House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Treasurer, Minister for Housing and Minister for Homelessness, Social and Community Housing, the Hon Michael Sukkar MP)

Chapter 6: CCIVs - Operating a CCIV

Outline of chapter

6.1 Divisions 1 to 5 of Part 8B.5 of Chapter 8B establish the regulatory framework for operating the sub-funds of a CCIV and allocating the assets and liabilities to sub-funds.

Context of amendments

6.2 Fund managers generally offer investors a choice of funds with different investment strategies. This allows investors flexibility around the assets underpinning their investments and the risk-return exposures they wish to take. Through the facility of sub-funds, CCIVs will be able to offer multiple investment strategies under a single corporate vehicle. This is an important feature of the CCIV regime that is expected to produce economies of scale and cost savings for funds managers, compared with the existing MIS regime that does not allow the consolidation of multiple funds.

6.3 The concept of a sub-fund draws on overseas regulatory precedents such as the United Kingdom's OEIC regime, in particular by having sub-funds sit within a corporate structure but not as a separate legal entity.

6.4 The sub-fund framework allows managed funds to offer a variety of investment options through multiple sub-funds under a single umbrella CCIV, and protects investors in a particular sub-fund of a CCIV by quarantining the business of that sub-fund from the business of all the other sub-funds of the CCIV. This is achieved by strictly segregating the assets and liabilities of each sub-fund from the assets and liabilities of the other sub-funds of the CCIV, including in an external administration context. See Chapter 7 for an explanation of the external administration arrangements for CCIVs and sub-funds.

Summary of new law

6.5 Divisions 1 to 5 of Part 8B.5 of Chapter 8B of Schedule 1 to the Bill establish the regulatory framework for sub-funds.

6.6 Division 1 clarifies the meaning of references to property of a CCIV and liabilities of a CCIV.

6.7 Division 2 sets out the fundamental requirement that every part of a CCIV's business must be referable to one and only one sub-fund and, taken together, the businesses of all of the sub-funds of a CCIV must comprise the entire business of the CCIV. Each sub-fund of a CCIV must be operated as a separate business.

6.8 Division 3 sets out the rules for determining what are the assets and liabilities of sub-funds and the segregated application of assets of sub-funds. It also establishes requirements for keeping an allocation register of the assets and liabilities of a CCIV.

6.9 Divisions 4 and 5 establish the purposes for which sub-fund assets may be applied and requirements for holding assets.

Comparison of key features of new law and current law

Detailed explanation of new law

Operating a sub-fund as a separate business

6.10 A CCIV may only operate a part of its business if that part of the business has been registered as a sub-fund. For the rules relating to registration of a sub-fund, see paragraphs 2.84 to 2.89. [Schedule 1, item 4, subsection 1233B(1)]

6.11 Each part of the CCIV's business that is registered must be operated separately from any other part of the CCIV's business. [Schedule 1, item 4, subsection 1233B(2)]

6.12 The effect of these requirements is that every part of the business of the CCIV must be referable to a sub-fund and no part of a CCIV's business can be referable to more than one sub-fund. If a CCIV has only one sub-fund, then the entire business of the CCIV is referable to that sub-fund. If a CCIV has multiple sub-funds, then each sub-fund must comprise a particular part of the CCIV's business and the business of every sub-fund of a CCIV must, when taken together, constitute the entire business of the CCIV.

6.13 If the corporate director does not register a part of the CCIV's business as a sub-fund or does not operate each sub-fund as a separate business, the corporate director commits an offence. If the corporate director acted intentionally, the offence is a fault-based offence with a maximum penalty of two years imprisonment. If intention cannot be established, the corporate director commits a strict liability offence with a penalty of up to 60 penalty units. [Schedule 1, item 4, subsections 1233B(3) to (5); Schedule 2, item 199, penalty for subsections 1233B(4) and (5) inserted into Schedule 3 to the Corporations Act]

6.14 The requirement to register sub-funds and operate them separately is critical for ensuring segregation between each of the parts of the CCIV's business. If the corporate director does not comply with these obligations, the integrity of the CCIV regime would be fundamentally compromised. For this reason, the imposition of a strict liability offence and penalty is appropriate. The offence is consistent with the Guide to Framing Commonwealth Offences.

Allocating assets and liabilities to sub-funds

6.15 The rules for allocating assets and liabilities of a CCIV to its constituent sub-funds are, to the greatest extent possible, automatic in their application. In this respect, they draw in part on requirements for statutory funds under the Life Insurance Act 1995 and for health benefit funds under the Private Health Insurance (Prudential Supervision) Act 2015.

6.16 The allocation rules are designed to ensure that all of a CCIV's assets and liabilities can be allocated to its sub-funds by the force of the rules themselves and cannot be left unallocated due to an act or omission by the corporate director of the CCIV. This is particularly important given that key aspects of the regulatory framework for CCIVs, such as the rules for external administration, operate at the sub-fund level.

