1.3.3 Third Question: Do the members have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or give directions)?

The answer to this question is “No”.

A. Day-to-day control over the operation of the scheme

The fundamental distinction which underlies the whole of the definition of a managed investment scheme is between:

  • schemes where ALL the members have day-to-day control over the operation of the scheme by making ALL the decisions and implementing what is agreed; and
  • schemes where the members contributions are either:
    1. pooled for use as the property of the scheme; or
    2. not pooled but used in a common enterprise that constitutes the scheme;

      with the day-to-day [routine, ordinary, everyday] activities of the scheme being managed or carried out by an operator on behalf of the members as a group, (whether or not they have the right to be consulted or give directions);

the objective assessment in determining day-to-day control being necessarily prospective, viewed from the time when the arrangement is made.    

The day-to-day control test is not about ownership or proprietorship, or the legal right to control of the scheme.

  • The purpose of the day-to-day control test is to make the important distinction about the nature of the investment each member of the scheme is making.
  • If the substance is that ALL the members exercise day-to-day “control in fact”over the operation of the scheme by making ALL the decisions and implementing what is agreed [actually managing or carrying out the routine, ordinary, everyday activities which comprise the scheme’s operations], then the scheme WILL NOT be a managed investment scheme.
  • However, if the substance is that the members contributions are either pooled for use as the property of the scheme, or not pooled but used in a common enterprise that constitutes the scheme, to produce financial benefits, or benefits consisting of rights or interests in property, and the members (as a group) appoint a person to operate the scheme [with the authority to actually manage or carry-out the routine, ordinary, everyday activities which comprise the scheme’s operations] on behalf of the group, then the scheme WILL be a managed investment scheme (whether or not they have the right to be consulted or give directions).
  • It is a negative test in the sense that for the arrangement to be a managed investment scheme it must be such that the members DO NOT have day-to-day “control in fact” over the operation of the scheme, prospectively viewed from time when the arrangement is made.

The day-to-day control test includes consideration as to whether a person who provides management services in relation to the property is either:

  1. a mere “agent” who manages the property of each member individually or “investment professional” who provides advice to the members on enhancing the value of their own property wothout exercising control; or
  2. “an operator of the scheme” who manages as a whole the property of the group.

The management activities of the promoter or operator ARE NOT to be imputed to the members in determining whether the members have day-to-day control over the operation of the scheme.

See the separate judgements of Lord Carnwath and Lord Sumption in Asset Land v FCA [59], [60] & [62] and [91], [93], [94], [97], [99] & [102], and Buss JA in Burton v Arcus [82] and [83]. Also see FCA Handbook (UK) [2014] – PERG 11.2 at Q.4, Q.6 and Q.12].

Horse racing schemes

Horse racing schemes generally [by practical necessity and in order to comply with the Australian Rules of Racing (ARR)] are sufficiently uniform in their basic key elements [structure and modus operandi] to justify the conclusion that any arrangement between 2 or more people (members) to own or lease a racehorse for the purpose of participating in the undertaking of caring for, training and racing it [the horse as a whole] to best advantage for the benefit of the group will, prima facie, satisfy the definition of a managed investment scheme.

The key elements that satisfy the definition are:

  1. the members contributions of money or money’s worth are either:

    1. pooled for use as the property of the scheme [typical of partnership or unit trust-based “investment” arrangements]; or
    2. not pooled but used in a common enterprise that constitutes the scheme [typical of co-ownership contract-based “enterprise” arrangements];

      to produce financial benefits, or benefits consisting of rights or interests in property; and
  2. the scheme is operated by a manager and a licensed trainer on behalf of the members as a group, (whether or not they have the right to be consulted or give directions).

