Energy Industries Superannuation Scheme Pty Limited as trustee of the Energy Industries Superannuation Scheme Pool A and Pool B (trading as EISS Super)

Case •

[2022] NSWSC 1202

•

09 September 2022

No judgment structure available for this case.

Supreme Court


New South Wales

Medium Neutral Citation: Energy Industries Superannuation Scheme Pty Limited as trustee of the Energy Industries Superannuation Scheme Pool A and Pool B (trading as EISS Super) [2022] NSWSC 1202
Hearing dates: 23 August 2022
Decision date: 09 September 2022
Jurisdiction:Equity
Before: Ball J
Decision:

See para [47]

Catchwords:

EQUITY — Trusts and trustees — Judicial advice under s 63 of the Trustee Act 1925 (NSW) — Whether trustee may insert amendments to trust deed of superannuation fund to give power to charge fee — Where capital reserve sought to enable trustee to meet potential liabilities from recent changes to regulatory environment

Legislation Cited:

Australian Prudential Regulation Authority Act 1998 (Cth)

Corporations Act 2001 (Cth)

Court Suppression and Non-Publication Orders Act 2010 (NSW)

Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth)

Prudential Standard SPS 520 Fit and Proper

Superannuation Administration Act 1996 (NSW)

Superannuation Industry (Supervision) Act 1993 (Cth)

Trustee Act 1925 (NSW)

Uniform Civil Procedure Rules 2005 (NSW)

Cases Cited:

Application by LGSS Pty Ltd atf Local Government Super [2021] NSWSC 1613

Application by Maritime Super Pty Ltd atf Maritime Super [2021] NSWSC 1614

Application by Motor Trades Association of Australia Superannuation Fund Pty Ltd atf Spirit Super [2021] NSWSC 1672

Application by NGS Super Pty Ltd atf NGS Super [2021] NSWSC 1694

Application by SCS Super Pty Limited atf Australian Catholic Superannuation and Retirement Fund [2022] NSWSC 686

Application by United Super Pty Ltd atf Construction and Building Unions Superannuation Fund [2021] NSWSC 1679

AustralianSuper Pty Ltd v McMillan [2021] SASC 147

In the Application of NSW Trustee & Guardian [2014] NSWSC 423

Invensys Australia Superannuation Fund Pty Ltd v Austrac Investments Ltd (2006) 15 VR 87; [2006] VSC 112

Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42

Re HEST Australia Ltd [2021] VSC 809

Re QSuper Board [2021] QSC 276

Category:Principal judgment
Parties: Energy Industries Superannuation Scheme Pty Limited as trustee of the Energy Industries Superannuation Scheme Pool A and Pool B (trading as EISS Super) (Plaintiff)
Representation:

Counsel:
D Hogan-Doran SC with SKS Danne (Plaintiff)
B J Doyle QC (Amicus Curiae)

Solicitors:
Dentons Australia Pty Ltd (Plaintiff)
Australian Prudential Regulation Authority (Amicus Curiae)
File Number(s): 2022/51827
Publication restriction: Nil

Judgment

Introduction

  1. The plaintiff, Energy Industries Superannuation Scheme Pty Limited (the Trustee), is the trustee of the Energy Industries Superannuation Scheme (trading as EISS Super) (the Scheme), which is an industry-based superannuation scheme that is operated on a not for profit or profit for members basis.

  2. By an amended summons filed on 8 June 2022, the Trustee seeks judicial advice pursuant to s 63 of the Trustee Act 1925 (NSW) that it would be justified in amending the trust deed in respect of the Scheme to permit it to charge a fee and be remunerated from the Scheme. The amendment to the trust deed is sought following amendments to the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act) which have broadened significantly the obligations placed on trustees of superannuation schemes and the types of penalty imposed in respect of breaches of those obligations for which the trustees cannot be indemnified out of the assets of the scheme. The purpose of the amendments permitting the Trustee to charge fees, which absent the amendments it is not entitled to do, is to enable the Trustee to build up a capital reserve from which possible future penalties may be paid. Absent such a reserve, the Trustee faces the likelihood that it will become insolvent if it becomes the subject of a penalty in respect of which it is not entitled to be indemnified from the assets of the Scheme. The application mirrors a number of similar (successful) applications made by trustees of industry based superannuation schemes following the amendments to the SIS Act: see Re QSuper Board [2021] QSC 276 (QSuper); Re HEST Australia Ltd [2021] VSC 809; Application by LGSS Pty Ltd atf Local Government Super [2021] NSWSC 1613 (LGSS); Application by Maritime Super Pty Ltd atf Maritime Super [2021] NSWSC 1614 (Maritime Super); Application by Motor Trades Association of Australia Superannuation Fund Pty Ltd atf Spirit Super [2021] NSWSC 1672 (Spirit Super); Application by United Super Pty Ltd atf Construction and Building Unions Superannuation Fund [2021] NSWSC 1679 (United Super); Application by NGS Super Pty Ltd atf NGS Super [2021] NSWSC 1694 (NGS Super); AustralianSuper Pty Ltd v McMillan [2021] SASC 147; Application by SCS Super Pty Limited atf Australian Catholic Superannuation and Retirement Fund [2022] NSWSC 686 (SCS Super).

  3. The Trustee also seeks its costs of the proceedings on an indemnity basis and suppression or non-publication orders pursuant to s 8(1) of the Court Suppression and Non-Publication Orders Act 2010 (NSW) (the Suppression Act) or the inherent jurisdiction of the Court in respect of some of the material filed in support of its application that is said to contain information that is confidential or commercially sensitive.

