The High Court unanimously dismissed an appeal by Wellington Capital Limited (Wellington)1and held that an in specie distribution of scheme property to members of a managed investment scheme was beyond the powers conferred under the constitution, as properly construed in light of the relevant provisions of the Corporations Act.
Implications for responsible entities
Responsible entities need to ensure that fund constitution specifically empower them to make in specie distribution to members and to undertake other transactions. Responsible entities may not be able to rely on provisions which purport to confer broad powers when effecting such transactions with regards to scheme members. The provisions of the constitution are to be interpreted having regard to the statutory history of the provisions regulating managed investment schemes which may constrain the powers of the responsible entity. The statutory context and the statutory duties will inform the scope of the powers and duties of the responsible entity.
Wellington is the responsible entity of a managed investment scheme named the Premium Income Fund (Scheme). The appeal concerned the power of Wellington to distribute scheme property, being shares in an unlisted public company, in specie to Scheme members. Wellington asserted that the constitution of the Scheme (Constitution) empowered Wellington to undertake such an in specie distribution. The Australian Securities and Investments Commission (ASIC) commenced proceedings challenging the validity of the distribution.
The Scheme primarily invested in mortgages, equities, debt instruments and cash. On 4 September 2012, Wellington sold assets of the Scheme to Asset Resolution Limited (ARL) in consideration for the issue of 830,523,768 shares in ARL (ARL Shares) to the Scheme. The assets which were sold to ARL had a publicly disclosed value of $90.75 million and represented approximately 41% by value of the assets comprising the property of the Scheme. On the same day, the ARL Shares were distributed to Scheme members in proportion to their holding.
ASIC challenged the validity of the transfer of the ARL Shares to the Scheme members on the basis that the Constitution did not permit Wellington to transfer Scheme property to members in this manner and sought declaratory and other relief.
In earlier proceedings, the Full Court of the Federal Court of Australia (FCAFC) allowed an appeal by ASIC against the decision of the trial judge and:
- made a declaration that the in specie distribution was beyond the power of Wellington under the Constitution; and
- that by making the distribution, Wellington had contravened section 601FB(1) of the Corporations Act 2001 (Cth) (Corporations Act) which required Wellington to operate the Scheme and perform the functions conferred on it by the Constitution and by the Corporations Act.
Wellington subsequently appealed the decision in the High Court. The High Court (in a joint judgement from French CJ, Crennan, Kiefel and Bell JJ, and a separate judgement by Gageler J) concurred with the decision of the FCAFC and held that the in specie distribution to Scheme members was beyond power.
Both the FCAFC and the High Court held that the power of the responsible entity is constrained by additional duties imposed on the responsible entity in its capacity as trustee. However, whereas the FCAFC reached its decision through the ‘prism of trust law’, the High Court cautioned against the application of traditional trust law principles to commercial trusts and stated that whilst relevant, it is in fact the statutory setting and the terms of the Constitution which shapes the content of the powers and duties of the responsible entity as trustee vis a vis the Scheme members.
Interpretation of Constitution
The main issue to be determined in the High Court involved whether the Constitution, on its proper construction, authorised Wellington to transfer Scheme property to Scheme member. In holding that the in specie distribution of ARL Shares was beyond the power of Wellington, the High Court stated that the content of the powers and duties of the responsible entity is to be determined by reference to the Constitution and its statutory setting.
Clause 13.1 of the Constitution set out Wellington’s powers in broad terms and conferred on Wellington, ‘all the powers in respect of the Scheme that is legally possible for a natural person or corporation to have and as though it were the absolute owner of the Scheme [P]roperty and acting in its personal capacity’. Clause 13.2 conferred specific powers to deal with Scheme property, including the power to, ‘acquire, dispose of… or otherwise deal with Scheme property as if the [R]esponsible [E]ntity were the absolute and beneficial owner’.
Wellington sought to argue that clauses 13.1 and 13.2 of the Constitution empowered it to make the distribution of ARL Shares to Scheme members. Wellington contended that as clause 13.1 conferred all the powers legally possible for a corporation to have, Wellington was permitted to exercise the power of a company to distribute any of the company’s property among the members in kind or otherwise provided under section 124 of the Corporations Act. Wellington also contended that the provision of the Constitution dealing with the income distribution of the Scheme contemplated Wellington making additional distributions out of capital or previous reserves and therefore implied that Wellington possessed the power to distribute Scheme property to Scheme members.
The High Court rejected this interpretation and stated that the power in clause 13 is constrained by the statutory duties imposed upon responsible entities under section 601FC(1) and the fiduciary obligations derived from the statutory trust imposed under section 601FC(2). The High Court, referred to the 1993 joint report by the Australian Law Reform Commission and Companies and Securities Advisory Committee, ‘Collective Investments: Other People’s Money Report No 65’, which indicated that the purpose of section 601FC(2) is to create a layer of fiduciary protection for scheme members in addition to the responsible entity’s statutory duties. The High Court approved the FCAFC’s reasoning that section 124 of the Corporations Act did not apply to managed investment schemes given the distinction in the definition of ‘member’ in the Corporations Act between companies and managed investment schemes.
In light of this, the High Court stated that clauses 13 should be read as an enabling provision. Clauses 13.1 and 13.2.5, in the context of the Constitution as a whole, facilitated Wellington’s external dealings with third parties. The provisions allowed third parties to have confidence that Wellington’s acts with respect to the Scheme property were within power and authorised by the Constitution. The High Court noted that the Constitution contained specific provisions which set out the circumstances in which the responsible entity may undertake an in specie distribution only on the winding up of the Scheme. The Constitution, on its proper construction, did not authorise Wellington to undertake intramural dealings involving non-consensual transfers of Scheme property to Scheme members.
The joint judgement of the High Court qualified the proposition in the FCAFC’s decision that a trustee could never transfer trust property to beneficiaries without the consent of all beneficiaries. The High Court held that the question will need to be determined by reference to the particular scheme constitution construed in its statutory setting.
In a separate judgment, Gageler J noted that the language of clause 13 is present to support a legal fiction that the responsible entity may deal with Scheme property and has broad powers in relation to those dealings. Gageler J echoed the joint judgement and emphasised that the legal fiction was important for construing the power broadly, but only in relation to dealings with people other than the Scheme members. Gageler J held that upon a close textual and contextual analysis of the provisions in clause 13, the provisions did not authorise Wellington to undertake an in specie distribution to Scheme members.
The FCAFC declared that Wellington had contravened section 601FB(2) and that Wellington did not have authority to transfer the ARL Shares to the Scheme members. The declaration that the act was beyond power does not invalidate the legal effect of the transfer of ARL Shares by Wellington to Scheme members. It was left to each Scheme member to determine whether they would take any action in relation to the transfer of ARL shares, or whether they would accept that transfer. The matter may be complicated depending on whether Scheme members had already sold their ARL Shares.
The High Court stated that the declarations made by the FCAFC were a correct statement of the legal position and refused to interfere with the declaratory relief.