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 3: CCIVs - Corporate governance

Outline of chapter

3.1 This Chapter sets out the requirements for corporate governance of a CCIV.

3.2 It sets out the rules regarding:

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governance of CCIVs (such as how a CCIV exercises company powers and the rules regarding a CCIV's constitution);

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the officers and employees of the CCIV (including the core obligations for the corporate director of the CCIV and the rules relating to its replacement);

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the officers, employees and auditors of the corporate director of the CCIV;

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the compliance plan of a retail CCIV;

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member protection (including related party transactions by retail CCIVs, rights and remedies for the member of a CCIV and the corporate director's civil liability to members);

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meetings (including resolutions of a CCIV and meetings of the members of a CCIV (or a sub-fund of the CCIV)); and

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corporate contraventions (including the rules for establishing civil and criminal liability under Commonwealth laws).

Context of amendments

Governance rules

3.3 As noted above, the key feature of a CCIV is its corporate status: a CCIV is a company used for collective investment.

3.4 Several of the core features of a CCIV have been drawn from overseas regulatory precedents - including that its business and affairs are operated by another company (its single 'corporate director').

3.5 In addition, parts of the regulatory framework for CCIVs have been drawn from the MIS regime in order to ensure general parity and consistency between the two regimes (such as many of the requirements for the constitution of a CCIV).

Officers of the CCIV

3.6 The requirement for a CCIV to be operated by a single corporate director draws on aspects of the United Kingdom's OEIC regime. OEICs may have either an authorised corporate director or a board of natural person directors, but overwhelmingly choose to have an authorised corporate director for reasons of governance and cost-effectiveness.

3.7 The single corporate director model also aligns with the existing responsible entity model for the operation of registered schemes and provides a simpler governance structure with clearer lines of responsibility than a board of individual directors.

3.8 The existing model for the operation of registered schemes imposes statutory duties on the responsible entity. There are also a range of duties at general law, including fiduciary duties, that apply to the corporate trustee of a MIS. These duties are largely replicated for the corporate director of a CCIV, with additional duties applying to the corporate director of a retail CCIV (consistent with the requirements for registered schemes). These duties are a key investor protection mechanism that ensure members of a CCIV have a comparable level of investor protection to an investor in a MIS.

Officers and employees of the corporate director of the CCIV

3.9 In addition to the duties placed on the responsible entity under the existing responsible entity model, duties are also imposed on the officers and employees of the responsible entity of a registered scheme. These duties are also a key investor protection that needs to be replicated in the retail CCIV context.

3.10 The officers and employees of the corporate director also owe duties to the corporate director (being a company) under the existing law.

Compliance plan of a retail CCIV

3.11 The existing model for registered schemes includes a requirement to maintain a compliance plan. The compliance plan sets out the measures the responsible entity will apply in operating the scheme to ensure compliance with the law and the scheme's constitution.

3.12 This mechanism is replicated in the retail CCIV context to ensure that members of a retail CCIV have a comparable level of investor protection to an investor in a registered scheme. However, unlike for registered schemes, a retail CCIV does not need to have a compliance committee as there is a requirement for the corporate director of the CCIV to have at least half of its directors as external directors.

Member protection

3.13 Chapter 2E of the Corporations Act sets out the rules regarding member approval of related party transactions for a public company. These rules apply to registered schemes (in a modified form) under Chapter 5C of the Corporations Act.

3.14 Similar rules are included in the context of retail CCIVs to ensure that investors in a retail CCIV have an equivalent level of consumer protection as investors in a registered scheme. The rules require further modification in the retail CCIV context to ensure that member approval is obtained by each affected sub-fund of the CCIV (given that the membership of the CCIV is referable to strictly segregated sub-funds of the CCIV and that the financial benefit may be paid out of the assets of one or more sub-funds of the CCIV).

3.15 Chapter 2F of the Corporations Act sets out the rights and remedies available to members of companies. Given a CCIV is a company, these rights and remedies are available to members of a CCIV. Some modifications are required to account for the unique structure of CCIVs. For example, modifications are required to ensure that members of a sub-fund also have some of the rights and remedies available at the CCIV level.

3.16 The existing responsible entity model also holds the responsible entity directly responsible to members for civil contraventions of Chapter 5C. A similar mechanism is required in the CCIV context to ensure that members of the CCIV also have a direct right of action against the corporate director for similar civil contraventions.

Meetings

3.17 As the directorship of a CCIV is held by a single corporate director and not individual person directors, it is necessary to provide special rules clarifying how a director's resolution may be passed by the directors of the corporate director, on behalf of the CCIV.

3.18 The Corporations Act prescribes different rules for meetings of members of companies and members of registered schemes. While CCIVs are companies, they have many features in common with registered schemes. In particular, and relevantly for the rules regarding meetings, a CCIV has a corporate director (similar to the responsible entity of a registered scheme) and a compliance plan (if it is a retail CCIV, similar to the compliance plan of a registered scheme). Accordingly, the rules for meetings of members of the CCIV are adapted from those applying to registered schemes.

3.19 Membership in the CCIV is referable to a sub-fund of the CCIV. Each sub-fund is strictly segregated from any other sub-fund of the CCIV. Accordingly, provision has been made for meetings (and resolutions) of members of a sub-fund (or sub-funds) of the CCIV (in addition to meetings (and resolutions) of the whole CCIV).

3.20 Further amendments have also been included to ensure the framework in the Corporations Act for facilitating virtual meetings applies to CCIVs (see discussion in Chapter 11 below).

Corporate contraventions

3.21 A CCIV has corporate responsibility for contraventions of its legal obligations, in the same way that other companies do. However, unlike other companies, generally a CCIV's only officer is another company; its corporate director. ^[2] Further, a CCIV does not have any employees.

3.22 The corporate director of a CCIV has an overarching obligation to operate the business and conduct the affairs of the CCIV. The corporate director must also perform the functions conferred on it by the CCIV's constitution and the Corporations Act, as well as ensure the CCIV itself complies with its constitution and the Corporations Act.

3.23 The responsibilities of the corporate director are designed to be similar to those of the responsible entity of a registered scheme. Under the framework that applies for registered schemes, the responsible entity (or trustee) of a scheme is directly responsible for any contravention of the law in relation to the scheme.

Summary of new law

Governance rules

3.24 As a CCIV is a type of company, it has the legal capacity and powers of an individual and a body corporate, including the power to enter into contracts and issue and cancel shares in the company.

3.25 Unlike other companies, a CCIV has a single corporate director. The corporate director is a public company with its own officers and employees. The new law includes provisions that allow the natural person officers of the corporate director to do some activities, such as enter into a contract on behalf of the CCIV in certain circumstances.

3.26 Both retail and wholesale CCIVs must have a constitution. The constitution of a CCIV is enforceable as a statutory contract between:

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the CCIV and each member;

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the CCIV and the corporate director;

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the corporate director and each member; and

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a member and each other member.

3.27 The constitution of a retail CCIV must make adequate provision for certain matters (such as the establishment of sub-funds and the method by which member complaints are to be dealt with).

Officers and employees of the CCIV

Officers and employees generally

3.28 A CCIV may only appoint one director: its corporate director. The corporate director is the public company named in ASIC's record of the CCIV's registration as its corporate director or temporary corporate director. A CCIV must not have a secretary or any employees.

3.29 A CCIV may not have any officers, other than a director, a receiver, a liquidator or a trustee or other person administering an arrangement between a CCIV and someone else.

3.30 An officer of a CCIV owes the duties that officers of a company owe under Part 2D.1 of the Corporations Act. In addition, a director of a retail CCIV owes duties similar to those owed by a responsible entity of a registered scheme. The latter duties prevail over the duties to the CCIV under Part 2D.1, to the extent of any conflict.

Further requirements for the corporate director of a CCIV

3.31 Only a public company that is not in external administration and that holds an AFSL authorising it to operate the business and conduct the affairs of the CCIV may be appointed as corporate director of the CCIV.

3.32 As a public company, the corporate director has natural person directors. At least half of the directors of the corporate director of a retail CCIV must be external directors. External directors bring a degree of detached supervision that is expected to enhance the standard of corporate governance of corporate directors of retail CCIVs.

3.33 The rules for appointing and replacing the corporate director of a CCIV are similar to the rules that apply to the appointment and replacement of a responsible entity of a registered scheme.

3.34 As noted above, the corporate director (as an officer of the CCIV) owes the same duties and has the same powers, as other officers of the CCIV (including its duties under Part 2D.1 of the Corporations Act). The director of a CCIV also owes additional duties similar to the duties of the responsible entity of a registered scheme or corporate trustee of a MIS (as relevant).

3.35 The corporate director of a CCIV also owes further duties that are specific to its role - including an obligation to operate the business and conduct the affairs of the CCIV.

3.36 The corporate director of a CCIV cannot appoint delegates but it has the power to appoint an agent to do anything that the corporate director is authorised to do in connection with the CCIV. These agents may appoint sub-agents. Akin to other companies, a CCIV also has the power to appoint an agent, who may also appoint sub-agents. The agents of the CCIV and the sub-agents of both the corporate director and the CCIV are taken to be agents of the corporate director.

3.37 The corporate director of a retail CCIV has extended liability for its agents (and persons taken to be its agents) for the purposes of determining whether there is a liability to the CCIV (or its members) or whether it has properly performed its duties (in order to be paid its fees, or be indemnified, out of the assets of a sub-fund of the CCIV).

Officers and employees of the corporate director of the CCIV

3.38 The officers and employees of the corporate director owe obligations to the corporate director under the existing law, in their capacity as officers and employees of a public company. The new law creates further obligations on these persons in relation to the CCIV.

3.39 In particular, the officers and employees of a corporate director of a retail CCIV owe duties that are similar to the duties owed by officers and employees of a responsible entity in relation to the registered scheme under the existing law.

3.40 The secretary of the corporate director of a CCIV has responsibility for certain contraventions of the law by the corporate director as well as certain contraventions of the law by the CCIV. This extension of the secretary of the corporate director's responsibility is important given a CCIV may not have a secretary.

3.41 Each of the directors of the corporate director of a CCIV has an extended duty to disclose their material personal interests in relation to the affairs of the CCIV to the other directors of the corporate director.

3.42 The restrictions on indemnifying, exempting or insuring an officer or auditor of a CCIV against certain liabilities to the CCIV has been extended to also cover an officer or auditor of the corporate director.

Compliance plan of a retail CCIV

3.43 A retail CCIV must have a compliance plan and a compliance plan auditor (similar to the requirements for a compliance plan of a registered scheme).

3.44 The compliance plan must set out adequate measures to be applied by the corporate director in operating the CCIV to ensure compliance with the Corporations Act and the CCIV's constitution. This is the only basic content requirement for the compliance plan.

3.45 The corporate director must ensure at all times that the CCIV's compliance plan meets the legislative requirements for compliance plans. The corporate director must also comply with the compliance plan.

Member protection

3.46 The rules in Chapter 2E of the Corporations Act (regarding member approval of a transaction that seeks to give a related party a financial benefit) apply to retail CCIVs in generally the same way as they apply to public companies. However, the rules are modified to ensure that member approval is obtained by each affected sub-fund of the CCIV (given that the membership of the CCIV is referable to strictly segregated sub-funds of the CCIV and that the financial benefit may be paid out of the assets of one or more sub-funds of the CCIV). In addition, some modifications are made to align the rules that apply to a CCIV (as a company) to the rules that apply to related party transactions in respect of a registered scheme under Part 5C.7 of Chapter 5C of the Corporations Act.

3.47 The rights and remedies available to members of a company under Chapter 2F of the Corporations Act are available to members of a CCIV. Some modifications have been made to extend certain rights and remedies that are available to members at the CCIV level to ensure they are available at the sub-fund level.

3.48 A member of a CCIV may bring, or intervene in, legal proceedings on behalf of the CCIV in certain circumstances.

3.49 The corporate director of a CCIV has civil liability to members of the CCIV for a contravention of Chapter 8B (regardless of whether or not the corporate director has been convicted). This is consistent with the right of a member of a registered scheme to seek remedy against the responsible entity of the scheme in similar circumstances.

Meetings

3.50 Similar to other companies, a CCIV's powers may be exercised by its director or its members. As with other companies, some decisions may only be made by the CCIV's members. Similarly, some decisions may only be made by the members of a particular sub-fund.

3.51 The corporate director of a CCIV may pass a resolution for the CCIV by passing a resolution of the directors of the corporate director. This mechanism effectively 'looks through' the corporate director of the CCIV (being a company itself) to the natural person directors of the corporate director who are making the decision to exercise the CCIV's powers. Part 2G.1 of the Corporations Act, which sets out the requirements for directors' meetings, does not apply to a CCIV, as this bespoke rule applies instead.

3.52 The rules for holding meetings of members of a CCIV, or a sub-fund, are based on the rules for registered schemes, rather than the rules for companies.

3.53 Some modifications are made to account for a CCIV's corporate status. In particular, a member's voting power at a meeting (of either the CCIV or a sub-fund) is referable to the value of the shares the member holds in the CCIV.

Corporate contraventions

3.54 Bespoke rules apply for the purposes of attributing the physical and mental elements of an offence to a CCIV. These bespoke rules apply to all Commonwealth laws. The general rules contained in the Criminal Code and other attribution rules (for example those contained in Chapter 7 of the Corporations Act) do not apply to a CCIV.

3.55 As a general rule, conduct engaged in by a person other than the CCIV is attributed to the CCIV if it is engaged in by one of the following parties, and the conduct was engaged in on behalf of the CCIV:

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an agent of the CCIV;

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a director of the CCIV;

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an employee, director or agent of the corporate director of the CCIV; or

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any other person acting at the direction, or with the consent or agreement of one of the entities listed above.

3.56 If the CCIV commits an offence, the new law deems the corporate director to have committed the offence and relieves the CCIV from being liable for any penalty in respect of the offence. This applies to both criminal contraventions by the CCIV and breaches of civil penalty provisions by the CCIV.

3.57 Separate rules allow a Court to order compensation be paid to a CCIV if it suffers loss or damage as a result of a contravention of a State or Territory law.

Comparison of key features of new law and current law

Detailed explanation of new law

Governance rules

CCIV's powers

3.58 As a CCIV is a type of company, it has the legal capacity and powers of an individual and a body corporate, including the power to enter into contracts and issue and cancel shares in the company. The CCIV's powers to make, vary, ratify or discharge a contract may be exercised by an individual acting with the CCIV's express or implied authority, akin to other companies. It should be noted, however, that a CCIV's power to issue shares and debentures are modified by the requirements of Part 8B.4. Further details about a CCIV's power to issue securities are contained in Chapter 4. [Schedule 2, items 45 and 46, note 2 to subsection 124(1)]

3.59 However, unlike other companies, a CCIV has only one director - its corporate director. This affects the application of section 127 of the existing law (relating to when a company is taken to have signed a document or fixed a seal). The new law effectively 'looks through' the corporate director to the natural person directors and secretary of the corporate director. Specifically, the CCIV is taken to have:

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signed a document if two directors, or a director and secretary, of the corporate director of the CCIV sign the document; or

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fixed a seal to a document if two directors, or a director and secretary of the corporate director of the CCIV witness the fixing of the seal.

