1. Some Recent Insolvency
Developments
Law Council of Australia
Insolvency Committee Workshop 2012
NSW Session
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2. Session was going to cover
• ASIC’s power to wind up
• ASIC notices website
• Price signalling
• Civil Dispute Resolution genuine steps
• Director penalty notices
• The future for official liquidators
• The future for CALDB and practitioner discipline
• Virtual meetings
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3. One Recent Insolvency Development
– the CAMAC Report on Managed
Investment Schemes
(Dated July 2012; publicly available since Tuesday 7
August 2012)
Law Council of Australia
Insolvency Committee Workshop 2012
NSW Session
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4. Managed Investment Schemes
• Economic significance of MIS
• Pooled schemes / Common Enterprise schemes
• Sole function REs / Multi-function REs
• Distinction between scheme itself and the RE
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5. Salient features of current legal structure
• The scheme itself is not a legal entity
• A scheme must have, and can only act by a RE, which
is a public company with an AFSL and, if listed,
governed also by ASX rules
• RE holds the scheme property and incurs all obligations
of the scheme as principal (as the scheme is not a legal
entity it cannot be principal)
• RE may be able to limit liability to third parties if it can
negotiate limited recourse provisions
• Otherwise, RE will have right of indemnity from scheme
assets, provided it hasn’t acted in breach of
duty/beyond power etc
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6. Salient features of current legal structure
• On a change of RE the new RE automatically succeeds
to all the rights and liabilities of the old RE relating to
the scheme (s.601FS and 601FT)
• Consequences include – need for incoming RE to
conduct detailed DD – often difficult in urgent
situations
• Neither Pt 5.1 nor Pt 5.3A applies to schemes
• There are only limited provisions in the Corporations
Act dealing with the winding up of schemes – use of
trust laws also necessary 6

7. Main issues which the report addresses
• Facilitating a change of RE - the RE’s personal
liability and ss.601FS and a number of other matters
make it difficult to find an RE willing to take over as
RE of a scheme when there is a need to change RE
– eg because the existing RE has become insolvent
• Protection of third parties dealing with schemes -
counterparties contracting with ‘the scheme’ do not
have direct recourse to the scheme assets. They
must sue the RE. But if the RE has acted in breach of
duty, it will have no reight of indemnity against the
scheme assets to which the counterparties can be
subrogated
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8. Main issues which the report addresses
• Restructuring schemes - there is no efficient and
effective means of facilitating a restructure of a
scheme
• Winding up schemes - the fact that both corporations
law and trust law have to be used where a scheme
and its RE are being wound up, and other factors to
do with the intermingling of the affairs of both make
winding schemes up uncertain and needlessly
complex
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9. The Big Idea – SLE
• The scheme itself will be a legal entity
– not a company, but an entity sui generis
– no directors or officers – mindless
• The scheme itself will hold its property
• The scheme would and could only still act
through the RE, but the RE would contract as
agent for the scheme, not as principal
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10. The Big Idea – SLE
• RE would have to disclose it was acting for the
scheme to avoid personal liability
• Counterparties would then have rights only against
the scheme (no risk of losing access to scheme
assets because of RE’s breach of duty)
• Indoor management rule for benefit of counterparties
• RE would owe its duties to the scheme; enforceable
on behalf of scheme by replacement (including
temporary) RE, external administrator, ASIC or
member (derivatively)
• Insolvent trading for directors of RE if cause insolvent
scheme to incur debts 10

11. Why is the Big Idea a Good Idea?
• Achieves almost full separation of the scheme’s
affairs from those of the RE (especially important with
multi-function REs)
• Gives counterparties direct rights against scheme
property rather than having to rely on RE’s rights of
indemnity & subrogation which may be lost through
RE misconduct
• Simplifies conforming treatment of schemes to
ordinary companies for things like winding up,
administration etc
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12. Why is the Big Idea a Good Idea?
