Host-Plus Pty Limited v Blackwell

Case [2022] SASC 59

SUPREME COURT OF SOUTH AUSTRALIA

(Civil)

HOST-PLUS PTY LIMITED v BLACKWELL

[2022] SASC 59

Judgment of the Honourable Justice Blue  

SUPERANNUATION - PRIVATE SECTOR FUNDS - TRUSTEES - GENERALLY

SUPERANNUATION - PRIVATE SECTOR FUNDS - AMENDMENT OF TRUST DEED

EQUITY - TRUSTS AND TRUSTEES - POWERS, DUTIES, RIGHTS AND LIABILITIES OF TRUSTEES - MISCELLANEOUS OTHER POWERS, DUTIES AND LIABILITIES - POWER TO VARY TRUSTS

The applicant trustee sought orders under section 59C of the Trustee Act 1936 (SA) varying the trust deeds governing the Hostplus Pooled Superannuation Trust and the Hostplus Superannuation Fund to insert a new clause empowering the trustee to charge a Risk Charge.

The motivation for the proposed amendments was that, particularly after 1 January 2022, the trustee of the Fund and the Trust, and trustees of superannuation funds generally, would be liable to the potential imposition of fines and penalties in relation to any contravention of Commonwealth laws in respect of which they would not be indemnified by their respective superannuation funds. The applicant has no significant capital of its own out of which to pay any such fine or penalty and in this respect is in a similar position to other trustees of industry superannuation funds.

The application was opposed by the respondent, a member of the Fund, as the representative of all actual and potential beneficiaries of the Fund and of the Trust. The interested party, the Australian Prudential Regulation Authority, made submissions without taking a position in relation to the application.

The application was heard as a matter of priority. Orders were made varying the respective trust deeds because of the imminent legislative changes due to come into operation.

Held:

1The proper construction of subsections 56(2) and 57(2) of the Superannuation Industry (Supervision) Act 1993 (Cth) considered (at [154]).

2The proposed clauses would not be rendered void by subsections 56(2) or 57(2) of the Superannuation Industry (Supervision) Act 1993 (Cth) (at [162]).

3In the absence of the acquisition by the Applicant of substantial capital, it would be rendered insolvent by the imposition of any significant non-indemnifiable penalty and this would cause very substantial costs and losses to the Fund and the Trust and thereby to the beneficiaries (at [126]).

4A preferable mechanism to provide capital to a trustee in the position of the Applicant would be for its superannuation funds to acquire shares in the trustee company but this is presently precluded by the Superannuation Industry (Supervision) Regulations 1994 (Cth) (at [194]).

5Given legislative provisions and time constraints, it was not possible to satisfactorily mitigate that risk by 1 January 2022 other than by the introduction of a trustee risk charge of the type proposed (at [220]).

6In the circumstances, there was good reason to vary the trust deeds and it was in the interests of the beneficiaries of the respective trusts to do so (at [221]).

7In the circumstances, the variations would not result in one class of beneficiaries of either trust being unfairly advantaged to the prejudice of another class (at…

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Host-Plus Pty Limited v Blackwell [2022] SASC 59
Case
[2022] SASC 59
Decision Date

CaseChat Overview and Summary

Host-Plus Pty Limited (HPPL) sought an amendment to the trust deeds of the Hostplus Pooled Superannuation Trust and the Hostplus Superannuation Fund to enable the imposition of a Risk Premium Charge. The primary legal issue was whether the court had the discretion to alter the trust deeds to allow for the new charges, and if so, whether such alterations were in the best interests of the fund members and beneficiaries. The court considered the statutory powers available under the Trustee Act 1936 (SA) and the implications of the proposed amendments on the financial stability and governance of the funds.

The court found that it did have the discretion under section 59C of the Trustee Act to vary the trust deeds. The court examined the necessity of the Risk Premium Charge, given HPPL's limited capital and the potential consequences of its insolvency. The evidence demonstrated that HPPL's inability to be indemnified by the funds against significant penalties could lead to its insolvency, necessitating a replacement trustee, which would be costly and detrimental to the funds' members. The proposed Risk Premium Charge was deemed necessary to maintain the financial stability of HPPL, thereby ensuring the continuity of trusteeship for the funds.

Accordingly, the court exercised its discretion to amend the trust deeds to include provisions for the Risk Premium Charge. The amendments were designed to ensure that the charges were imposed in the best financial interests of the fund members and were fair and equitable. The court concluded that these changes were in the best interests of the members and beneficiaries of the funds, thereby upholding the integrity and sustainability of the superannuation arrangements.