Practical necessity and the ARR, including the TOR Rules, require that the members:

  1. appoint both:
    1. a manager, to manage and control aspects of the scheme’s operations, including those relating to its legal structure and administration, dealings with racing officialdom, the trainer, and other service providers as required on behalf of the group [in accordance with the ARR and the terms of the TOR COA or other agreement adopted by the members]; and
    2. a licensed trainer, to take actual possession and control of the horse as a whole for the purpose of managing or carrying out those activities required to care for, train and race it to best advantage of the group [in accordance with the ARR and the terms of the TOR STA or other agreement adopted by the parties]; and
  2. surrender day-to-day control over their individual interests to the manager and the trainer so that those people can manage the members’ interests in common [the horse as a whole] for the benefit of the group, (whether or not they have the right to be consulted or give directions) [see the judgement of Byrne J in ASIC v IP Product [22]].

The realities of horse racing schemes [typically co-ownership arrangements] as they are designed to operate in practice are:

  1. each member’s interest in the horse the subject of the scheme [not the scheme itself so far as that is different] is inseparable from the interests of the other members; and
  2. the right of the members to manage their interests individually is effectively:

    1. subordinated to the rights of the members collectively and the authority of the manager and the trainer [with actual possession and control of the horse (as a whole)] to operate the scheme on behalf of the group; and
    2. limited to voting on those matters specified in the relevant Owners Agreement or Training Agreement as requiring the members’ approval (by the requisite majority).

The manager and the trainer are both clearly operators of the scheme who manage or carry out activities in relation to the horse as a whole on behalf of the members as a group. Neither of them is a mere “agent” who manages the property of each member individually or “investment professional” who simply provides advice to the members on enhancing the value of their own property without exercing control. [See Burton v Arcus [8], [12] and [16]; Asset Land v FCA [62] and [99]]; and Racing NSW v Vasili [21] and [22]].

Accordingly, day-to-day “control in fact” over the operation of the scheme devolves to the manager and the trainer, being the people who, as the operators of the scheme, actually perform “…the acts which constitute the management of or the carrying out if the activities which constitute the managed investment scheme“] [as stated by Davies AJ in ASIC v Pegasus. Also see Burton v Arcus and Racing NSW v Vasili].

Conversely, the members DO NOT have day-to-day “control in fact” over the operation of the scheme, prospectively viewed from the time when the arrangement is made. [see the judgement of Lord Sumption in Asset Land v FCA [91]].

However, a scheme may not possess these characteristics alone. The fact that it may also possess other characteristics such as terms which provide for the members to:

  1. pay their contributions towards operating expenses directly* to the relevant service providers [proportionate direct invoicing and payment of fees and expenses];
  2. be paid their distributions of any income (prize money) directly* via the stakes payment system; [*an alternative to the manager administering these arrangements via a designated scheme bank account] or
  3. participate in decision-making in accordance with the procedure (and requisite majority) set out in the applicable Owners Agreement or Training Agreement;

does not take it outside the scope of the definition – applying the nonrestrictive modifier statement attaching to the third limb of the definition in relation to paragraph (c) and the principles established by the case law [see the judgements of Owen J in ASIC v Chase Capital [57] and [63], and Barrett J in ASIC v Takaran Pty Ltd [15] and [16]]

Notes:

  1. It is also not significant to this analysis whether:
    1. the manager and the trainer are the same person or different people; or
    2. the members acquired their individual interests from either the manager or the trainer, or another person.
  2. In the case of schemes established as a result of a licensed trainer dealing in shares/interests it is common for the trainer or nominee to also act as the manager [even if the trainer is not a member of the scheme].

While the Owners Agreement and Training Agreement [both now mandatory under the TOR Rules] set out various powers and duties of the manager and the trainer AND specify that certain decisions cannot be taken by the manager or the trainer without the approval of the requisite majority of the members [e.g. change of trainer, gelding, relocation of the horse to race in another jurisdiction, race entry fee above a specified amount, etc.], this DOES NOT equate to the members having control over the operation of the scheme in the meantime [see judgement of Lord Carnwath in Asset Land v FCA]. There are usually few, if any, other restrictions on the authority of either the manager or the trainer to operate the scheme.

