Federal Register of Legislation - Australian Government

Primary content

A Bill for an Act to provide for corporate collective investment vehicles, to amend the law relating to taxation and superannuation and to make miscellaneous and technical amendments of the law in the Treasury portfolio, and for related purposes
Administered by: Treasury
For authoritative information on the progress of bills and on amendments proposed to them, please see the House of Representatives Votes and Proceedings, and the Journals of the Senate as available on the Parliament House website.
Registered 29 Nov 2021
Introduced HR 25 Nov 2021
Table of contents.

2019-2020-2021

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021

 

 

 

 

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)

 

 


Table of Contents

Glossary............................................................................................................ iii

General outline and financial impact........................................................... 1

Chapter 1:              CCIVs – Introduction.......................................................... 9

Chapter 2:              CCIVs – Registration....................................................... 27

Chapter 3:              CCIVs – Corporate governance..................................... 49

Chapter 4:              CCIVs – Securities......................................................... 123

Chapter 5:              CCIVs – Financial records and reporting.................. 145

Chapter 6:              CCIVs – Operating a CCIV........................................... 155

Chapter 7:              CCIVs – External administration................................. 177

Chapter 8:              CCIVs – Control and fundraising................................ 229

Chapter 9:              CCIVs – Regulation of financial services and
markets.............................................................................
237

Chapter 10:           CCIVs – Extension of Asia Region Funds Passport regime          253

Chapter 11:           CCIVs – Other amendments to corporations and financial services law 257

Chapter 12:           CCIVs – Delegated legislation for regulatory
framework........................................................................
269

Chapter 13:           CCIVs – Tax framework................................................ 273

Chapter 14:           Extension of temporary loss carry back...................... 295

Chapter 15:           Deductible gift recipients.............................................. 299

Chapter 16:           Minor and technical amendments Spring 2021....... 305

Chapter 17:           Retirement income covenant....................................... 317

Chapter 18:           Employee share schemes: Removing cessation of employment as a taxing point        333

Chapter 19:           Statement of Compatibility with Human Rights........ 339

Attachment 1:      Regulation Impact Statement – CCIVs....................... 365

Attachment 2:      Regulation Impact Statement – Retirement Income Covenant      399


This Explanatory Memorandum uses the following abbreviations and acronyms.

Abbreviation

Definition

ABN

Australian business number

ACN

Australian Company Number

AFSL

Australian financial services licence

AMIT

Attribution managed investment trust

APRA

Australian Prudential Regulation Authority

ARFN

Australian registered fund number

ARFP

Asia Region Funds Passport

ARFP Act

Corporations Amendment (Asia Region Funds Passport) Act 2018

ASIC

Australian Securities and Investments Commission

ASIC Act

Australian Securities and Investments Commission Act 2001

ATO

Australian Taxation Office

Bill

Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021

CCIV

Corporate collective investment vehicle

A reference to ‘CCIV’ in this explanatory memorandum is a reference to both retail and wholesale CCIVs unless otherwise specified

CGT

Capital gains tax

Commissioner

Commissioner of Taxation

Corporations Act

Corporations Act 2001

Criminal Code

Schedule to the Criminal Code Act 1995

ESS

Employee share scheme

GST

Goods and services tax

GST Act

A New Tax System (Goods and Services Tax) Act 1999

Guide to Framing Commonwealth Offences

Attorney-General’s Department, A Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers, January 2013

ICCPR

International Covenant on Civil and Political Rights

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

MIS

Managed investment scheme

MIT

Managed investment trust

OEIC

A company that is an Open‑Ended Investment Company regulated under legislation of the United Kingdom

PDS

Product disclosure statement

PPSA

Personal Property Securities Act 2009

RSE

Registrable superannuation entity

SIS Act

Superannuation Industry (Supervision) Act 1993

TAA 1953

Taxation Administration Act 1953

TFN

Tax file number

UCITS

Directive on Undertakings for Collective Investment in Transferable Securities (a harmonised regulatory framework adopted by the European Union)


General outline and financial impact

Schedules 1 to 5 – Corporate Collective Investment Vehicles

Outline

Schedules 1 to 5 to the Bill establish the regulatory and tax frameworks CCIVs.

Schedules 1 to 4 to the Bill amend corporate and financial services law to establish a CCIV as a new type of a company limited by shares that is used for funds management. A CCIV is an umbrella vehicle that is comprised of one or more sub‑funds and is operated by its single corporate director.

Schedule 5 to the Bill amends the taxation law to specify the tax treatment for the CCIV. The amendments give effect to the core CCIV tax framework to ensure that the CCIV is taxed on a flow-through basis, with the objective that the general tax treatment of CCIVs and their members align with the existing tax treatment of AMITs (and their members).

Date of effect

Schedules 1, 2, 3 and 5 to the Bill will commence on 1 July 2022.

Schedule 4 to the Bill commences on 1 July 2022 only if the Corporations Amendment (Meetings and Documents) Act 2021 has commenced prior to that date, otherwise it will not commence.

Proposal announced

The intention to create a CCIV regime was first announced in the 2016-17 Budget as part of the Ten Year Enterprise Tax Plan.

In May 2021 the Government announced the project would apply with a start date of 1 July 2022. Schedules 1 to 5 to the Bill fully implement the measure included in the 2021-22 Budget.

Financial impact

This measure is estimated to result in an unquantifiable impact on receipts over the forward estimates period.

 

Regulation impact statement

The measures detailed in Schedules 1 to 5 to the Bill are estimated to result in a total average annual regulatory cost of $1.2 million.

The Regulation Impact Statement covering the amendments in Schedules 1 to 5 to the Bill has been included in Attachment 1.

Human rights implications

Schedules 1 to 4 to the Bill engage, or may engage, human rights. See Statement of Compatibility with Human Rights — Chapter 19.

Schedule 5 to the Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 19.

Compliance cost impact

Compliance costs will be low to medium and be similar to current investment entities in the market.

Schedule 6 – Extension of temporary loss carry back

Outline

Schedule 6 to the Bill amends the income tax law to extend the loss carry back rules by 12 months, allowing eligible corporate tax entities to claim a loss carry back tax offset in the 2022‑23 income year.

Date of effect

The measure in Schedule 6 to the Bill will apply to assessments made in the 2020‑21 income year, in the 2021‑22 income year and in the 2022-23 income year.

Proposal announced

Schedule 6 to the Bill fully implements the measure Temporary loss carry back extension from the 2021-22 Budget.

Financial impact

All figures in this table represent amounts in $[m].

This measure is estimated to have the following receipts impact over the forward estimates period.

2021-22

2022-23

2023-24

2024-25

Nil

Nil

-3,200.0

410.0

Human rights implications

Schedule 6 to the Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 19.

Compliance cost impact

Low.

Schedule 7 – Deductible gift recipients

Outline

Schedule 7 to the Bill amends the ITAA 1997 to:

·                     specifically list the Greek Orthodox Community of New South Wales Ltd, Australian Associated Press Ltd, Virtual War Memorial Limited and SU Australia Ministries Limited as deductible gift recipients;

·                     extend the deductible gift recipient specific listings of Cambridge Australia Scholarships Limited and Foundation 1901 Limited; and

·                     remove the deductible gift recipient specific listing of the East African Fund Limited (with the fund remaining endorsed as a deductible gift recipient under another category).

Date of effect

The amendments apply to gifts made on or after 1 July 2019 to the Greek Orthodox Community of New South Wales Ltd.

The amendments apply to gifts made on or after 1 July 2021 and before 1 July 2026 to Australian Associated Press Ltd and Virtual War Memorial Limited.

The amendments apply to gifts made on or after 1 July 2021 and before 1 July 2023 to SU Australia Ministries Limited.

The amendments extend the period of the listing of Cambridge Australia Scholarships Limited so that it applies to gifts made on or after 1 July 2021 and before 1 July 2026.

The amendments extend the period of the listing of Foundation 1901 Limited so that it applies to gifts made on or after 1 September 2021 and before 1 September 2026.

The amendments to remove the deductible gift recipient listing of the East African Fund Limited take effect on the first day of the quarter following Royal Assent.

Proposal announced

Schedule 7 to the Bill fully implements the measure Philanthropy – updates to the list of specifically listed deductible gift recipients from the 2021-22 Budget; and partially implements the measure Philanthropy – updates to the list of specifically listed deductible gift recipients from the 2019-20 Mid Year Economic and Fiscal Outlook.

Financial impact

The specific listing of the Greek Orthodox Community of New South Wales Ltd was part of the 2019-20 Mid-Year Economic and Fiscal Outlook measure Philanthropy – updates to the list of specifically listed deductible gift recipients. The measure was estimated to have a total cost to revenue of $0.7 million from 2018-19 to 2022-23.

Specifically listing SU Australia Ministries Limited, Australian Associated Press Ltd, Virtual War Memorial Limited, and extending the specific listings of Cambridge Australia Scholarships Limited and Foundation 1901 Limited, and removing the specific listing of the East African Fund Limited were part of the 2021-22 Budget measure Philanthropy – updates to the list of specifically listed deductible gift recipients. The measure was estimated to decrease receipts by $7.5 million from 2020‑21 to 2024-25.

Human rights implications

Schedule 7 to the Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights — Chapter 19.

Compliance cost impact

Not applicable.

Schedule 8 – Minor and technical amendments Spring 2021

Outline

Schedule 8 to the Bill makes a number of miscellaneous and technical amendments to various laws in the Treasury portfolio. The amendments are part of the Government’s ongoing commitment to the care and maintenance of Treasury portfolio legislation.

The amendments make minor and technical changes to correct typographical and numbering errors, repeal inoperative provisions, remove administrative inefficiencies, address unintended outcomes, and ensure that the law gives effect to the original policy intent.

Date of effect

Part 1 of Schedule 8 commences the day after the Bill receives the Royal Assent.

Part 2 of Schedule 8 commences on the first day of the next quarter after the Bill receives the Royal Assent.

Part 3 of Schedule 8 commences immediately after the commencement of Part 2 of Schedule 2 to the National Consumer Credit Protection Amendment (Mandatory Credit Reporting and Other Measures) Act 2021 being 1 July 2022.

Part 4 of Schedule 8 commences immediately after the commencement of item 143 of Schedule 4 to the Treasury Laws Amendment (2020 Measures No. 6) Act 2020.

Proposal announced

This measure was announced on 24 September 2021.

Financial impact

These amendments in Schedule 8 to the Bill are estimated to have a small but unquantifiable impact on receipts over the forward estimates period.

Human rights implications

Schedule 8 to the Bill does not raise any human rights implications. See Statement of Compatibility with Human Rights — Chapter 19.

Compliance cost impact

The amendments in Schedule 8 to the Bill are unlikely to have more than a minor impact on compliance costs.

Schedule 9 – Retirement income covenant

Outline

Schedule 9 to the Bill amends the SIS Act to insert a new covenant that requires trustees of RSEs to develop a retirement income strategy for beneficiaries who are retired or are approaching retirement.

Date of effect

The amendments in Schedule 9 to the Bill introducing a retirement income covenant commence on the day after Royal Assent. This commencement allows trustees to take steps to gather information to formulate their retirement income strategy that will be publicly available from 1 July 2022. Trustees will not be required to give effect to all components of their strategy by 1 July 2022 as implementation of the strategy will be an ongoing process.

Proposal announced

Schedule 9 to the Bill partially implements the measure More Choices for a Longer Life – comprehensive income products in retirement from the 2018-19 Budget.

Financial impact

Schedule 9 to the Bill was estimated to have a nil impact on receipts over the forward estimates at the time of the 2020-21 Budget.

Human rights implications

Schedule 9 to the Bill engages human rights but does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 19.

Compliance cost impact

The amendments in Schedule 9 to the Bill have an estimated average annual regulatory cost of $20.2 million.  

Summary of regulation impact statement

Regulation impact on business
Impact

The amendments have an estimated average annual regulatory cost of $20.2 million.  

Main points

The retirement income covenant will require trustees of RSEs to formulate, review regularly and give effect to a retirement income strategy for the retired members of their fund, and the members of their fund approaching retirement.

·                     The strategy is a governance document developed by the trustees that identifies and recognises the broad retirement income needs of the members of the fund; and presents a plan to build the RSE’s capacity and capability to service those needs.

·                     Administratively this would require trustees to analyse information related to their membership, formulate and develop a retirement income strategy, review and give effect to the strategy. This includes publishing a summary of the strategy on the website of the RSE.

·                     It is anticipated that a requirement to develop a retirement income strategy would result in many trustees evaluating the products and assistance they offer to their members and investigating whether their product offerings can be improved to better meet the needs of their members.

Schedule 10 – Employee share schemes: Removing cessation of employment as a taxing point

Outline

Schedule 10 to the Bill amends the ITAA 1997 to remove cessation of employment as a taxing point for ESS interests which are subject to deferred taxation.

Date of effect

This measure will apply to ESS interests for which the ESS deferred taxing point occurs on or after the beginning of the financial year starting after Royal Assent, or if this Bill receives Royal Assent on 1 July—to ESS interests for which the ESS deferred taxing point occurs on or after that 1 July.

Proposal announced

Schedule 10 to the Bill partially implements the measure Employee Share Schemes – removing cessation of employment as a taxing point and reducing red tape from the 2021‑22 Budget.

Financial impact

The measure is estimated to have the following impact on the underlying cash balance over the forward estimates period ($m):

2020-21

2021-22

2022-23

2023-24

2024-25

0.0

0.0

0.0

-345.0

-205.0

Human rights implications

Schedule 10 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 19.

Compliance cost impact

Low.

 


Table of Contents:

Outline of chapter 10

Context of amendments. 10

History. 10

Policy objectives. 11

Regulatory framework. 12

Tax framework. 13

Summary of new law.. 13

Registration.. 13

Corporate governance. 15

Shares and debentures. 18

Financial record-keeping and reporting. 19

Operating a CCIV.. 19

External administration and deregistration.. 19

Takeovers, compulsory acquisitions, continuous disclosure and fundraising  20

Financial services and markets. 21

Asia Region Funds Passport regime. 21

Other amendments to corporations and financial services law.. 22

Tax framework. 23

Objects and outline of new law.. 24

Outline of new Chapter 8B in the Corporations Act 24

Outline of Subdivision 195-C of the ITAA 1997. 26

Application and commencement 26

 

 

Outline of chapter

1.1              Schedules 1 to 4 to the Bill amend corporate and financial services law to establish a CCIV as a new type of a company limited by shares that is used for funds management. A CCIV is an umbrella vehicle that is comprised of one or more sub-funds and is operated by its single corporate director.

1.2              Schedule 5 to the Bill amends the taxation law to specify the tax treatment for the newly established CCIV. The amendments give effect to the core CCIV tax framework to ensure that the CCIV is taxed on a flow-through basis, with the objective that the general tax treatment of CCIVs and their members align with the existing tax treatment of AMITs (and their members).

1.3              This Chapter of the explanatory memorandum discusses the policy context for CCIVs and provides an overview of the regulatory and tax frameworks.

1.4              All legislative references in this Chapters 1 to 12 are to the Corporations Act unless otherwise stated.

1.5              All legislative references in Chapter 13 are to the ITAA 1997 unless otherwise stated.

Context of amendments

History

1.6              In November 2009, the Australian Financial Centre Forum released the Australia as a Financial Centre: Building on our Strengths report (the Johnson report). The Johnson report made several policy recommendations aimed at increasing Australia’s cross-border trade in financial services and improving the competitiveness and efficiency of the financial sector.

1.7              In relation to funds management, the Johnson report included recommendations to develop the ARFP regime, along with the establishment of a new collective investment vehicle with a corporate structure.

1.8              The ARFP provides a multilateral framework that allows eligible funds to be marketed across member countries, with limited extra regulatory requirements. The ARFP is intended to support the development of a regional managed funds industry through improved market access and regulatory harmonisation. The Government implemented legislative changes for the ARFP regime in mid-2018, and the program commenced in February 2019 (after Japan and Thailand enacted their respective legislative changes).

1.9              The Johnson report also identified Australia’s need for a collective investment vehicle that provides flow‑through tax treatment, maintains investor protection, and is more internationally recognisable than a MIS (Australia’s current trust based collective investment vehicle). To address this gap, the report recommended that the Board of Taxation review the scope for providing a broader range of collective investment vehicles that would be subject to flow‑through taxation.

1.10          The then Government accepted this recommendation and the subsequent Review of Tax Arrangements Applying to Collective Investment Vehicles was released by the Board of Taxation in December 2011. The review recommended the creation of new collective investment vehicles which provide tax neutral outcomes for investors. The report also recommended that overseas experience in offshore jurisdictions inform the design of the new collective investment vehicles.

1.11          In the 2016-17 Budget, as part of the Ten Year Enterprise Tax Plan, the Government announced it would introduce tax and regulatory frameworks for two new types of collective investment vehicles, the CCIV and a limited partnership collective investment vehicle.

1.12          In the 2021-22 Budget, the Government reconfirmed its commitment to establishing the CCIV regime and announced a commencement date of 1 July 2022 for the regime.

1.13          Schedules 1 to 5 to the Bill establish the regulatory and tax frameworks for CCIVs.

Policy objectives

1.14          In developing the regulatory framework for CCIVs, a key policy objective has been to increase the competitiveness of Australia’s managed funds industry internationally to attract offshore investment.

1.15          In developing the tax framework for CCIVs, the policy objective has been to ensure that a CCIV is taxed on a flow-through basis, with the general tax treatment of CCIVs and their members aligned with the existing tax treatment of AMITs (and their members).

1.16          To this end, the Government has focused on ensuring the CCIVs framework would offer internationally recognisable investment products, flow‑through tax treatment, commercial flexibility and strong investor protections.

1.17          Australian funds management is currently conducted through a MIS, which has a trust-based structure. While the Australian managed funds industry is well established, it is predominantly domestically focused. Many offshore investors perceive the MIS structure to be inappropriate for large-scale funds management. The limited range of vehicles that can be used for funds management reduces the ability for Australian funds management to engage competitively with financial centres that offer significant cross-border funds management through the use of corporate vehicles for collective investment, such as Europe, the United Kingdom and Singapore.

1.18          The Government has analysed the regulatory regimes of leading fund domiciles, target export markets, and major financial centres in our region. The regulatory framework draws on the features of other equivalent vehicles internationally. It has been developed to facilitate the competitiveness and commercial viability of CCIVs while ensuring integrity of Australia’s investor protections and tax framework.

1.19          Like other international corporate collective vehicles, CCIVs will operate with a corporate structure, meaning they will have the legal form of a company limited by shares with most of the powers, rights, duties and characteristics of a company.

1.20          Aligning Australia’s regulatory framework with well-developed international regimes can lower the barriers to entry for new fund managers seeking to operate in Australia. This can increase competition and allow Australian consumers greater product choice, including exposure to new asset classes.

1.21          The introduction of the CCIV regime is also intended to complement the ARFP as it will provide Australian fund managers with a vehicle that will be compliant with the requirements for the ARFP and is similar to the corporate funds already available in parts of Asia.

1.22          The legislation also contributes to the more general objective of global regulatory alignment. The introduction of the CCIV helps to create a cohesive regional managed funds industry and facilitate more efficient participation in the global marketplace.

Regulatory framework

1.23          The CCIV regulatory framework utilises a company structure limited by shares so that it is recognisable to offshore investors and fund managers.

1.24          As a company, a CCIV will generally be subject to the ordinary company rules under the Corporations Act unless otherwise specified. Features of the MIS regime have also been incorporated into the design of CCIVs to the extent that they are consistent with the policy objective. In doing so, regulatory parity is maintained (to the extent possible) between the existing MIS framework and the CCIV framework. This will ensure efficient operation of the domestic funds management industry and ease of adoption for fund managers wishing to establish a CCIV.

1.25          For example, a CCIV must have share capital but the CCIV can issue some or all of its shares as being redeemable at the member’s option. This feature is similar to a member’s right to withdraw from a registered scheme. Further, while other types of companies are required to appoint natural person directors, a CCIV must have a single corporate director, which is consistent with the OEIC model and also similar to the structure for MISs (which are operated by a corporate trustee).

1.26          The CCIV regulatory framework distinguishes between retail and wholesale CCIVs. It aligns with the retail investor protections of a registered scheme while also replicating elements of the flexibility and lighter touch regulatory approach applying to wholesale MISs. This reflects the higher degree of investor sophistication among wholesale investors and their capacity to negotiate bespoke contractual protections and assess investment risks.

Tax framework

1.27          The CCIV tax framework provides flow-through tax treatment for investors. It achieves this by leveraging the existing trust taxation framework and the existing attribution flow-through regime (i.e., the new tax system for MITs, or the AMIT regime), rather than by creating a new bespoke tax regime. The general intent is that the tax outcomes for an investor in a sub-fund of a CCIV be the same as an investor in an AMIT.

Summary of new law

Registration

Registration of a CCIV

1.28          A CCIV is a new type of company that is limited by shares and has as its director a public company with an AFSL authorising it to operate the business and conduct the affairs of the CCIV (the corporate director).

1.29          A company may be registered as a CCIV if it meets certain basic registration requirements, including that upon registration it will have at least one sub-fund (which must have at least one member). The registration requirements are broadly similar to those of other companies.

1.30          Upon registration, the persons identified in the application as the proposed corporate director and members of the CCIV assume those roles (subject to meeting the relevant requirements for the roles). The shares specified in the application form are taken to be issued to those members upon registration.

1.31          A CCIV may be either retail or wholesale, with retail CCIVs subject to a regulatory framework that encompasses additional regulatory protections necessary for retail investors. Wholesale CCIVs are subject to a more limited regulatory framework, reflecting the higher degree of investor sophistication among wholesale investors and capacity to negotiate bespoke arrangements with fund providers.

1.32          A CCIV will be a wholesale CCIV unless it has at least one investor that acquires securities in the CCIV as a ‘retail client’ (within the existing meaning in Chapter 7 of the Corporations Act) because securities in the CCIV were issued or transferred to them in circumstances that would have required a PDS be given to them. In this case, the whole CCIV is treated as a retail CCIV.  

1.33          A retail CCIV with a single sub-fund, or a sub-fund of a retail CCIV (that has a single sub-fund) may be included in the official list of a prescribed financial market operated in Australia. Listing of a retail CCIV with more than one sub‑fund, or of multiple sub-funds of a retail CCIV, will be considered further once the CCIV regime is operating.

1.34          These restrictions only apply to listing on a prescribed financial market operated in Australia. Nothing in the new law prevents a security in a CCIV from being quoted on a financial market or settled using financial market infrastructure, such as the ASX Quoted Assets Market, subject to the rules of the relevant market. The restrictions on listing do not affect the capacity for a security in a CCIV to be quoted (regardless of the number of sub-funds of that CCIV).

Registration of a sub-fund of a CCIV

1.35          A CCIV is an umbrella vehicle that is comprised of one or more sub-funds. Each sub-fund may offer investors a different investment strategy. The capacity to group these funds together under one umbrella vehicle supports funds managers to build capacity and economies of scale.

1.36          A sub-fund of a CCIV is all or part of the CCIV’s business that is registered by ASIC as a sub-fund of the CCIV. A sub-fund is established on registration.

1.37          The initial sub-fund (or sub‑funds) of the CCIV are registered by ASIC as part of the registration of the CCIV. Registration of a sub-fund of the CCIV after the registration of the CCIV itself is by a standalone process.

1.38          An ARFN is given to each sub-fund as part of the registration process. A sub-fund’s name is the name specified in the record of the sub‑fund’s registration. A sub-fund’s name is subject to naming requirements, including that it must have the CCIV’s name at the start of its name.

Registers

1.39          Similar to a company and a registered scheme, a CCIV must maintain a register of its members that includes certain information (such as the details of the sub-fund that the members shares are referable to). If a CCIV is a member (for example, under cross‑investment within a CCIV), then the CCIV’s register of members must also identify the sub-fund to which the CCIV’s membership relates.

Corporate governance

Governance rules

1.40          As a CCIV is a type of company, it has the legal capacity and powers of an individual and a body corporate, including the power to enter into contracts and issue and cancel shares in the company.

1.41          Unlike other companies, a CCIV has a single corporate director. The corporate director is a public company with its own officers and employees. The new law includes provisions that allow the natural person officers of the corporate director to undertake certain activities for the CCIV, such as enter into a contract on behalf of the CCIV in certain circumstances.

1.42          Both retail and wholesale CCIVs must have a constitution. The constitution of a CCIV is enforceable as a statutory contract between:

·                     the CCIV and each member;

·                     the CCIV and the corporate director;

·                     the corporate director and each member; and

·                     a member and each other member.

1.43          The constitution of a retail CCIV must make adequate provision for certain matters (such as the establishment of sub-funds and the method by which member complaints are to be dealt with).

Officers of the CCIV

1.44          The CCIV must have as its sole director a public company that holds an AFSL authorising it to operate the business and conduct the affairs of a CCIV (the corporate director). The CCIV does not have any officers or employees other than the corporate director. The primary exception to this is any liquidator, administrator or receiver appointed to the CCIV, who is also an officer of the CCIV.

1.45          The corporate director of a CCIV has an obligation to operate the business and conduct the affairs of the CCIV. The corporate director must also perform the functions conferred on it by the CCIV’s constitution and the Corporations Act.

1.46          The new law sets out the powers and obligations of the corporate director in relation to the CCIV and its members. The corporate director has certain duties and obligations that arise from its role as a director of a company, and others that are specific to CCIVs.

1.47          The corporate director of a CCIV, and the officers and employees of the corporate director of a retail CCIV, owe additional duties and obligations that reflect those that apply to the responsible entity of a registered scheme or the corporate trustee of a MIS (as relevant). Some of the additional duties owed by the corporate director of a wholesale CCIV may be expressly excluded under the CCIV’s constitution. Overall, the duties for the corporate director of a CCIV are designed to provide investors in a CCIV comparable protections as investors in a MIS.

1.48          If there is any conflict between the duties that officers and employees of the corporate director owe to the CCIV and the duties they owe to the corporate director, the duties owed to the CCIV prevail. This approach ensures general parity between the MIS and CCIV regimes. In addition, if there is any conflict between the duties the corporate director owes to the CCIV and those it owes to the CCIV’s members, the duties to members prevail.

1.49          For the purposes of determining certain liabilities, the corporate director of a retail CCIV is liable for the acts of its agents (and other persons taken to be its agents, such as the agents of the CCIV), even if those acts are fraudulent or outside the scope of its authority. This ensures parity with the existing model for registered schemes and ensures the corporate director is ultimately liable for all of the CCIV’s operations.

Compliance plan

1.50          A retail CCIV must have a compliance plan and a compliance plan auditor (similar to the requirements for a compliance plan of a registered scheme).

1.51          The compliance plan must set out adequate measures to be applied by the corporate director in operating the CCIV to ensure compliance with the Corporations Act and the CCIV’s constitution. This is the only basic content requirement for the compliance plan.

1.52          The corporate director must ensure at all times that the CCIV’s compliance plan meets the legislative requirements for compliance plans. The corporate director must also comply with the compliance plan.

Member protection

1.53          Except in limited circumstances, a CCIV must obtain the approval of the members of each affected sub-fund if the CCIV wishes to give a financial benefit to a related party of the CCIV.

1.54          As for other companies, members of a CCIV may seek a remedy against a CCIV if its affairs (or the affairs of one or more sub-funds) are being conducted in a manner that is contrary to the interests of the members of the CCIV as a whole or one or more sub‑funds of the CCIV. The grounds for an order by the Court are not exhaustive and include an order to modify or repeal the CCIV’s constitution.

1.55          A member of a CCIV may bring, or intervene in, legal proceedings on behalf of the CCIV in certain circumstances.

1.56          The corporate director of a CCIV has civil liability to members of the CCIV for a contravention of Chapter 8B (regardless of whether the corporate director has been convicted of an offence or has had a civil penalty order made against it). This is consistent with the right of a member of a registered scheme to seek a remedy against the responsible entity of the scheme in similar circumstances.

Meetings

1.57          The corporate director (being a company with its own board of directors) may pass a resolution on behalf of the CCIV if the directors of the corporate director pass a resolution that expressly states it is on behalf of the corporate director and, if it is the corporate director of more than one CCIV, the CCIV to which the resolution applies.

1.58          A meeting of the members of the whole CCIV or a sub-fund of the CCIV may be called by the corporate director or by a member. The requirements for meetings of members of a CCIV are based on the requirements that apply to registered schemes.

1.59          Some modifications are made to account for a CCIV’s corporate status. In particular, a member’s voting power at a meeting (of either the CCIV or a sub‑fund) is generally referable to the value of the shares the member holds in the CCIV.

Corporate contraventions

1.60          The corporate director of a CCIV is generally responsible for conduct of the CCIV. This reflects the fact that a CCIV does not have any employees and the corporate director is its only director. The new law includes bespoke rules that apply across all Commonwealth laws and to conduct that constitutes a contravention of a criminal offence or a civil penalty provision. These rules operate in place of Part 2.5 of the Criminal Code and any other attribution rules that would otherwise apply in relation to conduct undertaken by or in relation to a CCIV.

1.61          The consequences of contravening a criminal offence or civil penalty provision by a CCIV do not apply to the CCIV. A CCIV is not liable for any fine or penalty and may not be issued an infringement notice. However, if a CCIV is found to have committed an offence or contravened a civil penalty provision, then the corporate director of the CCIV at the time of the offence or contravention is also taken to have committed the offence or contravened the provision and is liable for any associated fine or penalty.

1.62          The new law does not apply to contraventions of State and Territory laws. However, if a CCIV contravenes a State or Territory law then ASIC, the CCIV or a member of the CCIV may apply to a Court for a compensation order to be made against the corporate director in respect of any loss or damage as a result of the contravention.

Shares and debentures

1.63          A CCIV may have a variable capital structure that provides flexibility for the issue, redemption or repurchase of its shares. Like many managed funds, some CCIVs or sub-fund(s) may be ‘open-ended’ – meaning that its share capital is not limited. It has broad flexibility to issue, redeem or repurchase shares. Other CCIVs or sub-fund(s) may be ‘close‑ended’ (such as listed CCIVs or sub-funds) whose share capital is fixed or limited.

1.64          Many of the rules that apply to issuing or reducing share capital in an ordinary company do not apply to CCIVs given its variable capital nature.

1.65          A CCIV may issue shares and debentures, provided that each security is referable to only one sub-fund. The shares referable to one sub‑fund form a class of shares, if it is not divided into two or more classes.

1.66          A member may have a right to redeem their shares if provided for by the CCIV. These are ‘redeemable shares’ (or ‘redeemable preference shares’ if preferences are also attached to those shares). A CCIV may redeem shares if the sub-fund to which the shares are referable is solvent. Unlike for ordinary companies, redemptions do not need to be paid out of profit or out of the proceeds of a new issue of shares. Retail CCIVs must comply with additional requirements (for example, any relevant requirements set out in its constitution).

1.67          A CCIV may distribute its income and capital to members by paying dividends. Each share in a class of shares has the same dividend rights unless provided for in the CCIV’s constitution or by special resolution of the members of the sub-fund to which the shares are referable. A CCIV may pay a dividend on a share if the sub-fund to which the share is referable is solvent. The rules for the payment of dividends by ordinary companies do not apply to CCIVs (such as the rules regarding the payment of dividends if a company’s assets exceed its liabilities).

1.68          A CCIV is generally permitted to engage in cross-investment between sub‑funds of the CCIV. This involves a CCIV acquiring in respect of any of its sub-funds, one or more shares that are referable to another of its sub-funds. This approach aligns the CCIV framework with other international corporate collective vehicles and ensures that a CCIV can utilise funds management structures such as a master-feeder structure or a hedging structure.

1.69          A CCIV may reduce its share capital (for example, under a buy back) if it is authorised under the law or, in any case, if it is permitted in its constitution and the sub-fund to which the share(s) are referable is solvent.

Financial record-keeping and reporting

1.70          All CCIVs must keep written financial records that reflect its financial position and performance, and enable true and fair financial statements to be prepared.

1.71          Retail CCIVs must prepare financial reports and directors’ reports for
each sub-fund of the CCIV. Certain requirements in Chapter 2M of the
Corporations Act have been adapted to CCIVs consistent with its nature and for consistency with the MIS regime. For example, directors’ reports must include specific details about the corporate director and its directors, such as any benefits or interests of a director of the corporate director in the CCIV.

Operating a CCIV

1.72          A CCIV must have at least one sub-fund. Each part of the CCIV’s business must be referable to one (and only one) sub-fund of the CCIV. The cumulative business of all of the sub-funds of the CCIV must constitute the entire business of the CCIV.

1.73          A sub-fund is established on registration by ASIC and is identifiable by its unique name and ARFN. A sub-fund does not have legal personality. Each security that is issued by a CCIV must be referable to a sub-fund.

1.74          Allocation rules set out how assets and liabilities of the CCIV are attributed to the CCIV’s sub‑fund(s). In the event that money (acquired in a single lump sum) or property acquired by the CCIV relates to the business of more than one sub‑fund, the corporate director must determine the proportion of the money or property that is to be allocated to each sub-fund of the CCIV. The proportion that is allocated must be fair and reasonable in the circumstances. A single item of property that relates to the business of more than one sub-fund of the CCIV must be converted into money or other property that can be allocated among the sub-funds of the CCIV in accordance with the allocation rules.

1.75          Similar rules also apply to liabilities incurred by a CCIV.

External administration and deregistration

External administration

1.76          External administration applies on a sub-fund-by-sub-fund basis. This is achieved by applying translation rules to the existing external administration provisions in Chapter 5.

1.77          The translation rules ensure that the process for winding up a company in Chapter 5 applies in respect of a sub-fund of a CCIV. A CCIV cannot be wound up.

1.78          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.

1.79          In the arrangement and reconstruction provisions in Part 5.1, 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. This includes the power to make orders in relation to the assets and liabilities of a sub-fund.

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

Deregistration

1.81          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.

1.82          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.

1.83          The consequences of deregistering a sub-fund or CCIV generally mirror the consequences of deregistering other types of companies under Chapter 5A. On deregistration, a sub-fund ceases to be established and a CCIV ceases to exist. Any assets of the sub-fund vest in the Commonwealth or ASIC. The books of the sub-fund or the CCIV must be retained for three years after deregistration.

Takeovers, compulsory acquisitions, continuous disclosure and fundraising

1.84          The acquisition of a relevant interest in a CCIV is not regulated by the procedural rules and obligations regarding takeovers, compulsory acquisitions and buy-outs in Chapters 6 to 6B of the Corporations Act, unless the acquisition relates to a relevant interest in issued voting shares in a listed CCIV. This is consistent with the application of these rules to listed registered schemes.

1.85          Similarly, the Takeovers Panel’s jurisdiction only applies in relation to the affairs of a listed CCIV. This means that the Takeovers Panel has the power to intervene in the affairs of a listed CCIV, including in relation to a takeover of a listed CCIV.

1.86          Under the existing law, all CCIVs must comply with the rules around takeovers, compulsory acquisitions and buy‑outs when it is proposing to acquire interests in another entity that is covered by the rules in Chapters 6 to 6B of the Corporations Act.

1.87          If a CCIV is a disclosing entity (listed or otherwise), then it must
comply with the continuous disclosure requirements in Chapter 6CA of the Corporations Act in a manner consistent with a registered scheme that is a disclosing entity.

1.88          The fundraising rules in Chapter 6D of the Corporations Act do not apply to CCIVs. Instead, offers of securities in a CCIV are covered by the rules in Chapter 7 (explained further below).

Financial services and markets

1.89          The new law modifies the operation of Chapter 7 of the Corporations Act, which regulates financial services and markets. Key modifications are made to provisions that relate to assigning responsibility for conduct, financial services licensing and disclosure for financial products.

1.90          The corporate director of the CCIV is taken to provide any financial services that would otherwise be provided by a CCIV, with the exception of issuing securities in a CCIV, which is undertaken by the CCIV itself. The corporate director, therefore, is required to hold an AFSL that authorises it to provide the financial service of ‘operating the business and conducting the affairs of a CCIV’. Financial services provided by a CCIV are covered by the corporate director’s AFSL. A CCIV is always exempt from the requirement to hold an AFSL.

1.91          A PDS, rather than a prospectus, must be given to retail clients who acquire a security in a CCIV under Part 7.9 of the Corporations Act. Limited exceptions apply to the PDS requirements where a retail client is associated with a CCIV or corporate director, and in other circumstances as appropriate under Part 7.9 of the Corporations Act as modified by Part 8B.6.

1.92          Consistent with the application of the PDS regime to retail CCIVs, the design and distribution obligations in Part 7.8A of the Corporations Act also apply in relation to retail CCIVs. Similarly, ASIC’s power to make product intervention orders under Part 7.9 of the Corporations Act applies in relation to retail CCIVs.

Asia Region Funds Passport regime

1.93          The provisions relating to the ARFP regime have been extended to cover CCIVs. The corporate director of a retail CCIV may lodge an application with ASIC to register a sub-fund of the CCIV as an Australian passport fund. If the conditions for registration are satisfied, the sub-fund then becomes an Australian passport fund and the corporate director becomes the operator of the fund.

Other amendments to corporations and financial services law

Amendments to Chapter 9 of the Corporations Act

1.94          Chapter 9 of the Corporations Act includes a number of miscellaneous provisions, including relating to registers, auditors, penalties and offences. Modifications to certain provisions in Chapter 9 ensure that these administrative provisions work appropriately in relation to CCIVs and corporate directors.

Amendments to the ASIC Act

1.95          Amendments to the ASIC Act ensure that the definition of financial services in the ASIC Act applies correctly, and that ASIC can exercise its powers and functions effectively in relation to CCIVs.

Subordinate legislation for the regulatory framework

1.96          Certain matters may be prescribed in regulations where provided for in Chapter 8B. Regulations may also modify the operation of Chapter 8B, or the Corporations Act, for its application to CCIVs. In addition, ASIC may make exemption orders and modification declarations in relation to specified parts of Chapter 8B.

