Can a company in liquidation use its assets to pay the costs of winding up managed investment schemes of which it is the responsible entity?

20 November 2009

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Rubicon Asset Management Limited (RAML) was the responsible entity for five managed investment schemes. Each of those five schemes required winding up.

Under normal circumstances, the responsible entity would bear the costs of the winding up process in the event that there were not sufficient funds in the schemes (as was the case here). However, RAML was also insolvent and administrators had been appointed.

It was one of the conditions of RAML’s Australian Financial Services license that it should at all times hold at least $5 million in net tangible assets. RAML had satisfied this condition by keeping the required amount in a separate term deposit account and that money was still available. This amount represented a large percentage of RAML’s recoverable assets.

In Rubicon Asset Management Limited [2009] NSWSC 1068 the administrators of RAML asked the court to determine whether RAML could cover the costs of the windings up out of the $5 million, even though to do so would postpone the distribution of assets to RAML's unsecured creditors and greatly reduce the asset pool.

The direction was sought under section 601NF(2) of the Corporations Act 2001, which allows that the court may, by order, give directions about how a registered scheme is to be wound up if it thinks it necessary to do so.

McDougall J commented that, as a matter of public policy, it was desirable that insolvent schemes should be wound up and, if the court could not give a direction of the kind sought, no orderly winding up could occur where the responsible entity is also insolvent.

His Honour considered that the direction sought was, in effect, an order that RAML perform its statutory and contractual obligations with respect to the schemes. As a result, his conclusion was that directions about how the expenses of winding up were to be paid qualified as a direction about how the schemes were to be wound up.

The power to make such a direction is a discretionary one and there were a number of arguments for and against it. Foremost among these was the argument that making the direction would interfere with the rights of RAML’s creditors. His Honour found that it only interfered with the value of those rights, rather than the existence of those rights. Further, it did so in a way that was permissible as it was contemplated by the statutory regime which surrounded the winding up process. An important factor in making this decision was, however, the fact that the bulk of RAML’s liabilities were liabilities of the schemes themselves.

The decision was made without prejudice to the rights of RAML’s secured creditors.

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