House of Representatives

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)

Chapter 7: CCIVs - External administration

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

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)]

[Schedule 1, item 4, sections 1233H, 1233L and 1231A; Schedule 2, items 3, 8, 9, 12, 14 to 15, 17, 26-27, 29 to 30, section 9, definitions of 'assets', 'contributory', 'creditor of a sub-fund', 'extraordinary resolution', 'insolvent', 'liabilities', 'member', 'solvent' and 'special resolution', section 51E, definition of 'secured creditor', section 51F]

Other modifications

7.40 The new law provides that any other modifications that are necessary may be made so that the provisions apply to a sub-fund instead of a company. This ensures that the law operates in all circumstances in a manner that reflects, and is consistent with, the translation rules that establish the external administration regime for CCIVs. In particular, it ensures the object of preserving the segregated nature of sub-funds is implemented in corporate insolvency law. [Schedule 1, item 4, subparagraphs 1235C(1)(b), 1236E(1)(b), 1237B(1)(ii), 1238A(1)(b)(ii), 1238D(2)(b) and 1238G(1)(b)]

7.41 For example, in applying corporate insolvency law to CCIVs, certain modifications are made to account for the unique characteristics of a CCIV that distinguish it from other types of companies and the fact that a sub-fund is not a separate legal person.

7.42 This aspect of the translation rules replicates a precedent used in other parts of the Corporations Act where the law operates to ensure an intended outcome is expressly given effect to in all circumstances contemplated by the law (see, for example, paragraph 233(2)(b) and subsection 324BD(2) of the Corporations Act).

Provisions to which the translation rules apply

7.43 The translation rules apply to most of the provisions in Chapter 5 of the Corporations Act that relate to arrangements and reconstructions, receivership, winding up, recovery of property, external administration offences and other miscellaneous external administration provisions (see Table 7.3). [Schedule 1, item 4, paragraphs 1235(2)(a), 1236E(2)(a), 1237B(2)(a), 1238A(2)(a), 1238(3)(a) and 1238G(2)(a); Schedule 2, items 142 to 151, 154, 156 notes to Parts 5.1, 5.2, 5.3A, 5.3B, 5.4, 5.4A, 5.4B, 5.4C, 5.5, 5.6, 5.8 and 5.9 of the Corporations Act]

7.44 Regulations may be made to disapply the translation rules for specified provisions. This regulation making power ensures that adjustments can be made if the translation rules produce an unanticipated result in a particular section, or when later amendments are made to Chapter 5. Flexibility is important as CCIVs are a new type of vehicle and are structured differently to the other types of companies that are subject to Chapter 5. [Schedule 1, item 4, paragraphs 1235C(3)(c), 1236E(3)(c) and 1237B(3)(d), and subsections 1238A(3), 1238D(4) and 1238G(3)]

7.45 The translation rules also apply to other provisions in the Corporations Act and ASIC Act that relate to the operation of one of the provisions listed in Table 7.3. In section 9 of the Corporations Act, 'this Act' is defined to include regulations made under the Corporations Act, the Passport Rules for this jurisdiction, and the Insolvency Practice Rules. Similarly, the ASIC Act includes the regulations made under the ASIC Act. [Schedule 1, item 4, paragraphs 1235C(2)(b), 1236E(2)(b), 1237B(2)(b), 1238A(2)(b), 1238D(3)(b) and 1238G(2)(b)]

7.46 The provisions to which the translation rules apply are referred to as the arrangement and reconstructions provisions (for provisions relating to arrangements and reconstructions), receiver provisions (for provisions relating to receivership), winding up provisions (for provisions relating to winding up), property recovery provisions (for provisions relating to property recovery) external administration offences provisions (for provisions relating to Chapter 5 offences) and external administration miscellaneous provisions (for provisions relating to the miscellaneous provisions in Part 5.9). This terminology is modelled on existing subsection 233(2) of the Corporations Act which refers to 'winding up provisions'. [Schedule 1, item 4, subsections 1235C(2), 1236E(2), 1237B(2), 1238A(2), 1238D(3) and 1238G(2)]

7.47 The translation rules do not apply to the voluntary administration provisions in Part 5.3A of the Corporations Act or the restructuring provisions in Part 5.3B of the Corporations Act, as these types of external administration processes do not apply to a CCIV or a sub-fund of a CCIV.

References to debts and claims

7.48 In the winding up provisions, references to 'debts' of the CCIV refer to 'liabilities of a sub-fund', that is, liabilities of the CCIV that have been allocated to the sub-fund in accordance with the allocation rules for liabilities. References to a claim against the CCIV are read as references to 'claims against a sub-fund' to the extent that the claim is a liability of the sub-fund. [Schedule 1, item 4, section 1237C]

7.49 Similarly, in the property recovery provisions, references to 'incurring debts' cover liabilities of the sub-fund incurred by the CCIV. [Schedule 1, item 4, section 1238B]

7.50 The arrangement and reconstruction provisions, property recovery provisions, external administration offences provisions and external administration miscellaneous provisions do not refer to debts or claims. Accordingly, a corresponding rule is not required for these parts of Chapter 5.

References to 'a Chapter 5 body corporate'

7.51 A CCIV is a 'Chapter 5 body corporate' if any of its sub-funds are undergoing an external administration procedure. In other words, a CCIV is a 'Chapter 5 body corporate' if one or more of its sub-funds is being wound up, a receiver has been appointed to property of the CCIV, or the CCIV enters into a compromise or arrangement which involves one or more of its sub-funds. [Schedule 2, item 6, section 9, definition of 'Chapter 5 body corporate']

Arrangements and reconstructions

7.52 Arrangements and reconstructions of sub-funds of CCIVs occur in the same way as arrangements and reconstructions of Part 5.1 bodies. This is largely achieved by applying the translation rules explained at paragraphs 7.17 to 7.46 of this explanatory memorandum. [Schedule 1, item 4, sections 1235A and 1235C]

7.53 Arrangements and reconstructions involving multiple sub-funds may proceed but they are treated as two separate arrangements for the purposes of Part 5.1. This ensures that separate meetings are held for each sub-fund. [Schedule 1, item 4, section 1235C]

Example 7.7 A 'demerger' of a sub-fund

Casterley House CCIV has two sub-funds and wishes to spin off one sub-fund into a new CCIV.

Casterley House may use Part 5.1 to achieve this.

Example 7.8 A 'friendly takeover' of a sub-fund

Braavos CCIV also has two sub-funds. Meereen CCIV approaches Braavos CCIV with a proposition that involves moving one of the sub-funds into Meereen CCIV.

Part 5.1 may be used to facilitate this 'friendly takeover'.

Example 7.9 An internal reorganisation of a CCIV

Greyjoy CCIV wishes to amalgamate two of its sub-funds into a single sub-fund.

Part 5.1 can be used to facilitate this internal reorganisation. For the purposes of applying Part 5.1, the reorganisation is treated as two separate arrangements - one for each sub-fund. The members of each sub-fund must vote separately on the proposal.

References to the 'director'

7.54 The second translation rule is extended so that a reference to the 'director' of a Part 5.1 body includes both the corporate director and the natural person directors of the corporate director. This is consistent with existing section 410 which extends references to the director in Part 5.1 to the 'directors of the body or any one or more of them'. [Schedule 1, item 4, item 2 of the table in subsection 1235C(4)]

7.55 The consequence of extending the second translation rule to include the natural person directors of the corporate director are that:

•

the natural person directors each owe the obligations in Part 5.1, such as the obligation to instruct an accountant or solicitor if the members resolve to do so (see subsection 411(13));

•

the material interests of the natural person directors must also be disclosed in explanatory statements (see subsection 411(1)); and

•

the natural person directors are prohibited from administering a compromise or arrangement (see subsection 411(7)).