Background

  1. The Scheme was established by deed dated 30 June 1997 (the Trust Deed) pursuant to s 127 of the Superannuation Administration Act 1996 (NSW) to provide retirement benefits for employees of certain industry entities in New South Wales. The governing law of the Trust Deed is the law of New South Wales. The Scheme has its origins dating back to 1919 when it was only available to the energy industry in New South Wales. In 2013, the Scheme became a public offer fund. The Scheme is constituted by two funds known as Pool A and Pool B (the Fund), each of which is a registrable superannuation entity as defined in s 10(1) of the SIS Act. Each pool has a number of divisions. Pool B is now closed to new members, as are a number of divisions of Pool A. As at 31 December 2021, the Scheme had approximately 20,000 members and approximately $6.2 billion under administration.

  2. The Trustee holds an Australian financial services licence under Ch 7 of the Corporations Act 2001 (Cth) and an RSE licence under the SIS Act, the latter of which permits it to be the trustee of a public offer fund. The Trustee is governed by its constitution dated 11 April 2018. It has an issued capital of $8 and eight shares on issue held by seven separate entities each of which has some affiliation with the energy industry or related unions. The constitution provides that the board of the Trustee must comprise a minimum of four directors representing employers and four directors representing members, as well as for the appointment of one or more independent directors if required by the SIS Act (although there is currently no such requirement). Each director is subject to requirements of the Prudential Standard SPS 520 Fit and Proper standards issued by the Australian Prudential Regulation Authority (APRA).

  3. The majority of the Scheme’s assets are invested through the Energy Investment Fund, a wholesale investment trust, whose funds in turn are invested in collective investment trusts or underlying assets managed by external fund managers. EIF Pty Limited (EIF) is the trustee of the Energy Investment Fund and is owned by the Trustee. The Trustee and EIF have no other subsidiaries. The Trustee is responsible for, among other things, selecting, supervising and replacing the external fund managers.

  4. Under the Trust Deed, the Trustee has the power to do all things necessary to administer, maintain and preserve the Scheme, including to enter contracts, acquire, hold and dispose of trust property, employ staff, appoint attorneys and agents, and delegate its discretions, powers and authorities. A number of key functions have been outsourced by the Trustee, including member administration, custody, asset consultancy, clearing house, reporting and auditing.

  5. The Trustee also has the power to establish reserve accounts “as are necessary or convenient for the operation or administration of the Fund or any Division of the Fund”. Pursuant to that power, it has established the Operational Risk Financial Requirements Reserve (the ORFR Reserve) for Pools A and B and general reserves for both pools (the Trustee Cost Reserve). The ORFR Reserve was established “to ensure there are sufficient financial resources available to rectify losses to members and/or beneficiaries of the Scheme caused by operational risk events …”. The Trustee Cost Reserve was established to “ensure the Scheme has adequate resources to meet its strategic initiatives, current and future operating expenses and to protect members’ investments against losses resulting from contingent events that are not covered by the ORFR Reserve”. As at 31 December 2021 the Trustee Cost Reserve contained $15.8 million for Pool A and $7.7 million for Pool B, and the ORFR Reserve contained $10.6 million for Pool A and $4.4 million for Pool B.

  6. On 31 August 2021 the results of APRA’s first annual performance test of the Fund’s MySuper product were published. The product did not pass the test. On 12 November 2021 APRA imposed additional conditions on the Trustee’s RSE licence pursuant to s 29EA of the SIS Act. Those conditions required the Trustee to implement better expenditure processes, cease sponsorship arrangements and other expenditure not in the members’ best interests and implement a strategy to merge with a larger and better performing fund by 30 June 2022. Accordingly, on 17 December 2021 the Trustee executed a Memorandum of Understanding to effect a merger with United Super Pty Ltd, the trustee of the Construction and Building Unions Superannuation Fund (Cbus). The proposed merger has been delayed. It is now not expected to be completed before May 2023.

Relevant provisions of the Trust Deed

  1. Clause 4.5 of the Trust Deed provides:

4.5   Remuneration

(a)   The Trustee may be reimbursed from the Fund for:

(i)   all reasonable expenses incurred by it in carrying out its duties in relation to the Fund; and

(ii)   remuneration paid by the Trustee to a director of the Trustee.

(b)   The quantum of the amount payable to the Trustee (and the quantum of any amount payable to the directors of the Trustee) must be:

(i)   determined by a decision of a majority of the directors (or if the Superannuation Law requires a decision to be determined by a greater number of directors that number) after receiving and having given due regard to independent expert remuneration advice as to the appropriate level of remuneration; and

(ii)   approved by the shareholders of the Trustee.

(c)   The Trustee must, at reasonable intervals and, in any event, at least once every two years, consider whether the quantum of the fee payable to the Trustee and the quantum payable to directors remains appropriate and may amend the quantum of the fee accordingly, provided that no increase in quantum may be made except in accordance with the procedure referred to in paragraph 4.5(b) above.

  1. In addition to the implied indemnity provided by s 59(4) of the Trustee Act, which provides that the Trustee may reimburse itself out of trust property for “all expenses incurred in or about execution of the trustee’s trusts or powers”, the Trust Deed itself contains a number of provisions aimed at protecting the Trustee. Clause 9 relevantly provides:

9.1   Liability for acts or omission

The Trustee shall not be liable to the Fund nor to any person whatsoever to an extent greater than the assets of the Fund.

