The term “managed investment scheme”is defined in section 9 of the Act as:
“(a) a scheme that has the following features:
- people contribute money or money’s worth as consideration to acquire rights (“interests”) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not);
- any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the “members”) who hold interests in the Scheme (whether or not as contributors to the scheme or as people who have acquired interests from holders);
- the members do not 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 definition is deliberately wide, and all embracing, and designed to catch virtually all arrangements targeting collective investment, and would, by itself, catch virtually all business models and structures. Co-ownership, partnership [see ASIC v McNamara] and unit trust-based arrangements all fall within the scope of the definition.
The following terms are also defined in the Act:
“interest” in a managed investment scheme means:
“a right to benefits produced by the scheme (whether the right is actual, prospective or contingent and whether it is enforceable or not)”.
“investment” in a registered scheme means:
“(a) an interest in the scheme: or
(b) a legal or equitable interest in an interest in the scheme”.
“member”in relation to a managed investment scheme means:
“a person who holds an interest in the scheme”.
Some key words and phrases in the definition of a managed investment scheme are not defined in the Act, so must be given their ordinary meaning:
“an advantage or profit gained from something: enjoy the benefits of being a member”.
“common enterprise” means:
“a project or undertaking by 2 or more people”.
“give (something, especially money) in order to help achieve or provide something”.
“a gift or payment to a common fund or collection … that part played by a person or thing in bringing about a result or helping something to advance”.
“the power to influence or direct people’s behavior or the course of events: the whole operation is under the control of a production manager”.
“happening regularly everyday: the day-to-day management of the classroom”.
“the activity in which a business is involved”.
“to operate” means:
“control the functioning of”.
“a project or undertaking”.
“expressing a doubt or choice between alternatives” and “the statement applies whichever of the alternatives mentioned is the case”.
“whether or not” means:
“the statement applies whichever of the alternatives mentioned is the case”, and in the context of that statement “…whichever…” means “used to emphasize a lack of restriction in selecting one of a defined set of alternatives – regardless of which”.
Each limb of the definition contains a statement in brackets beginning with (“whether…” or “whether or not…”) which is a modifier statement to the head statement. A modifier statement is intended to provide a default rule for resolving ambiguities in elements of the head statement.
In each case the modifier statement is a nonrestrictive modifier which provides additional [nonessential] information that DOES NOT [express an intention to] limit or restrict the legal meaning of an element of the head statement. Whereas a restrictive modifier is a statement that modifies an element of the head statement in a way that is essential to its meaning.
The three limbs of the definition
The head statement in the first limb of the definition “people contribute money or money’s worth as consideration to acquire rights (“interests”) to benefits produced by the scheme” is subject to the nonrestrictive modifier “(whether the rights are actual, prospective or contingent and whether they are enforceable or not)” .
Consequently, [giving the word “whether” its ordinary meaning] the elements of the head statement apply whichever [regardless of which] of the alternatives mentioned in the modifier statement is the case. In other words, the rights being actual, prospective or contingent, enforceable or not, DOES NOT limit or restrict the legal meaning of the elements of the head statement.
The head statement in the second limb of the definition “any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the “members”) who hold interests in the Scheme” is subject to the nonrestrictive modifier “(whether or not as contributors to the scheme or as people who have acquired interests from holders)”.
Consequently, [giving the phrase “whether or not” its ordinary meaning] the elements of the head statement apply whichever [regardless of which] of the alternatives mentioned in the modifier statement is the case. In other words, the members being either contributors to the scheme or people who have acquired interests from holders DOES NOT limit or restrict the legal meaning of the elements of the head statement.
The head statement in the third limb of the definition “the members do not have day-to-day control over the operation of the scheme” is subject to the nonrestrictive modifier “(whether or not they have the right to be consulted or give directions)”.
Consequently, [giving the phrase “whether or not” its ordinary meaning] the elements of the head statement apply whichever [regardless of which] of the alternatives mentioned in the modifier statement is the case. In other words, any right they (the members) may have to be consulted or give directions DOES NOT limit or restrict the legal meaning of the elements of the head statement.
A proper assessment of any arrangements between 2 or more people (members) owning or leasing a racehorse to determine whether the scheme satisfies the definition of a managed investment scheme will include an analysis of its legal structure, the nature of the members’ interests depend upon its structure and modus operandi. If it satisfies the definition AND is not exempt, then its promotion and operation will be subject to regulation, regardless of what is intended by the person promoting or operating the scheme.
Relevant case law
In ASIC v McNamara, Mansfield J said:
 “I do not think there is any inconsistency between the Act [Corporations Act] and the Partnership Act 1892 (NSW).The Act does not purport to regulate partnerships of themselves, but to regulate managed investment schemes. A managed investment scheme can take on a number of forms, determined upon by the promoters of the scheme. It happens that in this particular case the scheme is in the form of a limited partnership, and to that extent in my view the Act is able to operate in relation to the scheme itself. It does not involve the Act purporting to do something inconsistently with rights granted under the Partnership Act 1892 (NSW)…”.
