Managed Investment Schemes: The High Court says you can’t contract out of Chapter 5C protections

In Westfield Management Ltd v AMP Capital Property Nominees Ltd [2012] HCA 54, four members of the High Court held that any contractual term that limits the protections provided under Chapter 5C of the Corporations Act is invalid. 

Section 601NB of the Corporations Act allows members of a registered MIS to call a members’ meeting and vote on an extraordinary resolution to wind up the scheme. An extraordinary resolution requires 50% of votes to pass.

The KSC Trust was a managed investment scheme registered under Chapter 5C of the Corporations Act.  Its sole asset was the Karrinyup Shopping Centre in Perth.

AMP Capital, the holder of two-thirds of the units in the KSC Trust called for a meeting to vote to wind up the trust.   AMP Capital had the votes to carry the resolution.  Westfield Management, the owner of the remaining one-third of units in the KSC trust sought and obtained an injunction in the New South Wales Supreme Court preventing AMP Capital from voting in favour of the resolution.

Westfield argued that a unilateral winding up of the KSC Trust would contravene a term of the joint venture agreement between AMP Capital and Westfield which prohibited the responsible entity from selling the scheme property without written consent of the unitholders.  It also argued that if AMP Capital voted in favour of the winding up it would contravene a term of the joint venture agreement requiring it to exercise voting rights in a way that gave effect to the provisions of the joint venture agreement.

The High Court rejected both arguments.  The primary (and only necessary) basis for dismissing the appeal was that on the proper construction of the agreement, the restriction on sale without consent did not apply to a sale in the course of winding up the trust.  But French CJ, Crennan, Kiefel and Bell JJ (Heydon J not deciding the point) went on to decide the second question, overturning the holdings of the trial judge and the Court of Appeal.

Westfield contended that the clause pertaining to the exercise of voting rights required AMP Capital to vote against its own resolution.  The consequence would be that AMP Capital was effectively deprived of its rights under s. 601NB.  Although the Court of Appeal had held that the clause did not require AMP Capital to vote in that way, it concluded that a term to that effect could be enforceable.

Having regard to the history and policy of Chapter 5C the Court disagreed.   The four justices deciding the question held that when parties choose to adopt Chapter 5C’s legal framework by creating a managed investment scheme, that choice brings with it the protections afforded by Chapter 5C, and parties may not contract out of those protections.  Any agreement to limit investors’ rights under Chapter 5C will be invalid.

Applying the Court’s reasoning, the responsible entity’s duties provided in s. 601FC will survive any purported contractual limitations, and the power to remove the responsible entity (s. 601FM) will fall into the same category.

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