Australian Superannuation Nominees Limited and Australian Prudential Regulation Authority
[2004] AATA 388
•19 April 2004
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2004] AATA 388
ADMINISTRATIVE APPEALS TRIBUNAL )
) N2003/810
GENERAL ADMINISTRATIVE DIVISION ) Re AUSTRALIAN SUPERANNUATION NOMINEES LIMITED Applicant
And
AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
Respondent
DECISION
Tribunal Mr J Block, Deputy President Date19 April 2004
PlaceSydney
Decision The Tribunal sets aside the decision under review.
[sgd] Mr J Block, Deputy President
CATCHWORDS
SUPERANNUATION – Approval of Trustees – requirements for approval under the SIS Act – $5 million in net tangible assets required for approval – ‘round robin’ arrangement alleged - regulations controlling choice of investments discussed – alleged conflicts of interest adequately dealt with by ASN – previous improper conduct by director of ASN adequately dealt with by ASN – effective management and control procedures in place within ASN - requirements fulfilled – decision set aside.
Superannuation Industry (Supervision) Act 1993 sections 21(2)(c), 26(1), 27C, 52, 58(1), 62, 263(1)(a), 344 and regulation 4.02
Administrative Appeals Tribunal Act 1975 section 42, 43
Minister for Immigration and Ethnic Affairs v Pochi 31 ALR 666
Drake v Minister for Immigration and Ethnic Affairs 94 ALR 577
REASONS FOR DECISION
19 April 2004 Mr J Block, Deputy President PART A – PRELIMINARY AND GENERAL
1. The term “relevant decision” means the decision of Mr Wayne Byres made on 22 January 2003 pursuant to section 27C of the Superannuation Industry (Supervision) Act 1993 (“SIS Act”) to vary the Instrument of Approval of the Applicant and in particular condition 2 of the schedule thereto, prohibiting the Applicant from taking or assuming the trusteeship of any further superannuation funds, and the decision by Mr K Chapman made on 22 April 2003, affirming the decision previously made by Mr Wayne Byres.
2. Mr R W White SC, of Counsel instructed by Thompson Eslick appeared for the Applicant and Mr L T Grey of Counsel instructed by Ms N Jayasinghe of the Respondent, appeared for the Respondent.
3. The Tribunal had before it the T-documents together with (and apart from the Agreed Bundle) Exhibits as follows:-
4. Exhibit A1
5. Folder containing relevant legislation
6. Exhibit A2
7. Standard form superannuation trust deed
8. Exhibit A3
9. Financial Services Licence granted to the Applicant
10. Exhibit A4
11. Letter from the Respondent to the Applicant dated 28 October 2003
12. Exhibit A5
13. Affidavit of Michael Nicholas Lillicrap (“Lillicrap”) dated 30 October 2003
14. Exhibit A6
15. Affidavit of Graeme Robert McDougall (“McDougall”) dated 30 October 2003
16. Exhibit A7
17. Affidavit of Benjamin David Smythe (“Smythe”) dated 20 October 2003 and the Exhibits referred to therein
18. Exhibit A8
19. Product Disclosure Statement in respect of the Applicant
20. Exhibit A9
21. Affidavit by Graham Edward Bird (“Bird”) dated 20 October 2003
22. Exhibit A10
23. Compliance Report by Bird dated 30 September 2003
24. Exhibit A11
25. Minutes of the Compliance and Investment Committee dated 21 June 2001
26. Exhibit A12
27. Letter by the Applicant to Tony Tighe dated 6 April 2001
28. Exhibit A13
29. Affidavit of David Jeffrey Taylor (“Taylor”) dated 21 October 2003
30. Exhibit A14
31. Details of the office holders and capital in respect of the Applicant (formerly Exhibit SA1 in the Stay application)
32. Exhibit A15
33. Statement by Stephen de Belle (“de Belle”) dated 21 October 2003
34. Exhibit A16
35. File note by Mr C Wilson dated 9 October 2001
36. Exhibit A17
37. Media release by the Respondent dated 19 December 2002
38. Exhibit A18
39. Brief for meeting between Applicant and Respondent held on 3 February 2003.
40. Exhibit A19
41. Letter by the Applicant to Ms Carlene Hing dated 9 August 2000
42. Exhibit A20
43. Press statement to the Senate Economic Legislation Committee
44. Exhibit A21
45. Respondent’s note for file dated 25 September 2002
46. Exhibit A22
47. Email from Mr Wilson to Mr Byres dated 10 February 2003
48. Exhibit A23
49. set of email messages dated 31 January 2000 and 1 February 2000 commencing with a message by Mr Lumsden to Mr Haywood and others
50. Exhibit R1
51. Superannuation Circular ILD1, April 1999
52. Exhibit R2
53. Annual financial report of the Applicant at 30 June 2003
54. Exhibit R3
55. Profit and Loss account for the Applicant for the quarter ended 30 September 2001
56. Exhibit R4
57. Letter from Applicant to Mr J Simons dated 25 March 2002
58. Exhibit R5
59. Letter from Applicant to Mr Bruce Inglis dated 29 April 2002
60. Exhibit R6
61. Profit and Loss statement for the Applicant in respect of the quarter ending December 2003 and accounts in respect of the months of January and February 2004
62. Exhibit R7
63. Affidavit dated 6 November 2003 by Wayne Stephen Byres (“Byres”)
64. Exhibit R8
65. Memorandum dated 20 March 2000 by the Respondent
66. Exhibit R9
67. Affidavit dated 7 November 2003 of Earl Gayford Burgess (“Burgess”).
68. Exhibit 10
69. Confidential Communication David Taylor to Strat Mairs and Anthony Hall dated 3 March 2000
4. In addition to the Exhibits referred to in clause 3, the Applicant tendered the Agreed Bundle and which deserves mention on its own. The term “Agreed Bundle” or “the Bundle” refers to six volumes of documents tendered by the Applicant. Throughout the hearing the Agreed Bundle was referred to by its volume number and also the number of the relevant page or pages. References to the volume were not strictly necessary because the pages in the volumes follow and are numbered sequentially. (In the Stay Decision, referred to later in these reasons, and at a time before I had considered the Agreed Bundle I noted that each volume of the Agreed Bundle commenced at page 1; that statement was not correct). These reasons also take into account material submitted by the parties in which there are references to the Agreed Bundle or the Bundle and sometimes in abbreviated form.
5. These reasons contain references to the transcript for the 17, 18 and 19 November 2003; in respect of the hearings on the 23 and 24 March 2004, and at which evidence was taken, I intend to refer to my own notes. It is my view that it is desirable that this decision be handed down as soon as reasonably possible and it is for this reason in particular that I prefer not to wait for the transcript in respect of those latter two days, or for that matter the hearings on the 25 and 26 March 2004, and at which argument only was heard. References to the transcript in respect of the hearings in November 2003 will be couched firstly by a reference to the date, followed by “TS” and then followed by the page number. It will be noted then that there have been in all seven days of hearings, on five of which evidence was taken.
6. The Tribunal has in the course of these proceedings issued three interlocutory decisions. On 23 February 2004 it issued a written Directions Decision (“the Directions decision”) pursuant to which the Respondent was directed to produce a large number of files which had not previously been produced. The Respondent complied with the Directions decision by producing a considerable quantity of material; however it did not produce a number of its communications with the responsible Minister (the Honourable Helen Coonan) on the basis that there were policy reasons why the Respondent should not be obliged to do so. However during the hearings in March 2004, the Applicant made an application for the production of those communications. After hearing argument, the Tribunal was given the relevant correspondence to consider overnight. Having read that correspondence, the Tribunal on the following morning directed that that correspondence be produced but subject to certain orders as to confidentiality. That material did not however result (on the basis foreshadowed as a possibility) in any additional evidence and the communications in question were returned to the Respondent.
