The publication of the 2015 book Insolvent Investments, edited by Stewart Maiden QC (LexisNexis), may have been a surprise to those who developed our managed investments schemes (MIS) law in the 1980s and 1990s. A series of inquiries and reports recommended ultimately what became Part 5C of the Corporations Act; but scant attention was given to the need for provisions dealing with the possible insolvency and liquidation of a MIS.
The book goes through the history of various reform recommendations at that time but is unable to find reasons for the limited attention given to the possible failure of a MIS, except perhaps an undue optimism and faith in the value and permanency of such schemes – indeed, how could investing in nice things like young trees and olive groves growing over decades possibly not succeed?
As the book then explains, the GFC tested many investment structures and MIS in particular were found wanting. So much so that, as the book says, ‘ingenious’ approaches by lawyers and the courts were required to deal with major MIS failures – Timbercorp, Great Southern, being early examples – adding much legal complexity and time in resolving their liquidation and returning what limited money remained to creditors and investors. A parliamentary inquiry in 2009 was the first of several.
Corporate Collective Investment Vehicle (CCIV)
All this is for the purpose of saying that a new investment structure – a Corporate Collective Investment Vehicle (CCIV) – is being proposed by the government, to replace MIS. It is said that it
‘will offer an internationally recognisable investment vehicle which can be readily marketed to foreign investors, including through the Asia Region Funds Passport’: [as to the Passport, see Managed-investment-schemes-proposed-reforms.]
The government previously released the tranche 1 draft Bill for consultation on 13 June 2018. Submissions for that tranche closed on 18 July.
The government has now released for public consultation the second tranche of the Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill 2018 and explanatory materials, with submissions having closed on 10 August.
The Bill would add provisions to the existing Corporations Act, with reliance placed on some provisions in Chapter 5.
External administration of a CCIV in a winding up
The draft Bill has detailed provisions for how a CCIV might be wound up, both voluntarily and by the court, with specially designed statutory demands being proposed, among other features. There then follows the processes and powers, and limitations on the liquidator’s role, necessary because the structure of the new law is that the provisions in the Corporations Act relating to winding up generally would apply not to the CCIV itself, but separately in respect of each sub‑fund of the CCIV. This would involve treating the CCIV in a winding up as if it comprised only of the sub‑fund that is affected by the winding up; and other sub‑funds of the CCIV would be kept separate and not affected.
The winding up provisions operate in respect of each sub‑fund by applying four separating assumptions, that:
- the only business carried on by the CCIV is the business of the sub‑fund in respect of which the CCIV is being wound up;
- the only shares issued by the CCIV are the shares referable to that sub‑fund;
- the only property of the CCIV is the property allocated to that sub‑fund; and
- the only debts and claims of the CCIV are the liabilities of that sub‑fund.
This approach preserves the segregation of assets between sub‑funds, the lack of which in current MIS law has created complex issues for the courts in the winding up of many MIS, as to the identification of scheme property, the rights of trust creditors and the tracing of assets.
The amendments therefore modify the application of the Ch 5 external administration framework so that, in the case of CCIVs as distinct from other companies, external administration applies in respect of a sub‑fund of a CCIV, rather than to the CCIV as a whole.
As the explanatory materials say, these provisions draw on the approach adopted for external administration of health benefits funds under the Private Health Insurance (Prudential Supervision) Act 2015. Health benefits funds have some similarities to sub‑funds of a CCIV as they are not separate legal entities.
Receivership and schemes of arrangement, but not voluntary administration
The Bill focuses on the liquidation of a sub-fund. Receivership and schemes of arrangement will also apply in respect of a sub‑fund. Voluntary administration and ASIC‑initiated wind up procedures will not apply. These provisions are said to be ‘under development’.
Other aspects of the Bill
The draft provisions also apply the Chapter 7 financial services regime to CCIVs; deal with the liability of the corporate director of a CCIV for contraventions by the CCIV; and the explanatory materials also include the proposed penalties framework for CCIVs, and the proposed approach to takeovers, compulsory acquisitions and buy-outs of a CCIV. The provisions for these aspects of the Bill are also under development.
As Stewart Maiden writes, ‘MIS may not be around forever, but collective investing will’ with ‘the lure of profit’ causing ‘constant evolution both of collective investment vehicles and the ways in which they are used’.
One way to assess the new CCIV regime is to see if it addresses the many deficiencies of existing MIS law. And the quality of any legal structure is often best tested by working out whether the various rights and interests it offers are readily and equitably resolved in the event of its failure and winding up.