9.2    Indemnity

Subject to Superannuation Law, the Trustee and each director of the Trustee shall be indemnified by the Fund in respect of any liability incurred while acting as the Trustee or as director of the Trustee (as the case may be) except where the liability arises from a breach of trust where the Trustee or director:

(a)   fails to act honestly in a matter concerning the Fund;

(b)   intentionally or recklessly fails to exercise, in relation to a matter affecting the Fund, the degree of care and diligence required to be exercised,

or the liability is for a monetary penalty under a civil penalty order imposed under Superannuation Law. The indemnity shall extend to all legal and other costs, charges and expenses of administering or winding up the Fund and otherwise of performing any trusts, powers, authorities and discretions under this Deed. The indemnity provided to the Trustee and the directors of the Trustee under this clause shall be in addition to any other indemnity allowed by law or given under this Deed.

9.2A    Limitation on indemnity

The Trustee shall not be entitled to indemnify itself:

(a)   out of assets of the Fund for any amount expended by the Trustee out of its own assets managed and maintained by the Trustee itself to cover the Operational Risk of the Fund;

(b)   out of any assets of the Fund that do not form part of the Operational Risk Reserve Account for any amount that relates to Operational Risk without first exhausting the Operational Risk Reserve Account.

9.3    Satisfaction of indemnity

Subject to Superannuation Law, the Trustee shall have a lien on and may dispose of all assets of the Fund in the hands of the Trustee for the purpose of the indemnity set forth in sub-clause 9.2.

  1. Clause 27.3 relevantly provides that each indemnity in the Trust Deed is a continuing obligation and shall survive termination of the Deed.

  2. Clause 20 of the Trust Deed deals with amendment. It relevantly provides:

20.1   Amendments

Subject to sub-clauses 20.2 and 20.4, the Trustee may, with the consent of the Minister, at any time by Deed or by oral or written resolution, amend, add to, delete or replace all or any of the provisions contained in this Deed, including the provisions of this clause, and the amendment, addition to, deletion or replacement may be retrospective or take effect on a specified date.

…

20.7   The Trustee is not permitted to make any amendment, addition, deletion or replacement provision in respect of clauses 3.7, 4.2, 4.3, 4.5, 7.5, 7.6, 8.2, 10.2, 20.1, 22 and 23 without the consent of the Minister.

Relevant Provisions of the SIS Act

  1. Section 52 of the SIS Act relevantly provides:

Governing rules taken to contain covenants

(1)   If the governing rules of a registrable superannuation entity do not contain covenants to the effect of the covenants set out in this section, those governing rules are taken to contain covenants to that effect.

General covenants

(2)   The covenants referred to in subsection (1) include the following covenants by each trustee of the entity:

(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 a prudent superannuation trustee would exercise in relation to an entity of which it is trustee and on behalf of the beneficiaries of which it makes investments;

(c)   to perform the trustee’s duties and exercise the trustee’s powers in the best financial interests of the beneficiaries;

(d)   where there is a conflict between the duties of the trustee to the beneficiaries, or the interests of the beneficiaries, and the duties of the trustee to any other person or the interests of the trustee or an associate of the trustee:

(i)   to give priority to the duties to and interests of the beneficiaries over the duties to and interests of other persons; and

(ii)   to ensure that the duties to the beneficiaries are met despite the conflict; and

(iii)   to ensure that the interests of the beneficiaries are not adversely affected by the conflict; and

(iv)   to comply with the prudential standards in relation to conflicts;

(e)   to act fairly in dealing with classes of beneficiaries within the entity;

(f)   to act fairly in dealing with beneficiaries within a class;

  1. Section 56 of the SIS Act (which was amended by the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) (the FSR Act)) places limits on a trustee’s right of indemnity. It relevantly provides:

(1)   Subject to subsections (2) and (2A), a provision in the governing rules of a superannuation entity is void if:

(a)   it purports to preclude a trustee of the entity from being indemnified out of the assets of the entity in respect of any liability incurred while acting as trustee of the entity; or

(b)   it limits the amount of such an indemnity.

(2)   A provision in the governing rules of a superannuation entity is void in so far as it would have the effect of exempting a trustee of the entity from, or indemnifying a trustee of the entity against:

(a)   liability for breach of trust if the trustee:

(i)   fails to act honestly in a matter concerning the entity; or

(ii)   intentionally or recklessly fails to exercise, in relation to a matter affecting the entity, the degree of care and diligence that the trustee was required to exercise; or

(b)   liability for an amount of a criminal, civil or administrative penalty incurred by the trustee of the entity in relation to a contravention of a law of the Commonwealth (including this Act); or

(c)   the payment of any amount payable under an infringement notice (however described) given under a law of the Commonwealth (including this Act); or

(d)   liability for the costs of undertaking a course of education in compliance with an education direction (within the meaning of this Act).

(2A)   A provision in the governing rules of a registrable superannuation entity is void in so far as it would have the effect of allowing a trustee of the entity:

(a)   to indemnify itself out of the assets of the entity for any amount expended out of capital of the trustee managed and maintained by the trustee to cover the operational risk of the entity; or

(b)   to indemnify itself out of any assets of the entity that do not form part of a reserve maintained for the purpose of covering the operational risk relating to the entity, any amount that relates to that risk, without first exhausting the reserve and any other financial resources managed and maintained by the trustee to cover the risk.

Section 57 contains similar provisions in relation to the indemnification of directors of a trustee.

