High Court closes the door on in specie distributions in managed investment schemes without express power

On 5 November 2014 the High Court handed down its decision in Wellington Capital Limited v Australian Securities and Investments Commission [2014] HCA 43 concerning the in specie distribution of scheme property by a responsible entity. However, the decision is applicable to trusts more generally.

The key issue was whether, in the absence of a specific power dealing with in specie distributions, the responsible entity, Wellington Capital (Wellington), had the power to make them?

The Court unanimously held that it did not and, in doing so, drew a clear distinction between the powers of a responsible entity that are extramural (relating to dealings with parties outside the scheme, eg creditors) and intramural (relating to dealings with parties inside the scheme, eg members).

Key Facts

In specie is a Latin phrase meaning “in its actual form”. In the context of managed investment schemes (and, indeed, trusts more generally), an in specie distribution involves the distribution of the scheme property in its current form rather than distribution of the proceeds of sale of the property (which is the more common course).

The key facts of the case can be summarised as follows:

Wellington was the responsible entity of a managed investment scheme known as the Premium Income Fund. The main activities of the fund included investment in mortgages, equities, debt instruments and cash. The members of the scheme were its unit holders, each of whom had an undivided interest in the scheme.
In September 2012, Wellington sold assets of the scheme to a third party, Asset Resolution Limited (ARL), in consideration for shares issued by ARL. The assets sold represented about 41% of the total fund with a publicly stated value of around $90 million.
On the same day as the assets were sold and the shares issued, Wellington directed the custodian of the scheme to transfer the ARL shares in specie to unit holders in the scheme in proportion to the number of units held.
The Australian Securities and Investments Commission (ASIC) commenced proceedings in the Federal Court in Sydney challenging the validity of the transfer. At first instance, Justice Jagot upheld the validity of the transfer, however ASIC successfully appealed from that decision to the Full Federal Court. Wellington was subsequently granted special leave to appeal to the High Court.

In the absence of a specific power to make in specie distributions, Wellington argued that a number of plenary powers granted by the constitution of the scheme were sufficient. In particular, Wellington relied on a provision of the scheme constitution that conferred upon Wellington “all the powers in respect of the scheme that is legally possible for a natural person or corporation to have”. It also pointed to its power to make in specie distributions on the winding up of the scheme as an indicator of its ability to do so in relation to the ARL shares.

Decision

The High Court unanimously dismissed Wellington’s appeal and held that the distribution was beyond Wellington’s powers as responsible entity because:

due to the nature of managed investment schemes where property is held on trust by the responsible entity for scheme members, it is necessary to consider the power to distribute property to members as an issue of trust law;
the conferral of plenary powers akin to those of a natural person or corporation only related to how Wellington could deal with the scheme property extramurally and didn’t empower dealings with the unit holders (ie intramural); and
the scheme constitution did not contemplate in specie distributions other than on winding up and in the absence of express consent from the unit holders, the distribution of ARL shares was therefore beyond Wellington’s powers as responsible entity.

Take away points

Two main points emerge from this decision.

Firstly, unless the constitution of a managed investment scheme (or other trust) specifically provides for in specie distributions, the responsible entity does not have power to make them.

Secondly, when considering the scope of power conferred on a responsible entity of a managed investment scheme, it is important to distinguish whether the proposed conduct is intramural or extramural to the scheme. Courts will regard plenary powers clauses in the same or similar terms to the clause considered in this case as only applicable in relation to external dealings with scheme property.