therefore a contribution by WFL of money’s worth to the Scheme (for the purpose of paragraph (a) of the definition of scheme property in section 9 of the Corporations Act 2001 (Cth) (Act). The Court held that it is not ownership that was essential to the Scheme, but only the right to use the land;
- rejected Primary’s argument that the land was acquired with the proceeds of contributions to the Scheme and therefore came within paragraph (d) of the definition of ‘scheme property’. The Court took a formalistic approach and found (bearing in mind that the Scheme was originally set up as a prescribed interest scheme) that the fact that money from the contributions account was paid to the manager (as remuneration for its services) which in turn had an obligation to pay a portion of these funds to the representative (WFL) who would use it to purchase land, meant that the required nexus was broken; and
- rejected the liquidators’ argument that the fact that WFL had the power to create security interests over the land was inconsistent with the land being scheme property. The Court stated that a RE would also have power to mortgage assets for the purposes of the Scheme and for the benefit of investors.
The Court then went on to consider the rights that Primary was entitled to exercise in respect of the land. The Court firstly noted that:
- sections 601FS and 601FT of the Corporations Act 2001 (Cth) provide for a smooth transition when an RE is replaced - section 601FS provides that the new RE takes the rights, obligations and liabilities of the former RE in relation to the scheme and section 601FT provides for a document to which the former RE was a party or in which the former RE was referred to be read as if the new RE was a party or was referred to in the document; and
- the “clear legislative intent” of sections 601FS and 601FT was for the new RE to be in no worse position in carrying out its functions than the former RE.
In light of this, the Court found that:
- it was necessary to ascertain which rights were exercised by WFL as registered proprietor of the land and which were exercised as RE;
- because WFL was both the RE and the registered proprietor, it did not (and did not need to) enter written agreements with itself as registered proprietor to carry out its obligations as RE eg to access the land and conduct works on it;
- the rights that Primary exercised when it undertook work in relation to the Scheme were not ownership rights but rather rights to use the land for the purposes of the Scheme;
- as a result of section 601FS, when Primary replaced WFL as RE, it took over the obligations of WFL under the relevant agreements and became entitled to exercise the rights that WFL had previously exercised to discharge those obligations;
- the lack of written authorisation for Primary as RE to conduct work was not a barrier to it doing so;
- it does not follow that because Primary was entitled to exercise rights, it should (under section 601FT) be registered as the proprietor of the land for the duration of the Scheme. The performance of its obligations is not dependent on it having legal title to the land; and
- the fact that the relevant agreements conferred rights only with respect to land leased to the growers did not mean that Primary did not have rights in relation to non-leased land (particularly firebreaks and access roads). The Court found that the fact that such rights were not documented was not a barrier to it exercising the rights that are necessary or incidental to the performance of its obligations.