The Importance of Constitutional Drafting

Owl Red 1 grey

The Importance of Constitutional Drafting


In 2014 Wellington Capital Ltd was brought before the Federal Court by ASIC, to challenge the validity of share transfers made by the Responsible Entity (RE) on behalf of its managed investment scheme.  The outcome of the case has important implications regarding a RE’s powers within the scheme constitution.




In 2012, Wellington Capital Ltd the RE of Premium Income Fund distributed a portion of the assets of the Premium Income Fund, to Asset Resolution Ltd (ARL).  In return, the scheme acquired all issued shares in ARL, which were then transferred to scheme members.


Concerned that Wellington acted beyond its’ powers set out in the Scheme Constitution, ASIC challenged the validity of the power to transfer at the Federal Court.  Following an appeal to the Full Court of the Federal Court, it was held that Wellington did not have the power to make the in specie transfer of shares to scheme members. 


This decision was upheld by the High Court, in a dismissed appeal made by Wellington late last year.



In its appeal to the High Court, Wellington argued that the fund’s constitution did allow the share transfer, based on the following provisions within the constitution:

  • The RE has "all powers in respect of the scheme that is legally possible for a natural person or corporation to have and as though it were the absolute owner of the Scheme property and acting in its personal capacity" (cl.13.1)
  • The RE has the power to "acquire, dispose of, exchange, mortgage, sub-mortgage, lease, sub-lease, let, grant, release or vary any right or easement or otherwise deal with Scheme property, as if the RE were the absolute and beneficial owner." (cl. 13.2.5)


However, this claim was rejected by the High Court on the basis that the provisions must be read in the context of the whole Scheme Constitution.  Within this context, it was found that the RE had the power to distribute scheme property in dealings with third parties, but not non consensual transfers with scheme members.


These findings emphasise the importance of clear constitutional drafting.  As provisions are to be interpreted within the Constitution as a whole, it is insufficient to grant broad powers within constitutional provisions.  As found in the case of Wellington Capital, these provisions may not be sufficient in granting an RE power to make in specie transfers to members.


Constitutional drafting for managed investment schemes is a complex matter.  Situations do arise such as a scheme holding illiquid assets that commercial and common sense would give rise to distributing in specie to unit holders.


Should you have any questions related to the above, or RE’s in general, please contact your relevant ESV Engagement Partner on 9283 1666.


Article by Tim Valtwies