“…S 109 of the Constitution provides that where there is an inconsistency
between a law of the Commonwealth and a law of a State, the State law is
invalid (or, in a practical sense), inoperable) to the extent of the
inconsistency. Therefore, even if an inconsistency between the laws were
apparent, the Act must operate to diminish the scope of the Partnership Act
interest and scheme
In Australian Softwood Forests Pty Ltd v A-G (NSW); Ex Rel Corporate Affairs Commission (the “Australian Softwood case”), Mason J stated:
 “In attempting to apply the statutory definition of “interest” to the transaction already outlined, we must ask ourselves, first, whether there is a “financial or business undertaking or scheme” and, secondly, what are its elements. We begin with the circumstance that the words in question are of wide import. For example, all that the word “scheme” requires is that there should be some programme, or plan of action……the statutory definition is not concerned with identity of the person or persons who carry it on.It is not material that the person who offers the “interests” to the public does not himself carry on the undertaking or scheme. Nor does it matter that by subscribing for an interest a member of the public will constitute himself as one who is engaged in carrying on the enterprise”.
 “……There is nothing in the notion of an undertaking or scheme that requires or implies that there is joint participation in everything comprised in the plan or that there must be a share or pooling of profits or receipts. (at p129)”.
 “There are real difficulties in the suggestion that the court can read down the very comprehensive definition of “interest” by reference to the supposedly unintended consequences of a literal reading on everyday commercial transactions. The definition is so general and all-embracing that it is impossible to say that it necessarily excludes particular transactions which appear to be covered by the general words. The hazards of adopting such a course are not dispelled by the absence of a supporting context. It would be different if we could glean from the legislative provisions an overall purpose which, being limited in scope, justified a reading down of the definition. Unfortunately in this case the search for a legislative purpose takes us back to the very words of the definition for the intended scope of the operative provisionsdepends so heavily on the comprehensive language of that definition. As Young C.J. observed in A Home Away Pty Ltd v Commissioner for Corporate Affairs (1981) VR 475, at p 478, in discussing the meaning of “interest” as defined in s.76(1): “If it were said that we should give effect to the purpose Parliament wished to achieve, we must first ascertain the purpose”.
In the case of ASIC v Chase Capital Management Pty Ltd, Owen J said:
 “…The term “scheme” is not defined in the Law. Some guidance can be obtained from Australian Softwoods Forests Pty Ltd v Attorney-General for the State of New South Wales (1981) 148 CLR 121 at 129, where Mason J said, in the context of the term “interest” in the former Companies legislation: “… all that the word ‘scheme’ requires is that there be ‘some programme, or plan of action’ ”; and
 “… the “scheme” is the entire operation…”.
In the case of ASIC v Takaran Pty Ltd, Barrett J considered the concept of a “scheme” within the definition. His Honour said, at 395:
 “The essence of a “scheme” is a coherent and defined purpose, in the form of a “programme” or “plan of action”, coupled with a series of steps or course of conduct to effectuate the purpose and purse the programme or plan. In some cases, the scope of the scheme will readily be gathered from some constitutive document in the nature of a blueprint setting out all relevant matters. In others, there may be no writing or such as there is may tell only part of the story, leaving the remainder to be supplied by necessary implication from all the circumstances. Profit-making will almost invariably be a feature or objective of the kind of scheme with which s9 definition of “managed investment scheme” is concerned, given the definition’s references in several places to “benefits”. Whatever is incidental and necessary to the pursuit of the profit (or “benefits”) will therefore be comprehended by the scheme, including, it seems to me, steps sensible to counter risk of loss (or detriment). Every cogent plan caters for – or, at least, recognizes and takes into account – contingencies of an adverse kind”.
 “It must
also be emphasized that a scheme having the characteristics bringing it within
the s9 definition of “managed investment scheme” will not necessarily possess
those characteristic alone. In Royal Bank of Canada v Inland Revenue
Commissioners  Ch665, Megarry J observed, in relation to the concept
of “ordinary banking business”, that “a statement of the essentials of a
business does not seem to me, without more, to be exhaustive of all that is
ordinary in that business”. A managed investment scheme, like a banking
business, may involve elements beyond to core attributes that give it its
essential character. Elements which lie beyond those attributes but contribute
to the coherence and completeness which make a “programme” or “plan of action”
must form part of that “scheme”. Every programme or plan of action must be
taken to include the logical incidents of and consequences of and sequels to
its acknowledged components”.
In the case of ASIC v Enterprise Solutions 2000 Pty Ltd the promoter of a betting scheme who collected funds from Australian punters and be them on horse races in Australia and Hong Kong using a proprietary hardware program, was held to be operating a managed investment scheme. An argument that the punters did not acquire any “interest” in a scheme and were only provided with betting services was rejected. The court said that the scheme involved rights to the benefits produced even though there was no assurance that the money invested would result in winning bets.
