Managed investment schemes: responsible entities may not have the powers they think they have

The High Court has reminded responsible entities (REs) of managed investment schemes to ensure the actions they take are authorised by the constitution of the scheme. In Wellington Capital Limited v Australian Securities and Investments Commission [2014] HCA 43, ASIC successfully sought declarations that dealings with scheme property by an RE were beyond power.

Background

Wellington Capital Limited (Wellington) is the RE of a managed investment scheme now known as the Premium Income Fund (the Scheme). In 2012, Wellington sold approximately 41 per cent of the assets of the scheme to Asset Resolution Ltd (ARL) in exchange for the entire issued share capital of ARL. Wellington then transferred the ARL shares to the unit holders of the Scheme. Such a transfer of an asset in its present form (rather than by converting the asset to cash and distributing that) is commonly known as an in specie distribution. Shortly after the in specie distribution was made, ASIC commenced Federal Court proceedings challenging the validity of the distribution.

Wellington considered that cll 13.1 and 13.2.5 of the scheme’s constitution gave it power to make the in specie distribution. Clause 13.1 provided that the RE had: ‘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.’ Clause 13.2.5 provided that the RE had the power to: ‘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’.