7. On 28 November 2003 the Tribunal issued a decision (“the Stay decision”) in accordance with Section 42(2) of the Administrative Appeals Tribunal Act 1975 staying the relevant decision upon conditions (referred to in the Stay decision as the “relevant conditions”) set out in clause 2 of the Stay decision; (it is unnecessary for me to repeat the relevant conditions). Part C of the Stay decision under the heading (“the Applicant’s financial position”) is repeated in these reasons as follows:
“PART C – THE APPLICANT’S FINANCIAL POSITION
31. At the time of the relevant decision the Applicant was the trustee of 225 superannuation funds including a number described as being in the course of migration to the Applicant and which did not in the end result migrate to the Applicant. As at 20 October 2003 the number was down to 174. It must be remembered that the effect of the relevant decision is that the Applicant is not permitted to take up the trusteeship of new funds and even where they would merely replace funds lost through natural attrition.
32. The Applicant acts only as trustee of the relevant funds. It does not administer the funds and it does not give independent advice. It receives a flat fee of $1,500.00 per annum for funds under 1.5 million and a very small percentage of assets on an annual basis for larger funds of which there are very few. It has from inception incurred losses and is continuing to do so. It seems clear that its projections and hopes as to trusts under management to be achieved were over- optimistic. At this time, and with the relevant decision in force it cannot reach the break-even point at which it might derive profit; it seems clear that as presently constituted the Applicant will continue to incur losses and which might in fact increase at a greater rate if in consequence of natural attrition there is further loss of funds.
33. Exhibit R2 indicates at page 11 that Deloittes in relation to the accounts for the year ending 30 June 2003 and under the head of ‘Going Concern’ said:-
“The financial report has been prepared on the going concern basis, which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business.
Pursuant to SIS legislation, the company is obliged to maintain a minimum of $5 million in net eligible assets. As at 30 June 2003 the net eligible assets were $5,054,021 and the company incurred a net operating loss of $104,962 for the year ended 30 June 2003.
The ability of the company to continue as a going concern is dependent on:
· The company generating sufficient new profitable business which is dependent on the company successfully arguing for a removal of a condition of its instrument of approval, imposed by APRA during the current financial year, which effectively restricts the company from accepting any new business. This matter is subject to review by the Administration Appeals Tribunal, with a hearing date of 17 November 2003; and
· The company maintaining its net eligible assets at an amount in excess of $5 million.”
34. Put in other words the continued solvency of the Applicant is or may become a very real issue.
35. There was evidence before me that the Applicant will be able to continue only if it obtains loan finance or if its shareholders continue to support it by fresh infusions of capital. There was no evidence that they will not support the Applicant, but there was also no evidence that they will. Mr Grey pointed to the enormous amount of work undertaken by the Applicant’s solicitors in this hearing as being indicative of a willingness on the part of the shareholders to finance the Applicant and that contention is not without merit. The effort in preparing the Agreed Bundle alone is clearly enormous. On the other hand, there is no reason to think that the patience of the Applicant’s shareholders is inexhaustible; it is reasonable to think that there may come a time when they form the view that to subscribe further capital would be to throw good money after bad. It is hard to imagine a financial institution lending to the Applicant in its current state, unless the Applicant is able to furnish strong security and conceivably in the form of personal guarantees by its shareholders or directors.
36. There was also evidence before me that for the Applicant to raise its fees might result in loss of business and having the effect that its financial position becomes yet worse.”
8. Oral evidence was given in November 2003 on behalf of the Applicant by Smythe and Bird. In November 2003, and at the time of the Stay decision, Smythe’s evidence was incomplete; it was completed during the hearings in March 2004. Oral evidence was given in March 2004 on behalf of the Applicant by de Belle and on behalf of the Respondent by Wayne Stephen Byres (“Byres”). In respect of the Respondent, Burgess was not required for cross‑examination; accordingly the content of his statement (Exhibit R9) can be accepted. Similarly and in respect of the Applicant, Taylor, Lillicrap and MacDougall were not required for cross‑examination. Accordingly their statements and being Exhibit A13 in the case of Taylor, Exhibit A5 in the case of Lillicrap and Exhibit A6 in the case of MacDougall can be accepted.
9. The relevant decision had the effect that the Applicant was prohibited from accepting the trusteeship of any further superannuation funds. (The original Instrument of Approval granted to the Applicant had been subsequently varied so as to impose a limitation of 300 funds).
10. Subsequently to the relevant decision and on 30 April 2003 the Respondent advised the Applicant that, with the consent of the relevant Minister, it had revoked the Applicant’s Instrument of Approval altogether. The Applicant instituted proceedings in the Federal Court on that day challenging the validity of that decision. A stay of that decision was granted on that day; that stay was continued by consent on 2 May 2003 (a Friday) conditionally upon the deposit into a new banking account of $5 million as to $2.5 million by 5 May 2003 and as to a further $2.5 million by 8 May 2003 (Agreed Bundle volume 5, page 1726); those conditions were satisfied. The Applicant was ultimately successful in the Federal Court proceedings; the orders were set aside ab initio and the Applicant received an order in its favour for costs.
11. On 20 August 2003 the Respondent served a Notice of Investigation on the Applicant pursuant to section 263(1)(a) of the SIS Act. Mr Anthony McGrath (“McGrath”) was appointed as Inspector to conduct the investigation. The Affidavit by Burgess contains a statement to the effect that he had a conversation with McGrath in October 2003 and in which McGrath said that he anticipated that his report would be available in February 2004. Mr Grey from the Bar table said, during the March 2004 hearings, that a report has been prepared and received by the Respondent, who is currently considering it.
12. Throughout these hearings Mr Grey has argued to me that I can and should take into account the fact that there is a current and ongoing investigation. Using the analogy of an iceberg, he argued that I should take the view that I might be seeing the tip of the iceberg and that the substantial bulk of it, currently below the surface, is yet to be revealed. As to what if anything will be revealed is of course not known. I have in turn throughout these proceedings made it clear that it is my duty to formulate the correct and preferable decision in relation to the relevant decision only and on the evidence before me only. The fact that there is an ongoing investigation is not in any way an aspect with which I can or should be concerned. I refer in this context to clause 6 of the Stay Decision which reads as follows:-
“6. The Tribunal had been informed, at a directions hearing held on 10 November 2003 that there is currently an ongoing investigation, pursuant to section 263 of the SIS Act into the affairs of the superannuation entities of which the Applicant is the trustee. Mr Grey indicated to the Tribunal that it was hoped that the Respondent would be able to complete the investigation early in 2004 and perhaps by the middle of 2004. Naturally enough he was not able to advise the Tribunal as to the nature of the inquiry or of progress to date. The current position then is that the Tribunal and the Applicant are aware only of the fact that there is such an ongoing inquiry. Mr Grey, on a number of occasions, urged the Tribunal to have regard to the fact that there is an ongoing inquiry and to make its findings on the basis of and with due regard to that fact. It must be appreciated however that the Tribunal is charged only with the review of the relevant decision and nothing else; the Tribunal indicated during the course of the hearing that it did not consider that it could or should take into account an aspect which is aptly at this stage categorised as suspicion on the part of the Respondent. It would appear that when his enquiries are complete, an inspector will advise the Respondent of his findings and, so it is hoped, a report will be issued within one month of that date. As to whether the Applicant will be given an opportunity to make representations in respect of any such enquiries or report is not clear.”
A statement to similar effect was included in the Directions decision at clause 8.
13. The evidence before the Tribunal is very large indeed. It consists of the Agreed Bundle (which is one of the Exhibits) and run into thousands of pages, the T‑documents and the other Exhibits which are numerous and in some cases lengthy and including of course the various witness statements. I have moreover been furnished with a number of most helpful submissions; I intend as a matter of convenience to include extracts from some of them in these reasons. In considering these extracts, I again draw attention to the methodology referred to previously in respect of the Agreed Bundle and the transcripts; in addition some initials refer to witnesses; for example “DJT” refers to Taylor.