Diagram 1.1 Regulatory framework for a CCIV

Note: This diagram shows the regulatory framework as it applies to a retail CCIV. A wholesale CCIV is not required to have a compliance plan. The CCIV and the corporate director may each appoint agents and service providers to exercise their respective powers and function.

Tax framework

1.97          The CCIV tax framework outlined in Chapter 13 amends the taxation law to specify the tax treatment for the CCIV regime. The amendments give effect to the core CCIV tax framework with the objective that the general tax treatment of CCIVs and their members aligns with the existing tax treatment of AMITs (and their members).

1.98          The CCIV tax framework achieves this objective by leveraging the existing trust taxation framework and the existing attribution flow-through regime (i.e., the new tax system for MITs, or the AMIT regime), rather than by creating a new bespoke tax regime.

1.99          Where a CCIV meets the AMIT eligibility criteria in respect of a sub-fund (which is a part of the CCIV), then the CCIV will be able to attribute amounts of assessable income, exempt income, non-assessable non-exempt income, and tax offsets derived or received by the CCIV to the relevant class of members of the CCIV. Those amounts will retain that character and be recognised (and taxed) in the hands of each member.

1.100      Where a CCIV does not satisfy the AMIT eligibility criteria in respect of a
sub-fund for a particular income year, then the CCIV tax treatment will generally default to the general trust taxation framework for that year.

Objects and outline of new law

Outline of new Chapter 8B in the Corporations Act

1.101      Part 8B.1 of Chapter 8B sets out the objects of the new Chapter.

1.102      The objects of Chapter 8B are to establish a regulatory framework for forming and operating CCIVs in a way that is fair, efficient and competitive and, in conjunction with the financial services licensing framework in Chapter 7 of the Corporations Act, to promote confident and informed investors in CCIVs.
[Schedule 1, item 4, section 1221
]

1.103      Part 8B.2 of Chapter 8B sets out the registration requirements for a CCIV and a sub-fund of a CCIV. Part 8B.2 also sets out the rules for the register of the CCIV’s members.

1.104      Part 8B.3 of Chapter 8B sets out the rules relating to the corporate governance of a CCIV. This includes the rules regarding:

·                     governance of CCIVs (such as how a CCIV exercises company powers and the rules regarding a CCIV’s constitution);

·                     the officers and employees of the CCIV (including the core obligations for the corporate director of the CCIV and the rules relating to its replacement);

·                     the officers, employees and auditors of the corporate director of the CCIV;

·                     the compliance plan of a retail CCIV;

·                     member protection (including related party transactions by retail CCIVs, rights and remedies for the member of a CCIV and the corporate director’s civil liability to members);

·                     meetings (including resolutions of a CCIV and meetings of the members of a CCIV (or a sub-fund of the CCIV)); and

·                     corporate contraventions (including the rules for establishing civil and criminal liability under Commonwealth laws).

1.105      Divisions 1 to 3 of Part 8B.4 of Chapter 8B establish the rules for corporate financing of a CCIV. These Divisions outline the types of securities that CCIVs may issue and the circumstances when a CCIV is permitted to pay dividends. These Divisions also explain the requirements that must be satisfied before a CCIV may redeem its shares or reduce its share capital and set out the circumstances in which the sub-funds of the CCIV may cross-invest.

1.106      Divisions 4 and 5 of Part 8B.4 of Chapter 8B set out the rules for the maintenance of financial records by CCIVs and how financial reports and audits are to be prepared and conducted for sub‑funds of CCIVs.

1.107      Part 8B.5 of Chapter 8B establishes the regulatory framework for operating the sub-funds of a CCIV and allocating the assets and liabilities to sub‑funds.

1.108      Part 8B.6 of Chapter 8B outlines the process for winding up a sub-fund and how the other external administration processes apply in the CCIV context. It also outlines the process for deregistering a CCIV and sub-funds of a CCIV.

1.109      Part 8B.7 of Chapter 8B outlines the rules for control, financial services and disclosure. Divisions 1 to 3 of Part 8B.7 outline how the following Chapters of the Corporations Act apply to CCIVs:

·                     Chapters 6 to 6B regarding takeovers, compulsory acquisitions and buy-outs;

·                     Chapter 6C regarding information about ownership in listed entities;

·                     Chapter 6CA regarding continuous disclosure; and

·                     Chapter 6D regarding fundraising and disclosure.

1.110      Division 4 of Part 8B.7 modifies the operation of Chapter 7 for CCIVs and sets out how markets and financial services regulation apply to CCIVs and corporate directors – including the requirements for disclosure.

1.111      Part 8B.8 of Chapter 8B outlines consequential amendments to Chapter 9 of the Corporations Act. The new law modifies certain provisions, such as those relating to registers, to ensure that they operate appropriately in relation to CCIVs and their corporate directors.

1.112      Part 8B.9 of Chapter 8B allows ASIC to make exemption orders and modification declarations in relation to the application of specified parts of Chapter 8B. Regulations may also modify the operation of Chapter 8B, or any other provision of the Corporations Act in relation to its application to CCIVs.

Outline of Subdivision 195-C of the ITAA 1997

1.113      Subdivision 195-C of the ITAA 1997 provides that for taxation purposes, a trust relationship is deemed to exist between a CCIV, the business, assets and liabilities referable to a sub-fund and the relevant class of members.

1.114      Each sub-fund is treated as a separate unit trust (known as the ‘CCIV sub-fund trust’) with the CCIV as trustee and members of the CCIV as beneficiaries of the CCIV sub-fund trust, in accordance with their shareholding that is referable to the sub-fund.

1.115      Under the deeming principle, all taxation laws apply to the CCIV, sub-fund and members in their deemed capacities, unless expressly excluded.

1.116      Subdivision 195-C of the ITAA 1997 also does the following:

·                     makes modifications to the AMIT criteria to ensure that only relevant criteria apply when determining a CCIV sub-fund trust’s AMIT eligibility; and

·                     makes amendments where a CCIV sub-fund trust fails to meet the modified AMIT eligibility criteria and is taxed in accordance with the general trust provisions.

Application and commencement

1.117      The amendments to corporate and financial services law and taxation law to give effect to the CCIV regime apply from 1 July 2022.
[Section 2]

1.118      The contingent amendments to the Corporations Act made by Schedule 4 to the Bill also apply from 1 July 2022 if Schedule 2 to the Corporations Amendment (Meetings and Documents) Act 2021 has already commenced. Otherwise, it will not commence.

 


Table of Contents:

Outline of chapter 28

Context of amendments. 28

Summary of new law.. 29

Registration of a CCIV.. 29

Registration of a sub-fund of a CCIV.. 30

Registers. 30

Comparison of key features of new law and current law.. 31

Detailed explanation of new law.. 32

A new type of company. 32

Registering a CCIV.. 33

Definition of a ‘retail CCIV’ and ‘wholesale CCIV’ 35

Application of the CCIV regulatory framework to retail CCIVs and wholesale CCIVs  40

Listing of a CCIV or a sub-fund. 41

Prohibition on changing company type. 41

Registering a sub-fund of a CCIV.. 41

Names of sub-funds. 43

Requirement to identify sub-fund of the CCIV on certain
documents.
46

Registers. 47

 

 

Outline of chapter

2.1              Chapter 2 of this explanatory memorandum sets out the registration requirements for a CCIV and a sub-fund of a CCIV.

2.2              It sets out:

·                     the requirements for registration as a CCIV;

·                     how a CCIV is registered;

·                     the rules for a CCIV’s name;

·                     the meaning of a retail CCIV and a wholesale CCIV;

·                     the prohibition on listing for certain CCIVs; and

·                     the restriction on changing company type.

2.3              In relation to the registration of a sub-fund of a CCIV, it sets out:

·                     what a sub-fund of a CCIV is;

·                     how a sub-fund of a CCIV is registered; and

·                     the rules for a sub-fund’s name.

2.4              Chapter 2 also sets out the rules for the CCIV’s company register.

Context of amendments

2.5              The key feature of a CCIV is its corporate status: a CCIV is a company used for collective investment. Investors may pool their funds in a CCIV and have them managed by a professional fund manager. Previously, the most common vehicle available for this kind of collective investment was a trust-based MIS. MISs that offer interests to retail clients are registered schemes and are regulated under Chapter 5C of the Corporations Act.

2.6              The establishment of CCIVs brings the Australian regime for funds management into line with jurisdictions overseas, in particular the European Union’s UCITS regime, the UK’s OEIC regime, and various other regimes in the Asian region.

2.7              Several of the core features of a CCIV have been drawn from overseas regulatory precedents, including that a CCIV is a company limited by shares and the concept of a sub-fund of a CCIV.

2.8              In addition, parts of the regulatory framework for CCIVs have been drawn from the MIS regime in order to ensure general parity and consistency between the two regimes.

2.9              As with a MIS, a CCIV may either be retail or wholesale. Generally, a CCIV is a retail CCIV if it issues or has issued its securities to retail clients. Otherwise, it is a wholesale CCIV. Different regulatory requirements apply to retail and wholesale CCIVs to ensure an appropriate balance between regulation and investor protection for retail and wholesale clients.

2.10          However, unlike the MIS regime, which only requires the registration of retail MISs, all CCIVs must be registered as a company with ASIC.

Summary of new law

Registration of a CCIV

2.11          A CCIV is a new type of company that is limited by shares and has as its director a public company with an AFSL authorising it to operate the business and conduct the affairs of the CCIV.

2.12          A company may be registered as a CCIV if it meets certain basic registration requirements, including that upon registration it will have at least one sub-fund (which must have at least one member).

2.13          A CCIV is registered through the same process as other companies, although the application process reflects the unique corporate structure of a CCIV (for example, additional information must be provided in relation to the sub‑fund or sub‑funds that the CCIV proposes to have on registration). Some of the content that is required for other companies is not relevant in the CCIV context (such as the details of the company’s secretary).

2.14          The application for registration must be accompanied by a notice stating whether the CCIV is to be a retail CCIV or a wholesale CCIV. If the CCIV is to be a retail CCIV, the application must also be accompanied by a copy of the CCIV’s compliance plan.

2.15          Upon registration, the persons identified in the application as the proposed corporate director and members of the CCIV assume those roles. The shares specified in the application form are also taken to be issued to those members upon registration.

2.16          A CCIV’s name is subject to special naming requirements – including requiring the expression “Corporate Collective Investment Vehicle” or the abbreviation “CCIV” at the end of its name.

2.17          A CCIV may be a retail CCIV or a wholesale CCIV. Retail CCIVs are subject to additional regulatory requirements that provide protections for retail clients. The new law sets out when a CCIV is a retail CCIV or a wholesale CCIV. A CCIV is a wholesale CCIV unless securities in the CCIV were issued to retail clients, or transferred to a retail client in circumstances that required that a PDS be given to that client. This will generally ensure that a CCIV with one or more retail clients (within the existing definitions in Chapter 7 of the
Corporations Act) will be a retail CCIV.

2.18          A retail CCIV with one sub-fund, or a sub-fund of a retail CCIV (with only one sub-fund), may be included in the official list of a prescribed financial market operated in Australia. However, other CCIVs and sub-funds (being retail CCIVs with more than one sub-fund, wholesale CCIVs, and their sub-funds) are prohibited from being listed as such.

2.19          These restrictions do not affect the ability to quote a security in a CCIV on a financial market, such as the ASX Quoted Assets Market, subject to the rules of that financial market. A security in a CCIV (regardless of the number of its sub-funds) may be quoted on a financial market, subject to the relevant requirements of that market.

2.20          A CCIV may not change into another type of company. Another type of company may not change into a CCIV.

Registration of a sub-fund of a CCIV

2.21          A sub-fund of a CCIV is all or part of the CCIV’s business that is registered by ASIC as a sub-fund of the CCIV. A sub-fund is established on registration.

2.22          The initial sub-fund or sub‑funds of the CCIV are registered by ASIC as part of the registration of the CCIV. Registration of a sub-fund of the CCIV after the registration of the CCIV itself is by a standalone process.

2.23          This standalone process involves lodging an application with ASIC in the prescribed form that states the proposed name of the sub‑fund, the name and ACN of the CCIV, the details of each person who consents to become a member of the sub-fund and certain information about the shares that each member will take up. This information aligns with the information required for registration of an initial sub-fund as part of the registration of the CCIV itself.

2.24          An ARFN is given to each sub-fund as part of the registration process.

2.25          A sub-fund’s name is the name specified in the record of the sub-fund’s registration. A sub-fund’s name is subject to naming requirements, including that it must have the CCIV’s name at the start of its name.

2.26          A sub-fund’s name and ARFN must be identified on certain documents, including all public documents and negotiable instruments.

Registers

2.27          Similar to a company and a registered scheme, a CCIV must maintain a register of members including the details of the securities held by each member and which sub-fund of the CCIV each security is referable to. If a CCIV is a member (for example, under cross‑investment within one CCIV), then the CCIV’s register of members must identify the relevant sub-fund to which the membership relates.

Comparison of key features of new law and current law

Table 2.1 Comparison of new law and current law

New law

Current law

Registration of a CCIV

A CCIV is a new type of company that is limited by shares and has as its director a public company with an AFSL authorising it to operate the business and conduct the affairs of the CCIV.

No equivalent.

A CCIV comes into existence on registration by ASIC. A company may be registered as a CCIV by ASIC if it meets certain basic registration requirements.

No equivalent.

A person applying to register a CCIV must provide certain content on registration, such as the details of the sub-fund or sub‑funds the CCIV proposes to have on registration.

The application must be accompanied by a notice stating whether the CCIV is to be a retail CCIV or a wholesale CCIV.

If a CCIV is to be a retail CCIV, the application must also be accompanied by the CCIV’s compliance plan.

No equivalent.

A CCIV may be a retail or wholesale CCIV. A CCIV will be a wholesale CCIV unless a security in the CCIV was issued to a retail client, or the transfer of a security in the CCIV to a client was in circumstances that required a PDS to be given to that client.

No equivalent.

Registration of a sub-fund of the CCIV

A sub-fund of a CCIV is all or part of the CCIV’s business that is registered by ASIC as a sub-fund of the CCIV. It is established on registration by ASIC.

No equivalent.

The initial sub-fund or sub‑funds of the CCIV are registered by ASIC as part of the registration of the CCIV. The registration of a sub-fund of the CCIV after the registration of the CCIV itself is by a standalone process.

The information required as part of this standalone process aligns with the information required for the registration of the initial sub-fund or sub‑funds as part of the CCIV’s registration.

No equivalent.

An ARFN is given to each sub-fund as part of the registration process.

No equivalent.

A sub-fund’s name is the name specified in the record of the sub‑fund’s registration. A sub-fund’s name is subject to naming requirements, including that it must have the CCIV’s name at the start of its name.

No equivalent.

A sub-fund’s name and ARFN must be identified on certain documents, including all public documents and negotiable instruments.

No equivalent.

Registers

A CCIV must maintain a register of members including the details of the securities held by each member and which sub-fund of the CCIV each security is referable to.

If a CCIV is a member, it must also identify the sub-fund to which the membership relates (being the sub‑fund to which the shares in the CCIV have been allocated as an asset).

No equivalent.

Detailed explanation of new law

A new type of company

2.28          A CCIV is a company that is registered as a CCIV under the Corporations Act. Defining a CCIV in this way reflects the fact that registration as a CCIV is a voluntary election.
[Schedule 2, items 5 and 9, definitions of ‘CCIV’ and ‘corporate collective investment vehicle’ in section 9]

2.29          As a CCIV is a new type of company, it is included separately in the table of types of companies that are registrable under the Corporations Act in subsection 112(1).
[Schedule 1, items 1 to 3, table in subsection 112(1) and notes to subsection 112(1); Schedule 2, item 21, definition of ‘public company’ in section 9 of the Corporations Act]

Registering a CCIV

Basic registration requirements

2.30          A company may be registered as a CCIV if it meets certain basic requirements for registration, including that:

·                     it is a company limited by shares;

·                     it has a constitution;

·                     the proposed director of the company is a public company that holds an AFSL authorising it to operate the business and conduct the affairs of the CCIV; and

·                     upon registration, it will have at least one sub-fund (which will have at least one member).

[Schedule 1, item 4, section 1222]

2.31          In order to be registered as a CCIV, a notice about whether the CCIV is to be a retail or wholesale CCIV must also be lodged with the application for registration. If the CCIV will be a retail CCIV upon registration, it must also have a compliance plan.
[Schedule 1, item 4, paragraphs 1222(f) and (g), and subsection 1222A(4)]

Process for registration

2.32          The ordinary process for applying to register a company, contained in section 117 of the Corporations Act, is modified for CCIVs. Consistent with subsection 117(4) of the Corporations Act, an application to register a CCIV must be in the prescribed form.
[Schedule 1, item, 4, subsection 1222A(1); Schedule 2, item 40, note 2 to subsection 117(1)]

2.33          The application must include the information requirements for companies listed in subsection 117(2) of the Corporations Act, with the exception of the following information, which is not relevant for CCIVs:

·                     the personal details and addresses of individual directors, as individuals may not be appointed as directors of a CCIV;

·                     the personal details and address of the company secretary, as a CCIV must not appoint a company secretary; and

·                     whether or not the company will have an ultimate holding company (and the details of the holding company).

[Schedule 1, item 4, subsection 1222A(2)]

2.34          The application must also include certain additional information, reflecting a CCIV’s unique form as a company, including:

·                     the name and registered office address of the public company that has consented, in writing, to be the CCIV’s corporate director;

·                     the proposed name of each sub-fund the CCIV proposes to establish on registration of the CCIV; and

·                     for each proposed sub-fund, information regarding the shares being taken up by persons who have consented to become members of the CCIV.

[Schedule 1, item 4, subsection 1222A(3)]

2.35          The person making the application must have the written consents of the proposed corporate director and members of the CCIV which, after the CCIV is registered, must be given to the CCIV. The CCIV has an obligation to keep the consents.
[Schedule 1, item 4, subsection 1222A(7)]

2.36          The application must be accompanied by a notice stating whether the CCIV is to be a retail CCIV or a wholesale CCIV and a copy of the CCIV’s constitution.
[Schedule 1, item 4, subsections 1222A(4) and (5)]

2.37          If the CCIV is to be a retail CCIV, then the application must also be accompanied by a copy of the compliance plan that has been signed by all the directors of the proposed corporate director.
[Schedule 1, item 4, subsection 1222A(6)]

2.38          After receiving an application to register a company as a CCIV, ASIC may register the company under section 118 of the Corporations Act if the company meets the basic registration requirements explained above.
[Schedule 1, item 4, section 1222C; Schedule 2, items 42 and 43, note 2 to subsection 118(1)]

2.39          A body may only be registered as a CCIV through this application process. There is no other way to register a CCIV. In particular, a body that is registered under State or Territory law may not be taken to be registered as a CCIV under section 5H of the Corporations Act. Allowing only one process for the registration of a CCIV enables ASIC to oversee the registration of all CCIVs.
[Schedule 1, item 4, section 1222B]

2.40          Under the Government’s Modernising Business Registers program, registration functions are progressively being transferred to the Australian Business Registry Services. The registration of a CCIV will be subject to this transfer as is the case for other company registrations.

Effect of registration

2.41          Upon registration, the persons proposed in the application to become the corporate director and members of the CCIV become those things. The shares specified in the application form are also taken to be issued to those members upon registration.
[Schedule 1, item 4, section 1222D; Schedule 2, item 44, note to subsection 120(1)]

Special naming requirements for a CCIV’s name

2.42          The naming requirements for the names of companies under Part 2B.6 of Chapter 2B of the Corporations Act generally apply to the name of a CCIV. However, there are some special requirements for a CCIV’s name.

2.43          Even though a CCIV is a company limited by shares, it does not need to have the word “Limited” at the end of its name. Instead, it is required to have the expression “Corporate Collective Investment Vehicle” at the end of its name. Alternatively, the abbreviation “CCIV” can be used.
[Schedule 1, item 4, sections 1222E and 1222F]

2.44          In the same way that a person is prohibited from carrying on a business using the words “Limited”, “No Liability” or “Proprietary” in their name (or an abbreviation of these words) unless allowed or required to do so under law, a person is also prohibited from carrying on a business with “Corporate Collective Investment Vehicle” or “CCIV” in their name unless allowed or required to do so under law.
[Schedule 1, item 4, section 1222G]

2.45          An application to change a CCIV’s name may not be lodged with ASIC under section 157A of the Corporations Act while a sub-fund of the CCIV is in liquidation.
[Schedule 1, item 4, section 1222H]

2.46          The naming requirements for a sub-fund’s unique name are explained further in paragraphs 2.92 to 2.106.

Definition of a ‘retail CCIV’ and ‘wholesale CCIV’

2.47          A CCIV is a retail CCIV if it satisfies the retail CCIV test or if it notifies ASIC that it is a retail CCIV. A CCIV is a wholesale CCIV if it is not a retail CCIV.
[Schedule 1, item 4, section 1222J; Schedule 2, items 25 and 28, definitions of ‘retail CCIV’ and ‘wholesale CCIV’ in section 9 of the Corporations Act]

Retail CCIV test

2.48          Distinguishing between retail CCIVs and wholesale CCIVs is necessary as, unlike the MIS regime, all CCIVs must be registered irrespective of whether they are retail or wholesale. However, retail CCIVs are subject to additional regulatory requirements compared to wholesale CCIVs.

2.49          A CCIV meets the retail CCIV test if it has at least one member who is a ‘protected retail client’, a ‘protected client under a custodial arrangement’ or a ‘protected member of a passport fund’. In this case, the CCIV as a whole is a retail CCIV.
[Schedule 1, item 4, subsection 1222K(1)]

2.50          A person is a protected retail client if the person acquires a security issued by a CCIV as a retail client. The retail client may acquire the security by way of issue or a transfer if the transfer amounts to an off‑market sale by a controller of the CCIV (as set out in subsection 1012C(5) of the Corporations Act),
is a sale amounting to an indirect issue (subsection 1012C(6) of the
Corporations Act) or is a sale amounting to an indirect off‑market sale by a controller of the CCIV (subsection 1012C(8) of the Corporations Act). The definition of a retail client in existing section 761G of the Corporations Act excludes persons who acquire a product in connection with a business, professional investors and certain products of a particularly high value. [Schedule 1, item 4, paragraphs 1222K(2)(a) and (b)]

2.51          There are two categories of members that are always excluded from the definition of a protected retail client, namely:

·                     persons ‘associated’ with the CCIV (see paragraph 9.38); and

·                     persons that acquire the security by way of an issue that is part of a small scale personal offer (see paragraph 9.42).

[Schedule 1, item 4, paragraphs 1222K(2)(c) and (d)]

2.52          A person is a protected client under a custodial arrangement if the acquisition of the security occurs under a ‘custodial arrangement’, the person would have been a retail client if there was an ‘equivalent direct acquisition’, and the person is not associated with the CCIV. Refer to section 1012IA of the Corporations Act for the ‘definition of a custodial arrangement’ and ‘equivalent direct acquisition’.
[Schedule 1, item 4, subsection 1222K(3)]

2.53          It is expected that ‘protected retail clients’ and ‘protected clients under a custodial arrangement’ are less sophisticated clients who may not have the knowledge, resources or expertise to protect their own interests.

2.54          Finally, a person is a protected passport fund member if the sub-fund is an Australian passport fund and the person became a member after the sub-fund became an Australian passport fund or on the expectation that the sub-fund would become an Australian passport fund (see sections 9 and 1216B of the Corporations Act).
[Schedule 1, item 4; subsection 1222K(4)]

2.55          A sub-fund of a CCIV with one or more protected passport fund members must remain an Australian passport fund under the Memorandum of Cooperation on the Establishment and Implementation of the ARFP.[1] Only sub-funds of retail CCIVs are eligible to become Australian passport funds. It is for this reason that a CCIV with a protected passport fund member must remain a retail CCIV. See Chapter 10 of this explanatory memorandum for a discussion of how the ARFP regime applies to CCIVs.

2.56          The corporate director, a former corporate director or a related party of the current or a former corporate director are not protected passport fund members. These persons are considered to have greater knowledge than other passport fund members and are in a better position to protect their own interests.
[Schedule 1, item 4, paragraph 1222K(4)(c)]

2.57          The carve-out for corporate directors and related parties is narrower than the carve-out for persons associated with the CCIV from the definition of a protected retail client or protected client under a custodial arrangement. This difference reflects the fact that only corporate directors and related parties are carved out from the special protections that apply when a registered scheme is an Australian passport fund in sections 1216A and 1216C of the Corporations Act.

2.58          The new law includes a power to make regulations that amend the circumstances where a person is a protected retail client, a protected client under a custodial arrangement or a protected passport fund member. This regulation-making power is necessary because minor amendments may need to be made to the definitions to take into account unforeseen circumstances or changes to the PDS regime (which is linked to the definition of a retail CCIV). It is envisaged that the regulation-making power will be used to deal with the same sorts of contingencies as the general regulation making power in Part 8B.9 of the new law (see Chapter 12 of this explanatory memorandum).
[Schedule 1, item 4, subsection 1222K(5)]

Notification as a retail CCIV

2.59          A CCIV is a retail CCIV if the most recent notice lodged with ASIC states that the CCIV is, or wishes to be, a retail CCIV. This notice may have been provided at the time of applying to register the CCIV or when the CCIV wishes to change its status.
[Schedule 1, item 4, subsection 1222L(1)]

2.60          A CCIV must state whether it intends to be a retail CCIV or a wholesale CCIV on registration. A wholesale CCIV or a retail CCIV can also provide a new notice to ASIC when its status changes.

Wholesale CCIVs changing their status

2.61          If a wholesale CCIV meets the retail CCIV test (see paragraphs 2.48 to 2.58), it must lodge a notice in the prescribed form within two business days of meeting the test.
[Schedule 1, item 4, paragraph 1222L(2)(a) and subsections 1222L(3) and (4)]

2.62          All CCIVs that meet the retail CCIV test are retail CCIVs, irrespective of whether they lodge a notice. Nevertheless, a CCIV is required to notify ASIC that it has become a retail CCIV to ensure that ASIC is aware that the CCIV is now subject to the additional regulatory requirements that apply only to retail CCIVs. Notification of a CCIV’s status to ASIC does not affect the obligations that apply to the CCIV.

2.63          A wholesale CCIV that fails to notify ASIC that it is a retail CCIV within two business days of meeting the retail CCIV test commits a strict liability offence punishable by a fine of up to 20 penalty units. See paragraph 2.71 for a discussion of why a strict liability offence is appropriate in this circumstance.
[Schedule 1, item 4, subsections 1222L(3) to (5); Schedule 2, item 199, penalty for subsection 1222L(3) inserted into Schedule 3 to the
Corporations Act]

2.64          Nevertheless, a CCIV has a defence if the CCIV did not know and could not reasonably have been expected to know that the CCIV had a protected retail client, a protected client under a custodial arrangement or a protected member of a passport fund. A defendant bears the evidential burden for this defence in respect of this knowledge. This offence-specific defence supplements the defence for mistake of fact in section 9.2 of the Criminal Code.
[Schedule 1, item 4, subsection 1222L(6)]

2.65          This offence pursues the legitimate objective of aiding the oversight and enforcement of the CCIV regime by ASIC, as well as broader confidence in the proper operation of the CCIV regime. It is important that ASIC, third parties and investors are readily able to identify the status of a CCIV as retail or wholesale. This is of critical importance because retail CCIVs are subject to a regulatory framework that encompasses additional regulatory protections necessary for retail investors. Wholesale CCIVs are subject to a more limited regulatory framework, reflecting the higher degree of investor sophistication among wholesale investors and capacity to negotiate bespoke arrangements with fund providers.

2.66          A CCIV will be a wholesale CCIV unless securities in the CCIV were issued or transferred to a retail client in circumstances that would have required that a PDS be given to that client under Chapter 7 of the Corporations Act. This is intended to ensure that a CCIV with one or more retail clients (within the existing meaning the Corporations Act) will generally be a retail CCIV.

2.67          Whether or not a CCIV is retail or wholesale, with reference to the nature of its clients, is a matter that is peculiarly within the knowledge of the defendant (being the CCIV). It would be significantly more difficult and costly for the prosecution to disprove than for the defendant to establish the matter. Accordingly, this reversal of the burden of proof is appropriate.

2.68          A wholesale CCIV may voluntarily elect to become a retail CCIV even if it does not meet the retail CCIV test. One situation where a wholesale CCIV may wish to become a retail CCIV is where it wishes to apply for one of its sub‑funds to become a passport fund. In order to become a retail CCIV, the wholesale CCIV needs to lodge a notice with ASIC.
[Schedule 1, item 4, paragraph 1222L(2)(a))]

Retail CCIVs changing their status

2.69          A retail CCIV that ceases to meet the retail CCIV test may notify ASIC that it wishes to become a wholesale CCIV. It is not required to provide this notice. This recognises that some CCIVs that do not meet the retail CCIV test may wish to remain as retail CCIVs; for example, so that they can apply to become Australian passport funds or because they intend to market their interests to retail clients.
[Schedule 1, item 4, paragraph 1222L(2)(b)]

2.70          Nevertheless, a CCIV must not notify ASIC that it is a wholesale CCIV if it meets the retail CCIV test. A CCIV which breaches this requirement commits a strict liability offence punishable by up to 20 penalty units. See paragraph 2.71 for a discussion of why a strict liability offence is appropriate in this circumstance.
[Schedule 1, item 4, subsections 1222L(6) and (7); Schedule 2, item 199, penalty for subsection 1222L(7) inserted into Schedule 3 to the Corporations Act]

Strict liability offences

2.71          The strict liability offences in the notification provisions are appropriate as the integrity of the regulatory regime is threatened if ASIC is unaware of the true status of a fund. There are additional regulatory requirements that apply to retail CCIVs, primarily to ensure there are appropriate protections in place for retail investors, and ASIC’s ability to enforce those requirements is hampered if it does not know whether a CCIV is a retail CCIV or a wholesale CCIV. For these reasons, the imposition of a strict liability offence is consistent with the Guide to Framing Commonwealth Offences.

Application of the CCIV regulatory framework to retail CCIVs and wholesale CCIVs

2.72          The distinction between retail CCIVs and wholesale CCIVs is an important one. This is because retail CCIVs are subject to the full regulatory framework in Chapter 8B, whereas wholesale CCIVs are subject to fewer requirements. This follows the regulatory approach for MISs, where retail MISs – that is, registered schemes – are subject to the full regulatory requirements. However, unlike the MIS regime, all CCIVs (including wholesale CCIVs) are required to be registered under the Corporations Act.

2.73          The table below sets out the key differences in the way retail and wholesale CCIVs are regulated (which reflects similar guidance included in the new law).
[Schedule 1, item 4, section 1222M]

Table 2.2 Comparison of key regulatory requirements for retail CCIVs and wholesale CCIVs

Regulatory requirement

Retail CCIV

Wholesale CCIV

Registration

Yes

Yes

Corporate director

Yes. Must have a corporate director, which has an explicit obligation to operate the CCIV. The corporate director (and officers and employees of the corporate director) owes general duties under Chapter 2D as well as additional statutory duties.

Yes. Must have a corporate director, which has an explicit obligation to operate the CCIV. The corporate director (and officers and employees of the corporate director) owes general duties under Chapter 2D as well as certain additional statutory duties.

At least one sub-fund

Yes

Yes

Share capital rules

Yes

Yes, with some exemptions (such as when calculating the price for redemptions of shares).

Constitution

Yes. The constitution must make adequate provision for certain matters.

Yes. Must have a constitution but no prescribed contents.

Compliance plan

Yes

No

Passport under ARFP

Yes

No

Listing of a CCIV or a sub-fund

2.74          A retail CCIV with a single sub-fund, or a sub-fund of a retail CCIV (with a single sub-fund), may be included in the official list of a prescribed financial market operated in the Australian jurisdiction. However, other CCIVs and sub‑funds (being retail CCIVs with more than one sub-fund, wholesale CCIVs, and their sub-funds) are prohibited from being listed as such.
[Schedule 1, item 4, section 1222N]

2.75          If a retail CCIV or its sub-fund is listed, then the rules that apply to listed entities in the Corporations Act apply in respect of that CCIV (and sub‑fund). A retail CCIV will be a ‘listed’ within the meaning in section 9 if it, or its only sub-fund, is included in the official list of a prescribed financial market in Australia. Similarly, a sub-fund will be ‘listed’ within the meaning of the Corporations Act if it (or the CCIV) is included in this list.
[Schedule 2, item 16, definition of ‘listed’ in section 9 of the Corporations Act]

2.76          These restrictions do not affect the ability to quote a security in a CCIV on a financial market, such as the ASX Quoted Assets Market, subject to meeting the market’s quoting rules. A security in a CCIV (regardless of the number of its sub-funds) may be quoted on a financial market, subject to the relevant requirements of that market.

Prohibition on changing company type

2.77          Part 2B.7 of the Corporations Act does not apply to a CCIV. This means that a CCIV may not change company type into another type of company. This also means that another type of company may not change company type into a CCIV.
[Schedule 1, item 4, section 1222P]

Registering a sub-fund of a CCIV

Meaning and nature of a sub-fund

2.78          A sub-fund of a CCIV is all or part of the business of the CCIV that is registered by ASIC as a sub-fund of the CCIV. It is established on registration by ASIC (explained further below).
[Schedule 1, item 4, subsection 1222Q(1), section 1222T]

2.79          A sub-fund does not have legal personality.
[Schedule 1, item 4, subsection 1222Q(2)]

2.80          This means that a sub-fund cannot enter into contracts, cannot sue or be sued in its own name, and cannot acquire, hold or dispose of assets or liabilities in its own name. It is the CCIV itself which has legal personality with the power to do all of this (and it must identify the relevant sub-funds when doing so – explained further below). A sub-fund is a distinct and protected part of the CCIV’s business. It is strictly segregated from any other sub-fund of the CCIV.

2.81          Despite the fact that a sub-fund does not hold assets or incur liabilities in its own name, assets and liabilities of the CCIV are allocated to each sub-fund of the CCIV in accordance with the allocation rules (see Chapter 6 of this explanatory memorandum).

2.82          Further, despite a sub-fund not being able to enter into agreements, or sue and be sued in its own name, member and third party rights and obligations may accrue against the assets and liabilities of the sub-fund.

2.83          A person is a member of a sub-fund if the person is a member of a CCIV and holds one or more shares that are referable to that sub-fund. The meaning of ‘referable’ in relation to a share of a CCIV is explained further in paragraph 4.17.
[Schedule 1, item 4, subsection 1222Q(3); Schedule 2, items 17, 22 and 28, definitions of ‘member’, ‘referable’ and ‘sub-fund’]

Registering a sub-fund of the CCIV

2.84          Sub-funds are subject to a streamlined registration process.

2.85          The initial sub-fund(s) of a CCIV are registered by ASIC as part of the registration of the CCIV itself (see discussion in paragraphs 2.30 to 2.41 above). ASIC may register the initial sub-fund(s) of the CCIV if it registers the CCIV and if the sub-fund’s proposed name has been provided in the application to register the CCIV. ASIC must register at least one sub-fund if it registers the CCIV.
[Schedule 1, item 4, section 1222R, subsection 1222S(1)]

2.86          Once a CCIV has been registered, ASIC may register further sub-funds of the CCIV upon receiving an application from the CCIV. The application must be in the prescribed form and include:

·                     the proposed name of the sub-fund;

·                     the name and ACN of the CCIV;

·                     the name and address of each person who consents to become a member of the sub-fund; and

·                     certain information about the shares that will be referable to the sub‑fund that each member will take up.

[Schedule 1, item 4, subsection 1222S(2), section 1222U]

2.87          The information about the initial membership of the sub-fund and the shares that are referable to it is the same type of information that is required upon registration of the initial sub-fund(s) of the CCIV as part of the application for registration of the CCIV itself. It reflects the fact that the new sub-fund would be a discrete part of the CCIV’s business.

2.88          If ASIC registers a sub-fund, whether as part of the initial registration of a CCIV or subsequently, it must give the sub-fund an ARFN and keep a record of the registration.
[Schedule 1, item 4, subsections 1222S(3) and (4)]

2.89          Similar to the records of registration of companies under section 118(2) of the Corporations Act, subsections 1274(2) and (5) of the Corporations Act apply to the record as if the records were documents lodged with ASIC. This allows a person to, among other things, inspect the records and use the record as evidence in legal proceedings.

2.90          Under the Government’s Modernising Business Registers program, registration functions are progressively being transferred to the Australian Business Registry Services. The registration of a sub-fund of a CCIV will be subject to this transfer, consistent with the process for registration of the CCIV (see paragraph 2.40 above).

The significance of separate registration of sub-funds

2.91          The separate registration of each sub-fund of a CCIV helps to ensure the business of the sub-fund is protected from the business of other sub-funds of the CCIV. In effect, a sub-fund does not come into being until the day it is registered and given a unique name and identifier – its ARFN – by ASIC. This supports the clear identification (and segregation) of the assets and liabilities of each sub-fund of a CCIV and ensures counterparties are always be able to identify the part of the business of a CCIV they are transacting with. This is further supported by the requirement to identify the sub-fund on documents that relate to the business of the sub-fund (see paragraphs 2.107 to 2.112).

Names of sub-funds

2.92          A sub-fund’s name is the name specified in ASIC’s record of the registration of the sub-fund.
[Schedule 1, item 4, subsection 1222T]

Naming requirements

2.93          The name of a sub-fund of the CCIV is dependent on the CCIV’s name.

2.94          If the CCIV has, as its name, the expression “Australian Company Number” followed by its ACN, then a sub-fund of the CCIV’s name may be the expression “Australian Registered Fund Number” followed by the sub-fund’s ARFN.
[Schedule 1, item 4, subsection 1222V(1)]

2.95          If the CCIV has, as its name, an available name, then the sub‑fund’s name must be constituted of the following three elements, in the following order:

·                     element 1: the CCIV’s name (without the expression “Corporate Collective Investment Vehicle”, which the CCIV is required to have at the end of its name (see paragraph 2.43));

·                     element 2: a name that is not:

                    identical to name of the second element of the name of any other sub-fund of the CCIV; or

                    a name that has been reserved by ASIC for a person who is not the person applying to have the sub-fund’s name registered; or

                    unacceptable for registration under the regulations;

·                     element 3: the expression “Sub-fund”.

