HLB v Trust Company Ltd
[2010] QCAT 40
•12 February 2010
CITATION: HLB v Trust Company Ltd [2010] QCAT 40
PARTIES: HLB
v
Trust Company Limited
APPLICATION NUMBER: GAA5651-09
MATTER TYPE: Guardianship and administration matters
HEARING DATE: 2 February 2010
HEARD AT: Brisbane
DECISION OF: J Allen (Presiding Member)
L Clarkson (Member)
DELIVERED ON: 12 February 2010
DELIVERED AT: Brisbane
DIRECTIONS MADE:
The Tribunal orders Trust Company Limited to compensate HLB within 28 days for its failure to comply with section 51 of the Guardianship and Administration Act 2000.
The amount of compensation shall be calculated on the difference between the return on investment of an amount of $3,641,695:
(a)held in the Trust Cash Management Fund and the
Commonwealth Bank of Australia 90 day Bank Bill for the period
1 April 2009 to 29 June 2009; and
(b)held in the Trust Cash Management Fund and the Commonwealth Bank of Australia 60 day Bank Bill or term deposit for the period 30 June 2009 to 28 August 2009.
Trust Company Limited shall provide the Tribunal with a copy of its calculation in respect of the compensation payment and supporting documents within 28 days.
CATCHWORDS: Authorised investments – sections 52 Guardianship and Administration Act 2000 Compensation for failure to comply – section 59 Guardianship and Administration Act 2000.
APPEARANCES and REPRESENTATION (if any):
The active parties attending the hearing were Mrs HAJ, Mr Ross Spence representing Trust Company Limited and Mr Brian Norman representing the Public Trustee of Queensland. Mr Peter Bryant attended as an interested party for Trust Company Limited.
REASONS FOR DECISION
BACKGROUND
[1]Trust Company Limited were appointed administrator for Ms HLB by order of Mullins J of the Supreme Court of Queensland on 18 August 2008 in respect of a damages award in the amount of $4,250,000.00. Trust Company Limited was ordered by Mullins J to give a management plan within the meaning of the Guardianship and Administration Act 2000 to the former Guardianship and Administration Tribunal within sixty (60) days of the date of that order. The requirement to submit the plan was in accordance with section 20 of the Guardianship and administration Act 2000 which requires a person who agrees to appointment as an administrator to give a financial management plan to the Tribunal fro approval.
[2]The plan was lodged with the Guardianship and Administration Tribunal on 8 July 2009 following a series of extensions of time which were granted by that Tribunal. As was the practice of that Tribunal an oral hearing occurred on 28 August to enable the tribunal to consider the plan.
[3]At that hearing it was disclosed that Trust Company Limited had received the settlement sum in respect of the damages award on 18 September 2008 and that it was held in the Trust Company limited at call fund known as the Trust Company Cash Management Fund and that as at the date of the hearing the earning rate for that fund was 2% per annum. The Guardianship and Administration Tribunal made directions that Trust Company Limited (described as trust Company of Australia Limited) provide submissions to the tribunal and other active parties in regard to:
a.Whether there has been any breach of the Guardianship and Administration Act 2000 in regard to their investment as administrator of HLB's funds to the date of the hearing;
b.The calculation of any compensation properly payable by Trust Company of Australia Limited under s59 of the Guardianship and Administration Act 2000.
[4]The other active parties at the hearing were given an opportunity to make submissions in reply to those of Trust Company Limited. In that regard it is noted that Mrs HAJ is Ms HLB’s administrator for all other financial matters and is always an active party at any tribunal hearing. The Public Trustee of Queensland is also an active party at all hearings of the Tribunal. This is in accordance with section 119 of the Guardianship and Administration Act 2000 which defines who is an active party for a proceeding under that Act.
[5]Trust Company Limited provided its submissions to the Guardianship and Administration Tribunal on 25 September 2009 and the Public Trustee of Queensland provided its reply to those submissions on 27 November 2009. Mrs HAJ made no written submissions in respect of the application.
THE ISSUES AND THE LEGISLATION
[6]Section 51 of the Guardianship and Administration Act 2000 applies if an administrator for an adult has power to invest. In this case Trust Company Limited was empowered to invest all moneys received and held under the order of Mullins J pursuant to that section.