[Schedule 1, item 4, section 1223; Schedule 2, items 47 to 49, note 3 to subsection 127(1) and note 2 to subsection 127(2)]

3.60 No amendments have been made to the statutory assumptions that people dealing with companies are entitled to make. However, these assumptions already apply cumulatively as existing subsection 129(8) allows an assumption to be made (for example, about the corporate director's compliance with its internal rules) for the purposes of making another assumption (for example, about the CCIV's compliance with its internal rules).

3.61 The Corporations Amendment (Meetings and Documents) Act 2021 facilitates the electronic execution of documents by a CCIV. These rules will apply to companies under the Corporations Act, including CCIVs. Schedule 4 to the Bill makes related contingent amendments to ensure the rules technology neutral signing and electronic provision of documents extends to CCIVs (see explanation in paragraphs 3.286 to 3.290).

Constitution

3.62 A CCIV must have a constitution. The constitution governs the internal operation of the CCIV and acts as a statutory contract between:

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the CCIV and each member;

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the CCIV and the corporate director;

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the corporate director and each member; and

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a member and each other member.

[Schedule 1, item 4, subsection 1223B(1), section 1223E]

Replaceable rules do not apply

3.63 Provisions in the Corporations Act that are replaceable rules do not apply as replaceable rules for a CCIV. This means that if the CCIV's constitution does not make provision for a particular matter that is the subject of a replaceable rule, the replaceable rule will not apply and no rules will operate with regard to that matter. [Schedule 1, item 4, section 1223A; Schedule 2, item 50, note to subsection 135(1)]

Adopting, modifying or repealing and replacing the constitution

3.64 A CCIV adopts its constitution on registration. Its constitution cannot be repealed unless it is replaced with another constitution. [Schedule 1, item 4, subsection 1223B(1) and subsection 1223D(1)]

3.65 The process for modifying, or repealing and replacing, the constitution differs depending on whether the CCIV is a retail or wholesale CCIV. Section 136 of the existing law does not apply to the adoption, modification or repeal of the constitution of a CCIV. [Schedule 1, item 4, subsection 1223D(6); Schedule 2, items 51 to 52, note 2 to subsection 136(1)]

3.66 For a wholesale CCIV, the process for modifying the constitution must be set out in the CCIV's constitution. This process must be complied with if the constitution is subsequently modified, repealed or replaced. [Schedule 1, item 4, paragraph 1223D(2)(b) and section 1223F]

3.67 For a retail CCIV, the constitution may be modified, repealed or replaced in the following circumstances:

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by special resolution of the members of the CCIV;

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by the corporate director, on its own initiative if it reasonably considers the change will not adversely affect members' rights; or

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by special resolution of the members of a sub-fund of the CCIV, if the corporate director reasonably considers the change will not adversely affect the rights of any member of any other sub-fund.

[Schedule 1, item 4, subsection 1223D(2)]

3.68 These requirements are generally based on the requirements for changing the constitution of a registered scheme in existing section 601GC.

3.69 If the constitution of either a wholesale or retail CCIV is modified or repealed and replaced, a copy of the modification (or the new constitution) and any notice of a later application date must be lodged with ASIC within 14 days of the modification. A failure to do so is an offence of strict liability with a maximum penalty of 20 penalty units. This is consistent with the Guide to Framing Commonwealth Offences and is essential to ensure compliance where ASIC relies upon the CCIV to provide this information to ensure the integrity of its records and its capacity to oversee the CCIV's compliance with the law and ensure basic protections for investors. In particular, ASIC is not able to appropriately consider the constitution and whether it meets the basic content requirements explained further below if it not provided with an up-to-date constitution as it is changed or replaced. [Schedule 1, item 4, subsections 1223D(3) and (4); Schedule 2, item 199, penalty for subsection 1223D(3) inserted into Schedule 3 to the Corporations Act]

3.70 Section 137 of the existing law sets the date that a modification or replacement of a CCIV's constitution takes effect in certain circumstances. If section 137 of the existing law does not set the date of effect, then the modification, or repeal and replacement, takes effect on the latest of the following:

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the date on which the modification or the new constitution is lodged with ASIC;

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if the CCIV is a retail CCIV, and the corporate director of the CCIV determines a later date, that date;

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if the CCIV is a wholesale CCIV, and the corporate director of the CCIV determines a later date in accordance with any requirements in its constitution, that date.

[Schedule 1, item 4, subsection 1223D(5)

Basic content requirements

3.71 The content of a constitution of a wholesale CCIV is not prescribed, apart from the requirement for the CCIV to set out the process for adopting a constitution after registration, and repealing or modifying the constitution. [Schedule 1, item 4, section 1223F]

3.72 The constitution of a retail CCIV must make provision for:

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the establishment of sub-funds;

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the establishment of classes of shares referable to sub-funds;

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the method by which complaints made by members of the CCIV are to be dealt with; and

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cross-investment between sub-funds of the CCIV, if the CCIV is to engage in such cross-investment.

[Schedule 1, item 4, paragraphs 1223G(a), (b) and (e)]

3.73 The constitution of a retail CCIV must also state that the CCIV has power to borrow or raise money (noting that, being a company, the CCIV has inherent power to do this). If there are to be limits on the CCIV's exercise of this power, the constitution must also set out those limits. [Schedule 1, item 4, paragraphs 1223G(c) and (d)]

3.74 If some or all of the shares of the CCIV are redeemable shares or redeemable preference shares, then the CCIV's constitution must make provision for the shares to be redeemed. This provision must make provision for the redemption - meaning that it must set out adequate matters regarding the redemption. The matters prescribed must be fair and reasonable to the members of the sub-fund to which the shares are referable. For liquid sub-funds, it must also specify the period within which redemptions must ordinarily be made (while the sub-fund is liquid) - recognising that in limited circumstances the ordinary redemption period may not be able to be satisfied (for example, in times of market volatility). Further, it must set out a price, or method for determining a price for redemption of those shares (while the sub-fund is liquid). The redemption provisions in Part 8B.4 are explained further in Chapter 4. [Schedule 1, item 4, section 1223H]

3.75 These requirements are generally based on the requirements for constitutions of registered schemes, contained in section 601GA of the Corporations Act. However, unlike for registered schemes, a retail CCIV's constitution does not need to set out the consideration that must be paid to become a member because the price of shares in a company may vary over time. In addition, unlike schemes, a CCIV is a company and may issue shares on such terms and with such rights and restrictions as it determines. Nor does it need to give power to a third party to deal with the CCIV's assets because the CCIV has power to make investments itself.

3.76 A failure to comply with the relevant minimum content requirements is a strict liability offence with a maximum penalty of 20 penalty units. Both the offence and penalty are consistent with the Guide to Framing Commonwealth Offences and provide a strong incentive to comply with these requirements core to the functioning of a CCIV and the inherent protections to members (given the contractual nature of the CCIV's constitution). [Schedule 1, item 4, subsections 1223B(2) and (3); Schedule 2, item 199, penalty for subsection 1223B(3) inserted into Schedule 3 of the Corporations Act]

3.77 ASIC also has power to direct a retail CCIV to modify its constitution to either:

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comply with the minimum content requirements; or

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ensure that the constitution deals with the matters that are the subject of the minimum content requirements, or the corporate director's right to be paid fees out of the assets of a sub-fund of the CCIV, in adequate detail.

[Schedule 1, item 4, subsections 1223(1) and (2)]

3.78 The direction must be given to the CCIV by notice in writing. The corporate director must comply with the direction within 14 days after it has been given the notice and lodge a copy of the modified constitution with ASIC within 14 days after the modification. A failure to comply with the direction within the required timeframe is a strict liability offence with a maximum penalty of 20 penalty units. A failure to lodge the modified constitution with ASIC within the required timeframe is also a strict liability offence with a maximum penalty of 20 penalty units. Both of these strict liability offences are consistent with the Guide to Framing Commonwealth Offences and with offences in the Corporations Act that apply in other circumstances involving the failure to lodge documents with ASIC or comply with directions given by ASIC. [Schedule 1, item 4, subsections 1223C(4) to (6); Schedule 2, item 199, penalty for subsections 1223C(4) and (5) inserted into Schedule 3 to the Corporations Act]

3.79 When modifying the CCIV's constitution in accordance with a direction from ASIC, the corporate director does not need to comply with the requirements that prescribe how a CCIV's constitution may be modified (see paragraphs 3.62 to 3.67). [Schedule 1, item 4, subsection 1223C(3)]

Officers and employees of the CCIV

Requirements for officers and employees generally

Appointment of officers and employees

3.80 A CCIV must only appoint one director: its 'corporate director'. The corporate director is the public company named in ASIC's record of the CCIV's registration as its corporate director or temporary corporate director. The rules relating to the appointment, removal and replacement of the corporate director are explained further below. [Schedule 1, item 4, subsections 1224(1) to (3)]

3.81 The appointment of more than one director, being a director appointed to a position other than the position of corporate director, is an offence punishable by up to two years imprisonment. This penalty is consistent with the Guide to Framing Commonwealth Offences. It provides a strong incentive to comply with this requirement, which is fundamental to the underlying structure of a CCIV. The CCIV regime has been designed on the basis that it has only one corporate director, with the remainder of the framework predicated on this model. [Schedule 2, item 199, penalty for subsection 1224(1) inserted into Schedule 3 to the Corporations Act]

3.82 These obligations are significant as, unlike other companies that are governed by the Corporations Act, a CCIV's sole director is a public company and not an individual person director.

3.83 Moreover, unlike other directors of conventional companies, the corporate director commits an offence if it appoints an alternate director to exercise some, or all, of its powers. [Schedule 1, item 4, subsections 1224(4) and (5); Schedule 2, item 199, penalty for subsection 1224(5) inserted into Schedule 3 of the Corporations Act]

3.84 Both the prohibition on appointing more than one director and the restriction on appointing an alternate director do not prevent a person from being held to be a shadow director of a CCIV within the meaning of the definition of 'director' in paragraph (b) of section 9 of the existing law. Any such director (or other director appointed in contravention with these requirements) is subject to the obligations of a director of a CCIV. [Schedule 1, item 4, subsection 1224(6)]

3.85 A CCIV must not have any other officers other than a director or a receiver, liquidator or a trustee or other person administering an arrangement between the CCIV and someone else. It is specifically prohibited from appointing a secretary or having any employees. A contravention of either of these requirements is an offence punishable by up to two years imprisonment. This penalty is consistent with the Guide to Framing Commonwealth Offences. It provides a strong incentive to comply with this requirement - which is fundamental to the underlying structure of a CCIV. The CCIV regime has been designed on the basis that the CCIV does not have any officers or employees other than its corporate director and certain persons under an external administration, with the remainder of the framework predicated on this structure. [Schedule 1, item 4, sections 1224A and 1224B; Schedule 2, item 199, penalty for subsections 1224A(1) and (2) inserted into Schedule 3 of the Corporations Act]

Duties of directors and other officers of a CCIV

3.86 An officer of a CCIV, including its director, owes the duties imposed on all company officers under Part 2D.1 of the existing law. This includes the duty to act in good faith in the best interests of the corporation and for a proper purpose under section 181 of the existing law.

3.87 The provisions in the existing law in relation to external administration have been modified so that external administration applies to each sub-fund of the CCIV rather than to the CCIV as a whole (see discussion in Chapter 7 below). The statutory duties that officers owe under Part 2D.1 of the existing law have been similarly modified so that an officer other than a director (such as a receiver or liquidator) only owes these duties to the sub-fund for which they have been appointed. [Schedule 1, item 4, section 1224C]

3.88 In addition to the general officers' duties under Part 2D.1, the director of a CCIV owes additional statutory duties that reflect its role as the operator of a collective investment scheme. These additional duties align with those owed by the corporate trustee and operator of a MIS (including under Chapter 5C of the Corporations Act and at general law). These additional duties ensure that investors in a CCIV are afforded comparable protections as investors in a MIS, with some differences tailored to the different legal structure of a CCIV. A summary of these duties in provided in Table 3.2 below. [Schedule 1, item 4, section 1224D]

3.89 The director of a retail CCIV owes a broader range of duties to members in recognition of the higher degree of protections for retail investors. These duties are based on the current statutory and general law duties that are owed to members of registered schemes. The duties the director of a wholesale CCIV owes relate to the fundamental investor protection for members in a wholesale CCIV and are comparable with the duties owed by a corporate trustee at general law and under trust legislation.

3.90 As noted above, the additional statutory duties are tailored to the different legal structure of a CCIV. In particular, the director of a CCIV (retail or wholesale) owes a duty to act in the best interests of the members of the CCIV, as well as the best interests of the members of each sub-fund (as a whole). This recognises the segregation of each group of members that invest in different sub-funds of a CCIV and ensures that the director must act in their interests in respect of the matters that relate to each sub-fund. However, in the event of any conflict between the director's duty to the members of the CCIV and its duty to the members of each sub-fund, the duty to the members of the CCIV prevails. This recognises the overarching status of the CCIV as a legal entity as a whole. [Schedule 1, item 4, subsections 1224D(1) and (2)]

3.91 The constitution of a wholesale CCIV may exempt the director of a wholesale CCIV from liability for contravention of certain additional duties - to the extent that the contravention was not dishonest and did not involve a lack of good faith. This is consistent with the capacity for the operator of a wholesale (and unregistered) scheme to exclude liability for certain general law duties in the constituent documents for the scheme. It ensures comparable protections are in place for investors in a wholesale CCIV as there are for investors in a wholesale scheme - and recognises their capacity to negotiate bespoke contractual protections under the constituent documents for the CCIV. [Schedule 1, item 4, subsection 1224D(4)]

3.92 If a director of a CCIV contravenes one of these duties, the director contravenes a civil penalty provision. [Schedule 2, item 192, new table items for subsections 1224D(1), (2) and (4) inserted into subsection 1317E(3) of the Corporations Act)]

3.93 If there is a conflict between a director's duties under Part 2D.1 and the additional duties set out above, the additional duties prevail. [Schedule 1, item 4, subsection 1224D(5)]

3.94 The additional duties set out above interact with other laws in the same way that the duties in Part 2D.1 do under section 185 of the existing law. That is, the additional duties have effect in addition to, and not in derogation of, any other rule of law that the person has because of their office or employment in relation to a corporation. [Schedule 1, item 4, subsection 1224D(6)]

3.95 In the same way that a director cannot be insured against a liability arising out of a contravention of section 182 or 183 of the existing law (being duties owed under Part 2D.1), a director of a CCIV cannot be insured against a liability arising out of a contravention of the additional duties outlined above. However, a wholesale CCIV may exempt or indemnify a director of a CCIV from liability if the contravention is not dishonest and does not involve a lack of good faith. [Schedule 1, item 4, subsections 1224D(7) and (8)]

Certain provisions of the Corporations Act do not apply to directors and other officers of a CCIV

3.96 Parts 2D.3 to 2D.5 of the existing law (about the appointment, remuneration, cessation of appointment of directors, the appointment of secretaries and public information about directors and secretaries) do not apply to CCIVs, as a CCIV is prohibited from appointing a director other than the corporate director or a company secretary (as explained above). The rules regarding the appointment, remuneration, removal and replacement of the corporate director are explained further below. [Schedule 1, item 4, paragraphs 1224E(a) and (b); Schedule 2, items 70 to 72, notes to Parts 2D.3, 2D.4 and 2D.5]

3.97 Part 2D.6 of the Corporations Act (about disqualification from managing corporations) does not apply for the purposes of disqualifying the corporate director of the CCIV. An effective mechanism for the disqualification of the corporate director is provided for as part of the requirements for the corporate director to hold an AFSL authorising it to operate the business and conduct the affairs of the CCIV. [Schedule 1, item 4, paragraph 1224F(d); Schedule 2, item 73, note to Part 2D.6]

3.98 Under Part 7.6 of the Corporations Act, a person (including the corporate director) may be disqualified from holding an AFSL in certain circumstances. The regime in Part 7.6 of the Corporations Act also applies to responsible entities of registered schemes (who are required to hold an AFSL authorising it to operate the scheme). An equivalent of Part 2D.6 does not apply to responsible entities of schemes.

