Allens

Insolvency & Restructuring

Focus: Winding up managed investment scheme with insolvent responsible entity

30 November 2009

In brief: The New South Wales Supreme Court recently found1 that if a responsible entity of a managed investment scheme goes into administration, it will still be liable to pay the shortfall in the costs of winding up any of the schemes for which it is responsible, even though this will reduce the pool of funds available to its unsecured creditors. Partner Michael Quinlan and Lawyer Ruth Greenwood report.

How does it affect you?

  • The responsible entity for a scheme will be liable for the costs of winding it up if the scheme does not have sufficient assets to cover the costs, even if the responsible entity is insolvent.
  • If you are an unsecured creditor of an insolvent responsible entity, your right to recover funds from the responsible entity will, where the schemes do not have sufficient assets to cover the winding-up costs, be subordinated to the costs of winding up the schemes for which it is responsible.
  • If you are an insolvency practitioner responsible for winding up a scheme that does not have sufficient assets to cover the costs of this, you can apply the responsible entity's assets to cover the shortfall.

Background

Rubicon Asset Management Limited (RAML) managed five managed investment schemes (the schemes) and was in administration. Justice McDougall accepted that each of the schemes was insolvent, and therefore agreed that they should be wound up on just and equitable grounds. It was accepted that the schemes did not have sufficient assets to meet the costs of winding them up. The issue was thus whether RAML could be made to expend its funds in winding up the schemes (given that this would reduce the pool of funds available to its unsecured creditors).

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Findings

Justice McDougall found that the court can order the winding up of a scheme even if the responsible entity's right of indemnity for the costs and expenses of winding up is likely to have no practical value – that is, a court can order that a responsible entity in administration incur the costs and expenses of winding up schemes for which it is responsible. He found this on the basis of:

  • section 601FH of the Corporations Act 2001 (Cth) (the Act), which provides that a responsible entity does not cease to be a responsible entity because it is under administration;
  • s601ND, which gives the court the power to order that a scheme be wound up by the responsible entity; and
  • s601NF, which provides that if an order for winding up is made under s601ND, the court has a relatively wide discretion to make directions as to how the scheme may be wound up.

Justice McDougall likened the power in s601NF to that in s601EE, which has been found, in many cases, to be a power without restriction.2

His Honour observed that his finding meant that the responsible entity's obligations took precedence, to the detriment of the responsible entity's creditors. Justice McDougall noted that this finding is envisaged by, and therefore is consistent with, the statutory scheme.

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What you should be doing in light of the decision

This decision is an important clarification of what happens when a managed investment scheme needs to be wound up but has insufficient funds to pay for it. Unsecured creditors of responsible entities need to be aware of this, as it is another way their funds may be dissipated. The decision provides important guidance for insolvency practitioners appointed to responsible entities.

Footnotes
  1. In Rubicon Asset Management Limited [2009] NSWSC 1068 per Justice McDougall.
  2. See, for example, Justice Mullins in Australian Securities and Investments Commission v Atlantic 3 Financial (Aust) Pty Ltd (No.3) [2004] 1 Qd R 591 at 597 [28]; Justice Warren in Australian Securities and Investments Commission v ABC Fund Managers Ltd (No.3) [2001] VSC 397 at [5]; and Justice Barrett in Australian Securities and Investments Commissions v Commercial Nominees of Australia Ltd (2002) 42 ACSR 240 at 243-244 [13]. 

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