[7]By section 51(2) of the Guardianship and Administration Act 2000 an administrator may only invest in authorised investments. The term “authorised investment” is defined in schedule 4 of the Guardianship and Administration Act 2000 as an investment which, if the investment were of trust funds by a trustee, would be an investment by the trustee exercising a power of investment under the Trusts Act 1973, part 3; or an investment authorised by the Tribunal.
[8]The investment of trust funds under part 3 of the Trusts Act 1973 is in accordance with the Prudent Person Rule, there being no list of authorised trustee investments. This is clear from section 21 of that Act. The tribunal notes that at the hearing Mr Peter Bryant submitted that the Trust Company Limited “Trust Cash management Fund” was an authorised investment under section 21 (1) (ka) of the Trust Act 1973. The Tribunal notes that that section is no longer part of the Trusts Act 1973 due to the Prudent Person Rule amendments to the Act in 1999.
[9]Sections 21 now states that a trustee may unless expressly forbidden by the instrument creating the trust invest trust funds in any form of investment. Section 22 of that Act sets out the duty of a trustee when exercising a power of investment. In the case of a trustee whose business includes acting as a trustee or investing money for other persons they must exercise the care, diligence and skill a prudent person engaged in that business would exercise in managing the affairs of other persons. Trust Company Limited is a trustee company under the Trustee Companies Act 1968 and therefore is a trustee engaged in the business of acting as a trustee. If that were not the case the duty of Trust Company Limited would be that which a prudent person of business would exercise in managing the affairs of other persons.
Subsection 22(3) of the Trusts Act 1973 requires a trustee to review the performance individually and as a whole of trust investments at least once a year.
Section 24 of the Trusts Act 1973 sets out the matters a trustee must, so far as they are appropriate, take into account when exercising a power of investment. Relevantly these are:
a.The purposes of the trust and the needs and circumstances of the beneficiaries;
b.The desirability of diversifying trust investments;
c.The nature of and risk associated with existing trust investments and other trust property;
d.The need to maintain the real value of the capital or income of the trust;
e.The risk of capital or income loss or depreciation;
f.The potential for capital appreciation;
g.The likely income return and timing of income return;
h.The length of the term of the proposed investment;
i.The total value of the trust estate;
j.The effect of the proposed investment for the tax liability of the trust;
k.The likelihood of inflation affecting the value of the proposed investment or other trust property;
l.The cost (including commissions, fees, charges and duties payable) of making the proposed investment;
m.The results of any review of existing trust investments.
Section 30B of the Trusts Act 1973 sets out matters which the Supreme Court of Queensland may take into account when in a proceeding for a breach of trust in relation to a duty under part 3. These are:
a.The nature and purpose of the trust;
b.Whether the trustee had regard to the matters set out in section 24 so far as they are appropriate to the circumstances of the trust;
c.Whether the trust investments have been made under an investment strategy formulated in accordance with the duty of the trustee under this part;
d.The extent to which the trustee acted on the independent and impartial advice of a person competent, or apparently competent, to give advice.
There is also power under section 30C of the Trust Act 1973 to set off all or part of the loss resulting from the investment against all or part of the gain resulting from any other investment whether in breach of trust or not.
The power of the Tribunal to order compensation is in accordance with section 59 of the Guardianship and Administration Act 2000 as follows:
A guardian or administrator for an adult (an appointee) may be ordered by the tribunal or a court to compensate the adult (or if the adult has died, the adult’s estate) for a loss caused by the appointee’s failure to comply with this Act in the exercise of a power.
The question for the Tribunal is whether Ms HLB has suffered loss as a result of a failure by Trust Company Limited to comply with section 51 of the Act in respect of the investment of funds in the Trust Company Trust Cash Management Fund. That is whether or not the investment in the Trust Company Cash Management Fund complied with the Prudent Person Rule in accordance with the Trust Act 1973, Part 3 during the period the funds were invested in that investment. It is question which must be answered having regard to the factors set out in section 24 of the Trusts Act 1973 and is not a question in regard to the Trust Cash Management Fund per se but in regard to an investment in that fund of funds held for Ms HLB having regard to all the circumstances including hers and the financial markets at the time.