3.99 Part 2D.7 of the Corporations Act (which prohibits hedging of remuneration of key management personnel) does not apply to the fees and benefits payable to a corporate director of a CCIV. This is consistent with the treatment for responsible entities of registered schemes, which are also not subject to this prohibition. [Schedule 1, item 4, paragraph 1224E(e); Schedule 2, item 74, note to Part 2D.7]

3.100 Part 2D.8 of the Corporations Act (about remuneration recommendations in relation to key management personnel for disclosing entities) does not apply to CCIVs that are disclosing entities. This is because fees and benefits payable to a corporate director of a CCIV are not subject to the remuneration recommendations made by remuneration consultants. For the corporate director of a retail CCIV, these fees and benefits must be set out in the CCIV's constitution (explained in paragraph 3.130). [Schedule 1, item 4, paragraph 1224E(f); Schedule 2, item 75, note to Part 2D.8]

3.101 The modifications to Parts 2D.5, 2D.6, 2D.7 and 2D.8 do not affect their application to the officers of the corporate director as a public company.

Further requirements for the corporate director of the CCIV

Appointment of the corporate director

3.102 As noted in paragraph 3.80, a CCIV may only appoint one director - its corporate director. The corporate director is the public company named in ASIC's record of the CCIV's registration as its corporate director or temporary corporate director.

3.103 A person applying to register a CCIV must provide information about the company that meets the basic eligibility requirement (explained below) and has consented in writing to becoming the CCIV's corporate director. Upon registration of the CCIV, the body named in the application for registration as the proposed corporate director becomes the corporate director of the CCIV (see paragraph 2.41).

3.104 A change in the corporate director only takes effect once the record of the CCIV's registration is altered to name another company as the CCIV's corporate director (or temporary corporate director). The rules for replacing the corporate director are explained further below. [Schedule 1, item 4, section 1224R]

3.105 Even if the corporate director's appointment, or continuance of its appointment is invalid (because the CCIV or the corporate director did not comply with the CCIV's constitution or the Corporations Act), acts done by the company named in ASIC's record as the corporate director are effective. However, the effectiveness of the act by the corporate director does not necessarily bind the CCIV in its dealings with any other people, nor does it necessarily make the CCIV liable to a third party. [Schedule 1, item 4, section 1224H]

Basic eligibility requirement

3.106 Only a public company that holds an AFSL authorising it to operate the business and conduct the affairs of the CCIV may be appointed as corporate director of the CCIV. This company cannot be in external administration (that is, a 'Chapter 5 body corporate' within the meaning of section 9 of the Corporations Act). [Schedule 1, item 4, section 1224F]

3.107 The corporate director's obligation to operate the business and conduct the affairs of the CCIV is explained further in paragraphs 3.116 to 3.121 below.

Requirement for corporate director of retail CCIV to have external directors

3.108 As a public company, the corporate director has natural person directors. At least half of the directors of the corporate director of a retail CCIV must be external directors. External directors bring a degree of detached supervision that is expected to enhance the standard of corporate governance of corporate directors of retail CCIVs. [Schedule 1, item 4, subsection 1224G(1)]

3.109 A director of a corporate director is an external director if:

•

the director is not, and has not been in the previous two years:

•

an employee or senior manager of the corporate director or a related body corporate;

•

substantially involved in business dealings, or in a professional capacity with the corporate director or a related body corporate;

•

a member of a partnership that is or was substantially involved in business dealings, or in a professional capacity, with the corporate director or a related body corporate;

•

the director does not have a material interest in the corporate director or a related body corporate; and

•

the director is not a relative of a person who has a material interest in the corporate director or a related body corporate.

[Schedule 1, item 4, subsection 1224G(2)]

3.110 A 'related body corporate' is defined in section 50 of the Corporations Act and would, for example, include a holding company or a subsidiary of the corporate director.

3.111 The corporate director of a retail CCIV must comply with the external director requirement within 14 days (or a longer period allowed in writing by ASIC) of becoming the corporate director. If at some later stage the corporate director does not comply with the external director requirement, then the corporate director has 14 days from that day (or a longer period allowed in writing by ASIC) to comply. [Schedule 1, item 4, subsections 1224G(3) and (6)]

3.112 This provision, including discretion for ASIC to extend the 14-day period, is intended to provide some flexibility in the event of non-compliance due to unforeseen circumstances, such as the death or incapacity of a natural person director of the corporate director. In giving an extension, ASIC may impose conditions to be complied with by the corporate director.

3.113 If the corporate director fails to comply with the external director requirement within the relevant period, it is liable for a strict liability offence with a maximum penalty of 20 penalty units. An intentional or reckless failure is an offence punishable by up to two years imprisonment. A failure to comply with a condition imposed by ASIC in extending the 14-day period is a strict liability offence with a maximum penalty of 60 penalty units. These penalties are appropriate given that a failure to have the appropriate number of external directors would reduce or remove the external or independent oversight that is provided by external directors of the corporate director. These penalties are also consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsections 1224G(4) to (7); Schedule 2, item 199, penalty for subsections 1224G(4), (5) and (6) inserted into Schedule 3 to the Corporations Act]

3.114 The requirements (and penalties) for external directors within the corporate director draw upon section 601JA, which requires the responsible entity of a registered scheme to establish a compliance committee if less than half of its directors are external directors. As explained above, the requirement that at least half the directors of a corporate director of a retail CCIV be external directors aligns with the circumstances in which a responsible entity is relieved of the requirement to have a compliance committee under Part 5C.5.

3.115 The corporate director's board is responsible, in place of the compliance committee, for monitoring the extent to which the corporate director complies with the CCIV's compliance plan.

Powers and obligations of the corporate director

3.116 As explained in paragraph 3.86, the corporate director (as an officer of the CCIV) owes the same duties, and has the same powers, as other officers of the CCIV (including its duties under Part 2D.1 of the Corporations Act). The director of a retail CCIV also owes additional duties similar to the duties of the responsible entity of a registered scheme (see paragraph 3.88 above).

3.117 The corporate director of a CCIV also owes further duties that are specific to its role - including an obligation to operate the business and conduct the affairs of the CCIV.

Obligation to operate the CCIV

3.118 The obligation to operate the CCIV applies to the corporate director of both a retail CCIV and a wholesale CCIV. The obligation has two limbs.

3.119 The first limb requires the corporate director to operate the business and conduct the affairs of the CCIV. This is designed to be a single encompassing requirement, rather than one obligation to operate the business and a separate obligation to conduct its affairs. [Schedule 1, item 4, paragraph 1224J(1)(a)]

3.120 The new definition of 'affairs' of a CCIV (which is largely based on the definition of 'affairs' of a body corporate) applies to this first limb. The definition sets out a range of activities that are included in the concept of 'affairs' of a CCIV (such as the promotion, formation, trading, transactions and dealings of the CCIV). The definition is not exhaustive and does not limit the types of matters or activities that are captured by the term. [Schedule 2, items 33 to 34, section 53AAA]

3.121 The second limb places an obligation on the corporate director of a CCIV to perform the functions conferred on it by the CCIV's constitution and the Corporations Act. This is appropriate because the corporate director is the controlling mind of the CCIV. [Schedule 1, item 4, paragraph 1224J(1)(b)]

Corporate director's power to exercise the powers of the CCIV

3.122 The corporate director has the power to exercise all the powers of the CCIV except those powers that the Corporations Act or the CCIV's constitution requires the CCIV to exercise in a general meeting. One example of a power that can only be exercised in a general meeting is amending the constitution. [Schedule 1, item 4, subsection 1224J(2)]

3.123 This power is analogous to the power granted to directors of other companies in existing section 198A. Existing section 198A does not apply to CCIVs as it is a replaceable rule. For a discussion of the application of replaceable rules in the CCIV context, see Chapter 2 of this explanatory memorandum.

No obligation to disclose material personal interests

3.124 Unlike other directors of conventional companies, the corporate director as sole director is not required to disclose a material personal interest to another director as the CCIV may only appoint one director. Accordingly, section 191 (relating to the director's duty to disclose material personal interests) of the existing law does not apply to the corporate director of a CCIV. [Schedule 1, item 4, section 1224K; Schedule 2, item 60, note to Division 2 of Part 2D.1]

Corporate director's responsibility for agents

3.125 The corporate director of a CCIV cannot appoint delegates but it has the power to appoint an agent to do anything that the corporate director is authorised to do in connection with the CCIV. These agents may appoint sub-agents. Akin to other companies, a CCIV also has the power to appoint an agent, who may also appoint sub-agents. The agents of the CCIV and the sub-agents of both the corporate director and the CCIV are taken to be agents of the corporate director. [Schedule 1, item 4, section 1224L; Schedule 2, items 61 and 62, note 2 to subsection 198D(1)]

3.126 When determining whether there is a liability to the CCIV or the CCIV's members, or whether the corporate director of a retail CCIV has properly performed its duties (for the purposes of being paid its fees or being indemnified out of the CCIV's assets), the corporate director of a retail CCIV is responsible for its agents (and persons taken to be its agents) even if the agent (or person) acts fraudulently or outside the scope of its authority. This offers a higher level of investor protection than the delegation rules for other types of companies in existing section 190 and the common law (for example, vicarious liability). It ensures that corporate directors of a retail CCIV have the same responsibility for agents as responsible entities of registered schemes in existing subsection 601FB(3). [Schedule 1, item 4, section 1224M]

3.127 The corporate director of a retail CCIV may have a liability to the CCIV, for example, if it was to breach the duties it owes to the CCIV under Part 2D.1 of the existing law. The corporate director of a retail CCIV may have a liability to the CCIV's members, for example, if it contravened a section of Chapter 8B.

3.128 The corporate director of a wholesale CCIV is not responsible for its agents (and sub-agents), as well as the CCIV's agents (and sub-agents) to the same degree as the corporate director of a retail CCIV. This reflects the fact that sophisticated investors are better able to negotiate bespoke contractual protections and assess investment risks than retail investors.

3.129 Other officers are not responsible for their agents in the same way as the corporate director. Extending the duty to liquidators would significantly increase the risk for liquidators of CCIVs relative to liquidators of conventional companies, potentially making it more difficult to appoint a liquidator of a CCIV.

Limitation on corporate director's right to fees and indemnities

3.130 If the corporate director of a retail CCIV is to have any right to be paid fees, or be indemnified, out of the assets of a sub-fund of the CCIV, then those fees or indemnities must be specified in the CCIV's constitution and are only available if the corporate director has properly performed its duties. [Schedule 1, item 4, section 1224N]

3.131 Any other agreement or arrangement which purports to provide otherwise has no effect.

Retail CCIV - limitation on acquisition of share in CCIV by corporate director

3.132 The corporate director of a retail CCIV may only acquire and hold shares in that CCIV for the consideration payable if the shares were acquired by another person, and subject to terms and conditions that would not disadvantage other members. This is to ensure that such acquisitions reasonably represent their market value and the process is fair to other members. A retail CCIV is subject to similar restrictions for self-acquisitions of shares (such as cross-investment or share buy-backs) (see paragraph 4.103 below). [Schedule 1, item 4, section 1224P]

3.133 A corporate director who contravenes this section, or any person involved in that contravention, contravenes a civil penalty provision. The existing law defines the circumstances in which a person may be 'involved' in a contravention under section 79 of the Corporations Act - including whether the person aided, abetted, counselled or procured the contravention. A person involved in the contravention may include a natural person director of the corporate director, the corporate director, a lawyer or an accountant. [Schedule 1, item 4, subsection 1224P(2), Schedule 2, item 192, new table item for subsection 1224P(2) inserted into subsection 1317E(3) of the Corporations Act]

3.134 If a person's involvement is intentional, then the person is liable for an offence with a maximum penalty of five years imprisonment, 2,000 penalty units or both (for an individual) or 20,000 penalty units (for a body corporate). This penalty is consistent with the Guide to Framing Commonwealth Offences and with the existing offence penalty a responsible entity would be subject to for similar offences (see section 601FG of the existing law). This penalty is justified to ensure integrity of the CCIV regime, by deterring the misuse of a CCIV by the corporate director or any person to acquire or hold shares terms that are not consistent with the market price or that would not be fair to other members [Schedule 1, item 4, section 1224P(3), Schedule 2, item 199, penalty for subsection 1224P(3) inserted into Schedule 3 to the Corporations Act]

Exercise of powers while sub-fund is in liquidation

3.135 The appointment of a liquidator does not remove the corporate director from office. However, 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. The corporate director may continue to exercise functions and powers that relate to the other sub-funds. [Schedule 1, item 4, section 1224Q]

3.136 There are two offences that apply to a corporate director who exercises a function or power that relates solely to the sub-fund that is being wound up. First, if the corporate director acts intentionally, the corporate director commits an offence with a penalty of 30 penalty units. Intention is the default fault element under section 5.6 of the Criminal Code. [Schedule 1, item 4, subsection 1224Q(4); Schedule 2, item 199 penalty for subsection 1224Q(4) inserted into Schedule 3 to the Corporations Act]

3.137 Second, if intention cannot be established, the corporate director commits a strict liability offence punishable by up to 20 penalty units. The application of a strict liability offence in this circumstance is consistent with the Guide to Framing Commonwealth Offences and is intended to ensure the integrity of the wind-up rules as they apply to sub-funds, in particular the role of the liquidator. [Schedule 1, item 4, subsection 1224Q(5); Schedule 2, item 199, penalty for subsection 1224Q(5) inserted into Schedule 3 to the Corporations Act]

3.138 The prohibition on exercising a function or power that relates solely to the sub-fund that is being wound-up does not apply to:

•

a person acting with the liquidator, provisional liquidator or Court's approval; or

•

a person acting in circumstances permitted by the Corporations Act.

