The Corporations and Markets Advisory Committee (CAMAC) has today issued its report in relation to managed investment schemes (schemes). In the report CAMAC:
- proposed a radical reform, based on a Freehills submission to CAMAC proposing that schemes have a separate legal personality. CAMAC has proposed that a scheme would be registered as a separate legal entity (SLE Proposal) and that a scheme can hold property and be sued in its own right and responsible entities (REs) will not incur liabilities personally in relation to the scheme,
- recommended that each scheme has a definitive register of scheme agreements and a definitive register of scheme property,
- recommended a number of changes to the regulatory framework in relation to replacing a RE or appointing a temporary responsible entity (TRE), including changing the voting requirements to replace the RE of an unlisted scheme,
- recommended the introduction of voluntary administration procedures for schemes, similar to those applicable to companies,
- recommended amendments to the Corporations Act to regulate the winding up process of both solvent and insolvent schemes, and
- concluded that restrictions and prohibitions on REs providing guarantees or indemnities are unnecessary and proposed statutory limited liability for members.
The SLE Proposal is an ambitious reform but it has the potential to significantly simplify and modernise the funds management industry, to reduce costs and uncertainty and to facilitate investments into Australia. We look forward to the government’s response to CAMAC’s report.
In November 2010, the Parliamentary Secretary to the Treasurer, the Hon. David Bradbury MP, referred various matters concerning the regulation of schemes to CAMAC for consideration and provision of advice.
After discussions and consultation with industry, CAMAC has today released its report in relation to schemes which sets out its conclusions and recommendations, which are summarised in this article, in respect of:
- the proposal to treat schemes as separate legal entities
- proposed key legislative reforms,
- changing the RE of a viable scheme,
- voluntary administration of schemes,
- winding up schemes, and
- other matters.
The SLE Proposal is based on a Freehills submission to CAMAC in which we suggested that many of the problems experienced under the current scheme framework could be solved if a scheme had its own legal personality.
Under the SLE Proposal, CAMAC has proposed that a registered scheme will have the status of a separate legal entity and that the scheme:
- will hold the legal title to scheme assets, thereby avoiding any ‘entangling’ of scheme property and the RE’s property,
- would be the principal to the scheme’s contracts. The RE will enter into arrangements for the scheme, as agent for a disclosed principal, and
- could sue and be sued in its own right, again acting though its agent, the RE. Importantly, under this proposal innocent creditors who currently rely on a right of subrogation to recover against scheme assets would not lose recourse to scheme assets in the event of any improper activity of the RE (in which event the RE would lose its right of indemnity out of scheme assets).
Under the SLE Proposal the RE:
- will still manage the scheme and will continue to be responsible for the scheme’s compliance,
- will be personally liable for any ‘insolvent trading’, if the scheme is insolvent at the time that the RE enters into an agreement as agent for the scheme, and
- may be subject to a derivative claim by members or ASIC if the RE acts in breach of its managerial duties or outside its agency powers.
While the SLE Proposal sounds ambitious and would require some work to implement, (including in relation to tax and duty laws because CAMAC proposes that schemes continue to be taxed on a ‘pass though basis’ and that the transfer of property from the RE to the MIS is a tax and duty exempt roll-over), it does overcome a number of problems with the existing framework, including:
- disincentives to an incoming RE taking on the RE role and the need to undertake due diligence on liabilities which the incoming RE will assume,
- identifying scheme liabilities and property where multiple schemes are operated by one RE, and
- any insolvency or administration of the RE.
Key legislative reforms
CAMAC noted that:
- much of the complexity surrounding the external administration of some common enterprise schemes can be traced to failure by REs to ensure adequate separation and recording of the affairs of each scheme they operate and clear identification of scheme property and its separation from the proprietary interests of scheme members utilised in schemes, and
- legal complexity has also arisen where REs operate a number of schemes which may form part of a more complex scheme or stapled arrangement.
CAMAC recommends that:
each scheme must have a definitive register of scheme agreements. The register would be divided into 3 distinct categories:
- agreements entered into by the RE, as scheme operator, with scheme members or external parties,
- agreements entered into by the RE, as agent of one or more scheme members, with external parties, and
- agreements entered into by scheme members with external parties pursuant to the operation of the scheme.
Each of the categories would be divided into a ‘continuing agreements’ section and a ‘completed agreements’ section and the register would also include material changes to agreements,
- each scheme must have a definitive register of scheme property, and
- the language of the Corporations Act is amended to clarify that the company named in ASIC’s record of registration as the RE or TRE remains the RE or TRE until that record is altered.
CAMAC also favours an obligation to establish and maintain an agreements register and a register of scheme property and subjecting each register to the compliance plan and annual audit.
If the SLE Proposal is not adopted, CAMAC considers that:
- the current trust law procedure for counterparties gaining access to scheme property through subrogation is not commercially appropriate. CAMAC proposes a direct right of recovery for scheme creditors (without the risk of recourse being lost through the RE’s improper conduct).
- there is merit in new schemes being operated by a sole function RE. This would mean that each new scheme would require the establishment, capitalisation and licensing of a new RE which we expect would be an impediment to establishing new schemes.