The final orders of the court included varying the trust deeds to insert new provisions regarding the Risk Premium Charge, granting liberty to apply for further variations, and allocating the costs of the proceeding between the funds in equal proportions.

Orders

Orders of the court

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Background

Background to the litigation

I was greatly assisted by counsel for all parties and in particular thank Mr Blackwell for acting as a representative and contradictor and APRA for making submissions to assist the Court.BackgroundSuperannuation industry Leaving aside self-managed superannuation funds, superannuation trustees and superannuation funds fall into two broad categories. In the first category, the trustee acts on a commercial, for profit, basis. I refer for convenience to such trustees as commercial trustees and the funds of which they are trustees as commercially operated funds.[4] [4] They are commonly called “retail funds” in Australia but this risks confusion with the dichotomy between retail funds (such as the Fund) and wholesale funds (such as the Trust). A commercial trustee charges a fee or fees to its superannuation fund and is free to use the money generated by the fee for its own purposes (including to pay out profits by way of dividends to its shareholders). Commercial trustees tend to be owned and controlled by banks or other financial institutions. Although commercial trustees are motivated by profit, they owe extensive fiduciary and statutory duties to act in the best interests of the members of their funds and, where there is a conflict between the interests of their fund’s members and their own interests, to give paramountcy to their duties to their fund’s members. Governmental regulation requires disclosure of the amount of fees charged by trustees of regulated superannuation funds but (subject to the following qualifications) does not regulate the amount of such fees. Section 99G of the Superannuation Industry (Supervision) Act 1993 (Cth) (the Supervision Act) limits the amount of fees that can be charged by a trustee of a regulated superannuation fund to members with small account balances of less than $6,000. Section 29V of the Supervision Act limits the types of fees that can be charged to members holding a MySuper product but section 29VA, which imposes charging rules, does not limit the amount of administration fees or investment fees[5] that can be charged (provided that they meet defined equality criteria as between all (relevant) MySuper members). [5] Section 29VC does limit the amount of certain more minor fees (activity fees and insurance fees) to a cost recovery basis. In the second category, the trustee acts on a not-for-profit basis. I refer for convenience to such trustees as non-commercial trustees and the funds of which they are trustees as cooperative funds. There are three broad types of cooperative funds: corporate, public sector and industry funds. Historically, each type was created for a particular class of employees. Corporate funds were created for employees of a private enterprise corporate group. Public sector funds were created for government employees. Industry funds were created for employees working in a particular industry. However, many if not most industry and public sector funds are now “public offer funds” open to any member of the public, whether or not employed and whether or not associated with a corporate group, government sector or industry. The original hard and fast distinction between corporate, public sector and industry funds no longer applies.