[Schedule 1, item 4, subsection 1224Q(2)]

3.139 These exceptions mirror the exceptions to section 198G of the Corporations Act.

3.140 Unlike section 198G, the defendant does not bear the evidential burden for establishing that they are permitted to act. In other words, the prosecution must state in their pleadings that the person is not permitted to act, and the burden would then shift to the defendant to prove otherwise. This departure from section 198G has been made to ensure consistency with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsection 1224Q(3)]

3.141 On the other hand, the defendant bears the evidential burden for proving that they are acting with the approval of the liquidator, provisional liquidator or the Court. The reversal of the evidential burden of proof is consistent with the Guide to Framing Commonwealth Offences because the prosecution is unlikely to be aware of any correspondence between the liquidator/provisional liquidator and the defendant. These facts lie peculiarly within the knowledge of the defendant and there would be no additional burden on a defendant to produce evidence of the grant of approval.

3.142 If there is a conflict between a function or power of the corporate director and the liquidator or provisional liquidator, the functions and powers of the liquidator or provisional liquidator prevail. [Schedule 1, item 4, subsections 1224Q(6) and (11)]

3.143 The new provisions relating to the functions of the officer do not interfere with any provision in the Corporations Act which applies despite section 198G (see, for example, sections 60-11, 65-45, 70-20, 90-10, 90-20 and 90-28 of the Insolvency Practice Schedule). [Schedule 1, item 4, subsections 1224Q(9) and (10)]

Replacing the corporate director

3.144 The process for changing the corporate director depends on the circumstances in which the corporate director is being changed. For example, different requirements apply in circumstances where the corporate director must be removed because it is no longer eligible to be the corporate director compared to circumstances where the corporate director wishes to retire from office of its own volition.

3.145 As explained in paragraph 3.104 above, a change in the corporate director only takes effect once the record of the CCIV's registration is altered to name another company as the CCIV's corporate director (or temporary corporate director). It is critical that a CCIV has a corporate director at all times because, without other officers or employees, the CCIV cannot operate and will have no governing mind.

Replacement of an ineligible corporate director

3.146 If the corporate director fails to meet the basic eligibility requirement (explained in paragraph 3.106 above), then ASIC, or a member (or group of members) of the CCIV may apply to the Court for the appointment of a temporary corporate director. [Schedule 1, item 4, section 1224S]

3.147 The application to Court is not mandatory. However, the appointment of a temporary corporate director enables the CCIV to continue to operate with a corporate director who is duly capable of being the corporate director until a permanent corporate director can be secured.

Retirement of corporate director

3.148 If the corporate director of the CCIV wishes to retire from its role, then it must call a meeting of the CCIV's members for the members to consider, and vote on, a special resolution to choose a new company to be the CCIV's corporate director. [Schedule 1, item 4, subsection 1224T(1)]

3.149 The notice of the meeting of the CCIV's members must set out the corporate director's reason for wanting to retire and nominate a new company that meets the basic eligibility requirement (explained in paragraph 3.106 above) and has consented, in writing, to becoming the CCIV's corporate director. [Schedule 1, item 4, subsection 1224T(2)]

3.150 A new company is only appointed as the CCIV's corporate director if the special resolution passes. However, the company chosen by members need not be the one nominated in the notice of the meeting.

3.151 If the special resolution passes, such that the members of the CCIV have chosen a new company to be the corporate director of the CCIV, then the current corporate director must notify ASIC of the change and asking it to alter the record of the CCIV's registration to name the new company as the CCIV's corporate director. This notice must be lodged with ASIC as soon as practicable, and in any event within two business days. It is only once the CCIV's record of registration has been updated that the appointment of the new corporate director is given effect. [Schedule 1, item 4, subsection 1224T(3)]

3.152 A failure to provide ASIC with the requisite notice is a strict liability offence with a penalty of up to 20 penalty units. The strict liability offence is consistent with the Guide to Framing Commonwealth Offences, as it is important that ASIC has up-to-date information about a CCIV's corporate director to enable it to update the record of registration to give effect to the change. [Schedule 1, item 4, subsection 1224T(5); Schedule 2, item 199 penalty for subsection 1224T(3) inserted into Schedule 3 to the Corporations Act]

3.153 In addition, if the corporate director fails to give the requisite notice, the nominated company chosen by the CCIV's members to be the CCIV's corporate director may also lodge the notice with ASIC. [Schedule 1, item 4, subsection 1224T(4)]

3.154 If the special resolution does not pass, such that the members have not chosen a new company to be its corporate director, then the current corporate director of the CCIV may apply to the Court for the appointment of a temporary corporate director. The appointment of a temporary corporate director would enable the current corporate director to retire, while also ensuring the CCIV has a suitability qualified company to act as corporate director until a permanent corporate director can be secured. [Schedule 1, item 4, subsection 1224T(6)]

3.155 There is also nothing to prevent the corporate director from re-commencing the process and calling a new meeting for the CCIV's members to consider and vote on a further special resolution to choose a new company to be the CCIV's corporate director under these provisions.

Replacement of corporate director by members

3.156 If the members of the CCIV wish to replace the corporate director of the CCIV, they may do so by calling a meeting of the CCIV's members to consider and vote on two special resolutions:

•

first, a special resolution that the current corporate director should be removed; and

•

second, a special resolution choosing a body to be the new corporate director of the CCIV.

[Schedule 1, item 4, subsection 1224U(1)]

3.157 The notice of the meeting of the CCIV's members must set out the intention to remove the current corporate director and nominate a company to be the new corporate director that meets the basic eligibility requirement and has consented in writing to becoming the corporate director of the CCIV. [Schedule 1, item 4, subsection 1224U(2)]

3.158 The decision to remove the corporate director can only be made by the members of the CCIV (rather than the members of a particular sub-fund of the CCIV) and cannot be initiated by the members of a single sub-fund unless, consistent with the requirements for a special resolution of the CCIV:

•

they have at least 5 per cent of the total votes of the whole CCIV; or

•

comprise of at least 100 members who are entitled to vote on this resolution for the whole CCIV.

3.159 The current corporate director is only removed and replaced with a new company if both special resolutions pass. The company chosen by members to be the new corporate director does not need to be the one nominated in the notice of the meeting.

3.160 The corporate director must notify ASIC of the appointment as soon as practicable (and in any event within two business days of the appointment) and asking it to alter the CCIV's record of registration to name the appointed company as the CCIV's corporate director. It is only once the CCIV's record of registration has been updated that the appointment of the new corporate director is given effect. [Schedule 1, item 4, subsection 1224U(4)]

3.161 A failure to provide ASIC with the requisite notice is a strict liability offence with a penalty of up to 20 penalty units. The strict liability offence is consistent with the Guide to Framing Commonwealth Offences as it is important that ASIC has up-to-date information about a CCIV changing its corporate director to enable it to update the record of registration to give effect to the change. [Schedule 1, item 4, subsection 1224U(6); Schedule 2, item 199, penalty for subsection 1224U(4) inserted into Schedule 3 to the Corporations Act]

Requirements for a temporary corporate director

3.162 An application to the Court to appoint a temporary corporate director can be made by:

•

ASIC, a member of the CCIV, or a group of members of the CCIV if the CCIV does not have a corporate director that meets the basic eligibility requirement (for example, where the corporate director's AFSL has been cancelled) (see explanation at paragraph 3.146 above); or

•

the current corporate director if the current corporate director wants to retire and members do not choose a new corporate director, or the chosen company does not consent to the appointment (see discussion at paragraph 3.154 above); or

•

ASIC, a member of the CCIV, or a group of members of the CCIV if the temporary corporate director of the CCIV fails to take steps to appoint a permanent corporate director.

3.163 On application, the Court may appoint a temporary corporate director if it is satisfied that such an appointment is in the interests of the members, the company meets the basic eligibility requirement and the company has consented in writing to becoming the temporary corporate director. The Court has discretion to make any further orders that it considers appropriate. [Schedule 1, item 4, subsections 1224V(1) and (2)]

3.164 If the Court appoints a temporary corporate director, the person who made the application must, as soon as practicable after the Court's order appointing the temporary corporate director, and in any event within two business days, lodge a notice with ASIC informing ASIC of the appointment. [Schedule 1, item 4, subsection 1224V(3)]

3.165 A failure to provide ASIC with the requisite notice is a strict liability offence with a penalty of up to 20 penalty units. The strict liability offence is consistent with the Guide to Framing Commonwealth Offences as it is important that ASIC has up-to-date information about a Court changing the CCIV's corporate director and is able to update the record of registration to give effect to the change. [Schedule 1, item 4, subsection 1224V(5); Schedule 2, item 199, penalty for subsection 1224V(3) inserted into Schedule 3 to the Corporations Act]

3.166 In addition, if the person who made the application fails to give ASIC the requisite notice, the company appointed as the CCIV's temporary corporate director may lodge the notice with ASIC. [Schedule 1, item 4, subsection 1224V(4)]

3.167 The temporary corporate director must take steps to ensure that members appoint a new corporate director or, if this fails to occur, to apply to the Court to have the CCIV wound up. The temporary corporate director must call a meeting of the CCIV's members within three months of its appointment to allow the members to choose a new corporate director (or any later period as extended by the Court). The resolution must be a special resolution. Further meetings may be called within the three-month period, or such period as the Court permits. [Schedule 1, item 4, subsections 1224W(1) to (5)]

3.168 A failure to call the meeting of the CCIV's members is a strict liability offence with a penalty of up to 20 penalty units. The strict liability offence is consistent with the Guide to Framing Commonwealth Offences and is justified in this situation as it is essential that the corporate director take steps to ensure a permanent director is appointed. [Schedule 1, item 4, subsection 1224W(10); Schedule 2, item 199, penalty for subsection 1224W(2) inserted into Schedule 3 to the Corporations Act]

3.169 The notice of the meeting of the members must nominate a company to be the permanent corporate director of the CCIV that meets the basic eligibility requirement and has consented, in writing, to becoming the CCIV's permanent corporate director. There is nothing in the new law to prevent the temporary corporate director from being chosen by the members to be the new corporate director, or another company (that is not the subject of the notice of the meeting) from being appointed as the permanent corporate director. [Schedule 1, item 4, subsection 1224W(6)]

3.170 If the members of the CCIV choose a company to be the new corporate director, the temporary corporate director must, as soon as practicable, lodge a notice with ASIC requesting that the CCIV's registration record be updated to reflect the change. [Schedule 1, item 4, subsections 1224W(7) and (8)]

3.171 A failure to provide ASIC with the requisite notice is a strict liability offence with a penalty of up to 20 penalty units. The strict liability offence is consistent with the Guide to Framing Commonwealth Offences as it is essential to the integrity of the record of registration that ASIC has up-to-date information about a Court changing the CCIV's corporate director and is able to update the record of registration to give effect to the change. [Schedule 1, item 4, subsection 1224W(10);Schedule 2, item 199, penalty for subsection 1224W(8) inserted into Schedule 3 to the Corporations Act]

3.172 If the temporary corporate director fails to call a meeting of the CCIV's members to appoint a permanent corporate director within the required period, ASIC, a member of the CCIV, or a group of members of the CCIV may apply to the Court for the appointment of a new temporary corporate director. The new temporary corporate director would then be under the same obligation to take steps to appoint a permanent corporate director. This process is not mandatory. It has been included as a stopgap to provide the CCIV with the opportunity to appoint a new temporary corporate director (who will be subject to the requirements to take steps to secure a permanent corporate director). [Schedule 1, item 4, section 1224X]

3.173 If the temporary corporate director has called one (or more) meetings of the CCIV's members to appoint a permanent corporate director within the required period, but the CCIV's members fail to pass a special resolution appointing a permanent corporate director, the temporary corporate director must apply to the Court for the winding up of all of the sub-funds of the CCIV. If the temporary corporate director does not make this application, ASIC, a member or a group of members of the CCIV may make the application. In addition to making an order to wind up all the sub-funds of the CCIV, the Court may make any further orders it considers appropriate. [Schedule 1, item 4, section 1224Y]

Consequences of changing the corporate director

3.174 If the corporate director changes, the former corporate director must, as soon as practicable, give the new corporate director any books in the former corporate director's possession or control that the Corporations Act requires to be kept in relation to the CCIV. The former corporate director must also give other reasonable assistance to facilitate the change in corporate director. [Schedule 1, item 4, subsection 1224Z(1)]

3.175 A failure to hand over any books, or to give any other reasonable assistance, is a strict liability offence with a maximum penalty of 20 penalty units. This penalty is consistent with the Guide to Framing Commonwealth Offences and is justified in this situation as it is important that the incoming corporate director has the necessary reports and information about the CCIV and its operations to perform its role effectively. [Schedule 1, item 4, subsection 1224Z(2);Schedule 2, item 199, penalty for subsection 1224Z(1) inserted into Schedule 3 to the Corporations Act]

3.176 Further, if the corporate director changes then the rights, obligations and liabilities of the former corporate director in relation to the CCIV become the rights, obligations and liabilities of the new corporate director. However, the former corporate director retains the right to be paid fees and to be indemnified for expenses incurred relating to the period when it was the corporate director. The former corporate director also retains any right, obligation or liability it had as a member of the CCIV and any liability for which it could not have been indemnified out of the assets of the CCIV had it remained the corporate director, and any liability it has arising out of a contravention of a provision of the Corporations Act. [Schedule 1, Part 1, item 4, section 1224ZA]

3.177 A document to which the former corporate director was a party has effect as if the new corporate director (and not the former corporate director) was the party to that document where the document is capable of having this effect after the change in corporate director. [Schedule 1, Part 1, item 4, section 1224ZB]

3.178 These provisions are modelled on sections 601FS and 601FT that apply to registered schemes and are intended to provide an administratively efficient mechanism for the novation of obligations to the new corporate director.

Termination payments

3.179 A CCIV must not give the corporate director a benefit in connection with its retirement from its position as director of the CCIV unless:

•

it is provided for under the CCIV's constitution (and, if it is a retail CCIV, the requirements described in paragraph 3.135 of this explanatory memorandum have been met); or

•

the members of each affected sub-fund of the CCIV have approved the giving of the benefit.

