In brief: The High Court has upheld the Full Federal Court's decision in proceedings brought by ASIC against Wellington Capital Ltd. In the process, the court reaffirmed that the powers of a responsible entity are ultimately derived from the scheme's constitution, but the exercise of those powers is constrained by the statutory and fiduciary duties imposed on the responsible entity. As well, the court confirmed that the usual broad plenary power of a trustee (the power to do anything as though it were the absolute legal and beneficial owner of trust property) may not be as broad as one might think. It also made interesting observations about section 231 of the Corporations Act. Partners Marc Kemp (view CV) and Penny Nikoloudis (view CV) and Lawyer Patrick Boyle report.
Constitutions of managed investment schemes typically include a provision that gives the responsible entity all the powers in respect of the scheme as if it were the absolute owner of scheme property and acting in its personal capacity. This power – referred to as the plenary power – is intended to operate as a standalone 'catch-all' power, and is often supplemented by a list of more specific powers. InWellington Capital Limited v Australian Securities and Investments Commission1 , the High Court considered the limits of the plenary power in a decision that affirmed the power's limitations when dealing with unit holders ('intramural' dealings), as opposed to third parties ('extramural' dealings).
On 4 September 2012, Wellington Capital Ltd, the responsible entity of the Premium Income Fund, a registered managed investment scheme, sold approximately 41 per cent of the scheme's assets to a company, Asset Resolution Ltd (ARL), in return for ARL shares. Wellington then arranged for those shares to be distributed in specie to unit holders in proportion to their holdings in the scheme, such that each unit holder would become an ARL shareholder.
The Australian Securities and Investments Commission (ASIC) challenged the transaction in the Federal Court, arguing, among other things, that the in specie distribution was beyond the powers conferred by the scheme's constitution and the Corporations Act 2001(Cth); and that the unit holders had not agreed to become shareholders of ARL, as required by s231 of the Corporations Act.
At first instance, the court held that the plenary power – which gave 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 Property and acting in its personal capacity' – included the power conferred on a company under s124 of the Corporations Act to distribute property 'among the members, in kind or otherwise'. The primary judge also concluded that, as the unit holders had agreed to be bound by a constitution that gave Wellington the power to distribute shares to the unit holders, their agreement to become shareholders of the company was imputed, satisfying the requirement of s231.
ASIC appealed to the Full Federal Court.
The Full Court reversed the primary judge's decision, finding that Wellington's plenary power must be construed in light of the other provisions of the scheme's constitution, the Corporations Act and through the prism of trust law. In particular, their Honours described a trust as 'Janus-like', having both a public and a private face. The former involved dealings with third parties by the responsible entity, which the plenary power was intended to facilitate, so that the responsible entity could deal with third parties as though it were the absolute owner of the scheme property. The latter involved dealings with unit holders, where, the court held, the plenary power was constrained, not least by the fact that the responsible entity held the scheme property on trust for the unit holders. Construing the plenary power in the context of the scheme's constitution as a whole, and noting (among other things) that the constitution dealt specifically with distributions of capital in cash only, the Full Court concluded that in specie distributions were beyond the power of the responsible entity.
As the Full Court put it:
To permit the responsible entity to deal with the scheme property as an absolute owner in its dealings with the unitholders would be contrary to the relationship of trustee and [beneficiary] which exists between them.
Wellington appealed to the High Court.
A responsible entity's plenary power: sources and limits
The High Court broadly concurred with the Full Court's reasoning, distinguishing between the responsible entity's dealings with third parties (its 'extramural' dealings) and its dealings with unit holders (its 'intramural' dealings). Regarding the latter, the responsible entity's powers are constrained by the Corporations Act (including the constraints imposed by the responsible entity's duties under s601FC(1) and the obligation to hold scheme property subject to the statutory trust imposed by s601FC(2)), and by the constitution itself, which, as noted above, dealt separately with the return of capital to unit holders without contemplating the distribution of assets in specie. As the High Court said:
A reading of [the plenary power provisions], in the context of the Scheme Constitution as a whole, leads to the conclusion that they had nothing to do with the circumstances in which assets or capital forming part of the Scheme Property could be returned to unit holders. They were facultative. They equipped Wellington to deal with the Scheme Property, in accordance with its duties, in the interests of Scheme members. [They] allowed third parties to have confidence that things done by the responsible entity with respect to the Scheme Property were within power and authorised by the Scheme Constitution. The conferral upon the responsible entity of power to act 'as though' it was the absolute owner of the property facilitated extramural dealings, which might have been by way of sale, purchase of property or investment of Scheme Funds. It did not authorise the responsible entity to undertake intramural dealings involving non-consensual transfers of Scheme Property to unit holders…[Our emphasis].
This is consistent with the fact that, as Justice Gageler pointed out in a separate concurring judgment, the plenary power is a legal fiction: the responsible entity has the power to act as if it were the absolute owner of the scheme property. This fiction may operate to facilitate extramural dealings with third parties (as the extract above states), but does not change the fact that, with respect to unit holders, the responsible entity is not the absolute owner and cannot deal with it as if it were, but owns the scheme property subject to the trust.
Section 231: some doubt remains
Section 231 of the Corporations Act says, in effect, that a person must agree to become a member of a company. What this involves has been the subject of debate. At first instance, the court concluded that, as the unit holders had agreed to be bound by a constitution that gave Wellington the power to distribute shares to the unit holders, their agreement to become shareholders of the company was imputed, satisfying the s231 requirement.
The High Court said that, since the necessary power did not exist, no such agreement could be imputed. In saying this, it seemed to imply that if the necessary power had existed, the imputation would have been enough to satisfy the s231 requirement. However, it did not state this categorically, and so some doubt remains.
How this affects responsible entities
Responsible entities would do well to make sure that their scheme constitutions deal expressly and unambiguously with the power to distribute scheme property (including shares) to unit holders, and with the requirement to obtain unit holder agreement for the purposes of s231.
More broadly, if a responsible entity seeks to undertake any other type of 'intramural' dealing with the unit holders of the scheme, it could not rely on a plenary power and would need to be expressly empowered to do so by the scheme's constitution.