Evidence

Evidence Before The Court

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Decision

Reasons for decision

It is appropriate to exercise the discretion under section 59C of the Trustee Act to vary the Trust Deeds of the Fund and the Trust.Conclusion For the above reasons, I made the following orders:1Pursuant to s 59C of the Trustee Act 1936 (SA), the trust deed in respect of the Hostplus Pooled Superannuation Trust is varied to insert a new provision in the terms of the document appearing at Annexure A of these orders.2Pursuant to s 59C of the Trustee Act 1936 (SA), the trust deed in respect of the Hostplus Superannuation Fund is varied to insert a new provision in the terms of the document appearing at Annexure B of these orders.3Liberty to apply to any party to further vary the Trust Deed.4The Applicant’s and the Respondent’s costs of the proceeding are to be met by the Applicant from the assets of the Hostplus Superannuation Fund and the Hostplus Pooled Superannuation Trust in equal proportions.Annexure A19.2A Risk Premium Charge (1)Subject to sub-clauses 19.2A(2) and (3), the Trustee is entitled to charge an annual fee to hold on its own account against the risk of acting as trustee of the Trust and other RSEs (Risk Premium Charge) which, will be an amount equal to 0.03% of the RSE NAV on the last day of the previous financial year. (2)The Risk Premium Charge will be deducted from the assets of the Trust in the manner and at the times as determined by the Trustee from time to time, and will be paid to the Trustee, subject to: (a) such determination being made in the best financial interests of Unitholders of the Trust; and (b) such determination being fair and equitable as between classes of Unitholders of the Trust, and as between Unitholders within a class. (3)A deduction of Risk Premium Charge under clause 19.2A(2) may only be made to the extent that at the date of the deduction, the balance of the Risk Premium Reserve, does not exceed:(a) 0.06% of the RSE NAV on the last day of the previous financial year; or (b) such amount, if any, as may be required by or under the Corporations Act 2001 (Cth) or the Superannuation Industry (Supervision) Act 1993 (Cth) requires, or as a Regulator directs the Trustee to hold as Risk Premium Reserve; whichever is greater. (4) The Trustee may determine to: (a) despite anything in this clause 19.2A, reduce, waive, postpone or suspend the charging of the Risk Premium Charge (or any part of it) in relation to the Trust as a whole, or a class or classes of Unitholders, or a particular Unitholder or Unitholders, for such period as it determines; and/or (b) accept any refund or rebate of the Risk Premium Charge in relation to the Trust as a whole, or a class or classes of Unitholders, or a particular Unitholder or Unitholders; provided this is in the best financial interests of the Unitholders of the Trust, and is fair and equitable as between classes of Unitholders of the Trust, and as between Unitholders within a class. (5)The Trustee must reduce or suspend the charging of the Risk Premium Charge, in relation to the Trust as a whole, or a class or classes of Unitholders, or a particular Unitholder or Unitholders as the Trustee considers appropriate, if and to the extent to which the Trustee is: (a) directed to do so in writing by a Regulator, including pursuant to any prudential standard made under the SIS Act; or (b) ordered to do so by a court, pursuant to a proceeding in which the Trustee is a party. (6)The Trustee must notify Unitholders at least annually, of the amount of the Risk Premium Charge: (a) charged directly to a Unitholder's account; or (b) otherwise, indirectly borne by the Unitholder (for example, by being deducted from the value of the Unitholder's investments or paid out of Trust reserves). (7) The Trustee must make available to Unitholders, at least annually, information on:(a) the balance of the Risk Premium Reserve as at the end of the previous financial year; (b) net earnings (if any) on the Risk Premium Reserve over the previous financial year; (c) any payments made into the Risk Premium Reserve in the previous financial year; (d) any payments made from the Risk Premium Reserve in the previous financial year; and (e) details of the contravention giving rise to the penalty comprising the liability where applicable.(8)For the avoidance of doubt the payment of the Risk Premium Charge under this clause 19.2A is treated as the payment of a Trust Liability and does not limit the Trustee’s right to reimbursement under clauses 19.1 and 19.2 or the Trustee’s right of indemnity under clause 20. In this clause 19.2A: "NAV" means the net value of the Trust Property determined by the Trustee after subtracting all Trust Liabilities from the total value of all property and other assets of the Trust."Risk Premium Reserve" means the net tangible assets held by the Trustee in its personal capacity, and not as trustee of the Trust, against the risk of acting as trustee of the Trust and other RSEs. "RSE" means a registrable superannuation entity under the SIS Act. "RSE NAV" means the NAV of the Trust and the net value of the assets less liabilities of any other RSE for which the Trustee acts as trustee, without any double counting.Annexure B4.11 Risk Premium Charge (1)Subject to sub-clauses 4.11(2) and (3), the Trustee is entitled to charge an annual fee to hold on its own account against the risk of acting as trustee of the Fund and other RSEs (Risk Premium Charge) which will be an amount equal to 0.03% of the RSE NAV on the last day of the previous financial year. (2)The Risk Premium Charge will be deducted from the assets of the Fund in the manner and at the times as determined by the Trustee from time to time, and will be paid to the Trustee, subject to: (a) such determination being made in the best financial interests of beneficiaries of the Fund; and (b) such determination being fair and equitable as between classes of beneficiaries of the Fund, and as between beneficiaries within a class. (3)A deduction of Risk Premium Charge under clause 4.11(2) may only be made to the extent that at the date of the deduction, the balance of the Risk Premium Reserve, does not exceed:(a) 0.06% of the RSE NAV on the last day of the previous financial year; or (b) such amount, if any, as may be required by or under the Corporations Act 2001 (Cth) or the Superannuation Industry (Supervision) Act 1993 (Cth) requires, or as a Regulator directs the Trustee to hold as Risk Premium Reserve; whichever is greater. (4) The Trustee may determine to: (a) despite anything in this clause 4.11, reduce, waive, postpone or suspend the charging of the Risk Premium Charge (or any part of it) in relation to the Fund as a whole, or a class or classes of beneficiaries, or a particular beneficiary, for such period as it determines; and/or (b) accept any refund or rebate of the Risk Premium Charge in relation to the Fund as a whole, or a class or classes of beneficiaries, or a particular beneficiary; provided this is in the best financial interests of the beneficiaries of the Fund, and is fair and equitable as between classes of beneficiaries of the Fund, and as between beneficiaries within a class. (5)The Trustee must reduce or suspend the charging of the Risk Premium Charge, in relation to the Fund as a whole, or a class or classes of beneficiaries, or a particular beneficiary as the Trustee considers appropriate, if and to the extent to which the Trustee is: (a) directed to do so in writing by a Regulator, including pursuant to any prudential standard made under the SIS Act; or (b) ordered to do so by a court, pursuant to a proceeding in which the Trustee is a party. (6)The Trustee must notify beneficiaries at least annually, of the amount of the Risk Premium Charge: (a) charged directly to a beneficiary 's account; or (b) otherwise, indirectly borne by the beneficiary (for example, by being deducted from the value of the beneficiary 's investments or paid out of Fund reserves). (7) The Trustee must make available to beneficiaries, at least annually, information on:(a) the balance of the Risk Premium Reserve as at the end of the previous financial year; (b) net earnings (if any) on the Risk Premium Reserve over the previous financial year; (c) any payments made into the Risk Premium Reserve in the previous financial year; (d) any payments made from the Risk Premium Reserve in the previous financial year; and (e) details of the contravention giving rise to the penalty comprising the liability where applicable.(8)For the avoidance of doubt the payment of the Risk Premium Charge under this clause 4.11 is treated as the payment of a Fund Expense and does not limit the Trustee’s right to reimbursement under clause 14.8 or the Trustee’s right of indemnity under clause 5.2.In this clause 4.11: "NAV" means the net value of the Fund determined by the Trustee after subtracting all Fund Expenses from the total value of all property and other assets of the Fund. "Risk Premium Reserve" means the net tangible assets held by the Trustee in its personal capacity, and not as trustee of the Fund, against the risk of acting as trustee of the Fund and other RSEs. "RSE" means a registrable superannuation entity under the SIS Act. "RSE NAV" means the NAV of the Fund and the net value of the assets less liabilities of any other RSE for which the Trustee acts as trustee, without any double counting.

