Effect of insolvent managed investment schemes
- What if the responsible entity of my managed investment scheme is insolvent?
- What if my managed investment scheme is wound up?
- What information will I receive and when will I be paid?
- What are my rights during the winding up process?
- Will I be able to write off my investment for tax purposes?
- What if my managed investment scheme has been 'frozen'?
- What if my interest payments or distributions have not been paid?
If the responsible entity of your managed investment scheme becomes insolvent and an external administrator (liquidator or voluntary administrator) or a receiver (controller, receiver and manager or managing controller) is appointed, your scheme may be wound up. This will depend on:
- whether another entity can be found to replace the responsible entity. This will depend on:
- the cost of administering the scheme
- whether the investment structure provides sufficient compensation to the new responsible entity
- the Court being willing to make an order appointing a temporary responsible entity until the temporary responsible entity is confirmed by a meeting of members or another replacement responsible entity is chosen
- for certain types of schemes, the availability and terms of engagement of a suitable operational manager to manage the various projects of a scheme
- the viability of the scheme, including the:
- willingness and ability of existing scheme members to pay for any shortfall in operating expenses
- long-term profitability outlook for each scheme
- potential impact of increasing investor default levels on the operating capital of certain types of scheme.
You may receive notice from the external administrator, or receiver of the responsible entity, that an application has been made to the Court to wind up your scheme. A decision can depend on whether any members of the scheme oppose the application.
If you believe the responsible entity of your scheme is insolvent, or have been informed that an external administrator or receiver has been appointed to your scheme's responsible entity, you should consider seeking legal and financial advice about how this may impact your investment in the scheme, including any:
- ongoing cost/fee obligations you may have under the scheme, and
- rights you may have in accordance with the scheme's constitution and the Corporations Act 2001 (Corporations Act).
A scheme can be wound up if:
- the scheme comes to an end
- a court orders the scheme to be wound up
- the members pass an extraordinary resolution directing the responsible entity to wind up the scheme
- the responsible entity considers the purpose of the scheme has been accomplished or cannot be accomplished and makes an application to the Court to have the scheme wound up.
If your scheme is a registered managed investment scheme and is wound up, the winding up is to be conducted in accordance with the Corporations Act and the scheme constitution. If the winding up is ordered by a Court, the Court may make orders on the winding up. You can obtain a copy of the constitution from the scheme's responsible entity. The responsible entity is generally responsible for the winding up. Winding up involves realising all the assets of the scheme, deducting reasonable costs (including unpaid creditors) and distributing the balance, if any, among members pursuant to the constitution and according to their respective interests in the scheme.
The Court may appoint an independent person, such as a liquidator, to oversee the winding up of the scheme. In certain circumstances, if the court orders the scheme be wound up, the Court may allow the responsible entity to wind up the scheme. In deciding whether to appoint an independent person to wind up a scheme, the Court may consider:
- the existence or potential for uncertainty or dispute about the members' legal position
- differing views on the appropriate method for bringing the scheme to an end, including the allocation of costs (e.g. where other schemes are involved)
- the need to distance the winding up from the responsible entity and other persons associated with it because of actual or potential conflicts
- the need to assess rights that members may have against the responsible entity
- the past conduct of the responsible entity — if the conduct suggests it is not in the best interest of members to allow the responsible entity to wind up the scheme
- the effect the appointment of a liquidator will have on the value of the scheme's assets
- the expenses involved in different and competing proposals for winding up the scheme
- the value of the funds invested and administered by the responsible entity
- the views of investors.
If your managed investment scheme is wound up, your scheme's responsible entity or the liquidator, if appointed, should keep you informed of the progress of the winding up. You should also be kept informed about how much of your investment you can expect to recover and when you will be paid. You may receive interim distributions during the course of the winding up, or a one-off distribution at the conclusion of the winding up.