Assets of a sub-fund

6.17 The assets of a CCIV generally comprise the money and property the CCIV acquires in the course of conducting its business. References to property of a CCIV for the purposes of Part 8B.5 include PPSA retention of title property that has vested in the CCIV. For an explanation of the meaning of PPSA retention of title property and a discussion of when PPSA retention of title property vests in a CCIV, refer to paragraphs 7.153 to 7.155. This extension is required as references in the Corporations Act to property of a corporation do not include PPSA retention of title property unless expressly provided for (see the note to the definition of 'property' in section 9). It ensures that the asset allocation rules can apply comprehensively to property of a CCIV. [Schedule 1, item 4, section 1233]

6.18 As a general rule, money or property acquired by a CCIV forms part of the assets of a sub-fund to the extent that the money or property was obtained by applying assets of the sub-fund (for example, by making investments). [Schedule 1, item 4, subsection 1233H(1); Schedule 2, item 3, definition of 'assets' in section 9 of the Corporations Act]

6.19 Subject to this general rule, the assets of a sub-fund comprise:

•

amounts paid in consideration for the issue of any shares that are referable to the sub-fund;

•

shares acquired by the CCIV in respect of the sub-fund that are shares in the CCIV that are referable to another sub-fund of the CCIV;

•

money deposited with or lent to the CCIV in connection with the issue of debentures that are referable to the sub-fund; and

•

any other money or property of the CCIV that, at the time it is acquired, relates solely to the business of the sub-fund.

[Schedule 1, item 4, paragraphs 1233H(2)(a) to (d)]

6.20 Money or property of a CCIV that is not covered by these rules - that is, money or property that relates to the business of more than one sub-fund of a CCIV - is allocated to a sub-fund in the proportion that is fair and reasonable to allocate at the time the money or property is acquired. The proportion that is fair and reasonable to allocate may be nil. [Schedule 1, item 4, paragraph 1233H(2)(e)]

6.21 This is a default allocation that applies subject to there being an operative allocation determination in respect of the money or property. In the absence of an operative allocation determination, the default allocation operates to ensure money or property of a CCIV that relates to the business of more than one sub-fund can be included as assets of a sub-fund. Allocation determinations for assets are explained at paragraphs 6.24 to 6.35 of this explanatory memorandum.

6.22 Provision is also made for the regulations to prescribe matters to be considered in determining the extent to which money or property of a CCIV forms part of the assets of a sub-fund of the CCIV. This ensures any gaps, ambiguities or unintended consequences resulting from the application of the rules governing what are the assets of a sub-fund can be addressed in a timely manner. This is critical given the central importance of the asset allocation rules for the effective operation of CCIVs and sub-funds. [Schedule 1, item 4, subsection 1233H(5)]

6.23 The assets of a sub-fund also include (or exclude) assets that the Court has ordered are to be (or are no longer to be) assets of the sub-fund as part of an arrangement or reconstruction (see paragraph 7.58). The Court's power to determine assets to be, or not to be, assets of a sub-fund operates despite the allocation rules for assets described above. [Schedule 1, item 4, subsection 1233H(4)]

Allocation determinations - assets

6.24 If money or property acquired by a CCIV in a single transaction relates to the business of more than one sub-fund of the CCIV, the corporate director must determine in writing the proportion of the money or property that is to be allocated to each sub-fund. The proportion that is to be allocated to a sub-fund may be nil. [Schedule 1, item 4, subsections 1233J(1) and (2)]

6.25 The determination by the corporate director must be fair and reasonable in the circumstances, having regard to the rules for what are assets of a particular sub-fund (see paragraphs 6.17 to 6.23). The determination must be made as soon as practicable after the money or property is acquired and must result in the money or property being wholly allocated between the CCIV's sub-funds. This protects the segregation of sub-fund assets by ensuring that all money or property that is subject to an allocation determination is allocated across the CCIV's sub-funds and there is no unallocated or partially allocated money or property. [Schedule 1, item 4, subsection 1233J(3)]

Example 6.1 All of the money or property must be allocated

A CCIV acquires property that relates to the business of both of its sub-funds. The corporate director determines that 50 per cent of the property should be allocated to one sub-fund and 45 per cent of the asset should be allocated to the other sub-fund.

This would not be a permissible allocation as it would leave 5 per cent of the property unallocated to a sub-fund.

6.26 In practice, there may be several allocation determinations that are 'fair and reasonable in the circumstances'. The corporate director may determine an allocation of money or property to be fair and reasonable in the circumstances so long as it lies within the bounds of what a reasonable person in the corporate director's position could consider to be fair and reasonable in the circumstances. It does not matter that there may be other allocations that are fair and reasonable.