• Should overcome reluctance of parties to take over
from an outgoing RE as the RE will not be taking on
all the (sometimes unknown) liabilities of the scheme
– Proper liabilities of scheme will be liabilities of
the SLE
– Liabilities improperly incurred by outgoing RE
will be enforceable against outgoing, but not
against the SLE or incoming RE
• Makes for simpler enforcement of remedies against
RE as obligations are clearly owed to RE
(constitutional provisions exempting RE from liability
to be limited)
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13. The Big Idea – plus a bit more
• Tax changes necessary to ensure no tax
charge on conversion of existing schemes to
SLE and SLEs are treated as tax neutral
• Report also suggests various changes which
will enhance the effectiveness of the Big Idea
(but which would also be useful changes
even if the Big Idea isn’t implemented and are
recommended as standalone changes)
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14. Additional recommendations – proposals
to assist identification of scheme assets
• Definitive register of ‘affairs’ of the scheme to be
maintained by RE
• Definitive register of property of the RE to be
maintained by RE
• Enforcement of obligation to maintain these registers
through compliance plan, audit, AFSL licensing and
depriving RE of recourse for indemnity to property not
registered
• Obligation to notify counterparties / right to seek court
order to register (not once new RE or external
administrator appointed)
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15. Additional recommendations – proposals
to assist identification of scheme assets
• Incoming (new or temporary) RE would be able
to rely on and only be bound by matters on
registers – in effect doing away with need for
more due diligence
• Incoming RE or external administrator to have
discretion to rectify register to add unrecorded
agreements etc
• Counterparty to be able to enforce against RE
and claim damages (if suffered) for RE’s failure
to record in register
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16. Additional recommendations - changing
the RE where scheme viable
• RE to assist prospective new RE if requested
by 5% of members or ordered to do so
• RE only to be remunerated for period it is
actually RE – must refund advance payments
• Poison pills on RE replacement to be
unenforceable
• Voting thresholds to be changed
• Contractual COC provisions not to be
triggered
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17. Additional recommendations - changing
the RE where scheme viable
• Court to be able to appoint anyone as TRE
not full RE)
• Greater flexibility for court in appointing TRE
(grounds)
• RE to assume liability for limited scheme
liabilities only
– liabilities it incurs
– otherwise, liabilities to limit of assets
available to indemnify it
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18. Restructuring schemes – a second Big
Idea
• Allow schemes to be subject to voluntary
administration regime(whether or not SLE
proposal implemented – but much simpler if it
is than under existing legal structures
• Definition of insolvency – scheme property is
insufficient to meet all the claims that can be
made against that property as and when
those claims become due and payable
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19. Restructuring schemes – VA if SLE
proposal implemented
• VA of SLE would not affect RE or vice versa
• Grounds – present or likely insolvency, or
purpose of scheme cannot be accomplished in
present form
• Could be initiated by SLE (acting through RE or
TRE) or substantial chargee
• RE and its directors at risk for insolvent trading to
encourage timely appointments
• RE would remain in place but powers would
transfer to administrator
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20. Restructuring schemes – VA if no SLE
• Creditors of ‘the scheme’ have rights against
the RE personally which need to be taken into
account (if RE has assets)
• Moratorium would have to extend to RE
(whether solvent or not)
• May need to consider class voting – eg
difference between creditors with limited
recourse and those with full recourse to RE
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21. Restructuring schemes – VA if no SLE
• Effect of any DOSA on other parties involved in
scheme (eg members in a common enterprise
scheme)
• If both RE (single-function) and scheme
insolvent, need to deal with affairs of both subject
to emergence of conflicts
• Otherwise, clarification needed re whether affairs
of RE include affairs of the schemes it operates
• Voting where parties only interested in some
assets?
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22. Other recommendations re VA for
schemes
• Wide moratorium to encompass all scheme
rights however scheme structured
• Affairs of scheme to be assessed by
reference to definitive registers
• Administrator to be able to make more than
one proposal for DOSA – dealing with whole
or part only of scheme’s affairs.
• Administrator to determine voting rights
(subject to appeal)
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23. Other recommendations re VA for
schemes
• Administrator must be registered liquidator
• Administrator’s indemnity for liabilities
incurred to have priority over RE’s
• Remuneration to be approved by ‘creditors’ or
committee
• Section 447A type provision to be included
• Where DOSA proposals involve continuation
of scheme, administrator can seek
appointment of TRE
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24. Winding up schemes
• Court to have express power to wind up for scheme
insolvency
• Combined scheme and RE winding up to be available
subject to conflicts
• Only registered liquidators
• Ambit of liquidation governed by definitive registers
• Conform powers of liquidator to company liquidator
• Voidable transaction provisions
• Clear priorities of payment – TRE, then external
administrators.
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25. Possible problems?
• The definitive registers
• Is the price of certainty too great for counterparties who are
excluded from participating in the scheme assets because of
RE delinquency?
• If no SLE regime is enacted – difficulties with
VA procedure
• Do the proposals focus adequately on the
issues caused by delinquent REs?
• Will the position regarding common
enterprise schemes continue to be too
complex?
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