Wellington Capital Limited v Australian Securities and Investments Commission [2014] HCA 43

What the court decided

Wellington Capital Ltd (Wellington) is responsible entity for a managed investment scheme that is now called the Premium Income Fund [2]. In September 2012 Wellington sold scheme assets with a publicly stated value of $90.75 million, about 41% by value of the scheme property, to Asset Resolution Ltd (ARL) for shares, and had the scheme's custodian transfer those shares to the unit holders in proportion to their units [3].

At first instance, Jagot J dismissed the challenge to the transfer brought by the Australian Securities and Investments Commission (ASIC) [4]. On ASIC's appeal, the Full Court of the Federal Court declared that the distribution was beyond Wellington's power under the scheme constitution and that Wellington had contravened section 601FB(1) of the Act [4]. Before the Full Court, ASIC no longer sought a declaration that the transfers were invalid [29]. The Full Court approached clause 13.1 through trust law and held that a trustee cannot simply transfer trust property to beneficiaries without their consent [32].

The appeal to the High Court was dismissed with costs [41]. French CJ, Crennan, Kiefel and Bell JJ gave joint reasons holding that the Full Court was right to find the distribution beyond power [5]. Gageler J gave separate reasons and joined in the dismissal [44].

The joint reasons held that the constitution, read with the Act, limited returns of capital to a winding up or to cash added to a periodic income distribution [5]. Clauses 13.1 and 13.2.5, which let Wellington deal with scheme property as if it were its absolute owner, were facultative provisions for dealings with third parties [35]. They did not authorise transfers of scheme property to unit holders without their consent [35]. The capital component of a distribution under clause 16 depended on the periodic duty to distribute income, and payments under that clause were to be in cash [26]. Clause 26.7, confined to the winding up process, gave no support to a general power to distribute non-cash property [28]. Neither set of reasons decided whether scheme property could be distributed in specie in a winding up [28], [55]. Clause 26.4 provided for distribution of the net proceeds of realisation [27]. The constitution did not authorise the in specie distribution of the ARL shares [36]. On the concern about illiquid assets, the joint reasons said that it might warrant an amendment to the constitution or a winding up [36].

The joint reasons agreed with the Full Court, against the primary judge, that clause 13.1 did not pick up the company power in section 124, because the Act distinguishes company members from scheme members [7]. The duties in section 601FC(1) and the trust in section 601FC(2) bore on construction, although there was no suggestion in the appeal of any breach [34]. ASIC had abandoned an earlier claim under section 601FC(1)(c) [10]. The joint reasons departed from the Full Court's trust law starting point, holding that a responsible entity's powers to dispose of scheme property are found in the constitution, read with statute and, subject to statute, trust law so far as it applies [12], [32]. In the context of this case, the Full Court's consent proposition was too wide [37]. The joint reasons noted that some cases have tended to reject a constraint on reducing a fund's capital analogous to capital maintenance, but left the point open [37].

The joint reasons held that the appropriation power in section 33(1)(l) of the Trusts Act 1973 (Qld), on which Wellington did not rely, was not enlivened on the facts, leaving open its interaction with the Act and the constitution [18].

In the joint reasons, the complaint about the unit holders' representation failed, as no orders operated on their rights [39]. They held that the declarations stated the legal position correctly and were appropriate for the Full Court's reasons, leaving each unit holder to decide whether to accept the transfer of ARL shares or take action about it [40].

Gageler J treated the absolute owner language in clauses 13.1 and 13.2.5 as a legal fiction [50]–[51]. In Gageler J's view, the fiction was inapt to empower dealings with unit holders as unit holders [53]. On Gageler J's reading, clauses 16 and 26 govern those dealings [54]. Gageler J did not address the precise scope of clause 26 [55]. Gageler J concluded that neither clause 13.1 nor clause 13.2.5 was a source of power to make an in specie distribution to unit holders [56]. Gageler J held that the Full Court's judgment on joinder of the unit holders was open to it [59]. Only Gageler J said in terms that the declaration that the transfer was beyond power, which referred not to a lack of legal capacity but to breach of a norm governing its exercise, did not “impugn the validity of the transfer” of legal title [60].

Why it matters

The decision is a reading of this constitution in its statutory setting [37]. The joint reasons read clauses 13.1 and 13.2.5 as directed to dealings with third parties [35], with returns to members governed by the distribution and winding up provisions [36]. In my view, a responsible entity should not assume that a general powers clause in similar terms authorises a distribution of non-cash scheme property to members, where the constitution separately provides for distributions and winding up. Readers should check the current requirements for amending a scheme constitution and the current text of the Act.

The joint reasons left open potential questions between unit holders and Wellington about the shares already transferred [40].

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.