When a scheme’s liquid assets fall below 80 percent of its value, members lose the right to redeem on demand. The Capital Market Act 2015 replaces it with a controlled procedure that treats every member alike. See the liquidity test for how a scheme becomes non-liquid.
When the trustee may make an offer
“The trustee of a scheme that is not liquid may offer members an opportunity to withdraw, wholly or partly, from the scheme to the extent that particular assets are available and able to be converted to money in time to satisfy withdrawal requests that members may make in response to the offer.”
Two points stand out. The offer is at the trustee’s discretion: “may”, not “shall”. Members of a property trust cannot force a withdrawal offer, although they can press the trustee through a meeting under Division 5 or, ultimately, vote to wind the scheme up (section 265). And the offer is tied to “particular assets”: the trustee must have identified property, such as a building under contract of sale or a parcel of shares, that it can turn into cash within the offer timetable. The deed must provide for the right to be exercised in accordance with Division 7 and may add further procedures consistent with it (section 210(5)(c)).
What the offer must say
The offer must be in writing and must be made either under procedures the trustee specifies or, otherwise, by giving a copy to every member, or every member of the relevant class (section 258(2)). For joint holders a copy to the first-named joint member suffices (section 258(5)). Section 258(3) requires it to specify:
- the period during which the offer remains open, which must be at least 21 days after the offer is made;
- the assets that will be used to satisfy withdrawal requests;
- the amount of money expected to be available when those assets are converted; and
- the method for dealing with requests if the money is insufficient, which must comply with section 261. The reference should probably be to section 260(3), which contains the pro rata formula; section 261 deals with cancellation.
As soon as practicable after making the offer the trustee must lodge a copy with the Securities Commission (section 258(6)), which lets the regulator check that the offer is fair and that the trustee is not favouring particular members.
Only one offer at a time
Section 259 provides that only one withdrawal offer may be open at any time in relation to a particular interest in a non-liquid scheme. The rule prevents a trustee from running overlapping offers on different terms, which could let a well-informed member pick the better one. It also means that a member who misses an offer must wait for the next, and the Act does not say how often offers must be made. Section 260(2) adds that no request may be satisfied while the offer is still open, so the trustee cannot pay early applicants in full and leave later ones to share what remains.
Payment and the pro rata formula
The trustee must ensure that requests made in response to the offer are satisfied within 21 days after the offer closes (section 260(1)). Where the money realised is not enough to meet every request, section 260(3) requires requests to be met proportionately. The formula in the published text is garbled by the loss of its layout, but its sense is clear: each member receives the total money available multiplied by the amount that member asked to withdraw, divided by the total of all amounts members asked to withdraw.
| Item | Example |
|---|---|
| Money available from the specified assets | K5,000,000 |
| Total withdrawal requests received | K8,000,000 |
| A church’s request | K400,000 |
| Church receives: 5,000,000 × 400,000 ÷ 8,000,000 | K250,000 |
The church keeps units equal to the unpaid K150,000 and may apply again in the next offer. Every member is scaled back by the same proportion, 62.5 percent in this example.
Cancelling an offer
Section 261 allows the trustee to cancel an offer before it closes if the offer contains a material error, and requires it to cancel if cancellation is in the best interests of members, for example because a sale has fallen through and the assets will not produce the money promised. Cancellation follows any procedure in the deed or, otherwise, is made by written notice to the members to whom the offer was made, and written notice of the cancellation must be lodged with the Commission (section 261(2)–(3)). Requests already lodged lapse with the offer.
What if the trustee ignores the procedure
Allowing a member to withdraw from a non-liquid scheme otherwise than under the deed and sections 258 to 261 is an offence: the trustee faces a fine of up to K500,000, and each director a fine of up to K100,000 or imprisonment for up to seven years, or both (section 257(3)–(4)). A member who loses money through the breach may sue the trustee within six years (section 262). See how to withdraw and suing the trustee.
Read a withdrawal offer closely. Compare the expected money with the latest valuation of the assets being sold, note the closing date and the likely scale-back, and decide whether to request a full or partial withdrawal. If the offer is silent on any of the four compulsory matters, raise it with the trustee and, if necessary, the Commission before the offer closes.
Sources
- Capital Market Act 2015 — ss 210(5)(c), 257(3)–(5), 258–261, 262, 265
Before relying on anything here, read the current text of the Capital Market Act 2015 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.