In the case of Re Risqy Limited it was held that the prospective benefit of earning interest at a promised specified rate was a benefit of the scheme and that this requirement of the definition of “managed investment scheme” was therefore satisfied.
In Australian Softwood case Mason J stated:
“…The argument is that in order to constitute a “common enterprise” there must be a joint participation in all the elements and activities that constitute the enterprise. I do not agree. An enterprise may be described as common if it consists of two or more closely connected operations on the footing that one part is to be carried out by A and the other by B, each deriving a separate profit from what he does, even though there is no pooling or sharing of receipts of profits. It will be enough that the two operations constituting the enterprise contribute to the overall purpose that unites them. There is then an enterprise common to both participants and, accordingly, a common enterprise”.
In WA Pines Pty Ltd v Hamilton Jones J said:
“… as to ‘common enterprise’, in my opinion that phrase is apt to cover not only an enterprise in common with other investors, but also an enterprise in common with the investor and the promoter”.
In Brookfield Multiplex Limited V International Litigation Funding Partners Pte Ltd (No 3), it was held [by Justices Sundberg and Dowsett in their majority decision]:
- that the requirement for pooling of contributions does not require physical pooling. In this case, pooling was effected by the class action members making their individual promises available for the purposes of the scheme and the benefit of scheme members;
- that the litigation funding arrangement was a common enterprise. They considered that there existed a shared purpose of successfully pursuing class action members’ claims that would then benefit the class action members; and
- that the scheme was clearly an enterprise. It was economic in nature and, indeed, could be considered commercial.
In ASIC v Chase Capital Management Pty Ltd, Owen J held:
 “… The question is whether the members have day-to-day control. It is not difficult to discern the distinction that the legislature was attempting to make. Very broadly, it is between the investment activities of an individual and that of a group. By the express terms of the applications, the investors have delegated “management” of the investment to CCML. There is no reservation of day-to-day or any other control or functions. I am not sure that the appointment of a committee of some of the investors to monitor the investments would make much difference. The question still remains: who has the day-to-day control”.
 “In my opinion, when the scheme documentation is analysed in its entirety, the intent of the scheme is that Enviro will control the day-to-day operations of the scheme from beginning to end. Enviro offers a total package which is presented in such a way that potential participants are encouraged to take up the entire package. Notwithstanding the assertions that participants will be running their own businesses. Enviro does not intend that the participants should take any active role in the day-to-day operations of any aspect of the scheme. The success or otherwise of the scheme is entirely dependent upon Enviro. In reality, although it is possible that some participants may choose to take an active role, the scheme is designed to attract passive investors.
 “The purpose or object of the legislation and the regulatory regime created pursuant to the legislation would be easily defeated if the court felt obliged to rely solely upon a strict view of the the legal rights and duties created by the documentation and was required to ignore the realities of the scheme as it was designed to operate in practice”.
In ASIC v IP Product Management Group Pty Ltd, Byrne J noted:
 “It will be recalled that under paragraph (iii) … The existence of a right in a member to be consulted or to give directions as to the operation of the scheme does not necessarily lead to the conclusion that that member has day-to-day control over its operation. The law contemplates, therefore, some greater involvement”.
The meaning of the term “operate” has been judicially considered in Australia in ASIC v Pegasus Leveraged Options Group Pty Ltd & Anor. In this case, ASIC sought declarations that the defendants (Pegasus and its sole director Mr McKim) had breached numerous provisions of the Corporations Act including for operating an unregistered managed investment scheme. Mr McKim was caught by the prohibition against operating an unregistered managed investment scheme since he formulated, directed and was actively involved in the day-to-day operation of the scheme.
In ASIC v Pegasus, Justice Davies stated:
 “The word “operate” is an ordinary word of the English language and, in the context, should be given its meaning in ordinary parlance. The term is not used to refer to ownership or proprietorship but rather to the acts which constitute the management of or the carrying out of the activities which constitute the managed investment scheme. The Oxford English Dictionary gives these relevant meanings:
“5. To effect or produce by action or the exertion of force or influence; to bring about, accomplish, work.
6. To cause or actuate the working of; to work (a machine, etc). Chiefly, US.
7. To direct the working of; to manage, conduct, work (a railway, business etc); to carry out or through, direct to an end (a principle, an undertaking, etc). orig. US”.
 I have concluded that Mr McKim operated the managed investment scheme. He was the living person who formulated and directed the scheme and he was actively involved in its day to day operations. He supervised others in their performance. I have also concluded that Mr McKim is not exempted by s601ED(6). He did not “merely” act as the agent or employee of the Pegasus. He was the directing mind and will of Pegasus and of the scheme”.