Ratio Decidendi

Legal Principle Established

The Policy provides that the Risk Reserve may only be applied by HPPL with the authority of the Board.Rationale for the proposed amendments The background to the proposed introduction of the Risk Charges is that HPPL only has share capital of $600 and after 1 January 2022 it would not be able to be indemnified by the Fund or the Trust against a liability for a fine or civil or administrative penalty or amount payable under an infringement notice under Commonwealth legislation (collectively a penalty). The rationale for the proposed introduction of the Risk Charges is that the Trustee of the Fund and the Trust would become insolvent if it were to incur a penalty in any significant amount. If HPPL were to become insolvent, it would be unable to continue as trustee of the Fund or the Trust. Section 120(2) of the Supervision Act defines a “disqualified person” amongst others as a company in respect of which a receiver, manager, administrator or provisional liquidator has been appointed or which is being wound up. Section 126K prohibits a disqualified person from acting as a trustee of a superannuation entity. Sections 133 and 134 empower APRA to remove a disqualified person as trustee of a superannuation entity and appoint a replacement trustee to act as trustee until the vacancy is filled. At first sight, it might be thought that it would be relatively easy for HPPL to be replaced with an alternative trustee of the Fund or the Trust. However, the evidence establishes that this is not the case and that there would be a very substantial cost and detriment to the Fund and the Trust, and therefore to the members of the Fund and the Trust, in that event. If HPPL were unable to continue as Trustee of the Fund or the Trust, theoretically there would be two alternatives. First, the appointment of a replacement trustee to take over as the long term trustee of the Fund and the Trust. Secondly, a merger of the Fund with another superannuation fund under the control of a short term replacement trustee and a dismantling of the Trust. Any replacement trustee (whether long term or short term) would be required to hold an AFS Licence from ASIC and an RSE Licence from APRA. APRA would be unlikely to appoint or license a replacement trustee that had the same directors as a trustee that had become a disqualified person. That power has never been exercised in respect of a large superannuation fund of the order of the Fund or the Trust. Any trustee appointed by APRA would only be an acting trustee in the short term and it would still be necessary to procure a long term replacement trustee if the first alternative could be pursued. Any acting trustee appointed by APRA would charge substantial fees. Although trustees of existing superannuation funds do not necessarily have significant capital or financial support from their shareholders, it appears likely that a replacement trustee would be required to have substantial capital or financial guarantees in order to obtain an RSE Licence. This would have to be provided in some form by the Fund and the Trust, either by directly providing the capital (see below) or by paying fees of the type proposed by HPPL to create such capital. Even if a replacement trustee could be procured without substantial capital, that trustee would run the same risk of insolvency as would have been run by (and hypothetically materialised for) HPPL. On the evidence adduced before me, it appears unlikely that a long term replacement trustee could be procured in respect of a superannuation fund of the size of the Fund and the Trust.