SUBMISSIONS BY THE PARTIES
Trust Company Limited (TCL) provided written submissions to the Tribunal as required by the directions order of 28 august 2008. TCL submitted that there was no breach of the Act. Stating that:
The investment by Trust (TCL) of Ms HLB’s funds for the period between the receipt of funds and the date of the hearing in the trust Cash management Fund, which is an authorised investment under section 51(2) of the Act, is consistent with the exercise of care, diligence and skill of a prudent person engaged in the business of managing the affairs of other persons. This is particularly true when consideration is given to the state of investment markets over the time period which demanded extreme risk aversion. From 11 September 2009, the funds were invested in a diversified portfolio of authorised investments consistent with the approved management plan.
TCL stated that the investment for the period between receipt of funds and 30 June 2009 earned income of $107,537 and there was no capital loss.
TCL stated there were two main reasons why funds were maintained in the Trust Cash Management Fund:
a.It took an extended period of time for discussions with Mrs HAJ to establish the most appropriate accommodation and care arrangements. TCL believed that during the period up until accommodation decisions were made, it was prudent to retain funds in an at call cash fund, being the Trust Cash Management Fund.
b.It was TCLS judgment as administrator that it was vital to protect the funds during the period of the global financial crisis which has represented the most significant global recession and credit crisis since the great depression, The Trust Cash management fund was chosen as an appropriately safe investment as the fund only invests in bank guaranteed investments. It is estimated that the investment of the funs in a diversified portfolio during the period between receipt of the funds and 30 June 2009 would have resulted in a capital loss of at least 8%. TCL did have regard to other investment options over the period between receipt of the funds and the date of the hearing however due to the Commonwealth Government guarantee on bank deposits there was a flight of funds from managed investment schemes particularly property security funds and mortgage funds resulting in a freeze on redemptions from many funds resulting in a liquidity crisis. In addition interbank lending was suspended temporarily, resulting in rather unusual yield curves fro cash investments. The contrast in interest rates between the trust Cash Management Fund and 90-day bank bills is highlighted in appendix 1 and demonstrates the market dislocation over the period.
TCL submitted that no compensation was payable by them to Ms HLB given the unusual nature of the investment markets over the time period and given that trust was working with MS HLB family to establish the most appropriate accommodation.
The Public Trustee of Queensland (PTQ) provided a written reply to the submissions of TCL dated 27 November 2009. The PTQ's view was that TCL had not adequately modelled the investment structure for Ms HLB and that consideration should be given as to whether TCL had breached section 51(2) of the Act. The concern raised was whether TCL should have been invested through superannuation and that TCL submissions would need to show they exercised due care and diligence along with their compliance with the Trust Act 1973. The PTQ submitted that the Tribunal should appoint a separate independent administrator to investigate these matters.
Mr Peter Bryant for TCL submitted at the hearing that there was no breach in regard to investments as the Trust Cash Management Fund was an authorised investment in accordance with section 21(ka) of the Trust Act 1973. As mentioned above this section has been deleted as a result of the enactment of the prudent person amendments to the Trusts Act 1973. Mr Ross Spence, financial planner, for TCL advised the tribunal that a meeting had been held with Mrs HAJ following receipt of the damages award on 18 September 2008 and that after considering the market turmoil and need for funds to cover costs for equipment and accommodation the decision had been taken to leave the funds in the Trust Cash management Fund. Mr Spence stated that a draft statement of advice of advice had been prepared on 11 March 2009 which reviewed the accommodation solution and current investments. He stated that other investments had been considered such as mortgage funds but these were frozen and he described bank bills as being all over the place. He stated that there had been serious concern about the market and its decline.
The Tribunal noted that in the statement of advice dated 29 June 2009 which was submitted to the Tribunal for its approval there was a recommendation that an amount of $800,000 be held in an Esanda term deposit at 4% for three months, with a notation that these funds were for short term capital requirements-property etc. Mr Spence was asked by the Tribunal whether this recommendation was contained in the draft statement of advice and he stated that it had not been included.