The meaning of “operate” in ASIC v Pegasus has been positively applied by the Supreme Court of WA, NSW and Qld since the original decision.
In Burton v Arcus, McClure JA said:
 “I have had the advantage of reading the judgement of Buss JA. I agree that the appeal should be upheld for the reasons he gives. I propose to make some additional observations on the third limb of the definition of managed investment scheme, namely whether the members had day-to-day control over the operation of the scheme. This limb of the definition links the prohibition in s601ED(5) and the relief (winding up) in s601EE of the Corporations Act 2001(Cth). Under s601ED(5) a person must not operate a managed investment scheme unless it is registered. If a person operates an unregistered managed investment scheme, that scheme can be wound up under s601EE. The word “operate” in the context of s601ED(5) and s601EE is to be given its ordinary meaning. The term is not used to refer to ownership or proprietorship but rather to acts that constitute the management of or the carrying out of the activities comprising the managed investment scheme: see Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561 at 574”.
 “The appellants contended that Global Finance Group Pty Ltd (“Global”) operated the private contributory mortgage investment scheme to which the appellants and respondents were parties (“the Newrose scheme”) and that it was a managed investment scheme as defined. If the investors collectively had the day-to-day control of the operation of the Newrose Scheme, it could not be said that Global operated the scheme (see s601ED(6) which provides that a person does not operate a scheme merely because he is acting as an agent or employee for another)”.
 “A managed investment scheme must be registered prior to commencement of the operation of the scheme. The phrase “day-to-day” means routine, ordinary, everyday management or operational decisions. I am of the view that the term “control” in the definition means authority to decide and direct and not merely to participate in decision-making”.
 “The respondents rely on two related submissions on the issue of day-to-day control. First, they contend the investors had control of all relevant matters which the identify as the nature, terms and conditions of the investment, whether to extend the term of the investment and matters relating to enforcement on default. Secondly, they contend that Global’s role in the operation of the scheme was purely administrative and involved no decision-making in its implementation or operation. They identify Global’s role in the operation of the scheme as confined to acting as a mere conduit for the payment of interest and the return of capital at the end of the term of the investment”.
 “The appellants contended that Global’s authority to administer the mortgage extended to enforcement upon breach. That would encompass decisions about whether and if so when to issue a notice of demand or default notice, whether to enter into possession of the mortgaged property or sell it or whether to commence proceedings. Without Global having such authority, the mortgagees could only take action under the mortgage if they all agreed to the proposed course of action”.
 “The need for unanimity is a very significant practical impediment to acting in relation to, or under, the mortgage. I accept that is the commercial reason for the investors’ express delegation to Global of authority to administer all matters relating to the mortgage. It would be impractical for all the investors to control the implementation of what had been agreed between each investor and Global and what was agreed in the mortgage…”.
 “First it is necessary to identify the plan or scheme in question. Global carried on the business of promoting and arranging private contributory mortgage investments…”.
 “That brings me to the issue of Global’s role in the Newrose scheme. It is apparent from the affidavit evidence on which the appellants relied that the question whether Global was in day-to-day control of the operation of the scheme was not understood to be a live issue. The evidence is scanty and incidental. Much depends on inference. What is clear is that Global initiated and promoted the Newrose scheme to a wide range of potential investors numbering more than 20. The promotion of the investment involved the provision of positive information and opinions as to the prudence of the investment. All contact relating to the Newrose scheme was between the individual investor(s) and Global. The investors did not know or deal with each other before the commencement of the operation of the scheme. During the term of the Newrose scheme, the identity of investors changed (by assignment of a share in the mortgage) without reference to the other investors. The change was organised and facilitated by Global”.
 “Further, it can be inferred from the evidence that after acceptance of Global’s offer and the payment of their investment contribution, the investors had no involvement in the management of the investment until after Global went into administration in February 1999. Thereafter it went into liquidation. It is the case that at some stage after Global went into administration the investors who were mortgagees at that time assumed day-to-day control over the Newrose scheme. However, that does not affect the position at the inception of the Newrose scheme until February 1999 or whether the mortgage is scheme property”.
 “From the time of receipt of the investors’ funds, Global acted in a variety of ways without reference to or direction from the investors…”.
 “It is apparent from the above that the investors delegated significant management functions to Global. Although there were few discretionary decisions, other decisions involved evaluative judgments bearing a similarity to discretionary decisions. Still other decisions were supervisory in nature but fell short of being purely pro forma in nature. Indeed, the nature and extent of Global’s day-to-day control in operating the Newrose scheme and other similar schemes resulted in widespread breaches of its express and implied duties to investors… I do not rely on Global’s misconduct as establishing day-to-day control. Rather it demonstrates that its day-to-day control of management provided it with the opportunity to engage in systemic misconduct”.
“… I am satisfied that Global had day-to-day control over the operation of the Newrose scheme”.