6.27 As long as the determination is one that a reasonable person in the corporate director's position could make, the allocation determination is operative from the time the money or property is acquired by the CCIV. If such an allocation determination is made after the money or property is acquired by the CCIV then the determination will be retrospective in its application. [Schedule 1, item 4, subsections 1233J(4)]

6.28 The particular proportion of money or property that is allocated to a sub-fund under an operative allocation determination is then taken to form part of the assets of the sub-fund from the time the money or property was acquired. This means that the default allocation for money or property that relates to the business of more than one sub-fund (see paragraphs 6.20 and 6.21) no longer applies in respect of that money or property. This ensures there is certainty about how the money or property is allocated between sub-funds as an operative allocation determination is definitive. [Schedule 1, item 4, subsection 1233H(3)]

Example 6.2 When the default allocation operates

On 31 December a CCIV acquires property that requires an allocation determination. The corporate director does not make an allocation determination until 2 January. The default allocation initially operates on 31 December and 1 January.

On 2 January, the corporate director makes an operative allocation determination. This allocation determination then operates retrospectively from the day the property was acquired, that is, from 31 December and replaces the default allocation, such that the default allocation no longer applies for the period 31 December to 1 January.

6.29 An operative allocation determination is irrevocable. This means that an operative determination may only be declared to be inoperative under an order of the Court. See paragraphs 6.61 to 6.63 for information about orders the Court can make in relation to assets and liabilities of sub-funds. [Schedule 1, item 4, subsection 1233J(5) and section 1233Q]

6.30 If an allocation determination is not 'fair and reasonable', does not result in the money or property being wholly allocated or does not comply with any relevant regulations, then the determination is not an operative determination. Instead, the corporate director's attempted exercise of its power has miscarried and there is no allocation determination by the corporate director. In the absence of an operative allocation determination, the default rule that applies to money or property that relates to the business of more than one sub-fund would continue to have effect (see paragraphs 6.20 and 6.21).

Example 6.3 An operative allocation determination

Grevillea CCIV has three sub-funds (Sub-fund A, Sub-fund B and Sub-fund C). Grevillea CCIV receives a lump-sum transfer of $1,000 from an investor that is consideration for shares to the value of $400 in Sub-fund A and shares to the value of $600 in Sub-fund B. Since the money is received in a single transaction and relates to the business of more than one of Grevillea CCIV's sub-funds, Grevillea CCIV's corporate director must make an allocation determination.

After considering the rules about when money or property forms part of the assets of a sub-fund - in particular the rule that amounts paid up in consideration for the issue of shares referable to a sub-fund are assets of the sub-fund - the corporate director determines that the allocation for Sub-fund A is $400, the allocation for Sub-fund B is $600 and the allocation for Sub-fund C is $0. The corporate director's allocation determination is fair and reasonable in the circumstances having regard for the rules about when money or property forms part of the assets of a sub-fund and results in the $1,000 lump sum being wholly allocated and so is an operative allocation determination.

As a result, $400 becomes part of the assets of Sub-fund A and $600 becomes part of the assets of Sub-fund B from the day the $1,000 lump sum was received by Grevillea CCIV.

6.31 A failure to comply with the requirements for allocation determinations is a fault-based offence, punishable by up to two years imprisonment. It is critical for the integrity of the segregation of each sub-fund that allocation determinations are made in accordance with these requirements. This penalty is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsection 1233J(6); Schedule 2, item 199, penalty for subsection 1233J(6) inserted into Schedule 3 to the Corporations Act]

6.32 A corporate director is not required to make an allocation determination if all of the sub-funds of the CCIV are being wound up. In a prosecution, the corporate director does not bear an evidential burden in relation to whether all of the sub-funds of the CCIV are in wind up as this information is not uniquely within the knowledge of the corporate director. This is consistent with the Guide to Framing Commonwealth Offences. In this situation, the liquidator or receiver must apply to the Court for an order declaring the extent to which money or property forms part of the assets of each sub-fund of the CCIV. For a discussion of how an allocation determination can be made or challenged after all of the sub-funds enter wind up, see paragraph 7.120. [Schedule 1, item 4, subsections 1233J(7) to (9), paragraph 1233Q(1)(e)]

When a single item of property must be converted into money or other fungible property

6.33 If, as a consequence of applying the allocation rules (see paragraphs 6.17 to 6.22), a single item of property forms part of the assets of two or more sub-funds, the corporate director must convert the property into money or other fungible property that can be allocated between the sub-funds. Once converted, the money or converted assets become assets of each sub-fund of the CCIV according to the proportion of the original asset that formed part of the assets each sub-fund. This is consistent with the general rule that is described in paragraph 6.18. [Schedule 1, item 4, subsections 1233K(1) and (3)]

6.34 For the purposes of this requirement, an item of property should be treated as a single item of property if it would generally be applied or dealt with as a single indivisible item in the ordinary course of commercial dealing. [Schedule 1, item 4, subsection 1233K(2)]