It can also take several months — even years — to know what return, if any, you can expect on your investment. The timing will depend on several factors, including the complexity of the scheme (e.g. whether other schemes are involved and whether the assets and liabilities of each scheme are readily identifiable) and the quality of the books and records of the scheme.
If you change your address, you should advise the scheme's investment manager or liquidator as soon as possible to ensure you continue to receive timely information about your investment.
When the winding up is complete, a registered company auditor must be engaged to audit the final accounts of the scheme. You should be provided with a copy of any report made by the auditor within a specified period after the responsible entity receives the report from the auditor.
You should consider seeking financial advice on how the winding up of the scheme will impact your personal circumstances.
If you are experiencing financial hardship you may be eligible for assistance, contact Centrelink or the Department of Veterans Affairs for more information. In some instances, the liquidator may contact the Commonwealth Minister for Families, Housing, Community Services and Indigenous Affairs requesting that the investment be excluded from the Aged Pension Deeming Provisions and for the purposes of determining an entitlement to a pension from the Department of Veterans Affairs.
The scheme constitution should set out your rights during the winding up process, including:
- voting at meetings of members — if you owe money on your investment, you may not be entitled to vote at meetings held during the winding up process unless you repay the outstanding amount
- your right to receive a copy of the auditor's report about the final accounts of the scheme
- your right to receive notice of termination of agreements or arrangements entered into with you in relation to the scheme.
Other rights as a member continue, this may include receiving an annual periodic statement.
You should seek advice specific to your own personal circumstances about the tax treatment of any loss on your investment.
The term 'frozen fund' refers to a registered managed investment scheme, which was originally marketed on the basis that investors had an ongoing or periodic right to redeem their investments on request, but which has since suspended that right.
The responsible entity is required by the Corporations Act to freeze redemptions if the scheme ceases to be 'liquid'. A scheme is not liquid unless at least 80% of its assets comprise cash, bills, marketable securities or other property that the responsible entity reasonably considers able to be realised for its market value within the period provided for in the scheme's constitution for satisfying withdrawal requests.
A freeze on withdrawals does not necessarily mean that you will not receive your money back, or that distributions will cease. The length of time that it will take to have all capital returned to members seeking it will vary significantly from scheme to scheme.
If you are concerned that your scheme is frozen and your ability to withdraw your investment has been suspended, you should contact your scheme's responsible entity for more information. The responsible entity should be able to tell you why your investment has been frozen and for how long. You may find the freeze is only temporary and for a defined period (e.g. six months).
If it becomes apparent there are insufficient funds to meet withdrawal from investors, it is possible the scheme may be wound up.
If you are concerned about a freeze on redemptions of a scheme, you can obtain a copy of the product disclosure statement. You should be able to obtain a copy directly from your scheme's investment manager or their website.
The product disclosure statement should be able to tell you:
- if your fund was liquid or illiquid when the product disclosure statement was current — whether a scheme is liquid or illiquid may affect your ability to withdraw your investment from the managed investment scheme
- if and when distributions will be paid — distributions are not always paid at regular intervals and there may be periods where no distributions are made.
- who to contact to raise any concerns or complaints you may have about your investment.
You can also obtain a copy of the constitution of the scheme setting out the rules and regulations governing the conduct of the scheme. You can obtain a copy of the constitution from the scheme's responsible entity. The constitution should outline some of your rights as a member and give you an understanding of the winding up process of your scheme.
You should consider seeking financial advice about how a freeze on withdrawing your investment will affect your personal circumstances. This will allow you to make an informed decision about your financial future.
If you have not received your interest payment or an anticipated distribution from your investment by the due date, you should contact the scheme's responsible entity. You should consider seeking financial advice on how the non-payment of your investment income will affect your personal circumstances. This will allow you to make an informed decision about your financial future.
The most recent product disclosure statement will tell you who to contact if you have any concerns or complaints about your scheme. Responsible entities are required under the Corporations Act to have in place an internal dispute resolution system and be members of an external dispute resolution scheme.