The application

  1. As I have said, the application is made under s 63 of the Trustee Act.

  2. Section 63(1) relevantly provides that an application may be made to the Court “for an opinion advice or direction on any question respecting the management or administration of the trust property …”. Section 63(2) states that if the trustee acts in accordance with that advice “the trustee shall be deemed, so far as regards the trustee’s own responsibility, to have discharged the trustee’s duty as trustee in the subject matter of the application, provided that the trustee has not been guilty of any fraud or wilful concealment or misrepresentation” in obtaining the advice. Section 63(3) provides for the use of a written statement instead of evidence. In the present case, the Trustee’s application was supported by an amended statement of facts as well as affidavit material. The statement of facts is not evidence. However, it forms the basis on which the advice is given, so that if the actual facts depart materially from the stated facts the advice will not attract the protection afforded by s 63(2). As is normal practice, the Trustee also obtained and filed an opinion from senior counsel (Ms Hogan-Doran SC) on the questions in respect of which judicial advice was sought.

  3. Section 63(4) of the Trustee Act concerns the service of notice and evidence. It provides that “[u]nless the rules of court otherwise provide, or the Court otherwise directs, it shall not be necessary to serve notice of the application on any person, or to adduce evidence by affidavit or otherwise in support of the application”.

  1. The Trustee’s application was brought ex parte and Fund members were not given notice of it, although the relevant industry organisations were. Notice of the application was also given to APRA, which, with the Court’s leave, appeared as amicus curiae at the hearing and provided the Court with written submissions. The Trustee also notified New South Wales Treasury (Treasury) as part of its requirement to obtain ministerial consent to the proposed amendments pursuant to cl 20.1 of the Trust Deed. Treasury has indicated that the Minister is likely to consent to the amendments if the Trustee receives the judicial advice it seeks.

  2. I accept that there would be practical difficulties and significant costs in notifying each member of the Scheme of the application and providing a suitable mechanism for dealing with queries that are likely to arise from notification. Having regard to those matters and, in circumstances where APRA and other interested parties were on notice of the application and APRA appeared and made submissions on judicial advice, I am satisfied that the Court should not order service of the application on Scheme members. That conclusion is consistent with the conclusion that other courts dealing with similar applications have reached: see Maritime Super at [82]–[84] per Ward CJ in Eq; LGSS at [55]–[59] per Ward CJ in Eq; Spirit Super at [54]–[56] per Henry J; United Super at [65]–[68] per Henry J; SCS Super at [31]–[35] per Hallen J.

Steps taken by the Trustee

  1. Following amendments to ss 56 and 57 of the SIS Act in late-2020, the Trustee began evaluating and considering the possible issues arising from the changes to the regulatory framework, including by seeking legal and actuarial advice. In particular, the Trustee engaged Ms Hogan-Doran to provide advice in relation to the amendments to s 56 of the SIS Act and KPMG Australia (KPMG) to consider and to provide a report on how much capital would be required “to cover the risk exposure to liabilities that the Trustee cannot pay out of the assets of EISS, and the level of trustee remuneration that the Trustee should consider for providing its superannuation trustee services having regard to that risk exposure”. The Trustee also explored alternative solutions to charging remuneration, including insurance, seeking contractual indemnities, and obtaining shareholder capital. However, it concluded that those options “offer, at best, a partial solution to the insolvency risk”, and that, consequently, “the current arrangements as to the Trustee’s remuneration no longer serve members’ best financial interests”. In addition to seeking advice, the Trustee did obtain insurance to mitigate insolvency risks. However, there have been limits to the insurance that it could obtain. The Trustee also consulted APRA and the Australian Securities and Investments Commission.

  2. During the course of its considerations, the composition of the Trustee’s board underwent significant changes. In particular, in September 2021, the Chief Executive Officer, one member director and three employer directors, including the Chair, all resigned.

  3. The advice that the Trustee, through its management, had obtained, together with a briefing paper prepared by management was considered at a board meeting on 15 November 2021. At that board meeting, the board resolved “to approve the proposal to seek to amend the [Trust Deed] which involves the approval of the Court, the NSW Treasurer and resulting amendments to the EISS Constitution”. Although not apparent from the resolution itself, it is apparent from the minutes that the approval was “to amend the [Trust Deed] to enable the Trustee to have the power to remunerate itself to create a special purpose reserve to cater for potential liability risk” having regard to the amendments to the SIS Act. The specific wording of the proposed amendment was not before the Board. It has gone through a number of iterations which take account of comments made by APRA and by the Court at the hearing of the application. In its final form, the proposed amendment is in the following terms:

4.6    Trustee remuneration

(a)   The Trustee has a right to be paid (and retain for its own benefit) such reasonable remuneration, charged by way of a fee, as is determined by the Trustee.

(b)   The Trustee may deduct its fee from the assets of the Fund at the times and in the manner determined by the Trustee.

(c)   The Trustee may apportion its fee as between:

(i)   different beneficiaries of the Fund; and

(ii)   any reserves maintained by the Trustee within the Fund,

in any manner determined by the Trustee to be fair.

(the Proposed Amendments).

  1. The Trustee in its amended statement of facts states that it intends to amend its constitution to include measures to protect any capital it raises by charging fees. Those amendments would provide, among other things, that (1) the capital accumulated by the Trustee could not be used to declare a dividend to shareholders of the Trustee; (2) the capital would be retained by the Trustee in its own right while it remains exposed to costs associated with the provision of its services that cannot be met out of the assets of the Fund; (3) the Trustee would release the capital back into the Fund or to a replacement trustee or to a trustee of any successor fund once it is no longer exposed to those risks. The Trustee also intends to amend its constitution so as to prevent shareholders from being able to amend the protective provisions without the consent of the New South Wales Treasurer and the Trustee.