The Owners Agreement or Training Agreement may also include terms that:

  1. empower the manager or the trainer to pursue remedies against a member who is in breach of a payment obligation; or
  2. restrict the members in dealing with their individual interests in the horse or require the sale of the horse as a whole if the members holding the requisite majority of interests determine that this be done.

There is no apparent basis upon which any oerson, including a licensed trainer, who is {a promoter] in the business of establishing or operating horse racing schemes could successfully argue [in any legal forum] that the resultant schemes are outside of the scope of the definition. Any such argument would likely be an artificial construction of the documents to avoid the legislative intention of the statutory provisions.

The need for ALL the members to exercise day-to-day control over the operation of the scheme by making all the decisions and implementing what is agreed would be impractical and a significant impediment to the operation of the scheme that is only overcome by the members:

  1. appointing a manager and a licensed trainer [with actual possession and control of the horse as a whole]; and
  2. delegating to them the authority to operate certain aspects of the scheme on behalf of the group.

The role of the manager and the ARR requiring the appointment of a manager

The owners or lessees of a racehorse are required to submit themselves to the jurisdiction of the Principal Racing Authority in the state or territory where they propose to race the horse, and to comply with the ARR and any local rules.

Where an ownership or leasehold arrangement has 2 or more members, the ARR require that they appoint a manager .

manager means:

“a person registered with Racing Australia as the manager of a horse owned or leased by a natural person, a group of natural persons, or a Syndicate. Unless established otherwise:

  1. The first named person appearing in the Certificate of Registration or other official ownership or leasing record held by Racing Australia will be deemed to be the manager [subject to AR63(1); and
  2. If a horse is owned or leased by more than one Syndicate, the first named person appearing in the Certificate of Registration or other official ownership or leasing record held by Racing Australia will be deemed to be the manager.

AR.63 states:

“Removal of manager of a horse

  1. Subject to the TOR Rules [and/or a term of the COA, if relevant], a manager of a horse may be removed or replaced from that position by written notice signed by the owners, lessees or Syndicate members representing more than 50% of the ownership of the horse.
  1. A manager of a horse is of their own right [and without separate express authorization by the owners, lessees or Syndicate members] entitled to:
    1. enter, nominate, accept or scratch a horse for any race;
    2. engage a jockey to ride a horse in any race;
    3. receive any prize money or trophy won by a horse;
    4. act for and represent the owners, lessees or Syndicate members in relation to the horse for the purpose of these Australian Rules;
    except that where a provision of the TOR Rules [and/or a term of the STA or the COA, if relevant] specifies a process, requirement, or course of action, that provision or term binds the manager in the event of any conflict or inconsistency with this subrule.
  2. The entry or nomination of a horse for any race must state the name of the manager.
  3. The trainer of a horse who enters, nominates, accepts or scratches a horse is, absent of proof an agreement between the trainer and owners to the contrary, deemed to have done so with the authority of the manager and all other nominees.”

This rule is a practical way of overcoming what would otherwise be impractical and significant impediment to the day-to-day operation of the scheme [a need for unanimity in decision-making and for all the members to exercise control over the implementation of what is agreed]. It ensures that the differing opinions and competing preferences of the individual members of any ownership or leasehold arrangement are manageable, particularly in dealings with the trainer and racing officialdom.

On 1 August 2017, Racing Australia introduced the Trainer and Owner Reform Rules – TOR Rules. The TOR Rules are set out in Schedule 2 of the ARR.

A requirement under the TOR Rules is that the members of a co-ownership arrangement must have an agreement setting out the terms which will govern the legal relationship between them. The terms of the TOR Co-owners Agreement (TOR COA) are deemed to apply [EXCEPT in the case of lead regulator approved syndicates established by licensed promoters, each of which will have its own approved agreement which must comply with the requirements of the ASIC Instrument] UNLESS the members elect either to add to or amend those terms, or to exclude and replace that agreement with another agreement.