7.56 A person who holds money or property of the CCIV (such as a custodian engaged by the CCIV) is also prohibited from administering an arrangement or compromise. [Schedule 1, item 4, section 1235D]

Court's powers

7.57 The Court's powers to facilitate reconstructions and amalgamations of Part 5.1 bodies have been expanded so that the Court may also make orders when the property or undertakings of one sub-fund are transferred to another sub-fund of the same CCIV. These orders could relate to deregistration of a sub-fund, the allotment or appropriation of shares or any of the other matters listed in section 413. [Schedule 1, item 4, section 1235E]

7.58 The Court also has the power to make any order it considers appropriate in relation to the assets and liabilities of a sub-fund involved in the compromise or amalgamation. Part 5.1 may be used to facilitate a variety of reconstructions and amalgamations and this power gives the Court the flexibility to make whatever orders are required in the circumstances. [Schedule 1, item 4, section 1235F]

Receivers and other controllers of property of sub-funds

7.59 The receivership provisions in Part 5.2 and Division 2B of Part 5.7B operate on a sub-fund-by-sub-fund basis and must be read in accordance with the translation rules. For an explanation of the translation rules, see paragraphs 7.17 to 7.46 of this explanatory memorandum. [Schedule 1, item 4, sections 1236 and 1236E; Schedule 2, item 142, note to 'Part 5.2']

Appointment of a controller

7.60 A controller of property may only be appointed in relation to property of a particular sub-fund of a CCIV. If a controller is appointed in relation to property allocated to more than one sub-fund, it is treated as two separate appointments (one appointment relating to the first item of property and one appointment relating to the second). [Schedule 1, item 4, section 1236A, definition of 'property' and section 1236B]

7.61 Controllers of property are persons who assume control of property subject to a security interest even if they have no management function. They include mortgagees in possession, a receiver and a receiver and manager. The Corporations Act and the new law use the term receiver to refer to both 'receivers' and 'receivers and managers' (see also existing section 416). [Schedule 1, item 4, section 1236A, definition of 'receiver']

7.62 The rules about persons who are disqualified from being appointed as a receiver of property of a sub-fund generally follow the rules about persons who are disqualified from being receivers of property of other types of companies in existing section 418. These persons include the corporate director, the natural person directors of the corporate director, a person who holds money or property for the CCIV, the auditor of the CCIV or the sub-fund, certain persons connected with a related body corporate of the CCIV, a secured party in relation to any property of the sub-fund or the secured party's director, secretary, senior manager or employee. Persons who were the corporate director, a director of the corporate director (or a body corporate related to the corporate director), promoter or connected with a related body corporate of the CCIV within the last 12 months are also prohibited from acting as a receiver unless ASIC grants permission in a written direction. [Schedule 1, item 4, section 1236C]

7.63 The person appointed to act as the receiver must either be a registered liquidator or authorised by, or under, a State, Territory or Commonwealth law to act as a receiver of property of the particular sub-fund. [Schedule 1, item 4, paragraph 1236C(1)(f) and subsection 1236C(2)]

Controller's relationship with a person who holds assets of the sub-fund of the CCIV

7.64 If one or more persons, other than the CCIV, holds assets of the sub-fund of the CCIV, the controller must notify the person or persons of its appointment to the role, or if it ceases to act in the role, in writing as soon as practicable and in any event within three business days after the appointment. [Schedule 1, item 4, section 1236D]

7.65 If one or more persons, other than the CCIV, holds assets of the sub-fund of the CCIV, the receiver may instruct this person or persons, in relation to dealing with assets of the sub-fund in respect of which the receiver was appointed. This power does not extend to mortgagees in possession and other controllers who are not receivers. [Schedule 1, item 4, section 1236G]

Dealing with assets of the sub-fund

7.66 The appointment of a receiver does not affect the operation of the allocation rules or the rules relating to the segregated application of assets (see Chapter 6 of this explanatory memorandum for a discussion of these rules). For example, the receiver cannot make any determinations with respect to the allocation of assets or liabilities to a particular sub-fund.

7.67 A receiver, or other controller, may challenge an allocation determination before the Court. For an explanation of this power, see paragraph 7.120. [Schedule 1, item 4, section 1233Q]

7.68 If a receiver is appointed on behalf of the holders of any debentures of the sub-fund, certain liabilities of the sub-fund (including auditor's fees) need to be paid in priority to any claim for principal or interest in respect of the debentures. This reflects the position for receivers of property of other types of companies in existing section 433. [Schedule 1, item 4, section 1236K]

Rights to inspect books and access reports

7.69 The corporate director must provide a controller with a report about the sub-fund's affairs under existing section 429.

7.70 If the controller requires additional information, it may require a further report from the current or former corporate director, the corporate director's officers or employees or any other persons who participated in the registration of the sub-fund (if the sub-fund was registered within one year of the date of the controller's appointment). This further report may relate to the affairs of the sub-fund or any other sub-fund to the extent that the information is required by the controller for the purpose of attaining the objectives for which the person was appointed. [Schedule 1, item 4, section 1236H]

7.71 The controller has a right, under existing section 431, to inspect any books of the sub-fund that relate to the property in respect of which the controller was appointed (read subject to the translation rules). In addition, bespoke amendments are made to extend the controller's inspection rights to include the right to inspect:

•

the allocation register; and

•

any other books of the CCIV to the extent that inspection is necessary for the purposes of attaining the objectives for which the person was appointed.

[Schedule 1, item 4, section 1236J]

7.72 The controller's inspection rights apply irrespective of whether the books are held by the corporate director, the natural person directors of the corporate director, or some other person such as a custodian (noting that existing section 431 refers generally to books held by 'a person').

7.73 If a controller ceases to act, ASIC may require the controller to transfer any books of the sub-fund to ASIC under existing section 422D. Under the existing law, ASIC is permitted to destroy any books that it still holds after a two-year period. A bespoke amendment is made to require ASIC to notify the CCIV before ASIC destroys any books transferred to it under existing section 422D (unless the CCIV has been deregistered). If the CCIV, by resolution of the corporate director, directs ASIC not to destroy the books, ASIC must transfer the books to the CCIV. [Schedule 1, item 4, section 1236L]

Voluntary administration

7.74 Voluntary administration under Part 5.3A of the Corporations Act is not available in the CCIV context. Voluntary administration allows a company to continue trading for 20 business days without unsecured creditors enforcing their claims, thereby giving the company the opportunity to restructure and negotiate a compromise with its creditors. As a CCIV does not carrying on an active business, a 20-business day moratorium is less likely to improve the outcomes for creditors and members in the CCIV context. [Schedule 1, item 4, section 1236M; Schedule 2, item 144, note to Part 5.3A]

Restructuring

7.75 The arrangements for restructuring a company under Part 5.3B of the Corporations Act are not available in the CCIV context. These arrangements were implemented as part of the Government's economic response to COVID-19 and are intended to reduce the costs of external administration for small businesses. Even if a CCIV met any relevant threshold requirements, the intention is for all CCIVs to be subject to the same insolvency regime. This promotes greater certainty and consistency in respect to the external administration of a sub-fund of a CCIV. [Schedule 1, item 4, section 1236N; Schedule 2, item 145, note to Part 5.3B]

Winding up of sub-funds

Core principles

7.76 Winding up also operates on a sub-fund-by-sub-fund basis. Only a sub-fund of a CCIV can be wound up and the CCIV itself cannot be wound up. ^[6] [Schedule 1, item 4, sections 1237 and 1237A]

7.77 The translation rules generally apply for the purposes of winding up (see the discussion of the translation rules at paragraphs 7.17 to 7.47). The translation rules apply to sections 53 and 91, paragraph 233(1)(a), Parts 5.4, 5.4A, 5.4B, 5.5 and 5.6, Divisions 2 and 2A of Part 5.7B and Schedule 2 to the Corporations Act, along with any other provisions of the Corporations Act and ASIC Act which relate to the operation of these sections. [Schedule 1, item 4, sections 1237B and 1237C; Schedule 2, item 80, notes to subsection 233(1), items 145 to 147 and 149 to 152, notes to Parts 5.4, 5.4A, and 5.4B, 5.5, 5.6, 5.7B and subsection 530C(1)]

7.78 The reference to the 'majority of directors' in section 494 is not expressly covered by the second translation rule which states that references to the director are to be read as the corporate director. Nevertheless, it is also to be read as a reference to the corporate director. [Schedule 1, item 4, section 1237K]

7.79 The consequence of applying the translation rules to the winding up provisions is that there are three winding up processes for sub-funds, namely:

•

winding up in insolvency (see existing sections 459A, 459B, 459P and 462);

•

winding up on other grounds (see existing section 461), including if:

-

a special resolution has been passed by the members of the sub-fund for the sub-fund to be wound up by the Court;

-

the CCIV suspends the part of its business that relates to the sub-fund for a whole year;

-

an act or omission is oppressive, unfairly prejudicial or unfairly discriminatory to members of the sub-fund; or

-

the Court is of the opinion that it is just and equitable that the sub-fund is wound up; and

•

voluntary winding up by the members (if the sub-fund is solvent) or by the creditors (if the sub-fund is insolvent) (see existing Part 5.5).

Statutory demands

7.80 A creditor may serve a statutory demand on a CCIV. The statutory demand must specify the name(s) of the sub-fund(s) of the CCIV to which the debt relates and the proportion of the debt that relates to each sub-fund (if more than one). This requirement is included to ensure that the solvency of the other sub-funds is not put into doubt by the service of the statutory demand. [Schedule 1, item 4, subsections 1237E(1) and (2)]

7.81 A statutory demand which does not name any sub-fund(s) or does not specify the proportion of the debt allocated to each sub-fund (if more than one) is invalid. However, if the statutory demand names the incorrect sub-fund(s) or the incorrect proportions, the statutory demand is not invalid and the Court may correct the defect (see paragraph 7.107 below).