14. Before leaving this general part A in order to turn to specific matters, I note in general terms that the duty of the Respondent is one which can never be easy. It must monitor the activities of the entities under its supervision in order to take action in advance of and if possible to prevent mishaps. However the law is clear and that is that I can and must take account only of evidence which has a probative value; (I will revert to the law later in these reasons). It is possible that the Respondent was motivated in its actions in respect of the relevant decision by two important factors. In the first place, it was clearly concerned by what occurred in respect of Commercial Nominees Australia Limited (“CNA”). CNA was a trustee organisation whose failure in respect of its duties resulted in the Federal Government being obliged to compensate persons suffering loss to the extent of approximately $30,000,000. The government was obliged to do so only if it could be said that the losses were caused, inter alia, by fraud. Just such a finding was made in an audit report commissioned for that purpose. Messrs Anthony Hall (“Hall”) and Smythe were involved in and employed by CNA and they were founding members of the Applicant. In November 2002 Hall was disciplined, but without a finding of dishonesty, by a disqualification, Smythe was not the subject of any disciplinary action, apparently because his role in CNA was subordinate. I was told that CNA invested funds in a cash management trust; that term as generally understood would refer to a cash management trust which invests only in safe securities such as government bonds, bank bills and the like. The cash management trust selected by CNA lost substantial amounts because it invested in a mushroom farm. That was one spectre which appeared to haunt the Respondent; the other was its belated discovery of the precise nature of the capital structure of the Applicant. That aspect took up so much of the Tribunal’s time that it is dealt with separately and in part B.
PART B – THE CAPITAL STRUCTURE OF THE APPLICANT
15. The Applicant’s memorandum dated 19 November 2003 and entitled “APRA’s Concerns: Memorandum of 20 January 2003 from Wilson to Byres (T12); Reasons of Chapman (T1); Letter of 8 July 2003 (Annexure WB3)” contains a clear description of the surrounding circumstances and the nature of the capital structure. The content of that memorandum, but confined to clauses 1 to 9 inclusive under the heading “Capital Structure”, is included in these reasons as follows:
“CAPITAL STRUCTURE
1. At the time APRA made its decision to vary the instrument of approval so as to not permit ASN to take up further funds, and at the time it proposed to revoke ASN’s approval as a trustee (ie January – April 2003), ASN’s capital structure was its principal concern (Smythe para 113; Bundle Vol 4 p 1320; APRA letter of 21 February 2003). At that time APRA contended (Notice to show cause of 7 February 2003; Vol 4 p 1226, para 43) that ASN’s capital structure did not satisfy s. 26(1)(b)(i) of the SIS Act (eg letter of 21 February 2003, Vol 4 at p 1324).
2. From December 1999 ASN was considering a number of options as to how to raise the $5 million capital required to meet the net tangible assets requirements. One such proposal was known as a capital raising from the “National Welfare Fund” (Smythe para 36(ii)). However from about February 2000 Mr Hall and Mr Heffron had meetings with a private group of investors introduced to ASN through an investment advisory firm called Mardon Hunt. APRA was advised on 10 February that there had been a very positive meeting with a group of investors and it was at that stage the intention of the investors to provide cash of $5 million which would mean redeeming the existing preference share arrangement. This was a reference to the preference shares that had been issued to the National Welfare Fund (Bundle Vol 2 p 398, Smythe para 36(iv)). The arrangements for the new $5 million of share capital were arranged by Mr Hall and Mardon Hunt. On 28 February 2000 ASN advised APRA that it had received a pledge from the investors and advised that $5 million would be raised by the issue of preferences shares which would then be lent to a special purpose vehicle where all investment activity would take place. At that time it was expected that representatives of the board of ASN and the individual investors would be on the board of the special purpose vehicle (Smythe para 36(vi), Bundle Vol 2 p 455).
3. On 29 February 2000 APRA specified the information which it wanted in relation to, inter alia, the capital raising. It asked for a copy of the constitution of the investment company, a copy of the loan contract to be entered into between ASN and the investment company, and a copy of any documentation in relation to the preference share issue. It did not ask for information as to how the special purpose vehicle would invest the $5 million. It also enclosed a copy of the current ASIC definition of net tangible assets and advised that APRA would be moving towards that definition for all approved trustees from 1 July (at 459). The attached document in relation to net tangible assets proposed that a trustee’s liabilities would be increased by an amount representing any investments in or amounts owing by an associate. This made it desirable that the special purpose vehicle not be an associate of ASN.
4. On 14 March 2000 arrangements were made for the restructuring of ASN’s capital. The shareholders resolved to redeem preference shares issued to National Welfare Fund and to issue preference shares to the new investors (see motions 1 and 6 at pp 465 and 467). Those resolutions were passed on 15 March 2000 (Smythe para 36(viii)).
5. On 15 March 2000 APRA advised that the granting of the Instrument of Approval would be conditional upon the provision to APRA of:
(a) the fixed and floating charge agreement between ASN and the special purpose investment company;
(b) the deposit deed between ASN and the special purpose investment company; and
(c) documentation to confirm the issue of 5 million preference shares by ASN (Vol 2 p 470).
6. On 27 March 2000 APRA provided ASN with a signed Instrument of Approval, and asked for copies of documentation to confirm the issue of five million preference shares by ASN, the executed deposit deed between ASN and the special purpose investment company, and the executed fixed and floating charge between ASN and the special purpose investment company. It also sought a statement from ASN’s external auditor certifying that the trustee had had net tangible assets in terms of the definition provided during the application process, of $5 million.
7. Those documents were provided and the letter responded to on 17 April 2000 (Vol 2 p 514). On that day APRA acknowledged receipt of the documents and advised that that was effective to “activate” the Instrument of Approval granted on 28 March 2000 (Vol 2 p 516).
8. There were separate deposit deeds between ASN and SAF related to each individual investor (Ex DJT1 p 40). The deeds provided that ASN could not withdraw the deposit unless it had obtained each necessary authorisation to do so including, if applicable, the authorisation of APRA (cl. 4.3; Ex DJT1, p 40 at p 47). They also provided that interest payable by SAF Finance was payable on an Interest Payment Date, being the Payment Date (if any) for any interim dividend referable to the Dividend Period as defined in the terms of issue of the Preference Shares. Thus ASN was not to obtain the interest on the investment of $5 million, except to pay dividends to the preference shareholders.
9. SAF Finance lent the money deposited with it by ASN to the investors who had subscribed for shares in ASN. The money was repayable by the investors to SAF Finance on the Maturity Date. That was defined as the date ASN became Insolvent (Ex DJT1 p 57 at p 62 (cl. 5.1), 59 (definition of Maturity Date) and 73 (definition of Insolvent).”
16. The Information Memorandum which brought in the Class ‘C’ Preference Share Investors is contained in volume one of the Agreed Bundle commencing at page 1. Reference was made during the course of the proceedings to the possibility that there was another Information Memorandum prepared by Mardon Hunt. However it would seem that there was only one Information Memorandum, and being the one in the Agreed Bundle, and in respect of which Mardon Hunt played an advisory role.
17. Section 26(1) of the SIS Act reads as follows:-
“(1) APRA must, in writing, approve an applicant as a trustee for the purposes of this Act if, and only if:
(a) APRA is satisfied that the applicant can be relied on to perform, in a proper manner, the duties of trustee of any relevant entity of which the applicant is or becomes the trustee; and
(b) at least one of the following subparagraphs applies:
(i) APRA is satisfied that the value of the net tangible assets of the applicant is not less than the amount prescribed by the regulations;
(ii) APRA is satisfied that the applicant is entitled to the benefit of an approved guarantee of an amount not less than the amount prescribed by the regulations, being a guarantee in respect of the applicant's duties as trustee of each relevant entity of which the applicant is, or is proposing to become, the trustee;
(ii)(a) APRA is satisfied that the applicant passes the test set out in subsection (1A);
(iii) the applicant has agreed to comply with the written requirements given to the applicant by APRA before the granting of the approval, being requirements relating to the custody of the assets of a relevant entity or relevant entities of which the applicant is or becomes the trustee.
(1A) For the purposes of subparagraph (1)(b)(ii)(a), the applicant passes the test set out in this subsection if:
(a) the applicant is entitled to the benefit of an approved guarantee, being a guarantee in respect of the applicant's duties as trustee of each relevant entity of which the applicant is, or is proposing to become, the trustee;
and
(b) the sum of the amount of the approved guarantee and the value of the net tangible assets of the applicant is not less than the amount prescribed by the regulations.”
18. It will be appreciated then that in order to obtain its Instrument of Approval, the Applicant was obliged to satisfy the Respondent as to Section 26(1)(a) of the SIS Act; it was also obliged to satisfy the Respondent as to one only of the subclauses of Section 26(1)(b) of the SIS Act and subclause (i) was the method selected.