[Schedule 1, item 4, subsections 1222V(2) and (3)]

2.96          Certain permitted abbreviations may be used in the sub-fund’s name in place of the words or expressions required by the Corporations Act to be included in a sub-funds name. These abbreviations are:

·                     SF (for the expression “Sub-fund”);

·                     AFRN (for the expression “Australian Registered Fund Number”);

·                     Aust (for the word “Australian”);

·                     No (for the word “number”); and

·                     & (for the word “and”).

[Schedule 1, item 4, section 1222X]

Example 2.1 Name of a sub-fund of a CCIV

Ironbank CCIV has two sub-funds.

The first sub-fund is referable to a part of its business that invests in global equities. This sub-fund has as its name Ironbank Global Equities SF.

The second sub-fund is referable to a part of its business that invests in Australian bonds. This sub-fund has as its name Ironbank Fixed Income SF.

2.97          The incorporation of the CCIV’s name into the sub-fund’s name ensures that the CCIV and the sub-fund are intrinsically linked by their respective names. In all of the CCIV’s dealings with other people in respect of a particular sub‑fund of the CCIV (including investors and third parties), a person can identify the CCIV to which the sub-fund relates.

2.98          The second element of the sub-fund’s name allows that sub-fund to be uniquely identifiable from any other sub-fund of the CCIV. This supports the CCIV differentiating between the different parts of the business to which each sub-fund of the CCIV relates.

2.99          Requiring the expression “sub-fund” to be at the end of the sub‑fund’s name is a means of signalling that the entity is a sub-fund (which is important given a sub-fund is not a separate legal entity (see the discussion in paragraph 2.79)).

Changing a sub-fund’s name

2.100      The name of a sub-fund of the CCIV may be changed by the CCIV:

·                     on application by the CCIV; or

·                     at the direction of ASIC.

[Schedule 1, item 4, subsections 1222Y(1) and 1222Z(1)]

2.101      An application by the CCIV must be made in the prescribed form and cannot be lodged with ASIC while the sub-fund is in liquidation. This ensures that creditors in a winding up situation are unambiguously able to identify the sub‑fund for the purposes of any debt or claim against the sub-fund throughout the winding up process. See Chapter 7 of this explanatory memorandum for an explanation of the process for winding up a sub-fund.
[Schedule 1, item 4, subsections 1222Y(1) and (2)]

2.102      If the proposed name meets the naming requirements under section 1222V, ASIC must change the sub-fund’s name by altering its record of registration accordingly. The change takes effect once the record is altered.
[Schedule 1, item 4, subsection (3)]

2.103      ASIC may also direct a CCIV to change a sub-fund’s name if:

·                     the name should not have been registered; or

·                     ASIC has directed the CCIV to change its name under section 158 (necessitating a corresponding change to each of the names of the sub‑funds of the CCIV).

[Schedule 1, item 4, subsection 1222Z(1)]

2.104      The CCIV has two months from the date on which it is given the direction to lodge an application to change the sub-fund’s name. The CCIV commits a strict liability offence with a fine of up to 120 penalty units if it fails to comply with the direction from ASIC within this timeframe. This penalty supports the objective of ensuring that sub-funds are clearly and appropriately identifiable by third parties (including creditors and other persons engaging with the CCIV) by ensuring there is a strong, clearly articulated incentive for the CCIV to comply with a direction from ASIC. The penalty is consistent with the equivalent penalty for companies at subsection 158(2) of the Corporations Act.
[Schedule 1, item 4, subsections 1222Z(1) to (3); Schedule 2, item 199, penalty for subsection 1222Z(2) inserted into Schedule 3 to the Corporations Act]

2.105      If a CCIV has failed to comply with ASIC’s direction, ASIC may change the sub-fund’s name to the expression “Australian Registered Fund Number” followed by the sub-fund’s ARFN. ASIC may do this by altering the sub‑fund’s record of registration and the change will take effect once the record has been altered.
[Schedule 1, item 4, subsections 1222Z(4) and (5)]

2.106      Regardless of how a sub-fund’s name is changed, any change in a sub-fund’s name does not:

·                     create a new legal entity;

·                     affect the sub-fund’s existing property, rights or obligations; or

·                     render defective any legal proceedings by or against the CCIV and relating to the sub-fund.

[Schedule 1, item 4, subsections 1222ZA]

Requirement to identify sub-fund of the CCIV on certain documents

2.107      A CCIV is required to set out a sub-fund’s name and ARFN on all of its public documents and negotiable instruments that relate to that sub-fund. If the particular document or negotiable instrument relates to more than one sub‑fund of the CCIV, then the name and ARFN of each relevant sub-fund of the CCIV must be set out on the document.
[Schedule 1, item 4, subsection 1222W(1)]

2.108      This requirement is based on section 153 of the Corporations Act that requires a company to identify its name and ACN all public documents and negotiable instruments. It will require a CCIV to identify all relevant sub‑funds of the CCIV on a broad range of documents, including documents that might give third parties rights or obligations in relation to an asset of a sub-fund of the CCIV.

2.109      ‘Public document’ is defined under section 88A of the Corporations Act and includes a range of documents, such as documents lodged with ASIC and documents that are signed or issued by or on behalf of the CCIV in the course of a particular transaction or dealing. There are some carve-outs to the definition, including for example, a label.

2.110      ‘Negotiable instrument’ is defined in section 9 of the Corporations Act and includes, for example, a cheque or letter of credit that is signed or issued by or on behalf of the CCIV.

2.111      The requirements for identifying the sub-fund on certain documents relating to the business of that sub-fund ensures persons who are dealing with the CCIV (being a legal person) can identify which part of the CCIV’s business its rights, or obligations, are accruing against. This is important given that a sub-fund is not a separate legal entity from the CCIV, but it is a protected part of the CCIV’s business that is strictly segregated from all other parts of the CCIV’s business.

2.112      Consistent with the equivalent requirement for companies, a contravention of the requirement to identify the relevant sub-fund(s) on all public documents and negotiable instruments is a strict liability offence attracting a fine of up to 30 penalty units. This is consistent with the Guide to Framing Commonwealth Offences and with strict liability offences imposed for similar requirements in the existing law (see, for example, section 153 of the Corporations Act).
[Schedule 1, item 4, subsection 1222W(2
); Schedule 2, item 199, penalty for subsection 1222W(1) inserted into Schedule 3 to the Corporations Act]

Registers

2.113      As is the case for companies and registered schemes under Chapter 2C of the Corporations Act, CCIVs must keep a register of:

·                     members;

·                     holders of options over unissued shares and related options documents; and

·                     debenture holders (if any).

2.114      In addition to the information captured for companies generally, a CCIV’s register must also capture information at the sub-fund level. In particular, it must identify the relevant sub-fund to which each share or other security is referable to.

2.115      In addition, if a CCIV is a member in the CCIV (such as under cross‑investment within the same CCIV, or by investing in another CCIV), the register must show the relevant sub-fund to which the CCIV’s membership relates. In practice, this will be the sub-fund to which the shares referable to another sub-fund have been allocated as an asset.
[Schedule 1, item 4, section 1222ZB; Schedule 2, items 53 to 56, notes to subsections 169(3), 170(1) and 171(1)]

Example 2.2  CCIV’s company register

Ironbank CCIV has two sub-funds: Ironbank Equities Sub-fund and Ironbank Growth Sub-fund.

Ros, Sarah, Lachlan and Rebecca are all investors in Ironbank CCIV.

Ros and Sarah are investors in Ironbank Equities Sub-fund – they hold shares in Ironbank CCIV that are referable to Ironbank Equities Sub-fund. Lachlan and Rebecca are investors in Ironbank Growth Sub-fund – they hold shares in Ironbank CCIV that are referable to Ironbank Growth Sub-fund.

Ironbank Growth Sub-fund has cross-invested into Ironbank Equities Sub‑fund. This means that Ironbank CCIV has acquired, in respect of Ironbank Growth Sub-fund, shares in the CCIV that are referable to Ironbank Equities Sub-fund. Under this cross‑investment, Ironbank CCIV is a member in Ironbank Equities Sub-fund – and this membership relates to Ironbank Growth Sub‑fund.

In addition to the information captured in a company register generally, Ironbank CCIV’s company register must capture information about its members at the sub-fund level. It must show that:

·                     Ros and Sarah are members that hold shares in Ironbank CCIV referable to Ironbank Equities Sub-fund;

·                     Lachlan and Rebecca are members that hold shares in Ironbank CCIV referable to Ironbank Growth Sub-fund; and

·                     Ironbank CCIV is a member that holds shares referable to Ironbank Equities Sub-fund, and this membership relates to Ironbank Growth Sub-fund.   


Table of Contents:

Outline of chapter 50

Context of amendments. 50

Governance rules. 50

Officers of the CCIV.. 51

Officers and employees of the corporate director of the CCIV.. 51

Compliance plan of a retail CCIV.. 51

Member protection.. 52

Meetings. 52

Corporate contraventions. 53

Summary of new law.. 53

Governance rules. 53

Officers and employees of the CCIV.. 54

Officers and employees of the corporate director of the CCIV.. 55

Compliance plan of a retail CCIV.. 56

Member protection.. 56

Meetings. 57

Corporate contraventions. 57

Comparison of key features of new law and current law.. 58

Detailed explanation of new law.. 65

Governance rules. 65

Officers and employees of the CCIV.. 70

Officers and employees of the corporate director of the CCIV.. 89

Compliance plan of a retail CCIV.. 94

Member protection.. 100

Meetings. 104

Corporate contraventions. 110

 

 

Outline of chapter

3.1              This Chapter sets out the requirements for corporate governance of a CCIV.

3.2              It sets out the rules regarding:

·                     governance of CCIVs (such as how a CCIV exercises company powers and the rules regarding a CCIV’s constitution);

·                     the officers and employees of the CCIV (including the core obligations for the corporate director of the CCIV and the rules relating to its replacement);

·                     the officers, employees and auditors of the corporate director of the CCIV;

·                     the compliance plan of a retail CCIV;

·                     member protection (including related party transactions by retail CCIVs, rights and remedies for the member of a CCIV and the corporate director’s civil liability to members);

·                     meetings (including resolutions of a CCIV and meetings of the members of a CCIV (or a sub-fund of the CCIV)); and

·                     corporate contraventions (including the rules for establishing civil and criminal liability under Commonwealth laws).

Context of amendments

Governance rules

3.3              As noted above, the key feature of a CCIV is its corporate status: a CCIV is a company used for collective investment.

3.4              Several of the core features of a CCIV have been drawn from overseas regulatory precedents – including that its business and affairs are operated by another company (its single ‘corporate director’).

3.5              In addition, parts of the regulatory framework for CCIVs have been drawn from the MIS regime in order to ensure general parity and consistency between the two regimes (such as many of the requirements for the constitution of a CCIV).

Officers of the CCIV

3.6              The requirement for a CCIV to be operated by a single corporate director draws on aspects of the United Kingdom’s OEIC regime. OEICs may have either an authorised corporate director or a board of natural person directors, but overwhelmingly choose to have an authorised corporate director for reasons of governance and cost-effectiveness.

3.7              The single corporate director model also aligns with the existing responsible entity model for the operation of registered schemes and provides a simpler governance structure with clearer lines of responsibility than a board of individual directors.

3.8              The existing model for the operation of registered schemes imposes statutory duties on the responsible entity. There are also a range of duties at general law, including fiduciary duties, that apply to the corporate trustee of a MIS. These duties are largely replicated for the corporate director of a CCIV, with additional duties applying to the corporate director of a retail CCIV (consistent with the requirements for registered schemes). These duties are a key investor protection mechanism that ensure members of a CCIV have a comparable level of investor protection to an investor in a MIS.

Officers and employees of the corporate director of the CCIV

3.9              In addition to the duties placed on the responsible entity under the existing responsible entity model, duties are also imposed on the officers and employees of the responsible entity of a registered scheme. These duties are also a key investor protection that needs to be replicated in the retail CCIV context.

3.10          The officers and employees of the corporate director also owe duties to the corporate director (being a company) under the existing law.

Compliance plan of a retail CCIV

3.11          The existing model for registered schemes includes a requirement to maintain a compliance plan. The compliance plan sets out the measures the responsible entity will apply in operating the scheme to ensure compliance with the law and the scheme’s constitution.

3.12          This mechanism is replicated in the retail CCIV context to ensure that members of a retail CCIV have a comparable level of investor protection to an investor in a registered scheme. However, unlike for registered schemes, a retail CCIV does not need to have a compliance committee as there is a requirement for the corporate director of the CCIV to have at least half of its directors as external directors.

Member protection

3.13          Chapter 2E of the Corporations Act sets out the rules regarding member approval of related party transactions for a public company. These rules apply to registered schemes (in a modified form) under Chapter 5C of the Corporations Act.

3.14          Similar rules are included in the context of retail CCIVs to ensure that investors in a retail CCIV have an equivalent level of consumer protection as investors in a registered scheme. The rules require further modification in the retail CCIV context to ensure that member approval is obtained by each affected sub-fund of the CCIV (given that the membership of the CCIV is referable to strictly segregated sub-funds of the CCIV and that the financial benefit may be paid out of the assets of one or more sub-funds of the CCIV).

3.15          Chapter 2F of the Corporations Act sets out the rights and remedies available to members of companies. Given a CCIV is a company, these rights and remedies are available to members of a CCIV. Some modifications are required to account for the unique structure of CCIVs. For example, modifications are required to ensure that members of a sub-fund also have some of the rights and remedies available at the CCIV level.

3.16          The existing responsible entity model also holds the responsible entity directly responsible to members for civil contraventions of Chapter 5C. A similar mechanism is required in the CCIV context to ensure that members of the CCIV also have a direct right of action against the corporate director for similar civil contraventions.

Meetings

3.17          As the directorship of a CCIV is held by a single corporate director and not individual person directors, it is necessary to provide special rules clarifying how a director’s resolution may be passed by the directors of the corporate director, on behalf of the CCIV.

3.18          The Corporations Act prescribes different rules for meetings of members of companies and members of registered schemes. While CCIVs are companies, they have many features in common with registered schemes. In particular, and relevantly for the rules regarding meetings, a CCIV has a corporate director (similar to the responsible entity of a registered scheme) and a compliance plan (if it is a retail CCIV, similar to the compliance plan of a registered scheme). Accordingly, the rules for meetings of members of the CCIV are adapted from those applying to registered schemes.

3.19          Membership in the CCIV is referable to a sub-fund of the CCIV. Each sub‑fund is strictly segregated from any other sub-fund of the CCIV. Accordingly, provision has been made for meetings (and resolutions) of members of a sub‑fund (or sub-funds) of the CCIV (in addition to meetings (and resolutions) of the whole CCIV).

3.20          Further amendments have also been included to ensure the framework in the Corporations Act for facilitating virtual meetings applies to CCIVs (see discussion in Chapter 11 below).

Corporate contraventions

3.21          A CCIV has corporate responsibility for contraventions of its legal obligations, in the same way that other companies do. However, unlike other companies, generally a CCIV’s only officer is another company; its corporate director.[2] Further, a CCIV does not have any employees.

3.22          The corporate director of a CCIV has an overarching obligation to operate the business and conduct the affairs of the CCIV. The corporate director must also perform the functions conferred on it by the CCIV’s constitution and the Corporations Act, as well as ensure the CCIV itself complies with its constitution and the Corporations Act.

3.23          The responsibilities of the corporate director are designed to be similar to those of the responsible entity of a registered scheme. Under the framework that applies for registered schemes, the responsible entity (or trustee) of a scheme is directly responsible for any contravention of the law in relation to the scheme.

Summary of new law

Governance rules

3.24          As a CCIV is a type of company, it has the legal capacity and powers of an individual and a body corporate, including the power to enter into contracts and issue and cancel shares in the company.

3.25          Unlike other companies, a CCIV has a single corporate director. The corporate director is a public company with its own officers and employees. The new law includes provisions that allow the natural person officers of the corporate director to do some activities, such as enter into a contract on behalf of the CCIV in certain circumstances.

3.26          Both retail and wholesale CCIVs must have a constitution. The constitution of a CCIV is enforceable as a statutory contract between:

·                     the CCIV and each member;

·                     the CCIV and the corporate director;

·                     the corporate director and each member; and

·                     a member and each other member.

3.27          The constitution of a retail CCIV must make adequate provision for certain matters (such as the establishment of sub-funds and the method by which member complaints are to be dealt with).

Officers and employees of the CCIV

Officers and employees generally

3.28          A CCIV may only appoint one director: its corporate director. The corporate director is the public company named in ASIC’s record of the CCIV’s registration as its corporate director or temporary corporate director. A CCIV must not have a secretary or any employees.

3.29          A CCIV may not have any officers, other than a director, a receiver, a liquidator or a trustee or other person administering an arrangement between a CCIV and someone else.

3.30          An officer of a CCIV owes the duties that officers of a company owe under Part 2D.1 of the Corporations Act. In addition, a director of a retail CCIV owes duties similar to those owed by a responsible entity of a registered scheme. The latter duties prevail over the duties to the CCIV under Part 2D.1, to the extent of any conflict.

Further requirements for the corporate director of a CCIV

3.31          Only a public company that is not in external administration and that holds an AFSL authorising it to operate the business and conduct the affairs of the CCIV may be appointed as corporate director of the CCIV.

3.32          As a public company, the corporate director has natural person directors. At least half of the directors of the corporate director of a retail CCIV must be external directors. External directors bring a degree of detached supervision that is expected to enhance the standard of corporate governance of corporate directors of retail CCIVs.

3.33          The rules for appointing and replacing the corporate director of a CCIV are similar to the rules that apply to the appointment and replacement of a responsible entity of a registered scheme.

3.34          As noted above, the corporate director (as an officer of the CCIV) owes the same duties and has the same powers, as other officers of the CCIV (including its duties under Part 2D.1 of the Corporations Act). The director of a CCIV also owes additional duties similar to the duties of the responsible entity of a registered scheme or corporate trustee of a MIS (as relevant).

3.35          The corporate director of a CCIV also owes further duties that are specific to its role – including an obligation to operate the business and conduct the affairs of the CCIV.

3.36          The corporate director of a CCIV cannot appoint delegates but it has the power to appoint an agent to do anything that the corporate director is authorised to do in connection with the CCIV. These agents may appoint sub-agents. Akin to other companies, a CCIV also has the power to appoint an agent, who may also appoint sub-agents. The agents of the CCIV and the sub-agents of both the corporate director and the CCIV are taken to be agents of the corporate director.

3.37          The corporate director of a retail CCIV has extended liability for its agents (and persons taken to be its agents) for the purposes of determining whether there is a liability to the CCIV (or its members) or whether it has properly performed its duties (in order to be paid its fees, or be indemnified, out of the assets of a sub-fund of the CCIV).

Officers and employees of the corporate director of the CCIV

3.38          The officers and employees of the corporate director owe obligations to the corporate director under the existing law, in their capacity as officers and employees of a public company. The new law creates further obligations on these persons in relation to the CCIV.

3.39          In particular, the officers and employees of a corporate director of a retail CCIV owe duties that are similar to the duties owed by officers and employees of a responsible entity in relation to the registered scheme under the existing law.

3.40          The secretary of the corporate director of a CCIV has responsibility for certain contraventions of the law by the corporate director as well as certain contraventions of the law by the CCIV. This extension of the secretary of the corporate director’s responsibility is important given a CCIV may not have a secretary.

3.41          Each of the directors of the corporate director of a CCIV has an extended duty to disclose their material personal interests in relation to the affairs of the CCIV to the other directors of the corporate director.

3.42          The restrictions on indemnifying, exempting or insuring an officer or auditor of a CCIV against certain liabilities to the CCIV has been extended to also cover an officer or auditor of the corporate director.

Compliance plan of a retail CCIV

3.43          A retail CCIV must have a compliance plan and a compliance plan auditor (similar to the requirements for a compliance plan of a registered scheme).

3.44          The compliance plan must set out adequate measures to be applied by the corporate director in operating the CCIV to ensure compliance with the Corporations Act and the CCIV’s constitution. This is the only basic content requirement for the compliance plan.

3.45          The corporate director must ensure at all times that the CCIV’s compliance plan meets the legislative requirements for compliance plans. The corporate director must also comply with the compliance plan.

Member protection

3.46          The rules in Chapter 2E of the Corporations Act (regarding member approval of a transaction that seeks to give a related party a financial benefit) apply to retail CCIVs in generally the same way as they apply to public companies. However, the rules are modified to ensure that member approval is obtained by each affected sub-fund of the CCIV (given that the membership of the CCIV is referable to strictly segregated sub-funds of the CCIV and that the financial benefit may be paid out of the assets of one or more sub-funds of the CCIV). In addition, some modifications are made to align the rules that apply to a CCIV (as a company) to the rules that apply to related party transactions in respect of a registered scheme under Part 5C.7 of Chapter 5C of the Corporations Act.

3.47          The rights and remedies available to members of a company under Chapter 2F of the Corporations Act are available to members of a CCIV. Some modifications have been made to extend certain rights and remedies that are available to members at the CCIV level to ensure they are available at the sub-fund level.

3.48          A member of a CCIV may bring, or intervene in, legal proceedings on behalf of the CCIV in certain circumstances.

3.49          The corporate director of a CCIV has civil liability to members of the CCIV for a contravention of Chapter 8B (regardless of whether or not the corporate director has been convicted). This is consistent with the right of a member of a registered scheme to seek remedy against the responsible entity of the scheme in similar circumstances.

Meetings

3.50          Similar to other companies, a CCIV’s powers may be exercised by its director or its members. As with other companies, some decisions may only be made by the CCIV’s members. Similarly, some decisions may only be made by the members of a particular sub-fund.

3.51          The corporate director of a CCIV may pass a resolution for the CCIV by passing a resolution of the directors of the corporate director. This mechanism effectively ‘looks through’ the corporate director of the CCIV (being a company itself) to the natural person directors of the corporate director who are making the decision to exercise the CCIV’s powers. Part 2G.1 of the Corporations Act, which sets out the requirements for directors’ meetings, does not apply to a CCIV, as this bespoke rule applies instead.

3.52          The rules for holding meetings of members of a CCIV, or a sub-fund, are based on the rules for registered schemes, rather than the rules for companies.

3.53          Some modifications are made to account for a CCIV’s corporate status. In particular, a member’s voting power at a meeting (of either the CCIV or a sub‑fund) is referable to the value of the shares the member holds in the CCIV.

Corporate contraventions

3.54          Bespoke rules apply for the purposes of attributing the physical and mental elements of an offence to a CCIV. These bespoke rules apply to all Commonwealth laws. The general rules contained in the Criminal Code and other attribution rules (for example those contained in Chapter 7 of the Corporations Act) do not apply to a CCIV.

3.55          As a general rule, conduct engaged in by a person other than the CCIV is attributed to the CCIV if it is engaged in by one of the following parties, and the conduct was engaged in on behalf of the CCIV:

·                     an agent of the CCIV;

·                     a director of the CCIV;

·                     an employee, director or agent of the corporate director of the CCIV; or

·                     any other person acting at the direction, or with the consent or agreement of one of the entities listed above.

3.56          If the CCIV commits an offence, the new law deems the corporate director to have committed the offence and relieves the CCIV from being liable for any penalty in respect of the offence. This applies to both criminal contraventions by the CCIV and breaches of civil penalty provisions by the CCIV.

3.57          Separate rules allow a Court to order compensation be paid to a CCIV if it suffers loss or damage as a result of a contravention of a State or Territory law.

Comparison of key features of new law and current law

Table 3.1 Comparison of new law and current law

New law

Current law

Governance rules

As a CCIV is a type of company, it has the legal capacity and powers of an individual and a body corporate, including the power to enter into contracts and issue and cancel shares in the company.

No equivalent.

The CCIV’s powers to make, vary, ratify or discharge a contract may be exercised by an individual acting with the CCIV’s express or implied authority, akin to other companies.

However, unlike other companies, a CCIV has only one director – its corporate director. This affects the application of section 127 of the existing law (relating to when a company is taken to have signed a document or fixed a seal). The new law effectively ‘looks through’ the corporate director to the natural person directors and secretary of the corporate director.

No equivalent.

A CCIV must have a constitution. The constitution governs the internal operation of the CCIV and acts as a statutory contract between:

·           the CCIV and each member;

·           the CCIV and the corporate director;

·           the corporate director and each member; and

·           a member and each other member.

No equivalent.

The constitution of a CCIV must meet the basic content requirements.

For a wholesale CCIV, it must set out the process for modifying and repealing and replacing the constitution. The content for a wholesale CCIV’s constitution is otherwise not prescribed.

The constitution of a retail CCIV must make provision for the establishment of sub-funds, the establishment of classes of shares referable to sub-funds, the method by which complaints made by members of the CCIV are to be dealt with, provision for the redemption of shares (if all or some shares are redeemable), and cross-investment between sub-funds of the CCIV (if the CCIV is to engage in such cross‑investment).

The constitution of a retail CCIV must also state that the CCIV has power to borrow or raise money (noting that, being a company, the CCIV has inherent power to do this). If there are to be limits on the CCIV’s exercise of this power, the constitution must also set out those limits.

No equivalent.

ASIC may direct a retail CCIV to modify its constitution to either:

·           comply with the minimum content requirements that apply to it; or

·           ensure that the constitution deals with the matters that are the subject of the minimum content requirements, or the corporate director’s right to be paid fees out of the assets of a sub-fund of the CCIV, in adequate detail.

No equivalent.

Officers and employees of the CCIV

A CCIV may only appoint one director: its ‘corporate director’.

No equivalent.

The corporate director is the public company named in ASIC’s record of the CCIV’s registration as its corporate director or temporary corporate director.

No equivalent.

Only a public company that is not in external administration and that holds an AFSL authorising it to operate the business and conduct the affairs of the CCIV may be appointed as corporate director of the CCIV.

No equivalent.

As a public company, the corporate director has natural person directors. At least half of the directors of the corporate director of a retail CCIV must be external directors.

No equivalent.

The corporate director of the CCIV is first appointed as part of the registration of the CCIV.

A change in the corporate director only takes effect once the record of the CCIV’s registration is altered to name another company as the CCIV’s corporate director (or temporary corporate director).

The process for changing the corporate director depends on the circumstances in which the corporate director is being changed. For example, different requirements apply in circumstances where the corporate director must be removed because it is no longer eligible to be the corporate director compared to circumstances where the corporate director wishes to retire from office of its own volition. The rules that apply are based on the rules for replacing the responsible entity of a registered scheme.

No equivalent.

A CCIV may not have any officers, other than a director, a receiver, a liquidator or a person administering an arrangement between a CCIV and someone else.

No equivalent.

A CCIV must not have a secretary or any employees.

No equivalent.

An officer of a CCIV owes the duties that officers of a company owe under Part 2D.1 of the Corporations Act. In addition, a director of a CCIV owes duties similar to those owed by a responsible entity of a registered scheme or corporate trustee of a MIS (as relevant). The latter duties prevail over the duties to the CCIV under Part 2D.1, to the extent of any conflict between duties.

No equivalent.

The corporate director of a CCIV also owes further duties that are specific to its role – including an obligation to operate the business and conduct the affairs of the CCIV.

No equivalent.

The corporate director of a CCIV cannot appoint delegates but it has the power to appoint an agent to do anything that the corporate director is authorised to do in connection with the CCIV. These agents may appoint sub-agents. Akin to other companies, a CCIV also has the power to appoint an agent, who may also appoint sub‑agents. The agents of the CCIV and the sub-agents of both the corporate director and the CCIV are taken to be agents of the corporate director.

No equivalent.

The corporate director of a retail CCIV has extended liability for its agents (and persons taken to be its agents) for the purposes of determining whether there is a liability to the CCIV (or its members) or whether it has properly performed its duties (in order to be paid its fees, or be indemnified, out of the assets of a sub-fund of the CCIV).

No equivalent.

Officers and employees of the corporate director of the CCIV

The officers and employees of the corporate director owe obligations to the corporate director under the existing law, in their capacity as officers and employees of a public company. The new law creates further obligations on these persons in relation to the CCIV.

No equivalent.

The officers and employees of a corporate director of a retail CCIV owe duties that are similar to the duties owed by officers and employees of a responsible entity in relation to a registered scheme under the existing law.

No equivalent.

The secretary of the corporate director of a CCIV has responsibility for certain contraventions of the law by the corporate director as well as certain contraventions of the law by the CCIV. This extension of the secretary of the corporate director’s responsibility is important given a CCIV must not appoint a secretary itself.

No equivalent.

The directors of the corporate director of a CCIV have an extended duty to disclose material personal interests in relation to the affairs of the CCIV to the other directors of the corporate director.

No equivalent.

The restrictions on indemnifying, exempting or insuring an officer or auditor of a CCIV against certain liabilities to the CCIV has been extended to also cover an officer or auditor of the corporate director.

No equivalent.

Compliance plan of a retail CCIV

A retail CCIV must have a compliance plan and a compliance plan auditor (similar to the requirements for a compliance plan of a registered scheme).

No equivalent.

The compliance plan must set out adequate measures to be applied by the corporate director in operating the CCIV to ensure compliance with the Corporations Act and the CCIV’s constitution. This is the only basic content requirement for the compliance plan.

No equivalent.

The corporate director must ensure at all times that the CCIV’s compliance plan meets the legislative requirements for compliance plans. The corporate director must also comply with the compliance plan.

No equivalent.

The corporate director of a retail CCIV must engage an auditor to audit compliance with the CCIV’s compliance plan.

No equivalent.

Member protection

The approval of the members of each affected sub-fund of a retail CCIV is required if the CCIV wishes to give a financial benefit to a related party.

No equivalent.

Member approval is not required for any fees or indemnities to be given to the corporate director of a retail CCIV that are specified in the CCIV’s constitution and that the corporate director is entitled to in the proper performance of its duties.

No equivalent.

Financial benefits from a retail CCIV to a closely held subsidiary, remuneration and reimbursement to an officer of the CCIV, or a financial benefit of a small amount to a related party are not exempt from requiring member approval.

No equivalent.

The related parties of a CCIV extend to entities that control the corporate director, an agent (or person engaged) by the corporate director and the directors of the corporate director (and their relatives).

No equivalent.

If a person has grounds for an order by the Court (because, for example, the CCIV’s affairs have been conducted in a way that is contrary to the interests of the CCIV as a whole or in a way that is contrary to the interests of a sub-fund (or sub-funds) as a whole), then the orders the Court can make include an order to modify or repeal the CCIV’s constitution.

No equivalent.

A CCIV must notify ASIC of the particulars of a division of the shares in the CCIV into classes (if the shares were not previously divided in this way) and a conversion of shares in a class into shares in another class.

No equivalent.

The corporate director of a CCIV has civil liability to members of the CCIV for a contravention of Chapter 8B (regardless of whether or not the corporate director has been convicted of an offence or has had a civil penalty order made against it).

No equivalent.

Meetings

The corporate director of a CCIV may pass a resolution for the CCIV by passing a resolution of the directors of the corporate director.

No equivalent.

Meetings of members of CCIVs are subject to the rules for meetings of members of registered schemes) as if:

·            the CCIV were a registered scheme;

·            the members of the CCIV were the members of that scheme;

·            the corporate director of the CCIV were the responsible entity of that scheme; and

·            the CCIV’s compliance plan was the compliance plan of that scheme.

The same rules apply to meetings of members of a sub-fund of a CCIV, but as if the sub-fund was a registered scheme, and its members were the members of that scheme.

No equivalent.

A resolution of a sub-fund may only be moved by the members of that sub-fund if it does not treat members of any other sub‑fund of the CCIV differently or affect any other interest of a member of any other sub-fund.

No equivalent.

Associates of a CCIV (which includes the corporate director) and the corporate director’s associates are not entitled to vote at a meeting of the members of the CCIV or a sub-fund if they have an interest in the resolution other than in their capacity as a member.

No equivalent.

Corporate contraventions

The conduct of specified persons is attributed to a CCIV for the purposes of all Commonwealth laws, these rules replace Part 2.5 of the Criminal Code and any bespoke attribution rules contained in Commonwealth laws. The provisions do not apply to State and Territory laws.

No equivalent.

The conduct of others in relation to specified persons is also taken to be in relation to the CCIV in certain circumstances.

No equivalent.

If the conduct of a person is attributed to a CCIV, then that person’s state of mind can also be attributed to the CCIV if certain conditions are met.

No equivalent.

If a CCIV commits an offence against a Commonwealth law, or contravenes a civil penalty provision, the corporate director of the CCIV is also taken to commit the offence or contravene the provision.

No equivalent.

The consequences of a breach of a Commonwealth law or a civil penalty provision by a CCIV do not apply to the CCIV. A CCIV is not liable for any fine or penalty, and may not be given an infringement notice.

No equivalent.

In the event that the CCIV breaches a State or Territory law, ASIC, the CCIV or a member of the CCIV may apply to the Court for a compensation order payable by the corporate director if the CCIV has suffered loss or damage as a result.

No equivalent.

If a sub‑fund is in external administration, the corporate director is not liable for any breach or contravention of Commonwealth laws if the relevant conduct is caused wholly by a receiver, liquidator or person administering a compromise or arrangement.

No equivalent.

Detailed explanation of new law

Governance rules

CCIV’s powers

3.58          As a CCIV is a type of company, it has the legal capacity and powers of an individual and a body corporate, including the power to enter into contracts and issue and cancel shares in the company. The CCIV’s powers to make, vary, ratify or discharge a contract may be exercised by an individual acting with the CCIV’s express or implied authority, akin to other companies. It should be noted, however, that a CCIV’s power to issue shares and debentures are modified by the requirements of Part 8B.4. Further details about a CCIV’s power to issue securities are contained in Chapter 4.
[Schedule 2, items 45 and 46, note 2 to subsection 124(1)]

3.59          However, unlike other companies, a CCIV has only one director – its corporate director. This affects the application of section 127 of the existing law (relating to when a company is taken to have signed a document or fixed a seal). The new law effectively ‘looks through’ the corporate director to the natural person directors and secretary of the corporate director. Specifically, the CCIV is taken to have:

·                     signed a document if two directors, or a director and secretary, of the corporate director of the CCIV sign the document; or

·                     fixed a seal to a document if two directors, or a director and secretary of the corporate director of the CCIV witness the fixing of the seal.

[Schedule 1, item 4, section 1223; Schedule 2, items 47 to 49, note 3 to subsection 127(1) and note 2 to subsection 127(2)]

3.60          No amendments have been made to the statutory assumptions that people dealing with companies are entitled to make. However, these assumptions already apply cumulatively as existing subsection 129(8) allows an assumption to be made (for example, about the corporate director’s compliance with its internal rules) for the purposes of making another assumption (for example, about the CCIV’s compliance with its internal rules).

3.61          The Corporations Amendment (Meetings and Documents) Act 2021 facilitates the electronic execution of documents by a CCIV. These rules will apply to companies under the Corporations Act, including CCIVs. Schedule 4 to the Bill makes related contingent amendments to ensure the rules technology neutral signing and electronic provision of documents extends to CCIVs (see explanation in paragraphs 3.286 to 3.290).

Constitution

3.62          A CCIV must have a constitution. The constitution governs the internal operation of the CCIV and acts as a statutory contract between:

·                     the CCIV and each member;

·                     the CCIV and the corporate director;

·                     the corporate director and each member; and

·                     a member and each other member.

[Schedule 1, item 4, subsection 1223B(1), section 1223E]

Replaceable rules do not apply

3.63          Provisions in the Corporations Act that are replaceable rules do not apply as replaceable rules for a CCIV. This means that if the CCIV’s constitution does not make provision for a particular matter that is the subject of a replaceable rule, the replaceable rule will not apply and no rules will operate with regard to that matter.
[Schedule 1, item 4, section 1223A; Schedule 2, item 50, note to subsection 135(1)]

Adopting, modifying or repealing and replacing the constitution

3.64          A CCIV adopts its constitution on registration. Its constitution cannot be repealed unless it is replaced with another constitution.
[Schedule 1, item 4, subsection 1223B(1) and subsection 1223D(1)]

3.65          The process for modifying, or repealing and replacing, the constitution differs depending on whether the CCIV is a retail or wholesale CCIV. Section 136 of the existing law does not apply to the adoption, modification or repeal of the constitution of a CCIV.
[Schedule 1, item 4, subsection 1223D(6); Schedule 2, items 51 to 52, note 2 to subsection 136(1)]

3.66          For a wholesale CCIV, the process for modifying the constitution must be set out in the CCIV’s constitution. This process must be complied with if the constitution is subsequently modified, repealed or replaced.
[Schedule 1, item 4, paragraph 1223D(2)(b) and section 1223F]

3.67          For a retail CCIV, the constitution may be modified, repealed or replaced in the following circumstances:

·                     by special resolution of the members of the CCIV;

·                     by the corporate director, on its own initiative if it reasonably considers the change will not adversely affect members’ rights; or

·                     by special resolution of the members of a sub-fund of the CCIV, if the corporate director reasonably considers the change will not adversely affect the rights of any member of any other sub-fund.

[Schedule 1, item 4, subsection 1223D(2)]

3.68          These requirements are generally based on the requirements for changing the constitution of a registered scheme in existing section 601GC.

