The Federal Court in Owen, in the matter of RiverCity
Motorway Pty Ltd v Madden (No 3) [2012] FCA 313 (RiverCity
No 3) has confirmed that administrators of companies
controlling managed investment schemes are exempted from many of
the usual duties and obligations imposed on responsible entities,
and contained in the Corporations Act 2001 (Cth). This
follows the decision of Norman and others v FEA Plantations
Ltd (2010) 191 FCR 39 (Norman's Case) which held
that receivers are not included in the definition of
"officer" (and therefore subject to the duties imposed by
the Act) for the purposes of managed investment schemes.
Duties of responsible entities
Entities responsible for managed investment schemes have
extensive duties to unit holders as well as general disclosure and
financial reporting obligations. In particular, responsible
entities must:
act in the best interests of scheme members, even if that
conflicts with the interests of the responsible entity
abide by continuous disclosure and financial reporting
obligations (in relation to the scheme), and
comply with the obligations of the responsible entity's
financial services licence.
"Officers" of responsible entities must compel the
entity to abide by these obligations. The term "officer"
is defined in section 9 of the Act and, unless a contrary
intention appears, includes administrators of a company.
The RiverCity Motorway Group consists of 10 companies, one of
which is the responsible entity for two managed investment schemes.
Administrators were appointed to the RiverCity Motorway Group in
February 2011.The Administrators brought an application seeking the
exemption provided to receivers in Norman's Case be
extended to administrators, and that the Administrators be released
from the various duties applicable to responsible entities.
The decision in RiverCity
Following the reasoning in Norman's Case, the Federal Court
confirmed the view that:
when amending the Act's definition of "officer"
in 1999, Parliament did not intend for the new definition to apply
to managed investment schemes
as with receivers, imposing "officers'"
obligations of on the Administrators would place the Administrators
in conflict with their duties to the entity's creditors,
and
in the circumstances, the Administrators (like receivers) ought
not be considered "officers" for the purposes of managed
investment schemes.
Beyond adopting Norman's Case, the Court found that
requiring the Administrators to complete the disclosure and
financial reporting requirements would be unduly onerous and
unnecessary, for the following reasons.
First, the Court found that, as trading of scheme units had been
suspended, unit holders do not require ongoing disclosure and
financial reports.
Secondly, the complexity of the scheme, and the Administration
generally, meant that the costs of disclosure and financial
reporting would be exceptionally high. As no dividend was expected
for unsecured creditors, the costs of disclosure and reporting
would be ultimately borne by the secured creditors, who were able
to request any required information from their Receivers and
Managers.
Conclusion
External administrators of failed managed investment schemes
face novel and difficult questions. One such question relates to
the interaction between administrators' duties owed to scheme
members and those owed to the company's creditors. The decision
in RiverCity No 3 will no doubt provide certainty to
administrators attempting to balance those duties.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Specific Questions relating to this article should be addressed directly to the author.
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