7.82 Generally, a creditor would be able to identify the name of the sub-fund(s) from its contract with the CCIV because the CCIV must set out a sub-fund's name and ARFN on all public documents and negotiable instruments relating to the sub-fund's business (see paragraph 2.107 of this explanatory memorandum).

7.83 Nevertheless, the creditor may require the corporate director to confirm the name of the sub-fund. [Schedule 1, item 4, paragraph 1233P(1)(a)]

7.84 The creditor may also require the corporate director to provide the part of the allocation records which relate to the debt. This power is included as the allocation records are not publicly available and contracts do not need to state the proportion of the debt that is to be allocated to each sub-fund. [Schedule 1, item 4, paragraph 1233P(1)(b)]

7.85 A request for details about the identity of the sub-fund(s) or the proportion of the debt allocated to the sub-funds must:

•

take the form of a written notice;

•

include sufficient information to enable the corporate director to identify the debt, claim or property; and

•

specify how and by when the information needs to be provided.

[Schedule 1, item 4, subsections 1233P(1) and (2)]

7.86 The creditor must give the corporate director at least fourteen days to respond. [Schedule 1, item 4, subsection 1233P(1)]

7.87 If the corporate director fails to comply with a request for information within the specified time period, the corporate director commits a strict liability offence publishable by a fine of up to 20 penalty units. The imposition of a strict liability offence and the penalty is consistent with the Guide to Framing Commonwealth Offences. A strict liability offence is required to ensure the integrity of the regime. If the corporate director fails to provide the requested information, a creditor may specify the incorrect sub-fund or proportion in the statutory demand and thereby unnecessarily cast doubt on the solvency of other sub-funds. [Schedule 1, item 4, subsection 1233P(3); Schedule 2, item 199, penalty for subsection 1233P(3) inserted into Schedule 3 to the Corporations Act]

7.88 A failure to comply with a statutory demand affects only the sub-fund(s) specified in the statutory demand. The CCIV may challenge the identity of the sub-fund(s) before the Court (see paragraphs 7.91 to 7.95 of this explanatory memorandum) and if that challenge is successful, only the correct sub-fund(s) specified in the statutory demand are affected. [Schedule 1, item 4, subsection 1237E(3)]

Example 7.10 Consequence of failing to comply with a statutory demand

A CCIV has two sub-funds. A statutory demand is served on the CCIV. The statutory demand refers only to the first sub-fund and the CCIV does not seek to have the statutory demand set aside or dispute the identity of the sub-fund listed in the statutory demand.

The CCIV fails to comply with the statutory demand.

Only the first sub-fund is presumed to be insolvent and may potentially be wound up. The failure to comply with statutory demand does not create any presumption of insolvency for the second sub-fund.

Setting aside a statutory demand

7.89 A CCIV may apply to the Court for an order setting aside a statutory demand if there is:

•

a dispute about the identity of the sub-fund(s) or the proportion of the debt allocated to each sub-fund;

•

a genuine dispute about the amount or existence of the debt (under existing sections 459G and 459H); or

•

a dispute about both the identity of the sub-fund(s) (or the proportion of the debt allocated to each sub-fund) and the amount/existence of the debt.

[Schedule 1, item 4, subsections 1237F to 1237H]

7.90 A different process must be used to apply to the Court for an order setting aside a statutory demand in each of the scenarios outlined at paragraph 7.89 above. These processes are explained below.

Disputes about the identity of the sub-fund or the proportion of the debt allocated to each sub-fund

7.91 The CCIV can challenge the name of the sub-fund(s) in a statutory demand by:

•

applying to the Court for an order setting aside a statutory demand under existing section 459G;

•

filing a notice setting out the name of the sub-fund(s) that the corporate director believes the debt relates to and the proportion of the debt allocated to each of those sub-funds; and

•

serving a copy of the notice on the person who served the statutory demand on the CCIV.

[Schedule 1, item 4, subsections 1237H(1) and 1237H(6)]

7.92 The application to the Court, along with the lodgment and serving of the notice, must occur within the statutory period after the statutory demand is served on the CCIV (see existing section 459G). [Schedule 1, item 4, subsection 1237H(1)]

7.93 The Court must determine the sub-fund or sub-funds of which the debt is a liability and the proportion of the debt allocated to each sub-fund. If the statutory demand fails to identify the correct sub-fund(s) or the correct proportion, the Court may make an order varying the statutory demand and declaring the demand to have had effect as from when the demand was served on the CCIV. The order may be made subject to conditions. [Schedule 1, item 4, subsections 1237H(2) and (3)]

7.94 The Court retains its discretionary power to set aside the statutory demand if it is of the view that the failure to identify the correct sub-fund(s) or the correct proportion will cause substantial injustice under existing section 459J. Alternatively, the Court may impose conditions on the order varying the statutory demand. [Schedule 1, item 4, subsections 1237H(3) and (4)]

7.95 If the Court concludes that the statutory demand correctly identifies the sub-fund, the Court must dismiss the application under existing section 459L. [Schedule 1, item 4, subsection 1237H(5)]

Disputes about the existence or amount of a debt

7.96 The Court may set aside the statutory demand if there is a genuine dispute about the existence of the debt or there is a genuine dispute about the amount of the debt and the 'substantiated amount' (essentially the amount not in dispute) is less than $2,000. The substantiated amount is the difference between the 'admitted amount' (which is essentially the amount of the debt that is not, in the Court's view, in dispute) and the amount of any offsetting claims (see existing section 459H).

7.97 The 'substantiated amount' and the 'admitted amount' are calculated separately in relation to each sub-fund specified in the statutory demand. In other words, the amount of the debt is determined by having regard to only the proportion of the debt and any offsetting claims that relate to the sub-fund. These amounts may be calculated by using the records of allocations that corporate directors are required to retain (see paragraph 6.64 of this explanatory memorandum). [Schedule 1, item 4, section 1237G]

7.98 The Court must dismiss the application if the Court is not of the view that there is a genuine dispute about the existence of the debt or that the substantiated amount is less than $2,000 (see existing section 459L).

Disputes about both the identity of the sub-funds and the existence/amount of the debt

7.99 If the CCIV disputes both the identity of the sub-fund(s) (or the proportion of the debt allocated to each sub-fund) and the existence or amount of the debt, it should follow the process for disputing the existence/amount of the debt set out at paragraphs 7.96 to 7.98. The Court may then deal with the identity of the sub-fund(s) as part of any order that it makes at the end of the proceedings relating to the existence/amount of the debt. [Schedule 1, item 4, paragraph 1237H(1)(d)]

Applications to wind up a sub-fund in insolvency

7.100 The CCIV, the corporate director, ASIC, or a creditor, contributory or liquidator of a sub-fund may apply for a sub-fund to be wound up in insolvency under Division 4 of Part 5.4 of the existing law.

7.101 Under the existing law, the corporate director, ASIC and contributories and certain creditors of the sub-fund may only apply for winding up in insolvency with the leave of the Court. The Court may only grant leave if there is a prima facie case that the company is insolvent (see existing section 459P).

7.102 A sub-fund is presumed to be insolvent in the same situations as when a company is presumed to be insolvent under existing section 459C. This includes if a CCIV failed to comply with a statutory demand and the failure affects the sub-fund. [Schedule 1, item 4, section 1237D]

7.103 As the translation rules apply to Part 5.4, an application to wind up a sub-fund in insolvency must specify the sub-fund. Generally, the creditor can identify the name of the sub-fund from documentation associated with the debt or claim against the CCIV (see paragraphs 2.107 to 2.112 of this explanatory memorandum for a discussion of the requirement to set out the sub-fund's name on all public documents and negotiable instruments). The creditor may also seek information about the identity of the sub-fund from the corporate director (see paragraphs 7.82 to 7.88 of this explanatory memorandum). This parallels the requirement for creditors to specify the name of the sub-fund(s) in a statutory demand. [Schedule 1, item 4, subsection 1237B]

Disputing the identity of the sub-fund

7.104 The CCIV may only dispute the identity of the sub-fund(s) in the application if the application to wind up the sub-fund does not rely on a failure to comply with a statutory demand. If the application is based on a failure to comply with a statutory demand, the CCIV may only dispute the identity of the sub-fund(s) in the statutory demand (see paragraphs 7.91 to 7.95 for a discussion of the process for disputing the identity of the sub-funds named in a statutory demand). [Schedule 1, item 4, paragraph 1237J(1)(b)]

7.105 This is consistent with section 459S which prohibits a company opposing an application for winding up on a ground which could have formed the basis of an application to set aside a statutory demand.