[Schedule 1, item 4, sections 1224ZC and 1224ZD]

3.180 The exceptions for member approval that are available for other companies are also available for a CCIV. In particular, a CCIV does not need to obtain member approval if the benefit is given:

•

under an order of the court; or

•

in prescribed circumstances.

3.181 Some of the exceptions that are available to other companies are not relevant to the benefits given to a corporate director (being a company and not a natural person), in particular the exception for benefits given in respect of:

•

a leave of absence that an officer of another company is entitled to under an industrial agreement; and

•

pensions or lump sum payments (such as retiring allowances of superannuation gratuities); and

•

damages for breach of contract or an agreement between the company and a person as consideration for the person agreeing to hold a position with the company.

[Schedule 1, item 4, section 1224ZE]

Officers and employees of the corporate director of the CCIV

3.182 The officers and employees owe obligations to the corporate director under the existing law, in their capacity as officers and employees of a public company. The new law creates further obligations on these persons in relation to the CCIV. It also extends certain obligations to the auditor engaged by the corporate director.

Duties owed by officers of the corporate director in relation to the CCIV

Duties owed by officers of a retail CCIV

3.183 The duties owed by officers of a corporate director of a retail CCIV are similar to some of the duties owed by the corporate director itself. These are the duty to:

•

act honestly;

•

exercise the degree of care and diligence that a reasonable person would exercise in the officer's position;

•

act in the best interests of the members of the CCIV, as well as the members of each sub-fund of the CCIV;

•

not make use of information acquired through being an officer of the corporate director to gain an improper advantage for the officer or another person or to cause detriment to members of the CCIV; and

•

not make improper use of their position to gain an advantage for themselves or any other person or to cause detriment to members of the CCIV.

[Schedule 1, item 4, paragraphs 1225(1)(a) to (f); Schedule 2, item 57, note to subsection 179(1)]

3.184 The duties to act in the best interests of members aligns with the duties owed by the director of the CCIV (explained above in paragraph 3.90). These duties are tailored to the different legal structure of a CCIV. This recognises the segregation of each group of members that invest in different sub-funds of a CCIV and ensures that the directors of the corporate director must act in their interests in respect of the matters that relate to each sub-fund. However, in the event of any conflict between the duty to the members of the CCIV and the duty to the members of each sub-fund, the duty to the members of the CCIV prevails. This recognises the overarching status of the CCIV as a legal entity as a whole.

3.185 An officer of a corporate director of a retail CCIV is also required to take all steps that a reasonable person would take to ensure that the corporate director complies with the Corporations Act, any conditions imposed on the corporate director's AFSL, the CCIV's constitution and the CCIV's compliance plan. [Schedule 1, item 4, paragraph 1225(1)(g)]

3.186 The duties owed by an officer of a retail CCIV are modelled on the duties owed by officers of a responsible entity in relation to the scheme in section 601FD of the existing law. These additional duties ensure that investors in a retail CCIV are afforded comparable protections as investors in a registered, with some differences tailored to the different legal structure of a CCIV.

3.187 A breach of any of the above duties is a breach of a civil penalty provision. If the breach is intentional or reckless, or a person's involvement in the breach is intentional or reckless, then the person is liable for an offence with a maximum penalty of five years imprisonment. This penalty is consistent with the Guide to Framing Commonwealth Offences and with the penalties an officer of a responsible entity is liable for under the existing law. [Schedule 1, item 4, subsection 1225(2); Schedule 2, item 192, new table item for subsection 1225(1) inserted into subsection 1317E(3) of the Corporations Act, and item 199, penalty for subsection 1225(2) inserted into Schedule 3 to the Corporations Act]

3.188 The officers of the corporate director also owe the Part 2D.1 duties to the corporate director under the existing law. To the extent that there is a conflict between the duties in the new law and the Part 2D.1 duties, the duties in the new law prevail. [Schedule 1, item 4, subsection 1225(3)]

3.189 The additional duties set out above interact with other laws in the same way that the duties in Part 2D.1 do under section 185 of the existing law. That is, the additional duties have effect in addition to, and not in derogation of, any other rule of law that the person has because of their office or employment in relation to a corporation. [Schedule 1, item 4, subsection 1225(4)]

Secretary of the corporate director's responsibility for certain contraventions

3.190 As explained in paragraph 3.85, the CCIV must not appoint a secretary. The corporate director's secretary has responsibility for certain contraventions of the law by the corporate director (being a public company) under section 188 of the existing law.

3.191 The new law extends the operation of section 188 to also hold the corporate director's secretary responsible for certain contraventions of law by the corporate director (being obligations the corporate director has in relation to the CCIV, such as obligations on the corporate director to lodge certain notices with ASIC). The new law also extends the operation of section 188 to hold the corporate director's secretary responsible for certain contraventions of the law by the CCIV (such as obligations on the CCIV to lodge certain notices with ASIC). [Schedule 1, item 4, sections 1225A and 1225B; Schedule 2, item 59, note to subsection 188(1)]

Extended duty to disclose material personal interests

3.192 Section 191 of the existing law (relating to the director's duty to disclose material personal interests) continues to apply to the natural person directors of the corporate director. Akin to other companies, the directors of the corporate director must disclose any material personal interest in the corporate director to the other directors of the corporate director.

3.193 In addition, the new law extends section 191 of the existing law so that a natural person director of the corporate director must also disclose any material personal interest in the affairs of the CCIV to the other natural person directors of the corporate director. [Schedule 1, item 4, section 1225C(1) and (2); Schedule 2, item 58, note to Division 2 of Part 2D.1]

3.194 Strict liability applies to the circumstance that the director of the corporate director has a material personal interest in a matter that relates to the affairs of a CCIV. The imposition of strict liability on this element of the offence is consistent with the operation of subsection 191A(1A) of the existing law (which imposes strict liability in similar circumstances). [Schedule 1, item 4, subsection 1225C(3)]

3.195 The existing exceptions for when a director does not have to disclose a material personal interest continue to apply to the natural person directors of the corporate director, both in respect of their material interests in the corporate director and in the CCIV. These include if the material personal interest arises because the director is a member of the CCIV and the interest is held in common with the other members of the CCIV. [Schedule 1, item 4, subsections 1225C(4) and (5)]

Right of access to CCIV books

3.196 Each natural person director of a corporate director of the CCIV has a right to inspect the books of the CCIV for the purposes of certain legal proceedings. This right is the same as the right of access that applies to directors of other types of companies. [Schedule 1, item 4, section 1225D; Schedule 2, items 63 and 64, note 2 to subsection 198F(1)]

Indemnities, exemptions and insurance against certain liabilities to the CCIV

Restrictions on indemnities and exemptions

3.197 As a CCIV is a type of company, existing section 199A prohibits retail and wholesale CCIVs from granting an officer (including corporate directors) or an auditor:

•

an exemption from a liability to the CCIV incurred as an officer or auditor;

•

an indemnity from a liability owed to the CCIV;

•

an indemnity for certain pecuniary penalties or compensation orders;

•

an indemnity from a liability that do not arise out of conduct in good faith; and

•

certain indemnities for legal costs.

[Schedule 1, item 4, subsection 1225E(2); Schedule 2, item 66, note to subsection 199A(1)]

3.198 The restrictions in existing section 199A are also extended to prohibit the CCIV from granting these types of exemptions or indemnities to an officer or auditor of the corporate director. [Schedule 1, item 4, subsection 1225E(1)]

3.199 Neither existing section 199A, nor the extended operation of section 199A, prohibits all types of indemnities. Similarly, they do not constrain whether the indemnity is given in an employment contract, the constitution or a deed.

Restrictions on insurance

3.200 The CCIV (or a related body corporate) is prohibited from insuring a current or former officer or auditor of the CCIV from a liability (other than legal costs) that arises out of:

•

a wilful breach of duty in relation to the CCIV; or

•

a breach of the officer's statutory duties not to improperly use their position or improperly use information under section 182 and 183 of the Corporations Act (respectively).

3.201 This restriction on insurance is extended to cover a liability of an officer or auditor of the corporate director of the CCIV. [Schedule 1, item 4, subsection 1225F(1) and (2); Schedule 2, item 67, note to subsection 199B(1)]

3.202 In addition, a retail CCIV is prohibited from insuring an officer or auditor of the corporate director of the CCIV for a liability to the members of the CCIV that arises out of a breach of their statutory duties under new section 1225D. [Schedule 1, item 4, subsection 1225F(3)]

Duties of employees of the corporate director in relation to the CCIV

3.203 The employees of the corporate director owe a duty to not make improper use of their position or of information acquired through being an employee of a corporate director in order to gain an advantage for themselves or another person or to cause detriment to members of the CCIV. [Schedule 1, item 4, subsection 1225F(1)]

3.204 These duties that are owed by employees of the corporate director are modelled on the duties of employees of responsible entities of registered schemes in section 601FE of the existing law. As with the corresponding registered scheme provisions, the new duties owed by officers of the corporate director are owed directly to the members.

3.205 A breach of the above duties is a breach of a civil penalty provision. If the breach is intentional or reckless, or a person's involvement in the breach is intentional or reckless, then the person is liable for an offence with a maximum penalty of five years imprisonment. This penalty is consistent with the Guide to Framing Commonwealth Offences and with the penalties an officer of a responsible entity is liable for under the existing law. [Schedule 1, item 4, subsection 1225F(2); Schedule 2, item 192, new table item for subsection 1225F(1) inserted into subsection 1317E(3) of the Corporations Act, and item 199, penalty for subsection 1225F(2) inserted into Schedule 3 of the Corporations Act]

3.206 The employees of the corporate director also owe the Part 2D.1 duties to the corporate director under the existing law. To the extent that there is a conflict between the duties in the new law and the Part 2D.1 duties, the duties in the new law prevail. [Schedule 1, item 4, subsection 1225F(3)]

3.207 The additional duties set out above interact with other laws in the same way that the duties in Part 2D.1 do under section 185 of the existing law. That is, the additional duties have effect in addition to, and not in derogation of, any other rule of law that the person has because of their office or employment in relation to a corporation. [Schedule 1, item 4, subsection 1225F(4)]

Compliance plan of a retail CCIV

Documenting the compliance plan

3.208 A retail CCIV must have a compliance plan. A wholesale CCIV is not required to have a compliance plan. [Schedule 1, item 4, subsections 1226(1) and (2)]

3.209 A CCIV that will, upon registration, be a retail CCIV is required to lodge with ASIC a copy of its compliance plan at the same time it lodges its application for registration (see paragraph 2.14 above).

3.210 In any event, a CCIV that becomes a retail CCIV must lodge a copy of the CCIV's compliance plan with ASIC within 14 days of becoming a retail CCIV. The copy must be signed by all of the directors of the corporate director. A failure to do so is a strict liability offence with a maximum penalty of 20 penalty units. This penalty is consistent with the Guide to Framing Commonwealth Offences and is also consistent with other offences in the Corporations Act that impose strict liability for failure to lodge a document with ASIC. [Schedule 1, item 4, subsections 1226(3) and (4); Schedule 2, item 199, penalty for subsection 1226(3) inserted into Schedule 3 to the Corporations Act]

3.211 The compliance plan must set out adequate measures to be applied by the corporate director in operating the CCIV to ensure compliance with the Corporations Act and the CCIV's constitution. This is the only basic content requirement for the compliance plan. [Schedule 1, item 4, section 1226A]

3.212 The corporate director must ensure at all times that the CCIV's compliance plan meets the legislative requirements for compliance plans. The corporate director must also comply with the compliance plan. [Schedule 1, item 4, paragraphs 1224D(2)(f) and (g)]

3.213 The corporate director's responsibilities in relation to the compliance plan are similar to those applying to responsible entities of registered schemes. However, unlike for registered schemes, there are no prescriptive content requirements for a CCIV's compliance plan. This is intended to improve the administrative efficiency and effectiveness of compliance plans through a more flexible and outcomes-focused approach.

3.214 The compliance plan requirements contained in the new law will be supported by ASIC guidance regarding the content of compliance plans, including in relation to identifying risks of non-compliance and measures for mitigating those risks. This means the compliance plan must be tailored to suit the nature, scale, complexity and assets of the CCIV. An adequate compliance plan should include mechanisms and procedures for early identification of potential breaches and for monitoring overall adherence to the compliance plan.

3.215 The compliance plan forms a part of the overall compliance management system that the corporate director, as an AFSL holder, must implement to meet its licence obligations under section 912A.

3.216 As it is likely that some corporate directors will be the corporate director for more than one CCIV, the new law provides flexibility for the compliance plan of a CCIV that is lodged with ASIC to incorporate by reference specified provisions of a compliance plan of another CCIV. The provisions incorporated by reference may be incorporated as at a specific date, or as in force from time to time. These provisions will be taken to be included in the plan. [Schedule 1, item 4, section 1226B]

This is expected to reduce the administrative burden where a corporate director is the corporate director of more than one CCIV. However, ASIC may require the corporate director to lodge a consolidated copy of the CCIV's compliance plan that sets out the full text of provisions taken to be included in the plan. If the corporate director does not comply with this direction, it commits an offence of strict liability, with a penalty of up to 20 penalty units. This is consistent with other offences in the Corporations Act that impose strict liability for failure to lodge a document with ASIC (see, for example, section 601HD of the Corporations Act). [Schedule 1, item 4, section 1226E; Schedule 2, item 199, penalty for subsection 1226E(3) inserted into Schedule 3 to the Corporations Act]

3.217 ASIC may also give a written direction to the corporate director of a CCIV to give it information about arrangements contained in the compliance plan. The direction must specify the timeframe within which the corporate director must give the information (of no less than 14 days after the direction is given). A failure to comply with this requirement is a strict liability offence, with a penalty of up to 60 penalty units. This is consistent with other offences in the Corporations Act that impose strict liability for failure to lodge information with ASIC when directed (see, for example, sections 321 and 158 of the Corporations Act). [Schedule 1, item 4, section 1226C; Schedule 2, item 199, penalty for subsection 1226C(2) inserted into Schedule 3 to the Corporations Act]

3.218 The corporate director of a CCIV may amend the CCIV's compliance plan or repeal and replace it. ASIC may also direct the corporate director to modify the CCIV's compliance plan to ensure it complies with the basic content requirement explained in paragraph 3.211 above. If the compliance plan is modified or replaced, the corporate director must lodge a copy of the modified or new compliance plan (signed by all the directors of the corporate director) with ASIC within 14 days of the change. The corporate director commits a strict liability offence if it does not comply with ASIC's direction or does not lodge the copy of the modified or new plan. Both of these offences carry a penalty of up to 20 penalty units. These penalties are consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, section 1226D; Schedule 2, item 199, penalty for subsections 1226D(3) and (4) inserted into Schedule 3 to the Corporations Act]

3.219 These strict liability offences that relate to documenting the compliance plan (explained in paragraphs 3.208 to 3.218 above) are important mechanisms for ensuring that ASIC can access comprehensive and up-to-date information about the compliance plan of a CCIV and for ensuring that CCIVs have in place robust measures for complying with the regulatory requirements and the CCIV's constitution. The offences are consistent with the Guide to Framing Commonwealth Offences and with other offences in the Corporations Act that impose strict liability for failure to lodge a document with ASIC (see, for example, section 601HD of the Corporations Act).

