This Federal Court of Australia Full Court decision sheds light upon issues of members’ rights with regard to scheme constitutions and provides an interesting discussion on the effect of lodging a constitution with ASIC.

The matter concerns the conduct of Australian Property Custodian Holdings Limited (APCH) as the responsible entity of the managed investment scheme, the Prime Retirement and Aged Care Property Trust (Trust). In short, APCH sought to amend the Trust’s constitution without member approval to provide, amongst other things, for the payment of a listing fee to itself, from Trust assets, in the event that Trust was listed on the Australian Stock Exchange. ASIC contended that member approval was required to make the amendments and accordingly that APCH and its directors breached provisions of the Corporations Act 2001 (Act) by seeking to give effect to the amendments and by paying the listing fee. ASIC was successful at trial. [1] This appeal was brought by directors of APCH, who sought to establish that the trial judge erred in finding that payments of the listing fee involved contraventions of the Corporations Act.

Section 601GC(1): a stand-alone power to amend

Trust’s constitution made provision for how amendments to the constitution were to be made. Section 601GC(1) provides for the modification or repeal and replacement of the constitution of a registered scheme. Argument was heard on whether section 601GC(1) of the Act provided a freestanding power to amend Trust’s constitution, or whether the statutory provision was qualified by the text of the constitution.

The Full Court, in considering the section, found that “the correct way to interpret s 601GC is to regard it as a freestanding provision providing the statutory power to modify, repeal or replace the existing constitution, irrespective of any limitation upon that power that may be found in the existing constitution”.[2] The Full Court found that this provision protects against the entrenchment of provisions in a constitution, avoiding the situation where members or a responsible entity are completely deprived of power to change a constitution. Relevantly, it was considered that the entrenchment of provisions would be inconsistent with the Act.

Members’ right to have a scheme administered in accordance with its constitution

It is accepted that the rights of a member of a managed investment scheme include having the scheme administered in accordance with its constitution. To date there has been a lack of clarity as to whether this right is contravened by amending a constitution pursuant to section 601GC(1)(b).[3] The Full Court found that “it is clearly anticipated by the legislation that there may be amendments that would unequivocally not be adverse to members’ rights…It does not follow from recognition that members’ rights include the rights of members to have a managed investment scheme administered according to the constitution that any change to the constitution will be adverse to members’ rights”.[4]

What does this mean for my practice?

The Full Court’s findings confirm that section 601GC is a freestanding power to amend a scheme’s constitution regardless of the terms of the constitution. However the kind of amendment that may be made pursuant to section 601GC(1)(b) must be an amendment that is unequivocally not adverse to members’ rights. Practically this is a high hurdle to negotiate and open only to limited application.

Validity of a constitution lodged with ASIC

This decision contains an interesting discussion of the effect of lodging an improperly amended constitution with ASIC and the validity of acts done in reliance upon such a constitution.[5] This discussion culminates in the comment that “[t]he approach of ASIC to the issue of invalidity was to assess whether it was the purpose of the [Corporations] Act, including Part 5C, that an act done in breach of s 601GC(1)(b) should be invalid. In our view, on this approach, the structure of the Act suggests that it was intended that amendments made to a scheme constitution, once lodged with ASIC, would be valid until set aside”.

What does this mean for my practice?

Investors should be advised to be vigilant with respect to amendments purportedly made pursuant to section 601GC(1)(b) of the Act. Such amendments may have consequences which cannot be remedied despite any underlying impropriety of an amendment.

Liability of APCH independently of its directors

At trial the directors of APCH were found to have contravened the Act. On appeal, the Full Court reversed the decision of the trial judge with regard to the liability of the directors, essentially on the basis of a statutory time limit.

After the Full Court published its reasons in respect of this appeal, argument was re-opened on the issue of whether APCH may be liable to members, despite findings against its directors being overturned (it is not alleged that APCH engaged in conduct other than by the acts of its directors). The Full Court is yet to return judgement on this point.