7.106 To dispute the identity of the sub-fund(s), the CCIV must file a notice with the Court that specifies the name of the correct sub-fund(s) and the proportion of the debt that relates to each sub-fund. [Schedule 1, item 4, section 1237J and subsection 1237H(6)]

7.107 The Court may substitute the name of the sub-fund with the name of another sub-fund if it thinks it is appropriate to do so and the notice filed by the creditor complied with the requirements in the Corporations Act (in that it named a sub-fund and the proportion of the debt, albeit that the incorrect sub-fund was named). The application then has effect as if the substituted sub-fund had been the original sub-fund. This ensures that the creditor is not disadvantaged if they identify the incorrect sub-fund. It also ensures that other provisions in the Corporations Act which rely on a sub-fund being named in an application for winding up operate appropriately (see, for example, existing section 490). For example, if the Court substitutes the name of a sub-fund, section 490 prohibits the voluntary wind up of the substituted sub-fund (which would now be wound up insolvency) and not the original sub-fund. [Schedule 1, item 4, subsections 1237J(2) to (5)]

Example 7.11 Effect of the Court substituting the name of a sub-fund in an application for winding up in insolvency

Section 490 of the existing law (when read subject to the translation rules) prohibits the members of a sub-fund from voluntarily winding up the sub-fund if an application for winding up of the sub-fund in insolvency has been filed.

Casterley House CCIV has two sub-funds, Casterley House Growth SF and Casterley House Low Risk SF. An application to wind up Casterley House Growth SF in insolvency was lodged by a creditor.

Casterley House CCIV successfully challenges the identity of the sub-fund in the notice. The Court orders that the name of Casterley House Growth SF be substituted with the name of Casterley House Low Risk SF in the application for winding up in insolvency.

The members of Casterley House Growth SF vote to voluntarily wind up the sub-fund. This is not prohibited by section 490 of the existing law as the application for winding up has effect as if the substituted sub-fund (Casterley House Low Risk SF) had been the original sub-fund specified in the application.

Persons prohibited from acting as a liquidator or provisional liquidator

7.108 Certain persons are prohibited from acting as a liquidator or provisional liquidator under existing section 532. This includes any person who is not a registered liquidator.

7.109 In addition, the new law modifies the effect of section 532 so that the natural person directors of a corporate director are also disqualified from acting as a liquidator or provisional liquidator (except with the leave of the Court). If a person (other than the CCIV) holds the assets of the sub-fund, that person is also disqualified from these roles. [Schedule 1, item 4, section 1237L]

Duties and powers of the liquidator or provisional liquidator

7.110 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 business of the sub-fund that is being wound up. This limitation ensures that the liquidator or provisional liquidator controls the affairs of only the sub-fund that is being wound up. [Schedule 1, item 4, subsection 1237N(1)]

Relationship between the powers of a liquidator and the corporate director

7.111 Table 7.4 summarises the responsibilities of the liquidator (or provisional liquidator) and the corporate director after a sub-fund enters into winding up. Further detail is provided in the following paragraphs.

7.112 The corporate director remains in office after the appointment of the liquidator but 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. See paragraphs 3.135 to 3.143 for further information about the duties and powers of the corporate director when a sub-fund is being wound up. [Schedule 1, item 4, section 1224Q]

7.113 The liquidator may also seek reasonable assistance from:

•

the corporate director;

•

officers of the corporate director;

•

a former corporate director; and

•

the officers and former officers of a former corporate director.

[Schedule 1, item 4, section 1237Q)]

Powers relating to the allocation of assets and liabilities

7.114 A liquidator or provisional liquidator does not have power to determine the proportion of assets and liabilities that are to be allocated to the sub-fund that is being wound up (or any other sub-fund). This remains the responsibility of the corporate director. [Schedule 1, item 4, subsections 1233J(9) and 1233M(9)]

7.115 Nevertheless, the liquidator has the power to require the corporate director to make an allocation determination and the power to challenge an allocation determination before the Court. [Schedule 1, item 4, sections 1237N and 1233Q]

7.116 These powers are not granted to a provisional liquidator. This is because the main function of a provisional liquidator is to preserve the status of the assets pending the making of a winding up order. The provisional liquidator may apply to the Court for this additional power if the provisional liquidator feels that it is necessary to perform its functions (see Re Rothwells Ltd (1989) 7 ACLC 545).

i) Liquidator's power to direct the corporate director to make an allocation determination

7.117 The liquidator may provide the corporate director with a written notice requiring the corporate director to record a debt, claim or property in the allocation register (and make any required allocation determination) within a specified period. The written notice must contain sufficient information to enable the corporate director to identify the debt, claim or property. Further, the specified period must be at least one business day after the notice is given. [Schedule 1, item 4, section 1233F]

7.118 The liquidator may wish to exercise the power to require the corporate director to record a debt, claim or property in two main situations:

•

where a debt or claim is not known until after the sub-fund enters into winding up; or

•

where a debt, claim or property is known before the sub-fund enters into winding up but was not recorded.

7.119 If the corporate director fails to record the debt, claim or property in the allocation register, the corporate director commits an offence. This is a strict liability offence with a penalty of up to 20 penalty units. The imposition of a strict liability offence is consistent with the Guide to Framing Commonwealth Offences because it is necessary to ensure the integrity of the winding up regime. The failure to make and record allocation determinations could prevent the liquidator from performing their functions and disadvantage creditors. [Schedule 1, item 4, subsections 1233F(4) and (5); Schedule 2, item 199, penalty for subsection 1233F(4) inserted into Schedule 3 to the Corporations Act]

ii) Liquidator's power to challenge an allocation determination before the Court

7.120 A liquidator may apply to the Court to challenge an allocation determination. See paragraphs 6.61 to 6.63 for an explanation of the orders a Court can make in relation to assets and liabilities of sub-funds.

Liquidator and provisional liquidator's interaction with any person who holds assets of the sub-fund

7.121 A CCIV may engage a person to hold the assets of the sub-fund on its behalf (such as a custodian engaged by the CCIV). If a person other than the CCIV holds the assets of the sub-fund, the liquidator or provisional liquidator must notify this person (or persons) of their appointment as soon as practicable and in any case within three business days after being appointed. This ensures that the person (or persons) receives timely notification. For other sections which require notification 'as soon as practicable' and also specify a maximum period, see sections 311, 450A and 533 of the existing law. [Schedule 1, item 4, subsection 1237M(1)]

7.122 If the liquidator or provisional liquidator of a sub-fund resigns or is removed from office, the sub-fund must also notify the person (or persons) holding the assets of the sub-fund in writing as soon as practicable and in any event within three business days after the resignation or removal. [Schedule 1, item 4, subsection 1237M(2)]

7.123 These notification requirements only apply in relation to a person that holds assets of the sub-fund that the liquidator has been appointed to. The liquidator does not need to notify any other person who holds the assets of other sub-funds of the CCIV.

7.124 The liquidator or provisional liquidator has the power to instruct any person about the assets of the sub-fund that is being wound up. This ensures that a liquidator or provisional liquidator can bring in all assets of the sub-fund that is being wound up. [Schedule 1, item 4, subsections 1237N(3) and (4)]

Example 7.12 Powers of the liquidator

Asha is appointed as liquidator of Ironbank CCIV in respect of Maximum Return SF. The CCIV has two other sub-funds which are not being wound up.

Ironbank CCIV has engaged a custodian, Hodor Pty Ltd, to hold the assets of Maximum Return SF on trust for Ironbank CCIV. There are other custodians appointed to the two other sub-funds which are not being wound up.

Asha must notify Hodor Pty Ltd of her appointment. She does not need to notify any other person that is holding the assets of the other sub-funds of the CCIV.

Asha may carry on only the part of the business that relates to Maximum Return SF and issue instructions to Hodor Pty, as a person holding the assets allocated to Maximum Return SF.

Asha cannot determine the proportion of assets and liabilities that are allocated to Maximum Return SF. Nor can she control the part of the business that relates to the other sub-funds or take in the assets of those sub-funds.

Rights of secured creditors

7.125 None of the constraints on the powers of the corporate director affect the rights of a secured creditor to realise or otherwise deal with a security interest. [Schedule 1, item 4, subsection 1224Q(8)]

Effect of winding up on the auditor

7.126 In the CCIV context, the auditor requirements apply to the CCIV as a whole and each of the sub-funds (see paragraphs 5.33 to 5.42 of this explanatory memorandum).

7.127 An auditor does not need to undertake any audit activities for the sub-fund that is being wound up. [Schedule 1, item 4, section 1232S]

7.128 If the CCIV has other sub-funds that are not being wound up, the auditor must continue to undertake their audit activities for:

•

each of the sub-funds that are not being wound up; and

•

the CCIV as a whole as if the only business carried on by the CCIV was the business of the sub-funds that are not being wound up.