6.35 Converted property must also comply with the allocation rules; that is, no single item of converted property can form part of the assets of two or more sub-funds, as this would necessitate a further conversion of the property. [Schedule 1, item 4, subsection 1233K(3)]

6.36 The conversion must be completed as soon as practicable after the item of property is acquired. A failure to comply with the requirements for converting assets is a fault-based offence, punishable by up to two years imprisonment. It is critical for the integrity of the segregation of each sub-fund that conversions are made in accordance with these requirements. This penalty is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsection 1233K(5); Schedule 2, item 199, penalty for subsection 1233K(5) inserted into Schedule 3 to the Corporations Act]

Liabilities of a sub-fund

6.37 As with assets, liabilities that are incurred by a CCIV in the course of its business must be allocated to the CCIV's sub-funds. The liabilities of a CCIV for the purposes of the Corporations Act (other than Chapter 2M and the accounting standards made under it) include:

•

debts of the CCIV (including contingent and prospective debts);

•

expenses of the CCIV: and

•

anything else that might give rise to a debt or claim against the CCIV, whether present or future, certain or contingent, ascertained or sounding only in damages.

[Schedule 1, item 4, subsections 1233A(1) and (3)]

6.38 This definition is wide enough to capture contingent or prospective liabilities that may be submitted to a liquidator in the context of winding up.

6.39 For the purposes of the sub-fund rules in Part 8B.5, a CCIV is taken to have incurred a liability when the circumstances giving rise to the debt, expense or claim occur. A debt is generally incurred when the obligation to pay arises. A contingent claim usually arises when the circumstances giving rise to the potential future liability arises. [Schedule 1, item 4, subsection 1233A(2)]

6.40 The liabilities of a sub-fund of a CCIV at a particular time are:

•

liabilities of the CCIV that relate solely to the business of that sub-fund; and

•

any other liabilities of the CCIV to the extent that it is fair and reasonable in the circumstances to allocate the liability to the sub-fund.

[Schedule 1, item 1, subsection 1233L(1)]

6.41 In determining whether it is fair and reasonable in the circumstances to allocate a part of a liability to a sub-fund, the following matters must be taken into account:

•

the extent to which the liability, at the time it arose, related to the business of the sub-fund;

•

the extent to which the assets of the sub-fund, as against assets of other sub-funds, have been applied to meet the liability since it arose; and

•

any regulations made for the purpose of determining whether a liability of a CCIV forms part of the liabilities of a sub-fund of the CCIV.

[Schedule 1, item 4, paragraph 1233L(1)(b) and subsection 1233L(4)]

6.42 The second of these three matters is ambulatory in its operation and is relevant in situations where the proportion of a liability that relates to the sub-fund may alter over time. It is for this reason that the liabilities of a sub-fund are defined with reference to a particular time.

Example 6.4 Variation in the allocation of a liability over time

Hovea CCIV takes out an interest only loan for two of its sub-funds, Sub-fund A and Sub-fund B, for the purposes of making investments for each of the sub-funds. 50 per cent of the loan principal is borrowed against the assets of sub-fund A and 50 per cent of the loan principle is borrowed against the assets of sub-fund B. Interest on the loan accrues daily and is payable in regular instalments.

At the time the first repayment of interest is due, 50 per cent of the interest charge is allocated to each sub-fund, reflecting the sub-funds' respective shares of the loan principal upon which the interest accrued during the first repayment period. At that time, Hovea CCIV pays 50 per cent of the interest charge and repays 25 per cent of the loan principle out of the assets of Sub-fund A and 50 per cent of the interest charge out of the assets of Sub-fund B (no principal is repaid out of the assets of Sub-fund B).

At the time the second payment of interest is due, taking into account the rules for determining when it is fair and reasonable in the circumstances to allocate a liability of a CCIV to a sub-fund, 33? per cent of the interest charge forms part of the liabilities of Sub-fund A and 66? of the interest charge forms part of the liabilities of Sub-fund B, since this reflects the sub-funds' respective shares of the outstanding principle on which interest accrued during the second repayment period.

6.43 As with the rules for assets of a sub-fund, default rules apply for liabilities of a CCIV that do not relate solely to the business of a particular sub-fund, subject to there being an operative allocation determination (see paragraphs 6.46 to 6.54 in respect of the liability. In the absence of an operative allocation determination, the default rules ensure a liability of the CCIV that relates to more than one sub-fund can be included as part of the liabilities of a sub-fund.