  2. The Proposed Amendments do not set out how the fee is to be calculated. It simply says that the fee must be reasonable. The Trustee refers to a report by KPMG dated 10 November 2021 in which KPMG advised the Trustee to consider charging a fee necessary to reach a target level of $6 million over a 2 to 3 year period, monthly in advance, ideally from the Fund’s general reserves. The Trustee has not made a final decision to accept that recommendation. However, in fixing the fee, the Trustee will be bound by its general law obligations and the covenants included in the Trust Deed by s 52 of the SIS Act.

Should the advice be given?

  1. As Ward CJ in Eq observed in Maritime Super at [78], citing Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42 at [58], the only jurisdictional bar to the exercise of the power under s 63 of the Trustee Act “is the existence of a question respecting the management or administration of the trust property or a question respecting the interpretation of the trust instrument …”. That bar plainly does not operate in this case.

  2. In exercising the power conferred by s 63, the role of the Court is not to take over the exercise of the trustee’s discretion but rather to give advice on whether a particular course of action is permissible: NGS Super at [60] per Henry J; SCS Super at [137] per Hallen J; Spirit Super at [57] per Henry J; In the Application of NSW Trustee & Guardian [2014] NSWSC 423 at [24]–[25] per Kunc J.

  3. In the present case, the question is whether the Trustee would be justified in exercising an express power to amend the Trust Deed. In considering that question, it is necessary for the Court to consider whether the power is being exercised in good faith, upon a real and genuine consideration of the matter and in accordance with the purpose for which the power was conferred and in a way that appears to be fair and equitable in the circumstances: see Invensys Australia Superannuation Fund Pty Ltd v Austrac Investments Ltd (2006) 15 VR 87; [2006] VSC 112 at [62] per Byrne J; Spirit Super at [65] per Henry J. The Court must also be satisfied that the exercise of power complies with the covenants imposed by the SIS Act and s 52 in particular: see Maritime Super at [85] per Ward CJ in Eq; LGSS at [80] per Ward CJ in Eq.

  4. It is now accepted that, in principle, it may be appropriate for the trustee of an industry-based superannuation fund that is not entitled to charge a fee for its services to exercise a power of amendment to permit it to do so to raise capital that can be used to meet liabilities incurred by the trustee, particularly as a result of amendments to the SIS Act. It is accepted that such an amendment does not infringe ss 56 or 57 of the SIS Act: see QSuper at [32] per Kelly J; LGSS at [105]–[108] per Ward CJ in Eq.

  5. It is also accepted that such an amendment may be in the interests of the members of the relevant scheme. As a result of the amendments to the SIS Act, the Trustee may be prevented from being indemnified out of the trust funds for certain liabilities and penalties including penalties imposed on it under the Act, even though the conduct giving rise to those penalties may be inadvertent. Those penalties include penalties for breaches of the covenants implied in the Trust Deed by ss 52 and 52A of the SIS Act. If the Trustee is unable to meet any such liability, the likelihood is that it will be placed into liquidation. That possibility has a direct and an indirect consequence for the members. The direct consequence if the trustee is placed into liquidation, is that the Scheme will need to find a new trustee, and, in the meantime, interim arrangements will need to be put in place to manage the Scheme. That is likely to impose additional costs on the Scheme and the hiatus may affect the proper administration of the Scheme. Those costs and the risks involved in a change of trustee may well not be warranted particularly if the trustee and its staff are competent and the insolvency of the trustee is the result of an inadvertent error. The indirect consequence is that it may be harder to find competent people to serve as directors of the trustee of such a scheme or in senior management positions if there is no mechanism available for discharging liabilities resulting from inadvertent errors. The resignation of several directors of the Trustee following the amendments tends to illustrate this point. It is obviously in the best interests of the members of a superannuation scheme that the scheme is able to attract the most competent people to administer it.

  6. In this case, it is important to bear in mind that the only question on which advice from the Court is sought concerns whether the Trustee is entitled to amend the Trust Deed to allow the Trustee to charge a reasonable fee. Reasonableness in this context is to be judged by reference to the purpose for which the amendment is made — that is, to raise capital to meet any possible liability for which the Trustee is not entitled to be indemnified out of the Fund because of the amendments to ss 56 and 57 of the SIS Act. The Court is not being asked to give advice in relation to the amount of capital that the Trustee may seek to raise and precisely how that amount is to be raised. The evidence is that the Trustee has sought advice on those matters but has not made a final decision on them.

  7. It is apparent from the material before the Court that the Trustee has considered whether other sources of funds are available to meet any potential liability the Trustee might have, including insurance, other types of indemnity and other sources of capital. There is no reason to think on the basis of the material before the Court that the Trustee’s investigations of those matters have been inadequate; and it is reasonable to conclude on the basis of the investigations undertaken by the Trustee that other sources of funds to meet a potential liability may be inadequate. In particular, the material is that the Trustee has been unable to obtain insurance that would cover the whole of its potential liability, has been unable to raise capital from other sources (and, in particular, its shareholders) and has been unable to obtain appropriate indemnities from other sources. Accordingly, consistently with what has already been said, it would be proper for the Trustee to raise the necessary capital by charging fees and therefore permissible to exercise the power of amendment to permit it to do so.

  8. The Trustee has indicated that it proposes to amend its constitution to ensure that any fees it charges will be retained for the stated purpose. Plainly, the advice sought is given on that basis.

