Legal News & Analysis – Asia Pacific – Australia – Banking & Finance

A recent decision by the High Court of Australia (Wellington Capital Limited v Australian Securities and Investments Commission [2014] HCA 43) has highlighted the need for responsible entities of managed investment schemes to know the precise scope of their powers under the scheme’s constitution. All five sitting justices dismissed an appeal by Wellington Capital Ltd (Wellington), the responsible entity of the Premium Income Fund (the Fund), a National Stock Exchange-listed managed investment scheme, holding that Wellington had acted beyond its power in making a non-consensual in specie transfer of Fund property to the unit holders of the Fund.

 
Key Facts

 
Wellington sold Fund assets to a special purpose unlisted public company (ARL) in consideration for 830m ARL shares being transferred to the Fund’s custodian (Perpetual). Wellington then directed Perpetual to transfer pro rata the ARL shares to the Fund’s unit holders. The ARL shares represented 41% of the value of the assets comprising the Fund property.

 
The Australian Securities and Investments Commission (ASIC) brought an application in the Federal Court challenging the validity of Wellington’s in specie distribution. At first instance, Jagot J dismissed ASIC’s application.¹ However the Full Court of the Federal Court allowed an appeal, and made a declaration that Wellington had made the distribution beyond power in contravention of section 601FB (1) of the Act.²

 
The Relevant Clauses In The Fund’s Constitution

 
Wellington argued that it had authority to effect the in specie transfer due to two clauses in the Fund’s constitution.

 
The first clause provided that Wellington has “all the powers in respect of the [Fund] that is legally possible for a natural person or corporation to have and as though it were the absolute owner of the [Fund] Property and acting in its personal capacity”. The Court held that this clause did not invoke the power in section 124 (1) (d) of the Act, which allows a company to “distribute any of the company’s property among the members in kind or otherwise”, because:

• the definition of “member’ differed between members of a company and members of a managed investment scheme; and
• in any event, trust law provides that Wellington as trustee could not transfer trust property to the beneficiaries without their consent.

 
The second clause conferred upon Wellington the power to “dispose of […] or otherwise deal with [Fund] property as if [it] were the absolute and beneficial owner”. The Court held that this clause only authorised Wellington as trustee to deal with third parties so as not to act in breach of trust, and that it did not confer the power to Wellington to make an in specie transfer of the Fund property.

 
In addition to these two clauses, the Court considered other clauses in the Fund’s constitution which it found demonstrated that Wellington had acted ultra vires. These clauses provided for the return of capital by Wellington to unit holders as cash payments (and not as asset transfers) solely for the purpose of:

 
1. satisfying its periodic obligations to make income distributions, or

 
2. winding up the Fund.

 
Implications

 
The High Court’s decision in Wellington Capital highlights the following points for responsible entities:

• a responsible entity’s dealings with third parties (its “extramural dealings”) must be distinguished from its dealings with unit holders (its “intramural dealings”), the latter being constrained by the responsible entity’s duties under the Corporations Act 2001 (Cth) (the Act);
• a scheme’s constitution must expressly allow for “intramural dealings” by a responsible entity, given that it holds the scheme property on trust for the scheme’s unit holders; and
• distributing scheme property without authority may amount to a retirement from office by a responsible entity and a winding up of the scheme (depending upon the extent to which the scheme property was actually distributed).

End Notes:

1 Australian Securities and Investments Commission v Wellington Capital Ltd (2012) 91 ACSR 514.

 
2 Australian Securities and Investments Commission v Wellington Capital Ltd (2013) 94 ACSR 293.

For further information, please contact:

Ashley Wharton, Partner, Ashurst
ashley.wharton@ashurst.com

Andrew Carter, Partner, Ashurst
andrew.carter@ashurst.com 

Sonia Tame, Partner, Ashurst
sonia.tame@ashurst.com

Mark Elvy, Partner, Ashurst
mark.elvy@ashurst.com

Adrian Chai, Partner, Ashurst
adrian.chai@ashurst.com

Chris Goddard, Partner, Ashurst 
chris.goddard@ashurst.com

Jonathan Gordon, Partner, Ashurst
jonathan.gordon@ashurst.com

Gareth Hughes, Partner, Ashurst
gareth.hughes@ashurst.com

Wen-Ts’ai Lim, Partner, Ashurst
wentsai.lim@ashurst.com

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