ASIC's new hardship relief for responsible entities of frozen funds

By Matt Daley, Vanessa Pallone and Louise Yuen
17 Sep 2020

While the Instrument may come as a welcomed relief for some responsible entities, ASIC has strongly warned them they continue to have a duty to act in the best interest of members.

Amid unprecedented economic uncertainty arising from the COVID-19 pandemic, ASIC has once again granted limited relief to responsible entities (REs) of illiquid ("frozen") funds in anticipation of an increased demand from members in registered managed investment schemes making withdrawals on hardship grounds (Hardship Relief). Frozen funds are, broadly speaking, registered schemes in respect of which the RE has suspended withdrawals and the issue of new interests in the scheme.

The instrument granting the Hardship Relief, ASIC Corporations (Hardship Withdrawals Relief) Instrument 2020/77, is operative until 27 August 2025 and provides conditional relief to REs from the various obligations outlined under Chapter 5C of the Corporations Act 2001.

The Instrument recognises that during such extreme market volatility, REs may have an obligation to protect members’ interests, but that action can prove “problematic” for individuals experiencing financial distress. This is not the first time we have seen ASIC take this action. During the Global Financial Crisis, there were a large number of schemes which became frozen. At that time, ASIC again modified the Act to provide hardship relief to REs of frozen funds.

Background to the Hardship Relief

Generally, the RE of a registered scheme is required to operate the scheme and perform the functions and duties conferred on it by the scheme's constitution and the Act. The RE is subject to specific statutory duties outlined in the Act, which includes the duty to treat members who hold interests of the same class equally. Members of registered schemes may also have a right to withdraw from a registered scheme and this right to withdraw must be fair to all members. However, the scheme's constitution must provide for the right and set out appropriate procedures to withdraw from the scheme.

ASIC has identified the above as impediments to an RE of a registered scheme making Hardship Relief payments to certain members who are suffering genuine hardship due to the inability to access their funds. In this regard, ASIC has issued the Instrument to facilitate the provision of Hardship Relief, within reasonable parameters, by REs of registered schemes to members suffering financial hardship while balancing the interests of those members who do not require Hardship Relief. It is a delicate balancing act, given that to meet the needs of withdrawing members the RE may need to realise scheme assets (at a time when assets may be difficult to value or the value of such assets may be comparatively low).

ASIC has, however, capped the total amount and number of hardship withdrawals a member may make in one calendar year. In this regard, REs may only grant four hardship withdrawals per calendar year totalling a maximum of $100,000. In saying this, this does not restrict the number of Hardship Relief applications an RE can accept (although an RE would need to consider the acceptance of a Hardship Relief application in the context of its overriding and continuing duty to act in the best interests of members). This would require an RE to consider matters such as the ability to rely upon current valuations in determining the appropriate unit price, the impact that the withdrawal may have on the assets as a whole, and the ability to meet future withdrawals.

Broadly, the Instrument provides conditional relief to REs from:

  • the duty to treat members of the same class equally;
  • the withdrawal regime in Chapter 5C.6 of the Act via the introduction of a new hardship withdrawal regime;
  • the requirement to set out adequate procedures for making and dealing with withdrawal requests in the scheme's constitution; and
  • the requirement that a special resolution of members must approve a constitutional change to include a hardship withdrawals provision.

REs' continuing obligations

The purpose of the Instrument is to offer REs, who have suspended withdrawals and ceased the issue of new interests in registered schemes, the discretion to make withdrawal payments to members (or the beneficiary of a member's estate or an instructor) without contravening the withdrawal and equal treatment provisions under the Act in cases of hardship. It is important to note however that REs are still subject to their general duties under the Act, including the duty to act in the best interests of its members and must ensure compliance with the relevant scheme constitution and any ASIC instruments of relief. In fact, an RE is faced with a number of key decisions which include whether to:

  • freeze the scheme;
  • rely on the Hardship Relief;
  • satisfy a Hardship Relief request; and / or
  • make withdrawal offers.

Specifically, ASIC note that upon exercising its discretion to permit or refuse a member’s Hardship Relief request, REs must ensure that they document how and why a decision to permit or refuse a hardship withdrawal payment was made.

The Instrument of relief

In order to rely on the Hardship Relief, REs must be satisfied that members who make Hardship Relief requests meet at least one of the hardship criterion. The types of hardship set out in the Instrument include (at a high level):

  • urgent financial hardship;
  • unemployment longer than 3 months;
  • compassionate grounds; and
  • permanent incapacity.

REs must also ensure that the scheme’s constitution includes a provision that expressly allows members to withdraw on hardship grounds. General provisions which provide a right to withdraw in accordance with the Act or which purport to incorporate statutory requirements cannot be relied upon. Where a scheme’s constitution does not provide for members’ withdrawal rights, REs may unilaterally amend the scheme’s constitution to include hardship withdrawal provisions. However, members must be individually contacted and be provided at least 14 days’ notification of any proposed amendment to the scheme’s constitution. This notification must also be published on the scheme’s website.

Although the Instrument enables unilateral amendment to a scheme’s constitution, REs must hold a members’ meeting if a meeting request is received from members with at least 5% of the votes that may be cast. Furthermore, while REs are not required to replicate the content of the Instrument in the Scheme’s constitution, ASIC expects scheme constitutions to contain the following:

  • the ability for members to withdraw on hardship grounds;
  • an RE's discretion to permit or refuse a Hardship Relief request; and
  • an RE's discretion to decide whether to satisfy the Hardship Relief request partially or in full.

As an aside, we note that the Instrument does not apply to REs of IDPS-like schemes, mortgage investment schemes, registered litigation funding schemes that involve representative proceedings and registered time-sharing schemes (collectively defined as an 'excluded scheme' in section 4 of the Instrument).

Applying for Hardship Relief

REs seeking to rely on the Instrument must provide ASIC with a notice of reliance on the relief, which includes a statement signed by a director or secretary of the RE that the board of the RE have resolved that the scheme is a frozen fund and that following any Hardship Relief payments, the scheme property will have adequate cash for an additional six month period for future hardship withdrawals and the day-to-day operation of the scheme. Once reliance on the relief ends, the RE must provide ASIC with a notice of cessation. In addition to notifying ASIC, REs must also notify members about the scheme’s reliance on the Instrument and explain the effect of the relief.

To assist ASIC with its regulatory approach in response to the continuing effects of the COVID-19 pandemic, the Instrument also stipulates that REs must report quarterly data to ASIC and include details of the number of hardship requests received and number requests satisfied.

ASIC is also continuing to offer individual hardship relief for frozen funds as well as relief to enable "rolling" withdrawal offers. We also note that those REs currently relying on relief in respect of frozen funds, can continue to do so.

While the Instrument may come as a welcomed relief for some REs, as noted above, ASIC has strongly warned REs that they continue to have a duty to act in the best interest of members, and have sought to encourage REs to consider whether seeking Hardship Relief is appropriate for the relevant scheme.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.