The collapse of several high profile managed investment schemes including Trio Capital and Rubicon Asset Management, have resulted in a series of Court rulings on the liquidation of schemes. Whilst these cases provide useful guidance on the mechanism of winding up schemes, they also highlight the onerous responsibilities imposed on responsible entities (REs) of an insolvent scheme.
Regulation of Managed Investment Schemes
A managed investment scheme involves:
- members contributing money to acquire rights or benefits produced by the scheme;
- contributions being pooled towards a common enterprise; and
- members relinquishing day to day control of the scheme (refer section 9 Corporations Act for precise definition).
Chapter 5C of the Corporations Act requires managed investment schemes with more than 20 members to be registered and operated by an RE. The RE must be a public company holding an AFSL licence. The conditions of that licence usually include that the RE hold net assets of a minimum value. Schemes are otherwise governed by their constitutions and Chapter 5C generally.
How can a Managed Investment Scheme be wound up?
Where the scheme does not achieve its purpose or objective, the RE may wind up the scheme, and has power to do so under section 601NC Corporations Act. Similar powers may be granted by the scheme constitution. Members may also seek a winding up, either through powers in the constitution or by calling a members' meeting and passing a resolution.
These provisions will be well known to companies undertaking the role of RE. The majority of recent cases concerning the winding up of schemes have been generated however under section 601ND of the Corporations Act, which permits the Court (Supreme or Federal) to wind up a scheme if it considers it just and equitable, on the application of the RE, a member, ASIC or a creditor.
Recent cases have made clear that "just and equitable" grounds will include the scheme being insolvent. The Courts have highlighted that winding up scheme is different to winding up a company. Winding up a scheme involves liquidating a trust, not a company. The usual provisions of the Corporations Act applicable to companies do not apply – guidance must instead be obtained by the constitution of the scheme (typically the trust deed), and from the Courts.
This has necessitated many applications for directions to Courts as to how a particular scheme should be wound up. In most applications the RE itself has also been insolvent and the application is often made by the liquidator/receiver/administrator of the RE. For example, in Rubicon Asset Management, administrators appointed to an RE obtained orders to wind up insolvent schemes operated by the RE. A similar position applied in Trio Capital.
What happens when the RE is solvent but the scheme is insolvent?
It is important to distinguish between the RE and the Scheme. The RE is the legal body that incurs debts on behalf of (and as trustee of) the scheme. Most cases considered by Courts have concerned an insolvent RE and insolvent scheme.
It is possible however that the RE responsible for administering the scheme could be solvent where the scheme is not. This is particularly where corporate REs provide RE facilities to multiple schemes and only incur debts to external creditors on the basis that the RE's liability is limited to its actual recoveries from scheme assets. The following issues could arise:
(a) Whether the RE has a responsibility to wind up an insolvent scheme. Chapter 5C does not deal specifically with this issue, which should be addressed in the scheme constitution. If the constitution is silent, the answer is probably yes, i.e. the RE probably does have an obligation to wind up, based on commentary of Justice McDougall in the recent decision of Rubicon Asset Management. The fact that a Court could order the RE to wind up the scheme (including on another party's application) reinforces that REs should factor that obligation when accepting the initial appointment as RE;
(b) If the scheme assets are insufficient to pay for the costs of the winding up, will the RE be obliged to use its own assets to do so? In Rubicon (which involved an insolvent RE), the administrators of the RE obtained orders permitting the RE to use its own assets to wind up the scheme. The Court said that if Rubicon were solvent, it would be obliged to use its own money to wind up the schemes if necessary. This was consistent with the RE's obligation in that case to hold at least $5,000,000 in tangible assets as a condition of its AFSL licence.
Lessons and Guidance for Responsible Entities
The Rubicon decision illustrates the obligations taken on by companies acting as REs of one or more schemes. The prospective RE should assume that if the scheme does become insolvent, the RE may need to use its own funds to wind it up. This is usually an expensive process, often costing hundreds of thousands of dollars. REs should factor this prospective liability into their risk assessment when taking appointments at the outset.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.