  9. As I have said, the Trustee has also placed material before the Court setting out the advice it has received from KPMG on the amount of capital it should seek to raise and how that should be done. Relevantly, the amount of capital that KPMG has advised that the Trustee should raise will not affect the balance of the accounts of individual members, since enough money is held in the reserves established in respect of each Fund to pay the fees recommended by KPMG. Since advice is not being sought on the amount of the fees recommended by KPMG, it is not necessary to consider this matter further. However, the fact that the Trustee has sought advice on the amount of the fees that it would be appropriate to charge in order to provide an adequate capital reserve provides support for the view that the power of amendment is being exercised for a proper purpose because it is being exercised to reduce the risk of insolvency earlier identified.

  10. It is appropriate to make one other point in this context. Necessarily the amount of capital that should be raised by the Trustee involves a degree of guesswork and judgment. By its nature the likelihood of an inadvertent breach that gives rise to a penalty is difficult to predict, as is the amount of any penalty. It would be neither practical nor prudent to seek to guard against all possibilities. Rather, it will be necessary for the Trustee to form a judgment on the appropriate amount having regard to all the relevant facts and bearing in mind that the purpose of raising capital is to mitigate the risks of insolvency, not to eliminate them. As I have said, it is not for the Court to make the judgment of what amount best achieves those goals consistently with acting in the best interests of members. Rather, if advice is sought on the question, the issue will be whether the Court is satisfied that in making that judgment the Trustee has complied with its obligations, including the obligations set out in s 52(2) of the SIS Act.

  11. In its submissions, APRA raised the question whether the amendment was a proper exercise of power and otherwise complied with the law having regard to the impending merger of the Fund with Cbus in accordance with directions given to the Trustee by APRA.

  12. I am satisfied that it is for a number of reasons. First, the issue raised by the amendment is a significant issue for members. Accordingly, it is appropriate that it be addressed promptly by the Trustee. Second, and connected to the first point, as the Trustee points out, there is no certainty that the merger will proceed. Consequently, the Trustee must plan for the possibility that it will not. Third, the proposed amendment and the other steps that the Trustee intends to take are consistent with the merger. As is apparent from the decision in United Super, the trust deed governing the Cbus fund has already been amended to permit the trustee of that fund to charge a fee. If the funds are to be merged, it seems appropriate that a similar right be included in the Trust Deed governing the Scheme. Moreover, as I have indicated, the Trustee intends to amend its constitution so that any remaining capital that is not required to be retained to discharge a potential liability will be paid to the new trustee. Fourth, as I have explained, no advice is currently being sought on the amount of any fee or how it is to be paid. The merger appears to be more relevant to that question than the question whether, in the light of what has happened, the Trustee should have the power to charge a fee. Nor does it seem inappropriate to deal with the question whether the Trustee should be given the power to charge a fee separately from the question of what fee should be charged. There appear to be obvious reasons why the Trustee should be given the power. The question of what fee should be charged and in what circumstances will depend on the circumstances as they exist at the time the question is considered. In this case, developments in relation to the merger may mean that those circumstances could change substantially over a short period of time.

  13. APRA also raised the question whether the orders made by the Court should specifically identify at least some of the assumptions on which the order is based. In my opinion, that is neither necessary nor desirable. As I have explained, the advice is given on the basis of the amended statement of facts. It is neither necessary nor desirable to single out particular facts in the order. I have amended the orders proposed by the Trustee to reflect that fact.

Confidentiality

  1. The Trustee seeks the following orders in relation to confidentiality:

4 Pursuant to s 8(1) of the Court Suppression and Non-Publication Orders Act 2010 (NSW) or the Court’s inherent jurisdiction, the disclosure (by publication or otherwise) of the following documents or any information contained in them (other than information, to the extent it has already been disclosed in another document filed, or to be filed in these proceedings that is not subject to this confidentiality order or has been disclosed by the Plaintiff publicly), by anyone other than the Plaintiff or the Australian Prudential Regulation Authority be prohibited throughout the Commonwealth of Australia:

a.   Confidential SR-2 to the Affidavit of Stephanie Redmond affirmed 18 February 2022;

b.   Confidential SR-3 to the Affidavit of Stephanie Redmond affirmed 18 February 2022;

c.   the Confidential Affidavit of Stephanie Redmond affirmed 18 February 2022;

d.   paragraphs 20 and 21 of the Affidavit of Lance Foster affirmed 4 May 2022;

e.   Confidential LF-1 to the Confidential Affidavit of Lance Foster affirmed 4 May 2022, except for the constitutional amendments at pages 134 to 169 of Confidential LF-1;

f.   Confidential LF-2 to the Confidential Affidavit of Lance Foster affirmed 8 June 2022, except for

i.   the Circular Resolution of the Board dated 2 June 2022 at pages 87 to 93 of Confidential LF-2; and

ii.   the letter to the Treasurer of New South Wales dated 6 June 2022 at pages 103 to 104 of Confidential LF-2;

g.   the Confidential Affidavit of Lance Foster affirmed 25 July 2022, except for paragraphs 21 and 22 of that affidavit;

h.   Confidential LF-3 to the Confidential Affidavit of Lance Foster affirmed 25 July 2022;

i.   the Confidential Opinion of Counsel dated 28 July 2022;

on the basis that the order is necessary to prevent prejudice to the proper administration of justice, or it is otherwise necessary in the public interest for the order to be made and that public interest significantly outweighs the public interest in open justice.

