ASIC v Wellington Capital Ltd [2013] FCAFC 52: Responsibile Entities and Managed Investment Schemes

In ASIC v Wellington Capital Ltd [2013] FCAFC 52 (28 May 2013) the full Federal Court has produced an interesting decision dealing with managed investment schemes and the role of a "responsible entity" in control of such schemes under Corporations Act 2001 (Cth) Chapter 5C.

Background

Wellington Capital Ltd (Wellington) is the "responsible entity" of a managed investment scheme now known as the Premium Income Fund (the Fund), the units in which are listed on the national stock exchange.

Since 1999, the Fund's principal activity has been the investment of unit holders' funds in mortgages, equities, debt instruments and cash. On 4 September 2012 Wellington sold assets comprising approximately 41 percent of the assets of the Fund to an unlisted public company called Asset Resolution Limited (ARL) and consideration for the sale was not paid in cash but instead consisted of the transfer to the Fund of approximately 830 million shares in ARL which  comprised the whole of the issued share capital of that company. Subsequently Wellington distributed "in specie" to each of the unit holders of the Fund the shares in ARL. The shares in ARL were distributed to unit holders of the Fund in proportion to their unit holdings.

It was this distribution that ASIC contends Wellington had no power under the Constitution of the Fund to make, that is, to transfer assets of the Fund, which comprised Scheme Property, to unit holders and it sought declaratory and other relief before the primary judge.

In proceeding delivered in an ex tempore judgment dismissing ASIC's action the primary judge was of the view that Wellington had power under two provisions of the Fund Constitution, namely clauses 13.1 and 13.2.5 to effect a distribution in specie.  The relevant clauses 13.1 and 13.2.5 were as follows:-

Natural Person - 13.1 The Responsible Entity shall have all the powers in respect of the Scheme that is legally possible for a natural  person or corporation to have and as though it where the absolute owner of the Scheme Property and acting in its personal capacity...

Additional Powers - 13.2 In the administration of the provisions of this Constitution, and the Corporations Act, in relation to the Scheme and the Scheme Property, the Responsible Entity shall have the following powers.  These powers shall be in addition to the powers, authorities and discretions vested in it by any other provision of this Constitution or by the Corporations Act and which shall not limit or be limited by, or be construed so as to limit or be limited by the powers, authorities and discretions otherwise by this Constitution or by the Corporations Act vested in the Responsible Entity, that is to say: ...

13.2.5 acquire, dispose of, exchange, mortgage, sub-mortgage, lease, sub-lease, let, grant, release or vary any right or easement or otherwise deal with Scheme Property as if the Responsible Entity were the absolute and beneficial owner;...

While neither of the clauses confered power in express terms to make the contested distribution the primary judge was satisfied that as a matter of construction of each of the clauses, the relevant power was conferred on Wellington, relying on Clause 13.1 providing that the Responsible Entity shall have all the powers in respect of the Scheme that are “legally possible” for an actual person or a corporation to have and as though the Responsible Entity was the absolute owner of the Scheme Property.

The primary judge found that cl 13.1 treated Wellington as a notional corporation and as an absolute owner acting in its personal capacity and considered that this was sufficient to pick up the power contained in the Corporations Act 2001 (Cth)(the Act) s 124(1)(d) to: “distribute any of the company's property among the members in kind or otherwise.”

Clause 13.2.5 confers power on Wellington to, inter alia, dispose of or otherwise deal with Scheme Property as if it were the absolute and beneficial owner. The primary judge found that since unit holders were bound by the terms of the Scheme, and in particular by clauses 13.1 and 13.2.5, they must be taken to have assented to become members of ARL on the in specie distribution and this was sufficient to satisfy the requirements of the Act s 231 (that section requiring the assent of a person to become a member of a corporation).

ASIC's appeal

ASIC appealed against the primary judge's orders referencing the Act Chapter 5C which deals with "Managed Investment Schemes" and in particular drawing attention to the nature of a managed investment scheme and to the terms of the Act s 601FC(2) which provides that the responsible entity holds scheme property on trust for scheme members.

The Result

The full Court allowed ASIC's appeal and set aside the orders made by the primary judge making orders in lieu as follows:

The in specie transfer of the shares in ARL from Wellington as Responsible Entity of the Fund to the unit holders of the Fund was beyond the power of Wellington under the constitution of the Fund and by making an in specie transfer of the Shares to the unit holders of the Fund, Wellington did not operate the Fund and perform the functions conferred on it by the Fund's constitution, and contravened the Act s 601FB(1).

The following key points were made by the Court at para [85] (however relevant other materials are at paras [82] - [86]:

"85  In our view, the distribution of the shares in ARL to the Unit Holders of the Fund was contrary to the terms of the constitution and was done without power."

Source: ASIC v Wellington Capital Ltd [2013] FCAFC 52 (28 May 2013)

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