Changing the RE of a viable scheme
CAMAC has made a number of recommendations to simplify and facilitate changing the RE of a viable scheme including:
- legislative amendments to simplify the due diligence process undertaken by a TRE or incoming RE,
- an obligation on the incumbent RE to provide reasonable assistance to a prospective TRE or incoming RE in its due diligence exercise,
- statutory controls on RE remuneration arrangements to cover the situation where an RE is replaced during a financial year,
- a general power of the court to determine the remuneration of a TRE of any scheme,
- where agreements (eg debt covenants) or scheme constitutions include ‘change of RE’ provisions, which are triggered when a person ceases to be the RE of a scheme, those provisions should only be enforceable if they do not unreasonably limit the right of scheme members to replace the RE,
- a reduction in the voting requirement to replace the RE of an unlisted scheme to a simple majority of the votes of scheme members cast at the meeting (in person or otherwise) provided that the total of the votes cast (for and against) of each of the resolutions constitutes at least 25% of the total votes of scheme members,
- an expansion of the criteria for eligibility to be a TRE to include a registered liquidator or anyone appointed by the court,
- if the SLE Proposal is not adopted, amendments to the statutory novation provisions to confirm that the transfer of property rights, obligations or liabilities under those provisions from an RE to a TRE or incoming RE shall not, of itself be taken to be a change of ownership of that property for the purposes of triggering pre-emptive rights or default events, and
- the court should be given a general power to adjust the TRE’s duties and liabilities to particular circumstances.
Voluntary administration of schemes
CAMAC recommends the introduction of voluntary administration procedures for schemes regardless of whether or not the SLE Proposal is adopted.
CAMAC contemplates that the voluntary administration procedures would be substantially similar to those applicable to companies, and will involve:
- a new concept of an ‘insolvent scheme’, which would be one of the grounds for placing the scheme into voluntary administration,
- a statutory framework governing the rights of creditors, including a moratorium and a deed of company arrangement process,
- the requirement for administrators to be limited to registered liquidators, and
- conferring a general discretionary powers of the court (similar to s 447A Corporations Act).
This proposal will give schemes:
- the benefit of voluntary administration procedures in order to restore their viability or provide an orderly administration, and
- access to appropriately qualified personnel independent of the responsible entity in times of financial distress.
However, we agree with CAMAC that there will be substantial complexity in implementing this reform, especially if the SLE Proposal is not adopted.
Winding up a scheme
Under the current legislative framework, a scheme cannot technically be ‘solvent’ or insolvent’ as it does not incur debts in its own right. As outlined above, CAMAC recommends that a definition of solvency is adopted, so that a scheme is solvent if the scheme property is sufficient to meet all the claims that can be made against that property as and when those claims become due and payable.
CAMAC also recommends the introduction of provisions for the solvent winding up of a scheme to become an insolvent winding up of the scheme, similar to the provisions applicable to companies.
CAMAC considered it unnecessary to prescribe detailed legislative provisions for the winding up process of a solvent scheme given that a scheme constitution is currently required to make adequate provision for the winding up of the scheme.
However, CAMAC did recommend that the threshold for scheme members to approve the winding up of their scheme under either section 601NB or section 601NC Corporations Act is amended to:
- 75% of the votes cast on the resolution,
- provided that the votes cast in favour of the winding up constitute at least 25% of the total votes of scheme members.
CAMAC proposes that the winding up of an insolvent scheme is regulated similarly to the regulation of the winding up of an insolvent company. Its recommendations include:
- to avoid any conflicts of interest, that the winding up of an insolvent scheme should be conducted only by a registered liquidator, rather than the RE,
- a statutory order of priorities in the winding up, and
- voidable transaction provisions on the winding up of an insolvent scheme, based on the existing voidable transaction provisions applicable to companies.
CAMAC proposes the limited expansion of the supervisory powers of the court in relation to winding up including:
- to give directions whenever the court thinks it appropriate to do so, including in relation to any particular matter arising under the winding up of a solvent or insolvent scheme, and
- an additional express power to wind up a scheme where the court is satisfied that the scheme is ‘insolvent’.
In circumstances where both the RE and the scheme(s) which it operates are insolvent and being wound up, CAMAC recommends that:
- where the winding up of an insolvent scheme is commenced by court order, the court can determine whether there should be a combined or separate winding up of the RE, and
- where the winding up of an insolvent scheme is commenced by a party other than the court, the liquidator of the RE should administer a combined scheme and RE winding up, unless or until the liquidator determines that in the circumstances it would be preferable to have separate windings up for one or more of the schemes.
Other matters concerning the regulation of schemes
CAMAC proposes to amend the Corporations Act so that:
- 100 members or members holding at least 5% of the votes of a scheme may direct the RE to convene, or may themselves convene,
- the court has a power to order,
a general meeting to consider an ordinary resolution. Currently members and the courts only have powers to convene meetings to consider special or extraordinary resolutions. This proposal will facilitate members proposing ordinary resolutions, for example to change the RE of a listed scheme or where an ordinary resolution is needed under the constitution.
On and from November 2012 REs will have increased net tangible asset requirements.1 Subject to an ongoing evaluation of whether the risk of RE failure can be managed through these financial requirements, CAMAC considered it unnecessary to restrict the RE’s ability to provide guarantees or indemnities in its personal capacity. CAMAC also rejected that the RE should be prohibited from providing guarantees or indemnities involving scheme property, noting that it would unduly inhibit an RE in operating a scheme for the benefit of scheme members.
CAMAC proposes that scheme members have statutory limited liability, in the same way that shareholders do, regardless of any contrary provision in the scheme constitution. CAMAC did not distinguish between registered and unregistered schemes in this respect so we would expect members of both to have statutory limited liability.