5   The documents referred to in order 4 be:

a.   placed in a sealed folder marked ‘Confidential – Not to be opened except by order of a judge of this Court’;

b.   not made available for inspection without an order of a judge of the Court;

c.   in respect of the items at 4(d), 4(f) and 4(g), to the extent that the items will otherwise be published, redacted.

6   Orders 4 and 5 will lapse after 2 years from the date of completion of the proposed successor fund transfer to the Construction and Building Unions Superannuation Fund, save that, with respect to the legally privileged communications and the counsel opinions set out in Annexure A to these orders, orders 4 and 5 will lapse upon the deregistration of the Plaintiff.

7   Grant liberty to apply to extend the time in order 6.

  1. The documents referred to in these orders fall into three categories. First, there is counsel’s advice which was provided to the Court in connection with the application for judicial advice. Second, there is legal advice that was given to the Trustee in connection with its consideration of the issues on which judicial advice is sought. Third, there is various material (affidavits and documents) that is said to contain commercially sensitive information because it reveals information about the Trustee’s commercial arrangements which are not public, including information about the proposed merger. An obvious example is the Trustee’s insurance arrangements. Disclosure of those arrangements may place the Trustee at a commercial disadvantage at the time the Trustee is seeking to negotiate a renewal of those arrangements.

  1. The precise role that counsel’s advice performs in this case is not entirely clear. Frequently, courts when considering an application for judicial advice expect to be provided with legal advice on an underlying claim or liability that is relevant to the advice. An obvious example is where a court is being asked to provide advice in relation to the commencement or settlement of proceedings by a trustee. In those cases, the court will want to be satisfied that the proceedings have reasonable prospects of success or that the settlement is reasonable. The provision of advice by counsel familiar with the matter is often a necessary element in the court being satisfied of those matters. In those cases, provision of the advice in connection with the application for judicial advice is not to be taken as a waiver of the privilege so far as the underlying proceedings are concerned. But in cases such as the present, there is only one proceeding and the advice concerns the relief sought in that proceeding. Consequently, the advice is more in the nature of submissions. It is difficult to see why confidentiality continues to attach to the advice except to the extent that the advice itself discloses confidential information. Nonetheless, Courts have been prepared to treat the advice as retaining its privileged nature and to make an order in exercise of the Court’s inherent power requiring the advice to be kept confidential: see, for example, LGSS at [163]; Maritime Super at [201]; SCS Super at [49]. The order is made in exercise of the Court’s inherent power since the status of the advice as evidence is unclear; and since the order is made in exercise of the Court’s inherent power, it is unnecessary to specify the period of time for which the order operates: cf s 12 of the Suppression Act, which requires the Court to specify the period for which an order under that Act operates. I should follow earlier decisions on this point.

  2. Similarly, it is generally accepted that legal advice provided to a trustee in connection with its consideration of the decision the subject of judicial advice retains its privileged quality, even if it is provided to the Court on the application for advice; and again, it is thought to be appropriate to protect that privilege by making an order in exercise of the Court’s inherent power: LGSS at [164]; Spirit Super at [96] and [105]; SCS Super at [48]–[49].

  3. As to the other material, s 8 of the Suppression Act relevantly provides:

(1)   A court may make a suppression order or non-publication order on one or more of the following grounds—

(a)   the order is necessary to prevent prejudice to the proper administration of justice,

…

(e)   it is otherwise necessary in the public interest for the order to be made and that public interest significantly outweighs the public interest in open justice.

(2)    A suppression order or non-publication order must specify the ground or grounds on which the order is made.

  1. I am satisfied that the other material in respect of which the Trustee seeks a suppression order under the Act is confidential in the sense earlier described and that a suppression order is necessary either to prevent prejudice to the proper administration of justice or is otherwise necessary in the public interest. Quite apart from any other consideration, it is important that applicants for judicial advice provide the Court with full information in relation to the matter on which advice is sought. Trustees would be discouraged from doing so if they could not be confident that their confidential information would be protected.

  2. The only issue is the length of time the order should remain in force. The Trustee originally proposed ten years, on the basis that that is the time it is required to keep records. However, in my opinion, that is too long. It is difficult to see how information in relation to the merger remains commercially sensitive once the merger is completed. Moreover, it is difficult to see how the Trustee’s commercial arrangements could remain commercially sensitive for a period of ten years, particularly when the likelihood is that it will no longer be the trustee of the Fund after 30 May 2023. I accept, however, that there is no certainty that the contemplated merger will occur. Alternatively, it could be further delayed. The Trustee sought to address these issues by proposing that the order remain in force for two years after the date the merger with Cbus is completed, with liberty to apply to extend that time if necessary. In my opinion, that approach is reasonable.

Orders and costs

  1. As Hallen J pointed out in SCS Super at [155], in these types of case, it is usual for the trustee’s costs calculated on the indemnity basis to be paid out of the trust assets. That approach is consistent with Trustee Act, ss 59(4) and 93 and Uniform Civil Procedure Rules 2005 (NSW) r 42.25. There is no reason to depart from that approach in this case.

  2. Accordingly, the orders of the Court are:

  1. Vary so much of the interim suppression order made on 23 August 2022 so as to exclude its application to the Australian Prudential Regulation Authority (APRA).

  2. Pursuant to s 63 of the Trustee Act 1925 (NSW) and r 55.2 of the Uniform Civil Procedure Rules 2005 (NSW), the Plaintiff would be justified in amending the trust deed of the funds of which the Plaintiff is trustee by inserting a new cl 4.6 as follows:

4.6    Trustee remuneration

(a)   The Trustee has a right to be paid (and retain for its own benefit) such reasonable remuneration, charged by way of a fee, as is determined by the Trustee.