7.129 If all of the sub-funds of a CCIV are being wound up, the auditor has no functions to perform and it ceases to hold office. [Schedule 1, item 4, section 1232S]

Access to books

7.130 The corporate director must deliver to the liquidator or provisional liquidator all books relating solely to the sub-fund that is being wound up under existing section 530A. The corporate director does not need to deliver:

•

books that relate to other sub-funds of the CCIV that are not in wind up; or

•

books that relate to the CCIV as a whole (even if those books also relate to the sub-fund that is in wind up).

[Schedule 1, item 4, section 1237R]

7.131 The liquidator or provisional liquidator may inspect the allocation register or any other book retained by the corporate director, the CCIV or any person other than the CCIV that holds the assets of the sub-fund if inspection is necessary for the liquidator to perform its functions or exercise its powers. Under section 1300 of the existing law, the corporate director may also make copies or take extracts. [Schedule 1, item 4, subsections 1237N(2), (4) and (5)]

7.132 Correspondingly, the corporate director may inspect and copy the books relating to the winding up of a sub-fund that are held by the liquidator or provisional liquidator. Inspection is only permitted to the extent that inspection is necessary for the corporate director to perform its functions or exercise its powers. [Schedule 1, item 4, section 1237S]

7.133 The liquidator or provisional liquidator, or ASIC, may also seek a warrant for books or property under existing section 530C.

7.134 The new law clarifies the types of books covered by search, seizure and inspection warrants in section 530C. The books that may be subject to a seizure warrant are the books of the CCIV that relate solely to the business of the sub-fund that is being wound up. These are the category of books that the corporate director must transfer to the liquidator (see paragraph 7.130). [Schedule 1, item 4, subsections 1237Z (1) and (2); Schedule 2, item 152, note to subsection 530C(1)]

7.135 The books that may be covered by a search and inspection warrant are any books of the CCIV, including books that do not relate solely to the business of the sub-fund. This ensures that books that may relate in part to other sub-funds that are not in wind up can be inspected and copied but remain in the hands of the corporate director. [Schedule 1, item 4, subsections 1237Z (1) and (3); Schedule 2, item 151, note to subsection 530C(1)]

7.136 The new law includes additional safeguards when warrants are granted in relation to the books or property of the CCIV. Consistent with the Guide to Framing Commonwealth Offences, these safeguards include that:

•

the person exercising the warrant must announce that they are authorised to enter the premises and provide the occupier of the premises (or their representative) with current photographic identity;

•

the person exercising the warrant must give the occupier (or their representative) a copy of the warrant and information about their rights and responsibilities as soon as practicable;

•

the person who takes custody of the seized property or books may only use them for the purposes of performing their functions;

•

the person who takes custody of the seized property or books must take reasonable steps to return them to the CCIV when they are no longer required to perform the person's functions; and

•

the person exercising the warrant must provide a receipt for the property or book seized under the warrant (one receipt is sufficient if two or more books or items of property are seized).

[Schedule 1, item 4, subsections 1237Z (4) to (11)]

Retention and destruction of books

Books held by an external administrator

7.137 A liquidator or provisional liquidator must, under the Insolvency Practice Rules ^[8] , retain the books of the CCIV that are transferred to them for at least five years after the sub-fund is wound up (the retention period).

7.138 The CCIV may, by written notice, request that the liquidator or provisional liquidator transfer the books back to the CCIV at the end of the retention period. The liquidator or provisional liquidator is only permitted to destroy the books at the end of the retention period if the CCIV has not made such a request. [Schedule 1, item 4, subsections 1237P(1) to (3); Schedule 2, items 197 and 198, notes to subsections 70-35(3) and 70-35(4) of Schedule 2 to the Corporations Act]

7.139 A liquidator or provisional liquidator who intentionally or recklessly fails to comply with the requirement to transfer the books back to the CCIV commits an offence punishable by a fine of up to 50 penalty units. This is the same as the existing offence for destroying books during the retention period in subsection 70-35(5) of the Insolvency Practice Rules. [Schedule 1, item 4, subsection 1237P(4); Schedule 2, item 199, penalty for subsection 1237P(4) inserted into Schedule 3 to the Corporations Act]

Books held by ASIC

7.140 The Insolvency Practice Rules require a liquidator or provisional liquidator to transfer books in its possession to ASIC if the person ceases to be the liquidator or provisional liquidator and ASIC requests the transfer of the books (see existing section 70-31 of Schedule 2 to the Corporations Act).

7.141 The Insolvency Practice Rules, when read subject to the separating assumptions, require ASIC to retain any books that it obtains under section 70-31 for at least two years after the winding up of the sub-fund is completed (ASIC's retention period) (see existing subsection 70-31(8) of Schedule 2 to the Corporations Act).

7.142 If ASIC wishes to destroy the books at the end of ASIC's retention period, it must notify the CCIV (if the CCIV has not been deregistered). The CCIV may require ASIC to transfer the books to the CCIV, instead of destroying them. This ensures that books are not destroyed if the CCIV remains in existence and the corporate director considers the books to be relevant to the business of sub-funds that have not been wound up. [Schedule 1, item 4, section 1237T]

Operating a CCIV while disqualified

7.143 A person who operates the business and conducts the affairs of the CCIV while a sub-fund is being wound up and within four years of the relation back date (generally the date that the sub-fund enters into winding up) may be personally liable for part of the sub-fund's debts and liabilities. The person will be liable if the liquidator of the sub-fund applies to the Court and the Court makes an order to that effect. [Schedule 1, item 4, section 1237V]

7.144 This provision ensures that persons unlawfully operating the CCIV bear a liability commensurate with that of the corporate director. It mirrors existing Division 7 of Part 5.7B which does not apply as a CCIV does not have a managing director.

Proof and ranking of claims

7.145 If a creditor submits a debt or claim to the liquidator, the liquidator must consider whether the debt or claim is a liability of the sub-fund being wound up. If the liquidator determines that the debt or part of the debt is not a liability of that sub-fund, the debt or part of the debt is not admissible to proof. [Schedule 1, item 4, subsection 1237W (1)]

7.146 The debt or part of the debt that is not a liability of the sub-fund being wound up is not extinguished. This recognises that the creditor may have a legitimate claim against the CCIV but in respect of another part of the CCIV's business. [Schedule 1, item 4, subsection 1237W (2)]

7.147 If the liquidator determines that the debt or claim is partly or wholly a liability of the sub-fund being wound up, the liquidator must determine the value of the debt or claim or refer the question to the Court (see existing section 554A). If the debt relates to more than one sub-fund, the liquidator must determine the value of the entire debt, not just the portion of the debt that relates to the sub-fund that is being wound up. Nevertheless, the value of the debt that is admissible to proof under Division 6 of Part 5.6 is only the portion of the debt that relates to the sub-fund that is being wound up. [Schedule 1, item 4, section 1237X]

7.148 Diagram 7.1 summarises the process that a liquidator must follow when a debt or claim is submitted to them.

Voidable transactions

7.149 The liquidator of the sub-fund may apply to the Court for orders avoiding certain voidable transactions entered into by the CCIV prior to the sub-fund's winding up under existing Divisions 1 and 2 of Part 5.7B. The translation rules apply to these provisions so that they operate only to the extent that the transaction affects the assets and liabilities allocated to the sub-fund. For a discussion of the translation rules, see paragraphs 7.17 to 7.46. [Schedule 1, item 4, section 1237B; Schedule 2, item 153, note to Part 5.7B]

7.150 Voidable transactions consist of insolvent transactions, unfair loans and unreasonable director-related transactions (see Divisions 1 and 2 of Part 5.7B of the existing law). Two bespoke modifications are made to these concepts in the context of CCIVs.

7.151 First, for the purposes of determining whether a transaction is an 'insolvent transaction', the company is presumed to be insolvent if the financial records of either the CCIV or the sub-fund are missing. [Schedule 1, item 4, section 1237ZA]

7.152 Second, 'unreasonable director-related transactions' include certain payments, dispositions and issues made to either the corporate director or a natural person director of the corporate director (or their associates or persons acting on their behalf). [Schedule 1, item 4, section 1237ZB]

Vesting of PPSA security interests that are not continuously perfected

7.153 If a PPSA security interest in the collateral of assets of a sub-fund is not registered within time, the PPSA security interest vests in the CCIV. ^[9] This achieves the same effect as existing section 588FL but recognises that:

•

the PPSA security interest is granted by the CCIV which is the legal person; and

•

the winding-up provisions operate at the sub-fund level and the assets to which the security interest attach are allocated to sub-funds.

