The Corporations and Markets Advisory Committee (CAMAC), an independent advisor to the Commonwealth Government, has issued a discussion paper on Managed Investment Schemes (MIS) proposing important legislative changes specifically to deal with external administration of insolvent MISs or responsible entities (RE). This follows a reference to CAMAC by Parliamentary Secretary to the Treasurer, the Hon. David Bradbury, in November 2010. This reference noted that, while the corporate insolvency provisions in the Corporations Act provide creditors and directors with certainty about their rights and obligations, the Act sets out very few specialised rules regarding the external administration of insolvent trusts or trustees.
The broad scope of the legislative changes proposed by CAMAC in dealing with scenarios in which the MIS or the RE experiences financial stress include:
- the introduction of a voluntary administration (VA) procedure for MISs, based on the approach in Part 5.3A of the Corporations Act. The VA provisions presently only apply to companies. An RE, being a company, can be placed in VA. However, an MIS, not being a company, cannot be placed in VA. CAMAC has proposed the concept of an 'MIS voluntary administration' to enable an administrator to be appointed to replace the RE as operator of the MIS, for there to be a moratorium to allow the administrator to determine whether the MIS is potentially viable, and whether a MIS deed could be proposed to restructure the MIS so it may continue to operate. CAMAC notes that an 'MIS voluntary administration' may need to apply to a broader range of parties and encompass a wider range of transactions than would be the case in a corporate VA, to avoid attempts at rehabilitation being frustrated by persons seeking to assert claims outside the process.
- options for an MIS liquidation process, which might include greater regulation of the process by which an RE winds up a scheme. Under Part 5C.9 of the Corporations Act, the process by which an RE winds up a scheme is left to the scheme constitution and any general law and trust principles. CAMAC raises the question whether a more regulated liquidation procedure is needed to protect the interests of members.
- options where the RE is insolvent, which may depend on the whether the RE operates a single MIS, or more than one MIS. CAMAC notes that the majority of registered REs operate more than one MIS.
CAMAC has identified that much of the complexity, disputation, delay and costs that have surrounded the external administration of some MISs in recent years can be traced to failure by REs to ensure adequate separation of the affairs of each of the MISs they operate, as well as legal uncertainty regarding the position of parties dealing with REs as operators of various schemes. CAMAC notes the difficulties that can arise in disentangling the affairs of different MISs point to the need to ensure, from the time the MIS is established, that its affairs can be clearly identified and those whose dealings with an RE involve that MIS can have a clear understanding of their legal position. Difficulties arise if these issues are left until MIS structures encounter financial problems.
To that end, CAMAC also recommends legislative reforms to require:
- whenever an RE, as operator of an MIS, is a principal to a legally enforceable contract, arrangement or understanding, that the RE specify this is the case and identify the MIS to the counterparty.
- from the commencement of an MIS, the RE maintain an ongoing register for that MIS of all relevant agreements.
- the property of a particular MIS be used only for the purposes of that MIS. Under general trust law principles, it would be a breach of fiduciary duty for a trustee to use property for purposes unrelated to that trust. The constitution of an MIS must make adequate provision for various matters, including the powers of the RE in relation to 'making investments of, or otherwise dealing with, scheme property' under section 601GA(1)(b). CAMAC notes that a view has been taken that an RE may validly deal with property of the MIS in any manner permitted in the constitution, including using MIS property to pay debts incurred by the RE in operating another MIS. CAMAC's proposed reform would make it clear that this conduct is prohibited. CAMAC has invited submissions on the matters raised by the discussion paper by 30 September 2011. Please contact us if you would like any assistance in preparing your submission or would otherwise like your views taken into account.