3.69          If the constitution of either a wholesale or retail CCIV is modified or repealed and replaced, a copy of the modification (or the new constitution) and any notice of a later application date must be lodged with ASIC within 14 days of the modification. A failure to do so is an offence of strict liability with a maximum penalty of 20 penalty units. This is consistent with the Guide to Framing Commonwealth Offences and is essential to ensure compliance where ASIC relies upon the CCIV to provide this information to ensure the integrity of its records and its capacity to oversee the CCIV’s compliance with the law and ensure basic protections for investors. In particular, ASIC is not able to appropriately consider the constitution and whether it meets the basic content requirements explained further below if it not provided with an up-to-date constitution as it is changed or replaced. [Schedule 1, item 4, subsections 1223D(3) and (4); Schedule 2, item 199, penalty for subsection 1223D(3) inserted into Schedule 3 to the Corporations Act]

3.70          Section 137 of the existing law sets the date that a modification or replacement of a CCIV’s constitution takes effect in certain circumstances. If section 137 of the existing law does not set the date of effect, then the modification, or repeal and replacement, takes effect on the latest of the following:

·                     the date on which the modification or the new constitution is lodged with ASIC;

·                     if the CCIV is a retail CCIV, and the corporate director of the CCIV determines a later date, that date;

·                     if the CCIV is a wholesale CCIV, and the corporate director of the CCIV determines a later date in accordance with any requirements in its constitution, that date.

[Schedule 1, item 4, subsection 1223D(5)

Basic content requirements

3.71          The content of a constitution of a wholesale CCIV is not prescribed, apart from the requirement for the CCIV to set out the process for adopting a constitution after registration, and repealing or modifying the constitution.
[Schedule 1, item 4, section 1223F]

3.72          The constitution of a retail CCIV must make provision for:

·                     the establishment of sub-funds;

·                     the establishment of classes of shares referable to sub-funds;

·                     the method by which complaints made by members of the CCIV are to be dealt with; and

·                     cross-investment between sub-funds of the CCIV, if the CCIV is to engage in such cross-investment.

[Schedule 1, item 4, paragraphs 1223G(a), (b) and (e)]

3.73          The constitution of a retail CCIV must also state that the CCIV has power to borrow or raise money (noting that, being a company, the CCIV has inherent power to do this). If there are to be limits on the CCIV’s exercise of this power, the constitution must also set out those limits.
[Schedule 1, item 4, paragraphs 1223G(c) and (d)]

3.74          If some or all of the shares of the CCIV are redeemable shares or redeemable preference shares, then the CCIV’s constitution must make provision for the shares to be redeemed. This provision must make provision for the redemption – meaning that it must set out adequate matters regarding the redemption. The matters prescribed must be fair and reasonable to the members of the sub-fund to which the shares are referable. For liquid sub-funds, it must also specify the period within which redemptions must ordinarily be made (while the sub-fund is liquid) – recognising that in limited circumstances the ordinary redemption period may not be able to be satisfied (for example, in times of market volatility). Further, it must set out a price, or method for determining a price for redemption of those shares (while the sub-fund is liquid). The redemption provisions in Part 8B.4 are explained further in Chapter 4.
[Schedule 1, item 4, section 1223H]

3.75          These requirements are generally based on the requirements for constitutions of registered schemes, contained in section 601GA of the Corporations Act. However, unlike for registered schemes, a retail CCIV’s constitution does not need to set out the consideration that must be paid to become a member because the price of shares in a company may vary over time. In addition, unlike schemes, a CCIV is a company and may issue shares on such terms and with such rights and restrictions as it determines. Nor does it need to give power to a third party to deal with the CCIV’s assets because the CCIV has power to make investments itself.

3.76          A failure to comply with the relevant minimum content requirements is a strict liability offence with a maximum penalty of 20 penalty units. Both the offence and penalty are consistent with the Guide to Framing Commonwealth Offences and provide a strong incentive to comply with these requirements core to the functioning of a CCIV and the inherent protections to members (given the contractual nature of the CCIV’s constitution).
[Schedule 1, item 4, subsections 1223B(2) and (3); Schedule 2, item 199, penalty for subsection 1223B(3) inserted into Schedule 3 of the
Corporations Act]

3.77          ASIC also has power to direct a retail CCIV to modify its constitution to either:

·                     comply with the minimum content requirements; or

·                     ensure that the constitution deals with the matters that are the subject of the minimum content requirements, or the corporate director’s right to be paid fees out of the assets of a sub-fund of the CCIV, in adequate detail.

[Schedule 1, item 4, subsections 1223(1) and (2)]

3.78          The direction must be given to the CCIV by notice in writing. The corporate director must comply with the direction within 14 days after it has been given the notice and lodge a copy of the modified constitution with ASIC within 14 days after the modification. A failure to comply with the direction within the required timeframe is a strict liability offence with a maximum penalty of 20 penalty units. A failure to lodge the modified constitution with ASIC within the required timeframe is also a strict liability offence with a maximum penalty of 20 penalty units. Both of these strict liability offences are consistent with the Guide to Framing Commonwealth Offences and with offences in the Corporations Act that apply in other circumstances involving the failure to lodge documents with ASIC or comply with directions given by ASIC.
[Schedule 1, item 4, subsections 1223C(4) to (6); Schedule 2, item 199, penalty for subsections 1223C(4) and (5) inserted into Schedule 3 to the Corporations Act]

3.79          When modifying the CCIV’s constitution in accordance with a direction from ASIC, the corporate director does not need to comply with the requirements that prescribe how a CCIV’s constitution may be modified (see paragraphs 3.62 to 3.67).
[Schedule 1, item 4, subsection 1223C(3)]

Officers and employees of the CCIV

Requirements for officers and employees generally

Appointment of officers and employees

3.80          A CCIV must only appoint one director: its ‘corporate director’. The corporate director is the public company named in ASIC’s record of the CCIV’s registration as its corporate director or temporary corporate director. The rules relating to the appointment, removal and replacement of the corporate director are explained further below.
[Schedule 1, item 4, subsections 1224(1) to (3)]

3.81          The appointment of more than one director, being a director appointed to a position other than the position of corporate director, is an offence punishable by up to two years imprisonment. This penalty is consistent with the Guide to Framing Commonwealth Offences. It provides a strong incentive to comply with this requirement, which is fundamental to the underlying structure of a CCIV. The CCIV regime has been designed on the basis that it has only one corporate director, with the remainder of the framework predicated on this model.
[Schedule 2, item 199, penalty for subsection 1224(1) inserted into Schedule 3 to the Corporations Act]

3.82          These obligations are significant as, unlike other companies that are governed by the Corporations Act, a CCIV’s sole director is a public company and not an individual person director.

3.83          Moreover, unlike other directors of conventional companies, the corporate director commits an offence if it appoints an alternate director to exercise some, or all, of its powers.
[Schedule 1, item 4, subsections 1224(4) and (5); Schedule 2, item 199, penalty for subsection 1224(5) inserted into Schedule 3 of the
Corporations Act]

3.84          Both the prohibition on appointing more than one director and the restriction on appointing an alternate director do not prevent a person from being held to be a shadow director of a CCIV within the meaning of the definition of ‘director’ in paragraph (b) of section 9 of the existing law. Any such director (or other director appointed in contravention with these requirements) is subject to the obligations of a director of a CCIV.
[Schedule 1, item 4, subsection 1224(6)] 

3.85          A CCIV must not have any other officers other than a director or a receiver, liquidator or a trustee or other person administering an arrangement between the CCIV and someone else. It is specifically prohibited from appointing a secretary or having any employees. A contravention of either of these requirements is an offence punishable by up to two years imprisonment. This penalty is consistent with the Guide to Framing Commonwealth Offences. It provides a strong incentive to comply with this requirement – which is fundamental to the underlying structure of a CCIV. The CCIV regime has been designed on the basis that the CCIV does not have any officers or employees other than its corporate director and certain persons under an external administration, with the remainder of the framework predicated on this structure.
[Schedule 1, item 4, sections 1224A and 1224B; Schedule 2, item 199, penalty for subsections 1224A(1) and (2) inserted into Schedule 3 of the Corporations Act]

Duties of directors and other officers of a CCIV

3.86          An officer of a CCIV, including its director, owes the duties imposed on all company officers under Part 2D.1 of the existing law. This includes the duty to act in good faith in the best interests of the corporation and for a proper purpose under section 181 of the existing law.

3.87          The provisions in the existing law in relation to external administration have been modified so that external administration applies to each sub-fund of the CCIV rather than to the CCIV as a whole (see discussion in Chapter 7 below). The statutory duties that officers owe under Part 2D.1 of the existing law have been similarly modified so that an officer other than a director (such as a receiver or liquidator) only owes these duties to the sub-fund for which they have been appointed.
[Schedule 1, item 4, section 1224C]

3.88          In addition to the general officers’ duties under Part 2D.1, the director of a CCIV owes additional statutory duties that reflect its role as the operator of a collective investment scheme. These additional duties align with those owed by the corporate trustee and operator of a MIS (including under Chapter 5C of the Corporations Act and at general law). These additional duties ensure that investors in a CCIV are afforded comparable protections as investors in a MIS, with some differences tailored to the different legal structure of a CCIV. A summary of these duties in provided in Table 3.2 below.
[Schedule 1, item 4, section 1224D]

3.89          The director of a retail CCIV owes a broader range of duties to members in recognition of the higher degree of protections for retail investors. These duties are based on the current statutory and general law duties that are owed to members of registered schemes. The duties the director of a wholesale CCIV owes relate to the fundamental investor protection for members in a wholesale CCIV and are comparable with the duties owed by a corporate trustee at general law and under trust legislation.

3.90          As noted above, the additional statutory duties are tailored to the different legal structure of a CCIV. In particular, the director of a CCIV (retail or wholesale) owes a duty to act in the best interests of the members of the CCIV, as well as the best interests of the members of each sub-fund (as a whole). This recognises the segregation of each group of members that invest in different sub-funds of a CCIV and ensures that the director must act in their interests in respect of the matters that relate to each sub-fund. However, in the event of any conflict between the director’s duty to the members of the CCIV and its duty to the members of each sub-fund, the duty to the members of the CCIV prevails. This recognises the overarching status of the CCIV as a legal entity as a whole.
[Schedule 1, item 4, subsections 1224D(1) and (2)]

3.91          The constitution of a wholesale CCIV may exempt the director of a wholesale CCIV from liability for contravention of certain additional duties – to the extent that the contravention was not dishonest and did not involve a lack of good faith. This is consistent with the capacity for the operator of a wholesale (and unregistered) scheme to exclude liability for certain general law duties in the constituent documents for the scheme. It ensures comparable protections are in place for investors in a wholesale CCIV as there are for investors in a wholesale scheme – and recognises their capacity to negotiate bespoke contractual protections under the constituent documents for the CCIV.
[Schedule 1, item 4, subsection 1224D(4)]

3.92          If a director of a CCIV contravenes one of these duties, the director contravenes a civil penalty provision.
[Schedule 2, item 192, new table items for subsections 1224D(1), (2) and (4) inserted into subsection 1317E(3) of the Corporations Act)]

3.93          If there is a conflict between a director’s duties under Part 2D.1 and the additional duties set out above, the additional duties prevail.
[Schedule 1, item 4, subsection 1224D(5)]

Table 3.2 – Additional duties of a director of a CCIV

Duty

Owed by director of retail CCIV?

Owed by director of wholesale CCIV?

Act honestly

Yes

Yes

Exercise the degree of care and diligence that a reasonable person would exercise in the director’s position

Yes

Yes

Liability for contravention may be excluded under constitution of CCIV 

Act in the best interests of the members of the CCIV

Yes

Yes

Act in the best interests of the members of a sub-fund (as a whole)

Yes

Yes

Have in place adequate arrangements for the management of conflicts of interest

Yes

Yes

Treat members of the CCIV who hold shares of the same class equally

Yes

Yes

Liability for contravention may be excluded under constitution of CCIV 

Treat members of the CCIV who hold shares of different classes fairly

Yes

Yes

Liability for contravention may be excluded under constitution of CCIV 

Treat members of different sub-funds of the CCIV fairly

Yes

Yes

Liability for contravention may be excluded under constitution of CCIV 

Not make use of information acquired through being director of the CCIV for certain purposes

Yes

Yes

Ensure that assets and liabilities of the sub-funds of the CCIV are clearly identified

Yes

(additional obligations apply in relation to assets and liabilities of CCIV under Part 8B.5)

No

(additional obligations apply in relation to assets and liabilities of CCIV under Part 8B.5)

Ensure that assets of a sub‑fund are held in the required manner

Yes

(additional obligations apply in relation to assets and liabilities of CCIV under Part 8B.5)

No

(additional obligations apply in relation to assets and liabilities of CCIV under Part 8B.5)

Ensure that the assets of a sub-fund of the CCIV are valued at regular intervals appropriate to the nature of the assets

Yes

No

Ensure that all payments out of the assets of the CCIV are made in accordance with the CCIV’s constitution and the Corporations Act

Yes

(additional obligations regarding the application of a sub-fund’s assets apply)

No

(additional obligations regarding the application of a sub-fund’s assets apply)

Ensure that the CCIV’s constitution meets the requirements of the Corporations Act

Yes

No

Ensure that the CCIV’s compliance plan meets the relevant requirements

Yes

No

Carry out or comply with any other duty, not inconsistent with the Corporations Act, that is conferred on the director by the CCIV’s constitution

Yes

(additional obligations under the Corporations Act and constitution apply)

No

(additional obligations under the Corporations Act and constitution apply)

 

3.94          The additional duties set out above interact with other laws in the same way that the duties in Part 2D.1 do under section 185 of the existing law. That is, the additional duties have effect in addition to, and not in derogation of, any other rule of law that the person has because of their office or employment in relation to a corporation.
[Schedule 1, item 4, subsection 1224D(6)]

3.95          In the same way that a director cannot be insured against a liability arising out of a contravention of section 182 or 183 of the existing law (being duties owed under Part 2D.1), a director of a CCIV cannot be insured against a liability arising out of a contravention of the additional duties outlined above. However, a wholesale CCIV may exempt or indemnify a director of a CCIV from liability if the contravention is not dishonest and does not involve a lack of good faith.
[Schedule 1, item 4, subsections 1224D(7) and (8)]

Certain provisions of the Corporations Act do not apply to directors and other officers of a CCIV

3.96          Parts 2D.3 to 2D.5 of the existing law (about the appointment, remuneration, cessation of appointment of directors, the appointment of secretaries and public information about directors and secretaries) do not apply to CCIVs, as a CCIV is prohibited from appointing a director other than the corporate director or a company secretary (as explained above). The rules regarding the appointment, remuneration, removal and replacement of the corporate director are explained further below.
[Schedule 1, item 4, paragraphs 1224E(a) and (b); Schedule 2, items 70 to 72, notes to Parts 2D.3, 2D.4 and 2D.5]

3.97          Part 2D.6 of the Corporations Act (about disqualification from managing corporations) does not apply for the purposes of disqualifying the corporate director of the CCIV. An effective mechanism for the disqualification of the corporate director is provided for as part of the requirements for the corporate director to hold an AFSL authorising it to operate the business and conduct the affairs of the CCIV.
[Schedule 1, item 4, paragraph 1224F(d); Schedule 2, item 73, note to Part 2D.6]

3.98          Under Part 7.6 of the Corporations Act, a person (including the corporate director) may be disqualified from holding an AFSL in certain circumstances. The regime in Part 7.6 of the Corporations Act also applies to responsible entities of registered schemes (who are required to hold an AFSL authorising it to operate the scheme). An equivalent of Part 2D.6 does not apply to responsible entities of schemes.

3.99          Part 2D.7 of the Corporations Act (which prohibits hedging of remuneration of key management personnel) does not apply to the fees and benefits payable to a corporate director of a CCIV. This is consistent with the treatment for responsible entities of registered schemes, which are also not subject to this prohibition.
[Schedule 1, item 4, paragraph 1224E(e); Schedule 2, item 74, note to Part 2D.7]

3.100      Part 2D.8 of the Corporations Act (about remuneration recommendations in relation to key management personnel for disclosing entities) does not apply to CCIVs that are disclosing entities. This is because fees and benefits payable to a corporate director of a CCIV are not subject to the remuneration recommendations made by remuneration consultants. For the corporate director of a retail CCIV, these fees and benefits must be set out in the CCIV’s constitution (explained in paragraph 3.130).
[Schedule 1, item 4, paragraph 1224E(f); Schedule 2, item 75, note to Part 2D.8]

3.101      The modifications to Parts 2D.5, 2D.6, 2D.7 and 2D.8 do not affect their application to the officers of the corporate director as a public company.

Further requirements for the corporate director of the CCIV

Appointment of the corporate director

3.102      As noted in paragraph 3.80, a CCIV may only appoint one director – its corporate director. The corporate director is the public company named in ASIC’s record of the CCIV’s registration as its corporate director or temporary corporate director.

3.103      A person applying to register a CCIV must provide information about the company that meets the basic eligibility requirement (explained below) and has consented in writing to becoming the CCIV’s corporate director. Upon registration of the CCIV, the body named in the application for registration as the proposed corporate director becomes the corporate director of the CCIV (see paragraph 2.41).

3.104      A change in the corporate director only takes effect once the record of the CCIV’s registration is altered to name another company as the CCIV’s corporate director (or temporary corporate director). The rules for replacing the corporate director are explained further below.
[Schedule 1, item 4, section
1224R]

3.105      Even if the corporate director’s appointment, or continuance of its appointment is invalid (because the CCIV or the corporate director did not comply with the CCIV’s constitution or the Corporations Act), acts done by the company named in ASIC’s record as the corporate director are effective. However, the effectiveness of the act by the corporate director does not necessarily bind the CCIV in its dealings with any other people, nor does it necessarily make the CCIV liable to a third party.
[Schedule 1, item 4, section 1224H]

Basic eligibility requirement

3.106      Only a public company that holds an AFSL authorising it to operate the business and conduct the affairs of the CCIV may be appointed as corporate director of the CCIV. This company cannot be in external administration (that is, a ‘Chapter 5 body corporate’ within the meaning of section 9 of the Corporations Act).
[Schedule 1, item 4, section 1224F]

3.107      The corporate director’s obligation to operate the business and conduct the affairs of the CCIV is explained further in paragraphs 3.116 to 3.121 below.

Requirement for corporate director of retail CCIV to have external directors

3.108      As a public company, the corporate director has natural person directors. At least half of the directors of the corporate director of a retail CCIV must be external directors. External directors bring a degree of detached supervision that is expected to enhance the standard of corporate governance of corporate directors of retail CCIVs.
[Schedule 1, item 4, subsection 1224G(1)]

3.109      A director of a corporate director is an external director if:

·                     the director is not, and has not been in the previous two years:

·                     an employee or senior manager of the corporate director or a related body corporate;

·                     substantially involved in business dealings, or in a professional capacity with the corporate director or a related body corporate;

·                     a member of a partnership that is or was substantially involved in business dealings, or in a professional capacity, with the corporate director or a related body corporate;

·                     the director does not have a material interest in the corporate director or a related body corporate; and

·                     the director is not a relative of a person who has a material interest in the corporate director or a related body corporate.

[Schedule 1, item 4, subsection 1224G(2)]

3.110      A ‘related body corporate’ is defined in section 50 of the Corporations Act and would, for example, include a holding company or a subsidiary of the corporate director.

3.111      The corporate director of a retail CCIV must comply with the external director requirement within 14 days (or a longer period allowed in writing by ASIC) of becoming the corporate director. If at some later stage the corporate director does not comply with the external director requirement, then the corporate director has 14 days from that day (or a longer period allowed in writing by ASIC) to comply.
[Schedule 1, item 4, subsections 1224G(3) and (6)]

3.112      This provision, including discretion for ASIC to extend the 14‑day period, is intended to provide some flexibility in the event of non‑compliance due to unforeseen circumstances, such as the death or incapacity of a natural person director of the corporate director. In giving an extension, ASIC may impose conditions to be complied with by the corporate director.

3.113      If the corporate director fails to comply with the external director requirement within the relevant period, it is liable for a strict liability offence with a maximum penalty of 20 penalty units. An intentional or reckless failure is an offence punishable by up to two years imprisonment. A failure to comply with a condition imposed by ASIC in extending the 14‑day period is a strict liability offence with a maximum penalty of 60 penalty units. These penalties are appropriate given that a failure to have the appropriate number of external directors would reduce or remove the external or independent oversight that is provided by external directors of the corporate director. These penalties are also consistent with the Guide to Framing Commonwealth Offences.
[Schedule 1, item 4, subsections 1224G(4) to (7); Schedule 2, item 199, penalty for subsections 1224G(4), (5) and (6) inserted into Schedule 3 to the Corporations Act]

3.114      The requirements (and penalties) for external directors within the corporate director draw upon section 601JA, which requires the responsible entity of a registered scheme to establish a compliance committee if less than half of its directors are external directors. As explained above, the requirement that at least half the directors of a corporate director of a retail CCIV be external directors aligns with the circumstances in which a responsible entity is relieved of the requirement to have a compliance committee under Part 5C.5.

3.115      The corporate director’s board is responsible, in place of the compliance committee, for monitoring the extent to which the corporate director complies with the CCIV’s compliance plan.

Powers and obligations of the corporate director

3.116      As explained in paragraph 3.86, the corporate director (as an officer of the CCIV) owes the same duties, and has the same powers, as other officers of the CCIV (including its duties under Part 2D.1 of the Corporations Act). The director of a retail CCIV also owes additional duties similar to the duties of the responsible entity of a registered scheme (see paragraph 3.88 above).

3.117      The corporate director of a CCIV also owes further duties that are specific to its role – including an obligation to operate the business and conduct the affairs of the CCIV.

Obligation to operate the CCIV

3.118      The obligation to operate the CCIV applies to the corporate director of both a retail CCIV and a wholesale CCIV. The obligation has two limbs.

3.119      The first limb requires the corporate director to operate the business and conduct the affairs of the CCIV. This is designed to be a single encompassing requirement, rather than one obligation to operate the business and a separate obligation to conduct its affairs.
[Schedule 1, item 4, paragraph 1224J(1)(a)]

3.120      The new definition of ‘affairs’ of a CCIV (which is largely based on the definition of ‘affairs’ of a body corporate) applies to this first limb. The definition sets out a range of activities that are included in the concept of ‘affairs’ of a CCIV (such as the promotion, formation, trading, transactions and dealings of the CCIV). The definition is not exhaustive and does not limit the types of matters or activities that are captured by the term.
[Schedule 2, items 33 to 34, section 53AAA]

3.121      The second limb places an obligation on the corporate director of a CCIV to perform the functions conferred on it by the CCIV’s constitution and the Corporations Act. This is appropriate because the corporate director is the controlling mind of the CCIV.
[Schedule 1, item 4, paragraph 1224J(1)(b)]

Corporate director’s power to exercise the powers of the CCIV

3.122      The corporate director has the power to exercise all the powers of the CCIV except those powers that the Corporations Act or the CCIV’s constitution requires the CCIV to exercise in a general meeting. One example of a power that can only be exercised in a general meeting is amending the constitution.
[Schedule 1, item 4, subsection 1224J(2)]

3.123      This power is analogous to the power granted to directors of other companies in existing section 198A. Existing section 198A does not apply to CCIVs as it is a replaceable rule. For a discussion of the application of replaceable rules in the CCIV context, see Chapter 2 of this explanatory memorandum.

No obligation to disclose material personal interests

3.124      Unlike other directors of conventional companies, the corporate director as sole director is not required to disclose a material personal interest to another director as the CCIV may only appoint one director. Accordingly, section 191 (relating to the director’s duty to disclose material personal interests) of the existing law does not apply to the corporate director of a CCIV.
[Schedule 1, item 4, section 1224K; Schedule 2, item 60, note to Division 2 of Part 2D.1]

Corporate director’s responsibility for agents

3.125      The corporate director of a CCIV cannot appoint delegates but it has the power to appoint an agent to do anything that the corporate director is authorised to do in connection with the CCIV. These agents may appoint sub‑agents. Akin to other companies, a CCIV also has the power to appoint an agent, who may also appoint sub-agents. The agents of the CCIV and the sub‑agents of both the corporate director and the CCIV are taken to be agents of the corporate director.
[Schedule 1, item 4, section 1224L; Schedule 2, items 61 and 62, note 2 to subsection 198D(1)]

3.126      When determining whether there is a liability to the CCIV or the CCIV’s members, or whether the corporate director of a retail CCIV has properly performed its duties (for the purposes of being paid its fees or being indemnified out of the CCIV’s assets), the corporate director of a retail CCIV is responsible for its agents (and persons taken to be its agents) even if the agent (or person) acts fraudulently or outside the scope of its authority. This offers a higher level of investor protection than the delegation rules for other types of companies in existing section 190 and the common law (for example, vicarious liability). It ensures that corporate directors of a retail CCIV have the same responsibility for agents as responsible entities of registered schemes in existing subsection 601FB(3).
[Schedule 1, item 4, section
1224M]

3.127      The corporate director of a retail CCIV may have a liability to the CCIV, for example, if it was to breach the duties it owes to the CCIV under Part 2D.1 of the existing law. The corporate director of a retail CCIV may have a liability to the CCIV’s members, for example, if it contravened a section of Chapter 8B.

3.128      The corporate director of a wholesale CCIV is not responsible for its agents (and sub-agents), as well as the CCIV’s agents (and sub‑agents) to the same degree as the corporate director of a retail CCIV. This reflects the fact that sophisticated investors are better able to negotiate bespoke contractual protections and assess investment risks than retail investors.

3.129      Other officers are not responsible for their agents in the same way as the corporate director. Extending the duty to liquidators would significantly increase the risk for liquidators of CCIVs relative to liquidators of conventional companies, potentially making it more difficult to appoint a liquidator of a CCIV.

Limitation on corporate director’s right to fees and indemnities

3.130      If the corporate director of a retail CCIV is to have any right to be paid fees, or be indemnified, out of the assets of a sub-fund of the CCIV, then those fees or indemnities must be specified in the CCIV’s constitution and are only available if the corporate director has properly performed its duties.
[Schedule 1, item 4, section 
1224N]

3.131      Any other agreement or arrangement which purports to provide otherwise has no effect.

Retail CCIV – limitation on acquisition of share in CCIV by corporate director

3.132      The corporate director of a retail CCIV may only acquire and hold shares in that CCIV for the consideration payable if the shares were acquired by another person, and subject to terms and conditions that would not disadvantage other members. This is to ensure that such acquisitions reasonably represent their market value and the process is fair to other members. A retail CCIV is subject to similar restrictions for self-acquisitions of shares (such as cross-investment or share buy-backs) (see paragraph 4.103 below).
[Schedule 1, item 4, section 1224P] 

3.133      A corporate director who contravenes this section, or any person involved in that contravention, contravenes a civil penalty provision. The existing law defines the circumstances in which a person may be ‘involved’ in a contravention under section 79 of the Corporations Act – including whether the person aided, abetted, counselled or procured the contravention. A person involved in the contravention may include a natural person director of the corporate director, the corporate director, a lawyer or an accountant.
[Schedule 1, item 4, subsection 1224P(2), Schedule 2, item 192, new table item for subsection 1224P(2) inserted into subsection 1317E(3) of the Corporations Act]

3.134       If a person’s involvement is intentional, then the person is liable for an offence with a maximum penalty of five years imprisonment, 2,000 penalty units or both (for an individual) or 20,000 penalty units (for a body corporate). This penalty is consistent with the Guide to Framing Commonwealth Offences and with the existing offence penalty a responsible entity would be subject to for similar offences (see section 601FG of the existing law). This penalty is justified to ensure integrity of the CCIV regime, by deterring the misuse of a CCIV by the corporate director or any person to acquire or hold shares terms that are not consistent with the market price or that would not be fair to other members  
[Schedule 1, item 4, section 1224P(3), Schedule 2, item 199, penalty for subsection 1224P(3) inserted into Schedule 3 to the Corporations Act]

Exercise of powers while sub-fund is in liquidation

3.135      The appointment of a liquidator does not remove the corporate director from office. However, the corporate director must cease to exercise a function or power that relates solely to the business of the sub‑fund that is being wound up. The corporate director may continue to exercise functions and powers that relate to the other sub‑funds.
[Schedule 1, item 4, section 1224Q]

3.136      There are two offences that apply to a corporate director who exercises a function or power that relates solely to the sub-fund that is being wound up. First, if the corporate director acts intentionally, the corporate director commits an offence with a penalty of 30 penalty units. Intention is the default fault element under section 5.6 of the Criminal Code.
[Schedule 1, item 4, subsection 1224Q(4); Schedule 2, item 199 penalty for subsection 1224Q(4) inserted into Schedule 3 to the Corporations Act]

3.137      Second, if intention cannot be established, the corporate director commits a strict liability offence punishable by up to 20 penalty units. The application of a strict liability offence in this circumstance is consistent with the Guide to Framing Commonwealth Offences and is intended to ensure the integrity of the wind-up rules as they apply to sub-funds, in particular the role of the liquidator.
[Schedule 1, item 4, subsection 1224Q(5); Schedule 2, item 199, penalty for subsection 1224Q(5) inserted into Schedule 3 to the Corporations Act]

3.138      The prohibition on exercising a function or power that relates solely to the sub‑fund that is being wound-up does not apply to:

·                     a person acting with the liquidator, provisional liquidator or Court’s approval; or

·                     a person acting in circumstances permitted by the Corporations Act.

[Schedule 1, item 4, subsection 1224Q(2)]

3.139      These exceptions mirror the exceptions to section 198G of the Corporations Act.

3.140      Unlike section 198G, the defendant does not bear the evidential burden for establishing that they are permitted to act. In other words, the prosecution must state in their pleadings that the person is not permitted to act, and the burden would then shift to the defendant to prove otherwise. This departure from section 198G has been made to ensure consistency with the Guide to Framing Commonwealth Offences.
[Schedule 1, item 4, subsection 1224Q(3)]

3.141      On the other hand, the defendant bears the evidential burden for proving that they are acting with the approval of the liquidator, provisional liquidator or the Court. The reversal of the evidential burden of proof is consistent with the Guide to Framing Commonwealth Offences because the prosecution is unlikely to be aware of any correspondence between the liquidator/provisional liquidator and the defendant. These facts lie peculiarly within the knowledge of the defendant and there would be no additional burden on a defendant to produce evidence of the grant of approval.

3.142      If there is a conflict between a function or power of the corporate director and the liquidator or provisional liquidator, the functions and powers of the liquidator or provisional liquidator prevail.
[Schedule 1, item 4, subsections 1224Q(6) and (11)]

3.143      The new provisions relating to the functions of the officer do not interfere with any provision in the Corporations Act which applies despite section 198G (see, for example, sections 60-11, 65-45, 70-20, 90-10, 90-20 and 90-28 of the Insolvency Practice Schedule).
[Schedule 1, item 4, subsections 1224Q(9) and (10)]

Replacing the corporate director

3.144      The process for changing the corporate director depends on the circumstances in which the corporate director is being changed. For example, different requirements apply in circumstances where the corporate director must be removed because it is no longer eligible to be the corporate director compared to circumstances where the corporate director wishes to retire from office of its own volition.

3.145      As explained in paragraph 3.104 above, a change in the corporate director only takes effect once the record of the CCIV’s registration is altered to name another company as the CCIV’s corporate director (or temporary corporate director). It is critical that a CCIV has a corporate director at all times because, without other officers or employees, the CCIV cannot operate and will have no governing mind.

Replacement of an ineligible corporate director

3.146      If the corporate director fails to meet the basic eligibility requirement (explained in paragraph 3.106 above), then ASIC, or a member (or group of members) of the CCIV may apply to the Court for the appointment of a temporary corporate director.
[Schedule 1, item 4, section 1224S]

3.147      The application to Court is not mandatory. However, the appointment of a temporary corporate director enables the CCIV to continue to operate with a corporate director who is duly capable of being the corporate director until a permanent corporate director can be secured.

Retirement of corporate director

3.148      If the corporate director of the CCIV wishes to retire from its role, then it must call a meeting of the CCIV’s members for the members to consider, and vote on, a special resolution to choose a new company to be the CCIV’s corporate director.
[Schedule 1, item 4, subsection 1224T(1)]

3.149      The notice of the meeting of the CCIV’s members must set out the corporate director’s reason for wanting to retire and nominate a new company that meets the basic eligibility requirement (explained in paragraph 3.106 above) and has consented, in writing, to becoming the CCIV’s corporate director.
[Schedule 1, item 4, subsection 1224T(2)]

3.150      A new company is only appointed as the CCIV’s corporate director if the special resolution passes. However, the company chosen by members need not be the one nominated in the notice of the meeting.

3.151      If the special resolution passes, such that the members of the CCIV have chosen a new company to be the corporate director of the CCIV, then the current corporate director must notify ASIC of the change and asking it to alter the record of the CCIV’s registration to name the new company as the CCIV’s corporate director. This notice must be lodged with ASIC as soon as practicable, and in any event within two business days. It is only once the CCIV’s record of registration has been updated that the appointment of the new corporate director is given effect.
[Schedule 1, item 4, subsection 1224T(3)]

3.152      A failure to provide ASIC with the requisite notice is a strict liability offence with a penalty of up to 20 penalty units. The strict liability offence is consistent with the Guide to Framing Commonwealth Offences, as it is important that ASIC has up-to-date information about a CCIV’s corporate director to enable it to update the record of registration to give effect to the change.
[Schedule 1, item 4, subsection 1224T(5); Schedule 2, item 199 penalty for subsection 1224T(3) inserted into Schedule 3 to the Corporations Act]

3.153      In addition, if the corporate director fails to give the requisite notice, the nominated company chosen by the CCIV’s members to be the CCIV’s corporate director may also lodge the notice with ASIC.
[Schedule 1, item 4, subsection 1224T(4)]

3.154      If the special resolution does not pass, such that the members have not chosen a new company to be its corporate director, then the current corporate director of the CCIV may apply to the Court for the appointment of a temporary corporate director. The appointment of a temporary corporate director would enable the current corporate director to retire, while also ensuring the CCIV has a suitability qualified company to act as corporate director until a permanent corporate director can be secured.
[Schedule 1, item 4, subsection 1224T(6)]

3.155      There is also nothing to prevent the corporate director from re‑commencing the process and calling a new meeting for the CCIV’s members to consider and vote on a further special resolution to choose a new company to be the CCIV’s corporate director under these provisions.

Replacement of corporate director by members

3.156      If the members of the CCIV wish to replace the corporate director of the CCIV, they may do so by calling a meeting of the CCIV’s members to consider and vote on two special resolutions:

·                     first, a special resolution that the current corporate director should be removed; and

·                     second, a special resolution choosing a body to be the new corporate director of the CCIV.

[Schedule 1, item 4, subsection 1224U(1)]

3.157      The notice of the meeting of the CCIV’s members must set out the intention to remove the current corporate director and nominate a company to be the new corporate director that meets the basic eligibility requirement and has consented in writing to becoming the corporate director of the CCIV.
[Schedule 1, item 4, subsection 1224U(2)]

3.158      The decision to remove the corporate director can only be made by the members of the CCIV (rather than the members of a particular sub‑fund of the CCIV) and cannot be initiated by the members of a single sub‑fund unless, consistent with the requirements for a special resolution of the CCIV:

·                     they have at least 5 per cent of the total votes of the whole CCIV; or

·                     comprise of at least 100 members who are entitled to vote on this resolution for the whole CCIV.

3.159      The current corporate director is only removed and replaced with a new company if both special resolutions pass. The company chosen by members to be the new corporate director does not need to be the one nominated in the notice of the meeting.

3.160      The corporate director must notify ASIC of the appointment as soon as practicable (and in any event within two business days of the appointment) and asking it to alter the CCIV’s record of registration to name the appointed company as the CCIV’s corporate director. It is only once the CCIV’s record of registration has been updated that the appointment of the new corporate director is given effect.
[Schedule 1, item 4, subsection 1224U(4)]

3.161      A failure to provide ASIC with the requisite notice is a strict liability offence with a penalty of up to 20 penalty units. The strict liability offence is consistent with the Guide to Framing Commonwealth Offences as it is important that ASIC has up-to-date information about a CCIV changing its corporate director to enable it to update the record of registration to give effect to the change.
[Schedule 1, item 4, subsection 1224U(6); Schedule 2, item 199, penalty for subsection 1224U(4) inserted into Schedule 3 to the Corporations Act]

Requirements for a temporary corporate director

3.162      An application to the Court to appoint a temporary corporate director can be made by:

·                     ASIC, a member of the CCIV, or a group of members of the CCIV if the CCIV does not have a corporate director that meets the basic eligibility requirement (for example, where the corporate director’s AFSL has been cancelled) (see explanation at paragraph 3.146 above); or

·                     the current corporate director if the current corporate director wants to retire and members do not choose a new corporate director, or the chosen company does not consent to the appointment (see discussion at paragraph 3.154 above); or

·                     ASIC, a member of the CCIV, or a group of members of the CCIV if the temporary corporate director of the CCIV fails to take steps to appoint a permanent corporate director.