19. Taylor’s evidence (Exhibit A13) was that prior to the preference share issue another possibility and relating to AXA bonds was considered; clauses 15 to 20 of Taylor’s statement (Exhibit A13) are included in these reasons as follows:-
“15. Between late February or early March 2000 and mid April 2000, I was involved in drafting and subsequently settling the documentation relating to the issue of the preference shares, the deposit of monies with SAF Finance and the documentation in relation to the loans made from SAF Finance to individual investors. This involved drafting the following documents, including:
(i)the terms of the class ‘C’ preference shares issue;
(ii) the Deposit Deeds between ASN and SAF Finance in relation to each particular investor’s investment;
(iii) the terms of a “D” class preference share issue for preference shares, which were to be issued to each of the investors in order to allow them to obtain any dividends which may be paid by ASN, which would not otherwise be paid to them under the terms of their “C” Class preference share terms
(iv) the fixed and floating charge over the assets and undertaking of SAF Finance granted to ASN; and
(v) a series of loan agreements between SAF Finance and each of the investors
Exhibited to this affidavit and marked “DJT1” is a copy of the standard set of documents as executed and referred to in (i), (ii), (iii) and (v) above and the copy of the charge referred to in (iv). The charge was also registered.
16. At the time that these documents were being prepared and put in place, I did not consider the structure to be in any way artificial or consider that it was being designed to circumvent or avoid the obligations of ASN to hold $5m in net tangible assets. Indeed, the opposite was my understanding. The capital that was being raised through the issue of preference shares was raised to ensure that ASN had $5m in net tangible assets, as required under the SIS Act. The intention, to my understanding, of having a special purpose investment vehicle, namely SAF Finance, was in order to allow the monies that were to be invested into ASN to be quarantined from the ordinary working capital of ASN, and to not be available for use by ASN, and to be managed by the investors themselves. This structure accordingly made it attractive for the investors to make the initial investment, because they would ultimately control how the money advanced to ASN could be invested.
17. I took instructions from Mr Strat Mairs and Mr Anthony Bloore of Mardon Hunt when the documents were being prepared. I recall that Mr Hall was present at one or more of the meetings referred to in paragraphs 10 and 11 above, but I did not take instructions from him. Mr Hall did not devise or arrange the structure of the investment. This was done by Mardon Hunt. I do not recall meeting anyone else from ASN (other than Mr Hall) during the period prior to the investment transaction being finalised.
18. SAF Finance was set up as a single shareholder company. The initial shareholder was Cathy James (Martin James’ wife) and she and Mr de Belle were the original two directors. It is my understanding that a resolution was passed by the directors of SAF Finance to invest the monies placed on deposit under the terms of the Deposit Deed from ASN, by way of loans to individual investors.
19. The fact that SAF Finance resolved to make its investments by way of a loan back to the original ASN investors, in my opinion did not detract from the legitimacy of the investment made by those investors to ASN under the terms of the preference share issue. The documentation which I prepared to record the investment into ASN (see Exhibit “DJT1”) was prepared to (and did) create enforceable rights between each of the relevant parties. The Deposit Deed requires SAF Finance to repay those monies to ASN on demand, subject to obtaining the approval of APRA to do so.
20. At the time that SAF Finance made loans to the original investors, I cannot now recall what enquiries were made by SAF Finance concerning the financial worth of each of those investors, including myself. I can say, however, that each of the investors or their spouses other than Kevin Fuller (who was a client of Andrew Bloore and who I understood to be a respected academic from Victoria), were persons who were personally known to me, and each of them I would describe as high net worth individuals, and persons of integrity and standing. There was certainly no concern in my mind that those persons did not have the financial means to repay the loans made to them by SAF Finance, if called upon to do so.”
20. The capital structure, often referred to as the “round robin” an appellation disliked by Mr White, can be summarised thus; $5 million was raised in ‘C’ class preference share capital from a number of investors and including Messrs Gary Best, Martin James and Taylor, all then, senior partners in Mallesons. (Taylor is no longer a senior partner in that firm). That amount was lent (“the SAF deposit”) to SAF Finance Pty Ltd (“SAF”) and SAF gave a charge to the Applicant by way of security. SAF in turn simultaneously with receipt of the amount of $5 million lent it back (“the shareholder deposits”) to the ‘C’ class preference shareholders who had subscribed that capital to the Applicant in the first place. Those shareholders consisted of a number of natural persons and also of two companies, Exflex Holdings Pty Ltd and DB Capital Pty Ltd referable to and controlled by de Belle and Sarkissian (referred to later in these reasons) respectively. There was some degree of mismatch between the SAF deposit and the shareholder deposits in that the former provided (in general terms) for the repayment of the SAF deposit with the Respondent’s consent, while under the shareholder deposits the amounts lent were repayable in the event of insolvency (as that term is defined in the SIS Act) of the Applicant. All of these transactions occurred on the same day. The effect of course was that the relevant ‘C’ class shareholders were indebted to SAF and could in the event of insolvency of the Applicant be required to repay the amounts borrowed by them respectively. The relevant ‘C’ class shareholders are set out in Exhibit A14 (previously Exhibit SA1) and where the right-hand column indicates the subsequent redemptions, as follows :-
“Class C
CAA
Robert Andrew Bloore
250,000
17 Apr 00
CAO01
-30,000
26 Aug 03
220,000
CA015
CAB
Exflex Holdings P/L
(ACN 002 421 16
500,000
17 Apr 00
CA002
-500,000
26 Aug 03
0
CA024
CAC
DB Capital P/L (ACN 051 079 808)
500,000
17 Apr 00
CA003
-500,000
26 Aug 03
0
CA016
CAD
Peter Keller
500,000
17 Apr 00
CA004
-500,000
26 Aug 03
0
CA021
CAE
Martin James
500,000
17 Apr 00
CA005
-500,000
26 Aug 03
0
CA019
CAF
David Jeffrey Taylor
500,000
17 Apr 00
CA006
-500,000
26 Aug 03
0
CA017
CAG
Linda Best
500,000
17 Apr 00
CA007
-500,000
09 Jan 02
0
CA0012
CAH
Kevin William Fuller
500,000
17 Apr 00
500,000
CA008
CAI
David M Wills
500,000
17 Apr 00
CA009
-500,000
18 Jun 02
0
CA014
CAJ
Robert Graham Bloore
500,000
17 Apr 00
CA010
-10,000
26 Aug 03
490,000
CA023
CAK
Magdalen Clements
250,000
17 Apr 00
0
CA011
-250,000
26 Aug 03
0
CA022
CAL
Gary Best
500,000
09 Jan 02
CA012
-10,000
26 Aug 03
490,000
CA018
CAM
David MacGregor
500,000
18 Jun 02
CA013
-500,000
26 Aug 03
0
CA020
21. De Belle’s evidence was that the ‘C’ class preference shareholders were the subject of inquiries as to their creditworthiness by him and Sarkissian; in the case of de Belle and Sarkissian themselves each investigated the other. The effect of course was that each ‘C’ class preference shareholder did not lay out any actual money because simultaneously with his, her or its subscription for ‘C’ class preference shares in the Applicant, the same amount was lent back by SAF. It was for this reason that the Respondent called it a “round robin”. Mr Byres described it, even less flatteringly as a “furphy”. Mr Grey in his submissions referred to the ‘C’ class preference shareholders as having no “hurt” money. The evidence of Byres on this subject, in some respects confused, will be dealt with later in these reasons.
22. The Respondent had, in relation to a real property investment arrangement previously contemplated, sought information as to due diligence in respect of the properties concerned. It did not, at any rate at that time, inquire as to where the SAF monies had been invested. Accounts subsequently presented on behalf of SAF indicated no income of any kind; they did not however at any rate initially cause any concern to the Respondent and more particularly as to the fact that SAF was deriving no income.
23. Mr White’s objection to the arrangement being described as a “round robin” arose because those words are commonly used in the context of a sham. I am satisfied that in this case there was no sham. Genuine legal rights and obligations were created. That the debts to the ‘C’ class shareholders were recoverable is evidenced, as Mr White contended, by the speed with which amounts were paid in the context of the Federal Court proceedings referred to previously in these reasons.
