Allens

Funds Management

Focus: Removing REs – what the courts have been saying

23 October 2009

In brief: In recent months, several hostile attempts to remove responsible entities have come before the courts. As a result, there has been sharper focus on the statutory regime for changing responsible entities, with many of the relevant provisions of the Corporations Act 2001 (Cth) having now been tested. Partner Susan Burns and Senior Associate Penny Nikoloudis examine the effect of recent case law on the procedures for removing REs.

How does it affect you?

  • An attempt to remove a responsible entity (RE) needs to be structured carefully to ensure that it can withstand challenge and that unintended consequences are avoided
  • From the perspective of the RE being removed, there are a number of levels on which the removal attempt may be challenged, as the recent cases demonstrate.
  • While the recent cases have clarified many of the procedural issues relating to the removal of REs, there are still some important unresolved questions. Based on current market activity, we expect that it will not be long before those issues are also brought to the courts' attention.

Three ways to replace the RE under the Act

Broadly speaking, under Division 2 of Part 5C.2 of the Corporations Act 2001 (Cth) (the Act), the RE of a registered managed investment scheme can be replaced in three ways:

  • Voluntary retirement: The RE may retire by calling a meeting of the scheme's members to explain its reason for wanting to retire and to enable the members to vote on a resolution to choose a company to be the new RE of the scheme.1
  • Temporary RE appointed by the court: The court may appoint a company as the temporary RE of the scheme if the court is satisfied that the appointment is in the members' interests. An application to the court may be made by the Australian Securities and Investments Commission (ASIC), a member of the scheme or the current RE in the circumstances specified in the Act. The temporary RE is required to call a members' meeting within three months to allow the members to choose a company to be the new RE or, alternatively, the scheme may be wound up.2
  • Removal of RE by members: The members may call a meeting to consider and vote on a resolution that the current RE should be removed and a resolution choosing a company to be the new RE.3

Return to top

The scheme's constitution

It has been held that the statutory procedures for replacing the RE do not necessarily extinguish, or entirely displace, any provisions in the scheme's constitution that purport to give members additional or wider power to remove the RE than that conferred by the Act. Unless a provision in the constitution is in conflict with a provision of the Act (eg by imposing a voting threshold that is inconsistent with that specified in the Act), the provision in the constitution should be allowed to operate.4

For example, a scheme's constitution may provide that the RE must retire if the RE becomes insolvent. Such clauses are commonly found in older constitutions and reflect the previous regulatory regime that required retirement covenants of this nature to be included in trust deeds. As this type of clause is arguably not in conflict with the Act, unless the constitution is amended to remove the clause5, the RE must comply with the undertaking and retire if it becomes insolvent.6 However, the scheme would not be able to continue without an RE, so it would need to be wound up unless a new RE were appointed. This result may not be in the best interests of members, particularly if the scheme itself is not 'insolvent'. In these circumstances, the statutory regime could step in and provide the mechanisms (discussed above) for ASIC, the members or the retiring RE (eg through its liquidator) to take action to have a new or temporary RE appointed to the scheme. Of course, this assumes a replacement RE is available and willing to take on that role.

The Turnbull Review of the Managed Investments Act 1998 (Cth) in December 2001 (the Turnbull Review) considered it undesirable that provisions in a scheme's constitution should override legislative requirements and, accordingly, recommended that 'changes of a scheme's RE should be effective only if made in accordance with Division 2 of Part 5C.2, and provisions of a scheme's constitution relating to the removal and replacement of a scheme's RE should not override the legislation in any circumstances'. However, the recommendations of the Turnbull Review have not, to date, been implemented.

Return to top

Latest developments

Not surprisingly, the flurry of recent court decisions have focused on the procedures that apply where members seek to remove the RE under section 601FM of the Act. Therefore, that is also our focus here.

Thanks to a series of cases involving a variety of schemes, ranging from olive grove projects7 to funds that invest in airport toll roads8 and mortgages9, there is now authority, and greater clarity, on a number of important procedural matters that had, until now, been ambiguous or untested. In summary, these recent cases have explored the following issues.

  • Are there any limits on members' statutory rights to convene meetings?