6.44 Provision is also made for the regulations to prescribe matters to be considered in determining the extent to which a liability of the CCIV forms part of the liabilities of a sub-fund of the CCIV. This ensures any gaps, ambiguities or unintended consequences resulting from the application of the rules governing what are the liabilities of a sub-fund can be addressed in a timely manner. This is critical given the central importance of the liability allocation rules for the effective operation of CCIVs and sub-funds. [Schedule 1, item 4, subsection 1233L(4)]

6.45 The liabilities of a sub-fund also include (or exclude) liabilities that the Court has ordered are to be (or are no longer to be) liabilities of the sub-fund as part of an arrangement or reconstruction (see paragraph 7.58). The Court's power to determine liabilities to be, or not to be, liabilities of a sub-fund operates despite the allocation rules for liabilities described above. [Schedule 1, item 4, subsection 1233L(3)]

Allocation determinations - liabilities

6.46 If a liability of a CCIV relates to the business of more than one of the CCIV's sub-funds, the corporate director must determine in writing the proportion of the liability that is to be allocated to each sub-fund. The proportion of the liability that is to be allocated to a sub-fund may be nil. [Schedule 1, item 4, subsections 1233M(1) and (2)]

6.47 The corporate director's determination must be fair and reasonable in the circumstances, having regard to the rules for allocating liabilities to sub-funds (see paragraph 6.41). The determination must be made as soon as practicable after the liability arises, result in the liability being wholly allocated between the CCIV's sub-funds, and be expressed to apply from the time the liability arises. [Schedule 1, item 4, subsection 1233M(3)]

6.48 The rules governing allocation determinations for liabilities broadly mirror the requirements for allocation determinations for assets. For a discussion of when a determination is 'fair and reasonable' and why 100 per cent of a liability must be allocated, see paragraphs 6.25 to 6.27.

6.49 The proportion of the liability that is to be allocated to a sub-fund under an allocation determination may be varied in certain circumstances (see paragraphs 6.55 to 6.60) and thus an allocation determination has application at a particular time.

6.50 The allocation determination is operative at a time if the determination applies at that time and is one that a reasonable person in the corporate director's position could make. This means an operative determination may be retrospective in its application. [Schedule 1, item 4, subsection 1233M(4)]

6.51 The proportion of a liability that is allocated to a sub-fund under an operative allocation determination is then taken to form part of the liabilities of the sub-fund at that time. This means that the default allocation for a liability that relates to the business of more than one sub-fund (see paragraph 6.46) no longer applies in respect of that liability at that time. This ensures there is certainty about how the money or property is allocated between sub-funds as an operative allocation determination is definitive. [Schedule 1, item 4, subsection 1233L(2)]

6.52 An operative allocation determination is irrevocable. This means that an operative determination may only be declared to be inoperative under an order of the Court. See paragraphs 6.61 to 6.63 for information about orders the Court can make in relation to assets and liabilities of sub-funds. Although it is irrevocable, the corporate director may vary an allocation determination in certain circumstances (see paragraphs 6.55 to 6.60). [Schedule 1, item 4, subsection 1233M(5) and section 1233Q]

6.53 A failure by the corporate director of a CCIV to comply with the requirements for allocation determinations is a fault-based offence, punishable by up to two years imprisonment. It is critical for the integrity of the segregation of each sub-fund that allocation determinations are made in accordance with these requirements. This penalty is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsection 1233M(6); Schedule 2, item 199, penalty for subsection 1233M(6) inserted into Schedule 3 to the Corporations Act]

6.54 A corporate director is not required to make an allocation determination if all of the sub-funds of the CCIV are being wound up. In a prosecution, the corporate director does not bear an evidential burden in relation to whether all of the sub-funds of the CCIV are in wind up as this information is not uniquely within the knowledge of the corporate director. This is consistent with the Guide to Framing Commonwealth Offences. In this situation, the liquidator or receiver must apply to the Court for an order declaring the extent to which a liability forms part of the liabilities of each sub-fund of the CCIV. [Schedule 1, item 4, subsections 1233M(7) to (9)]

Varying an allocation determination for a liability

6.55 A corporate director may vary an allocation determination for a liability if it is necessary to do so in order for the allocation determination to remain an operative determination. For example, a corporate director may decide to exercise this discretion when it is aware of a prospective change in circumstances that could render an allocation determination inoperative. [Schedule 1, item 4, subsection 1233N(1)]

6.56 A corporate director must vary a determination if a change in circumstances means that the existing determination becomes, or will become, inoperative. The variation must be made as soon as practicable after the change in circumstances occurs. One situation where a determination may become inoperative is if, as a consequence of one sub-fund paying the part of a liability it is allocated faster than another sub-fund pays the part of the liability it is allocated, the determination ceases to be fair and reasonable in the circumstances. [Schedule 1, item 4, subsection 1233N(2)]

6.57 The corporate director may need to vary a determination multiple times in response to changes in circumstances. That is, the obligation to vary a determination has a recursive operation and operates in respect of the determination as subsequently varied.

