Insights / November 5th, 2021

The Responsible Entity and rights to claim costs from scheme assets

To be more specific an RE has a right to be paid fees and to be indemnified for expenses or liabilities from scheme assets, providing those rights are documented in the scheme’s constitution. A key requirement however is that the right must only be available in relation to the proper performance of the RE’s duties (s.601GA(2)).

On face value this may appear to be reasonably straight forward, however the question of whether a claim for costs satisfies the obligations, requires careful examination as there may be significant consequences for an RE that makes a claim from scheme assets improperly. Some of the key considerations include:

  • How the RE’s rights are documented in the constitution. This includes the level of certainty in which the day to day activities for which expenses or costs are recoverable have been drafted. A common approach is for constitutions to contain lengthy, broadly stated categories of costs that an RE is entitled to claim, effectively providing “catch all” provisions. It is important that careful examination is undertaken on a regular basis to ensure the provisions remain appropriate, as the approach may overlook the nuances of day to day operations and responsibilities of an RE that may evolve over time. This may require a reconciliation of the actual activities undertaken by the RE against those categories, as there is a degree of risk associated with ambiguity in the drafting.

  • The RE’s rights to costs as they are documented in the constitution should be considered as compared against disclosures provided to members/investors of the scheme. It is important that there is consistency between the constitution and the Product Disclosure Statement as this will influence what the RE may be able to claim from scheme assets.

  • Consideration must be had as to what constitutes the RE’s duties, as distinct from the RE’s rights. This will turn on how the RE’s duties (in the context of its rights to claim costs) have been documented, compared against the categories of costs that can be claimed. If a right is inconsistent with a duty, it is likely to be more difficult to prove that the right to recover an expense was in the proper performance of a duty.

  • The question of what constitutes proper performance must be determined having regard to the interpretation of the courts. This question must be considered on a case by case basis as it requires careful consideration of the type of cost being claimed.

  • There is a distinction to be drawn between the circumstances in which an RE can claim amounts as fees vs expenses and liabilities, with differing approaches for each. It is important that clear categorisation of fees vs expenses is reflected in the scheme documentation, disclosure documents and invoices to avoid a dispute.

  • It is of paramount importance that the duties of an RE are considered in the context of outsourcing arrangements in place to ensure that costs remain recoverable.

As the saying goes, it isn’t a problem until it is a problem. A consequence of failing to meet the obligation in s.601GA(2) is that an RE may be liable for those costs found to be improperly claimed from scheme assets. The legal process associated with how an RE may end up in such a position is a separate consideration.

Cowell Clarke can assist you with any concerns or queries you may have regarding your managed investment scheme. Contact us and someone from our Financial Services team will be able to assist you.

This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.

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