TCL provided a graph with their written submissions which set out a comparison of the Trust Cash management Fund rates against Bank Bills for the period 18 September 2008 to 28 August 2009. That graph showed that the rates both declined gradually from the start of the period to 18 January 2009 and that between that date and the 18 April 2009 the TCL rate declined to about 2% while the Bank bill rate remained at or above 3%. At the hearing Mr Ross Spence confirmed that the comparison rate was the Commonwealth bank of Australia 90 day bank bill rate
Both Mr Bryant and Mr Spence stated that it was easy in hindsight to look at investment returns and say decisions should have been made. Mr Spence said that the priority for TCL was to preserve Ms HLB’s capital. Mr Spence stated that it would not be appropriate to change investments every time there was a change in market rates and that the standard procedure for TCL was to review investments every 6 months unless circumstances changed dramatically. Mr Spence stated that an important factor at the time was the guarantee on bank deposits by the federal government. He agreed though that a bank bill or term deposit had the same government guarantee benefit as the underlying investments in the Trust Cash Management Fund.
The Tribunal noted that the advice in regard to the investment of the amount of $800,000 in an Esanda Term deposit seemed to be contrary to one of the grounds raised in TCL's written submissions as the submission was that the funds should remain at call pending the finalisation of the accommodation choice. Mr Spence stated that the advice was given at the time that the rest of the funds were to be placed in a diversified portfolio and at that time the markets had stabilised. When the question was put to Mr Spence as to why his advice was not to leave the funds in the Trust Cash Management fund on an at call basis pending the purchase of the house he stated that the Esanda term deposit provided a better overall return.
Mrs HAJ stated at the hearing that she had raised her concern about the interest Ms HLB was earning following the hearing on 28 August 2009. She stated that she was shocked to hear that it was only 2% and thought that a bank term deposit could have earned higher interest at the time. She stated that she had been receiving quarterly reports which set out the income earned by the fund and she had not been aware of the interest rate until the hearing.
Mr Brian Norman for the PTQ submitted that within funds of the magnitude here the PTQ would look to its investment section to place the funds at the best possible rate. He stated that the funds would be likely at least be invested in the PTQ term investment account which provided a rate similar to a term deposit, and that the only funds which would be left in the PTQ at call fund would be those which are required in the short term. Mr Norman submitted that it was not a question of judging in hindsight. The discharge of the prudent person rule required evidence to the effect that the advisers had applied their minds to the matters set out under the Act. Mr Norman submitted that there had been a breach of the Act and that a compensation order should be made. He stated that it would be appropriate to calculate compensation from the time when the pattern of the interest rate differential became apparent.
TCL did not make any submissions in regard to the calculation of any compensation the Tribunal might be minded to award to Ms HLB.
CONCLUSION
TCL received an amount of $4,211,287 as administrator for Ms HLB on 18 September 2008 and, after paying certain outlays, held the balance of that amount in its Trust Cash Management Fund until 11 September 2009. TCL in its submissions to the Tribunal confirmed that when the earning rate of that fund was compared to the Commonwealth Bank of Australia 90 day bank bill rate over that period there was a differential in the earning rate of that fund of approximately 1% from around the beginning of April 2009.
TCL as administrator is required to invest in accordance with the prudent person rule set out in the Trust Act 1973. This rule does not prescribe a list of authorised investments for administrators, but details the matters which administrators must take into account when making investment decisions. These matters are set out in section 24 of the Trusts Act 1973. The Tribunal accepts that the investment climate during the period in question was volatile and that it was prudent to ensure that capital risk was minimised in accordance with section 24(1)(e) of the Trust Act 1973. The Tribunal is mindful that the risk of income loss in accordance with section 24(1) (e) and the likely income return and timing of income return in accordance with section 24(1) (f) are important considerations. This is particularly relevant in this case where there was investment in only one type of investment, and investment of like capital risk such as the Trust Cash Management Fund and a 90 bank bill had a wide income variation. .
The first of TCL’s written submissions to the effect that the funds should stay in the Trust Cash Management Fund while the accommodation situation was sorted out cannot be accepted having regard to the fact that TCL’s own financial planner’s advice in the statement of advice of 29 June 2009 was that the cash needed for the house should be held in an Esanda term deposit and at the hearing the basis for this advice was expressed to because of the better return from the term deposit.
