Open-ended investment vehicles: how should they be restructured?

In August 2017 Treasury invited consultation on a plan to introduce a new form of company: Corporate Collective Investment Vehicles.

CCIVs are intended to replace trust-based managed investment schemes – currently the only collective investment vehicle providing a flow-through tax treatment – with ‘a more internationally recognisable’ structure, similar to the UK’s ‘Open-ended Investment Vehicle’ regime.  By doing so, the Government hopes to make it easier to attract international investment and inbound capital flows.

Key features of a CCIV

Details of the regulatory framework for the CCIV are on the Treasury website here, but in summary:

• The CCIV itself will be an ‘umbrella entity’ with at least one, and probably several, sub-funds (in the UK: ‘protected cells’).
• The CCIV will create and allocate a new class of shares for each sub-fund, but those sub-funds will be notional and will not be separate legal entities.
• A CCIV must have a single corporate director, which itself must be a public company holding an Australian Financial Services License.  The duties of a corporate director will align to those currently owed by the responsible entity of an MIS scheme.
• A CCIV which accepts investments from retail investors must hold its assets via a separate ‘depositary’ company – also a public company with an AFSL.
• Each sub-fund will be ‘ring fenced’ or ‘bankruptcy remote.’  The assets of a sub-fund belong exclusively to that sub-fund, and are not available to the creditors of any other entity – including the umbrella CCIV.

What will happen to an insolvent sub-fund?

Treasury has adopted a phased approach to development of the new CCIV framework, and consideration of restructuring issues has been deferred until later.

There appear to be three main options:

1. Apply the current MIS framework.  MIS schemes are wound up by Court order made under section 601ND, with almost any other issues addressed by an application for directions under section 601NF.  Reliance on court directions – rather than a legislative framework as for liquidation and administration – has led some to describe MIS wind ups as the closest that Australia has to the cumbersome and expensive Chapter 11 process.
2. Follow the UK approach.  The UK legislation provides that a sub-fund is to be wound up ‘as if it were an open-ended investment company‘ treated ‘as if it were a separate legal person for the purposes of winding up.’  Like the current Australian regime, winding up is the only option – there is no scope to restructure a sub-fund.
3. Allow a broader range of restructuring options.  If there is a policy reason why MIS schemes and sub-funds must be wound up and cannot be restructured, it has not been articulated.  There should be some consideration given to allowing sub-funds to have access to a broader range of restructuring options such as voluntary administration and schemes of arrangement.

Treasury has flagged future consultation on winding up of CCIV funds, likely to be later this year.