3.163      On application, the Court may appoint a temporary corporate director if it is satisfied that such an appointment is in the interests of the members, the company meets the basic eligibility requirement and the company has consented in writing to becoming the temporary corporate director. The Court has discretion to make any further orders that it considers appropriate.
[Schedule 1, item 4, subsections 1224V(1) and (2)]

3.164      If the Court appoints a temporary corporate director, the person who made the application must, as soon as practicable after the Court’s order appointing the temporary corporate director, and in any event within two business days, lodge a notice with ASIC informing ASIC of the appointment.
[Schedule 1, item 4, subsection 1224V(3)]

3.165      A failure to provide ASIC with the requisite notice is a strict liability offence with a penalty of up to 20 penalty units. The strict liability offence is consistent with the Guide to Framing Commonwealth Offences as it is important that ASIC has up-to-date information about a Court changing the CCIV’s corporate director and is able to update the record of registration to give effect to the change.
[Schedule 1, item 4, subsection 1224V(5); Schedule 2, item 199, penalty for subsection 1224V(3) inserted into Schedule 3 to the Corporations Act
]

3.166      In addition, if the person who made the application fails to give ASIC the requisite notice, the company appointed as the CCIV’s temporary corporate director may lodge the notice with ASIC.
[Schedule 1, item 4, subsection 1224V(4)]

3.167      The temporary corporate director must take steps to ensure that members appoint a new corporate director or, if this fails to occur, to apply to the Court to have the CCIV wound up. The temporary corporate director must call a meeting of the CCIV’s members within three months of its appointment to allow the members to choose a new corporate director (or any later period as extended by the Court). The resolution must be a special resolution. Further meetings may be called within the three-month period, or such period as the Court permits.
[Schedule 1, item 4, subsections 1224W(1) to (5)]

3.168      A failure to call the meeting of the CCIV’s members is a strict liability offence with a penalty of up to 20 penalty units. The strict liability offence is consistent with the Guide to Framing Commonwealth Offences and is justified in this situation as it is essential that the corporate director take steps to ensure a permanent director is appointed. [Schedule 1, item 4, subsection 1224W(10); Schedule 2, item 199, penalty for subsection 1224W(2) inserted into Schedule 3 to the Corporations Act]

3.169      The notice of the meeting of the members must nominate a company to be the permanent corporate director of the CCIV that meets the basic eligibility requirement and has consented, in writing, to becoming the CCIV’s permanent corporate director. There is nothing in the new law to prevent the temporary corporate director from being chosen by the members to be the new corporate director, or another company (that is not the subject of the notice of the meeting) from being appointed as the permanent corporate director.
[Schedule 1, item 4, subsection 1224W(6)]

3.170      If the members of the CCIV choose a company to be the new corporate director, the temporary corporate director must, as soon as practicable, lodge a notice with ASIC requesting that the CCIV’s registration record be updated to reflect the change.
[Schedule 1, item 4, subsections 1224W(7) and (8)]

3.171      A failure to provide ASIC with the requisite notice is a strict liability offence with a penalty of up to 20 penalty units. The strict liability offence is consistent with the Guide to Framing Commonwealth Offences as it is essential to the integrity of the record of registration that ASIC has up-to-date information about a Court changing the CCIV’s corporate director and is able to update the record of registration to give effect to the change.
[Schedule 1, item 4, subsection 1224W(10);Schedule 2, item 199, penalty for subsection 1224W(8) inserted into Schedule 3 to the Corporations Act]

3.172      If the temporary corporate director fails to call a meeting of the CCIV’s members to appoint a permanent corporate director within the required period, ASIC, a member of the CCIV, or a group of members of the CCIV may apply to the Court for the appointment of a new temporary corporate director. The new temporary corporate director would then be under the same obligation to take steps to appoint a permanent corporate director. This process is not mandatory. It has been included as a stopgap to provide the CCIV with the opportunity to appoint a new temporary corporate director (who will be subject to the requirements to take steps to secure a permanent corporate director). [Schedule 1, item 4, section 1224X]

3.173      If the temporary corporate director has called one (or more) meetings of the CCIV’s members to appoint a permanent corporate director within the required period, but the CCIV’s members fail to pass a special resolution appointing a permanent corporate director, the temporary corporate director must apply to the Court for the winding up of all of the sub-funds of the CCIV. If the temporary corporate director does not make this application, ASIC, a member or a group of members of the CCIV may make the application. In addition to making an order to wind up all the sub-funds of the CCIV, the Court may make any further orders it considers appropriate.
[Schedule 1, item 4, section 1224Y]

Consequences of changing the corporate director

3.174      If the corporate director changes, the former corporate director must, as soon as practicable, give the new corporate director any books in the former corporate director’s possession or control that the Corporations Act requires to be kept in relation to the CCIV. The former corporate director must also give other reasonable assistance to facilitate the change in corporate director.
[Schedule 1, item 4, subsection 1224Z(1)]

3.175      A failure to hand over any books, or to give any other reasonable assistance, is a strict liability offence with a maximum penalty of 20 penalty units. This penalty is consistent with the Guide to Framing Commonwealth Offences and is justified in this situation as it is important that the incoming corporate director has the necessary reports and information about the CCIV and its operations to perform its role effectively.
[Schedule 1, item 4, subsection 1224Z(2);Schedule 2, item 199, penalty for subsection 1224Z(1) inserted into Schedule 3 to the Corporations Act]

3.176      Further, if the corporate director changes then the rights, obligations and liabilities of the former corporate director in relation to the CCIV become the rights, obligations and liabilities of the new corporate director. However, the former corporate director retains the right to be paid fees and to be indemnified for expenses incurred relating to the period when it was the corporate director. The former corporate director also retains any right, obligation or liability it had as a member of the CCIV and any liability for which it could not have been indemnified out of the assets of the CCIV had it remained the corporate director, and any liability it has arising out of a contravention of a provision of the Corporations Act.
[Schedule 1, Part 1, item 4, section 1224ZA]

3.177      A document to which the former corporate director was a party has effect as if the new corporate director (and not the former corporate director) was the party to that document where the document is capable of having this effect after the change in corporate director.
[Schedule 1, Part 1, item 4, section 1224ZB]

3.178      These provisions are modelled on sections 601FS and 601FT that apply to registered schemes and are intended to provide an administratively efficient mechanism for the novation of obligations to the new corporate director.

Termination payments

3.179      A CCIV must not give the corporate director a benefit in connection with its retirement from its position as director of the CCIV unless:

·                     it is provided for under the CCIV’s constitution (and, if it is a retail CCIV, the requirements described in paragraph 3.135 of this explanatory memorandum have been met); or

·                     the members of each affected sub-fund of the CCIV have approved the giving of the benefit.

[Schedule 1, item 4, sections 1224ZC and 1224ZD]

3.180      The exceptions for member approval that are available for other companies are also available for a CCIV. In particular, a CCIV does not need to obtain member approval if the benefit is given:

·                     under an order of the court; or

·                     in prescribed circumstances.

3.181      Some of the exceptions that are available to other companies are not relevant to the benefits given to a corporate director (being a company and not a natural person), in particular the exception for benefits given in respect of:

·                     a leave of absence that an officer of another company is entitled to under an industrial agreement; and

·                     pensions or lump sum payments (such as retiring allowances of superannuation gratuities); and

·                     damages for breach of contract or an agreement between the company and a person as consideration for the person agreeing to hold a position with the company.

[Schedule 1, item 4, section 1224ZE]

Officers and employees of the corporate director of the CCIV

3.182      The officers and employees owe obligations to the corporate director under the existing law, in their capacity as officers and employees of a public company. The new law creates further obligations on these persons in relation to the CCIV. It also extends certain obligations to the auditor engaged by the corporate director.

Duties owed by officers of the corporate director in relation to the CCIV

Duties owed by officers of a retail CCIV

3.183      The duties owed by officers of a corporate director of a retail CCIV are similar to some of the duties owed by the corporate director itself. These are the duty to:

·                     act honestly;

·                     exercise the degree of care and diligence that a reasonable person would exercise in the officer’s position;

·                     act in the best interests of the members of the CCIV, as well as the members of each sub-fund of the CCIV;

·                     not make use of information acquired through being an officer of the corporate director to gain an improper advantage for the officer or another person or to cause detriment to members of the CCIV; and

·                     not make improper use of their position to gain an advantage for themselves or any other person or to cause detriment to members of the CCIV.

[Schedule 1, item 4, paragraphs 1225(1)(a) to (f); Schedule 2, item 57, note to subsection 179(1)]

3.184      The duties to act in the best interests of members aligns with the duties owed by the director of the CCIV (explained above in paragraph 3.90). These duties are tailored to the different legal structure of a CCIV. This recognises the segregation of each group of members that invest in different sub-funds of a CCIV and ensures that the directors of the corporate director must act in their interests in respect of the matters that relate to each sub-fund. However, in the event of any conflict between the duty to the members of the CCIV and the duty to the members of each sub-fund, the duty to the members of the CCIV prevails. This recognises the overarching status of the CCIV as a legal entity as a whole.

3.185      An officer of a corporate director of a retail CCIV is also required to take all steps that a reasonable person would take to ensure that the corporate director complies with the Corporations Act, any conditions imposed on the corporate director’s AFSL, the CCIV’s constitution and the CCIV’s compliance plan.
[Schedule 1, item 4, paragraph 1225(1)(g)]

3.186      The duties owed by an officer of a retail CCIV are modelled on the duties owed by officers of a responsible entity in relation to the scheme in section 601FD of the existing law. These additional duties ensure that investors in a retail CCIV are afforded comparable protections as investors in a registered, with some differences tailored to the different legal structure of a CCIV.

3.187      A breach of any of the above duties is a breach of a civil penalty provision. If the breach is intentional or reckless, or a person’s involvement in the breach is intentional or reckless, then the person is liable for an offence with a maximum penalty of five years imprisonment. This penalty is consistent with the Guide to Framing Commonwealth Offences and with the penalties an officer of a responsible entity is liable for under the existing law.
[Schedule 1, item 4, subsection 1225(2); Schedule 2, item 192, new table item for subsection 1225(1) inserted into subsection 1317E(3) of the Corporations Act, and item 199, penalty for subsection 1225(2) inserted into Schedule 3 to the Corporations Act
]

3.188      The officers of the corporate director also owe the Part 2D.1 duties to the corporate director under the existing law. To the extent that there is a conflict between the duties in the new law and the Part 2D.1 duties, the duties in the new law prevail.
[Schedule 1, item 4, subsection 1225(3)]

3.189      The additional duties set out above interact with other laws in the same way that the duties in Part 2D.1 do under section 185 of the existing law. That is, the additional duties have effect in addition to, and not in derogation of, any other rule of law that the person has because of their office or employment in relation to a corporation.
[Schedule 1, item 4, subsection 1225(4)]

Secretary of the corporate director’s responsibility for certain contraventions

3.190      As explained in paragraph 3.85, the CCIV must not appoint a secretary. The corporate director’s secretary has responsibility for certain contraventions of the law by the corporate director (being a public company) under section 188 of the existing law.

3.191      The new law extends the operation of section 188 to also hold the corporate director’s secretary responsible for certain contraventions of law by the corporate director (being obligations the corporate director has in relation to the CCIV, such as obligations on the corporate director to lodge certain notices with ASIC). The new law also extends the operation of section 188 to hold the corporate director’s secretary responsible for certain contraventions of the law by the CCIV (such as obligations on the CCIV to lodge certain notices with ASIC).
[Schedule 1, item 4, sections 1225A and 1225B; Schedule 2, item 59, note to subsection 188(1)]

Extended duty to disclose material personal interests

3.192      Section 191 of the existing law (relating to the director’s duty to disclose material personal interests) continues to apply to the natural person directors of the corporate director. Akin to other companies, the directors of the corporate director must disclose any material personal interest in the corporate director to the other directors of the corporate director.

3.193      In addition, the new law extends section 191 of the existing law so that a natural person director of the corporate director must also disclose any material personal interest in the affairs of the CCIV to the other natural person directors of the corporate director.
[Schedule 1, item 4, section 1225C(1) and (2); Schedule 2, item 58, note to Division 2 of Part 2D.1]

3.194      Strict liability applies to the circumstance that the director of the corporate director has a material personal interest in a matter that relates to the affairs of a CCIV. The imposition of strict liability on this element of the offence is consistent with the operation of subsection 191A(1A) of the existing law (which imposes strict liability in similar circumstances).
[Schedule 1, item 4, subsection 1225C(3)]

3.195      The existing exceptions for when a director does not have to disclose a material personal interest continue to apply to the natural person directors of the corporate director, both in respect of their material interests in the corporate director and in the CCIV. These include if the material personal interest arises because the director is a member of the CCIV and the interest is held in common with the other members of the CCIV.
[Schedule 1, item 4, subsections 1225C(4) and (5)]

Right of access to CCIV books

3.196      Each natural person director of a corporate director of the CCIV has a right to inspect the books of the CCIV for the purposes of certain legal proceedings. This right is the same as the right of access that applies to directors of other types of companies.
[Schedule 1, item 4, section 1225D; Schedule 2, items 63 and 64, note 2 to subsection 198F(1)]

Indemnities, exemptions and insurance against certain liabilities to the CCIV
Restrictions on indemnities and exemptions

3.197      As a CCIV is a type of company, existing section 199A prohibits retail and wholesale CCIVs from granting an officer (including corporate directors) or an auditor:

·                     an exemption from a liability to the CCIV incurred as an officer or auditor;

·                     an indemnity from a liability owed to the CCIV;

·                     an indemnity for certain pecuniary penalties or compensation orders;

·                     an indemnity from a liability that do not arise out of conduct in good faith; and

·                     certain indemnities for legal costs.

[Schedule 1, item 4, subsection 1225E(2); Schedule 2, item 66, note to subsection 199A(1)]

3.198      The restrictions in existing section 199A are also extended to prohibit the CCIV from granting these types of exemptions or indemnities to an officer or auditor of the corporate director.
[Schedule 1, item 4, subsection 1225E(1)]

3.199      Neither existing section 199A, nor the extended operation of section 199A, prohibits all types of indemnities. Similarly, they do not constrain whether the indemnity is given in an employment contract, the constitution or a deed.

Restrictions on insurance

3.200      The CCIV (or a related body corporate) is prohibited from insuring a current or former officer or auditor of the CCIV from a liability (other than legal costs) that arises out of:

·                     a wilful breach of duty in relation to the CCIV; or

·                     a breach of the officer’s statutory duties not to improperly use their position or improperly use information under section 182 and 183 of the Corporations Act (respectively).

3.201      This restriction on insurance is extended to cover a liability of an officer or auditor of the corporate director of the CCIV.
[Schedule 1, item 4, subsection 1225F(1) and (2); Schedule 2, item 67, note to subsection 199B(1)]

3.202      In addition, a retail CCIV is prohibited from insuring an officer or auditor of the corporate director of the CCIV for a liability to the members of the CCIV that arises out of a breach of their statutory duties under new section 1225D. [Schedule 1, item 4, subsection 1225F(3)]

Duties of employees of the corporate director in relation to the CCIV

3.203      The employees of the corporate director owe a duty to not make improper use of their position or of information acquired through being an employee of a corporate director in order to gain an advantage for themselves or another person or to cause detriment to members of the CCIV.
[Schedule 1, item 4, subsection 1225F(1)]

3.204      These duties that are owed by employees of the corporate director are modelled on the duties of employees of responsible entities of registered schemes in section 601FE of the existing law. As with the corresponding registered scheme provisions, the new duties owed by officers of the corporate director are owed directly to the members.

3.205      A breach of the above duties is a breach of a civil penalty provision. If the breach is intentional or reckless, or a person’s involvement in the breach is intentional or reckless, then the person is liable for an offence with a maximum penalty of five years imprisonment. This penalty is consistent with the Guide to Framing Commonwealth Offences and with the penalties an officer of a responsible entity is liable for under the existing law.
[Schedule 1, item 4, subsection 1225F(2); Schedule 2, item 192, new table item for subsection 1225F(1) inserted into subsection 1317E(3) of the Corporations Act, and item 199, penalty for subsection 1225F(2) inserted into Schedule 3 of the Corporations Act]

3.206      The employees of the corporate director also owe the Part 2D.1 duties to the corporate director under the existing law. To the extent that there is a conflict between the duties in the new law and the Part 2D.1 duties, the duties in the new law prevail.
[Schedule 1, item 4, subsection 1225F(3)]

3.207      The additional duties set out above interact with other laws in the same way that the duties in Part 2D.1 do under section 185 of the existing law. That is, the additional duties have effect in addition to, and not in derogation of, any other rule of law that the person has because of their office or employment in relation to a corporation.
[Schedule 1, item 4, subsection 1225F(4)]

Compliance plan of a retail CCIV

Documenting the compliance plan

3.208      A retail CCIV must have a compliance plan. A wholesale CCIV is not required to have a compliance plan.
[Schedule 1, item 4, subsections 1226(1) and (2)]

3.209      A CCIV that will, upon registration, be a retail CCIV is required to lodge with ASIC a copy of its compliance plan at the same time it lodges its application for registration (see paragraph 2.14 above).

3.210      In any event, a CCIV that becomes a retail CCIV must lodge a copy of the CCIV’s compliance plan with ASIC within 14 days of becoming a retail CCIV. The copy must be signed by all of the directors of the corporate director. A failure to do so is a strict liability offence with a maximum penalty of 20 penalty units. This penalty is consistent with the Guide to Framing Commonwealth Offences and is also consistent with other offences in the Corporations Act that impose strict liability for failure to lodge a document with ASIC.
[Schedule 1, item 4, subsections 1226(3) and (4); Schedule 2, item 199, penalty for subsection 1226(3) inserted into Schedule 3 to the
Corporations Act]

3.211      The compliance plan must set out adequate measures to be applied by the corporate director in operating the CCIV to ensure compliance with the Corporations Act and the CCIV’s constitution. This is the only basic content requirement for the compliance plan.
[Schedule 1, item 4, section 1226A]

3.212      The corporate director must ensure at all times that the CCIV’s compliance plan meets the legislative requirements for compliance plans. The corporate director must also comply with the compliance plan.
[Schedule 1, item 4, paragraphs 1224D(2)(f) and (g)]

3.213      The corporate director’s responsibilities in relation to the compliance plan are similar to those applying to responsible entities of registered schemes. However, unlike for registered schemes, there are no prescriptive content requirements for a CCIV’s compliance plan. This is intended to improve the administrative efficiency and effectiveness of compliance plans through a more flexible and outcomes-focused approach.

3.214      The compliance plan requirements contained in the new law will be supported by ASIC guidance regarding the content of compliance plans, including in relation to identifying risks of non‑compliance and measures for mitigating those risks. This means the compliance plan must be tailored to suit the nature, scale, complexity and assets of the CCIV. An adequate compliance plan should include mechanisms and procedures for early identification of potential breaches and for monitoring overall adherence to the compliance plan.

3.215      The compliance plan forms a part of the overall compliance management system that the corporate director, as an AFSL holder, must implement to meet its licence obligations under section 912A.

3.216      As it is likely that some corporate directors will be the corporate director for more than one CCIV, the new law provides flexibility for the compliance plan of a CCIV that is lodged with ASIC to incorporate by reference specified provisions of a compliance plan of another CCIV. The provisions incorporated by reference may be incorporated as at a specific date, or as in force from time to time. These provisions will be taken to be included in the plan.
[Schedule 1, item 4, section 1226B]

This is expected to reduce the administrative burden where a corporate director is the corporate director of more than one CCIV. However, ASIC may require the corporate director to lodge a consolidated copy of the CCIV’s compliance plan that sets out the full text of provisions taken to be included in the plan. If the corporate director does not comply with this direction, it commits an offence of strict liability, with a penalty of up to 20 penalty units. This is consistent with other offences in the Corporations Act that impose strict liability for failure to lodge a document with ASIC (see, for example, section 601HD of the Corporations Act).
[Schedule 1, item 4, section 1226E; Schedule 2, item 199, penalty for subsection 1226E(3) inserted into Schedule 3 to the Corporations Act
]

3.217      ASIC may also give a written direction to the corporate director of a CCIV to give it information about arrangements contained in the compliance plan. The direction must specify the timeframe within which the corporate director must give the information (of no less than 14 days after the direction is given). A failure to comply with this requirement is a strict liability offence, with a penalty of up to 60 penalty units. This is consistent with other offences in the Corporations Act that impose strict liability for failure to lodge information with ASIC when directed (see, for example, sections 321 and 158 of the Corporations Act). 
[Schedule 1, item 4, section 1226C; Schedule 2, item 199, penalty for subsection 1226C(2) inserted into Schedule 3 to the Corporations Act]

3.218      The corporate director of a CCIV may amend the CCIV’s compliance plan or repeal and replace it. ASIC may also direct the corporate director to modify the CCIV’s compliance plan to ensure it complies with the basic content requirement explained in paragraph 3.211 above. If the compliance plan is modified or replaced, the corporate director must lodge a copy of the modified or new compliance plan (signed by all the directors of the corporate director) with ASIC within 14 days of the change. The corporate director commits a strict liability offence if it does not comply with ASIC’s direction or does not lodge the copy of the modified or new plan. Both of these offences carry a penalty of up to 20 penalty units. These penalties are consistent with the Guide to Framing Commonwealth Offences.
[Schedule 1, item 4, section 1226D; Schedule 2, item 199, penalty for subsections 1226D(3) and (4) inserted into Schedule 3 to the Corporations Act]

3.219      These strict liability offences that relate to documenting the compliance plan (explained in paragraphs 3.208 to 3.218 above) are important mechanisms for ensuring that ASIC can access comprehensive and up-to-date information about the compliance plan of a CCIV and for ensuring that CCIVs have in place robust measures for complying with the regulatory requirements and the CCIV’s constitution. The offences are consistent with the Guide to Framing Commonwealth Offences and with other offences in the
Corporations Act that impose strict liability for failure to lodge a document with ASIC (see, for example, section 601HD of the Corporations Act).

3.220      In contrast to the requirements for registered schemes, there is no requirement for a CCIV to have a compliance committee to provide oversight of the operations of the CCIV. Instead, at least half of the directors of the corporate director of a retail CCIV must be external directors.

3.221      The requirement for external directors applies generally in respect of all retail CCIVs and aligns with the circumstances in which a responsible entity of a registered scheme is relieved of the requirement to have a compliance committee under Part 5C.5. The requirement for the corporate director of a retail CCIV to have external directors is explained in further detail at paragraphs 3.108 to 3.115.

Auditing the compliance plan

3.222      The corporate director of a retail CCIV must engage an auditor to audit compliance with the CCIV’s compliance plan. A failure to do so is a strict liability offence with a penalty of up to 20 penalty units. A strict liability offence provides a strong incentive to comply with this requirement, which ensures there is external scrutiny of a CCIV’s compliance plan. The penalty is consistent with the Guide to Framing Commonwealth Offences.
[Schedule 1, item 4, subsections 1226F(1) and (2); Schedule 2, item 199, penalty for subsection 1226F(1) inserted into Schedule 3 to the
Corporations Act]

3.223      The auditor of the compliance plan must be a registered company auditor, an audit firm or an authorised audit company. In order to ensure independent scrutiny, the auditor of the compliance plan must not be:

·                     the corporate director (or an associate of the corporate director);

·                     a person who holds money or property of the CCIV (or an associate of the person); or

·                     the auditor of the corporate director’s own statutory financial statements (however, in this instance only, the CCIV compliance plan auditor may be from the same audit firm as the auditor of the corporate director).

[Schedule 1, item 4, subsections 1226F(1) to (4)]

3.224      Within three months of the end of the financial year (generally by 30 September), the auditor must conduct an annual audit of the compliance plan and report whether, in the auditor’s opinion, the corporate director has complied with the CCIV’s compliance plan, and whether the plan continues to meet the requirements for compliance plans explained above. A contravention of this requirement is a strict liability offence with a maximum penalty of 20 penalty units. A strict liability offence ensures there is a strong incentive for the auditor to undertake a regular and timely audit of the CCIV’s compliance plan. The penalty is consistent with the Guide to Framing Commonwealth Offences.
[Schedule 1, item 4, subsections 1226G(1) and (6); Schedule 2, item 199, penalty for subsection 1226G(1) inserted into Schedule 3 to the
Corporations Act]

3.225      The corporate director can also arrange for the auditor to carry out additional audits.
[Schedule 1, item 4, subsection 1226F(5)]

3.226      The auditor of the compliance plan must have access at all reasonable times to the books of the CCIV and assistance for the purposes of the audit of the compliance plan, including assistance with information and explanations as required from officers of the corporate director. An officer of the corporate director who fails to provide this access, or give this information, commits an offence of strict liability with a maximum penalty of 20 penalty units. A strict liability offence ensures officers of the corporate director have a strong incentive to provide the compliance plan auditor with full assistance and disclosure during the audit process and is consistent with the Guide to Framing Commonwealth Offences.
[Schedule 1, item 4, subsections 1226G(2) and (3); Schedule 2, item 199, penalty for subsection 1226G(3) inserted into Schedule 3 to the
Corporations Act]

3.227      The corporate director must lodge the auditor’s report of the compliance plan with ASIC at the same time as it lodges the annual financial statements and reports of the CCIV. A contravention of this requirement is a strict liability offence with a maximum penalty of 20 penalty units. This offence creates a strong incentive for the corporate director to provide ASIC with timely and independently audited information about the CCIV’s compliance processes and record over the previous financial year and is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsections 1226G(4); Schedule 2, item 199, penalty for subsection 1226G(4) inserted into Schedule 3 to the Corporations Act]

3.228      The auditor of the compliance plan has qualified privilege in respect of statements made in the audit report and notifications that the auditor makes to ASIC about contraventions of the compliance plan.
[Schedule 1, item 4, subsection 1226G(5)]

3.229      These requirements are based on the requirements for compliance plans of registered schemes contained in section 601HG. They ensure there is an independent, annual compliance review process to assist the corporate director and its officers in monitoring and managing compliance risks.

Offences for contraventions by individual auditor

3.230      As for registered schemes, an individual auditor, audit company, or lead auditor commits an offence if the person fails to notify ASIC of certain matters within 28 days of becoming aware of them. The person must notify ASIC if they become aware of:

·                     a significant contravention of the Corporations Act;

·                     a contravention of the Corporations Act that is not significant but that the auditor believes has not or will not be adequately dealt with through the audit process; or

·                     an attempt by a person to influence or interfere with the audit.

[Schedule 1, item 4, subsections 1226H(1), (2), (3) and (7)]

3.231      A failure to notify ASIC of any of the above matters is an offence with a maximum penalty of one year imprisonment. This penalty is consistent with the Guide to Framing Commonwealth Offences and provides a strong incentive to notify ASIC of key matters central to ASIC’s role as regulator.
[Schedule 1, item 4, subsection 1226H(6); Schedule 2, item 199, penalty for subsection 1226H(6) inserted into Schedule 3 to the Corporations Act]

3.232      In determining whether a contravention is a significant one, a person should consider:

·                     the penalty for the contravention;

·                     the effect that the contravention has or may have on the financial position of the CCIV or a sub-fund of the CCIV or the information available about the financial position of the CCIV or a sub-fund of the CCIV; and

·                     any other relevant matter.

[Schedule 1, item 4, subsection 1226H(4) and (5)]

3.233      The circumstances that give rise to a contravention and the matters that need to be considered when determining whether a contravention is significant are based on the equivalent provisions for registered schemes.

Changing the compliance plan auditor

3.234      The auditor of the compliance plan may be removed by the corporate director or may resign on its own initiative. In certain circumstances, the corporate director must remove the auditor of the compliance plan.

3.235      The corporate director must remove the auditor if it is no longer eligible to act as the auditor of the compliance plan (see paragraph 3.223 for the eligibility requirements for a CCIV’s compliance plan auditor). A failure to do so is a strict liability offence with a penalty of up to 20 penalty units. The corporate director may also remove the auditor for other reasons if ASIC consents to the removal.
[Schedule 1, item 4, subsections 1226J(1) and (2); Schedule 2, item 199, penalty for subsection 1226J(1)(a) inserted into Schedule 3 to the Corporations Act]

3.236      The auditor may, by written application, resign subject to ASIC consenting to the resignation. ASIC must notify the auditor and the corporate director whether it consents to the auditor’s resignation as soon as practicable after receiving the application.
[Schedule 1, item 4, subsections 1226J(3) and (4)]

3.237      To encourage proper disclosure of an auditor’s reasons for resigning, a statement by the auditor in its application or in answer to an inquiry by ASIC concerning the reasons for its resignation cannot be used as evidence in civil or criminal proceedings. It also cannot be used as the basis for prosecution, action or suit against the auditor (other than in respect of a contravention relating to false or misleading statements under section 1308). A certificate by ASIC that the statement was made in the auditor’s application for resignation, or in answer to an inquiry by ASIC, is conclusive evidence that the statement was so made.
[Schedule 1, item 4, subsection 1226J(5)]

3.238      The day on which the auditor’s resignation takes effect is the later of:

·                     the day specified in the notice of resignation; or

·                     the day ASIC consents to the resignation; or

·                     the day fixed by ASIC for the resignation.

[Schedule 1, item 4, subsection 1226J(6)]

3.239      If the auditor of the compliance plan changes, the corporate director must, within 7 days, write to ASIC asking it to alter the record of the CCIV’s registration to show the name of the new auditor. A failure to do so is a strict liability offence with a penalty of up to 20 penalty units. A strict liability offence ensures there is a strong incentive for the corporate director to provide information to ASIC about the identity of the compliance plan auditor in the event of a change in auditor. The offence is consistent with the Guide to Framing Commonwealth Offences. ASIC must comply with the request if the change complies with the Corporations Act.
[Schedule 1, item 4, section 1226K; Schedule 2, item 199, penalty for subsection 1226K(1) inserted into Schedule 3 of the Corporations Act]

3.240      These requirements are based on the requirements for changing the auditor of a compliance plan for a registered scheme, contained in section 601HH.

Member protection

Related party transactions by retail CCIVs

Approval of related party transactions required at the sub-fund level (not at whole-of-CCIV level)

3.241      The rules concerning related party transactions in Chapter 2E of the Corporations Act generally apply to retail CCIVs in the same way that they apply to public companies, and to an entity that a retail CCIV controls in the same way as it applies to an entity a public company controls. The rules concerning related party transactions do not apply to wholesale CCIVs.
[Schedule 1, item 4, section 1227; Schedule 2, item 76, note to Chapter 2E]

3.242      To the extent the rules require a retail CCIV to obtain the approval of its members to give a related party a financial benefit, the CCIV must separately obtain the approval of the members of each sub‑fund that is affected by the giving of the financial benefit (not the CCIV as a whole).
[Schedule 1, item 4, subsections 1227A(1) and (2), Schedule 2, item 77 and 78, note 3 to subsection 208(1)and note 3 to subsection 209(2)]

3.243      If the members of a sub-fund do not give approval, the CCIV cannot enter into the transaction with respect to that sub-fund. If a transaction relates to more than one sub-fund of the retail CCIV, the CCIV must separately obtain the approval of the members of each affected sub-fund. If the members of any of the affected sub-funds do not approve the transaction, the CCIV will not be able to enter into the transaction with respect to those sub-funds.

Exceptions

3.244      If the corporate director of a retail CCIV is entitled to fees or an indemnity under the CCIV’s constitution, and the provisions of the constitution comply with the requirements for such clauses (see paragraphs 3.130 to 3.131 above), then a retail CCIV is not required to obtain the approval of the affected members. A similar exception applies to the fees and indemnities given to a responsible entity of a registered scheme (that is set out in the registered scheme’s constitution).
[Schedule 1, item 4, subsection 1227A(3)]

Exceptions available to public companies not available for retail CCIVs

3.245      The exception for remuneration and reimbursement to an officer or employee of a public company under section 211 of the existing law is not available for a retail CCIV, as there are bespoke exceptions for the corporate director’s financial benefits explained above.
[Schedule 1, paragraph 1227B(1)(a)]

3.246      The exceptions in sections 213 and 214 of the existing law for small amounts given to a related party, or financial benefits given a closely held subsidiary, are also not available for retail CCIVs. This is consistent with the rules that apply to related party transactions in respect of a registered scheme (see section 601LE in Chapter 5C of the Corporations Act). It recognises that the payment of any amount by a retail CCIV to a related party of the CCIV (no matter how small) requires member approval.
[Schedule 1, paragraphs 1227B(1)(b) and (c)]

3.247      The exceptions from the related party transaction rules in the existing law continue to apply to entities the retail CCIV controls in relation to benefits given to its related parties.
[Schedule 1, item 4, subsection 1227B(2)]

Procedural requirements for member approval

3.248      Approval for a related party transaction may only be given at a meeting of the members of each affected sub-fund of a retail CCIV. A body corporate that is a member of the CCIV may appoint an individual representative to exercise its powers at the meeting in the same way as an individual may be appointed to exercise the body corporate’s powers at a meeting of a registered scheme.
[Schedule 1, item 4, section 1227D]

3.249       A retail CCIV must, as for a public company, prepare an explanatory statement to members as part of the process of obtaining member approval. The statement must include certain information, such as the identity of the related party and the nature of the financial benefit to be given. The corporate director of a CCIV, and any of the directors of the corporate director of the CCIV, are also required to set out in the explanatory statement certain information, including:

·                     any recommendation about the giving of the financial benefit, and the reasons for the recommendation;

·                     whether they have an interest in the outcome of the proposed resolution to approve the financial benefit; and

·                     all other information that is known to the company, the corporate director, or any of the directors of the corporate director that is reasonably required by the members in order to decide whether it is in the sub-fund’s interest to pass the proposed resolution.

[Schedule 1, item 4, section 1227C]

Meaning of ‘related party’

3.250      Section 228 (about ‘related parties’ of a public company) does not apply to a CCIV. Related parties of a CCIV are instead:

·                     the corporate director of the CCIV or an entity that controls the corporate director of the CCIV;

·                     the directors of the corporate director and their parents and children, the directors (if any) of an entity that controls the corporate director and their parents and children and any entity controlled by any of these persons (unless also controlled by the CCIV); and

·                     any entity acting in concert with a related party of the CCIV on the understanding that the related entity will receive a financial benefit if the CCIV gives the entity a financial benefit.

[Schedule 1, item 4, subsections 1227E(1) to (5) and (8)]

3.251      An entity is also a related party of a CCIV if it was a related party in the previous six months or if it has reasonable grounds to believe it will become a related party of the CCIV at any time in the future.
[Schedule 1, item 4, subsections 1227E(6) and (7)]

3.252      Consequential amendments are made to the definitions of ‘entity’, ‘financial benefit’ and ‘related party’ to reflect the modifications contained Part 8B.4 of the new law.
[Schedule 2, items 10, 13 and 24, definitions of ‘entity’, ‘financial benefit’ and ‘related party’ in section 9 of the Corporations Act]

Rights and remedies of members of a CCIV

3.253      Members of a CCIV, like members of any other company, may apply to the court for remedy in circumstances where:

·                     the conduct of the affairs of the CCIV;

·                     an actual or proposed act or omission on behalf of the CCIV; or

·                     an actual or proposed resolution of the CCIV’s members, or a class of members;

is either contrary to the interests of the CCIV as a whole or oppressive to (or unfairly prejudicial to or unfairly discriminatory against) a member or class of members of the CCIV. This right is extended so that members of one or more sub-funds of the CCIV may seek also remedy when it is contrary to the interests of the members of that sub-fund (or those sub‑funds), considered as a whole.
[Schedule 1, item 4, section 1227F; Schedule 2, item 79, notes to section 232
]

3.254      The court has power to make any order provided for under section 233 of the Corporations Act that it considers appropriate in relation to a CCIV (in the same way that it can in relation to any other company). This includes an order to appoint a receiver to manage any or all of a sub‑fund’s property or modify or repeal the CCIV’s constitution.
[Schedule 1, item 4, section 1227G; Schedule 2, items 80 to 81, note to subsections 233(1) and (3)]

3.255      A member or officer of a CCIV (or a former member or former officer) may bring, or intervene in, proceedings on behalf of the CCIV with leave from the court in the same way that a member or officer of any other company can. The court must grant the application for leave if certain factors are established, including if it is probable that the company itself will not bring the proceedings and it is in the best interests of the company that the applicant be granted leave (among other things). The rebuttable presumption that granting leave is not in the best interests of the company applies to CCIVs in the same way as it applies to other companies (except that references to a third party means a person that is not a related party of the CCIV).
[Schedule 1, item 4, section 1227H; Schedule 2, items 82 and 83, note 2 to subsection 237(4)]

3.256      The CCIV must comply with the relevant procedures for varying and cancelling class rights in the same way that other companies are required to do so. If the CCIV’s constitution sets out the procedure for varying and cancelling class rights, the CCIV must follow that procedure. If the CCIV’s constitution does not set out the procedure for varying and cancelling class rights, the CCIV must pass a special resolution of the sub‑fund of the CCIV to which the affected shares are referable, instead of a special resolution of the whole CCIV. The CCIV must also pass a special resolution of the affected class of members (in the same way that other companies are required to do so).
[Schedule 1, item 4, section 1227J; Schedule 2, items 84 and 85 notes to subsections 246B(1) and 246B(2)]

3.257      Certain actions are taken to vary rights attached to shares of a CCIV in the same way that certain actions are taken to vary the rights attached to shares of other companies (except that sub-funds of the CCIV to which only one class of shares are referable are treated in the same way as other companies with one class of shares).
[Schedule 1, item 4, section 1227K]

3.258      A CCIV must notify ASIC in the prescribed form of the particulars of a division of the shares in the CCIV into classes (if the shares were not previously divided in this way) and a conversion of shares in a class into shares in another class in the same way that a public company is required to do so.
[Schedule 1, item 4, section 1227L; Schedule 2, item 86, note to subsection 246F(3)]

Civil liability of corporate director to members

3.259      If a member suffers loss or damage because the corporate director has contravened a provision in Chapter 8B, then the member has a direct right of recourse against the corporate director to recover the amount of the loss or damage from the corporate director. This is regardless of whether or not the corporate director has been convicted of an offence, or has a civil penalty order made against it, in respect of the contravention.
[Schedule 1, item 4, subsection 1227M(1)]

3.260      This right is consistent with the right of a member of a registered scheme to seek remedy against the responsible entity of the registered scheme in similar circumstances, as provided for in section 601MA of the existing law.

3.261      The new law includes a statutory limitation period that requires the action against the corporate director to be taken within 6 years after the member’s cause of action has arisen.
[Schedule 1, item 4, subsection 1227M(2)]

3.262      The availability of this remedy for members of a CCIV does not affect any liability that a person, including the corporate director or an officer or employee of the corporate director, has under the Corporations Act or under any other laws. In particular, it does not affect the ability to convict the person of an offence, or make a civil penalty order against it, for the contravention of the relevant provision in Chapter 8B.
[Schedule 1, item 4, subsection 1227M(3)]

Meetings

3.263      A CCIV’s powers may be exercised by its director or its members. As explained in paragraphs 3.122 and 3.123 above, some of the CCIV’s powers must be exercised by the members of the CCIV. For example, the decision to replace the corporate director of a CCIV must be made by the CCIV’s members.

3.264      In addition, some of the CCIV’s powers may be exercised in relation to a particular sub-fund of the CCIV, by that sub-fund’s members. For example, a decision to wind up a sub‑fund voluntarily.