24. De Belle in his evidence thought that in the case of the loans to the two corporate shareholders there had been personal guarantees. The evidence of Taylor does not indicate that there were any personal guarantees and none were produced in evidence.
25. SAF and the Applicant were structured so as to ensure that they were not associated or, as de Belle put it, “related”. This was done so as to ensure that in calculating the net tangible assets (“NTA”) of the Applicant it was not necessary to add back the SAF deposit. De Belle was a director at the relevant time of SAF but not the Applicant, and there were no common shareholders. At a later date (in 2002) de Belle became a director and the chairman of the Applicant.
26. The fact that the shareholder deposits were so readily collected (some three years later) is significant but that said, it is indicative to some extent, in my view, of being wise after the event. There was no evidence that the financial positions of the ‘C’ class preference shareholders were monitored on an ongoing basis. A shareholder of means in 2000 might have less or no means at a later date. (Recent corporate history in Australia indicates no lack of relevant examples). This is so a fortiori the case in respect of two corporate shareholders and whose shareholders or directors do not appear to have given personal guarantees.
27. Mr White is entitled to contend that the arrangement did create genuine rights and obligations. At the same time a structure of this nature, if not fully disclosed to the Respondent, as this was not, is in my view simply too clever for its own good. It was documented by Mallesons (through Taylor, then a partner) and Deloittes issued a sign-off letter as to the NTA of the Applicant, and which clearly gave comfort to and indeed satisfied the Respondent (and also, so he said, Smythe as to which see later in these reasons). De Belle in his evidence was firmly of the view that it was a subtle and clever structure with which over years in the banking and investment industry he had become familiar. In my view it was ill advised. It is clear enough that when the Respondent became aware of the nature of the capital structure it became concerned, and so much so that its concern was one of the root causes of these proceedings, which have been costly to the Applicant in a number of respects. My own view is that a structure of this nature is worthy of consideration (if at all) if and only if the Respondent with full knowledge of all of its implications approves it and of course it is unlikely to do so. The Applicant contends that there was no obligation on the Applicant to advise the Respondent on the basis that the Respondent could have made its own inquiries. The true test in my view can be expressed by asking this question. Would the regulator, the Respondent, had it known of the loan-back of the relevant funds have approved? Where the answer is likely to be in the negative (as is the case in this instance) an Applicant must make a full disclosure. The importance of the relevant funds in the scheme of things and bearing in mind that the Instrument of Approval was issued, inter alia, on the basis that those funds satisfied the requirements of Section 26(1)(b)(i) of the SIS Act, is such that in my view this must be so. For the Applicant to say, as it does, that the Respondent made no enquiries is not a proper or valid answer. I do not agree with de Belle that it is either subtle or clever and I do not agree with Taylor’s views when he says that he could see nothing wrong with it. The very fact that there was no disclosure is of itself significant. The basis upon which Deloittes issued a sign-off as to the NTA of the Applicant is not known to me. In particular I do not know the nature and extent and terms of their mandate.
28. I have said that evidence of Byres on this subject was confused. The evidence of Byres was in my view generally worthy of credit. He appears to be an honest and able young man whose career is moving upwards. But his comprehension of the law was suspect. He commenced with the proposition that the “round robin” amounted on analysis to no more than a commitment or guarantee on the part of the relevant shareholders. That being so, application might have been made under Section 26(1)(b)(ii) but it was not; it was made in accordance with Section 26(1)(b)(i). This is perhaps a roundabout or layman’s view of the position, but it is not legally correct. (It may be noted that Section 26(1)(b)(ii) contemplates a guarantee of compliance with all of the Applicant’s duties as trustee).
29. Byres accepted that the Applicant subsequently offered to procure a bank guarantee supporting the SAF deposit. The Respondent refused on the basis that to accept that offer would involve a guarantee and falling within a different subsection. Moreover and upon legal advice the Respondent did not in respect of certain important matters advise the Applicant as to its attitude; that legal advice was not revealed on grounds of legal professional privilege.
30. Of course the provision of a bank guarantee would and should have been sufficient simply because it would have had the effect (assuming that it was properly drafted) that the SAF deposit became fully secured.
31. After the Federal Court proceedings had been dismissed, a fresh issue of preference capital raised $5 million which is deposited with and earns interest from St George Bank. After the ‘C’ class preference capital, $3.7 million has been redeemed but $1.7 million remains, and so that the Applicant now has capital of $6.7 million. However the very fact that the capital was differently structured in the first place appears to have left the Respondent with lingering and unallayed concerns.
PART C – OTHER CONCERNS OF THE RESPONDENT
32. The Applicant furnished me with a Memorandum entitled “The Legislative Scheme and ASN’s Business”; it does not appear to me to be controversial and is repeated and incorporated in these reasons as follows:-
“Legislative Scheme – Small APRA Funds (SAFs)
1. Small superannuation funds, that is superannuation funds with fewer than five members, have for a long time been subject to a somewhat different regulatory regime than other funds. Before October 1999 the SIS Act established a separate category of superannuation funds defined as an “excluded superannuation fund”. This was simply a superannuation fund with fewer than five members. They were exempted from some of the prudential requirements under the SIS Act on the basis that members of those funds were capable of looking after their own interests. Such funds were then subject to APRA’s prudential regulation. The object of the Superannuation Legislation Amendment Act (No 3) 1999 was to amend the definition of excluded superannuation fund so as to ensure that all members of excluded superannuation funds were able to protect their interests. Members of excluded funds were usually related, either by marriage or by being business partners and also usually acted as trustees and were therefore able readily to influence the investment strategy and administration of the fund. The effect of the Superannuation Legislation Amendment Act (No 3) 1999 was to create a new class of superannuation fund called a “self-managed superannuation fund” whose regulation was transferred to the Australian Tax Office. The trustees of self-managed superannuation fund had to be members of the fund or, if the fund was a company, its directors had to be members (SIS Act s.17A).
2. Small funds which were not self-managed funds remained under APRA’s regulation. Section 21(2)(c) of the SIS Act provides that a person cannot be a trustee of the superannuation fund with fewer than five members (other than a self-managed superannuation fund) unless the person is an approved trustee. Section 26 deals with the approval of trustees. It provides, inter alia, that APRA must approve an applicant as a trustee for the purposes of the Act if, and only if, APRA is satisfied that the applicant can be relied on to perform, in a proper manner, the duties of trustee of a superannuation fund of which it becomes trustee and, inter alia, APRA is satisfied the value of the net tangible assets of the applicant is not less than the amount prescribed by the regulations ($5 million).
3. However even those small funds which did not become self-managed superannuation funds stand in a different position from other funds. An important difference is contained in s. 58(1) of the SIS Act. That section provides that the governing rules of a superannuation entity other than a superannuation fund with fewer than five members or an excluded approved deposit fund must not permit the trustee to be subject, in the exercise of any of the trustee’s powers under those rules, to direction by any other person. The purpose of the underlined exception is that the previous exception which enabled members of “excluded funds” to direct trustees to purchase certain assets that accorded with the overall investment strategy of the fund, continued for all regulated superannuation funds with fewer than five members, including those that were regulated by APRA (Superannuation Legislation Amendment Bill (No 3) 1999 Explanatory Memorandum item 39).
4. The trust deeds of the funds of which ASN is trustee permit ASN to act upon the directions of members in relation to the investments of the funds’ assets where that direction accords with the investment strategy of the fund and meets the statutory requirements (cl. 3.9, standard trust deed to be tendered).
5. Section 52 of the SIS Act sets out the covenants to be included in the governing rules of a superannuation entity as to the duties of a trustee. These include the duty to act honestly and with due care, skill and diligence, to exercise powers and duties for the benefit of beneficiaries, to keep the assets of each fund separate, and, to formulate and give effect to an investment strategy that has regard to the whole of the circumstances of the superannuation fund including the particular matters referred to in s. 52(f)(i) – (iv). Those matters deal with risk and return, diversification, liquidity, and solvency. Importantly, s. 52(4) provides that an investment strategy is taken to be made in accordance with paragraph 52(2)(f) even if it provides for a specified beneficiary or class of beneficiaries to give directions to the trustee where:
(a) those directions relate to the strategy to be followed by the trustee in relation to the investment of a particular asset or assets of the entity; and
(b) the directions are given in circumstances covered by the regulations.