In Burton v Arcus, Buss JA held:
 “The term “day-to-day” connotes routine, ordinary, everyday. See The Shorter Oxford Dictionary (1993), page 598; The Macquarie Dictionary (Third Edition), page 492”.
 “As the Privy Council observed in Bermuda Cablevisions Ltd v Colica Trust Co Ltd  AC 198 at 207, expressions such as “control” take their colour from the context in which they appear: there is no general rule as to the meaning of the word “control. The expression “day-to-day control” is not a term of art. It must be given the meaning which the context requires. …”.
 “In my opinion, the third element in para (a) of the definition is concerned with control in fact as distinct from the legal right to control. It is also concerned with control in fact by the members of a scheme as a whole. The members as a whole may not have control in fact even though the constructive document for the scheme may confer on them the legal right to control”.
 “The members of a scheme will have “day-to-day control over the operation of the scheme” if:
a. the members as a whole participate in making the routine, ordinary, everyday business decisions relating to its management; and
b. the members as a whole are bound by the decisons that are made“.
“Conversely, if the members as a whole do not participate in making the routine, ordinary, everyday business decisions relating to the management of the scheme or if the members as a whole are not bound by the decisions which are made, they will not have day-to-day control over its operation”.
 “The concept of “day-to-day control over the operation of the scheme”, within para (a) of the definition, does not, of course, require that there be activities in relation to the scheme on each and every day or even on most days during the term of the scheme”.
 “In my opinion, the circumstance that the promoter or operator of a scheme manages the scheme (or certain aspects of it) on behalf of the members does not mean that the members by their agent, the promoter or operator, have day-to-day control in fact over the operation of the scheme. In other words, the management activities of the promoter or operator in relation to a scheme are not to be imputed to the members in determining whether the members have such day-to-day control”.
 “My construction of the third element in para (a) of the definition gives effect to the evident legislative purpose or object embodied in the definition and Ch 5C. If:
- the third element in para (a) of the definition was concerned with the legal right to control and not control in fact; or
- the management activities of the promoter or operator in relation to the scheme were to be imputed to the members in evaluating whether the third element was satisfied or not, with the consequence that if the promoter or operator had “day-to-day control over the operation of the scheme” then the members, by their agent, the promoter or operator, would have day-to-day control,
the legislative framework for the regulation of managed investment schemes would be seriously, if not entirely, eroded”.
The activities that constitute the act of “training” a racehorse and the person in “control” of those activities
The only industry specific case law found by the writer that provides authoritative guidance in relation to these characteristics inherent in horse racing scheme is the decision of Mr. D.B. Armati in Racing NSW v Vasili. The case involved charges that were the subject of prior hearings against licensed trainer Mr Con Karakatsanis and registered owner Mr Angelis Vasili, it being determined that Mr. Vasilis was in fact the trainer of various horses owned by him when he was not the holder of a current trainers licence and that he improperly held licensed trainer Mr. Karakatsanis out to be the trainer of those horses. In his judgement, Mr. Armati referred to two Queensland decisions which were referenced in submissions in the following terms:
 …The Appeal Panel referred to these cases in the following terms:
“21 …Racing Appeal Authority Queensland … The appeal of Mrs Julie Nash, a decision handed down 8 January 2001, the Authority described training in the following way:
“There is no single action that provides and defines the concept of training a racehorse. Training encompasses a range of tasks that collectively make up the practice of training a thoroughbred. These include feeding, grooming, caring, stabling, treating, exercising, setting trackwork regimes, assessment of form, nominating, accepting and an increasing list of singular minor tasks. A trainer that participates in all the tasks can, when considered collectively, make up the practice of training”.
“22 …Racing Appeal Authority in the Appeal of Robert Heathcote, delivered on 18 June 2002:
“As has been commented on above, there are numerous tasks which make up the training of a racehorse. To these should be added that the essential matter which relates to who is the person training a racehorse, is who is the person in “control” of the horse. The meaning of “control” in this context is simply not the physical control of the horse but who has the dominance in those non-exhaustive activities referred to in the decision of Nash that make up the act of training”.
Once regarded as the leading UK case in relation to precisely what constitutes “day-to-day control” is that of Andrew Brown (and others) v InnovatorOne PLC (and others).
The relevant aspects of this case centered on the meaning of “… day-to-day control over the management of the property” under the Financial Services and Markets Act 2000 (UK), (FSMA), which is the UK equivalent of the Australian legislation.
In Andrew Brown v InnovatorOne Justice Hamblen said:
: “The crux of this issue was whether the Schemes meet the negative “day-to-day control” requirement in s.235(2) – “The arrangements must be such that the persons who are to participate (“participants”) do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or give directions”.
: “As already found, it was the understanding of the individual Defendants that the schemes were not CIS’s because of the second advice of Mr Crystal and the amendments to the documentation made in consequence. In particular, it was believed that the investors had the requisite “day to day control over the management of the property”of the scheme”.
