Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Corporate Collective Investment Vehicles

The government is consulting on a Bill in line with what it says is its commitment “to establishing a commercially viable regime for corporate collective investment vehicles (CCIVs) from 1 July 2022. A CCIV is an investment vehicle with a corporate structure – designed to be an alternative to a trust-based managed investment scheme”.  Corporate Collective Investment Vehicles – Regulatory and Tax Frameworks | Treasury.gov.au

The difficulties with the current managed investment schemes are well documented, including as to the fact that they have no external administration laws beyond those applicable to companies under Ch 5 of the Corporations Act.

The Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill 2021 would introduce a new Chapter 8B in the Corporations Act, containing the core provisions outlining the establishment of CCIVs and their regulatory requirements.

Changes are also made to the income tax law, which align the tax treatment of CCIVs to the existing treatment of attribution managed investment trusts (providing investors with the benefits of flow-through taxation); and amendments to other legislation to support the implementation of CCIVs, such as to the ASIC Act 2001 and the PPSA 2009.

The draft law for the CCIV regime was released for public consultation in several tranches in 2018. In January and February 2019, a full exposure draft package of the regulatory and tax law was released for further public consultation.

What is a CCIV?

According to Treasury, a

“CCIV is a new type of company limited by shares. Adopting the corporate structure ensures that CCIVs are recognisable to offshore investors and fund managers. Many features of the managed investment scheme regime have been incorporated into the regulatory framework for CCIVs to ensure the efficient operation of the domestic funds management industry and broadly consistent investor protections. The core regulatory framework and basic operational requirements for CCIVs previously consulted on in 2018 and 2019 have been maintained”.

Insolvency issues

Essentially, sub‑funds of a CCIV are to be operated as separate businesses: s 1233B. The new law sets out a single insolvency regime for CCIVs that applies on a sub-fund by sub-fund basis. As what Treasury calls “a protected cell”, a sub-fund may enter into external insolvency administration and this does not affect the operation of each other sub-fund of the CCIV, addressing a significant problem with managed investment schemes. A CCIV itself cannot be wound up.  Treasury says that

“ensuring that all CCIVs are subject to a single insolvency regime promotes greater certainty and consistency in the external administration of sub-funds of the CCIV: see [7.71 and 7.153] of the EM.

The amendments contained in Part 8B.6 of the Bill modify the application of the Ch 5 external administration framework – schemes of arrangement, receivership, winding up and voluntary administration – so that, in the case of CCIVs, external administration applies to each sub‑fund of a CCIV rather than to the CCIV as a whole. This ensures the strict segregation of the assets and liabilities of a sub-fund is preserved throughout the external administration process.

The provisions in Part 8B.6 draw in part on the approach adopted for external administration of health benefits funds under the Private Health Insurance (Prudential Supervision) Act 2015 – see Division 6–External management of health benefits funds. Treasury explains that health benefits funds have some similarities to sub‑funds of a CCIV in that they are not separate legal entities.

United Kingdom’s Open-ended Investment Company (OEIC)

This approach contrasts with that adopted in the United Kingdom’s OEIC regime under s 236 of the Financial Services and Markets Act 2000 where sub‑funds are deemed to have separate legal personality for the purposes of external administration (but not for any other purpose). Treasury says that the UK’s approach has not been adopted “because it would artificially distinguish between the legal personality of sub‑funds before and during external administration”.

Translation rules

In order to have external administration apply on a sub-fund-by-sub-fund basis, “translation rules” are applied to the existing external administration provisions in Chapter 5.  These rules ensure that the process for winding up a company in Chapter 5 applies in respect of a sub-fund of a CCIV.  The translation rules applying to each of the Chapter 5 procedures for CCIVs (that is, schemes of arrangement, receivership, winding up and voluntary administration) are broadly equivalent.

Insolvent trading

As one exception, the translation rules apply to the insolvent trading provision under s 588G, however the rules are modified to ensure that the natural person directors (rather than the corporate director) owe the duty to prevent insolvent trading. The directors of the corporate director have a duty to prevent insolvent trading by sub‑funds: see section 588G (as modified by Division 5 of Part 8B.6).

In the context of reductions in share capital, (s 1231R),

“(2) a sub‑fund is solvent if, and only if, the CCIV is able to pay all the debts that are liabilities of the sub‑fund, as and when they become due and payable.

Note:    The liabilities of a sub‑fund can only be met from assets of the sub‑fund: see section 1233S.

(3)         A sub‑fund that is not solvent is insolvent”.

Winding up demands

In the context of a winding up demand, leading to the winding up of a sub‑fund in insolvency, s 1238D, “when a sub‑fund is presumed to be insolvent” provides that s 459C(2)(a) “is taken to be satisfied in relation to a sub‑fund of a CCIV if: (a) the CCIV failed (as defined by section 459F) to comply with a statutory demand; and (b) the failure affects the sub‑fund (see subsection 1238E(3))…

Section 1238E(3) provides that “whether a CCIV has failed to comply with a statutory demand is determined under section 459F. If the CCIV has failed to comply with a statutory demand, the failure affects each sub‑fund specified in the demand”.

However voluntary administration is not available in the CCIV regime.  This is because, as a CCIV does not carry on an active business, the 20-business day moratorium on creditor claims “is less likely to improve the outcomes for creditors and members in the CCIV context”: s 435D.

Powers of liquidators and directors

The new law also sets out the powers of a liquidator and corporate director when a sub-fund is being wound up. A liquidator only has the power to perform a function to the extent that it relates to the sub- fund that is being wound up. The corporate director continues to make all allocation determinations and exercise its normal powers for the sub-funds that are not being wound up.

Parts 5.1 and 5.2

In the arrangement and reconstruction provisions in Part 5.1 of the Corporations Act, the consequence of applying the translation rules is that sub-funds may be rearranged within a CCIV or transferred between CCIVs. The new law also grants the Court additional powers to make orders in the CCIV context, including orders in relation to the assets and liabilities of a sub-fund.

In the receivership provisions, Part 5.2, receivers are taken to be appointed by each sub-fund separately. Receivers have special powers to challenge allocation determinations before the Court.

Part 5.3A?

However voluntary administration is not available in the CCIV regime.  This is because, as a CCIV does not carry on an active business, the 20-business day moratorium on creditor claims “is less likely to improve the outcomes for creditors and members in the CCIV context”: s 435D.

Deregistration

The amendments contained in Part 8B.6 provide a process for deregistering sub-funds and CCIVs.

A sub‑fund of a CCIV may be voluntarily deregistered on application by the CCIV, the corporate director or the liquidator of the sub‑fund. ASIC or a Court may also initiate deregistration of a sub‑fund in certain circumstances.

A CCIV must be deregistered by ASIC after the CCIV’s last sub-fund has been deregistered. This is the only way a CCIV may be deregistered.

The consequences of deregistering a sub-fund or CCIV generally mirror the consequences of deregistering other types of companies under Chapter 5A.

The consultation has closed.

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