The TOR COA includes the following terms which are clear and unambiguous and give the manager the power and authority to manage and operate aspects of the scheme on behalf of the members (as a group):

“3.4 The Managing Owner will manage the Horse Ownership Venture for the benefit of all Co-Owners. That will be on the basis of there being no cost to the Co-owners for the Managing Owner’s services unless otherwise agreed by them by Unanimous Consent”.

“3.5 The Managing Owner must:

  1. use reasonable endeavours to properly manage the Horse Ownership Venture, including using reasonable endeavours to ensure that the Trainer complies with the Trainer’s reporting obligations as set out in clauses 2.2(c) and 2.3 of the STA;
  2. make decisions in the best interests of the Co-owners as a whole;
  3. comply with the Managing Owner’s obligations under the TOR Rules; and
  4. ensure that no funds provided by the Co-owners in respect of the Horse Ownership Venture are applied other than for the purpose of the Horse Ownership Venture”.

“3.6 The Managing Owner can only make the following decisions, and carry out any reasonable actions to effect those decisions, on behalf of the Co-owners with Majority Consent:

  1. approve a scheduled treatment event for the Horse (including veterinary or surgical treatment) which in the reasonable opinion of the Managing Owner is expected to exceed $4000 (including GST);
  2. geld the Horse and/or to provide the consent to surgery for a gelding procedure;
  3. accept or object to a Fees Notice provided by the Trainer (including a decision in respect of any proposed variations to a Fees Notice), provided that if Co-owners with 50% aggregate ownership of the Horse wish to accept, and Co-owners with 50% aggregate ownership of the Horse wish to object to, a Fees Notice (or any proposed variations), the Managing Owner must object on behalf of the Co-owners;
  4. engage a new Trainer;
  5. offer for sale, and/or sell, the whole of the Horse;
  6. pay nomination, acceptance or late acceptance fees in an amount in excess of $10,000 (including GST) for the Horse to contest a race;
  7. relocate the Horse to race in another State, Territory or Country;
  8. retire the Horse;
  9. pay or provide for a discretionary bonus or commission to a jockey or to the Trainer (other than if prescribed by the agreement for Training Services between the Trainer and the Co-owners);
  10. change the Managing Owner of the Horse; and
  11. if the Horse is used for breeding as part of the Horse Ownership Venture, then:

    1. if the Horse is an entire to be stood as a stallion, which stud the Horse should stand at and his service fee each year;
    2. if the Horse is a filly or mare, whether she is to be bred in any given year and if so which stallion the Horse is to be bred to”.
“3.7 The Managing Owner can only make the following decisions, and carry out any reasonable actions to effect those decisions, on behalf of the Co-owners with Special Consent:

  1. if the Horse is a colt or entire, stand the Horse as a stallion, either alone as part of the Horse Ownership Venture or in joint venture or partnership with others;
  2. if the Horse is a filly or mare, use the Horse as a broodmare rather than sell or retire her;
  3. change any of the terms of this Agreement, except that a decision to make Co- owners jointly and severally liable in respect of obligations in connection with the Horse Ownership Venture can only be made with Unanimous Consent”.
“3.8 A decision to borrow funds for the purpose of the Horse Ownership Venture requires Unanimous Consent”.

“3.9 Other than as provided in clauses 3.6 to 3.8, and subject to the obligations of the Managing Owner in clauses 3.4 and 3.5, the Managing Owner can make all other decisions reasonably required for the purpose of managing the Horse Ownership Venture as the Managing Owner sees fit in his or her absolute discretion”.