: “There was and remains a lack of clarity as to what the “day-to-day control requirement means. This is illustrated by the July 2008 report of the Financial Markets Law Committee (“FMLC”) entitled “Operating Collective Investment Scheme: Legal assessment of problems associated with the definition of Collective Investment Scheme and related terms” written by a Working Group chaired by Mr Michael Brindle QC”.
 “The role of the FMRC is to identify issues of legal uncertainty on the framework of the wholesale financial markets. Under the heading ‘Legal uncertainties in the definition of CIS’, the report states: “The notion of ‘day-to-day control’ is vague and FSMA does not give any further guidance on how it should be interpreted. Furthermore, the phrase “whether or not they have the right to be consulted or to give directions”, which purports to clarify the “day-to-day control of the property” notion, is also obscure. There is no clear picture as to which level of control the “right to be consulted or to give directions” encompasses” (para 2.5). More specifically, the report comments as follows (para 3.9):
“Day-to-day control over the management of …” is not a wholly easy concept. “Control over the management of…” is presumably intended to be distinguished from “management of …” i.e. arrangements will not qualify simply because the participants do not manage the property themselves. On the other hand “day-to-day control” must clearly mean more than “have the right” to be consulted or give directions”. In Elliott, Laddie J referred in “colloquial terms” to “minding the shop”. In practice it is not always easy to apply the test, though it appears as a minimum the participants should be in a position to tell the person who is actually managing the property what to do on a day-to-day basis”.
Justice Hamblen then confirmed that it is not the right to exercise control – but the actual exercise – that is important.
 “In the present case the Claimants were in a position to tell Mr Carter, the person actually managing the property, what to do on a continuing day to day basis. They could have exercised that control at any time. However, I agree with the Claimants that more is required and that they must actually exercise that control sufficiently to be regarded as being in effective control. It is necessary to look beyond the documents which may provide for “day-to-day control” by investors and to consider how the scheme was designed to and did operate in practice. This is borne out by the Australian case of Enviro (2001) 36 A.C.S.R. 762 in relation to the similar “day-to-day control” test under the Australian definition of the equivalent to a CIS. In his judgment Martin J stated as follows:
 “The purpose or object of the legislation and the regulatory regime created pursuant to the legislation would be easily defeated if the court felt obliged to rely solely upon a strict view of the the legal rights and duties created by the documentation and was required to ignore the realities of the scheme as it was designed to operate in practice”.
Justice Hamblen found that the investors did not give directions or assert their rights to exercise day-to-day control sufficiently to be regarded as being in effective control over the management of the property and rejected an argument that this was the investors’ choice, instead holding that:
 “… the degree of control actually exercised was as envisaged by the [marketing documents] and the documentation. It was thought that the documentation would mean that that degree of control was sufficient, but I find that it was not”.
Justice Hamblen also found that:
- establishing such schemes was a regulated activity; and
- such schemes were collective investment schemes from the point in time when the investors paid their subscription money rather than from some later point in time when the members failed to exercise day-to-day control sufficiently to be regarded as being in effective control over the management of the property [see paragraphs  to  of judgement].
In relation to the observations of the FMRC referenced in paragraphs  and  of that judgement, those observations should be reviewed alongside the observations of the Financial Control Authority (FCA) subsequently published in its FCA Handbook (UK) . See Perimeter Guidance – Chapter 11: Guidance on property investment clubs and land investment schemes – PERG 11.1. [Background] and PERG 11.2 [Guidance on property investment clubs], and particularly the answers to Q4, Q6, and Q12.
Chapter 11 is concerned with the rights of the members of some property investment clubs (sometimes known as buy-to-let schemes, buy-to-let syndicates, or property investment syndicates) in the UK, where the members have been considered to have control over the day-to-day management of the property:
“Q.4: What is a collective investment scheme and will my property investment scheme be one?
Broadly speaking, a collective investment scheme is any arrangement:
- the purpose or effect of which is to enable those taking part (either by owning the property, or part of it, or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property;
- where persons taking part do not have day-to-day control over the management or disposal of the property;
- where either the contributions and profits or income are pooled, or the property is managed as a whole by or on behalf of the operator of the scheme, or both.
Whether your property investment club is a collective investment scheme or not will depend on its individual structure and the facts surrounding it. If your club meets each of the above conditions and is not exempt, then its operation and promotion should come under FCA regulation. This is regardless of whether that was intended by the person operating or promoting the club”.
“Q.6: What is the purpose of the day-to-day control test and the nature of day-to-day control?
The purpose of the day-to-day control test is to try to draw an important distinction about the nature of the investment that each investor is making. If the substance is that each investor is investing in a property whose management will be under his control, the arrangements should not be regarded as a collective investment scheme. On the other hand, if the substance is that each investor is getting rights under a scheme that provides for someone else to manage the property, the arrangement would be regarded as a collective investment scheme”.