(b)    The Trustee may deduct its fee from the assets of the Fund at the times and in the manner determined by the Trustee.

(c)   The Trustee may apportion its fee as between:

(i)   different beneficiaries of the Fund; and

(ii)   any reserves maintained by the Trustee within the Fund,

in any manner determined by the Trustee to be fair.

  1. Pursuant to s 93 of the Trustee Act 1925 (NSW), the costs of these proceedings be paid out of the assets of the fund of which the Plaintiff is trustee, on an indemnity basis.

  2. Pursuant to s 8(1) of the Court Suppression and Non-Publication Orders Act 2010 (NSW) or the Court’s inherent jurisdiction, the disclosure (by publication or otherwise) of the following documents or any information contained in them (other than information, to the extent it has already been disclosed in another document filed, or to be filed in these proceedings that is not subject to this confidentiality order or has been disclosed by the Plaintiff publicly), by anyone other than the Plaintiff or APRA be prohibited throughout the Commonwealth of Australia:

(a)   Confidential SR-2 to the Affidavit of Stephanie Redmond affirmed 18 February 2022;

(b)   Confidential SR-3 to the Affidavit of Stephanie Redmond affirmed 18 February 2022;

(c)   the Confidential Affidavit of Stephanie Redmond affirmed 18 February 2022;

(d)   paragraphs 20 and 21 of the Affidavit of Lance Foster affirmed 4 May 2022;

(e)   Confidential LF-1 to the Confidential Affidavit of Lance Foster affirmed 4 May 2022, except for the constitutional amendments at pages 134 to 169 of Confidential LF-1;

(f)   Confidential LF-2 to the Confidential Affidavit of Lance Foster affirmed 8 June 2022, except for:

(i)   the Circular Resolution of the Board dated 2 June 2022 at pages 87 to 93 of Confidential LF-2; and

(ii)   the letter to the Treasurer of New South Wales dated 6 June 2022 at pages 103 to 104 of Confidential LF-2;

(g)   the Confidential Affidavit of Lance Foster affirmed 25 July 2022, except for paragraphs 21 and 22 of that affidavit;

(h)   Confidential LF-3 to the Confidential Affidavit of Lance Foster affirmed 25 July 2022;

(i)   the Confidential Opinion of Counsel dated 28 July 2022;

on the basis that the order is necessary to prevent prejudice to the proper administration of justice, or it is otherwise necessary in the public interest for the order to be made and that public interest significantly outweighs the public interest in open justice.

  1. The documents referred to in order 4 be:

(a)   placed in a sealed folder marked ‘Confidential – Not to be opened except by order of a judge of this Court’;

(b)   not made available for inspection without an order of a judge of the Court;

(c)   in respect of the items at 4(d), 4(f) and 4(g), to the extent that the items will otherwise be published, redacted.

  1. Orders 4 and 5 will lapse after 2 years from the date of completion of the proposed successor fund transfer to the Construction and Building Unions Superannuation Fund, save that, with respect to the legally privileged communications and the counsel opinions set out in Annexure A to these orders, orders 4 and 5 will lapse upon the deregistration of the Plaintiff.

  2. Grant liberty to apply to extend the time in order 6.

  3. Note that APRA is excluded from order 4 on the basis that:

(a) APRA is subject to secrecy obligations in relation to protected documents and protected information under s 56 of the Australian Prudential Regulation Authority Act 1998 (Cth);

(b)   APRA agreed with the Plaintiff that any confidential material provided in support of its foreshadowed application would be kept confidential and that APRA would not disclose the confidential material unless required by law or until the information is otherwise available to the public; and

(c)   other restrictions will apply to the disclosure of the confidential material by operation of law, such as legal professional privilege and the Harman Undertaking.

**********

Annexure A

1. Senior Counsel’s email dated 25 July 2021 together with attachments at Confidential SR-2 pages 179-222.

2. Memorandum of Advice of Senior and Junior Counsel dated 6 September 2021 at Confidential SR-2 pages 147-166.

3. Advice of KPMG Legal to EISS dated 8 November 2021 and enclosed appendices at Confidential SR-2 pages 285-315.

4. General Counsel’s Memorandum to the EISS Board dated 9 November 2021 at Confidential LF-1 pages 9-21.

5. General Counsel’s Memorandum to the EISS Board dated 10 December 2021 at Confidential LF-1 pages 96-97.

6. Advice of Dentons to EISS dated 8 February 2022 and enclosed Memorandum and annexures Confidential SR-2 pages 331-562.

7. General Counsel’s Memorandum to the EISS Board dated 11 February 2022 at Confidential LF-1 pages 170-173.

8. General Counsel’s Memorandum to the EISS Board dated 25 March 2022 at Confidential LF-1 pages 230-233.

9. Letter of KPMG Legal to EISS dated 12 April 2022 and attached appendices at Confidential LF-1 pages 210-229.

10. Memorandum of Advice of Senior Counsel dated 25 May 2022 at Confidential LF-2 pages 54-84.

11. General Counsel’s Memorandum to the EISS Board dated 26 May 2022 at Confidential LF-2 pages 85-86.

12. General Counsel’s Memorandum to the EISS Board dated 1 June 2022 and attachments at Confidential LF-2 pages 94-102.

13. General Counsel’s Memorandum to the EISS Board dated 21 July 2022 at Confidential LF-3 pages 1-2.

14. Confidential Opinion dated 28 July 2022

Decision last updated: 09 September 2022

Most Recent Citation