[Schedule 1, item 4, section 1237ZC]

7.154 Consequential amendments are also made to section 267 of the PPSA to vest security interests in the CCIV if the security interest is not perfected by the time when the winding up of the sub-fund commences. [Schedule 3, item 15, section 267 of the PPSA]

7.155 Other provisions in Division 2A also operate at the sub-fund level and must be read in accordance with the translation rules. For a discussion of the translation rules, see paragraphs 7.17 to 7.46. [Schedule 1, item 4, section 1237B; Schedule 2, item 152, note to Part 5.7B]

Winding up provisions which do not apply

7.156 Part 5.4C of the Corporations Act (about winding up by ASIC) does not apply to a CCIV. One of the main reasons that ASIC uses its Part 5.4C powers is to protect employees' entitlements. As a CCIV has no employees, ASIC does not require this power in the CCIV context. [Schedule 2, item 149, note to Part 5.4C]

7.157 Subdivision B of Division 3 of Part 5.5 (about the simplified liquidation process for creditors' voluntary winding up) does not apply to a CCIV. This simplified liquidation process was implemented as part of the Government's economic response to COVID-19 and is intended to reduce the costs of external administration for small businesses. Even if a CCIV met any relevant eligibility requirements, the intention is for all CCIVs to be subject to the same insolvency regime. This promotes greater certainty and consistency in respect to the external administration of a sub-fund of a CCIV. [Schedule 1, item 4, section 1237B(3)(b)]

7.158 A pooling determination (Division 8 of Part 5.6) may not be made in respect of a CCIV, and a CCIV or its sub-funds may not be part of a pooled group. A pooling determination results in each company in a group being taken to be jointly and severally liable for the debts payable by other members of the group. These determinations would interfere with the segregation of assets and liabilities between sub-funds if they were to apply in the context of CCIVs and sub-funds. [Schedule 1, item 4, paragraph 1237B(3)(c)]

7.159 Part 5.7 (about winding up bodies other than companies) does not apply to CCIVs. A CCIV cannot be a 'Part 5.7 body' as it cannot be registered with ASIC unless it is a company (see paragraph 2.29 of this explanatory memorandum).

7.160 Part 5.4C, Division 8 of Part 5.6 and Part 5.7 are not expressly disapplied. Rather, this result is achieved by disapplying all winding up provisions and then activating select provisions. Parts 5.4C, Division 8 of Part 5.6 and Part 5.7 are not activated. [Schedule 1, item 4, sections 1237A and 1237B]

7.161 Finally, none of the provisions relating to employees or secretaries of a company apply in the CCIV context because a CCIV does not have employees or a company secretary.

Property recovery provisions

Special translation rules

7.162 Special translation rules apply to the property recovery provisions in Divisions 3, 4, 5 and 6 of Part 5.7B. These translation rules ensure that the directors of the corporate director of the CCIV, instead of the corporate director, owe a duty to prevent insolvent trading and other duties in those Divisions. [Schedule 1, item 4, section 1238]

7.163 These special translation rules treat references to the 'director' and 'officer' differently from the general translation rules that apply to the other Parts of Chapter 5. References to 'director' etc are replaced with a reference to the natural person directors of the corporate director, rather than the corporate director. Similarly, references to an 'officer' are replaced with a reference to the natural person director of the corporate director, any shadow director of the corporate director or an external administrator of the sub-fund. [Schedule 1, item 4, subsection 1238A(4), table items 2 and 3]

7.164 Apart from these changes, the translation rules operate in the same way as the rules explained above at paragraphs 7.17 to 7.47 of this explanatory memorandum. [Schedule 1, item 4, section 1238A]

When a debt is taken to have been incurred

7.165 The existing law sets out when a debt is taken to have been incurred for the purposes of the insolvent trading provisions (see existing subsection 588G(1A)). These rules also apply in the CCIV context. [Schedule 1, item 4, subsection 1238C(1)]

7.166 New rules are inserted for redeemable shares which are a new type of ordinary share that is liable to be redeemed (see Chapter 4: of this explanatory memorandum). These rules are modelled on the rules for redeemable preference shares. They provide that a debt is taken to have been incurred when a redeemable share that is redeemable at the CCIV's option is redeemed. If the redeemable share is redeemable otherwise than at the CCIV's option, the debt is taken to have been incurred when the share is issued or another share is converted into the redeemable share. [Schedule 1, item 4, subsection 1238C(2)]

External administration offences and other miscellaneous provisions

7.167 The translation rules explained at paragraphs 7.17 of this explanatory memorandum apply to the external administration offences in Part 5.8 and related machinery provisions in Part 5.9. These Parts include offences for a past or present officer who does not disclose, to the external administrator, all of the property of the sub-fund or fraudulently makes a material omission in any statement relating to the affairs of the sub-fund (existing section 590). Part 5.8 also prohibits a person inducing a person to appoint them as the external administrator and fraud by an officer (existing sections 595 and 596). ^[10] [Schedule 1, item 4, sections 1238A and 1238D; Schedule 2, items 153 and 155, notes to Part 5.8 and 5.9]

7.168 Bespoke amendments are made to existing section 596 (relating to fraud by officers) and 596A (summonsing a person for mandatory examination) to apply them to the natural person directors of the corporate director, as well as any other natural persons that are officers. These amendments are required because, as per the second translation rule, 'director' is generally read to mean the corporate director. [Schedule 1, item 4, sections 1237U and 1238F; Schedule 2, items 155 and 157, notes to subsection 596(1) and section 596A]

Deregistration of a sub-fund

7.169 There are three processes for deregistering a sub-fund:

•

voluntary deregistration;

•

ASIC-initiated deregistration; and

•

deregistration following amalgamation or winding up.

[Schedule 1, item 4, sections 1239, 1239A and 1239C; Schedule 2, item 158, notes to Part 5A.1]

Voluntary deregistration

7.170 A CCIV, the corporate director of the CCIV or the liquidator of the sub-fund may apply for a sub-fund of the CCIV to be deregistered if:

•

the CCIV is not a party to any legal proceedings that relate to the sub-fund; and

•

the sub-fund has no remaining assets or liabilities.

[Schedule 1, item 4, subsections 1239(1) and (2)]

7.171 The circumstances in which a sub-fund can be voluntarily deregistered generally mirror the circumstances for companies in subsections 601AA(1) and (2). While there is no explicit requirement for the CCIV not to be carrying on any business that relates to the sub-fund, this is generally the case if the sub-fund has no remaining assets or liabilities.

7.172 Applications to voluntarily deregister a sub-fund must be in the prescribed form and, if the CCIV lodges the application, the CCIV must nominate a person who is to be given notice of the deregistration. [Schedule 1, item 4, subsections 1239(1) and (3)]

7.173 ASIC also has a power to ask for information about the current and former officers of the CCIV (including the corporate director or the liquidator) and the current and former officers of the corporate director. This parallels ASIC's information-gathering powers when deregistering a company in existing subsection 601AA(4). [Schedule 1, item 4, subsection 1239(4)]

7.174 The procedure for ASIC to deregister a sub-fund is the same as the procedure for deregistering a company in existing subsections 601AA(4) to (7). It involves ASIC giving two months' notice of the intended deregistration on its database and publishing a notice of the proposed deregistration. After the two months has passed, ASIC may deregister the sub-fund. It must also notify the applicant (or their nominee) when the deregistration has occurred. [Schedule 1, item 4, subsections 1239(5) to (7)]

7.175 Notices given or published in accordance with the new bespoke provisions for voluntarily deregistering a sub-fund are taken to have been given or published under the existing provisions for voluntarily deregistering a company. This ensures that sections in the Corporations Act that refer to the company notice provisions continue to operate appropriately (see, for example, subsections 589(3), 589(5) and 1351(4)). [Schedule 1, item 4, subsections 1239(8)]

7.176 If the sub-fund is an Australian passport fund, ASIC is prohibited from deregistering the sub-fund if the sub-fund has 'protected members'. For an explanation of which members are protected members and the passport arrangements, see Chapter 10: of this explanatory memorandum and in particular paragraph 10.10. [Schedule 1, item 4, subsections 1239(9) to (10)]

Interaction with Chapter 5

7.177 A CCIV that wishes to deregister a solvent sub-fund has two options. First, it could liquidate the sub-fund's assets, discharge the sub-fund's liabilities, redeem all shares referable to the sub-fund and then voluntarily deregister the sub-fund. Alternatively, it could voluntarily wind up the sub-fund (see paragraphs 7.76 to 7.161 of this explanatory memorandum). Diagram 7.2 summarises these two options.

7.178 The decision about whether or not to use the voluntary winding up process is a commercial decision for the CCIV. Generally, a voluntary winding up process would be used if the preconditions for voluntary deregistration are not satisfied, for example, because the sub-fund has remaining assets which cannot be liquidated.