3.220 In contrast to the requirements for registered schemes, there is no requirement for a CCIV to have a compliance committee to provide oversight of the operations of the CCIV. Instead, at least half of the directors of the corporate director of a retail CCIV must be external directors.

3.221 The requirement for external directors applies generally in respect of all retail CCIVs and aligns with the circumstances in which a responsible entity of a registered scheme is relieved of the requirement to have a compliance committee under Part 5C.5. The requirement for the corporate director of a retail CCIV to have external directors is explained in further detail at paragraphs 3.108 to 3.115.

Auditing the compliance plan

3.222 The corporate director of a retail CCIV must engage an auditor to audit compliance with the CCIV's compliance plan. A failure to do so is a strict liability offence with a penalty of up to 20 penalty units. A strict liability offence provides a strong incentive to comply with this requirement, which ensures there is external scrutiny of a CCIV's compliance plan. The penalty is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsections 1226F(1) and (2); Schedule 2, item 199, penalty for subsection 1226F(1) inserted into Schedule 3 to the Corporations Act]

3.223 The auditor of the compliance plan must be a registered company auditor, an audit firm or an authorised audit company. In order to ensure independent scrutiny, the auditor of the compliance plan must not be:

•

the corporate director (or an associate of the corporate director);

•

a person who holds money or property of the CCIV (or an associate of the person); or

•

the auditor of the corporate director's own statutory financial statements (however, in this instance only, the CCIV compliance plan auditor may be from the same audit firm as the auditor of the corporate director).

[Schedule 1, item 4, subsections 1226F(1) to (4)]

3.224 Within three months of the end of the financial year (generally by 30 September), the auditor must conduct an annual audit of the compliance plan and report whether, in the auditor's opinion, the corporate director has complied with the CCIV's compliance plan, and whether the plan continues to meet the requirements for compliance plans explained above. A contravention of this requirement is a strict liability offence with a maximum penalty of 20 penalty units. A strict liability offence ensures there is a strong incentive for the auditor to undertake a regular and timely audit of the CCIV's compliance plan. The penalty is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsections 1226G(1) and (6); Schedule 2, item 199, penalty for subsection 1226G(1) inserted into Schedule 3 to the Corporations Act]

3.225 The corporate director can also arrange for the auditor to carry out additional audits. [Schedule 1, item 4, subsection 1226F(5)]

3.226 The auditor of the compliance plan must have access at all reasonable times to the books of the CCIV and assistance for the purposes of the audit of the compliance plan, including assistance with information and explanations as required from officers of the corporate director. An officer of the corporate director who fails to provide this access, or give this information, commits an offence of strict liability with a maximum penalty of 20 penalty units. A strict liability offence ensures officers of the corporate director have a strong incentive to provide the compliance plan auditor with full assistance and disclosure during the audit process and is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsections 1226G(2) and (3); Schedule 2, item 199, penalty for subsection 1226G(3) inserted into Schedule 3 to the Corporations Act]

3.227 The corporate director must lodge the auditor's report of the compliance plan with ASIC at the same time as it lodges the annual financial statements and reports of the CCIV. A contravention of this requirement is a strict liability offence with a maximum penalty of 20 penalty units. This offence creates a strong incentive for the corporate director to provide ASIC with timely and independently audited information about the CCIV's compliance processes and record over the previous financial year and is consistent with the Guide to Framing Commonwealth Offences. [Schedule 1, item 4, subsections 1226G(4); Schedule 2, item 199, penalty for subsection 1226G(4) inserted into Schedule 3 to the Corporations Act]

3.228 The auditor of the compliance plan has qualified privilege in respect of statements made in the audit report and notifications that the auditor makes to ASIC about contraventions of the compliance plan. [Schedule 1, item 4, subsection 1226G(5)]

3.229 These requirements are based on the requirements for compliance plans of registered schemes contained in section 601HG. They ensure there is an independent, annual compliance review process to assist the corporate director and its officers in monitoring and managing compliance risks.

Offences for contraventions by individual auditor

3.230 As for registered schemes, an individual auditor, audit company, or lead auditor commits an offence if the person fails to notify ASIC of certain matters within 28 days of becoming aware of them. The person must notify ASIC if they become aware of:

•

a significant contravention of the Corporations Act;

•

a contravention of the Corporations Act that is not significant but that the auditor believes has not or will not be adequately dealt with through the audit process; or

•

an attempt by a person to influence or interfere with the audit.

[Schedule 1, item 4, subsections 1226H(1), (2), (3) and (7)]

3.231 A failure to notify ASIC of any of the above matters is an offence with a maximum penalty of one year imprisonment. This penalty is consistent with the Guide to Framing Commonwealth Offences and provides a strong incentive to notify ASIC of key matters central to ASIC's role as regulator. [Schedule 1, item 4, subsection 1226H(6); Schedule 2, item 199, penalty for subsection 1226H(6) inserted into Schedule 3 to the Corporations Act]

3.232 In determining whether a contravention is a significant one, a person should consider:

•

the penalty for the contravention;

•

the effect that the contravention has or may have on the financial position of the CCIV or a sub-fund of the CCIV or the information available about the financial position of the CCIV or a sub-fund of the CCIV; and

•

any other relevant matter.

[Schedule 1, item 4, subsection 1226H(4) and (5)]

3.233 The circumstances that give rise to a contravention and the matters that need to be considered when determining whether a contravention is significant are based on the equivalent provisions for registered schemes.

Changing the compliance plan auditor

3.234 The auditor of the compliance plan may be removed by the corporate director or may resign on its own initiative. In certain circumstances, the corporate director must remove the auditor of the compliance plan.

3.235 The corporate director must remove the auditor if it is no longer eligible to act as the auditor of the compliance plan (see paragraph 3.223 for the eligibility requirements for a CCIV's compliance plan auditor). A failure to do so is a strict liability offence with a penalty of up to 20 penalty units. The corporate director may also remove the auditor for other reasons if ASIC consents to the removal. [Schedule 1, item 4, subsections 1226J(1) and (2); Schedule 2, item 199, penalty for subsection 1226J(1)(a) inserted into Schedule 3 to the Corporations Act]

3.236 The auditor may, by written application, resign subject to ASIC consenting to the resignation. ASIC must notify the auditor and the corporate director whether it consents to the auditor's resignation as soon as practicable after receiving the application. [Schedule 1, item 4, subsections 1226J(3) and (4)]

3.237 To encourage proper disclosure of an auditor's reasons for resigning, a statement by the auditor in its application or in answer to an inquiry by ASIC concerning the reasons for its resignation cannot be used as evidence in civil or criminal proceedings. It also cannot be used as the basis for prosecution, action or suit against the auditor (other than in respect of a contravention relating to false or misleading statements under section 1308). A certificate by ASIC that the statement was made in the auditor's application for resignation, or in answer to an inquiry by ASIC, is conclusive evidence that the statement was so made. [Schedule 1, item 4, subsection 1226J(5)]

3.238 The day on which the auditor's resignation takes effect is the later of:

•

the day specified in the notice of resignation; or

•

the day ASIC consents to the resignation; or

•

the day fixed by ASIC for the resignation.

[Schedule 1, item 4, subsection 1226J(6)]

3.239 If the auditor of the compliance plan changes, the corporate director must, within 7 days, write to ASIC asking it to alter the record of the CCIV's registration to show the name of the new auditor. A failure to do so is a strict liability offence with a penalty of up to 20 penalty units. A strict liability offence ensures there is a strong incentive for the corporate director to provide information to ASIC about the identity of the compliance plan auditor in the event of a change in auditor. The offence is consistent with the Guide to Framing Commonwealth Offences. ASIC must comply with the request if the change complies with the Corporations Act. [Schedule 1, item 4, section 1226K; Schedule 2, item 199, penalty for subsection 1226K(1) inserted into Schedule 3 of the Corporations Act]

3.240 These requirements are based on the requirements for changing the auditor of a compliance plan for a registered scheme, contained in section 601HH.

Member protection

Related party transactions by retail CCIVs

Approval of related party transactions required at the sub-fund level (not at whole-of-CCIV level)

3.241 The rules concerning related party transactions in Chapter 2E of the Corporations Act generally apply to retail CCIVs in the same way that they apply to public companies, and to an entity that a retail CCIV controls in the same way as it applies to an entity a public company controls. The rules concerning related party transactions do not apply to wholesale CCIVs. [Schedule 1, item 4, section 1227; Schedule 2, item 76, note to Chapter 2E]

3.242 To the extent the rules require a retail CCIV to obtain the approval of its members to give a related party a financial benefit, the CCIV must separately obtain the approval of the members of each sub-fund that is affected by the giving of the financial benefit (not the CCIV as a whole). [Schedule 1, item 4, subsections 1227A(1) and (2), Schedule 2, item 77 and 78, note 3 to subsection 208(1)and note 3 to subsection 209(2)]

3.243 If the members of a sub-fund do not give approval, the CCIV cannot enter into the transaction with respect to that sub-fund. If a transaction relates to more than one sub-fund of the retail CCIV, the CCIV must separately obtain the approval of the members of each affected sub-fund. If the members of any of the affected sub-funds do not approve the transaction, the CCIV will not be able to enter into the transaction with respect to those sub-funds.

Exceptions

3.244 If the corporate director of a retail CCIV is entitled to fees or an indemnity under the CCIV's constitution, and the provisions of the constitution comply with the requirements for such clauses (see paragraphs 3.130 to 3.131 above), then a retail CCIV is not required to obtain the approval of the affected members. A similar exception applies to the fees and indemnities given to a responsible entity of a registered scheme (that is set out in the registered scheme's constitution). [Schedule 1, item 4, subsection 1227A(3)]

Exceptions available to public companies not available for retail CCIVs

3.245 The exception for remuneration and reimbursement to an officer or employee of a public company under section 211 of the existing law is not available for a retail CCIV, as there are bespoke exceptions for the corporate director's financial benefits explained above. [Schedule 1, paragraph 1227B(1)(a)]

3.246 The exceptions in sections 213 and 214 of the existing law for small amounts given to a related party, or financial benefits given a closely held subsidiary, are also not available for retail CCIVs. This is consistent with the rules that apply to related party transactions in respect of a registered scheme (see section 601LE in Chapter 5C of the Corporations Act). It recognises that the payment of any amount by a retail CCIV to a related party of the CCIV (no matter how small) requires member approval. [Schedule 1, paragraphs 1227B(1)(b) and (c)]

3.247 The exceptions from the related party transaction rules in the existing law continue to apply to entities the retail CCIV controls in relation to benefits given to its related parties. [Schedule 1, item 4, subsection 1227B(2)]

Procedural requirements for member approval

3.248 Approval for a related party transaction may only be given at a meeting of the members of each affected sub-fund of a retail CCIV. A body corporate that is a member of the CCIV may appoint an individual representative to exercise its powers at the meeting in the same way as an individual may be appointed to exercise the body corporate's powers at a meeting of a registered scheme. [Schedule 1, item 4, section 1227D]

3.249 A retail CCIV must, as for a public company, prepare an explanatory statement to members as part of the process of obtaining member approval. The statement must include certain information, such as the identity of the related party and the nature of the financial benefit to be given. The corporate director of a CCIV, and any of the directors of the corporate director of the CCIV, are also required to set out in the explanatory statement certain information, including:

•

any recommendation about the giving of the financial benefit, and the reasons for the recommendation;

•

whether they have an interest in the outcome of the proposed resolution to approve the financial benefit; and

•

all other information that is known to the company, the corporate director, or any of the directors of the corporate director that is reasonably required by the members in order to decide whether it is in the sub-fund's interest to pass the proposed resolution.

[Schedule 1, item 4, section 1227C]

Meaning of 'related party'

3.250 Section 228 (about 'related parties' of a public company) does not apply to a CCIV. Related parties of a CCIV are instead:

•

the corporate director of the CCIV or an entity that controls the corporate director of the CCIV;

•

the directors of the corporate director and their parents and children, the directors (if any) of an entity that controls the corporate director and their parents and children and any entity controlled by any of these persons (unless also controlled by the CCIV); and

•

any entity acting in concert with a related party of the CCIV on the understanding that the related entity will receive a financial benefit if the CCIV gives the entity a financial benefit.

