The High Court has confirmed that a trustee cannot rely on a its general trustee powers to make an in specie distribution of assets to unit holders in a managed investment scheme without their consent.
In Wellington Capital Limited v Australian Securities and Investments Commission  HCA 43, the High Court dismissed an appeal from a decision of the Federal Court that Wellington Capital Limited (Wellington), the responsible entity of the Premium Income Fund (Scheme), had acted beyond its powers when it made an in specie distribution of shares to scheme members as part of a fund restructure.
In 2012, Wellington sold assets of the Scheme to Asset Resolution Ltd (ARL) in consideration of the issue of 830,532,768 shares in ARL to Perpetual Nominees Limited, as custodian for the Scheme. ARL was a special purpose unlisted public company formed for the purpose of spinning out certain assets of the Scheme. The assets sold to ARL had a value of $90.75 million, which represented about 41% by value of the assets of the Scheme . On the same day, Wellington instructed Perpetual to transfer the ARL shares held by Perpetual to the unit holders in the Scheme in proportion to the number of units held by each unit holder.
Clause 13.1 of the Scheme’s constitution conferred on the responsible entity “all the powers in respect of the Scheme that is legally possible for a natural person or corporation to have and as though it were the absolute owner of the Scheme Property and acting in its personal capacity.” The responsible entity relied on this provision to make the in specie transfer as there was no specific power in the constitution allowing the responsible entity to make an in specie transfer of assets in lieu of a cash distribution. No prior consent to the transfer was obtained from the unit holders.
ASIC objected to the transfer on the basis that the responsible entity had acted beyond its powers. A single judge of the Federal Court rejected ASIC’s application on the basis that the general powers conferred on Wellington by clause 13 picked up the powers conferred on corporations by s 124 of the Corporations Act, which included the power to distribute any of the company’s property among members, in kind or otherwise.
ASIC appealed and the Full Court of the Federal Court allowed the appeal. It held that clause 13.1 is a saving provision which enabled Wellington, as a trustee, to deal with the Scheme property as though it were the absolute owner . Clause 13.1 was not concerned with the powers of Wellington in relation to the unit holders and in the absence of the consent of the beneficiaries, it is not open to a trustee simply to transfer the trust property to the beneficiaries.
Wellington appealed to the High Court, which dismissed the appeal with costs.
Key issues for responsible entities and trustees
The High Court decision is as relevant to trustees of wholesale funds as it is to responsible entities of registered managed investment schemes. General powers clauses like the one in cl 13.1 of the Premium Income Fund’s constitution are common in most constitutions and trust deeds for wholesale and retail funds. They are often relied upon by trustees to conduct the day-to-day business of the trust. However, it is now clear that these general powers clauses do not convey on the trustee an unfettered imprimatur to deal with the assets of the trust in any way they choose, or at least, do not allow a non-consensual transfer of scheme property to unit holders. If you are in doubt about whether you are authorised as a trustee to undertake a certain transaction with trust property, then get a mandate from unit holders and amend the constitution to grant yourself the appropriate powers.