6. The relevant regulation is Regulation 4.02. The trustee must provide a choice of investment strategies, and the beneficiaries must be given the investment objectives of each of the strategies and all information the trustee reasonably believes a person would reasonably need for the purpose of understanding the effect of, and any risk involved in, each of the strategies.
7. The SIS Act also contains restrictions on investments which a superannuation fund can make. Section 62 requires that the trustee must ensure that the fund is maintained solely for the purposes set out in that section, which, putting it generally, are to provide benefits for members of the fund. Subject to some exceptions, lending to members is prohibited (s. 65). Subject to exceptions the trustee cannot acquire assets from a related party of the fund (s. 66(1)). However a trustee can acquire “in-house assets” at market value if the acquisition does not result in the level of in-house assets exceeding the permitted level and certain other requirements are satisfied (s. 66(2A)). Subject to certain exceptions trustees may not borrow (s. 67). There are detailed in-house asset rules in Part 8 Division 1 of the SIS Act. Some investments made before 11 August 1999 were “grand-fathered” even though they would otherwise have contravened the in-house asset requirements (S 71A – 71F in Part 8 Division 1 Subdivision D). Where a fund’s in-house assets exceeded 5% of the market valuation of the fund’s total assets, the trustee is required to prepare and carry out a plan to ensure that in-house assets are disposed off to bring it within the ratio (s. 82). Investments must be made and maintained on an arms’ length basis, or must be on terms at least as favourable as would apply on an arms’ length basis (s. 109).
ASN’s business
8. ASN was not licensed as an investment adviser under the old s. 784 of the Corporations Act. The old Part 7.3 of the Corporations Act has been replaced by a new Chapter 7 by the Financial Services Reform Act 2001 which came into effect on 11 March 2002. It has a two year transition period. The new Chapter 7 applies to financial products including superannuation interests (S 764A(1)(g)). ASN was granted an Australian financial services licence by ASIC on 22 September 2003 (Bundle Vol 6 p 2022). The licence (to be tendered) authorises ASN to provide general financial product advice for superannuation, but not personal advice (S 766B(3) and (4)). ASN cannot give advice on particular investments, nor on what investment strategies are appropriate having regard to members’ objectives, financial situations and needs.
9. There is no requirement under the SIS Act that an approved trustee be licensed as an investment adviser. ASN did not suggest to APRA that it would be licensed as an investment adviser. It was not obliged, and not entitled, to offer investment advice to the superannuation funds of which it was trustee.
10. The management of the funds’ assets is handled exclusively by external fund managers, with ASN acting as the custodian of the assets (Smythe, para 10). It does not provide fund members with advice in relation to their choice of investments. That choice is controlled by the fund members and their nominated adviser, subject to legislative restrictions monitored by ASN (Smythe, para 11). ASN is charged with formulating and implementing an investment strategy for the fund and ensuring its ongoing compliance with the relevant legislation. Whilst it formulates investment strategies, the choice of the relevant strategy is a matter for the funds’ members. This is consistent with ss. 52 and 58 of the SIS Act.
11. In contrast to other approved trustees, ASN is not a funds manager. It does not provide SAF beneficiaries with investment advice, investment management or accounting or taxation services in relation to the funds. Whilst it lodges returns with relevant regulators, the returns are prepared by administrators appointed by ASN. It uses specialist external service providers who are responsible for providing those services. ASN takes on the trustee and compliance responsibilities as well as the custodial functions. It extricates members from those responsibilities which would otherwise apply to them if they themselves were trustees administering the funds as self-managed superannuation funds (Smythe, paras 12 and 13). ASN is not aligned to a major fund manager or life office.
12. ASN monitors the funds’ investments against their investment strategies. It does so through a monthly review of the assets of the funds against the asset allocation bands in the funds’ investments strategies. It also ensures that the funds’ investments are made in compliance with the SIS Act. It is also responsible for overseeing the work done by other service providers for the superannuation funds under its trusteeship. This includes the work done by administrators appointed by ASN to provide accounting services to the funds, including the preparation of returns which are lodged by ASN (Smythe, para 13).
13. The majority of funds under its trusteeship are funds held by wealthy individuals or their families. The majority of those persons employ their own financial planner or investment adviser (Smythe para 9).
33. It is important to remember that the Applicant provides merely a trustee and custodial function. It does not administer the funds; this function is provided by an administration company. Nor does it give investment advice; this function is provided by the members or their representatives.
34. Section 52 of the SIS Act reads as follows:-
“SECT 52.
(1) If the governing rules of a superannuation entity do not contain
covenants to the effect of the covenants set out in subsection (2), those
governing rules are taken to contain covenants to that effect.
The covenants
(2) The covenants referred to in subsection (1) are the following covenants
by the trustee:
(a) to act honestly in all matters concerning the entity;
(b) to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide;
(c) to ensure that the trustee's duties and powers are performed and exercised in the best interests of the beneficiaries;
(d) to keep the money and other assets of the entity separate from any money and assets, respectively:
(i) that are held by the trustee personally; or
(ii) that are money or assets, as the case may be, of a
standard employer-sponsor, or an associate of a standard employer-sponsor, of
the entity;
(e) not to enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee's functions and powers;
(f) to formulate and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to,
the following:
(i) the risk involved in making, holding and realising, and
the likely return from, the entity's investments having regard to its objectives and its expected cash flow requirements;
(ii) the composition of the entity's investments as a whole
including the extent to which the investments are diverse or involve the entity in being exposed to risks from inadequate diversification;
(iii) the liquidity of the entity's investments having regard
to its expected cash flow requirements;
(iv) the ability of the entity to discharge its existing and
prospective liabilities;
(g) if there are any reserves of the entity-to formulate and to give effect to a strategy for their prudential management, consistent with the entity's investment strategy and its capacity to discharge its liabilities (whether actual or contingent) as and when they fall due;
(h) to allow a beneficiary access to any prescribed information or any prescribed documents.
Covenant referred to in paragraph (2)(e)
(3) A covenant referred to in paragraph (2)(e) does not prevent the trustee
from engaging or authorising persons to do acts or things on behalf of the
trustee.
Covenant referred to in paragraph (2)(f)
(4) An investment strategy is taken to be in accordance with paragraph
(2)(f) even if it provides for a specified beneficiary or a specified class of
beneficiaries to give directions to the trustee, where:
(a) the directions relate to the strategy to be followed by the trustee in relation to the investment of a particular asset or assets of the entity; and
(b) the directions are given in circumstances covered by regulations made for the purposes of this paragraph.
Regulations may prescribe other covenants
(5) The regulations may prescribe a covenant to be included in the governing
rules of a superannuation entity and, if the governing rules of such a
superannuation entity do not contain a covenant to the effect of the
prescribed covenant, those rules are taken to contain a covenant to that
effect.
Prescribed covenants may overlap with other requirements
(6) Without limiting the generality of subsection (5), the regulations may
prescribe, for the purposes of that subsection, a covenant that elaborates,
supplements, or otherwise deals with, any aspect of:
(a) a matter to which a covenant in subsection (2) relates; or
(b) a matter to which a provision of this Act (other than this section) relates.
But prescribed covenants must be capable of operating concurrently with other requirements
(7) However, a covenant prescribed for the purposes of subsection (5) must
be capable of operating concurrently with:
(a) all the covenants referred to in subsection (2); and
(b) this Act other than this section.
Covenant by corporate trustee has effect as covenant by trustee's directors
(8) A covenant by a corporate trustee of a superannuation entity that is to
the effect of a covenant referred to in subsection (2), or to the effect of a
covenant prescribed by regulations referred to in subsection (5), also
operates as a covenant by each of the directors of the trustee to exercise a
reasonable degree of care and diligence for the purposes of ensuring that the
trustee carries out the first-mentioned covenant, and so operates as if the
directors were parties to the governing rules.