In regard to the second written submission that it was vital to protect the funds during the period of the global financial crisis. This is clearly a paramount consideration but there was no evidence that an investment in a bank bill or term deposit was any less safe than investment in the Trust Cash management Fund. Mr Spence for TCL agreed that both types of investments were subject to the bank guarantee. Mr Norman submitted that the PTQ would ensure that funds were held in its at call fund for as short a time as possible and only the amount required in the short term would remain in the at call fund.
The ultimate issue for the Tribunal was whether it was prudent for TCL to leave the funds in the Trust Cash Management Fund once the trend of lower returns in that type of investment (as against bank bills) became apparent.
Mr Spence stated the investments were reviewed every six months unless circumstances changed dramatically. TCL is in the business of being a trustee and investment manager and is expected to be well aware of current trends in investments. In this case they held nearly $4,000,000 in one investment which in normal circumstances would have been contrary to the requirement in section 24(1) (b) of the Trusts Act 1973 to have regard to the desirability of diversifying trust investments. While it is accepted that capital security was a paramount consideration the Tribunal expects that the TCL would ensure that the funds they held were earning an appropriate rate of income return, having regard to the return from other similar forms of investment.
If, as was the case here, there was an investment which had the same capital protection as the Trust Cash Management Fund but with a significantly greater return without locking the money in for a long period, the Tribunal’s view is that TCL should have preferred the second form of investment.
The tribunal accepts Mr Norman’s submissions that the PTQ acting as administrator under the same duties as TCL would hold monies in an at call fund for as a short a time as possible and obtain appropriate advice to ensure that the best return was obtained.
The Tribunal is satisfied that TCL should have regularly reviewed the return on the funds held in the Cash Management Fund as against other capital guaranteed investments during the financial crisis and that when there was a clear differential in interest rates between the Trust Cash Management Fund and similarly capital protected investments it would have been prudent for TCL to change the investment of Ms HLB’s funds to the alternative investment. The Tribunal has had regard to the financial management plan of TCL which advised that an amount of $300,000 should be available on an at call basis for the needs of MS HLB and is satisfied that the balance of funds would be available for investment in a 90 day bank bill or term deposit during the period in question. The available funds were $3,941,695 as at 29 June 2009, in accordance with TCL’s statement of advice. The difference between the Trust Cash Management Fund and the 90 day bank bill rate of 1% would result in an amount of $3,034.74 less per month if an amount of $3,641,695 were left in the Trust Cash Management Fund when it could have been invested in a higher yielding fixed term investment. The Tribunal is satisfied that Ms HBL has suffered loss caused by TCL’s failure to comply with section 51 of the Act by not investing in accordance with the requirements of the Trusts Act 1973 in regard to the Prudent Person Rule and that MS HLB should be compensated accordingly. The tribunal notes that section 30B of the Trust Act 1973 contemplates setting off a loss made on one investment against a profit made on another investment. In this case there is only one investment which was held during the period and so the section does not apply.
The tribunal makes an order that TCL compensate Ms HLB in accordance with section 59 of the Act for the loss suffered by her. TCL has made no submissions as to how that loss should be calculated. The Tribunal notes the submission of Mr Brian Norman for the PTQ that the loss should be calculated from the time the differential in interest rates became apparent. The Tribunal is satisfied that having regard to the graph provided by TCL that the trend in interest rates was established by 1 April 2009 as the 90 day bank bill rate had remained stable at around 3% for 2 months and the Trust Cash Management Fund rate has fallen from 3% to nearly 2% during the same period. TCL is ordered to pay compensation to Ms HBL based on their calculation of the difference in the earnings on an amount of $3,641,685:
a.during the period 1 April 2009 to 29 June 2009 having regard to the earnings of the funds in the Trust Cash Management Fund and the Commonwealth bank of Australia 90 day bank bill rate; and
b.during the period 30 June 2009 to 28 August 2009 having regard to the earnings of the funds in the Trust Cash Management Fund and the Commonwealth bank of Australia 60 day bank bill rate or equivalent term deposit rate.
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