3.265      The new law sets out the method by which a resolution for the CCIV may be passed by the corporate director or by the CCIV’s members.

Directors’ meetings

3.266      The corporate director of a CCIV may pass a resolution for the CCIV by passing a resolution of the directors of the corporate director. This mechanism effectively ‘looks through’ the corporate director of the CCIV (being a company itself) to the natural person directors of the corporate director who are making the decision to exercise the CCIV’s powers.
[Schedule 1, item 4, subsection 1228(1)]

3.267      The resolution must clearly state that it is on behalf of the corporate director in its capacity as a corporate director of the CCIV. It should also state which CCIV the resolution relates to if the corporate director is the corporate director of more than one CCIV. These requirements aim to avoid uncertainty about which company the natural person directors of the corporate director are acting for (that is, the CCIV, another CCIV or the corporate director itself).
[Schedule 1, item 4, paragraphs 1228(1)(a) and (b)]

3.268      Part 2G.1 of the Corporations Act, which sets out the requirements for directors’ meetings, does not apply to a CCIV, as this bespoke rule applies instead. This does not affect the application of Part 2G.1 for resolutions, or meetings, of the corporate director of the CCIV (being a company itself).
[Schedule 1, item 4, subsections 1228(2) and (3); Schedule 2, item 87, note to Part 2G.1]

Meetings of members of the CCIV and sub-funds

3.269      The rules for holding meetings of members of a CCIV and its sub-funds are based on the rules for registered schemes, rather than the rules for companies. The rules for meetings of members of registered schemes apply to a CCIV as if:

·                     the CCIV is a registered scheme;

·                     the CCIV’s members are the members of that scheme;

·                     the corporate director is the responsible entity of the registered scheme;

·                     the CCIV’s constitution were the scheme’s constitution; and

·                     the CCIV’s compliance plan is the registered scheme’s compliance plan.

[Schedule 1, item 4, section 1228A; Schedule 2, items 12, 27 and 88-90, definitions of ‘extraordinary resolution’ and ‘special resolution’ in section 9 and notes Part 2G.2, Part 2G.3 and Part 2G.4 of the Corporations Act]

3.270      Similar adaptations have been made for meetings of the members of a sub-fund of a CCIV. As such, the rules apply to meetings of members of a sub-fund of a CCIV as if:

·                     the sub-fund is a registered scheme;

·                     the sub-fund’s members are the members of the scheme;

·                     the corporate director is the responsible entity of the registered scheme;

·                     the CCIV’s constitution were the scheme’s constitution; and

·                     the CCIV’s compliance plan is the registered scheme’s compliance plan.

[Schedule 1, item 4, section 1228B]

3.271      A resolution may only be moved by the members if the resolution does not treat any other member of any other sub-fund differently or affect any other interest of a member of any other sub-fund. This requirement applies to all CCIVs (listed or otherwise).
[Schedule 1, item 4, section 1228E]

3.272      If a member of a sub-fund wishes to call a meeting of the members of a sub‑fund of the CCIV, then that member may only request a copy of so much of the register of the CCIV’s members as relates to that particular sub-fund of the CCIV. If a member is calling a meeting of the members of the whole CCIV, it may request a copy of the full register of members. The CCIV must, without charge, produce a copy of the register of members (in part or in full, as required). A failure to do this is a strict liability offence with a maximum penalty of 20 penalty units. This penalty is consistent with the Guide to Framing Commonwealth Offences and ensures the ability of members to exercise their right to call meetings – being a basic member right in any company.
[Schedule 1, item 4, section 1228D]

Example 3.1 Meetings of members of a CCIV and its sub-funds

Ironbank CCIV has three sub-funds, Ironbank Growth SF, Ironbank Wealth SF and Ironbank Gold Investment SF.

Two proposals are put forward.

·                     The first proposal involves replacing the corporate director.

·                     The second proposal relates to cancelling forfeited shares in each of two of the sub‑funds, Ironbank Growth SF and Ironbank Wealth SF.

Separate meetings of the whole CCIV, the members of Ironbank Growth SF and Ironbank Wealth SF are called. For administrative convenience, the meetings are to be held on the same day.

The first proposal affects the interests of the members of the whole CCIV. Accordingly, a resolution is put to all of the members of the CCIV who must vote on the proposal together.

Eighty per cent of the members of the whole CCIV vote in favour of the first proposal. A review of the count of the votes indicates that only 20 per cent of the members of Ironbank Gold Investment SF voted in favour of the proposal. However, because it is a resolution of the whole CCIV (with the vote of all of the members of the CCIV considered as a whole), the resolution is carried.

As the second proposal only affects the interests of the members of Ironbank Growth SF and Ironbank Wealth SF, it is only put forward at the meetings of Ironbank Growth SF and Ironbank Wealth SF.

Eighty per cent of the members of Ironbank Growth SF vote in favour of the second proposal. However, only five per cent of the members of Ironbank Wealth SF are in favour of the proposal.

As the second proposal can proceed in a manner that does not affect the interests of the members of Ironbank Wealth SF, it can proceed in respect of just Ironbank Growth SF. It cannot proceed in respect of Ironbank Wealth SF.

Further modifications to the meeting rules for CCIVs and sub-funds

3.273      Some further modifications to the meeting rules are made to account for the CCIV’s corporate status.

3.274      In particular, a member in a CCIV has a share in the CCIV (which are different to interests in a scheme). At a meeting of the CCIV or a sub-fund of the CCIV, a member’s voting power is:

·                     for a vote on a show of hands, 1 vote;

·                     for a vote on a poll at a meeting of the CCIV, 1 vote for each dollar of the value of the total shares in the CCIV that the member holds (and, in the case of a meetings of the members of a sub-fund, that is referable to the relevant sub-fund); or

·                     for a vote on a poll at a meeting of a sub-fund of a CCIV, 1 vote for each dollar of the value of the total shares that the member holds in the CCIV that are referable to that sub-fund.

[Schedule 1, item 4, section 1228F]

3.275      The chair has a casting vote and, if the chair is a member, any vote it has in its capacity as member.
[Schedule 1, item 4, paragraph 1228F(2)(c)]

3.276      If a member holds a share jointly with another person, then only the vote of the member whose name appears first in the register of members of the CCIV counts.
[Schedule 1, item 4, paragraph 1228F(2)(d)]

3.277      If an associate of a CCIV (including the corporate director), or an associate of the corporate director has an interest in the resolution other than in their capacity as a member of the CCIV, they are not entitled to vote at either a meeting of the members of the CCIV or a sub-fund of the CCIV.
[Schedule 1, item 4, section 1228G]

3.278      If a CCIV is listed, the corporate director, its associates and the CCIV’s associates are entitled to vote their interest on resolutions to remove the corporate director and choose a new corporate director (in the same way that these persons can for listed registered schemes).

3.279      A bespoke rule applies for determining how to calculate the value of a person’s shares, for the purposes of determining that person’s voting power at a meeting of the CCIV or of the sub-fund. A different method of calculating the value of a person’s shares applies depending on whether:

·                     the person’s shares are redeemable;

·                     the CCIV is listed;

·                     the sub-fund to which the person’s shares are referable is liquid; and

·                     the person’s shares are in a retail or wholesale CCIV.

[Schedule 1, item 4, section 1228H]

3.280      If the person holds shares in a retail CCIV that is listed, then the value of those shares is the last sale price on the relevant prescribed market on the trading day immediately before the day on which the poll is taken.
[Schedule 1, item 4, subsection 1228H(3)]

3.281      If the person holds shares in a retail CCIV that is not listed, and those shares are redeemable and referable to a sub-fund that is liquid, then the value of those shares are calculated in accordance with the rules in the retail CCIV’s constitution. A retail CCIV’s constitution must make provision for certain matters regarding the redemption of redeemable shares.
[Schedule 1, item 4, subsection 1228H(4)]

3.282      If the person holds shares in a wholesale CCIV that are redeemable and referable to a sub-fund that is liquid, and its constitution has set out the amount to be paid for redeeming a share, then the value of the person’s shares is calculated in accordance with those rules.
[Schedule 1, item 4, subsection 1228H(5)]

3.283      In all other cases, the value of a person’s shares is the amount that the corporate director of the CCIV determines in writing to be the price that a willing but not anxious buyer would pay for the shares if it was sold on the business day immediately before the day on which the poll at the meeting is taken.
[Schedule 1, item 4, subsection 1228H(2)]

3.284      These methods for calculating the value of the shares of a CCIV are based on the methods for calculating the value of a member’s interest in a registered scheme for the purposes of calculating that member’s voting power at a meeting of the scheme’s members under section 253F of the existing law.

3.285      The right of the auditor of a scheme’s compliance plan to attend a meeting of the scheme’s members, contained in Part 2G.4 of the Corporations Act, is not applicable to wholesale CCIVs or sub-funds of wholesale CCIVs as a wholesale CCIV is not required to have a compliance plan.
[Schedule 1, item 4 section 1228C]

Contingent amendments to facilitate hybrid meetings and the use of technology for CCIVs

3.286      Schedule 4 to the Bill makes contingent amendments to Chapter 1 of the Corporations Act to facilitate technology neutral signature of documents and electronic provision of documents to members in the context of CCIVs.

3.287      The contingent amendments apply from commencement of the CCIVs regime on 1 July 2022 if the Corporations Amendment (Meetings and Documents) Act 2021 has commenced by that date. The contingent amendments do not commence at all if the Corporations Amendment (Meetings and Documents) Act 2021 does not commence prior to 1 July 2022.

3.288      The contingent amendments ensure that technology neutral signing is facilitated for documents relating to meetings of the members of a sub-fund (in addition to meetings of the members of a CCIV, which are already covered as a meeting of the members of a company under the changes).
[Schedule 4, items 1 and 2, paragraphs 110(2)(a) and (ba)]

3.289      The contingent amendments also facilitate the technology neutral sending of documents, including financial reports, to members of a CCIV (including members of a sub‑fund). In particular, amendments are made to ensure meeting-related documents sent by the corporate director of a CCIV to members of a CCIV (or sub-fund) are technology neutral and allow recipients to make elections regarding the form in which they receive documents.
[Schedule 4, items 3 to 6 and 9, paragraph 110E(1)(ba), paragraph 110J(3)(ba), subsection 110K(2A), subsections 100K(4) and (5)]

3.290      Consistent with the requirements in the Corporations Amendment (Meetings and Documents) Act 2021, the corporate director must notify members of their rights to make elections regarding the form of documents. A failure to do so is a strict liability offence with a penalty of up to 30 penalty units. This is the same as the penalty that applies if a company or a registered scheme fails to provide this notice to members of an ordinary company or scheme.
[Schedule 4, item 10, penalty for subsection 110KA(2A) inserted into Schedule 3 to the Corporations Act]

Corporate contraventions

General attribution rules

3.291      The new rules for attributing the physical and mental element of an offence to a CCIV apply for the purposes of all Commonwealth laws, irrespective of whether those laws currently apply or disapply Part 2.5 of the Criminal Code, or include other attribution rules for conduct. The special attribution rules do not apply to offences under State laws because such an application would offend the Melbourne Corporation doctrine.[3]
[Schedule 1, item 4, section 1229]

Other attribution rules do not apply

3.292      The new attribution rules are designed to be comprehensive and all existing Commonwealth attribution rules are disapplied in determining whether a CCIV has committed an offence. This includes Part 2.5 of the Criminal Code and any other bespoke rules that attribute:

·                     conduct engaged in by a person;

·                     conduct engaged in by a person in relation to another person; or

·                     a state of mind; or

·                     to a body corporate.

[Schedule 1, item 4, section 1229A]

3.293      In the context of civil penalty provisions, rules that attribute an offence or a provision in relation to a contravention to a body corporate are also disapplied in the CCIV context.
[Schedule 1, item 4, section 1229A]

3.294      Examples of bespoke attribution rules that are disapplied are section 769B of the Corporations Act, section 12GH of the ASIC Act, section 199 of the Aboriginal and Torres Strait Islander Act 1995 and section 324 of the National Consumer Credit Protection Act 2009.

3.295      The attribution rules do not interfere with the special rules in the new law for determining when a corporate director is responsible for acts of its agents and the CCIV’s agents for the purposes of determining certain liabilities (see paragraph 3.126).
[Schedule 1, item 4, section 1229C]

Attributing conduct to a CCIV

3.296      As a general rule, conduct engaged in by a person other than the CCIV is attributed to the CCIV if it is engaged in by one of the following parties, and the conduct was engaged in on behalf of the CCIV:

·                     an agent of the CCIV;

·                     a director of the CCIV;

·                     an employee, director or agent (an official) of the corporate director of the CCIV; or

·                     any other person acting at the direction, or with the consent or agreement of one of the entities listed above.

3.297      For the purposes of the liability provisions, conduct has the same meaning as in section 769B of the existing law. Section 769B defines ‘conduct’ as an act, or omission to perform an act, or a state of affairs.
[Schedule 1, item 4, subsection 1229B(7)]

3.298       There are certain conditions which need to be established before attributing conduct of an agent, an official of the corporate director or a person acting at the direction of another person. These conditions are explained below.

Attribution from agents of the CCIV

3.299      Conduct engaged in by an agent of the CCIV is taken to have been engaged in by a CCIV if the conduct was engaged in on behalf of the CCIV and the agent was acting within the scope of that agent’s actual or apparent authority in relation to the CCIV.
[Schedule 1, item 4, subsections 1229B(1) and (4), item 1 of the table]

3.300      Conduct engaged in by an agent appointed by a liquidator, receiver or person administering a compromise is not attributed to a CCIV. If a receiver, liquidator or provisional liquidator is an agent of the CCIV, conduct engaged in by the receiver is also not attributed to the CCIV.
[Schedule 1, item 4, subsection 1229B(5)]

Attribution from directors of the CCIV

3.301      Conduct engaged in by a corporate director or a shadow director of the CCIV is taken to have been engaged in by a CCIV if the conduct was engaged in on behalf of the CCIV.
[Schedule 1, item 4, subsections 1229B(1) and (4), item 2 of the table]

3.302      Note that the conduct of a liquidator, receiver or person administering a compromise will not be attributed to the CCIV as those persons are not covered by the definition of ‘director’.

Attribution from officials of the corporate director

3.303      Conduct engaged in by an employee, director or agent of the corporate director of the CCIV is also taken to have been engaged in by a CCIV if the:

·                     conduct was engaged in on behalf of the CCIV; and

·                     the employee, director or agent was acting within the scope of their actual or apparent authority in relation to the corporate director.

[Schedule 1, item 4, subsections 1229B(1) and (4), item 3 of the table]

3.304      For the purposes of the attribution rules, the employee, director or agent is referred to as an official.
[Schedule 1, item 4, subsection 1229B(4), item 2 of the table]

3.305      Officials of the corporate director are one step further removed from the CCIV. In other words, officials only have a relationship with the CCIV by virtue of their relationship with the corporate director. The new law recognises that both the official and the corporate director must be acting within the scope of their authority.

3.306      This attribution rule does not cover officials of a shadow director. However, they may be covered by the attribution rule for persons acting at the direction or consent of another person.

Example 3.2 Attribution from officials of the corporate director

Samantha is an employee at DB Director Services Ltd. DB Director Services Ltd is the corporate director for multiple CCIVs, including Magic Investments CCIV and Bewitching Investments CCIV.

Samantha is instructed to undertake work for Magic Investments CCIV. While undertaking this work in accordance with the instructions, she engages in conduct which would constitute the physical element of an offence.

Samantha’s conduct can be attributed to Magic Investment CCIV because:

·                     DB Director Services Ltd is acting on behalf of Magic Investments CCIV; and

·                     Samantha is acting within the scope of her authority as an employee at DB Director Services Ltd.

However, Samantha’s conduct cannot be attributed to Bewitching Investments CCIV because DB Director Services Ltd is not acting on behalf of Bewitching Investments CCIV.

Attribution from other persons acting at the direction of another person

3.307      There is also an attribution rule that applies to any other person acting at the direction, or with the consent or agreement of:

·                     an official of the corporate director;

·                     an agent of the CCIV; or

·                     the director (or shadow director) of a CCIV.

[Schedule 1, item 4, subsections 1229B(1) and (4), item 4 of the table]

3.308      The person providing the direction, consent or agreement is referred to as the first person. This explanatory memorandum uses the term ‘the second person’ to refer to the person acting at the first person’s direction. The second person could be a sub-agent of the CCIV, an agent of a director or an agent of an official of the corporate director.
[Schedule 1, item 4, subsection 1229B(4), item 4]

3.309      The second person is one step further removed from the CCIV. For example, an agent of an official of the corporate director only has a relationship with the CCIV by virtue of the agent’s relationship with the official, the official’s relationship with the corporate director and the corporate director’s relationship with the CCIV. This is illustrated in Diagram 3.1.

Diagram 3.1 Relationship between agents of officials and the CCIV

 

CCIV

 

One step removed from the CCIV

Corporate Director of the CCIV

 

Two steps removed from the CCIV

Official of the Corporate Director

 

Three steps removed from the CCIV

Agent of an Official

3.310      The conduct of the other person is attributed to the CCIV only if each person in the chain is acting on behalf of the person directly above them in the chain. For example, the conduct of an agent of an official is only attributed to the CCIV if:

·                     the agent is acting at the direction, or with the consent or agreement of the official of the corporate director;

·                     the official is acting within the scope of the official’s actual or apparent authority in relation to the corporate director; and

·                     the corporate director is acting on behalf of the CCIV.

[Schedule 1, item 4, subsections 1229B(1) and (4), item 4 of the table]

3.311      Similarly, the conduct of an agent of an agent of the CCIV (a sub‑agent of the CCIV) is only attributed to the CCIV if:

·                     the sub-agent of the CCIV is acting at the direction, or with the consent or agreement of the agent of the CCIV;

·                     the agent of the CCIV is acting on behalf of the CCIV.

[Schedule 1, item 4, subsections 1229B(1) and (4), item 4 of the table]

3.312      This is illustrated in the diagram below.

Diagram 3.2 Relationship between sub-agents and the CCIV

 

CCIV

 

One step removed from the CCIV

Agent of the CCIV

 

Two steps removed from the CCIV

Sub-agent of the CCIV

Recursive operation

3.313      The final item in the table in the new law has a recursive operation. In other words, it applies to:

·                     a person acting at the direction, or with the consent or agreement of an official of the corporate director, an agent of the director or a director of a CCIV;

·                     a person acting at the direction of a person acting at the direction of an official of the corporate director, an agent of director or a director of a CCIV;

·                     a person acting at the direction of a person acting at the direction of a person acting at the direction of an official of the corporate director, an agent of a director or a director of a CCIV

and so forth.

3.314      There is no legal limit to the number of times that the final item in the table can be relied on.

Diagram 3.3 Recursive operation for agents of the CCIV

 

CCIV

 

Item 1 of the Table

Agent of the CCIV

 

Item 4 of the Table (Initial Application)

Sub-agent of the CCIV

 

Item 4 of the Table (First Recursive Application)

Sub-sub-agents of the CCV

 

Item 4 of the Table (Second Recursive Application)

Sub-sub-sub agents of the CCIV

 

and so forth

Attributing conduct in relation to a counterparty of the CCIV

3.315      Conduct engaged in by a person in relation to a counterparty of the CCIV is taken to be engaged in in relation to a CCIV if certain conditions are satisfied.

3.316      A counterparty may be:

·                     an agent of the CCIV;

·                     a corporate director or shadow director of the CCIV;

·                     an official of the corporate director (that is, an employee, director or agent of a corporate director);

·                     a person acting at the direction or with the consent or agreement of an agent of the CCIV, a director of the CCIV or an official of the CCIV (recursively applied).

[Schedule 1, item 4, subsections 1229B(2) and (4)]

3.317      The other conditions that need to be satisfied are the same as those that apply when attributing conduct to a CCIV (see paragraphs 3.296 to 3.314). These are summarised in the below table.
[Schedule 1, item 4, subsections 1229B(2) and (4)]

Table 3.3 Conditions that need to be satisfied before attributing conduct in relation to a counterparty to also be in relation to the CCIV

Counterparty

Conditions

Agents of the CCIV and person acting at their direction

Agent of the CCIV

·           the agent of the CCIV is acting on behalf of the CCIV

·           the agent is acting within the scope of the agent’s actual or apparent authority in relation to the CCIV

Persons connected to an agent of the CCIV

In addition to the above conditions for the agent of the CCIV:

·           the person must be acting at the direction, or with the consent or agreement (whether express or implied) of the agent.*

Directors of the CCIV and person acting at their direction

Director of the CCIV

The director of the CCIV is acting on behalf of the CCIV

Persons connected to the director of the CCIV

In addition to the above conditions for the director of the CCIV:

·           the person must be acting at the direction, or with the consent or agreement (whether express or implied) of the director.*

Officials of the corporate director and person acting at their direction

An official of the corporate director

·           the official is acting within the scope of the official’s actual or apparent authority in relation to the corporate director;

·           the corporate director is acting on behalf of the CCIV

Persons connected to the official of the corporate director

In addition to the above conditions for the official of the CCIV:

·           the person must be acting at the direction, or with the consent or agreement (whether express or implied) of the official.*

* Operates recursively.

Attributing state of mind to a CCIV

3.318      If the conduct of a person is attributed to the CCIV, that person’s state of mind can also be attributed to the CCIV. In attributing the conduct of the person to the CCIV, all of the conditions set out in earlier parts of this Chapter must be satisfied (see Table 3.3 for a summary of these conditions).
[Schedule 1, item 4, subsections 1229B(3) and (4)]

3.319      It is not permissible to attribute conduct from one person and the mental element from another person. Instead, the physical and mental element must be attributed from the same person.
[Schedule 1, item 4, subsection 1229B(3)]

3.320      The mental state of a receiver or an agent appointed by a liquidator, receiver or a person administering a compromise is not attributed to the CCIV, as those persons are not captured within the definition of ‘director’.

3.321      For the purposes of the liability provisions, state of mind has the same meaning as in section 769B of the existing law. Section 769B defines ‘state of mind’ to include a reference to the knowledge, intention, opinion, belief or purpose of the person and the person’s reasons for the person’s intention, opinion, belief or purpose.
[Schedule 1, item 4, subsection 1229B(6)]

Consequences of contraventions by the CCIV

Policy rationale for treating CCIVs differently to other companies

3.322      Similar to other companies, a CCIV has corporate criminal responsibility for any offence it commits under a Commonwealth, State or Territory law. However, unlike other companies, there are several policy concerns with holding the company solely responsible.

3.323      First, a CCIV has no officers or employees other than its corporate director (except when a sub-fund is in external administration). If a CCIV contravenes its obligations under the law, it is because its corporate director or its agent has caused it to do so.

3.324      The corporate director has overarching responsibility for the CCIV’s operations. The corporate director is under an obligation to operate the business and conduct the affairs of the CCIV. It is also under an obligation to ensure the CCIV complies with its constitution and the Corporations Act.

3.325      Second, if a CCIV had sole responsibility for a contravention of the law and was required to pay the resulting fine or penalty, the members would suffer a loss. This is because the fine or penalty would need to be paid out of the assets of a sub‑fund (or sub-funds) of the CCIV, thereby reducing the pool of assets available to members. The consequence is that members who are investors in this vehicle would suffer loss for contraventions for which they were not responsible and had no control over.

3.326      Third, in the context of registered schemes, the responsible entity (or trustee) for the scheme bears the consequence for a contravention rather than the registered scheme (or its members). The responsible entity is the only legal person and has responsibility for all of the obligations in relation to the scheme. If the law operated differently for CCIVs and registered schemes, CCIVs would potentially be at a competitive disadvantage.

3.327      For these reasons, the new law seeks to protect members from loss when there has been a contravention of the law by a CCIV. It adopts a different approach for contraventions of Commonwealth and State laws, as set out below.

Contraventions of Commonwealth laws

3.328      If a CCIV commits an offence against a law of the Commonwealth or contravenes a civil penalty provision, the corporate director of the CCIV at the time of the commission of the offence is taken to commit the offence or contravene the provision, along with the CCIV.
[Schedule 1, item 4, subsections 1229D(1) and (2) and 1230E(1) and (2)]

3.329      The new law then removes the consequences of committing an offence for the CCIV. Specifically:

·                     the CCIV may not be convicted of the offence;

·                     the CCIV is not liability for any fine or penalty;

·                     an infringement notice may not be given to the CCIV in relation to the alleged commission of the offence or contravention.

[Schedule 1, item 4, subsection 1229D(4) and (5) and subsections 1229E(4) and (5)]

3.330      These provisions do not affect any consequences that apply to the corporate director as a result of the corporate director also being taken to have committed the offence or contravened the provision.

3.331      Nothing in the new law prevents ASIC from seeking an injunction against either the corporate director or the CCIV.

3.332      If there is a change in the corporate director after the commission of the offence, the new corporate director is not liable. Only the corporate director at the time of the commission of the offence or contravention is liable.

3.333      These laws cover:

·                     Commonwealth criminal offences;

·                     Commonwealth civil penalty provisions in the Corporations Act; and

·                     other laws of the Commonwealth which impose a civil penalty in relation to the contravention.

[Schedule 1, item 4, subsection 1229D(1) and subsections 1229E(2)]

Contraventions of State and Territory laws

3.334      ASIC, the CCIV or a member may apply to the Court for a compensation order payable by the corporate director if the CCIV suffers loss or damage as a result of a contravention or an alleged contravention of a State or Territory law.
[Schedule 1, item 4, section 1229F]

3.335      A compensation order may be available if:

·                     the CCIV is found to have committed a State or Territory offence and ordered to pay a fine;

·                     the CCIV is found to have committed a State or Territory civil penalty provision and ordered to pay a penalty; or

·                     the CCIV pays an amount in settlement of proceedings in respect of an alleged contravention.

[Schedule 1, item 4, subsections 1229F(2) and (5)]

3.336      An application for a compensation order must be commenced within 6 years of the time when a contravention was proven. If the proceedings were settled and no contravention was proven, an application for a compensation order must be made within 6 years of the alleged contravention.
[Schedule 1, item 4, section 1229G]

3.337      The order is enforceable as if it were a judgment of the Court.
[Schedule 1, item 4, subsection 1229F(4)]

3.338      These provisions are designed to minimise the likelihood of members suffering damage as a result of the corporate director causing the CCIV to breach its State or Territory obligations. The new laws recognise the Commonwealth does not have the power to deem the corporate director to have committed a State offence and they do not interfere with the State or Territory laws under which the contravention arises.
[Schedule 1, item 4, subsection 1229F(6)]

Exception when a sub-fund is in external administration

3.339      The new law ensures that a corporate director is not responsible for an offence or contravention when the relevant conduct is caused wholly by a receiver, liquidator or a person administering a compromise (‘an external administrator’).

3.340      There are three mechanisms used to achieve this. These are explained below.

1. Attribution rules do not apply

3.341      The conduct or mental state of an external administrator or an agent appointed by an external administrator is not attributed to a CCIV. This is because:

·                     Receivers and liquidators (who may be agents of a CCIV) and agents of an external administrator are expressly carved out of the attribution rules that apply to other agents of a CCIV.

·                     Only the conduct of directors (not officers) is attributed to the CCIV. This differs to other attribution regimes, such as Part 2.5 of the Criminal Code.

[Schedule 1, item 4, subsections 1229B(4) and (5)]

3.342      This may mean that the physical or mental element is not attributed to the CCIV and the CCIV does not commit an offence or contravene a civil penalty provision at all. If the CCIV does not commit an offence (or contravene a civil penalty provision), then none of the consequences of a contravention by the CCIV flow.

2. Corporate director not taken to be responsible for Commonwealth offences

3.343      Second, there is an exception to the provision that holds that the corporate director is taken to have committed any offence committed by the CCIV. This exception applies if the conduct constituting the offence was engaged by the CCIV solely as a result of an exercise of powers by an external administrator.
[Schedule 1, item 4, paragraphs 1229D(1)(b) and 1229E(1)(b)]

3.344      The exception only applies if all of the conduct giving rise to the offence was caused wholly by the external administrator. In other words, the exception does not apply if two acts need to be established, the external administrator caused one act to occur but the corporate director caused the other act to occur.

3. Compensation orders not available for State and Territory offences

3.345      Third, a Court cannot order the corporate director at the time of the commission of the offence to compensate the CCIV if the conduct constituting the contravention solely resulted from the exercise of powers of an external administrator.
[Schedule 1, item 4, subsection 1229F(3)]

3.346      This exception operates in the same way as the exception to the provision that holds the corporate director to have committed a Commonwealth offence (see the discussion at paragraph 3.343 to 3.344 above).

 


Table of Contents:

Outline of chapter 123

Context of amendments. 124

Summary of new law.. 124

Comparison of key features of new law and current law.. 125

Detailed explanation of new law.. 126

Issuing shares in a CCIV.. 126

Share conversions. 128

Share redemptions. 129

Dividends. 134

Notice requirements. 135

Cross-investment between sub-funds of a CCIV.. 135

Share capital reductions. 139

Self-acquisition of shares. 141

Rule against giving financial assistance. 143

Effect on corporate director’s duties. 143

Debentures. 143

 

Outline of chapter

4.1              This Chapter outlines the types of securities that CCIVs may issue and the circumstances when a CCIV is permitted to pay dividends. The Chapter also explains the requirements that a CCIV must satisfy when reducing its share capital (including under redemptions and share buy-backs).

Context of amendments

4.2              A CCIV may have a variable capital structure that provides flexibility for the issue, redemption or repurchase of its shares. Like many managed funds, some CCIVs or sub-fund(s) may be ‘open-ended’ – meaning that its share capital is not limited. It has broad flexibility to issue, redeem or repurchase shares. Other CCIVs or sub-fund(s) may be ‘close ended’ (such as listed CCIVs or sub‑funds) whose share capital is fixed or limited. Proprietary and public companies are close-ended and are not able to be open‑ended.

4.3              At common law, the doctrine of the maintenance of share capital ordinarily prevents a company from reducing its share capital except in the legitimate course of its business. This doctrine is intended to protect the interests of members and creditors. Chapter 2J modifies that position for ordinary companies so that capital can generally be reduced in some circumstances where it is fair and reasonable to members and does not materially prejudice the company’s ability to pay its creditors.

4.4              Part 8B.4 recognises that CCIVs are intended to operate as investment funds, rather than carrying on active businesses, and may have a variable capital structure. Part 8B.4 sets out the rules for share capital management for CCIVs – which provide greater flexibility for CCIVs to issue and reduce its share capital in circumstances where other types of companies are prohibited from doing so.

Summary of new law

4.5              Division 1 of Part 8B.4 governs the issue and redemption of shares and the payment of dividends.

4.6              Subdivision A of Division 1 of Part 8B.7 provides that a CCIV may issue shares, including redeemable shares, referable to only one sub-fund of the CCIV. It also specifies the requirements for converting shares of one type into another type.

4.7              Subdivision B of Division 1 of Part 8B.7 sets out the requirements for redemptions of redeemable shares.

4.8              Subdivision C of Division 1 of Part 8B.7 enables a CCIV to pay calls on partly-paid shares in certain circumstances.

4.9              Subdivision D of Division 1 of Part 8B.7 provides for the payment of dividends to members.

4.10          Subdivision E of Division 1 of Part 8B.7 relaxes the requirements for reporting to ASIC in relation to share issues and cancellations.

4.11          Subdivision F of Division 1 of Part 8B.7 permits cross‑investment between sub-funds of a CCIV – consistent with other international CCIVs.

4.12          Division 2 of Part 8B.4 sets out the requirements for transactions affecting share capital.

4.13          Subdivision A of Division 2 of Part 8B.4 sets out the circumstances for the reduction of share capital by a CCIV. Generally, it provides greater flexibility for CCIVs to reduce its share capital compared to ordinary companies given its variable capital nature.

4.14          Subdivision B of Division 2 of Part 8B.4 sets out the circumstances in which a CCIV may directly acquire or take control over its shares (including in relation to cross‑investment).

4.15          Finally, Division 3 of Part 8B.4 allows a CCIV to issue debentures, but these must also be referable to only one sub-fund.

Comparison of key features of new law and current law

Table 4.1 Comparison of new law and current law

New law

Current law

A CCIV can issue shares provided the share is referable to one and only one sub-fund.

A CCIV can issue debentures but the debenture must be referable to one and only one sub-fund.

No equivalent.

A CCIV may issue redeemable shares (ordinary shares which are liable to be redeemed) or redeemable preference shares.

A right of redemption is not a preferential right.

No equivalent.

A CCIV may redeem redeemable shares or redeemable preference shares if:

·            it is on the terms on which they are issued; and

·            the sub-fund to which the shares are referable is solvent immediately before the redemption and there are reasonable grounds for suspecting it would not become insolvent immediately after the redemption.

Additional requirements apply to redemptions of shares in retail CCIVs based on whether the sub‑fund is considered liquid or non-liquid.

No equivalent.

A CCIV may pay dividends to members of a particular sub‑fund if the sub‑fund to which the shares are referable is solvent immediately before the redemption and there are reasonable grounds for suspecting it would not become insolvent immediately after the redemption.

No equivalent.

Cross-investment between sub‑funds of a CCIV is permitted subject to any requirements or restrictions prescribed in the regulations.

No equivalent.

A CCIV may reduce its share capital if:

·            the reduction is permitted by the CCIV’s constitution; and

·            each sub-fund affected by the reduction is solvent immediately before the reduction and will not be insolvent immediately after the reduction.

No equivalent.

A CCIV is prohibited from acquiring or taking security over its own shares in certain circumstances.

No equivalent.

Detailed explanation of new law

Issuing shares in a CCIV

4.16          A CCIV has the power to issue shares in itself. The self‑dealing exemption, which allows companies to issue their own shares without holding an AFSL, applies to CCIVs as a CCIV is a type of company.

4.17          A CCIV can determine the terms of issue and the rights and restrictions attaching to its shares in the same way as other companies, subject to one caveat. Each share must be referable to a single sub-fund. That is, the rights attaching to the share must relate to the assets of one sub-fund and to no other sub‑funds. This preserves the segregation of assets between each sub-fund.
[Schedule 1, item 4, subsections 1230(1) and (3); Schedule 2, item 91, note 5 to subsection 254B(1)]

4.18          The requirement for each share to be referable to only one sub-fund does not preclude a CCIV from issuing multiple classes of shares for each sub-fund. Nor does it prevent members holding shares in more than one sub-fund.

4.19          A CCIV may engage in cross-investment within the CCIV, such that it may acquire in respect of one sub-fund, shares that are referable to another sub‑fund (explained further below). The fact that a sub-fund has invested into another sub-fund does not change the underlying character of the shares of the investing sub-fund. Those shares are still only referable to one sub-fund. That is, if sub-fund A acquires shares referable to sub-fund B, the shares that are referable to sub‑fund B do not change. Those shares are only referable to sub‑fund B (and not also sub-fund A).
[Schedule 1, item 4, subsection 1230(2)]

4.20          Regulations may prescribe further requirements placed on a CCIV issuing shares in itself. It is anticipated that any such regulations would contain technical detail concerning the issuance of shares by the CCIV in itself. For example, the regulations may outline pricing mechanisms which would be acceptable for use in determining the price applied to a share issued by a CCIV in itself.
[Schedule 1, item 4, section 1230(3), (5) and (6)]

4.21          This regulation-making power is appropriate to ensure alignment between the regulatory requirements applied to MISs when issuing shares and those applied to CCIVs. Any regulations made under this power would be subject to parliamentary scrutiny and disallowance.

4.22          A court can only make an order that is inconsistent with the requirement for each share to be referable to only one sub-fund if the interests of justice require it.
[Schedule 1, item 4, subsection 1230(4)]

4.23          The shares referable to the same sub-fund form at least one class of shares. The shares referable to that sub-fund may be divided into further classes – such that multiple classes of shares are referable to the same sub-fund.
[Schedule 1, item 4, subsections 1230A; Schedule 2, item 35, note to subsection 57(1)]

Types of shares that may be issued

4.24          A CCIV may issue the same types of shares as other companies, including ordinary shares and preference shares.

