MIS investors can act to save value
Don’t wait for compensation – How to rescue viable assets from a collapsed managed investment scheme
- Where a managed investment scheme or its operator (the responsible entity) collapses investors face very real prospects of investment loss
- The prospects of obtaining compensation for such loss are generally low for a number of reasons
- There is a proactive alternative which can preserve value – replacing the responsible entity and continuing the scheme
- Where the underlying business of the scheme has value (or potential value over time) or the scheme has some assets, this can be a viable alternative to waiting for compensation that may never come
- With the right legal assistance, and the right replacement responsible entity, through proactive collective action investors can rescue their investment or protect its value
Introduction
With the federal government seemingly intent on leaving managed investment scheme investors out in the cold, investors in these schemes are once again left with only a handful of options, such as replacing responsible entities, to rescue assets or recover their investment.
It’s fair to say investors of failed managed investment schemes have many reasons to feel let down in recent times.
The Federal Government’s proposed compensation scheme of last resort excludes managed investment schemes. My colleague Michael Chapman recently wrote about it here.
This is despite the litany of substantial investment losses suffered by these investors, often as a result of the conduct or failures of the product issuers and managers, not an intermediary (ie financial advisor).
It is as if the avenues of remedy for investors of failed schemes have repeatedly been put out of reach. This appears to reflect both a structural difficulty and a negative perception of investors in managed investment schemes.
Re structural difficulty – schemes are designed so that the investor is a participant in the business of the scheme, but has no day to day control over the business (which is central to the tax treatment of the investment, often a fundamental characteristic of the investment and its marketing). Investors’ ability to claim directly against scheme assets is complicated, as they remain one or two steps away from control of the assets and their assets are pooled with other investors’ assets.
Re the negative perception – investors in managed investment schemes are seen as having merely pursued tax breaks, rather than as investors in the substantive product. Accordingly, they are considered as tax minimisers or sophisticated investors seeking some quasi-arbitrage – when they are largely mum and dad, retiree investors to whom marketing of the schemes is targeted.
An extraordinary amount of wealth of middle Australia that was invested in these schemes has been either lost or transferred off-shore, through the fire-sale of distressed, but valuable, Australian assets.
Over the last decade or more there have been several attempts by investors to seek remedies before the Courts. Some attempts have had some success, but many others have resulted in failure and further pain. Attempts at reform have been stultified*.
Managed investment schemes and the legal framework in which they are required to operate are particularly complicated and often vexing.
Accordingly, creative and strategic approaches are called for when things go wrong.
Often the circumstances of the failure and the structural arrangements of the schemes will be such that recoveries are minimal or impossible. And this is where access to a scheme like the compensation scheme of last resort is necessary.
However, in other cases where the underlying business of the scheme has value (or potential value over time) or the scheme has some assets, there is an alternative to seeking after the fact redress via compensation (but not closing the door on compensation).
Replacing the RE can be a more effective option than seeking compensation
All the recent focus has been on recovery or compensation of last resort arrangements for investors in failed managed investment schemes. History and current policy settings mean other options must be considered.
Often investors have overlooked an alternative recovery option with potentially greater prospects of success: replacing the responsible entity of the scheme – which can be effective, even if the scheme has otherwise collapsed, or the RE of the scheme has gone into liquidation/receivership.
We have done this very thing, with the Willmott Forests 1995-1999 Project scheme. The Willmott Forests Group was a forestry management MIS group which collapsed owing investors and creditors approximately $500 million. We guided a group of resilient investors through 6 years of major litigation in a complex insolvency to rescue one scheme from the morass – the 1995-1999 Project.
How did this play out – Willmott Forests replacing the responsible entity
Willmott Forests Limited (Willmott) acted as responsible entity of a number of managed investment schemes. In 2010 receivers and a voluntary administrator were appointed to Willmott and subsequently Willmott was placed into liquidation.
One of Willmott’s forestry schemes was Willmott Forests 1995-1999 Project (Scheme), which contained woodlots on leases of unencumbered land, owned by Willmott. The trees, having been planted between 1995 and 1999, would not be ready to harvest for at least another 10 years. However, the investors were likely to end up with nothing, or very little, after other priority creditors of Willmott were paid out of the sale of the Willmott assets, including the land on which the investors’ trees stood.
With the assistance of their lawyers, members of the Willmott Forests 1995-1999 Project (Scheme) called a meeting of Scheme members to consider and vote on resolutions that the responsible entity be removed and a new responsible entity be chosen. In situations like this, the resolutions must only be extraordinary resolutions if the scheme is not listed.
Once appointed, the new responsible entity sought to prevent the liquidator of Willmott from terminating the investors’ leasehold rights. Although this legal challenge ultimately failed before the High Court, the new responsible entity then sought declarations and orders from the Court which would enable it to exercise rights with respect to the land, with the Court finding that on the appointment of the new responsible entity, Willmott’s scheme rights in respect of land became rights of the new responsible entity for the life of the scheme.
To this day, the new responsible entity harvests the trees for the benefit of the investors, and ultimately reached a settlement to buy the land on which they grew.
Where every other Willmott scheme collapsed and was wound up by liquidators, the 1995-1999 Project not only survived, but flourished, and the disputes with the liquidators settled with the Project taking ownership of not just the trees in dispute, but the land on which they grew.
This is detailed further below, and in the case study on our website (https://mackaychapman.com.au/willmott-forests-2/).
Takeaways
This powerfully demonstrates that some parts of a managed investment scheme may be able to be salvaged through collective action by investors to remove the responsible entity and appoint a new company to be the responsible entity. This might also apply where the responsible entity itself has collapsed financially and has had receivers and administrators appointed.
Replacing the responsible entity is not the end of the process. Any new responsible entity will have to deal with rights, obligations and liabilities of the former responsible entity and agreements entered into by the previous responsible entity (see ss 601FS and 601FT).
However, having appointed a new responsible entity, the investors will look to the new responsible entity to act in the investors best interests and work to salvage the assets of the scheme.
*(The Corporations and Markets Advisory Committee was in the early stages of a ‘root and branch’ review of MIS, following its earlier review of how MIS dealt with insolvency and distress issues, when the Federal Government disbanded it in its May 2014 budget.
The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such. It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only. You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.