“Q.12: I run a scheme where each person owns individual properties or parts of properties in the property investment club either directly or indirectly (for example, through a limited liability company or a limited liability partnership of which he is the owner or through a limited liability partnership). … Is this scheme a collective investment scheme?
No, unless the properties belonging to each person, company or limited liability partnership are managed as a whole by or on behalf of the operator of the scheme. … This is provided the operator is managing each property on an individual basis.
… As an example, if a managing agent manages a block of flats on the basis that the only profit or income each individual flat owner obtains is what arises from the management of his property, there is no management as a whole. However, if the managing agent managed the flats in such a way that each individual flat owner received an income from total lettings, regardless of whether that person’s flat was let or not, the properties are managed as a whole and the arrangements are likely to be a collective investment scheme”.
Prior to the decision in Andrew Brown v InnovatorOne, the leading case on the interpretation of the provisions of Section 75 of the Financial Services Act 1986, which Section 235 of the FSMA repeats virtually exactly, was that of The Russell-Cooke Trust Company v Elliott.
In Russell-Cooke v Elliott it was held that, in order to fall outside Section 235(2) [the definition of collective investment scheme], the arrangement must be such that all the participants have day-to-day control of the property. If even one of them did not, then it would be a collective investment for all of them since arrangements could not be a collective investment for some participants and not for others. If any of those involved in arrangements caught by Section 235(1) are passive investors it would appear sub-section (2) will therefore be satisfied.
Both of those cases have now to some degree been superseded by the Supreme Court case Asset Land Investment PLC v FCA. In this case, the approach adopted by Lord Sumption in his judgement in relation to determining “day-to-day control over the management of the property” is more nuanced and makes it clear that the objective assessment is temporarily limited to the point in time when the arrangements were made.
Asset Land v FCA involved a land-banking arrangement pursuant to which the appellant company Asset Land Investments Plc (AL) acquired greenfield sites and sold them to investors in small parcels (plots). Despite various disclaimers in the documents, there was a clear understanding between AL and the investors that:
- AL would:
- move to have the whole property rezoned for housing development; and
- [when that was done] would arrange for a developer to buy the whole property; and
- each investor would then receive a share of the profit from the sale of the property assuming it would be worth more than the prices they paid for their plots.
AL argued that the arrangement was not a collective investment scheme. However, the court held that AL was operating such a scheme.
In Asset Land v FCA:
the Supreme Court provides authoritative guidance in relation to the principles which should ultimately determine whether a given investment meets the statutory definition of a collective investment scheme. Lord Sumption and Carnwath in their separate judgements take the opportunity to consider the statutory definition of a collective investment scheme and proffer some significant guidance of general application of the definition going forward.
Lord Carnwath, with whom Lords Mance, Clarke, Sumption and Hodge agreed, said:
 “…The word ‘arrangements’ has its ordinary meaning …”.
 The content of the arrangements was a matter of fact for the judge….The judge was entitled to take the view that the understandings of the investors conformed to what was intended by the operator. Similarly he was not required to give special weight to contractual or other documents without regard to their context”.
 The judge concluded that arrangements within the section were made when plots were marketed and investors paid their deposits, the object of the arrangements being that the company should achieve a sale of the site after seeking to enhance its value by improving the prospects for housing development, the price to be shared between the owners. That conclusion was amply supported by the evidence, and discloses no error of law”.
“The property and its management”
 ”Grounds 2 and 3 overlap and it is convenient to deal with them together. It is clear in my view that the relevant “property” for the purposes of section 235(1) was each of the company’s sites taken as a whole, not the individual plots. That was the property whose sale was to lead to the profits which were the object of the exercise, and which brought about the scheme within the scope of the section”.
 “… The property for the purposes of the subsection (1) is the whole site. That definition remains the same in principle throughout the section. But management control of the property under subsections (2) and (3 may be achieved in different ways. It is necessary to consider the mechanisms by which the participants on the one hand or the operator on the other manage or have management control of the property. The mechanisms may not be the same in each case, and they need not be legal mechanisms. That follows from the acceptance that the term ‘arrangements’ is not limited to agreements binding in law. By the same token, the ‘control’ envisaged by those arrangements is not confined to legal control”.
 “Have … control in subsection (2) is not a technical term … it must be taken to refer to ‘the reality’ of the how the arrangements are to be operated, which may or may not involve rights or powers enforceable in law … The FCA’S guidance not draws the correct contrast:
“if the substance is that each investor is investing in a property whose management will be under his control, the arrangements should not be regarded as a collective investment scheme. On the other hand, if the substance is that each investor is getting rights under a scheme that provides for someone else to manage the property the arrangements would be regarded as a collective investment scheme”.