The role of the trainer and the ARR requiring the appointment of a trainer

The role of the trainer is a complex one. The trainer is:

  1. a contracted provider of training and ancillary services (including materials and products), with it being necessary for the trainer to take actual possession of the horse (as a whole) in order to be able to provide the services;
  2. the agent of the owner(s) or lessee(s) when procuring the services of other parties to provide services in relation to the horse while it is in the care and under the control of the trainer, including (without limitation) chiropractic care, dentistry, farriery and veterinary care, transportation, etc.[the trainer may also provide or procure agistment, breaking-in and pre-training];
  3. the authorized representative of the owner or lessee, or manager and all other nominees (if 2 or more owners or lessees), when nominating and accepting the horse for races and in most cases engaging the services of a jockey; and
  4. the person directly responsible under the ARR for notifying the Principal Racing Authority of the location of the horse whilst it is in training and for presenting it at the races in a fit and proper condition to race (including being free of any prohibited substance or race day treatment).

The trainer is also a manager:

  1. responsible for supervising the trainer’s own staff (including foreperson, stable hands, grooms, trackwork riders, racing manager, etc.) and all third-party service providers (including in most cases the jockey) in how they perform their duties and supply their services in relation to the horse; and
  2. in the sense that the trainer is the directing mind of the scheme, with day-to-day control over those aspects of the scheme relating to the care, training and racing of the horse [as a whole] to best advantage, with it being necessary for the trainer to exercise his or her own professional skills, judgment and considerable discretion, when supplying these services and carrying out these activities, including formulating and implementing during each preparation:

    1. a training program [including initial liability for payment of track fees] to bring it to racing fitness ; and
    2. a racing program [including initial liability for payment of most race nomination and entry fees] with the objective of racing it to best advantage;

      notwithstanding any right of the owner(s) or lessee(s) to be consulted or give directions.

The significant role of the trainer as an operator of the scheme is further evidenced by the fact that most of the scheme’s operating expenses will likley comprise invoices issued by either the trainer [for services rendered, including materials and products supplied, race entry fee fees, etc], or third-party service providers procured by the trainer to provide services and carry pout activities in relation to the horse whilst in training and racing, pre-training or on agistment.

The ARR also require that the horse be trained by a licensed trainer.

trainer” means:

“a person licensed or granted a permit by a PRA to train horses, and includes any persons licensed to train as a training partnership”.

AR.61 states:

“Only horses trained by a licensed trainer to race, official trail or jump out

  1. To be able to be entered for or run in any race or official trial or jump-out, a horse must be trained by a person with a licence to train.
  2. Subrule (1) does not apply:

    1. to a horse entered for a race where the entries close more than 60 days before the advertised date for the running of a race; and
    2. to any other race excepted under the Rules”.

AR.63(4) is also relevant here (see above).

AR.105 states:

“Matters that may affect the running of a horse in a race

  1. The trainer of a horse, or any person that is in control of a horse, that is nominated for a race must:

    1. ensure that the horse is fit and properly conditioned to race;
    2. by nominating time, report to the Stewards any occurrence, condition, surgery or treatment that may affect the horse’s performance in the race where the occurrence takes place, condition is present, surgery is performed or treatment is administered before nomination time;
    3. as soon as is practicable after nomination time and before acceptance time, report to the Stewards any occurrence, condition, surgery, or treatment that may affect the horse’s performance in the race where the occurrence takes place, condition is present, surgery is performed or treatment is administered after nomination time and before acceptance time;
    4. if the horse is accepted for the race – as soon as practicable, report to the Stewards any occurrence, condition, surgery or treatment that may affect the horse’s performance in a race where the occurrence takes place, condition is present, surgery is performed or treatment is administered after acceptance time.
  2. The Owner and/or trainer of a horse must:
    1. as soon as practicable after a race, report to the Stewards anything which might have affected the running of their horse in a race; and
    2. immediately after a race, report to the Stewards:

      1. any loss or breaking of gear which occurred during the race; or
      2. any unusual happening in connection with the race.
  3. Further to subrule (2), if a trainer becomes aware of any condition or injury which may have affected the horse’s performance in the race, the trainer must report the condition or injury to the Stewards as soon as practicable and no later than acceptance time for its next race engagement.