6.58 If a corporate director fails to vary a determination as soon as practicable after a determination has or will become inoperative, the corporate director commits an offence punishable by up to two years imprisonment. The corporate director may have a defence available under section 9.1 of the Criminal Code if the corporate director was ignorant of the fact which resulted in the existing determination ceasing to be fair and reasonable. This penalty is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsection 1233N(5); Schedule 2, item 199, penalty for subsection 1233N(5) inserted into Schedule 3 to the Corporations Act]

Requirements for variations of allocation determinations

6.59 A variation of an allocation determination must be in writing and meet the requirements for allocation determinations, namely, the variation must be fair and reasonable in the circumstances (including having regard to the time when the variation applies), comply with any relevant regulations and result in the liability being wholly allocated. For an explanation of these requirements, see paragraph 6.47. [Schedule 1, item 4, subsection 1233N(3)]

6.60 The variation must also specify the time at which the variation starts to apply, which may be an earlier or a later point in time from when the variation is made. The variation takes effect from the time specified in the variation. This means a variation could take effect retrospectively to make an inoperative allocation determination operative once again, or prospectively to take into account circumstances that will arise in the future that may render an allocation determination inoperative. [Schedule 1, item 4, paragraph 1233N(3)(b), subsection 1233M(4) and note to subsection 1233N(2)]

Orders a Court can make in relation to assets and liabilities of sub-funds

6.61 A Court may make an order or give directions in relation to the assets and liabilities of a sub-fund of a CCIV where it is satisfied an allocation determination is not operative, the CCIV's allocation register is incorrect or deficient, or if all of a CCIV's sub-funds are being wound up. The corporate director of the CCIV, a liquidator or a controller of property of a sub-fund may make an application for such an order. [Schedule 1, item 4, subsections 1233Q(2) and (3)]

6.62 The Court may give any order or direction it considers appropriate in relation to the assets and liabilities of the sub-funds of a CCIV, including an order:

•

requiring the corporate director to update or correct the CCIV's allocation register;

•

declaring that money or property, or a liability, forms part of the assets of a particular sub-fund (or sub-funds);

•

declaring the extent to which money or property, or a liability, forms part of the assets of the CCIV's sub-funds;

•

requiring the corporate director to make an allocation determination or to vary an allocation determination; or

•

declaring that an allocation determination is not operative.

[Schedule 1, item 4, subsection 1233Q(1)

6.63 Where an order requires a corporate director to make an allocation determination (or vary a determination), the determination (or variation) the corporate director makes must be consistent with the order unless the order authorises the corporate director to do otherwise, or the corporate director first obtains leave of the Court. [Schedule 1, item 4, subsection 1233Q(4)]

Documenting the allocation of assets and liabilities to sub-funds

Obligation to set up and maintain an allocation register

6.64 The corporate director must set up and maintain a register of the assets and liabilities of the sub-funds of the CCIV. Under section 1306 of the Corporations Act, the allocation register may be in written or electronic form. The maintenance of the allocation register continues to be a function of the corporate director even when one, some or all of the sub-funds of the CCIV are being wound up. [Schedule 1, item 4, subsections 1233C(1) and (3)]

6.65 This requirement applies from the time the CCIV is registered. A failure by the corporate director to meet this requirement is a strict liability offence with a penalty of up to 60 penalty units. The imposition of a strict liability offence is appropriate as the establishment and continuing maintenance of the allocation register is critical to ensuring there is a complete and up-to-date register of the assets and liabilities of the sub-funds of a CCIV. [Schedule 1, item 4, subsection 1233C(2); Schedule 2, item 199, penalty for subsection 1233C(2) inserted into Schedule 3 to the Corporations Act]

6.66 Assets and liabilities of a sub-fund of a CCIV must be clearly identified as such in the allocation register. Appropriate and sufficient information must be contained in the register to clearly identify each assets and liability of the sub-fund. For example, the register should identify the date on which the asset was acquired and its value, the date on which the liability was incurred and its amount, among other things. [Schedule 1, item 4; subsections 1233D(1) and 1233E(1)]

6.67 The information that must be recorded in the allocation register and when it must be recorded is set out in Table 6.2.

[Schedule 1, item 4, subsections 1233D(2) to (4), subsections 1233E(2) to (4)]

6.68 If the corporate director fails to maintain or update the record, the corporate director commits an offence. If the corporate director acted intentionally or recklessly, the maximum penalty is up to two years imprisonment. If intention or recklessness cannot be established, the offence is a strict liability offence with a penalty of up to 60 penalty units. These penalties and the imposition of a strict liability offence is appropriate as the accuracy of the register is critical to preserving the segregation between the sub-funds and therefore the integrity of the regime. [Schedule 1, item 4, subsections 1233D(5) and (6) and subsections 1233E(5) and (6); Schedule 2, item 199, penalty for subsections 1233D(5) and (6) and subsections 1233E(5) and (6) inserted into Schedule 3 of the Corporations Act]

Retention of records

6.69 The records of entries made in the allocation register and allocation determinations (including variations of allocation determinations) for money or property and liabilities of the CCIV must be retained for seven years after the end of the year in which:

•

the CCIV disposes of money or property; or

•

a liability is discharged or otherwise ceases to be a liability of the CCIV.

