In the recent decision of the High Court, Wellington Capital Ltd v ASIC & Anor  HCA 43, it was held that a Responsible Entity could not make an in specie distribution to members because the constitution of the managed investment scheme did not specifically confer this power.
The case is a reminder to Responsible Entities (RE) on the importance of constitutional drafting.
Constitutional provisions are interpreted against the context of the Scheme Constitution as a whole, and general constitutional provisions granting broad powers may be insufficient to grant an RE power to conduct in specie distributions (transfer of scheme property rather than by sale of property and distribution of proceeds) to members.
Wellington Capital Ltd was a responsible entity that operated a managed investment scheme. In 2012 Wellington distributed the assets of the managed investment scheme to Asset Resolution Ltd (ARL), in return for a share issue in ARL. Wellington then transferred the shares in ARL to scheme members. ASIC commenced proceedings at the Federal Court to challenge the validity of the transfer. The case eventually went to the High Court.
Before the High Court, Wellington tried to justify the transfer based on two key provisions of its scheme constitution:
- The RE has "all 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" (cl.13.1)
- The RE has 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 RE were the absolute and beneficial owner." (cl. 13.2.5)
It was argued that cl. 13.1 and 13.2.5 gave the RE the power to make an in specie transfer of shares to scheme members.
This was unanimously rejected. The High Court held that the power conferred by both cl. 13.1 and cl. 13.2.5 had to be read in the context of the Constitution as a whole, and the Corporations Act. Doing so, the majority found the clauses were designed to give the RE the power to deal with scheme property in dealings with third parties – not members. By contrast, other provisions in the Constitution specifically allowed scheme property to be returned to members by income distribution and by winding up, respectively. The constitution did not have a specific constitutional provision allowing in specie transfers.
Hence the power did not extend to the RE’s relationship with Scheme members, and Wellington had acted beyond power:
"The conferral upon the responsible entity of power to act ‘as though’ it was the absolute owner of the property facilitated extramural dealings, which might have been by way of sale, purchase of property or investment of Scheme funds. It did not authorise the responsible entity to undertake intramural dealings involving non-consensual transfers of Scheme property to unit holders."
In earlier proceedings in the Full Federal Court Wellington had argued that because cl. 13.1 conferred "all powers" of a corporation upon the RE, it had the powers of a company under section 124 of the Corporations Act, which included the power to make an in specie distribution of company property to members. This was rejected by the Full Federal Court on the basis that the statutory definition of "member" varies between that of a company and that of a Managed Investment Scheme. Although the High Court did not consider this issue, it indicated its agreement with this conclusion.