ASIC-initiated deregistration

7.179 ASIC may deregister a sub-fund if:

•

the CCIV has not lodged any documents that relate to the sub-fund under the Corporations Act in the last 18 months and ASIC has no reason to believe that the part of the business of the CCIV that relates to the sub-fund is being carried on;

•

the CCIV has not paid the portion of the review fees that relates to the sub-fund for at least 12 months after the due date for payment;

•

the liquidator of the sub-fund is no longer acting;

•

the sub-fund's affairs have been fully wound up and the return that the liquidator should have lodged is at least six months late; or

•

the sub-fund's affairs have been fully wound up and the assets of the sub-fund are not enough to cover the costs of obtaining a Court order for the sub-fund's deregistration.

[Schedule 1, item 4, subsections 1239A(1) to (3)]

7.180 The grounds for ASIC deregistering a sub-fund differ from the grounds for deregistering a company in existing subsections 601AB(1) and (2) in two respects. First, the ground for deregistering a company if a response to a return of particulars has not been lodged is not required for a sub-fund as a sub-fund is not a legal entity and is not required to respond to returns of particulars. Second, there is no ground for deregistering a sub-fund if the ASIC Supervisory Cost Recovery Levy is unpaid because this levy is to be imposed on the corporate director, not the CCIV. ^[11]

7.181 ASIC must not deregister a sub-fund if the sub-fund has an asset that relates to multiple sub-funds and the asset has not yet been converted into money or multiple fungible assets that can be allocated between the sub-funds. For an explanation of the corporate director's obligation to convert assets that are automatically allocated to one sub-fund and are not fungible assets, see paragraphs 6.17 to 6.35 of this explanatory memorandum.

7.182 If the sub-fund is an Australian passport fund, ASIC is also prohibited from deregistering the sub-fund if the sub-fund has 'protected members' and deregistration would be contrary to the interests of these persons. For an explanation of which members are protected members and the passport arrangements, see paragraph 10.10 of this explanatory memorandum. [Schedule 1, item 4, subsections 1239A(4) and (5)]

7.183 The procedure for ASIC to deregister a sub-fund involves three steps:

•

issuing a notice providing the CCIV with an opportunity to show cause as to why the sub-fund should not be deregistered at a hearing;

•

issuing a notice of intended deregistration; and

•

deregistering the sub-fund and issuing a notice of deregistration.

7.184 The first step (the show cause process) involves ASIC giving the CCIV a written notice that requires the CCIV to show cause, at a hearing before a specified person, as to why the sub-fund should not be deregistered. The notice must specify the grounds on which ASIC proposes to deregister the sub-fund and a reasonable time and place at which the hearing is to be held. The hearing must be held at the time and place specified in the notice, unless the CCIV agrees to a different time or place. [Schedule 1, item 4, subsections 1239A(6) to (7)]

7.185 The person conducting the hearing must give the CCIV an opportunity to be heard at the hearing. After the hearing, the person must provide a report to ASIC with a recommendation about whether the sub-fund should be deregistered and ASIC must consider the report and recommendation. [Schedule 1, item 4, subsections 1239A(8) to (9)]

7.186 Notices provided by ASIC to the CCIV and the report prepared after a hearing are administrative in character and are therefore not legislative instruments. The new law expressly states that these documents are not legislative instruments. This provision is merely declaratory of their existing status and is designed to assist readers. It does not provide an exemption from the Legislation Act 2003. [Schedule 1, item 4, subsection 1239A(10)]

7.187 If ASIC decides to deregister the sub-fund after the hearing, it must give at least five business days' notice of the intended deregistration to the CCIV, the corporate director and any liquidator of the sub-fund and publish the notice in the prescribed manner (unless ASIC does not have the necessary information about the person's identity or address). ASIC may deregister the sub-fund after the notice period has ended. [Schedule 1, item 4, subsections 1239B(1) to (4)]

7.188 ASIC must not deregister the sub-fund if it has reason to believe that the CCIV has one or more single items of property that relate to more than one sub-fund and have not been converted into money, or other property that can be allocated between the sub-funds. The corporate director is required to convert the property as soon as practicable after the property is acquired (see paragraphs 6.33 to 6.35 of this explanatory memorandum). [Schedule 1, item 4, paragraph 1239B(3)(b)]

7.189 Within five business days after the sub-fund is deregistered, ASIC must notify the CCIV, the corporate director and any liquidator of the sub-fund of the deregistration and the date on which the deregistration occurred. [Schedule 1, item 4, subsections 1239B(5) and (6)]

7.190 The deregistration procedure roughly parallels the process for an ASIC-initiated deregistration of a company with two exceptions. First, a show cause process is included to ensure procedural fairness. Deregistration procedures and other similar processes introduced in recent years have included a show cause process and this is now considered best practice. See, for example, existing section 905J (cancellation of derivative trade repository), section 908BJ (suspension or cancellation of a benchmark administrator license) and section 1216C (deregistration of a passport fund).

7.191 The second difference is that ASIC may deregister the sub-fund five business days after issuing the notice of intended deregistration (rather than two months). This change is appropriate as the notice of intended deregistration may only be issued after the show cause procedure has been completed. If ASIC was required to complete the show cause procedure and wait an additional two months after issuing the final notice of intended deregistration, inactive sub-funds would remain registered for a significant period of time.

7.192 Notices given or published in accordance with the new bespoke provision for the ASIC-initiated deregistration of a sub-fund are taken to have been given or published under the corresponding company provision. Similarly, references to the period between ASIC notifying of the proposed deregistration of the company and the actual deregistration are taken to refer to the five-business-day period between ASIC notifying of the intended deregistration of the sub-fund and its actual deregistration. This ensures that other references in the Corporations Act to the company notice provisions continue to operate appropriately (see, for example, subsections 589(3) and 589(5)). [Schedule 1, item 4, subsection 1239B(7) and section 1238E]

Deregistration following amalgamation or winding up

7.193 ASIC is also required to deregister a sub-fund if the Court orders the deregistration of the sub-fund after the conclusion of a reconstruction under Part 5.1, the release of a liquidator or the lodgment of an end of administration return. [Schedule 1, item 4, section 1239C]

Effect of deregistration of a sub-fund

7.194 On deregistration, the property of the sub-fund vests in either the Commonwealth (for trust property) or ASIC (for other property). This vesting occurs in the same way that assets of deregistered companies vest in the Commonwealth or ASIC. [Schedule 1, item 4, subsections 1239D(1) and (2)]

7.195 Subsection 601AD(1) of the Corporations Act (which provides that a company ceases to exist on deregistration) does not apply in the context of a sub-fund being deregistered. This is because the CCIV continues to exist after the sub-fund has been deregistered, noting that a CCIV is automatically deregistered once its last sub-fund has been deregistered (see paragraphs 7.215 to 7.217 of this explanatory memorandum). As a sub-fund does not have legal personality, it is unnecessary to provide that a sub-fund ceases to exist on deregistration. [Schedule 1, item 4, note to subsection 1239D(1)]

7.196 The CCIV must retain, for three years after the sub-fund has been deregistered, the books of the sub-fund apart from the books that a liquidator is required to retain. If the CCIV is also deregistered, the books are to be held by the last corporate director of the CCIV. [Schedule 1, item 4, subsections 1239D(3)]

7.197 Failing to keep books is a strict liability offence with a maximum penalty of 20 penalty units. As the offence is not one of absolute liability, the defence of honest and reasonable mistake of fact is available. [Schedule 1, item 4, subsection 1239D(4); Schedule 2, item 199, penalty for subsection 1239D(3) inserted into Schedule 3 to the Corporations Act]

7.198 The offence and penalty for failing to retain books is consistent with the Guide to Framing Commonwealth Offences. The imposition of a strict liability offence is appropriate in this circumstance as it is necessary to strongly deter misconduct that could result in the sub-fund's records being lost. The strict liability offence also reduces non-compliance and bolsters the integrity of the regulatory regime by allowing ASIC to deal with offences expeditiously. The penalty mirrors the penalty for failing to retain books after the deregistration of the company in existing subsection 601AD(5).

