Recent court decisions concerning managed investment schemes

In brief

In this update we report on two recent court decisions that will be of interest to fund managers:

·          Silkman v Shakespeare Haney Securities Ltd [2011] NSWSC 148 – access by beneficiaries to trust documents

·          AvSuper Pty Ltd v Commonwealth Managed Investments Ltd [2010] NSWSC 1499 – redemption of units from illiquid scheme

Access by beneficiaries to trust documents

Ms Silkman was an investor in a registered managed investment scheme that (like many) became illiquid during the GFC and redemptions from which have been frozen.  She requested the responsible entity to provide access to an extensive list of documents relating to the scheme’s mortgage investments, pursuant to her claimed right in equity as a beneficiary of the trust.  The reason for her request was her concern that many of the investments may not have been suitable and proper investments, and she wished to determine whether any breaches of law had been committed by the responsible entity or its directors.  The responsible entity refused to provide access.

Her case before the New South Wales Supreme Court relied upon a line of case authority (the “Londonderry approach”) [1] under which “trust documents” are themselves either trust property or are so closely related to trust property that they may be characterised as documents in which the beneficiary has an interest.  Under the Londonderry approach, a beneficiary need only establish that the defendant is the trustee and that the documents sought are “trust documents”.

His Honour referred to the Privy Council decision in Schmidt v Rosewood Trust [2] which declined to follow Londonderry and held that a beneficiary has no equitable proprietary interest in documents giving rise to a right of production and inspection, but that rather a beneficiary that seeks disclosure of trust documents may apply to the court, and that an order for disclosure is one aspect of the court’s inherent jurisdiction to intervene in the administration of trusts.

In the absence of clear guidance by Australian appellate decisions, his Honour preferred the Schmidt approach because it did not have the jurisprudential difficulties of the Londonderry approach.  Those difficulties included determining a workable definition of “trust documents”, working out the nature of the beneficiary’s so-called proprietary interest in such documents, the illogical result that a discretionary beneficiary (who has no less an interest in the due administration of the trust but who has no proprietary interest in the trust assets) should be denied disclosure, and the fact that authorities which have taken the Londonderry approach have limited the beneficiary’s right to disclosure by reference to the interests of third parties in maintaining confidentiality.

Taking the Schmidt approach, the court declined to intervene to order disclosure for reasons that included that the plaintiff had failed to establish that the responsible entity had fallen short of its disclosure obligations under the Corporations Act and the constitution or that inspection of the wide scope of documents sought by her would cure any such deficiency.

Key message

Investors in managed investment schemes structured as trusts do not have a general right, by virtue of their beneficiary status, to inspect documents relating to the scheme. 

Note however that, in addition to the right in equity to apply to the court referred to above, the Corporations Act confers on investors the right to inspect and obtain a copy of scheme registers (s.173) and to apply to the court for inspection of books of the scheme (s.247A).

Redemption of units from illiquid scheme

Commonwealth Managed Investments Ltd (CMIL) is the trustee and responsible entity of the Commonwealth Property Hotel Fund, a registered managed investment scheme.  AvSuper Pty Ltd is the beneficial holder of special units in the fund.  The fund was due to be wound up in May 2008, but following a meeting of unitholders its term was extended by 3 years to 2011, and unitholders were given the option of converting their units into special units to be redeemed in three tranches at 6 monthly intervals.  AvSuper exercised the option to have its units converted.  At the time of the meeting the fund was liquid within the meaning of the Corporations Act. [3] However, the fund was adversely affected by the GFC and was not liquid at any of the three redemption dates.

AvSuper sought a declaration that upon the fund again becoming liquid, CMIL was obliged to redeem its units at prices that would have prevailed as at the relevant redemption dates.

The court dismissed the application.  The constitution provided that the trustee has no obligation to redeem or repurchase any units except pursuant to the terms of (a) redemption offers made to all unitholders on the same terms, and where the maximum period in which redemptions had to be satisfied while the fund was liquid is 24 months or (b) a redemption offer taken to be made by the trustee, and taken to be accepted by each holder of special units, in relation to specified proportions of special units on three specified dates.

The constitution did not contain a provision of a kind described in s.601GA(4)(c) providing for the exercise of a member’s right to withdraw while the scheme is not liquid in accordance with Part 5C.6 of the Corporations Act.  Accordingly, the court held, the terms in the constitution for redemption of the special units specifying the members’ right to withdraw from the scheme are exercisable only while the scheme is liquid.  The court considered that on the conversion of units into special units, the responsible entity was taken to have made, and AvSuper was taken to have accepted, a redemption offer for the redemption of special units in accordance with the clause, where the clause is to be read as stipulating that each specified proportion of units is to be redeemed on its specified date “if the fund is then liquid”.  There was nothing in the text of the constitution that provides that if the specified proportion of units is not redeemed at the specified date because the fund is not then liquid, the units will be redeemed at such later date as the fund becomes liquid, nor would it be necessary to imply such a term in order to give business efficacy to the document.

The court further held that as a result of this construction, AvSuper would not be in a special position on the winding-up of the fund, whether or not the fund has then become liquid.  Its right to have its special units redeemed has ceased to exist because the fund was not liquid at the specified dates.

Key message

The decision highlights that the withdrawal provisions in a scheme constitution will be strictly construed, and if the constitution does not specifically provide for withdrawal in circumstances where the scheme is illiquid, existing withdrawal provisions will not be interpreted in a way so as to somehow preserve withdrawal rights that arise during a period of illiquidity until such time (if ever) that the scheme becomes liquid again.