The Full Court of the Federal Court construed a typical universal powers clause in a managed investment scheme constitution narrowly and concluded that it did not authorise Wellington Capital Limited, as responsible entity of the Premium Income Fund, to make an in specie distribution of assets to unitholders without their consent. Responsible entities should be aware that a universal powers clause may not be as broad as it seems. If they wish to have the power to make in specie distributions without consent of unitholders, they should have an express power under the fund constitution. Wellington has sought to appeal to the High Court.
Wellington Capital Limited (Wellington) was the responsible entity of a managed investment scheme known as the Premium Income Fund (the Fund). Wellington sold approximately 41% of the Fund’s assets to Asset Resolution Limited (ARL) in consideration for all of the shares in ARL, and then made an in specie distribution of those shares to the Fund’s unitholders.
The constitution of the Fund (Fund Constitution):
- contained a typical universal powers clause which gave Wellington (as responsible entity) “all the powers in respect of the Scheme… as though it were the absolute owner of the Scheme Property and acting in its personal capacity” (clause 13.2);
- did not give Wellington an express power to make distributions in specie but rather the power to “dispose of [the Fund’s property] as if it were the absolute and beneficial owner” (clause 13.2.5); and
- gave Wellington an express power to make distributions of income or capital by paying them into an account (ie in cash) “or as otherwise directed by the Unit Holders” (clause 16.4).
In finding that the in specie distribution of the ARL shares was contrary to the Fund Constitution and was done by Wellington without power, the Full Court:
- construed the universal powers clause narrowly and “through the prism” of trust law, finding that pursuant to s 601FC(2) of the Corporations Act 2001 (Cth) (Act), responsible entities hold scheme property on trust for scheme members and cannot transfer that trust property without the members’ consent;
- found that section 124(1)(d) of the Act clearly refers to a power to distribute to members of a company (rather than members of a managed investment scheme), and as such the universal powers clause did not pick up the power to distribute property to members of the Fund; and
- found that the power in clause 13.2.5 related to the manner of disposal, and did not contemplate a distribution of part of the Fund property.
The Court also stressed that shares in a company are an entirely different species of property to units in a managed investment scheme. The management of ARL is in the hands of the ARL directors (rather than Wellington) who are subject to the ARL constitution (rather than the terms of the trust comprised in the Fund Constitution).
Note that on 24 June 2013, Wellington filed an application to the High Court for special leave to appeal the judgment of the Full Court of the Federal Court.
Note also that on 2 July 2013, the Full Court of the Federal Court delivered its judgment on costs, ordering that Wellington pay ASIC's costs at first instance (with one exception) and of the appeal, and that Wellington is not entitled to be indemnified out of the assets of the Fund in respect of either its or ASIC's costs unless the unitholders consent.
See the case.