7.199 If the Commonwealth or ASIC becomes aware of any outstanding obligations in relation to the deregistered sub-fund and the CCIV or liquidator would have been bound to act if the sub-fund had not been deregistered, the Commonwealth or ASIC may fulfil the obligation. This gives the Commonwealth and ASIC the same power to fulfil any outstanding obligations relating to a deregistered sub-fund in the same way as for a deregistered company. Alternatively, if ASIC becomes aware of outstanding obligations after the sub-fund's deregistration, ASIC may seek to have the sub-fund reinstated (see paragraph 7.203). [Schedule 1, item 4, section 1239E]

7.200 A creditor of the sub-fund may recover any amount which is payable to the CCIV under an insurance contract which covered the creditor's liability immediately before the sub-fund was deregistered. This achieves the same effect as existing section 601AG. [Schedule 1, item 4, section 1239F]

7.201 If the sub-fund is also an Australian passport fund, it ceases to be a passport fund. The Register of Passport Funds must be updated to reflect this. See Chapter 10: of this explanatory memorandum for a discussion of how the ARFP arrangements apply in the CCIV context. [Schedule 1, item 4, subsections 1239D(5)]

7.202 If a CCIV has its annual fee payable during the period when it is being deregistered then the fee is not required to be paid. [Schedule 1, item 4, section 1242G; Schedule 2, item 196, note to section 1351]

Reinstatement of a sub-fund

7.203 Under existing section 601AH, a sub-fund may be reinstated if:

•

ASIC is satisfied that the sub-fund should not have been deregistered; or

•

the Court orders its reinstatement.

[Schedule 1, item 4, subsection 1239G(1)]

7.204 There is no requirement for the ASIC Supervisory Cost Recovery Levy to be paid in full before ASIC reinstates a sub-fund, unlike existing subsection 601AH(1A). This requirement is not needed because the ASIC Supervisory Cost Recovery Levy is imposed on the corporate director, not the CCIV. [Schedule 1, item 4, subsection 1239G(5)]

7.205 If a sub-fund is reinstated, the sub-fund is taken to have been registered throughout the period it was deregistered. This departs from the language in subsection 601AH(5) because a sub-fund does not 'exist' as it is not a legal person. [Schedule 1, item 4, subsections 1239G(2) and (5)]

7.206 Further, on reinstatement, any property which vested in the Commonwealth or ASIC on deregistration revests in the CCIV (subject to any security interest that may have attached to the property before it vested in the Commonwealth or ASIC). The property is then allocated to the sub-fund in accordance with the allocation rules. [Schedule 1, item 4, subsection 1239G(4)]

7.207 The existing law also gives the Court the power to validate anything done during the period when the sub-fund was deregistered or make any other order that it considers appropriate. This could include an order in relation to the assets or liabilities of the sub-fund or an order in relation to the assets and liabilities of another sub-fund. [Schedule 1, item 4, subsection 1239G(3)]

Reinstatement after the CCIV has been deregistered

7.208 If the CCIV has been deregistered and a sub-fund of the CCIV is to be reinstated, the CCIV must also be reinstated. The CCIV is then taken to have continued in existence as if it had not been deregistered (but only to the extent of the reinstated sub-fund). [Schedule 1, item 4, subsections 1239H(1) and (2)]

7.209 The reinstatement of the CCIV does not reinstate all of the sub-funds. Each sub-fund must be reinstated separately.

Example 7.13 Reinstatement of the CCIV

Frey CCIV and its two sub-funds (Frey Growth Sub-fund and Frey Wealth Sub-fund) have been deregistered.

The Court orders the reinstatement of Frey Growth Sub-fund and Frey CCIV. This does not result in the reinstatement of Frey Wealth Sub-fund.

7.210 The former corporate director is automatically reinstated. This reappointment operates from the time when the CCIV is reinstated. [Schedule 1, item 4, subsections 1239H(3)]

7.211 If the former corporate director ceases to exist or is no longer eligible to hold that position (for example, because their license has been suspended or they are a Chapter 5 body corporate), ASIC may apply for the appointment of a temporary corporate director. Refer to Chapter 3 of this explanatory memorandum for a discussion of the process for appointing a temporary corporate director and an explanation of the eligibility requirements for these positions.

7.212 If the sub-fund was an Australian passport fund prior to its deregistration, the reinstatement of the sub-fund does not result in it becoming a passport fund again. If the sub-fund wished to become a passport fund again, the corporate director must make a new application. [Schedule 1, item 4, subsection 1239G(6)]

Notice requirements

7.213 ASIC must give notice of the reinstatement of a sub-fund and the CCIV in the Gazette. The notice requirements parallel those that apply when a company is reinstated as per subsection 601AH(4) of the existing law. [Schedule 1, item 4, subsections 1239G(5) and 1239J]

7.214 If a CCIV is reinstated, notice must be provided to the company that is reinstated to the corporate director. [Schedule 1, item 4, subsection 1242J]

Deregistration of a CCIV

7.215 ASIC must deregister a CCIV if it does not have any registered sub-funds. This reflects the fact that a CCIV, by definition, must have at least one sub-fund. [Schedule 1, item 4, subsection 1239K(1)]

7.216 ASIC must give the corporate director of the CCIV written notice that the CCIV has been deregistered and the date on which it has been deregistered within five business days after the date the CCIV is deregistered. [Schedule 1, item 4, subsections 1239K(2) and (3)]

7.217 A CCIV cannot be deregistered under section 601AA, 601AB or 601AC of the Corporations Act. It is not necessary to also include a voluntary deregistration process because a CCIV cannot be deregistered while it still has registered sub-funds (and the CCIV is automatically deregistered when it ceases to have any registered sub-funds). Similarly, there is no need for a process for deregistering a CCIV following amalgamation or winding up because these procedures operate at the sub-fund level. [Schedule 1, item 4, subsection 1239K(4)]

Consequences of deregistration

Retention of books of the CCIV

7.218 If the CCIV is deregistered, the corporate director of the CCIV at the time of deregistration must retain the books of the CCIV (apart from the books that the liquidator is required to retain) for three years after the CCIV's deregistration. For an explanation of the books that the liquidator is required to retain, see paragraphs 7.137 to 7.142 of this explanatory memorandum. [Schedule 1, item 4, subsections 1239L(1) and (4)]

7.219 If the corporate director is deregistered during the three year retention period, the natural person directors of the corporate director at the time of the corporate director's deregistration must retain the books for the remainder of the period. [Schedule 1, item 4, section 1239L(3)]

7.220 A failure to retain the books is a strict liability offence with a penalty of up to 20 penalty units. The imposition of a strict liability offence and the penalty complies with the Guide to Framing Commonwealth Offences. Strict liability is appropriate as it is necessary to deter misconduct which could result in the books of the CCIV being lost and allows the regulator to expeditiously deal with offences to maintain public confidence. It is also consistent with the existing offence for failing to retain the books of a deregistered company and the new offence for failing to retain the books of a deregistered sub-fund (see paragraphs 7.196 to 7.198 of this explanatory memorandum). [Schedule 1, item 4, subsection 1239L(2);Schedule 2, item 199, penalty to subsection 1239L(1) inserted into Schedule 3 to the Corporations Act]

Example 7.14 Retention of books following deregistration

ASIC deregisters Baratheon CCIV on 23 March 2023. The corporate director of Baratheon CCIV at the time of deregistration is CD Services Ltd.

At the time that Baratheon CCIV is deregistered, CD Services Ltd has three directors, Arryn, Brienne and Catelyn. One month later, on 23 April 2023, Arryn resigns as a director of CD Services Ltd and is replaced by Dany.

CD Services Ltd is then deregistered on 26 June 2023.

The books of Baratheon CCIV must be retained by CD Services Ltd from 23 March 2023 to 26 June 2023.

After the deregistration of CD Services Ltd on 26 June 2023, Baratheon CCIV's books must be retained by the natural person directors of CD Services Ltd at the time of the corporate director's deregistration (Brienne, Catelyn and Dany).

Brienne, Catelyn and Dany must continue to retain the books until the three year period expires, that is, until 23 March 2026.

Other consequences of deregistration

7.221 Subsections 601AD(1) and (3), and sections 601AF and 601AG continue to apply to CCIVs in the same way that they apply to other types of companies. This means that the CCIV ceases to exist on deregistration and claims may be made against insurers in certain circumstances. [Schedule 1, item 4, subsection 1239L(4); Schedule 2, item 157, note 2 to Part 5A.1]

7.222 Provisions relating to the vesting of property (such as subsection 601AD(2) and section 601AE) are not expressly disapplied but they have no operation in the context of the deregistration of a CCIV. This is because a CCIV may only be deregistered if it has no assets (whereas other types of companies may be deregistered if they have up to $1,000 of assets).

Reinstatement of a CCIV

7.223 A CCIV may only be reinstated if one of its sub-funds is reinstated. For an explanation of the process for reinstating a sub-fund, see paragraphs 7.169 to 7.214 of this explanatory memorandum. [Schedule 1, item 4, section 1239M]

Transfer of registration

7.224 A CCIV cannot transfer its registration under a State or Territory law. State and Territory laws do not currently provide for a company to be registered as a CCIV. [Schedule 1, item 4, section 1239N; Schedule 2, item 159, note to Part 5A.2]