[Schedule 1, item 4, subsections 1233G(1) and (2)]

6.70 The failure to retain records is a fault-based offence punishable by up to two years imprisonment (if intention or recklessness is established) or a strict liability offence punishable by up to 60 penalty units. These penalties and the imposition of the strict liability offence is consistent with the Guide to Framing Commonwealth Offences and appropriate because the retention of accurate records of the assets and liabilities of a sub-fund is critical for ensuring the segregation between the sub-funds and the integrity of the CCIV regime. [Schedule 1, item 4, subsections 1233G(3) and (4); Schedule 2, item 199, penalty for subsections 1233G(3) and (4) inserted into Schedule 3 to the Corporations Act]

Interaction with the winding-up rules

6.71 The register provides a record of the assets and liabilities of each sub-fund. This information may be particularly useful to creditors or liquidators.

6.72 A creditor of a CCIV may request information about an allocation and a copy of the relevant part of the register (see paragraphs 7.84 to 7.87 of this explanatory memorandum). [Schedule 1, item 4, section 1233P]

6.73 A liquidator must also be provided with access to the register (see paragraph 7.131). [Schedule 1, item 4, subsections 1238N(2) and (5)]

6.74 The corporate director must update the register even if one or more of the sub-funds are being wound up. In situations where all of the sub-funds are being wound up, the corporate director is not required to make allocation determinations but it must still record any self-allocating assets in the register and update the register to record any determinations made by the Court. For a more detailed discussion of the corporate director's obligations when one or more sub-funds are being wound up, see Chapter 7. [Schedule 1, item 4, section 1233C(3)]

6.75 If the corporate director fails to record an asset or liability in the allocation register, a liquidator may require the corporate director to record the asset or liability. For a discussion of this power, refer to paragraphs 7.117 to 7.119. [Schedule 1, item 4, section 1233F]

Segregated application of assets of sub-funds

Purposes for which an asset of a sub-fund may be applied

6.76 A CCIV must not apply or deal with assets of a sub-fund, whether directly or indirectly, except for one or more of the following purposes:

•

meeting liabilities of the sub-fund;

•

carrying on the business of the sub-fund;

•

paying a dividend to members of the sub-fund;

•

providing consideration to a member of the sub-fund in respect of a reduction of share capital affecting the sub-fund;

•

redeeming redeemable shares or redeemable preference shares referable to the sub-fund;

•

making a payment under the Chapter 5 external administration rules relating to winding up or certain priority payments by a receiver (see Chapter 7 of this explanatory memorandum);

•

complying with a Court-approved compromise or arrangement (see Chapter 7 of this explanatory memorandum);

•

making any other distribution to members of the sub-fund that the CCIV is permitted to make under the Corporations Act and the CCIV's constitution (for example, half yearly distributions); or

•

a purpose specified in the regulations as a permitted purpose.

[Schedule 1, item 4, sections 1234A(1) and 1234B]

6.77 A CCIV is not permitted to apply or deal with money or property of a CCIV that has not been clearly identified in the CCIV's allocation register as forming part of the assets of a sub-fund or sub-funds. [Schedule 1, item 4, section 1234]

6.78 A CCIV is also not permitted to jointly apply the assets of two or more sub-funds to acquire a single asset or grant a single security interest over the assets of more than one sub-fund. These prohibitions are designed to preserve the segregation between the sub-funds. [Schedule 1, item 4, subsection 1234A(3) and section 1234D]

6.79 These provisions ensure that all of the business of a CCIV is conducted through its constituent sub-funds and that the assets of a sub-fund are not applied for the purpose of meeting liabilities or expenses of another sub-fund of the CCIV. Any liability or expense of a sub-fund must be met solely out of the assets of that sub-fund. Similarly, an asset of a CCIV cannot be applied, and a liability of a CCIV cannot be met, until such time as that asset or liability has been allocated to a sub-fund.

6.80 This protects the distinct investment activity carried on by each sub-fund from the impacts of the investment activity carried on by the other sub-funds of that CCIV.

6.81 A single item of property that forms part of the assets of two or more sub-funds of the CCIV and requires conversion into money or other fungible property may not be applied for any purpose other than for the purpose of converting the property (see paragraphs 6.33 to 6.35). [Schedule 1, item 4, section 1234C]

Regulations

6.82 The regulations may prescribe additional purposes for which sub-fund assets may be, or must not be, applied. Prescription of such purposes would not alter any other obligations or requirements in respect of holding or applying assets. [Schedule 1, item 4, paragraphs 1234B(j) and 1234A(1)(b)]

6.83 This is to ensure that the law is flexible and able to respond to particular circumstances that may not have been apparent at the time of drafting. It is also possible that regulations relating to certain types of assets or purposes may be quite technical or detailed in nature or only relevant in certain circumstances, and therefore more appropriately dealt with in regulations.