4.25          A CCIV also has the power to issue shares that can be redeemed at the member’s option and/or the CCIV’s option. If all the CCIV’s or sub-fund’s shares are redeemable at the member’s option, the CCIV or sub-fund (as relevant) is ‘open-ended’ and members can seek a return of their paid‑up capital in exchange for cancelling the shares.
[Schedule 1, item 4, subsections 1230B(1) to (4)]

4.26          The mere fact that a share can be redeemed does not make it a preference share. This modifies the common law position where shares liable to be redeemed at the member’s option are ‘preference shares’ if the other shares on issue (or the other shares that the CCIV has the power, in its constitution, to issue) cannot be redeemed.
[Schedule 1, item 4, subsection 1230B(5)]

4.27          A share that can be redeemed may be either a ‘redeemable share’ or a ‘redeemable preference share’. A redeemable share is an ordinary share that can be redeemed. In the context of a CCIV, a redeemable preference share is a share that can be redeemed and has a preference attached to it (apart from a right to redeem). Any preferences relating to redemptions are ignored for the purposes of determining whether a share is a preference share. Preferences that are taken into account in determining whether a share is a preference share or redeemable preference share are, for example, priority over dividends.
[Schedule 1, item 4, subsections 1230B(4) to (5); Schedule 2, item 22, definition of ‘redeemable share’ in section 9 of the Corporations Act]

Share conversions

4.28          A CCIV may convert any type of share into an ordinary share that is not a redeemable share. There are no specific requirements for this type of share conversion. The new law is based on the provisions applying to the conversion of preference shares into ordinary shares in existing section 254G. In addition, the rules for the variation of class rights in sections 246B to 246G of the existing law continue to apply to any conversion.
[Schedule 1, item 4, item 1 of the table at subsection 1230C(1); Schedule 2, items 92 to 93, note 2 to subsection 254G(1)]

4.29          A CCIV may convert any share (including a preference share or an ordinary share that is not redeemable) into a redeemable share if the conversion is approved by a special resolution of the sub-fund of the CCIV to which the share is referable (subject to the restrictions on varying class rights). The requirement to obtain a special resolution is based on the existing requirements for converting ordinary shares into preference shares. Redeemable shares, like preference shares, have additional rights attaching to them that do not apply to other ordinary shares.
[Schedule 1, item 4, item 2 of the table at subsection 1230C(1)]

4.30          Conversions of any type of share into a preference share (other than a redeemable preference share) are permitted if the holders rights are set out in the CCIV’s constitution or the rights have been approved by a special resolution of the sub-fund of the CCIV to which the share is referable. If there are amounts unpaid on the shares, the unpaid amount is divided equally among the replacement shares.
[Schedule 1, item 4, item 3 of the table at subsection 1230C(1); Schedule 2, items 92 to 93, note 2 to subsection 254G(1)]

4.31          Conversions of any type of share (whether an ordinary share, redeemable share or preference share) into a redeemable preference share are prohibited. This reflects existing subsection 254G(3). Nevertheless, the requirements for CCIVs are significantly more flexible than for other types of companies because the right to redemption is not itself a preferential right in the CCIV context. [Schedule 1, item 4, subsection 1231C(2)]

4.32          A CCIV is also permitted to convert shares into a larger or smaller number. Unlike other types of companies, the CCIV is not required to hold a general meeting and pass a resolution in order to do so.
[Schedule 1, item 4, subsection 1231C(3); Schedule 2, items 94 to 95, note to subsection 254H(1)]

Share redemptions

4.33          The requirements for redeeming shares in a CCIV are more flexible than the requirements for redeeming shares in other types of companies. This reflects the fact that CCIVs are a type of collective investment vehicle where members of a CCIV can seek a return of their paid-up capital, while still providing a level of protection for creditors.
[Schedule 1, item 4, section 1230D]

4.34          The share redemptions rules differ depending on whether the CCIV is a retail or wholesale CCIV and whether the sub-fund to which the share relates is liquid. The requirements for each type of redemption are summarised in Table 4.2 and explained in more detail in the following paragraphs.
[Schedule 1, item 4, section 1230D and 1230F; Schedule 2, item 96, note to Part 2H.
2]

4.35          All shares are cancelled after they have been redeemed (resulting in a reduction of share capital for the CCIV that is authorised under the law – see explanation in paragraphs 4.88 to 4.98 below).
[Schedule 1, item 4, section 1230E
]

Table 4.2 Rules for Share Redemptions

 

Redemption type

Summary of requirements

1.       

Base requirements – all CCIVs

·           Must be on the terms on which they are issued.

·           Sub-fund to which the shares are referable must not be insolvent immediately before the redemption and there must be reasonable grounds for suspecting that the sub‑fund would not become insolvent immediately after the redemption.

2.       

Additional requirements – retail CCIVs where sub-fund is liquid

In addition to the base requirements above:

·           Must be permitted by the CCIV’s constitution.

·           Price is determined in accordance with the CCIV’s constitution.

3.       

Additional requirements – retail CCIVs where sub-fund is not liquid

In addition to the base requirements for a wholesale CCIV:

·           Must be permitted by the CCIV’s constitution.

·           Particular assets of the sub-fund are able to be converted to money in time to satisfy the request.

·           Comply with certain procedural requirements, including lodging a copy of the offer with ASIC.

Redeeming shares of any CCIV

4.36          A CCIV (retail or wholesale) may only redeem shares (being either redeemable shares or redeemable preference shares) if it is in accordance with the terms on which the shares were issued. Terms on which shares are issued has the same meaning as section 254B and section 254J of the existing law, reflecting a company’s ability to determine the terms and rights on which its share are issued, and the requirement to redeem in accordance with those terms.
[Schedule 1, item 4, subsection 1230F(1)]

4.37          In addition, a CCIV may only redeem shares if the sub-fund to which the shares are referable is not insolvent and there are reasonable grounds for suspecting that the sub-fund to which the shares are referable would not become insolvent immediately after the redemption. Solvency and insolvency is defined under existing section 95A of the Corporations Act (see also explanation at paragraph 4.91 below).
[Schedule 1, item 4, subsection 1230F(2)]

4.38          The requirements for redemptions of shares in a CCIV are more flexible than the requirements for redemptions of ‘redeemable preference shares’ in a company, contained in existing Part 2H.2. In particular, a share redemption in a CCIV does not need to be paid out of profits or the proceeds of a new share issue. Instead, the above solvency requirement must be satisfied. This makes it easier for members of a CCIV to seek a return of their paid-up capital while still providing a level of protection for creditors.

4.39          If a CCIV redeems shares in contravention of these requirements (because the sub-fund was insolvent or the redemption was not in accordance with the terms of issue for the shares), then the redemption is still valid. Any contract or negotiation associated with the redemption is also still valid.
[Schedule 1, item 4, subsection 1230F(3)]

4.40          In addition, the CCIV does not commit an offence. However, a person dishonestly involved in the CCIV’s contravention is liable for an offence with a penalty of up to 2,000 penalty units or 5 years imprisonment (or both) for an individual, or 20,000 penalty units for a body corporate. This penalty is consistent with the Guide to Framing Commonwealth Offences. It is consistent with the existing penalty for the equivalent redemption provisions for corporations under section 254L of the existing law. It ensures that persons involved in the management of the CCIV’s share capital or transactions related to this capital are appropriately incentivised to take reasonable steps to protect the interests of members and creditors when making a redemption – by ensuring the terms of issue are complied with and that a redemption is not made when the relevant sub-fund is insolvent.
[Schedule 1, item 4, subsection 1230F(4); Schedule 2, item 199, penalty for subsection 1230F(4) inserted into Schedule 3 to the Corporations Act] 

4.41          If a person is involved in the CCIV’s contravention but the relevant fault element of dishonesty is not satisfied, then they may be liable for a civil penalty under existing section 1317E of the existing law.
[Schedule 1, item 4, subsection 1230F(5); Schedule 2, item 192, new table item for subsection 1230F(5) inserted into subsection 1317E(3) of the Corporations Act]

4.42          The existing law defines the circumstances in which a person may be ‘involved’ in a contravention under section 79 of the Corporations Act – including whether the person aided, abetted, counselled or procured the contravention. A person involved in the contravention may include a natural person director of the corporate director, the corporate director, a lawyer or an accountant.

Additional requirements for retail CCIVs

4.43          In addition to the requirements above, a retail CCIV is subject to further requirements for the redemption of shares depending on whether the sub-fund to which the share is referable is liquid or not.

4.44          A sub-fund is liquid if at least 80 per cent of the value of its assets are liquid; that is, they can be realised within the period specified in the CCIV’s constitution for satisfying redemptions.
[Schedule 1, item 4, section 1230H]

4.45          There is a presumption that money in an account or on deposit with a bank, bank accepted bills and marketable securities are liquid assets but the presumption may be rebutted. Regulations may also specify other kinds of property that are presumed to be liquid. Additionally, any other property is a liquid asset if the CCIV’s corporate director reasonably expects that the property can be realised for its market value within the period specified in the CCIV’s constitution for satisfying redemptions when the sub-fund is liquid.
[Schedule 1, item 4, subsection 1230H(2)]

Redeeming shares of a retail CCIV where the sub-fund is liquid

4.46          If a sub-fund is liquid, a retail CCIV may redeem a share in the CCIV if, in addition to the requirements above:

·                     the redemption is permitted by the CCIV’s constitution; and

·                     the redemption is in accordance with the CCIV’s constitution.

[Schedule 1, item 4, section 1230G]

4.47          If a retail CCIV redeems a share in circumstances where it is not permitted by the CCIV’s constitution or it is not in accordance with the CCIV’s constitution, then it is liable for a strict liability offence with a penalty of up to 20 penalty units. This offence is consistent with the Guide to Framing Commonwealth Offences. There is a real risk of members being disadvantaged or treated inequitably if a redemption is not consistent with the constitution – given the constitution sets out the terms and rights attached to the member’s shares.
[Schedule 1, item 4, subsections 1230G(1) and (2); Schedule 2, item 199, penalty for subsections 1230G(1) and (2) inserted into Schedule 3 to the Corporations Act]

Redeeming shares of a retail CCIV where the sub-fund is not liquid

4.48          The CCIV may only offer members an opportunity to redeem shares in a non-liquid sub-fund to the extent that particular assets of the sub-fund are able to be converted to money in time to satisfy redemption requests that members may make in response to the offer, and no other offer is open in relation to the sub-fund.
[Schedule 1, item 4, subsection 1230J(1)]

4.49          A redemption offer must be in writing and must be made in accordance with any procedures for doing so in the CCIV’s constitution, or otherwise by giving a copy to all members of the sub-fund in question. For joint members, a copy need only be given to the joint member named first in the register of members.
[Schedule 1, item 4, subsections 1230J(2) and (4)]

4.50          The CCIV must also lodge a copy of the offer with ASIC as soon as practicable after making the offer. A failure to lodge this notice is a strict liability offence punishable by up to 20 penalty units. There are legitimate grounds for penalising persons who do not intentionally or recklessly fail to lodge the offer because ASIC needs to be aware of all offers to properly perform its supervisory role and protect consumers. Existing offences for failing to lodge other documents with ASIC are also strict liability offences (see, for example, sections 319 and 320 of the Corporations Act). Both the offence and the penalty are consistent with the principles in the Guide to Framing Commonwealth Offences.
[Schedule 1, item 4, subsection 1230J(5) to (6); Schedule 2, item 199, penalty for subsection 1230J(5) inserted into Schedule 3 to the Corporations Act]

4.51          A redemption offer must specify:

·                     the period during which the offer will remain open (which must last for at least 21 days after the offer is made);

·                     the assets that will be used to satisfy redemption requests;

·                     the amount of money that is expected to be available when those assets are converted to money; and

·                     the method the CCIV will use to deal with redemption requests if the money available is insufficient to satisfy all requests (provided the method complies with the requirements set out below in paragraph 4.54).

[Schedule 1, item 4, subsection 1230J(3)]

4.52          The CCIV must ensure redemption requests made in response to a redemption offer are satisfied within 21 days after the offer closes.
[Schedule 1, item 4, subsection 1230K(1)]

4.53          Only one offer may be open in relation to a particular sub-fund at any one time and the CCIV cannot satisfy the redemption until the offer closes. Thus, a CCIV may not make a standing offer with respect to an illiquid sub‑fund. This mirrors the requirements for registered schemes and reduces the risk of members of the same sub-fund being treated differently.
[Schedule 1, item 4, subsections 1230J(1) and 1230K(2)]

4.54          If an insufficient amount of money is available (from assets specified in the offer) to satisfy all redemption requests, the requests must be satisfied proportionately according to the following formula:

4.55          The CCIV has the option of cancelling a redemption offer before it closes if it contains a material error, and must cancel the redemption offer before it closes if it is in the best interests of members of the sub-fund to do so.
[Schedule 1, item 4, subsection 1230J(6)]

4.56          The CCIV must make the cancellation in accordance with any procedures for doing so in the CCIV’s constitution or otherwise by notice in writing to the members to whom the offer was made. The CCIV must also lodge written notice of the cancellation with ASIC as soon as practicable and in any event within two business days after the cancellation.
[Schedule 1, item 4, subsections 1230J(7) to (8)]

4.57          A failure to lodge a written notice of the cancellation with ASIC is a strict liability offence punishable by a penalty of up to 20 penalty units. Both the offence and the penalty are consistent with the principles in the Guide to Framing Commonwealth Offences. A strict liability offence is appropriate because a failure to lodge the document undermines ASIC’s ability to perform its supervisory responsibilities. It is consistent with the imposition of strict liability in other circumstances involving the failure to lodge documents with ASIC in the existing law.
[Schedule 1, item 4, subsection 1230J(9); Schedule 2, item 199, penalty for subsection 1230J(8) inserted into Schedule 3 to the Corporations Act]

Calls on capital

4.58          The power for a company to limit calls on share capital to when a company is externally administered in existing section 254N does not apply to a CCIV.
[Schedule 1, item 4, section 1230N; Schedule 2, item 97, note to subsection 254N(1)]

Dividends

4.59          A CCIV may only pay dividends to members of a sub‑fund if the sub‑fund to which the share is referable is solvent immediately before the dividend is paid and there are reasonable grounds for suspecting that the sub-fund would not become insolvent immediately after the dividend is paid. 
[Schedule 1, item 4, section 1230M; Schedule 2, item 98, note 3 to subsection 254T(1)]

4.60          The preconditions for paying dividends are less onerous for CCIVs than for other types of companies (see existing section 254T). Other types of companies are prohibited from paying dividends if their assets do not exceed their liabilities, the payment is not fair and reasonable to the company’s shareholders as a whole or the payment of dividends could materially prejudice the company’s ability to pay its creditors. Similarly, there is no explicit or implicit requirement for the dividends to be paid from profit.

4.61          Less onerous requirements are appropriate in the CCIV context as CCIVs are a form of collective investment vehicle and may return capital or pay dividends to members on a more regular basis than other types of companies. The only constraints on the payment of capital for registered schemes are those contained in the trust deeds. If a CCIV was required to satisfy the same preconditions for paying dividends as other types of companies, the flexibility of the CCIV regime would be hampered and CCIVs would be at a commercial disadvantage to registered schemes.

4.62          A failure to comply with the requirements for paying dividends is an offence with a maximum term of imprisonment of two years. This is the same as the corresponding offence for other types of companies in existing section 254T.
[Schedule 2, item 199, penalty for subsection 1230M(1) inserted into Schedule 3 to the Corporations Act]

4.63          Each share in a class of shares in a CCIV must have the same dividend rights unless the CCIV’s constitution provides for differential rights or differential rights are agreed by special resolution of the sub-fund to which the shares are referable.
[Schedule 1, item 4, section 1230N; Schedule 2, item 99, note to subsection 254W(1)]

Notice requirements

4.64          The notice requirements in Part 2H.6 do not apply to CCIVs. This is because share issues, redemptions and cancellations are expected to occur more frequently in the CCIV context and the notice requirements could create a large compliance burden for CCIVs. Further, there are no notice requirements applying to registered schemes.
[Schedule 1, item 4, section 1230P; Schedule 2, item 100, note to Part 2H.6]

Cross-investment between sub-funds of a CCIV

4.65          A CCIV is generally permitted to acquire in respect of any of its sub-funds, one or more shares that are referable to another of its sub-funds. This is referred to as cross-investment between sub-funds of a CCIV.
[Schedule 1, item 4, section 1230Q]

4.66          Cross-investment between sub-funds of a CCIV is intended to allow a CCIV to utilise funds management structures such as:

·                     a building blocks structure (also known as a master‑feeder structure), where a CCIV establishes sub-funds that hold a certain asset class (building block sub-funds) and then creates a number of other sub-funds with different levels of exposure to the building block sub-funds; or

·                     a hedging structure, where one sub-fund of the CCIV holds core assets and additional sub‑funds hold a relevant hedging instrument and shares in the core sub-fund.

4.67          The ability to engage in cross-investment between sub‑funds of a CCIV applies despite any law (including legislation, common law or equity) in force in Australia or elsewhere. For example, the rules in the Corporations Act that prohibit a company from directly acquiring its own shares do not restrict cross‑investment between sub-funds of a CCIV. However, these rules continue to restrict for example, a CCIV from acquiring in respect of a sub-fund, shares that are referable to that same sub‑fund.
[Schedule 1, item 4, section 1230Q]

Requirements and restrictions on cross-investment

4.68          The regulations may provide for requirements or restrictions on cross‑investment.
[Schedule 1, item 4, section 1230R]

4.69          These requirements and restrictions are intended to ensure there are adequate protections for members of the CCIV where the CCIV engages in cross‑investment. This could include, for example, requirements and restrictions that are designed to prevent circular investment or to ensure there is sufficient transparency relating to cross-investment transactions.

4.70          The current intention is to include a restriction on circular investment in the regulations – subject to feedback obtained in consultation.

4.71          Having these restrictions and requirements in the regulations is appropriate as it ensures there is sufficient flexibility to determine and adjust the requirements over time, in response to changes in the market or issues that may only become apparent once the regime is operational. This approach is also consistent with other comparable overseas regimes, such as Singapore and the United Kingdom.

4.72          If a CCIV does not comply with the requirements or restrictions on cross‑investment, the CCIV does not commit an offence. Instead, the person involved in the CCIV’s contravention commits an offence if the person acted dishonestly. The offence is punishable by up to five years’ imprisonment, 2,000 penalty units or both (for an individual) or 20,000 penalty units (for a body corporate). These penalties are consistent with the Guide to Framing Commonwealth Offences.
[Schedule 1, item 4, subsections 1230S(2) and (3); Schedule 2, item 199, penalty for subsection 1230S(3) inserted into Schedule 3 to the Corporations Act]

4.73          If the person involved in the contravention does not act dishonestly, the person contravenes a corporation/scheme civil penalty provision.
[Schedule 1, item 4, section 1230S(4); Schedule 2, item 192, new table item for subsection 1230S(4) inserted into subsection 1317E(3) of the Corporations Act]

4.74          The existing law defines the circumstances in which a person may be ‘involved’ in a contravention under section 79 of the Corporations Act – including whether the person aided, abetted, counselled or procured the contravention. A person involved in the contravention may include a natural person director of the corporate director, the corporate director, a lawyer or an accountant.

4.75          These consequences are appropriate as there is the risk of significant harm to the members of the investor sub-fund and other third parties that engage with the CCIV (such as creditors) if the requirements and restrictions are not complied with. Contravention of these requirements or restrictions could also compromise the integrity of the CCIV’s structure (for example, with respect to the strict segregation of the sub-funds of the CCIV).

4.76          Additionally, if a CCIV engages in cross-investment and contravenes the requirements or restrictions in the regulations, this contravention does not affect the validity of the acquisition or share or of any contract or transaction connected with it. This approach ensures there is more certainty for third parties, including members of the investor sub-fund, with respect to these acquisitions. It is also consistent with the existing consequences of failing to comply with the prohibition on companies acquiring shares in itself. 
[Schedule 1, item 4, section 1230S]

Membership rights of the CCIV

4.77          Where a CCIV, in respect of a sub-fund, acquires shares that are referable to another sub-fund of the CCIV, the CCIV will generally be a member of the second sub-fund as it is the legal person holding shares issued by the second sub-fund.

4.78          To ensure this outcome does not unduly influence the governance of the CCIV or subvert the rights of the other members in the second sub-fund, the CCIV is not entitled to vote as a member of the second sub-fund on a resolution at a meeting of the CCIV’s members.
[Schedule 1, item 4, subsection 1230T(1)]

4.79          However, the CCIV remains entitled to vote as a member of the second sub-fund on a resolution at a meeting of members of the sub-fund, subject to any requirements or restrictions prescribed in the regulations. This regulation-making power may be used to prescribe when the CCIV’s vote can be cast at a meeting of members of the sub-fund, and who can cast the CCIV’s vote on behalf of the CCIV at such a meeting.
[Schedule 1, item 4, subsection 1230T(2)]

4.80          A CCIV will continue to be entitled to any financial rights it may have in respect of the shares it has acquired in engaging in cross-investment.

Inclusion of cross-investment information in the constitution and product disclosure statements

4.81          If a retail CCIV intends to engage in cross-investment between sub-funds of the CCIV, its constitution must make adequate provision for cross-investment. This ensures that prospective members of a retail CCIV are aware that this type of investment activity could occur in relation to the sub-fund they are considering investing in.
[Schedule 1, item 4, paragraph 1223G(e)]

4.82          Additionally, if a retail CCIV intends to engage in cross‑investment, its PDS must include a statement to that effect. This will assist retail clients to understand the potential risk profile of their investment.
[Schedule 1, item 4, section 1241T(1)]

4.83          Further, if a retail CCIV is required to provide a PDS to a retail client, the PDS may also need to include information about any fees that may be charged to members in respect of any cross‑investment activity. The requirement to include information about the cost of the relevant financial product and any amounts that will or may be payable by a holder of the product after its acquisition is an existing feature of the PDS regime.

Other amendments relating to cross-investment

4.84          The provisions make clear that where a CCIV engages in cross-investment and acquires a share in respect of a sub-fund that is referable to another sub-fund within the CCIV, this is not considered to be a share buy-back.
[Schedule 1, item 4, section 1230U, note 1 to subsection 1231C(1)]

4.85          Additionally, engaging in cross-investment as permitted by the new cross‑investment rules, does not relieve the corporate director of a CCIV, or an officer or employee of the corporate director of a CCIV, from any duties under the Corporations Act or their fiduciary duties. This includes the general duties under Part 2D.1 of the Corporations Act and the specific duties for CCIVs in Divisions 2 and 3 of Part 8B.3.
[Schedule 1, item 4, section 1230V]

4.86          A share does not become referable to another sub-fund merely because of cross-investment between sub-funds. That is, the sub-fund to which a share is referable does not change if, after the share is issued, the CCIV acquires the share in respect of another of its sub-funds.
[Schedule 1, item 4, subsection 1230(2)]

4.87          For the purposes of the meaning of the assets of a sub‑fund (and more broadly, the allocation rules relating to assets and liabilities of sub-funds), a share that is referable to a sub-fund and that is acquired out of another sub-fund’s assets, forms part of the other sub-fund’s assets. This reflects that the share is property obtained by the application of assets of the other sub-fund.
[Schedule 1, item 4, paragraph 1233H(2)(c)]

Share capital reductions

General requirements

4.88          A CCIV may reduce its share capital (for example, under a share buy-back) if it is authorised under the law. The CCIV regime establishes a wide range of circumstances where a reduction in share capital is authorised.

4.89          A reduction is specifically authorised if:

·                     it involves the redemption of redeemable shares or redeemable preference shares that comply with the requirements for redemptions in Subdivision B of Division 1 of Part 8B.4 (explained above);

·                     it is reduced under a Court order;

·                     it involves the cancellation of shares following the return of a financial product under a cooling-off period;

·                     it involves the cancellation of forfeited shares (approved by resolution of the members of the relevant sub-fund) or in other circumstances covered by Division 3 of Part 2J.1; or

·                     it is authorised under regulations.

[Schedule 1, item 4, sections 1231D, 1231E, 1231F, 1231G and 1231H; Schedule 2, items 102 to 105, notes to Divisions 1, 2 and 3 of Part 2J.1 and Part 2J.2]

4.90          In addition to these specific circumstances, in any event, a reduction is authorised if it is permitted in the CCIV’s constitution and, immediately before the reduction, each sub-fund that is affected by the reduction is solvent and there are no reasonable grounds for suspecting it would become insolvent immediately after the reduction.
[Schedule 1, item 4, section 1231A]

4.91          A sub-fund is solvent if it is able to pay the debts that are liabilities of the sub-fund as and when they become due and payable. If a sub-fund is not able to pay the debts that are liabilities of sub-fund as and when they become due and payable then the sub-fund is insolvent. These definitions are based on the cash‑flow test of solvency which is used for other companies (see existing section 95A of the Corporations Act) but applies them at the sub-fund level.
[Schedule 2, items 14 and 26, definitions of ‘insolvent’ and ‘solvent’ in section 9 of the Corporations Act]

4.92          If there are any requirements prescribed in regulations for the share capital reduction, then the reduction must also comply with those requirements in order to be authorised. The regulations may prescribe requirements for different types of share capital reductions (such as buy-backs or cancellations), different circumstances in which the reduction arises (such as on-market or off‑market, equal access or selective), or different types of CCIVs or sub-funds.

4.93          The capacity to prescribe additional requirements in regulations are intended to ensure there are adequate protections for members and third parties (such as creditors) in different circumstances for share capital reductions in a CCIV.  Having these restrictions and requirements in the regulations is appropriate as it ensures there is sufficient flexibility to determine and adjust the requirements over time, in response to changes in the market or issues that may only become apparent once the regime is operational.

4.94          The requirements for reducing a CCIV’s share capital relax the existing provisions that apply generally to companies, recognising the CCIV’s status as a corporate collective investment vehicle that generally has variable capital. For example, the existing requirements for ordinary companies to obtain shareholder approval and ensure the reduction does not materially prejudice the company’s ability to pay its creditors do not apply to CCIVs.

Consequences of non-compliance

4.95          If a CCIV does not comply with the requirements for share capital reductions, the CCIV does not commit an offence. Instead, the person involved in the CCIV’s contravention commits an offence if the person acted dishonestly. The offence is punishable by up to five years’ imprisonment, 2000 penalty units or both (for an individual) or 20,000 penalty units (for a body corporate). These penalties are consistent with the Guide to Framing Commonwealth Offences and essential to ensure the protection of creditors and members and is consistent with penalties for similar offences elsewhere in the
Corporations Act.
[Schedule 1, item 4, subsections 1231B(1) and (3); Schedule 2, item 199, penalty for subsection 1231B(3) inserted into Schedule 3 to the Corporations Act]

4.96          If the person involved in the contravention does not act dishonestly, the person contravenes a corporation/scheme civil penalty provision. The maximum penalty for contravening a corporation/scheme civil penalty provision is $200,000.
[Schedule 1, item 4, subsection 1231B(4); Schedule 2, item 192, new table item for subsection 1231B(4) inserted into subsection 1317E(3) of the Corporations Act]

4.97          The existing law defines the circumstances in which a person may be ‘involved’ in a contravention under section 79 of the Corporations Act – including whether the person aided, abetted, counselled or procured the contravention. A person involved in the contravention may include a natural person director of the corporate director, the corporate director, a lawyer or an accountant.

4.98          If a share capital reduction is unauthorised, the validity of the reduction or of any contract connected with it is not affected. This promotes certainty and ensures that third parties can rely on acts by the CCIV relating to share capital reductions.
[Schedule 1, item 4, subsection 1231B(2)]

Share buy-backs

4.99          As with other companies, a CCIV may buy back its shares. A share buy-back that amounts to a share capital reduction must meet the same requirements as other share capital reductions by a CCIV explained above.
[Schedule 1, item 4, subsections 1231C(1), (2) and (6)]

4.100      Once a CCIV has agreed to buy back its shares, all rights attaching to the shares are suspended. The suspension is lifted if the agreement is terminated. Immediately after the shares are transferred back to the CCIV, the shares are cancelled and the CCIV cannot dispose of them.
[Schedule 1, item 4, subsections 1231C(3) to (5)]

Self-acquisition of shares

4.101      A CCIV is generally prohibited from acquiring shares (or units of shares) in itself.
[Schedule 1, item 4, section 1231J]

4.102      There are three main exceptions where a CCIV is permitted to acquire its shares. These are:

·                     in buying back shares (see paragraphs 4.99 to 4.100 of this explanatory memorandum);

·                     under a court order; or

·                     when engaging in cross-investment (see paragraphs 4.65 to 4.67 of this explanatory memorandum).

[Schedule 1, item 4, section 1231J(1); Schedule 2, items 106 and 107, note 2 to subsection 259B(1)]

4.103      A retail CCIV must only acquire shares in itself for the consideration payable if the shares were acquired by another person, and subject to terms and conditions that would not disadvantage other members. This is relevant in all circumstances when a retail CCIV acquires shares in itself – including under cross-investment or under a share buy-back. This is to ensure that such acquisitions reasonably represent their market value and the process is fair to other members. The corporate director of a retail CCIV is subject to similar restrictions when acquiring shares in the CCIV (see paragraph 3.132 above).
[Schedule 1, item 4, 1231J]

4.104      If a CCIV acquires shares other than when permitted, the CCIV does not commit an offence. Instead, the person involved in the CCIV’s contravention commits an offence if the person acted dishonestly. The offence is punishable by up to five years’ imprisonment, 2000 penalty units or both (for an individual) or 20,000 penalty units (for a body corporate). These penalties are consistent with the Guide to Framing Commonwealth Offences and with existing offence penalties a responsible entity would be subject to for similar offences (see section 601FG of the existing law).
[Schedule 1, item 4, subsection 1231J(4) and (6); Schedule 2, item 199, penalty for subsection 1231J(6) inserted into Schedule 3 to the
Corporations Act]

4.105      If the person involved in the CCIV’s contravention does not act dishonestly, the person contravenes a civil penalty provision.
[Schedule 1, item 4, subsection 1231J(5); Schedule 2, item 192, new table item for subsection 1231J(5) inserted into subsection 1317E(3) of the Corporations Act]

4.106      The existing law defines the circumstances in which a person may be ‘involved’ in a contravention under section 79 of the Corporations Act – including whether the person aided, abetted, counselled or procured the contravention. A person involved in the contravention may include a natural person director of the corporate director, the corporate director, a lawyer or an accountant.

4.107      Akin to other companies, a CCIV is also prohibited from taking security over shares in itself or a company that it controls. The existing law provides exceptions for companies which are financial institutions or take security under approved ESSs. These exceptions are not available for CCIVs as they should not be financial institutions and cannot hire employees.
[Schedule 1, item 4, section 1231K]

Rule against giving financial assistance

4.108      There is no prohibition on a CCIV giving financial assistance. The prohibition on giving financial assistance in Part 2J.3 of the existing law is primarily designed to protect the interests of existing shareholders and creditors by ensuring that a trading company is not able to hand over control of the company to another person. A specific prohibition on a CCIV giving financial assistance is not required because:

·                     a CCIV is not a trading company;

·                     a CCIV must be widely held if it wishes to take advantage of the concessional tax treatment; and

·                     there are specific duties which protect the interests of members of a retail CCIV (see, for example, the corporate director’s duty to act in the best interests of members, explained at paragraph 3.183).

[Schedule 1, item 4, section 1231L]

4.109      Retaining the prohibition on giving financial assistance could prevent some of the transactional dealings which are conventional for MISs, such as, fee rebates and the payments of expenses associated with the issue of interests by the corporate director.

Effect on corporate director’s duties

4.110      A corporate director is not relieved from any of its duties (including the new duties set out in Chapter 5 of this explanatory memorandum) because it complied with the relevant requirements for share capital reductions or redemptions.
[Schedule 1, item 4, section 1231M]

Debentures

4.111      A CCIV may issue debentures so long as each debenture is referable to one and only one sub-fund. Thus, the debenture holder’s rights in respect of the assets of the CCIV must be limited to rights in respect to the assets of the single sub-fund against to which the debenture is referable.
[Schedule 1, item 4, section 1231N]

4.112      If the debenture or the required trust deed creates or includes a security interest, that interest must not be over CCIV assets that are referable to a different sub-fund.


Table of Contents:

Outline of chapter 145

Context of amendments. 145

Summary of new law.. 146

Comparison of key features of new law and current law.. 147

Detailed explanation of new law.. 148

How the rules in Chapter 2M apply to CCIVs. 148

Financial records. 149

Financial reporting. 149

Liability. 154

Lodging amended reports with ASIC.. 154

Solvency resolutions. 154

 

Outline of chapter

5.1              Division 4 of Part 8B.4 sets out the rules for how financial reports and audits are to be prepared and conducted for CCIVs and their sub‑funds.

5.2              Division 5 of Part 8B.4 outlines how particular provisions in the existing law about updating ASIC information for companies and registered schemes apply to CCIVs.

Context of amendments

5.3              Chapter 2M of the Corporations Act sets out the requirements for financial records, financial and directors’ reports, and audits. 

5.4              Generally, the existing requirements in Chapter 2M apply to a company or other entity as a whole. Given a CCIV’s business is segregated into different sub-funds, the financial record-keeping and reporting requirements are tailored to apply at the sub-fund level. This ensures appropriate information is maintained in respect of each sub-fund and made available to members as relevant – providing appropriate transparency over the financial affairs of each sub-fund.

5.5              Consistent with the arrangements for MISs, only retail CCIVs are required to prepare financial reports that comply the relevant requirements in Chapter 2M (as modified by Part 8B.4). Wholesale CCIVs may prepare financial reports, even though they are not required to do so under the new law.

5.6              Also consistent with the arrangements for registered schemes, retail CCIVs must prepare financial reports for each sub-fund. The new law does not require a financial report to be prepared or consolidated for the whole CCIV. However, retail CCIVs may prepare a whole-of-CCIV report even though they are not required to do so under the new law. 

5.7              For retail CCIVs, adjustments to auditing requirements, especially for auditor independence, are made to account for the range of relationships and potential conflicts of interest between an auditor of a CCIV’s sub‑fund and the CCIV or its corporate director.

Summary of new law

5.8              Subdivision A of Division 4 of Part 8B.4 sets out generally how Chapter 2M applies to CCIVs. The rules apply to a retail CCIV as if it is a company or a disclosing entity (where relevant) and as though references to ‘director’ or ‘directors’ are references to the corporate director of the CCIV.

5.9              With the exception of Part 2M.2, about keeping financial records, Chapter 2M does not apply to wholesale CCIVs. Part 2M.2 applies to a wholesale CCIV as if references to ‘director’ or ‘directors’ were references to the corporate director of the CCIV.

5.10          Subdivision B provides that a CCIV’s obligation to keep financial records extends to keeping financial records for its sub‑funds.

5.11          Subdivision C governs what kind of financial reporting requirements apply to a retail CCIV and its sub-funds, what should be contained in those reports, and how auditing and auditor’s reports (Division 3 of Part 2M.3) apply to CCIVs and sub-funds.

5.12          Financial reporting requirements generally apply to retail CCIVs in respect of each sub-fund. That is, a retail CCIV is required to prepare an annual financial report and directors’ report for each sub‑fund. A retail CCIV must also prepare half‑year financial and directors’ reports for those sub‑funds with enhanced disclosure (ED) securities on issue. Auditing requirements also apply to the retail CCIV’s financial reports at the sub-fund level.

5.13          Subdivision D adapts the provisions for financial reporting to the members of each sub-fund of a retail CCIV. It also sets out amendments for reporting requirements for retail CCIVs that are debenture issuers.

5.14          Subdivision E applies the requirement to re-lodge amended financial statements with ASIC to sub-funds.

5.15          Subdivision F deals with the appointment and removal of auditors for retail CCIVs. Where there is a relationship between the auditor and the CCIV or a corporate director (including current and former corporate directors, directors of the corporate director, and persons involved in the management of either), a conflict of interest situation may arise. The rules for appointment, removal and fees of auditors of a retail CCIV are adapted from those for MISs.

5.16          Subdivision G sets out the liability of directors of the corporate director of a retail or wholesale CCIV for contraventions of Chapter 2M.

5.17          Division 5 of Part 8B.4 disapplies provisions about solvency resolutions (Part 2N.3 and section 348C of the Corporations Act) to CCIVs. This is in line with arrangements for MISs.

Comparison of key features of new law and current law

Table 5.1 Comparison of new law and current law

New law

Current law

Retail CCIVs are subject to the rules in Chapter 2M that apply to companies and disclosing entities (where relevant). Wholesale CCIVs are only subject to the rules about financial records in Part 2M.2.

No equivalent.

In addition to its own financial records, a CCIV must keep financial records for each sub-fund.

No equivalent.

A retail CCIV is required to prepare an annual financial report and directors’ report for each sub-fund. Half‑year financial and directors’ reports are also required for those sub‑funds with ED securities on issue.

No equivalent.

A retail CCIV’s annual directors’ report must include specific details about the corporate director and its directors, such as whether a director of the corporate director is a party to a contract which entitles that director to a benefit of a right to call for or deliver shares in the CCIV.

No equivalent.

The financial reports for each sub‑fund of a retail CCIV are to be audited in line with the requirements in Division 3 of Part 2M.3.

No equivalent.

A retail CCIV is required to report to members of each sub-fund the relevant financial and directors’ reports.

No equivalent.

If a retail CCIV is being audited, the auditor or a professional member of the audit team has a conflict of interest if it is currently or formerly:

·           the corporate director of the CCIV;

·           a director of the corporate director; or

·           a person involved in the management of the CCIV or corporate director.

No equivalent.

Detailed explanation of new law

How the rules in Chapter 2M apply to CCIVs

5.18          Division 4 of Part 8B.4 modifies the application of Chapter 2M so that the reporting requirements in Chapter 2M generally apply to retail CCIVs in the same way as they apply to registered schemes.
[Schedule 1, item 4, section 1232(1); Schedule 2, item 109, note to Part 2M.1]

5.19          Division 4 of Part 8B.4 sets out how financial reporting applies to retail CCIVs at the sub‑fund level. A retail CCIV that is a disclosing entity[4] will also be subject to the additional disclosure requirements that apply to disclosing entities, such as the requirement for half-yearly financial reports. Only the rules about financial records in Part 2M.2 apply to wholesale CCIVs.
[Schedule 1, item 4, sections 1232(2) and (3)]

Financial records

5.20          The obligation to keep written financial records in line with Part 2M.2 applies to retail and wholesale CCIVs and each sub-fund of a CCIV. A CCIV must keep written financial records that:

·                     record and explain the transactions relating to the sub‑fund and the performance of the sub-fund;

·                     would enable accurate financial statements to be prepared and audited for the sub-fund; and

·                     comply with any further requirements prescribed in regulations in respect of the financial records for each sub-fund.

[Schedule 1, item 4, section 1232A; Schedule 2, item 110, notes to subsection 286(1)]

5.21          The capacity to prescribe further requirements in regulations is appropriate to ensure matters of technical specificity may be contained in subordinate legislation (such as prescriptive matters that should be recorded in respect of cross-investment within a CCIV). These further requirements may apply to retail or wholesale CCIVs (or both). Any regulations relating to financial record keeping requirements placed on CCIVs made would be subject to parliamentary scrutiny and disallowance.

5.22          The obligations relating to financial records apply as though the sub-fund were the CCIV. This includes:

·                     the language requirements for the records;

·                     the physical format of the records; and

·                     where the records may be kept.