Reasonable degree of care and diligence
(9) The reference in subsection (8) to a reasonable degree of care and
diligence is a reference to the degree of care and diligence that a reasonable
person in the position of director of the trustee would exercise in the
trustee's circumstances.”
35. Regulation 4.02 of the Regulations (and which is referable to s 52(4) of the SIS Act) provides as follows:-
“4.02 Covenants in governing rules of a superannuation entity — beneficiary investment choice
(1) For the purposes of paragraph 52 (4) (b) of the Act, the circumstances in which a direction of the kind referred to in that paragraph (other than a subsequent direction of that kind) may be given are:
(a) in the case of a direction by a specified beneficiary who is, or a class of specified beneficiaries each of whom is, a standard employer-sponsored member — the circumstances stated in sub regulations (2) and (3); and
(b) in any other case — the circumstances stated in sub regulation (2).
(2) For the purposes of paragraphs (1) (a) and (b), the following circumstances are stated, namely that:
(a) the trustee gives to the beneficiary, or to each member of the class of beneficiaries, a choice of 2 or more investment strategies from which the beneficiary, or class of beneficiaries, may choose a strategy or combination of strategies; and
(b) the beneficiary, or each member of the class of beneficiaries, is given:
(i) the investment objectives of each of the strategies mentioned in paragraph (a); and
(ii) all information the trustee reasonably believes a person would reasonably need for the purpose of understanding the effect of, and any risk involved in, each of those strategies; and
(c) the beneficiary, or each member of the class of beneficiaries, is fully informed of the range of directions that can be given and the circumstances in which they can be changed; and
(d) the direction is given after compliance with the above paragraphs, and the direction specifies:
(i) which of the strategies or which combination of strategies referred to in paragraph (a) is to be followed in relation to investments of the beneficiary’s, or class of beneficiaries’, interest in the fund; and
(ii) where applicable, matters related to the choice referred to in that paragraph.
Example
A strategy could allow the beneficiary, or class of beneficiaries, a choice in exposure to certain classes of asset. The beneficiary may choose 60% in fixed interest loans and 40% in shares and the choice of the level of exposure to the class of assets would be a “matter” mentioned in subparagraph (ii).
8. I am aware of ASN’s obligations in relation to formulating and implementing an investment strategy for each of the SAFs under its trusteeship. I am further aware that section 58 of the SIS Act allows SAF members to direct ASN in relation to their choice of investment strategy and the particular assets within the strategy, subject to satisfying legislative requirements such as section 62 of the SIS Act which refers to the sole purpose test. I believe that ASN’s staff together with its systems and processes can ensure that ASN is able to meet these obligations.
9. As a member of the ASN’s Board, I am aware of the trustee covenants in the SIS Act, which essentially codify general trust law concepts relating to duties of trustees. In my opinion the Board of ASN fully understands its role as trustee and the duties of a trustee as stated in the covenants in the SIS Act and is confident that the staff and systems in place at ASN permit the effective discharge of these duties.”
Graeme Robert MacDougall
“4. During the Board Meeting of 16 September 2003, Mr Graham Bird attended the meeting to discuss with the Board the contents of his recently completed independent compliance review of ASN. Mr Bird noted that in his opinion, the business of ASN was being conducted in compliance with the law, regulations and conditions stated in ASN’s Instrument of Approval. He further noted to the Board that in his opinion the operations of ASN as an Approved Trustee for SAFs were being managed in an appropriate manner.
5. I felt comfort from Mr Bird’s extensive review report given his knowledge, experience and expertise within the industry. As Mr Bird, is an external member of ASN’s Audit, Risk and Governance Committee, and is responsible for conducting a quarterly written compliance review of the operations of ASN to the committee and Board, I believe his involvement provides ASN with best practice compliance support and assistance.
6. Since becoming a Director of ASN’s I have reviewed ASN’s approach to corporate governance and feel confident with the professional approach. It is my intention to monitor regularly this very important aspect of my duties as a Director.
7. In my experience the area of potential conflict of interests has been handled efficiently and effectively. As a non-executive Director, I was required to complete a conflict of interest register upon appointment. At every Board Meeting, each Director is required to confirm that their disclosure in relation to their conflict has not varied. On an annual basis, each Director is also required to reconfirm the contents of their individual conflict of interest register. If a matter is discussed at Board level that potentially involves a conflict of interest in relation to a particular Director, ASN’s protocol is for that Director to take no part in the discussions and the Director is ineligible to vote on the matter. In my experience ASN’s processes for dealing with conflicts of interests are of best practice.
8. ASN recently applied for an Australian Financial Services Licence, which was subsequently approved and granted. As part of the application process, I spent time at ASN’s offices reviewing its compliance documents, which provide guidance to ASN’s operatives in discharging their respective responsibilities. I found the documents to be of sufficient detail in content to justify the granting of the licence.
9. As a member of the Trustee Board, I am aware of the trustee covenants in the SIS Act, which essentially codify general trust law concepts relating to the duties of trustees. In my experience the Board of ASN fully understands its role as trustee and the duties of a trustee as stated in the covenants in the SIS Act. I am confident that the systems and processes within ASN are sufficiently robust to ensure that ASN is able to meet these fiduciary duties.
10. I am aware of ASN’s requirements in relation to formulating and implementing an investment strategy for the SAFs under ASN’s trusteeship. I am aware that section 58 of the SIS Act allows a SAF member to direct ASN in relation to their choice of investment strategy and the particular assets within the strategy. I am also aware of the need to satisfy legislative requirements, such as section 62 of the SIS Act that refers to the sole purpose test. I feel confident that the systems and processes are robust enough to ensure that ASN is able to meet these fiduciary duties in relation to its investment strategy requirements.
11. I maintain my knowledge of all relevant legislation and regulations pertaining to the management of superannuation funds and the responsibilities of an Approved Trustee, by participating regularly in discussions and the legislative process of possible changes and amendments to the relevant Acts.”
70. A careful consideration of Bird’s evidence has caused me to believe that he is entitled to be regarded as an expert in his field and such that his report may be accepted. The Applicant criticised aspects of it on the basis that it was in some respects sparse; I consider that it is acceptable. Bird’s evidence (which, as I have indicated, was not seriously challenged) is that the Applicant is perfectly capable of managing his business (described by him as small) and has put in place satisfactory procedures.
PART G – THE RESPONDENT
71. Smythe at paragraph 94 of Exhibit A7 noted that the Respondent had advised that it was considering revocation of the Applicant’s approval.
72. Byres at clause 19 of Exhibit R7 indicated that the Respondent proposed to refuse the Applicant the right to accept further funds, as an interim measure. However Chapman’s reasons (Agreed Bundle volume 5 pages 1639 and following) do not suggest that the relevant decision was in any way interim. The Agreed Bundle volume 5, page 1538 and following contains recommendations to Mr Venkatramani. It noted incorrectly that the Applicant had acknowledged that Hall would not be a responsible person. Mr Venkatramani’s recommendations to the responsible minister (Agreed Bundle volume 5, page 1677) are similar to the recommendation referred to in the preceding clause but in stronger terms.
PART H - THE CURRENT FINANCIAL POSITION OF THE APPLICANT
73. Since the Stay decision, 18 funds have undertaken to commit to or have committed to the Applicant. There has been some, but not a significant increase in fees derived. In the quarter ending December 2003 Exhibit R6 indicates a loss of $46,393.57. Trustee fees amounted to $67,500.47. However legal costs amounted to $57,370.05. In January 2004 the Applicant made an operating profit of $34,732.05 but then sustained an operating loss of $16,003.67 in February 2004.
74. Smythe was criticised because at the time of issue of the Instrument of Approval, there were forecasts of the fees which would be derived in relation to varying numbers of funds under management. The numbers stated were far greater than those in fact achieved. Mr White contended that the information referred to was illustrative and in order to set out the profits which might be derived if the number of funds specified was achieved. Nothing very much turns on this aspect except that Smythe gave evidence as to an allocation by the Respondent of a large number of funds, and where the Applicant had cause to hope for an allocation of at least some of them, but where all of such funds were allocated to companies administered by accountants. It is possible then that there was at one time some room for optimism on the part of the Applicant, but if the numbers specified were indeed forecasts then they were over-optimistic.