“The judge found that the facts of the present case brought it within the FCA’s second category. He was entitled to do so … Their ability as individual owners to determine ultimately whether or not to participate in a sale cannot be equated with control of its management in the meantime. In any event as the judge found, it would make no sense for them in practice to opt out of the realization of the profit which was the only purpose for the arrangements”.
 “Conversely, turning to subsection (3)(b), under the arrangements as found by the judge control of the management activities for the property as a whole lay with the company. It was acting as the operator of the scheme, not as mere managing agent for the individual owners. It it true that its control was not underpinned by any legal rights over the units making up the property. That did not affect the substance of the arrangements, even if it might have been an obstacle to their effective implementation…”.
Lord Sumption, with whom Lords Mance, Clarke and Hodge agreed, said:
“Section 235(1): arrangements”
 “’Arrangements’ is a broad and untechnical word. It comprises not only contractual or other legally binding arrangements, but any understanding shared between the parties to the transaction about how the scheme would operate, whether legally binding or not. It also includes consequences which necessarily follow from that understanding, or from the commercial context in which it was made In these respects, the definition is concerned with substance and not with form. It is, however, important to emphasize that it is concerned with what the arrangements were and not with what was done thereafter…it must be possible to determine whether arrangements amount to collective investment schemes as soon as those arrangements have been made. Whether the scheme is a collective investment scheme depends on what was objectively intended at that time, and not on what later happened if different”.
“Section 235(2): with respect to property”
 “…The reason is that the property referred to in subsection (1) is the property from whose acquisition, holding, management or disposal the profits or income were to be derived. On the judge’s findings that was the whole site. It was the whole site that was to be rezoned and it was the whole site which was to be sold to a developer. The profit which each investor would derive from these transactions would be derived from an aliquot share of the entire sale price for the site”.
“Section 235(2): day-to-day control”
 “‘Control’ of property means the ability to decide what is to happen to it … that does not only mean the legal ability to decide. It extends to a case where arrangements are such that the investor will in practice be able to do so. But the critical point is that the absence of day-to-day control in subsection (2) has to be a feature of the arrangements. This is necessarily prospective, viewed from the time when the arrangements are made. Either those arrangements confer or allow control on the part of the investors or they do not. The test cannot depend on what happens after the arrangements have been made. Nor would a test based on the actual exercise of control be realistic. Some kinds of property require little or nothing by way of management. Some situations do not require any exercise of management control. The question must necessarily be in whom would control be vested were control to be required…”.
“Section 235(3)(b): management of the property as a whole”
 “Subsection (3)(b) provides that what has to be ‘managed as a whole’ is the property the subject to the scheme, not the scheme itself so far as that is different”.
 “The fundamental distinction which underlies the whole of section 235 is between (i) cases where the investor retains entire control of the property and simply employs the services of an investment professional (who may or may not be the person from whom he acquired it) to enhance value; and (ii) cases where he and the other investors surrender control over their property to the operator of the scheme so that it can be either pooled or managed in common, in return for a share of the profits generated by the collective fund …”.
 “On which side of the line does this case fall? In strictly legal terms, the three core representations did not call for any surrender of control over the plots to an investment intermediary. On the contrary, each investor remained the entire owner and sole controller of his plot and simply counted on Asset Land to enhance its value and find him a buyer. But the transaction cannot be viewed only in legal terms and the judge found that the practical consequences of the arrangement went wider that the express terms of the three core representations. He discounted the significance of the investors ‘legal right to dispose of the their plots as they pleased, because he considered that the arrangement embodied in the core representations could not work if the investors exercised the rights they theoretically possessed: see paras 162, 169 of his judgement. The dominion of the investors over their plots, although apparently complete, was in reality an illusion … On that ground … I agree that the schemes with which we are concerned are collective investment schemes”.
The authoritative guidance provided by the FCA Handbook  (quoted above) and cited with approval by Lord Carnwath in his judgement in Asset Land v FCA at  and  (quoted above),is in sharp contrast to the comments of the FMLC Working Group chair Mr Michael Brindle (in the July 2008 report of the FMLC) as to the vagueness of the “day-to-day control” test under the FSMA cited by Justice Hamblen in his judgement in Andrew Brown v InnovatorOne at and  (quoted above).
Difference in wording between the UK and Australian definitions
There is a difference in the wording of the definition of “collective investment scheme” in the FSMA :
“… (2) The arrangement must be such that the persons who are to participate (“participants”) do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions …”.
and the Australian definition:
“(iii) The members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or give directions)”.
Regardless of the different wording and phrasing, since the decision in Burton v Arcus and Asset Land v FCA it is clear they are both now interpreted by the courts to have a similar meaning, particularly in relation to the application of the day-to-day control test. If anything, the Australian definition is more precise and less ambiguous than the UK definition.
While UK judicial decisions are not binding upon Australian Courts, the decisions cited above are nonetheless persuasive.