Disclosure and financial reporting requirements relaxed for Administrators

The Federal Court in Owen, in the matter of RiverCity Motorway Pty Ltd v Madden (No 3) [2012] FCA 313 (RiverCity No 3) has confirmed that administrators of companies controlling managed investment schemes are exempted from many of the usual duties and obligations imposed on responsible entities, and contained in the Corporations Act 2001 (Cth). This follows the decision of Norman and others v FEA Plantations Ltd (2010) 191 FCR 39 (Norman's Case) which held that receivers are not included in the definition of "officer" (and therefore subject to the duties imposed by the Act) for the purposes of managed investment schemes.

Duties of responsible entities

Entities responsible for managed investment schemes have extensive duties to unit holders as well as general disclosure and financial reporting obligations. In particular, responsible entities must:

• act in the best interests of scheme members, even if that conflicts with the interests of the responsible entity
• abide by continuous disclosure and financial reporting obligations (in relation to the scheme), and
• comply with the obligations of the responsible entity's financial services licence.

"Officers" of responsible entities must compel the entity to abide by these obligations. The term "officer" is defined in section 9 of the Act and, unless a contrary intention appears, includes administrators of a company.

The RiverCity Motorway Group consists of 10 companies, one of which is the responsible entity for two managed investment schemes. Administrators were appointed to the RiverCity Motorway Group in February 2011.The Administrators brought an application seeking the exemption provided to receivers in Norman's Case be extended to administrators, and that the Administrators be released from the various duties applicable to responsible entities.

The decision in RiverCity

Following the reasoning in Norman's Case, the Federal Court confirmed the view that:

• when amending the Act's definition of "officer" in 1999, Parliament did not intend for the new definition to apply to managed investment schemes
• as with receivers, imposing "officers'" obligations of on the Administrators would place the Administrators in conflict with their duties to the entity's creditors, and
• in the circumstances, the Administrators (like receivers) ought not be considered "officers" for the purposes of managed investment schemes.

Beyond adopting Norman's Case, the Court found that requiring the Administrators to complete the disclosure and financial reporting requirements would be unduly onerous and unnecessary, for the following reasons.

First, the Court found that, as trading of scheme units had been suspended, unit holders do not require ongoing disclosure and financial reports.

Secondly, the complexity of the scheme, and the Administration generally, meant that the costs of disclosure and financial reporting would be exceptionally high. As no dividend was expected for unsecured creditors, the costs of disclosure and reporting would be ultimately borne by the secured creditors, who were able to request any required information from their Receivers and Managers.

Conclusion

External administrators of failed managed investment schemes face novel and difficult questions. One such question relates to the interaction between administrators' duties owed to scheme members and those owed to the company's creditors. The decision in RiverCity No 3 will no doubt provide certainty to administrators attempting to balance those duties.

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.