It is also a requirement under the TOR Rules that the owner(s) or lessee(s) and the trainer must have an agreement setting out the terms upon which the trainer will provide training and ancillary services. The terms of the TOR Standard Training Agreement (TOR STA) are deemed to apply UNLESS the parties elect either to add to or amend those terms, or to exclude and replace that agreement with another agreement. The terms of the TOR STA provide for the appointment of a licensed trainer to take possession and control of the horse and to care for, train and race it to best advantage for the benefit of the owner(s) or lessee(s).

The TOR STA includes the following terms which are clear and unambiguous and give the trainer the power and authority to manage and operate aspects of the scheme on behalf of the members (as a group):

“THE RIGHTS AND OBLIGATIONS OF THE TRAINER

2.1 The Trainer agrees to care for, train, stable, feed, exercise and arrange appropriate treatment for the Horse in accordance with the Rules of Racing and to the standard of a reasonable Trainer in the Australian thoroughbred racing industry.

2.2 The Trainer (or an authorised representative of the Trainer) must:

  1. care for and train the Horse in accordance with the Rules of Racing and to enable it to race to the best of its ability;
  2. train the Horse with due care, skill, and diligence with reference to industry practice in the thoroughbred racing industry in Australia; and
  3. periodically and in a timely manner report to the Owner about the welfare, progress, and performance of the Horse, at a minimum and without limitation:

    1. when the Horse enters the Trainer’s stable for training;
    2. when the Horse departs the Trainer’s stable for agistment (including by identifying the place of agistment);
    3. when the Horse transfers to another stable of the Trainer, or interstate, or to another Trainer, or to a selling agent;
    4. when the Horse is nominated for or accepted for a trial or a race;
    5. when the Horse suffers a material injury or illness, requires veterinary treatment, or dies; and
    6. by providing a post-trial or post-race report within a reasonable time of the completion of either.

2.3 A report in relation to any of the matters set out in clause 2.2(c) above may be provided in any comprehensible form including:

  1. verbally in person;
  2. by telephone (including by leaving a voicemail);
  3. in written form (including by post, email, text message or facsimile).

2.4 Subject to clause 2.5, the Trainer has the right to engage a qualified person considered by the Trainer to be appropriate and/or necessary to attend to the Horse, including a veterinarian, farrier, horse dentist, horse chiropractor, horse acupuncturist, or water walker therapist.

2.5 If the cost of any scheduled treatment event for the Horse (including veterinary or surgical treatment) is in the reasonable opinion of the Trainer expected to exceed $2000 (including GST), the Trainer must obtain the approval of the Managing Owner before arranging that treatment.

2.6 The Trainer has the right to nominate, enter, accept, scratch or withdraw the Horse from any race or trial as the Trainer thinks fit, except:

  1. if the Trainer comes to a separate agreement in relation to any of those matters to the contrary with the Managing Owner;
  2. if the amount of a fee associated with the nomination, entrance, acceptance, scratching or withdrawal of the Horse exceeds $2000 (including GST), the Trainer must seek approval from the Managing Owner in relation to its payment. If a Managing Owner does not respond within a reasonable time of that request for approval, the Trainer may proceed and will not be liable for doing so, including in relation to the payment of any fee referred to in this clause.

2.7 The Trainer is not required to nominate, enter or accept in relation to the Horse if, despite having made requests of the Managing Owner to be put into funds for the cost of the relevant nomination, acceptance or entry, that does not occur prior to the time for nomination, entry, or acceptance.

2.8 The Trainer will engage and instruct the race jockey unless prior agreement to the contrary is made between the Trainer and the Managing Owner.

2.9 The Trainer is entitled to accept the instructions of the Managing Owner as representing all Owners, except in relation to the proposed gelding, sale or retirement of the Horse, in which case the Trainer must inform all Owners and obtain confirmation of the consent of more than 50% of the ownership equity of the Horse”.