[Schedule 1, item 4, subsections 1227E(1) to (5) and (8)]

3.251 An entity is also a related party of a CCIV if it was a related party in the previous six months or if it has reasonable grounds to believe it will become a related party of the CCIV at any time in the future. [Schedule 1, item 4, subsections 1227E(6) and (7)]

3.252 Consequential amendments are made to the definitions of 'entity', 'financial benefit' and 'related party' to reflect the modifications contained Part 8B.4 of the new law. [Schedule 2, items 10, 13 and 24, definitions of 'entity', 'financial benefit' and 'related party' in section 9 of the Corporations Act]

Rights and remedies of members of a CCIV

3.253 Members of a CCIV, like members of any other company, may apply to the court for remedy in circumstances where:

•

the conduct of the affairs of the CCIV;

•

an actual or proposed act or omission on behalf of the CCIV; or

•

an actual or proposed resolution of the CCIV's members, or a class of members;

is either contrary to the interests of the CCIV as a whole or oppressive to (or unfairly prejudicial to or unfairly discriminatory against) a member or class of members of the CCIV. This right is extended so that members of one or more sub-funds of the CCIV may seek also remedy when it is contrary to the interests of the members of that sub-fund (or those sub-funds), considered as a whole. [Schedule 1, item 4, section 1227F; Schedule 2, item 79, notes to section 232]

3.254 The court has power to make any order provided for under section 233 of the Corporations Act that it considers appropriate in relation to a CCIV (in the same way that it can in relation to any other company). This includes an order to appoint a receiver to manage any or all of a sub-fund's property or modify or repeal the CCIV's constitution. [Schedule 1, item 4, section 1227G; Schedule 2, items 80 to 81, note to subsections 233(1) and (3)]

3.255 A member or officer of a CCIV (or a former member or former officer) may bring, or intervene in, proceedings on behalf of the CCIV with leave from the court in the same way that a member or officer of any other company can. The court must grant the application for leave if certain factors are established, including if it is probable that the company itself will not bring the proceedings and it is in the best interests of the company that the applicant be granted leave (among other things). The rebuttable presumption that granting leave is not in the best interests of the company applies to CCIVs in the same way as it applies to other companies (except that references to a third party means a person that is not a related party of the CCIV). [Schedule 1, item 4, section 1227H; Schedule 2, items 82 and 83, note 2 to subsection 237(4)]

3.256 The CCIV must comply with the relevant procedures for varying and cancelling class rights in the same way that other companies are required to do so. If the CCIV's constitution sets out the procedure for varying and cancelling class rights, the CCIV must follow that procedure. If the CCIV's constitution does not set out the procedure for varying and cancelling class rights, the CCIV must pass a special resolution of the sub-fund of the CCIV to which the affected shares are referable, instead of a special resolution of the whole CCIV. The CCIV must also pass a special resolution of the affected class of members (in the same way that other companies are required to do so). [Schedule 1, item 4, section 1227J; Schedule 2, items 84 and 85 notes to subsections 246B(1) and 246B(2)]

3.257 Certain actions are taken to vary rights attached to shares of a CCIV in the same way that certain actions are taken to vary the rights attached to shares of other companies (except that sub-funds of the CCIV to which only one class of shares are referable are treated in the same way as other companies with one class of shares). [Schedule 1, item 4, section 1227K]

3.258 A CCIV must notify ASIC in the prescribed form of the particulars of a division of the shares in the CCIV into classes (if the shares were not previously divided in this way) and a conversion of shares in a class into shares in another class in the same way that a public company is required to do so. [Schedule 1, item 4, section 1227L; Schedule 2, item 86, note to subsection 246F(3)]

Civil liability of corporate director to members

3.259 If a member suffers loss or damage because the corporate director has contravened a provision in Chapter 8B, then the member has a direct right of recourse against the corporate director to recover the amount of the loss or damage from the corporate director. This is regardless of whether or not the corporate director has been convicted of an offence, or has a civil penalty order made against it, in respect of the contravention. [Schedule 1, item 4, subsection 1227M(1)]

3.260 This right is consistent with the right of a member of a registered scheme to seek remedy against the responsible entity of the registered scheme in similar circumstances, as provided for in section 601MA of the existing law.

3.261 The new law includes a statutory limitation period that requires the action against the corporate director to be taken within 6 years after the member's cause of action has arisen. [Schedule 1, item 4, subsection 1227M(2)]

3.262 The availability of this remedy for members of a CCIV does not affect any liability that a person, including the corporate director or an officer or employee of the corporate director, has under the Corporations Act or under any other laws. In particular, it does not affect the ability to convict the person of an offence, or make a civil penalty order against it, for the contravention of the relevant provision in Chapter 8B. [Schedule 1, item 4, subsection 1227M(3)]

Meetings

3.263 A CCIV's powers may be exercised by its director or its members. As explained in paragraphs 3.122 and 3.123 above, some of the CCIV's powers must be exercised by the members of the CCIV. For example, the decision to replace the corporate director of a CCIV must be made by the CCIV's members.

3.264 In addition, some of the CCIV's powers may be exercised in relation to a particular sub-fund of the CCIV, by that sub-fund's members. For example, a decision to wind up a sub-fund voluntarily.

3.265 The new law sets out the method by which a resolution for the CCIV may be passed by the corporate director or by the CCIV's members.

Directors' meetings

3.266 The corporate director of a CCIV may pass a resolution for the CCIV by passing a resolution of the directors of the corporate director. This mechanism effectively 'looks through' the corporate director of the CCIV (being a company itself) to the natural person directors of the corporate director who are making the decision to exercise the CCIV's powers. [Schedule 1, item 4, subsection 1228(1)]

3.267 The resolution must clearly state that it is on behalf of the corporate director in its capacity as a corporate director of the CCIV. It should also state which CCIV the resolution relates to if the corporate director is the corporate director of more than one CCIV. These requirements aim to avoid uncertainty about which company the natural person directors of the corporate director are acting for (that is, the CCIV, another CCIV or the corporate director itself). [Schedule 1, item 4, paragraphs 1228(1)(a) and (b)]

3.268 Part 2G.1 of the Corporations Act, which sets out the requirements for directors' meetings, does not apply to a CCIV, as this bespoke rule applies instead. This does not affect the application of Part 2G.1 for resolutions, or meetings, of the corporate director of the CCIV (being a company itself). [Schedule 1, item 4, subsections 1228(2) and (3); Schedule 2, item 87, note to Part 2G.1]

Meetings of members of the CCIV and sub-funds

3.269 The rules for holding meetings of members of a CCIV and its sub-funds are based on the rules for registered schemes, rather than the rules for companies. The rules for meetings of members of registered schemes apply to a CCIV as if:

•

the CCIV is a registered scheme;

•

the CCIV's members are the members of that scheme;

•

the corporate director is the responsible entity of the registered scheme;

•

the CCIV's constitution were the scheme's constitution; and

•

the CCIV's compliance plan is the registered scheme's compliance plan.

[Schedule 1, item 4, section 1228A; Schedule 2, items 12, 27 and 88-90, definitions of 'extraordinary resolution' and 'special resolution' in section 9 and notes Part 2G.2, Part 2G.3 and Part 2G.4 of the Corporations Act]

3.270 Similar adaptations have been made for meetings of the members of a sub-fund of a CCIV. As such, the rules apply to meetings of members of a sub-fund of a CCIV as if:

•

the sub-fund is a registered scheme;

•

the sub-fund's members are the members of the scheme;

•

the corporate director is the responsible entity of the registered scheme;

•

the CCIV's constitution were the scheme's constitution; and

•

the CCIV's compliance plan is the registered scheme's compliance plan.

[Schedule 1, item 4, section 1228B]

3.271 A resolution may only be moved by the members if the resolution does not treat any other member of any other sub-fund differently or affect any other interest of a member of any other sub-fund. This requirement applies to all CCIVs (listed or otherwise). [Schedule 1, item 4, section 1228E]

3.272 If a member of a sub-fund wishes to call a meeting of the members of a sub-fund of the CCIV, then that member may only request a copy of so much of the register of the CCIV's members as relates to that particular sub-fund of the CCIV. If a member is calling a meeting of the members of the whole CCIV, it may request a copy of the full register of members. The CCIV must, without charge, produce a copy of the register of members (in part or in full, as required). A failure to do this is a strict liability offence with a maximum penalty of 20 penalty units. This penalty is consistent with the Guide to Framing Commonwealth Offences and ensures the ability of members to exercise their right to call meetings - being a basic member right in any company. [Schedule 1, item 4, section 1228D]

Example 3.1 Meetings of members of a CCIV and its sub-funds

Ironbank CCIV has three sub-funds, Ironbank Growth SF, Ironbank Wealth SF and Ironbank Gold Investment SF.

Two proposals are put forward.

•

The first proposal involves replacing the corporate director.

•

The second proposal relates to cancelling forfeited shares in each of two of the sub-funds, Ironbank Growth SF and Ironbank Wealth SF.

Separate meetings of the whole CCIV, the members of Ironbank Growth SF and Ironbank Wealth SF are called. For administrative convenience, the meetings are to be held on the same day.

The first proposal affects the interests of the members of the whole CCIV. Accordingly, a resolution is put to all of the members of the CCIV who must vote on the proposal together.

Eighty per cent of the members of the whole CCIV vote in favour of the first proposal. A review of the count of the votes indicates that only 20 per cent of the members of Ironbank Gold Investment SF voted in favour of the proposal. However, because it is a resolution of the whole CCIV (with the vote of all of the members of the CCIV considered as a whole), the resolution is carried.

As the second proposal only affects the interests of the members of Ironbank Growth SF and Ironbank Wealth SF, it is only put forward at the meetings of Ironbank Growth SF and Ironbank Wealth SF.

Eighty per cent of the members of Ironbank Growth SF vote in favour of the second proposal. However, only five per cent of the members of Ironbank Wealth SF are in favour of the proposal.

As the second proposal can proceed in a manner that does not affect the interests of the members of Ironbank Wealth SF, it can proceed in respect of just Ironbank Growth SF. It cannot proceed in respect of Ironbank Wealth SF.

Further modifications to the meeting rules for CCIVs and sub-funds

3.273 Some further modifications to the meeting rules are made to account for the CCIV's corporate status.

3.274 In particular, a member in a CCIV has a share in the CCIV (which are different to interests in a scheme). At a meeting of the CCIV or a sub-fund of the CCIV, a member's voting power is:

•

for a vote on a show of hands, 1 vote;

•

for a vote on a poll at a meeting of the CCIV, 1 vote for each dollar of the value of the total shares in the CCIV that the member holds (and, in the case of a meetings of the members of a sub-fund, that is referable to the relevant sub-fund); or

•

for a vote on a poll at a meeting of a sub-fund of a CCIV, 1 vote for each dollar of the value of the total shares that the member holds in the CCIV that are referable to that sub-fund.

[Schedule 1, item 4, section 1228F]

3.275 The chair has a casting vote and, if the chair is a member, any vote it has in its capacity as member. [Schedule 1, item 4, paragraph 1228F(2)(c)]

3.276 If a member holds a share jointly with another person, then only the vote of the member whose name appears first in the register of members of the CCIV counts. [Schedule 1, item 4, paragraph 1228F(2)(d)]

3.277 If an associate of a CCIV (including the corporate director), or an associate of the corporate director has an interest in the resolution other than in their capacity as a member of the CCIV, they are not entitled to vote at either a meeting of the members of the CCIV or a sub-fund of the CCIV. [Schedule 1, item 4, section 1228G]

3.278 If a CCIV is listed, the corporate director, its associates and the CCIV's associates are entitled to vote their interest on resolutions to remove the corporate director and choose a new corporate director (in the same way that these persons can for listed registered schemes).

3.279 A bespoke rule applies for determining how to calculate the value of a person's shares, for the purposes of determining that person's voting power at a meeting of the CCIV or of the sub-fund. A different method of calculating the value of a person's shares applies depending on whether:

•

the person's shares are redeemable;

•

the CCIV is listed;

•

the sub-fund to which the person's shares are referable is liquid; and

•

the person's shares are in a retail or wholesale CCIV.

[Schedule 1, item 4, section 1228H]

3.280 If the person holds shares in a retail CCIV that is listed, then the value of those shares is the last sale price on the relevant prescribed market on the trading day immediately before the day on which the poll is taken. [Schedule 1, item 4, subsection 1228H(3)]

3.281 If the person holds shares in a retail CCIV that is not listed, and those shares are redeemable and referable to a sub-fund that is liquid, then the value of those shares are calculated in accordance with the rules in the retail CCIV's constitution. A retail CCIV's constitution must make provision for certain matters regarding the redemption of redeemable shares. [Schedule 1, item 4, subsection 1228H(4)]

3.282 If the person holds shares in a wholesale CCIV that are redeemable and referable to a sub-fund that is liquid, and its constitution has set out the amount to be paid for redeeming a share, then the value of the person's shares is calculated in accordance with those rules. [Schedule 1, item 4, subsection 1228H(5)]

3.283 In all other cases, the value of a person's shares is the amount that the corporate director of the CCIV determines in writing to be the price that a willing but not anxious buyer would pay for the shares if it was sold on the business day immediately before the day on which the poll at the meeting is taken. [Schedule 1, item 4, subsection 1228H(2)]

3.284 These methods for calculating the value of the shares of a CCIV are based on the methods for calculating the value of a member's interest in a registered scheme for the purposes of calculating that member's voting power at a meeting of the scheme's members under section 253F of the existing law.

3.285 The right of the auditor of a scheme's compliance plan to attend a meeting of the scheme's members, contained in Part 2G.4 of the Corporations Act, is not applicable to wholesale CCIVs or sub-funds of wholesale CCIVs as a wholesale CCIV is not required to have a compliance plan. [Schedule 1, item 4 section 1228C]

Contingent amendments to facilitate hybrid meetings and the use of technology for CCIVs

3.286 Schedule 4 to the Bill makes contingent amendments to Chapter 1 of the Corporations Act to facilitate technology neutral signature of documents and electronic provision of documents to members in the context of CCIVs.

3.287 The contingent amendments apply from commencement of the CCIVs regime on 1 July 2022 if the Corporations Amendment (Meetings and Documents) Act 2021 has commenced by that date. The contingent amendments do not commence at all if the Corporations Amendment (Meetings and Documents) Act 2021 does not commence prior to 1 July 2022.

3.288 The contingent amendments ensure that technology neutral signing is facilitated for documents relating to meetings of the members of a sub-fund (in addition to meetings of the members of a CCIV, which are already covered as a meeting of the members of a company under the changes). [Schedule 4, items 1 and 2, paragraphs 110(2)(a) and (ba)]

3.289 The contingent amendments also facilitate the technology neutral sending of documents, including financial reports, to members of a CCIV (including members of a sub-fund). In particular, amendments are made to ensure meeting-related documents sent by the corporate director of a CCIV to members of a CCIV (or sub-fund) are technology neutral and allow recipients to make elections regarding the form in which they receive documents. [Schedule 4, items 3 to 6 and 9, paragraph 110E(1)(ba), paragraph 110J(3)(ba), subsection 110K(2A), subsections 100K(4) and (5)]

3.290 Consistent with the requirements in the Corporations Amendment (Meetings and Documents) Act 2021, the corporate director must notify members of their rights to make elections regarding the form of documents. A failure to do so is a strict liability offence with a penalty of up to 30 penalty units. This is the same as the penalty that applies if a company or a registered scheme fails to provide this notice to members of an ordinary company or scheme. [Schedule 4, item 10, penalty for subsection 110KA(2A) inserted into Schedule 3 to the Corporations Act]

Corporate contraventions

General attribution rules

3.291 The new rules for attributing the physical and mental element of an offence to a CCIV apply for the purposes of all Commonwealth laws, irrespective of whether those laws currently apply or disapply Part 2.5 of the Criminal Code, or include other attribution rules for conduct. The special attribution rules do not apply to offences under State laws because such an application would offend the Melbourne Corporation doctrine. ^[3] [Schedule 1, item 4, section 1229]

Other attribution rules do not apply

3.292 The new attribution rules are designed to be comprehensive and all existing Commonwealth attribution rules are disapplied in determining whether a CCIV has committed an offence. This includes Part 2.5 of the Criminal Code and any other bespoke rules that attribute:

•

conduct engaged in by a person;

•

conduct engaged in by a person in relation to another person; or

•

a state of mind; or

•

to a body corporate.

[Schedule 1, item 4, section 1229A]

3.293 In the context of civil penalty provisions, rules that attribute an offence or a provision in relation to a contravention to a body corporate are also disapplied in the CCIV context. [Schedule 1, item 4, section 1229A]

3.294 Examples of bespoke attribution rules that are disapplied are section 769B of the Corporations Act, section 12GH of the ASIC Act, section 199 of the Aboriginal and Torres Strait Islander Act 1995 and section 324 of the National Consumer Credit Protection Act 2009.

