Public Unit Trusts: Some Regulative Models (Working Paper) [1999] JSPL 21; (1999) 3 Journal of South Pacific Law

Public Unit Trusts: Some Regulative Models

 By Professor R.A. Hughes,
School of Law,
University of the South Pacific

Introduction

In this paper I will examine the basic features of unit trusts, concentrating for the most part on what are known as public unit trusts.(1) I will comment generally on the nature of the regulatory schemes involved in Australia, New Zealand, Fiji and Vanuatu and attempt to draw some comparisons between the different approaches to regulation which are adopted in these jurisdictions.

 

The Nature of A Unit Trust

A unit trust is a type of express trust. The trust instrument provides that the beneficial ownership of the trust is divided into units and these units are then allocated to beneficiaries. In many respects the units in the trust have features which are similar to shares. The holding of a unit carries with it certain rights which are defined in the trust deed. Most commonly, there is a divided structure of management of the trust between a manager and a trustee. It is a division which purported to provide for a trustee as a guardian of the interests of the unit holders and a separate management company which would have the day to day running of the scheme to which the trust relates. Whilst the division was adopted in the interests of investor protection it has created some confusion about the proper areas of authority of each.

The use of unit trusts as vehicles for investment is common throughout Australia, New Zealand, the United States of America and Europe. This is not yet so in the South Pacific. The only major unit trust operation in Fiji is the Unit Trust of Fiji. There is little evidence in other South Pacific jurisdictions of the promotion or growth of investment in unit trusts and it would be idle to speculate on whether this form of investment is likely to prove attractive in those regions at this time. Even so, the mechanisms are in place in some jurisdictions for the establishment of unit trust schemes. With it there comes the vehicle for regulation of certain types of investment, but it is doubtful whether the implications of this legislation for the promotion of schemes of investment in the South Pacific are widely known, much less complied with.

There are two types of unit trust: private and public. Private unit trusts tend to be used to provide the basis for the operation of commercial enterprises. The fact that the participants hold units allows ownership to be transferred, with or without the consent of the other parties, in the event that, say, one of the parties wishes to retire from the business. On the other hand, public unit trusts are used to attract investment from the public in a variety of investment schemes. This form of investment has a long history extending back to the early part of the nineteenth century in England when they competed with the company as a form of investment structure. Indeed they still do.

Public unit trusts are also know as corporate trusts or regulated trusts. In the United States, they are called mutual funds, or perhaps managed funds. Some superannuation schemes are structured as unit trusts. A superannuation scheme is an investment scheme which provides for a person to receive accumulated investment benefits on their retirement from work or in the event of their death. Most often these schemes are independently regulated by legislation.

Sometimes these entities behave in law as if they were corporate undertakings. In many respects their activities are regulated by specific legislation requiring a specific management structure. It has often been the case that the courts have applied the principles of corporate law, such as fraud on the minority, to public unit trusts. The legislation in question generally attempts to impose certain standards on the management of the trust and to provide safeguards to investors in units. They are public vehicles of investment and are therefore subject to investor protection policies on the same model as corporations. Often, for example, they are subject to the provisions which require that any offering of units must be accompanied by a prospectus providing certain minimum information to investors about the nature of the scheme in which they are investing.

The older types of public unit trust were either fixed trusts or flexible trusts depending on whether the trust must invest in specified types of assets or not. Most trusts now are types of flexible trust. In recent times there has been a tendency to classify trusts according to the types of investment in which the particular trust engages; for example, equity trusts, which invest in shares, bond trusts, cash management trusts, property trusts, time sharing schemes and even green trusts.

Notwithstanding their similarities with corporate structures, and their assimilation in Australia under the wing of corporate securities regulation, public unit trusts are still to be approached as trusts.(2) This basic proposition was upheld by the High Court of Australia in Charles v Commissioner of Taxation, where it was said :

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"A unit held under this trust deed is fundamentally different from a share in a company. A share confers upon the holder no legal or equitable interest in the assets of the company; it is a separate piece of property, and if a portion of the company's assets is distributed amongst the shareholders the question whether it comes to them as income or as capital depends upon whether the corpus of the property (their shares) remains intact despite the distribution. But a unit under the trust deed before us confers a proprietary interest in all the which for the time being is subject to the trust of the deed, so that the question whether moneys distributed to unit holders under the trust form part of their income or of their capital must be answered by considering the character of those moneys in the hands of the trustees before the distribution is made"(3)

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Put simply, the corporate entity principle requires that company shares be characterised as a form of property which exists independently of the property which is owned by the corporation or company itself; that is, as a separate juristic entity. Shares are property in their own right. Even if the value of the share might determined for some accounting purposes by reference to value of the underlying assets of the company, the shares do not indicate that the holder of the shares has any direct proprietary interest in the assets of the company. Those underlying assets are the assets of the independent entity which is the corporation itself. The shares constitute legal choses-in-action which belong to the share holders. They are bundles of rights which define the rights of participation which shareholders have in the corporation or company, the rights to receive distributions of profits from the company, the right to vote and so on.