Court orders

6.84 A court can only make an order that is inconsistent with the rules relating to the purposes for which the assets of a sub-fund may be applied if the court considers the interests of justice to require it to do so. This caveat protects the integrity of the court by ensuring that it is not required to make an unjust order. [Schedule 1, item 4, subsection 1234E(1)]

6.85 Court orders have priority over the rules about the application of sub-fund assets. In other words, if a court makes an order that is inconsistent with these rules, the CCIV must apply the assets and liabilities of the sub-fund so as to comply with the court order, in priority over any other permitted application of sub-fund assets. [Schedule 1, item 4, subsection 1234E(2)]

Consequences of a non-compliant application

6.86 A contravention of the rules concerning the segregated application of assets by a CCIV does not invalidate a contract or transaction related to the contravention. This provides certainty for counterparties of the CCIV entering into contracts or transactions in respect of the business of a sub-fund. However, a Court may prevent a dealing or transaction by issuing an injunction under section 1324 of the Corporations Act. [Schedule 1, item 4, subsection 1234F(1)]

6.87 A person who contravenes the rules relating to the segregated application of assets commits an offence. If intention or recklessness is established, the offence carries a maximum of two years imprisonment. Otherwise, the offence is a strict liability offence with a penalty of up to 60 penalty units. [Schedule 1, item 4, subsections 1234F(2) to (4); Schedule 2, item 199, penalty for subsections 1234F(3) and 4 inserted into Schedule 3 to the Corporations Act]

6.88 These penalties and the imposition of a strict liability offence is appropriate and consistent with the Guide to Framing Commonwealth Offences. The rules relating to the application of assets are critical to ensuring the segregation between sub-funds and protecting the interests of creditors and members of each sub-fund. In this way, they are fundamental to the integrity of the CCIV regime.

How CCIV assets are held

How CCIV money and property must be held

6.89 The CCIV may hold its money and property, or another person may do so on the CCIV's behalf (such as a custodian engaged by the CCIV) - subject to any regulations made for the purposes of this requirement. [Schedule 1, item 4, section 1234G]

6.90 If another person holds the CCIV's money and property, that person is taken to hold the money and property of the CCIV on trust for the CCIV. As a result, there is a fiduciary relationship between the person and the CCIV. However, nothing in Chapter 8B is intended to make a CCIV or its corporate director a trustee or trustees of the money or property of the CCIV. [Schedule 1, item 4, section 1234H]

6.91 This differs from the trust relationship that exists in the context of registered schemes where the responsible entity holds the assets on trust for the members. The difference reflects the fact that a CCIV, unlike a registered scheme, is a separate legal entity.

6.92 The new law sets out requirements about how the money and property of the CCIV must be held. These apply to any person that holds the money and property of the CCIV.

6.93 All assets of a sub-fund of a CCIV that have been clearly identified in the allocation register as such must be held separately from the assets of any other sub-fund of the CCIV. This requirement is subject to the regulations. [Schedule 1, item 4, subsections 1234J(1) and (4)]

6.94 In addition, money or property of a CCIV that has not yet been identified in the CCIV's allocation register as forming part of the assets of a sub-fund and any property of a CCIV that must be converted into money or other fungible property must each be kept separately from any other money or property of the CCIV. This ensures that money or property which does not yet form part of the assets of a sub-fund is not applied as part of the business of the sub-fund. [Schedule 1, item 4 subsections 1234J(2) and (3)]

6.95 If a person fails to hold money or property of a CCIV in accordance with these requirements, the person contravenes a civil penalty provision and commits a strict liability offence punishable by up to 60 penalty units. For an explanation of why a strict liability offence is appropriate, see paragraphs 6.97 to 6.98. [Schedule 1, item 4, subsection 1234J(5); Schedule 2, item 192, new table items for subsections 1234J(1), (2) and (3) inserted into subsection 1317E(3) of the Corporations Act; Schedule 2, item 199, penalty for subsections 1234J(1), (2) and (3) inserted into Schedule 3 to the Corporations Act]

6.96 The regulations may create exceptions for various classes of assets, including assets that are held outside of Australia. [Schedule 1, item 4, section 1234K]

Why strict liability offences are appropriate

6.97 Several of the offences in Division 5 are strict liability offences. Under the Guide to Framing Commonwealth Offences, the imposition of a strict liability offence is appropriate where it is necessary to protect the integrity of the regime.

6.98 The rules relating to the segregated holding of assets protect the segregation between the sub-funds and the interests of the creditors and members of each sub-fund. If the rules are breached and assets of different sub-funds are comingled, there is a real risk that assets of one sub-fund will be mistakenly used to discharge the liabilities of another sub-fund. This would threaten the integrity of the CCIV regime.