3.295 The attribution rules do not interfere with the special rules in the new law for determining when a corporate director is responsible for acts of its agents and the CCIV's agents for the purposes of determining certain liabilities (see paragraph 3.126). [Schedule 1, item 4, section 1229C]

Attributing conduct to a CCIV

3.296 As a general rule, conduct engaged in by a person other than the CCIV is attributed to the CCIV if it is engaged in by one of the following parties, and the conduct was engaged in on behalf of the CCIV:

•

an agent of the CCIV;

•

a director of the CCIV;

•

an employee, director or agent (an official) of the corporate director of the CCIV; or

•

any other person acting at the direction, or with the consent or agreement of one of the entities listed above.

3.297 For the purposes of the liability provisions, conduct has the same meaning as in section 769B of the existing law. Section 769B defines 'conduct' as an act, or omission to perform an act, or a state of affairs. [Schedule 1, item 4, subsection 1229B(7)]

3.298 There are certain conditions which need to be established before attributing conduct of an agent, an official of the corporate director or a person acting at the direction of another person. These conditions are explained below.

Attribution from agents of the CCIV

3.299 Conduct engaged in by an agent of the CCIV is taken to have been engaged in by a CCIV if the conduct was engaged in on behalf of the CCIV and the agent was acting within the scope of that agent's actual or apparent authority in relation to the CCIV. [Schedule 1, item 4, subsections 1229B(1) and (4), item 1 of the table]

3.300 Conduct engaged in by an agent appointed by a liquidator, receiver or person administering a compromise is not attributed to a CCIV. If a receiver, liquidator or provisional liquidator is an agent of the CCIV, conduct engaged in by the receiver is also not attributed to the CCIV. [Schedule 1, item 4, subsection 1229B(5)]

Attribution from directors of the CCIV

3.301 Conduct engaged in by a corporate director or a shadow director of the CCIV is taken to have been engaged in by a CCIV if the conduct was engaged in on behalf of the CCIV. [Schedule 1, item 4, subsections 1229B(1) and (4), item 2 of the table]

3.302 Note that the conduct of a liquidator, receiver or person administering a compromise will not be attributed to the CCIV as those persons are not covered by the definition of 'director'.

Attribution from officials of the corporate director

3.303 Conduct engaged in by an employee, director or agent of the corporate director of the CCIV is also taken to have been engaged in by a CCIV if the:

•

conduct was engaged in on behalf of the CCIV; and

•

the employee, director or agent was acting within the scope of their actual or apparent authority in relation to the corporate director.

[Schedule 1, item 4, subsections 1229B(1) and (4), item 3 of the table]

3.304 For the purposes of the attribution rules, the employee, director or agent is referred to as an official. [Schedule 1, item 4, subsection 1229B(4), item 2 of the table]

3.305 Officials of the corporate director are one step further removed from the CCIV. In other words, officials only have a relationship with the CCIV by virtue of their relationship with the corporate director. The new law recognises that both the official and the corporate director must be acting within the scope of their authority.

3.306 This attribution rule does not cover officials of a shadow director. However, they may be covered by the attribution rule for persons acting at the direction or consent of another person.

Example 3.2 Attribution from officials of the corporate director

Samantha is an employee at DB Director Services Ltd. DB Director Services Ltd is the corporate director for multiple CCIVs, including Magic Investments CCIV and Bewitching Investments CCIV.

Samantha is instructed to undertake work for Magic Investments CCIV. While undertaking this work in accordance with the instructions, she engages in conduct which would constitute the physical element of an offence.

Samantha's conduct can be attributed to Magic Investment CCIV because:

•

DB Director Services Ltd is acting on behalf of Magic Investments CCIV; and

•

Samantha is acting within the scope of her authority as an employee at DB Director Services Ltd.

However, Samantha's conduct cannot be attributed to Bewitching Investments CCIV because DB Director Services Ltd is not acting on behalf of Bewitching Investments CCIV.

Attribution from other persons acting at the direction of another person

3.307 There is also an attribution rule that applies to any other person acting at the direction, or with the consent or agreement of:

•

an official of the corporate director;

•

an agent of the CCIV; or

•

the director (or shadow director) of a CCIV.

[Schedule 1, item 4, subsections 1229B(1) and (4), item 4 of the table]

3.308 The person providing the direction, consent or agreement is referred to as the first person. This explanatory memorandum uses the term 'the second person' to refer to the person acting at the first person's direction. The second person could be a sub-agent of the CCIV, an agent of a director or an agent of an official of the corporate director. [Schedule 1, item 4, subsection 1229B(4), item 4]

3.309 The second person is one step further removed from the CCIV. For example, an agent of an official of the corporate director only has a relationship with the CCIV by virtue of the agent's relationship with the official, the official's relationship with the corporate director and the corporate director's relationship with the CCIV. This is illustrated in Diagram 3.1.

3.310 The conduct of the other person is attributed to the CCIV only if each person in the chain is acting on behalf of the person directly above them in the chain. For example, the conduct of an agent of an official is only attributed to the CCIV if:

•

the agent is acting at the direction, or with the consent or agreement of the official of the corporate director;

•

the official is acting within the scope of the official's actual or apparent authority in relation to the corporate director; and

•

the corporate director is acting on behalf of the CCIV.

[Schedule 1, item 4, subsections 1229B(1) and (4), item 4 of the table]

3.311 Similarly, the conduct of an agent of an agent of the CCIV (a sub-agent of the CCIV) is only attributed to the CCIV if:

•

the sub-agent of the CCIV is acting at the direction, or with the consent or agreement of the agent of the CCIV;

•

the agent of the CCIV is acting on behalf of the CCIV.

[Schedule 1, item 4, subsections 1229B(1) and (4), item 4 of the table]

3.312 This is illustrated in the diagram below.

Recursive operation

3.313 The final item in the table in the new law has a recursive operation. In other words, it applies to:

•

a person acting at the direction, or with the consent or agreement of an official of the corporate director, an agent of the director or a director of a CCIV;

•

a person acting at the direction of a person acting at the direction of an official of the corporate director, an agent of director or a director of a CCIV;

•

a person acting at the direction of a person acting at the direction of a person acting at the direction of an official of the corporate director, an agent of a director or a director of a CCIV

and so forth.

3.314 There is no legal limit to the number of times that the final item in the table can be relied on.

Attributing conduct in relation to a counterparty of the CCIV

3.315 Conduct engaged in by a person in relation to a counterparty of the CCIV is taken to be engaged in in relation to a CCIV if certain conditions are satisfied.

3.316 A counterparty may be:

•

an agent of the CCIV;

•

a corporate director or shadow director of the CCIV;

•

an official of the corporate director (that is, an employee, director or agent of a corporate director);

•

a person acting at the direction or with the consent or agreement of an agent of the CCIV, a director of the CCIV or an official of the CCIV (recursively applied).

[Schedule 1, item 4, subsections 1229B(2) and (4)]

3.317 The other conditions that need to be satisfied are the same as those that apply when attributing conduct to a CCIV (see paragraphs 3.296 to 3.314). These are summarised in the below table. [Schedule 1, item 4, subsections 1229B(2) and (4)]

* Operates recursively.

Attributing state of mind to a CCIV

3.318 If the conduct of a person is attributed to the CCIV, that person's state of mind can also be attributed to the CCIV. In attributing the conduct of the person to the CCIV, all of the conditions set out in earlier parts of this Chapter must be satisfied (see Table 3.3 for a summary of these conditions). [Schedule 1, item 4, subsections 1229B(3) and (4)]

3.319 It is not permissible to attribute conduct from one person and the mental element from another person. Instead, the physical and mental element must be attributed from the same person. [Schedule 1, item 4, subsection 1229B(3)]

3.320 The mental state of a receiver or an agent appointed by a liquidator, receiver or a person administering a compromise is not attributed to the CCIV, as those persons are not captured within the definition of 'director'.

3.321 For the purposes of the liability provisions, state of mind has the same meaning as in section 769B of the existing law. Section 769B defines 'state of mind' to include a reference to the knowledge, intention, opinion, belief or purpose of the person and the person's reasons for the person's intention, opinion, belief or purpose. [Schedule 1, item 4, subsection 1229B(6)]

Consequences of contraventions by the CCIV

Policy rationale for treating CCIVs differently to other companies

3.322 Similar to other companies, a CCIV has corporate criminal responsibility for any offence it commits under a Commonwealth, State or Territory law. However, unlike other companies, there are several policy concerns with holding the company solely responsible.

3.323 First, a CCIV has no officers or employees other than its corporate director (except when a sub-fund is in external administration). If a CCIV contravenes its obligations under the law, it is because its corporate director or its agent has caused it to do so.

3.324 The corporate director has overarching responsibility for the CCIV's operations. The corporate director is under an obligation to operate the business and conduct the affairs of the CCIV. It is also under an obligation to ensure the CCIV complies with its constitution and the Corporations Act.

3.325 Second, if a CCIV had sole responsibility for a contravention of the law and was required to pay the resulting fine or penalty, the members would suffer a loss. This is because the fine or penalty would need to be paid out of the assets of a sub-fund (or sub-funds) of the CCIV, thereby reducing the pool of assets available to members. The consequence is that members who are investors in this vehicle would suffer loss for contraventions for which they were not responsible and had no control over.

3.326 Third, in the context of registered schemes, the responsible entity (or trustee) for the scheme bears the consequence for a contravention rather than the registered scheme (or its members). The responsible entity is the only legal person and has responsibility for all of the obligations in relation to the scheme. If the law operated differently for CCIVs and registered schemes, CCIVs would potentially be at a competitive disadvantage.

3.327 For these reasons, the new law seeks to protect members from loss when there has been a contravention of the law by a CCIV. It adopts a different approach for contraventions of Commonwealth and State laws, as set out below.

Contraventions of Commonwealth laws

3.328 If a CCIV commits an offence against a law of the Commonwealth or contravenes a civil penalty provision, the corporate director of the CCIV at the time of the commission of the offence is taken to commit the offence or contravene the provision, along with the CCIV. [Schedule 1, item 4, subsections 1229D(1) and (2) and 1230E(1) and (2)]

3.329 The new law then removes the consequences of committing an offence for the CCIV. Specifically:

•

the CCIV may not be convicted of the offence;

•

the CCIV is not liability for any fine or penalty;

•

an infringement notice may not be given to the CCIV in relation to the alleged commission of the offence or contravention.

[Schedule 1, item 4, subsection 1229D(4) and (5) and subsections 1229E(4) and (5)]

3.330 These provisions do not affect any consequences that apply to the corporate director as a result of the corporate director also being taken to have committed the offence or contravened the provision.

3.331 Nothing in the new law prevents ASIC from seeking an injunction against either the corporate director or the CCIV.

3.332 If there is a change in the corporate director after the commission of the offence, the new corporate director is not liable. Only the corporate director at the time of the commission of the offence or contravention is liable.

3.333 These laws cover:

•

Commonwealth criminal offences;

•

Commonwealth civil penalty provisions in the Corporations Act; and

•

other laws of the Commonwealth which impose a civil penalty in relation to the contravention.

[Schedule 1, item 4, subsection 1229D(1) and subsections 1229E(2)]

Contraventions of State and Territory laws

3.334 ASIC, the CCIV or a member may apply to the Court for a compensation order payable by the corporate director if the CCIV suffers loss or damage as a result of a contravention or an alleged contravention of a State or Territory law. [Schedule 1, item 4, section 1229F]

3.335 A compensation order may be available if:

•

the CCIV is found to have committed a State or Territory offence and ordered to pay a fine;

•

the CCIV is found to have committed a State or Territory civil penalty provision and ordered to pay a penalty; or

•

the CCIV pays an amount in settlement of proceedings in respect of an alleged contravention.

[Schedule 1, item 4, subsections 1229F(2) and (5)]

3.336 An application for a compensation order must be commenced within 6 years of the time when a contravention was proven. If the proceedings were settled and no contravention was proven, an application for a compensation order must be made within 6 years of the alleged contravention. [Schedule 1, item 4, section 1229G]

3.337 The order is enforceable as if it were a judgment of the Court. [Schedule 1, item 4, subsection 1229F(4)]

3.338 These provisions are designed to minimise the likelihood of members suffering damage as a result of the corporate director causing the CCIV to breach its State or Territory obligations. The new laws recognise the Commonwealth does not have the power to deem the corporate director to have committed a State offence and they do not interfere with the State or Territory laws under which the contravention arises. [Schedule 1, item 4, subsection 1229F(6)]

Exception when a sub-fund is in external administration

3.339 The new law ensures that a corporate director is not responsible for an offence or contravention when the relevant conduct is caused wholly by a receiver, liquidator or a person administering a compromise ('an external administrator').

3.340 There are three mechanisms used to achieve this. These are explained below.

1. Attribution rules do not apply

3.341 The conduct or mental state of an external administrator or an agent appointed by an external administrator is not attributed to a CCIV. This is because:

•

Receivers and liquidators (who may be agents of a CCIV) and agents of an external administrator are expressly carved out of the attribution rules that apply to other agents of a CCIV.

•

Only the conduct of directors (not officers) is attributed to the CCIV. This differs to other attribution regimes, such as Part 2.5 of the Criminal Code.

[Schedule 1, item 4, subsections 1229B(4) and (5)]

3.342 This may mean that the physical or mental element is not attributed to the CCIV and the CCIV does not commit an offence or contravene a civil penalty provision at all. If the CCIV does not commit an offence (or contravene a civil penalty provision), then none of the consequences of a contravention by the CCIV flow.

2. Corporate director not taken to be responsible for Commonwealth offences

3.343 Second, there is an exception to the provision that holds that the corporate director is taken to have committed any offence committed by the CCIV. This exception applies if the conduct constituting the offence was engaged by the CCIV solely as a result of an exercise of powers by an external administrator. [Schedule 1, item 4, paragraphs 1229D(1)(b) and 1229E(1)(b)]

3.344 The exception only applies if all of the conduct giving rise to the offence was caused wholly by the external administrator. In other words, the exception does not apply if two acts need to be established, the external administrator caused one act to occur but the corporate director caused the other act to occur.

3. Compensation orders not available for State and Territory offences

3.345 Third, a Court cannot order the corporate director at the time of the commission of the offence to compensate the CCIV if the conduct constituting the contravention solely resulted from the exercise of powers of an external administrator. [Schedule 1, item 4, subsection 1229F(3)]

3.346 This exception operates in the same way as the exception to the provision that holds the corporate director to have committed a Commonwealth offence (see the discussion at paragraph 3.343 to 3.344 above).