5.23          The corporate director is also entitled, as the director of the CCIV, to access the records under section 290.
[Schedule 1, item 4, section 1232B; Schedule 2, item 111, note to subsection 290(1)]

Financial reporting

Annual financial reports and directors’ reports

5.24          A retail CCIV is required to prepare a financial report and a directors’ report for each financial year, for each of its sub‑funds. The annual reporting requirements in Division 1 of Part 2M.3 apply to retail CCIVs, with some modifications tailored to the CCIV structure and to reflect that CCIV reporting occurs at the sub‑fund level.
[Schedule 1, item 4, section 1232C; Schedule 2, items 112 to 113, note to Division 1 of Part 2M.3 and notes to subsection 292(1)]

5.25          The annual financial report for each sub-fund must contain:

·                     financial statements for the year;

·                     the notes to the financial statements; and

·                     the directors’ declaration about the statements and notes.

[Schedule 1, item 4, subsections 1232D(1) and (2); Schedule 2, item 114, note to section 295(5)]

5.26          Regulations may prescribe further requirements for the financial reports for a sub‑fund of a retail CCIV. The capacity to prescribe these matters in regulations is appropriate to ensure matters of technical specificity may be contained in subordinate legislation (such as prescriptive content requirements in relation to cross-investment within a CCIV). Any regulations relating to financial reporting requirements placed on CCIVs made would be subject to parliamentary scrutiny and disallowance.
[Schedule 1, item 4, section 1232D(3)]

5.27          The directors’ report for each sub-fund of a retail CCIV must contain similar information as required for companies under sections 298, 299 and 300 of the Corporations Act, modified to reflect the CCIV structure. This includes disclosing the name of each officer of the CCIV and each officer of the corporate director of the CCIV, at any time during the financial year or since the end of the financial year, and for how long they were an officer of the CCIV or the corporate director. Additionally, the CCIV must provide the name of each corporate director of the CCIV during the financial year, and each director of a company that has been the corporate director of the CCIV at any time during the financial year or since the end of the financial year.
[Schedule 1, item 4, sections 1232C and 1232E; Schedule 2, items 115 to 116, notes to sections 298(2) and 300(1)]

5.28          This extension of the usual disclosure requirements reflects the unique corporate structure of a CCIV and ensures that there is full and proper disclosure of the individuals involved in a retail CCIV’s decision‑making.

5.29          The directors’ report for each sub-fund of a retail CCIV must also contain the information required for registered schemes in subsection 300(13), including the fees paid to the corporate director and its associates out of the CCIV’s assets during the financial year.
[Schedule 1, item 4, section 1232E(3); Schedule 2, item 117, note to section 300(13)]

5.30          The directors’ report for each sub-fund of a listed retail CCIV must contain similar information as required for listed companies under sections 299A and 300, including the relevant interests of each director of the corporate director in the shares in the CCIV. However, some content that must be provided in relation to other listed companies under section 300A is not required for CCIVs.
[Schedule 1, item 4, subsections 1232E(2) and (4)]

Half-year reporting

5.31          A retail CCIV with any sub-funds that have ED securities referable to them must prepare a half‑year directors’ report and half‑year financial report for each of those sub-funds. As with the annual reporting requirements, the half‑year reporting requirements set out in Division 2 of Part 2M.3 are tailored to the CCIV structure and to reflect that CCIV reporting occurs at the sub‑fund level. The directors’ report must include information about the directors of the corporate director of the CCIV as well as about the corporate director of the CCIV.
[Schedule 1, item 4, section 1232F; Schedule 2, items 118 to 119, notes to sections 302 and 303(5)]

5.32          The half-yearly directors’ reports must disclose the name of each corporate director of the CCIV at any time during the half year or since the end of the half year, and for how long they were the corporate director of the CCIV. The CCIV must provide the name of each director of a company that has been the corporate director of the CCIV at any time during the half year or since the end of the half year.
[Schedule 1, item 4, section 1232F(6); Schedule 2, items 120 to 121, notes to sections 306(1) and (3)]

Auditing and audit reports

5.33          The audit and auditor’s report requirements in Division 3 of Part 2M.3 of the Corporations Act generally apply to retail CCIVs in the same way as for other companies, subject to modifications to apply them at the sub‑fund level. As such, these provisions, including in relation to the retention of audit papers, the independence of the auditor and the powers of the auditor, apply to the audit of a sub-fund. Applying the audit and auditor’s report provisions in this way ensures that there is appropriate oversight of the financial reports at the sub‑fund level.
[Schedule 1, item 4, section 1232G; Schedule 2, item 122, note to Division 3 of Part 2M.3]

5.34          When auditing a sub-fund, the auditor must form an opinion about whether the CCIV has kept sufficient financial records to enable a financial report to be prepared and audited for the sub-fund, as well as kept other records and registers relating to the sub-fund as required by the Corporations Act.
[Schedule 1, item 4, section 1232G(3); Schedule 2, item 123, note to section 307]

5.35          Provisions in the Corporations Act dealing with registration, independence, and other requirements for auditors apply in the normal way to auditors of a retail CCIV’s sub-funds.

5.36          To ensure that there is clarity about when an auditor or audit company has a conflict of interest with a retail CCIV, the application rule that otherwise applies to Chapter 2M (see paragraph 5.18) does not apply for the purposes of subsection 324CD(2).
[Schedule 1, item 4, section 1232N; Schedule 2, item 132, note to section 324CD(2)]

5.37          Instead, when determining whether there is a conflict of interest situation between a retail CCIV and an auditor, the standard test is expanded to include consideration of the relationship between the auditor, audit firm or company, any current or former member of the firm or company, or an audit company’s current or former management (including directors) and:

·                     the current or former corporate director;

·                     a current or former director of the corporate director;

·                     a person currently or formerly involved in the management of the CCIV; or

·                     a person currently or formerly involved in the management of the corporate director.

[Schedule 1, item 4, section 1232N; Schedule 2, item 132, note to section 324CD(2)]

5.38          The auditor independence requirements in the Corporations Act are similarly extended to require consideration of the relationship between the auditor or audit firm and the corporate director of the audited CCIV (as an audited body).
[Schedule 1, item 4, section 1232P; Schedule 2, item 133, note to Subdivision B of Division 3 of Part 2M.4]

5.39          The new law modifies the application of subsection 324CH(3) and sections 324CI, 324CJ and 324CK to ensure that certain auditor independence rules that apply to listed entities do not apply to listed retail CCIVs in the same way that they do not apply to listed registered schemes. This is to ensure broad consistency between auditor rules for listed retail CCIVs and listed registered schemes.
[Schedule 1, item 4, paragraph 1232P(b)]

5.40          The new law also extends section 324CL of the Corporations Act, which determines who is an officer for the purposes of establishing whether an auditor is independent, to the officers of the corporate director of the CCIV.
[Schedule 1, item 4, section 1232Q; Schedule 2, item 134, note to subsection 324CL(1)]

5.41          The rules in Division 7 of Part 2M.4 concerning appointment, removal and fees of auditors for registered schemes apply to retail CCIVs as though a retail CCIV were a registered scheme and the CCIV’s corporate director was the responsible entity for the scheme. Division 7 is applied instead of Division 6 of Part 2M.4 (which provides for the appointment, removal and fees for auditors for companies) so that there is regulatory alignment between the requirements for registered schemes and retail CCIVs.
[Schedule 1, item 4, section 1232R; Schedule 2, items 135 and 136, notes to Division 6 and Division 7 of Part 2M.4]

5.42          If an auditor, in the course of an audit, considers that there are circumstances that give rise to a significant contravention of the Corporations Act the auditor must notify ASIC. When determining whether a significant contravention has occurred, the auditor must consider the effect of the contravention on the overall financial position of the CCIV, sub-fund or both, as well as the adequacy of information available about their overall financial position.
[Schedule 1, item 4, section 1232G(4); Schedule 2, item 124, note to section 311(4)]

Financial reporting to members

5.43          The requirement to provide annual financial reports to members under Division 4 of Part 2M.3 of the Corporations Act applies to retail CCIVs in respect of each sub-fund of the CCIV, with modifications to account for reporting in relation to each sub-fund. References to ‘members’ in this Division are treated as if they are references to members of the sub-fund.
[Schedule 1, item 4, section 1232H; Schedule 2, items 125 to 126, notes to Division 4 of Part 2M.4 and section 314(1)]

5.44          A retail CCIV must report to the members of each of its sub‑funds within three months after the end of the financial year.
[Schedule 1, item 4, section 1232J; Schedule 2, item 127, note to section 315(3)]

5.45          The Corporations Act also sets out reporting requirements that apply to a company that issues debentures. These require that the issuer of debentures provide and make available certain reports to the trustee for debenture holders or the debenture holders. If a retail CCIV issues debentures, the modifications that apply to financial reports, directors’ reports and auditor’s reports also apply in relation to the CCIV’s reporting in relation to its debentures.
[Schedule 1, item 4, section 1232L; Schedule 2, item 129, note to section 318(1)]

5.46          A CCIV is not required to hold an annual general meeting and the requirement to consider reports for financial records at an annual general meeting does not apply to CCIVs.
[Schedule 1, item 4, section 1232K; Schedule 2, item 128, note to section 317(1)]

Liability

5.47          A corporate director of a CCIV and the natural person directors of the corporate director are each deemed to be directors of the CCIV for the purposes of placing liability for failing to take all reasonable steps to comply with certain requirements under Chapter 2M. This also applies to the corporate director of a wholesale CCIV, and its natural person directors, to the extent that they fail to take all reasonable steps to comply with Part 2M.2 of the Corporations Act, as modified by Division 4 of Part 8B.4.
[Schedule 1, item 4, section 1232T; Schedule 2, items 137 to 139, notes to subsections 344(1) and (2)]

Lodging amended reports with ASIC

5.48          If there is an amendment to the financial report of a sub‑fund of a retail CCIV after that report has been lodged with ASIC, then the CCIV must lodge the amended report with ASIC and provide a copy to any member of that sub‑fund who requests one.
[Schedule 1, item 4, section 1232M; Schedule 2, items 130 and 131, note 2 to section 322(3)]

5.49          If the amendment is a material one, then the CCIV must notify the members of that sub-fund as soon as is practicable of the nature of the amendment and their right to obtain a copy of the amended report.
[Schedule 1, item 4, section 1232M]

Solvency resolutions

5.50          The requirements concerning solvency resolutions contained in Parts 2N.3 and 2N.4 of the Corporations Act do not apply to CCIVs or sub‑funds. This ensures consistency of treatment between MISs and CCIVs.
[Schedule 1, item 4, section 1232U; Schedule 2, items 140 and 141, notes to Part 2N.3 and section 348C(1)]


Table of Contents:

Outline of chapter 155

Context of amendments. 155

Summary of new law.. 156

Comparison of key features of new law and current law.. 157

Detailed explanation of new law.. 158

Operating a sub-fund as a separate business. 158

Allocating assets and liabilities to sub-funds. 159

Assets of a sub-fund. 159

Liabilities of a sub-fund. 164

Documenting the allocation of assets and liabilities to sub-funds. 170

Segregated application of assets of sub-funds. 173

How CCIV assets are held. 175

 

 

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

Table 6.1 Comparison of new law and current law

New law

Current law

A CCIV may only operate a part of its business if the part of the business has been registered as a sub‑fund.

Every part of the CCIV’s business must be referable to a sub‑fund, and no part may be referable to more than one sub‑fund.

No equivalent.

Every part of the CCIV’s business must be operated as a sub‑fund and must be operated separately.

No equivalent.

The assets of the CCIV include the money and property the CCIV acquires in carrying on its business.

No equivalent.

All assets of a CCIV must be allocated to a sub‑fund. This may occur through the automatic application of the allocation rules, or through an allocation determination made by the corporate director.

No equivalent.

An allocation determination made by the corporate director must be ‘fair and reasonable in the circumstances’.

No equivalent.

A single asset cannot be allocated to more than one sub‑fund. The corporate director must convert a single item of property that would otherwise be part of the assets of multiple sub‑funds into money or other fungible property that can be allocated separately.

No equivalent.

The liabilities of the CCIV include all debts and expenses of the CCIV. This includes contingent or prospective liabilities including those that may be submitted to a liquidator in the context of winding up.

No equivalent.

All liabilities of a CCIV must be allocated to a sub‑fund. If a liability does not relate solely to the business of a sub-fund, the corporate director must make an allocation determination in respect of the liability.

No equivalent.

The corporate director must set up and maintain a register of the assets and liabilities of the sub‑funds of its CCIV. Assets and liabilities must be clearly identified as assets and liabilities of the sub‑fund/s of the CCIV.

No equivalent.

A CCIV must not apply or deal with assets of a sub‑fund except for certain purposes (including meeting the liabilities of the sub‑fund or carrying on the business of the sub‑fund).

A CCIV must not apply or deal with the money or property of a CCIV that has not been clearly identified in the CCIV’s allocation register.

No equivalent.

A CCIV may hold its money or property, or another person may hold its money and property on its behalf (such as a custodian). If another person holds the CCIV’s money and property, that person holds them on trust for the CCIV, and is subject to certain requirements in relation to how the assets are held.

No equivalent.

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, 33⅓ per cent of the interest charge forms part of the liabilities of Sub-fund A and 66⅔ 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.

Table 6.2 Information to be recorded in the allocation register and when it must be recorded

Event

Requirements for the entry on the Register

When the entry must be made

The CCIV acquires money or property that relates solely to the business of a sub-fund of the CCIV.

The name of the sub-fund to which the money or property relates.

Within 5 business days after the money or property is acquired by the CCIV.

The CCIV acquires money or fungible property that relates to the business of more than one sub-fund of the CCIV (requiring an allocation determination but not conversion into money or other fungible property).

The proportion of the money or property that is allocated to each sub-fund by the allocation determination for the money or property.

Within 5 business days after the allocation determination is made.

The CCIV acquires a single item of property that forms part of the assets of two or more sub-funds of the CCIV (requiring an allocation determination and conversion into money or other fungible property).

Identification as an item of property requiring conversion.

The proportion of the property applicable to each sub-fund under the allocation determination for the property.

Within 5 business days after the allocation determination is made.

Money or property is disposed of or otherwise ceases to be money or property of the CCIV.

Removal of the money or property as assets of the sub-fund.

Within 5 business days after the property is disposed of or otherwise ceases to be money or property of the CCIV.

The CCIV incurs a liability that relates solely to the business of a sub-fund of the CCIV.

The name of the sub-fund

Within 5 business days after the liability arises.

The CCIV incurs a liability that relates to the business of more than one sub-fund of the CCIV (requiring an allocation determination).

The proportion of the liability that is allocated to each sub-fund by the allocation determination for the liability.

Within 5 business days after the allocation determination is made.

The CCIV discharges a liability or a liability otherwise ceases to be a liability of a sub-fund of the CCIV.

Removal of the liability as a liability of the sub-fund.

Within 5 business days after the liability is discharged or otherwise ceases to be a liability of the sub-fund.

[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.


Table of Contents:

Outline of chapter 177

Context of amendments. 178

Summary of new law.. 178

Comparison of key features of new law and current law.. 179

Detailed explanation of new law.. 185

General principles. 185

Arrangements and reconstructions. 195

Receivers and other controllers of property of sub‑funds. 197

Voluntary administration.. 199

Restructuring. 200

Winding up of sub-funds. 200

Property recovery provisions. 217

Deregistration of a sub-fund. 218

Deregistration of a CCIV.. 226

Transfer of registration.. 228

 

 

Outline of chapter

7.1              This chapter outlines the process for winding up a sub-fund and how the other external administration processes apply in the CCIV context. It also outlines the process for deregistering a CCIV and sub‑funds of a CCIV.

Context of amendments

7.2              The regulatory requirements for schemes of arrangement, receivership, winding up and voluntary administration for Australian companies – collectively referred to as external administration – are contained in Chapter 5 of the Corporations Act. The amendments contained in Parts 8B.6 of Schedule 1 to the Bill modify the application of the external administration framework 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.

7.3              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. Health benefits funds have some similarities to sub‑funds of a CCIV in that they are not separate legal entities.

7.4              This approach contrasts with the approach used in the United Kingdom’s OEIC regime, where sub‑funds are deemed to have separate legal personality for the purposes of external administration (but not for any other purpose). The United Kingdom’s approach has not been adopted because it would artificially distinguish between the legal personality of sub‑funds before and during external administration.

7.5              The amendments contained in Parts 8B.6 of Schedule 1 to the Bill also modify the application of the external administration framework in Chapter 5 of the Corporations Act so that certain types of external administration do not apply to a CCIV or a sub‑fund of a CCIV.

7.6              Chapter 5A of the Corporations Act sets out the process for deregistering a company. The amendments contained in Part 8B.6 provide a process for deregistering sub‑funds and CCIVs. A CCIV must be deregistered if it has no registered sub‑funds.

Summary of new law

7.7              Part 8B.6 applies the external administration provisions on a sub‑fund‑by‑sub‑fund basis by using translation rules. Most significantly, the first translation rule requires references in the provisions to the company undergoing external administration to be read as a reference to the sub-fund.

7.8              Division 1 of Part 8B.6 contains general rules for construing terms and expressions.

7.9              Division 2 of Part 8B.6 sets out the translation rules for the arrangement and reconstruction provisions. It also expands the Court’s power to make orders in situations where the arrangement and reconstruction involves a sub-fund.

7.10          Division 3 of Part 8B.6 contains the translation rules for receivership and sets out the special duties and powers of receivers.

7.11          Division 3A of Part 8B.6 provides that two external administration processes – voluntary administration and restructuring – do not apply to a CCIV or a sub‑fund of a CCIV.

7.12          Division 4 of Part 8B.6 covers the winding up provisions. It sets out the translation rules and the powers of the corporate director, and the liquidator when a sub-fund is being wound up. It also makes bespoke amendments to the process for serving a statutory demand and applying to the Court for an order for winding up.

7.13          Divisions 5 to 7 of Part 8B.6 cover the insolvent trading provisions in Divisions 3 to 6 of Part 5.7B, offence provisions in Part 5.8 and miscellaneous machinery provisions in Part 5.9. Several of the offence provisions in these Parts (including the duty to prevent insolvent trading) are owed by the natural person directors of the corporate director.

7.14          Division 8 of Part 8B.6 covers the provisions for deregistration and transfer of registration of a CCIV and its sub-funds.

Comparison of key features of new law and current law

Table 7.1 Comparison of new law and current law

New law

Current law

Core principle

The external administration provisions apply on a sub-fund-by-sub-fund basis.

No equivalent.

General translation rules

The first translation rule replaces a reference in the provisions to the company undergoing external administration (the relevant company) with a reference to the sub-fund.

The second translation rule replaces a reference in the provisions to the ‘directors’ of the relevant company with a reference to the corporate director.

The third translation rule replaces a reference in the provisions to the ‘officers’ of the relevant company with a reference to the corporate director, a shadow director or an external administrator of a sub-fund.

The fourth and fifth translation rules replace a reference in the provisions to the ‘shares’ or ‘debentures’ of the relevant company to the shares or debentures referable to the sub-fund.

No equivalent.

Arrangements and reconstructions

Sub-fund by sub-fund application

The general translation rules apply to the arrangement and reconstruction provisions in Part 5.1 (and related provisions).

The second translation rule is also extended for the reconstructions and amalgamation provisions. This extension requires references to the ‘director’ to be read as including the natural person directors of the corporate director, in addition to the corporate director.

Arrangements and reconstructions involving multiple sub-funds are treated as separate arrangements for the purposes of Part 5.1.

Persons prohibited from administering an arrangement

The natural person directors of a corporate director must not administer an arrangement or compromise. If a person holds the money or property of the CCIV, that person must also not administer an arrangement or compromise.

Additional Court powers

The Court has additional powers to make orders when the arrangement or reconstruction involves sub-funds. This includes the power to make any order it considers appropriate in relation to the assets and liabilities of the sub-fund.

No equivalent.

Receivers and other controllers of property

Sub-fund by sub-fund application

The general translation rules apply to the receivership provisions in Part 5.2 and Division 2B of Part 5.7B (and related provisions).

If a controller is appointed in relation to property allocated to more than one sub‑fund, it is treated as two separate appointments.

The controller’s functions and powers prevail over those of the corporate director.

Persons prohibited from acting as a receiver

The natural person directors of a corporate director are prohibited from acting as a receiver. If a person holds the money or property of the CCIV, that person is also prohibited from acting as receiver.

Dealing with assets

Receivers may instruct a person that holds a sub-fund’s assets in relation to dealing with assets of the sub-fund in receivership.

Receivers and other controllers may challenge an allocation determination before the Court.

The controller may inspect the allocation register and any other books of the CCIV to the extent that inspection is necessary to attain the objectives for which the controller was appointed.

No equivalent.

Winding up of sub-funds

The general translation rules apply to the winding up provisions in Parts 5.4 to 5.6, Divisions 2 and 2A of Part 5.7B and Schedule 2 to the Corporations Act (and related provisions).

Statutory demands

A statutory demand served on a CCIV must specify the name of the sub-funds of the CCIV to which the debt relates and the proportion of the debt that relates to each sub-fund.

A creditor may seek information about the name of the sub-funds and the proportion of the debt allocated to each sub-fund from the corporate director.

A CCIV may dispute:

·           the identity of the sub-funds or the proportion of the debt; or

·           the amount or existence of the debt.

If the statutory demand fails to identify the correct sub-fund or the correct proportion, the Court may make an order varying the statutory demand.

Applications to wind up a sub-fund

An application to wind up a sub-fund in insolvency must specify the sub-fund.

The CCIV may dispute the name of the sub‑fund if the application does not rely on a failure to comply with a statutory demand. If the Court accepts the CCIV’s submissions, the Court may substitute the name of the sub-fund on the application.

Persons prohibited from acting as a liquidator or provisional liquidator

The natural person directors of a corporate director of a CCIV are disqualified from acting as a liquidator or provisional liquidator of a sub-fund of the CCIV. If a person other than the CCIV holds assets of the sub-fund of the CCIV, that person is also disqualified these roles.

Powers of liquidator and the corporate director

A liquidator or provisional liquidator may only exercise a power or perform a function to the extent that it relates solely to the carrying on of the sub-fund that is being wound up.

The corporate director remains in office but must not exercise a function or power that relates solely to the sub-fund that is being wound up.

The liquidator does not have the power to determine the proportion of assets and liabilities that are allocated to each sub-fund but it may:

·           direct the corporate director to make an allocation determination; or

·           challenge an allocation determination before the Court.

Auditor’s functions

An auditor does not need to undertake any audit activities for the sub‑fund that is being wound up.

Books

The corporate director must deliver to the liquidator all books relating solely to the sub‑fund being wound up.

The corporate director may inspect the books held by the liquidator, and the liquidator may inspect the books held by the corporate director or a person that holds assets of the sub-fund (to the extent that the books are necessary for the person to perform their functions).

A liquidator, provisional liquidator or ASIC may apply to the Court for a search and inspection for any books of the CCIV They may also apply for a search and seizure warrant for books of the CCIV that relate solely to the sub-fund that is being wound up.

Proof and ranking of claims

The liquidator must consider whether a debt or claim submitted to it is a liability of the sub-fund.

If the debt is not a liability of the sub-fund, the debt is not admissible to proof.

If the debt is a liability of the sub-fund, the liquidator must determine the value of the debt or refer the question to the Court.

Voidable transactions

‘Unreasonable director-related transactions’ include certain payments, dispositions and issues made to either the corporate director or a natural person director. These transactions are voidable.

Operating a CCIV while disqualified

A person who operates a CCIV while a sub-fund is being wound up or within four years of the date that sub-fund enters into winding up may be personally liable for the sub-fund’s debts.

No equivalent.

Property recovery provisions

The translation rules apply to the provisions relating to recovery of property and insolvent trading in Divisions 3, 4, 5 and 6 of Part 5.7B. However, the second and third translation rules are modified to ensure that the natural person directors (rather than the corporate director) owe the duty to prevent insolvent trading.

No equivalent.

Offence and miscellaneous provisions

The general translation rules apply to the external administration offences in Part 5.8 and the miscellaneous provisions in Part 5.9.

The offence for fraud by officers (existing section 596) and the Court’s power to summons a person for mandatory examination (existing section 596A) also apply to the natural person directors of the corporate director.

No equivalent.

Deregistration of sub-funds

A sub-fund may be voluntarily deregistered, on application by the CCIV, the corporate director or the liquidator of the sub-fund, if the CCIV is not a party to any legal proceedings relating to the sub-fund and the sub-fund has no remaining assets or liabilities. ASIC may also initiate the deregistration of a sub-fund in certain circumstances.

No equivalent.

ASIC must deregister a sub-fund if the Court orders the sub-fund’s deregistration following the conclusion of a reconstruction under Part 5.1, the release of a liquidator or the lodgment of an end of administration return.

No equivalent.

Deregistration of a CCIV

A CCIV must be deregistered if it does not have any registered sub-funds. A CCIV that is also an Australian passport fund ceases to be a passport fund when it is deregistered.

No equivalent.

Retention of books

The CCIV must retain the books of the sub‑fund for three years after the sub-fund is deregistered. If the CCIV is also deregistered, the books of the sub-fund and the CCIV must be held by the last corporate director of the CCIV.

No equivalent.

Detailed explanation of new law

General principles

Provisions apply on a sub-fund-by-sub-fund basis

7.15          The provisions relating to external administration apply on a sub‑fund‑by‑sub‑fund basis. This is designed to preserve the segregated application of assets of each sub‑fund. It also accommodates the possibility that different sub‑funds of a CCIV could enter an external administration process at different times.
[Schedule 1, item 4, sections 1236 and 1237]

7.16          Notwithstanding that the provisions apply on a sub-fund-by-sub-fund basis, they recognise that the CCIV is the only legal entity. Unlike the OEIC regime in the United Kingdom, sub‑funds are not deemed to have separate legal personality for winding up. This ensures that the legal character of a sub‑fund remains consistent throughout its life and a sub‑fund does not become imbued with legal personality when it enters into external administration.

Translation rules

7.17          The main mechanism that is used to apply the external administration provisions on a sub‑fund‑by‑sub‑fund basis is the translation rules. These rules ensure that the existing external administration provisions, as they relate to companies, can be applied to sub-funds of a CCIV by substituting references to certain key words with references to alternative words that are relevant in the CCIV context.
[Schedule 1, item 4, sections 1235C, 1236E, 1237B, 1238A, 1238D and 1238G]

7.18          The translation rules also apply, by application of section 23 of the Acts Interpretation Act 1901, irrespective of whether the section uses the singular of the word or the plural, for example, it applies to both references to ‘a share in the company’ and ‘shares in the company’.

7.19          The translation rules applying to each of the relevant Chapter 5 external administration procedures for CCIVs (that is, schemes of arrangement, receivership and winding up) are broadly equivalent. The main difference relates to whether references to ‘directors’ and ‘officers’ include the natural person directors of the corporate director. Subtle differences also exist to reflect differences in the language in the various parts of Chapter 5. For example, the entity subject to the external administration procedure is referred to as a ‘corporation’ in Part 5.2 and a ‘company’ in Part 5.8. These differences are noted in the discussion below.

First translation rule – references to the company

7.20          The first translation rule substitutes a reference in the provisions to the company that is, or is to be, the subject of an external administration procedure with a reference to ‘the sub-fund’. The company that is, or is to be, subject to the external administration procedure is referred to as the relevant company. For example, in the context of the winding up provisions in Parts 5.4 to 5.6, the relevant company is the company that is to be, or has been, wound up or is the subject of an application for a winding up order.
[Schedule 1, item 4, item 1 of the tables in subsections 1235C(4), 1236E(4), 1237B(4), 1238A(4), 1238D(5) and 1238G(4)]

7.21          The first translation rule applies irrespective of whether the relevant company is referred to as a company, a body corporate or in some other way. It also applies where the reference to the company is implicit, for example, in paragraph 459P(1)(b) where the provision refers to a ‘creditor’ and it is implied that it is a ‘a creditor of the relevant company’.
[Schedule 1, item 4, item 1 of the tables in subsections 1235C(4), 1236E(4), 1237B(4), 1238A(4), 1238D(5) and 1238G(4)]

7.22          The first translation rule shifts the focus of the provisions from the CCIV to the sub-fund. It recognises that part of the business of the CCIV relates to the sub-fund, which can be wound up (or undergo another external administration process) independently of the parts of the business that relate to the other sub-funds.

7.23          There are two situations where the first translation rule does not apply, namely, where:

·                     the reference is to a company other than the ‘relevant company’ (see, for example, section 588V, which refers to a ‘holding company’); and

·                     the reference is to the ‘relevant company’ but the context requires the entity to have the capacity and powers of a legal person (see examples and further discussion below).

[Schedule 1, item 4, subsections 1235C(4) and (5), 1236E(4) and (5), 1237B(4) and (5), 1238A(4) and (5), 1238D(5) and (6) and 1238G(4) and (5)]

7.24          Examples of the types of provisions that refer to the legal capacity and powers of the company include references to the company:

·                     entering into a transaction;

·                     paying compensation;

·                     being bound by a compromise or arrangement;

·                     dealing with property;

·                     bringing or being a party to legal proceedings;

·                     executing a document or instrument;

·                     giving or receiving a document or notice;

·                     making an application to the Court or ASIC;

·                     having a bank account;

·                     having a constitution (as a sub-fund does not have a constitution); and

·                     contravening a provision of the Corporations Act.

7.25          In sections which assume legal personality, references to the company continue to be read as references to the CCIV. However, to the extent that it is possible, the operation of these sections is confined to the sub-fund. This approach recognises that the sub‑fund is not a legal entity, while still ensuring that external administration applies on a sub-fund-by-sub-fund basis.
[Schedule 1, item 4, subsections 1235C(6), 1236E(6), 1237B(6), 1238A(6), 1238D(7) and 1238G(6)]

Example 7.1 Applying the first translation rule

Section 459A states that ‘[o]n application under section 459P, the Court may order that an insolvent company be wound up in insolvency’.

Applying the first translation rule, the reference to the insolvent ‘company’ must be read as a reference to the insolvent ‘sub-fund’. In other words, the Court must make an order that refers to a single sub-fund of the CCIV, rather than the CCIV as a whole.

Example 7.2 Situation where the first translation rule does not apply

Section 471B provides that:

While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a company is acting, a person cannot begin or proceed with:

(a) a proceeding in a court against the company ….

(emphasis added)

Applying the first translation rule, the first and second reference to a company should be read as a reference to the sub-fund that is being wound up and a provisional liquidator of that sub-fund.

The first translation rule does not apply to paragraph (a) because only a legal person can be sued. This reference should continue to refer to the company, but its operation should be confined to the sub-fund in wind up. For example, it captures proceedings in a court that relate to assets allocated to the sub-fund that is being wound up, but not proceedings that relate solely to assets and liabilities allocated to other sub-funds.

Second and third translation rules – references to director, officer etc.

7.26          The second translation rule replaces a reference in the provisions to ‘director’, ‘directors’ and ‘board’ with a reference to the ‘corporate director of the CCIV’.
[Schedule 1, item 4, item 1 of the tables in subsections 1235C(4), 1236E(4), 1237B(4), 1238A(4), 1238D(5) and 1238G(4)]

7.27          The second translation rule is necessary as CCIVs, unlike other companies, do not have natural person directors. The effect of the second translation rule is that references to directors generally do not include natural person directors of the corporate director.

7.28          The third translation rule clarifies that a reference to the ‘officer’ of the relevant company refers to the:

·                     corporate director of the CCIV;

·                     a shadow director of the CCIV;[5] or

·                     a receiver, receiver and manager, liquidator or trustee administering a compromise or arrangement for the sub-fund that is in external administration.

[Schedule 1, item 4, item 1 of the tables in subsections 1235C(4), 1236E(4), 1237B(4), 1238A(4), 1238D(5) and 1238G(4)]

7.29          This third translation rule recognises that a CCIV may only appoint a single corporate director, but that a different external administrator may be appointed for each sub‑fund (as Chapter 5 applies to CCIVs on a sub-fund-by-sub-fund basis).

7.30          There are some exceptions to the second and third translation rules. These provide that the natural person directors of the corporate director:

·                     are each taken to be a director of a sub-fund for the purposes of the arrangement and reconstruction provisions (see paragraph 7.52 of this explanatory memorandum for an explanation of the special second translation rule that applies to the arrangements and reconstructions provisions);

·                     are ineligible to act as a receiver or a liquidator (see paragraphs 7.62 and 7.109);

·                     are required to provide reasonable assistance to the liquidator under existing section 530A (see paragraph 7.113);

·                     each individually owe a duty to ensure that a CCIV does not trade in relation to a sub-fund when the sub-fund is insolvent (see paragraph 7.162 for an explanation of the special second translation rule for the property recovery provisions);

·                     may commit an offence under existing section 596 if they use fraud to induce a person to give credit to the CCIV, gift the sub-fund’s property with the intent to defraud or engage in certain other similar conduct (see paragraph 7.168); and

·                     may be mandatorily summonsed up to two years after the end of the external administration procedure under existing section 596A (see paragraph 7.168).

Example 7.3 Applying the third translation rule

A CCIV has two sub-funds. The corporate director of the CCIV is Director Services Ltd, which has three directors – Eliza, Huda and Chen and the CCIV has no shadow directors. A receiver has been appointed to property of the first sub-fund. The second sub‑fund is about to be wound up.

Paragraph 532(2)(c) of the existing law prohibits a person from being appointed as the liquidator of a company if the person is ‘an officer or employee of the company (otherwise than by reason of being a liquidator of the company or of a related body corporate)’ (emphasis added).

Applying the third translation rule, the reference to ‘an officer’ would mean Director Services Ltd. However, a liquidator cannot be a body corporate in any event. Instead, an exception applies that prevents the three individual directors of Director Services Ltd from being appointed as the liquidator for the second sub-fund.

Paragraph 532(1A)(c), when read subject to the third translation rule, does not prohibit the receiver of property of the first sub-fund from being appointed as the liquidator of the second sub-fund. This is because a reference to an ‘officer’ only includes the receiver of property of the sub-fund that is to be wound up, not a receiver appointed in respect of property of another sub‑fund.

Fourth and fifth translation rules

7.31          The fourth translation rule substitutes a reference to ‘shares’ in the relevant company with a reference to the ‘shares referable to the sub‑fund’. This recognises that all shares are shares of a CCIV but the rights attaching to those shares must relate to only one sub-fund. Refer to paragraphs 4.16 to 4.23 of this explanatory memorandum for an explanation of the meaning of shares being referable to a sub-fund.
[Schedule 1, item 4, item 4 of the tables in subsections 1235C(4), 1236E(4), 1237B(4), 1238A(4), 1238D(5) and item 3 of the table in subsection 1238G(4)]

7.32          Similarly, the fifth translation rule replaces references to the ‘debentures’ of a relevant company with references to the ‘debentures referable to the sub-fund’.
[Schedule 1, item 4, item 5 of the table in subsections 1235C(4), 1236E(4), 1237B(4)]

7.33          The fifth translation rule is not required for the property recovery provisions or the offence or miscellaneous provisions in Divisions 6, 7, and 8 of Part 8B.6 as there is no reference to ‘debentures’ in these Parts.

Example 7.4 Applying the fourth translation rule

A CCIV has two sub-funds. The Court orders the winding up of the first sub-fund. The CCIV then transfers shares referable to the second sub-fund.

Existing section 486A voids certain transfers of shares in a company that are made after the commencement of winding up by the Court.

Applying the fourth translation rule, the reference to shares in section 486A is read as a reference to the shares referable to the first sub-fund. Therefore, the transfer of shares referable to the second sub‑fund is not void, notwithstanding that it occurred after the first sub-fund commenced winding up.

Sixth, seventh and eighth translation rules

7.34          The sixth and seventh translation rules replace references to ‘a general meeting’ of the relevant company, and to the relevant company ‘in general meeting’ with a reference to ‘a meeting of members of the sub‑fund’ and ‘the members of the sub-fund at a meeting of members of the sub-fund’. The rules for members’ meetings of sub-funds are explained in Chapter 3 of this explanatory memorandum.
[Schedule 1, item 4, items 6 and 7 of the table in subsection 1237B(4)]

7.35          The eighth translation rule replaces references to ‘incorporation’ of the relevant company with a reference to ‘registration of the sub-fund’. The rules for registration of a sub-fund are explained in paragraphs 2.84 to 2.91 of this explanatory memorandum.
[Schedule 1, item 4, item 8 of the table in subsection 1237B(4)]

7.36          The sixth, seventh and eighth translation rules are only required in the parts of Chapter 5 that relate to winding up. The Corporations legislation does not refer to ‘general meetings’ or ‘incorporation’ in the context of any other external administration procedures.

Example 7.5 Applying the seventh translation rule

Subsection 495(1) of the existing law requires the ‘company in general meeting’ to appoint a liquidator for a voluntary wind up.

Applying the seventh translation rule, the liquidator may be appointed at a members’ meeting of the sub-fund. There is no need call a general meeting of the CCIV.

Example 7.6 Applying the eighth translation rule

Paragraph 461(1)(c) of the existing law provides that a company may be wound up if it does not commence business within one year from its incorporation or suspends its business for a whole year.

Applying the eighth translation rule, a sub-fund in a CCIV may be wound up if business is not commenced within one year from its registration or if the business of the sub-fund is suspended for a whole year.

Terms defined in relation to a company

7.37          A special translation rule applies to terms or expressions that are only defined in relation to a company or body corporate. This rule states that the company definition is applied but the CCIV is treated as if it had only the sub‑fund that is in external administration. All of the other sub‑funds of the CCIV are disregarded.
[Schedule 1, item 4, subsection 1235(2)]

7.38          Examples of terms that are defined only in relation to a company or body corporate include:

·                     related entity in relation to a body corporate;

·                     holding company;

·                     subsidiary of a company; and

·                     affairs of a body corporate.

7.39          Some terms are defined both in relation to a company and in relation to a sub‑fund. The special rule for terms defined in relation to a company is not used in these instances. Instead, the definition of the term in relation to a sub-fund is used in the ordinary way. The main terms used in Chapter 5 which are defined in relation to a sub‑fund are set out in Table 7.2.
[Schedule 1, item 4, subsection 1235(1)]

Table 7.2 Terms defined in relation to a sub-fund