In the Brisconnections proceedings in April this year, it was held that:

  • a requisition by members to convene a meeting can be set aside on the grounds that the members exercised their right for an improper purpose only if it can be established that the members do not really want the relevant resolution passed at the meeting. This could not be demonstrated in that case and the requisition was held to be valid; and
  • members' statutory rights to requisition meetings and to vote at such meetings are superior to, and prevail over, the contractual rights of third parties (including financiers and underwriters). Any contractual restrictions, such as undertakings not to amend scheme constitutions or change the RE, will not prevent members from exercising their statutory rights to requisition meetings and vote on resolutions that may result in a breach by the RE of a contractual undertaking.
  • How many resolutions?
    • Since the introduction of the managed investments regime, there has been some debate about whether s601FM requires two distinct resolutions to be passed by members (ie one relating to the RE's removal and a separate resolution relating to the appointment of the new RE) or whether a single resolution covering both the removal and the appointment will suffice. There are sometimes strategic advantages in adopting one approach rather than the other.
    • This issue has now been directly addressed in two recent decisions, just months apart from one another.10 The current authority, established in July of this year in City Pacific v Bacon, is that, although s601FM(1) contemplates two resolutions, in the sense that both matters need to be considered by members, it does not require members to vote separately on the removal and replacement resolutions. In that case, the two resolutions were adopted by one vote, and this was held to be consistent with s601FM(1).

Return to top

  • Voting restrictions

The recent cases have also considered the effect of the voting restriction in s253E in the context of resolutions to remove and replace REs:

  • In the past, there has been a question about whether the outgoing RE of an unlisted scheme11 is disqualified from voting on both the removal and replacement resolutions, or only on the removal resolution. (This, of course, was on the assumption that two separate votes would be required which, as discussed above, is no longer supported by case law.) In July this year, in City Pacific v Bacon, Justice Dowsett observed that it would not be difficult to identify why the outgoing RE would be interested in the 'replacement' resolution as well as the 'removal' resolution. The reasons he gives suggest it will almost always be the case that, where an RE is resisting being removed, it will not be able to vote on the 'replacement' resolution.
  • There is also an unresolved issue about the meaning of 'associate' in s253E and whether the appropriate test is that contained in s12 of the Act (on the one hand) or ss11 and 15 of the Act (on the other). In Australian Olives Ltd v Livadaras in September of last year, it was assumed (without analysis or challenge) that the s12 test applies. However, we think this is far from clear and that the issue needs to be resolved by legislative reform or ASIC policy.
  • Reliance on ASIC register

In Huntley Management v Australian Olives (No 2) in June of this year, the court did not accept that a company that becomes named in ASIC's record of registration as the RE of a scheme will, by virtue of that registration, be the 'new RE' if the purported change of RE did not comply with the relevant provisions of the Act. As a practical matter, this means that where a change of RE is being contested, the ASIC register cannot be relied upon as conclusive evidence of the current RE.

Overall, it would be fair to say that the recent cases have gone some way towards facilitating a change of RE at the instigation of members, and making it more difficult to successfully challenge or resist a removal attempt.

These latest developments, as well as some of the more established principles, are discussed in more detail in a table we have prepared.

Footnotes
  1. Section 601FL of the Act.
  2. Sections 601FN, 601FP and 601FQ of the Act, and regulation 5C.2.02 of the Corporations Regulations.
  3. Section 601FM of the Act.
  4. MTM Funds Management Ltd v Cavalane Holdings Pty Ltd [2000] NSWSC 922.
  5. In relation to the RE's power to amend the Constitution, please see our Focus.
  6. The true scope of the exception in Cavalane is untested. Arguably, a provision that causes the automatic removal of the RE is inconsistent with the requirement in Division 2 of Part 5C.2 that members pass a resolution regarding retirement and removal.
  7. Australian Olives Ltd v Livadaras [2008] FCA 1407 and Huntley Management Ltd v Australian Olives Ltd (No 2) [2009] FCA 686.
  8. Brisconnections Management Co Ltd (as responsible entity for the Brisconnections Investment Trust and the Brisconnections Holding Trust) v Australian Style Investments Pty Ltd [2009] VSC 128 and Macquarie Capital Advisers Ltd v Brisconnections Management Co Ltd (as responsible entity for the Brisconnections Investment Trust and the Brisconnections Holding Trust) [2009] QSC 82.
  9. City Pacific Ltd (as the responsible entity for the City Pacific First Mortgage Fund) v Bacon (as agent for the 'Requisitioning Members') (No 2) [2009] FCA 772.
  10. Brisconnections Management Co Ltd (as responsible entity for the Brisconnections Investment Trust and the Brisconnections Holding Trust) v Australian Style Investments Pty Ltd [2009] VSC 128 (April 2009) and City Pacific Ltd (as the responsible entity for the City Pacific First Mortgage Fund) v Bacon (as agent for the 'Requisitioning Members') (No 2) [2009] FCA 772 (July 2009).
  11. An RE of a listed scheme is specifically authorised to vote on resolutions to remove and replace it (s253E).

For further information, please contact:

Return to top

Share or Save for later

What are these?
 

To save this publication on your smartphone or
tablet for off-line reading (eg on a plane flight),
we recommend Pocket.