75. Mr Grey said that if the Applicant had been properly capitalised from the outset there would have been additional interest income. That is clearly true. But it does not detract from the fact that the relevant decision amounts, so it was said, to slow strangulation. To say, as the Respondent does, that the Applicant is not financially viable in current circumstances does indicate a degree of self-fulfilling prophesy.
76. The board of the Applicant is now constituted by the presence of persons of expertise and repute. Bird is contracted to furnish services on an ongoing basis. A number of testimonials furnished originally in the Federal Court proceedings and attached to the statement by Smythe indicate that the Applicant is furnishing a service which is valued.
part i – the law and conclusion
77. In accordance with s 43 of the Adminisitrative Appeals Tribunal Act 1975 it is my duty to formulate the correct and preferable decision. I must do so on the evidence before me at this time. The term “evidence” in this context means evidence of probative value. In doing so I must not have regard to suspicion or conjecture. The fact that the Respondent made a decision or decisions is not of itself probative. The fact that the Respondent may have voiced concerns is also not in any way of itself probative.
78. In Minister for Immigration and Ethnic Affairs v Pochi 31 ALR 666 the full Federal Court (Smithers, Evatt and Deane JJ) said at pages 689 and 690:
“It would be both surprising and illogical if, in proceedings before a statutory tribunal involving an issue of the gravity of deportation of an established resident, the rules of natural justice were restricted to the procedural steps leading up to the making of a decision and were completely silent as to the basis upon which the decision itself might be made. There would be little point in the requirements of natural justice aimed at ensuring a fair hearing by such a tribunal if, in the outcome, the decision maker remained free to make an arbitrary decision. If decision, in such a case, were to be based on mere suspicion or speculation, the rules of procedure aimed at governing the process of making findings of material fact would involve no more than a futile illusion of fairness. I respectfully agree with the conclusion of Diplock LJ that it is an ordinary requirement of natural justice that a person bound to act judicially “base his decision” upon material which tends logically to show the existence or non-existence of facts relevant to the issue to be determined. As has been mentioned, the requirements of natural justice may vary according to the nature of the inquiry (see, eg, Russell v Duke of Norfolk, supra, at 118) and that conclusion may not be of universal validity in that it may not, for example, apply in respect of some domestic forums. It is however of general validity in the case of a statutory tribunal which is bound to act judicially. Indeed, that conclusion, upon analysis and for present purposes, does little more than place in a proper context of the essential duty of fairness of a statutory tribunal bound to act judicially, the well-established principle of law that a decision of such a statutory tribunal must ordinarily be based on evidence which is reasonably capable of sustaining it (Allinson v General Council of Medical Education and Registration [1894] 1 QBD 750 at 760, 763, 766; Astridge Investments Ltd v Minister of Housing and Local Government [1965] 1 WLR 1320 at 1326; and see per Stephen J, Ex parte Jordan (1898) XIX NSWLR 25 at 29). Implicit both in Diplock LJ’s conclusion and in that well-established principle are both the requirement that findings of material fact of a statutory tribunal must ordinarily be based on logically probative material and the requirement that the actual decision of such a tribunal must, when relevant questions of fact are in issue, ordinarily be based upon such findings of material fact and not on mere suspicion or speculation. Those requirements, like all the ordinarily applicable rules of natural justice, may be modified or abolished by the express words or intendment of the legislation establishing the tribunal or conferring jurisdiction upon it (see, Commissioner of Police v Tanos (1958) 98 CLR 383 at 396 cited with approval by Lord Wilberforce in Wiseman v Borneman, supra, at 318; Twist v Randwick Municipal Council (1976) 12 ALR 379 AT 382-3; Salemi v Minister for Immigration and Ethnic Affairs, supra, at 5, 19, 45, 51).”
79. And in Drake v Minister for Immigration and Ethnic Affairs 94 ALR 577 the full Federal Court (Bowen CJ, Smithers and Deane JJ) said at page 589:
“The question for the determination of the Tribunal is not whether the decision which the decision-maker made was the correct or preferable one on the material before him. The question for the determination of the Tribunal is whether that decision was the correct or preferable one on the material before the Tribunal. The Act offers little general guidance on the criteria and rules which the Tribunal is to apply in the performance of its task of reviewing administrative decisions which are subjected to its surveillance. Even in a case such as the present where the legislation under which the relevant decision was made fails to specify the particular criteria or considerations which are relevant to the decision, the Tribunal is not, however, at large. In its proceedings, it is obliged to act judicially, that is to say, with judicial fairness and detachment. In its review of an administrative decision, it is subject to the general constraints to which the administrative officer whose decision is under review was subject, namely, that the relevant power must not be exercised for a purpose other than that for which it exists (Water Conservation & Irrigation Commission v Browning (1947) 74 CLR 492 at 496, 498, 499-500, 504), that regard must be had to the relevant considerations, and that matters “absolutely apart from the matters which by law ought to be taken into consideration” must be ignored: R v Cotham [1898] 1 QB 802 at 806; Randall v Northcote Corp [1910] 11 CLR 100 at 109-110; Shrimpton v Commonwealth (1945) 69 CLR 613 at 620; R v Anderson; Ex parte Ipec-Air Pty Ltd (1965) 113 CLR 177 at 189; [1965] ALR 1067 at 1071.”
80. As at this date there is no substantive evidence against the Applicant. To the extent that the capital structure was objectionable that objection has been fully rectified. Hall has gone and, according to de Belle, his whereabouts are unknown. Sarkissian was never a concern because his actions in relation to Telstra had nothing to do with the Applicant. Banner and Heffron have resigned their respective positions. Smythe is still in the Applicant’s employ but he was never a cause for real concern bearing in mind that he was not the subject of any disqualification action. The Respondent complains that the Applicant has been reactive rather than pro-active and this is to some extent true. There was only one investment which might conceivably have given cause for concern but it was put in place before the Applicant became the trustee of the relevant fund. Thereafter and as I have indicated, the Applicant has resigned its appointment as trustee of that fund in the face of the refusal of that fund to dispose of the offending investment. Investments of a dubious or questionable nature have been refused. The evidence before me suggests that the concerns expressed by Byres are without foundation. Possible conflicts of interests are monitored, as Bird confirmed. Proposed investments are scrutinised. The services of Bird on an ongoing basis have been engaged. Bird’s evidence at 18 TS 51 was that if the Applicant cannot take further funds it must eventually fail
81. The Applicant has gone through a very difficult time indeed. These proceedings and also the Federal Court proceedings have involved substantial costs. The production of the Agreed Bundle alone (and for which the Applicant’s legal advisers deserve to be commended) was an enormous undertaking but it must have been very costly. The Applicant has survived, although not without incurring losses.
82. The Stay decision was as I have noted issued in November 2003 at a time when the evidence was, so I thought, far from complete. It was clear at that time that the Respondent would have to substantiate (vague) allegations of impropriety. Its only witness was Byres whose presence in his current position is comparatively recent. His evidence was truthful but not in all respects helpful to the Respondent, and certainly did not serve to furnish evidence of anything which might cause this Tribunal to affirm the relevant decision.
83. The current position then is that whatever difficulties or causes for complaint existed in the past those problems have been resolved. The capital structure is in order and personnel whose presence was in any way questionable are no longer employed by or involved with the Applicant. There is in my view no basis upon which the relevant decision can or should be affirmed and it is thus set aside. At Mr White’s suggestion I note that the effect is that the limit of 300 funds which applied previously, by way of amendment to the terms of the Instrument of Approval, is restored.
84. These proceedings were held in private as required by s 344 of the SIS Act. However no applications of the kind contemplated by s 344 of the SIS Act were made and no orders were given.
I certify that the 84 preceding paragraphs are a true copy of the reasons for the decision herein of Mr J Block, Deputy President
Signed: Guy Moloney .....................................................................................
Associate
Date/s of Hearing 17, 18 &19 November 2003
23, 24, 25 & 26 & 29 March, 2004;
Date of Decision 19 April 2004
Counsel for the Applicant Mr R W White SC
Solicitor for the Applicant Thomson Eslick
Counsel for the Respondent Mr L T Grey
Solicitor for the Respondent Ms N Jayasinghe
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