Official Trustee in Bankruptcy v Kirkland, John Sloane

[1997] FCA 1506

IN THE FEDERAL COURT OF AUSTRALIA
TASMANIA DISTRICT REGISTRY	TG 15 of 1997

ON APPEAL FROM A JUDGMENT OF A SINGLE JUDGE OF THE FEDERAL
COURT OF AUSTRALIA

BETWEEN:

OFFICIAL TRUSTEE IN BANKRUPTCY
Appellant

AND:

JOHN SLOANE KIRKLAND
First Respondent

TNT SUPERANNUATION FUND PTY LIMITED
Second Respondent

JUDGES:

RYAN, EINFELD and FOSTER JJ

DATE OF ORDER:

22 DECEMBER 1997

WHERE MADE:

MELBOURNE (HEARD IN HOBART)

MINUTES OF ORDER

THE COURT ORDERS THAT:

1. The appeal be allowed.

1. The order made on 25 July 1997 be set aside and in lieu thereof:

(a)it is declared that Article 10.5 of the Rules referred to in the trust deed made on 11 April 1969 between Thomas Nationwide Transport Limited and TNT Superannuation Pty Limited as amended is, to the extent that it provides for forfeiture of benefits if the person otherwise entitled thereto becomes bankrupt or insolvent before 1 July 1994, void;

(b)it is ordered:

(i)that the second respondent pay to the applicant within 28 days of this Order the Preserved Withdrawal Benefit including all accrued interest to which John Sloane Kirkland, (“the bankrupt”) but for the sequestration order of 31 August 1993, would have been entitled pursuant to the said Rules;

(ii)that the costs of the applicant and the second respondent including reserved costs be taxed as between solicitor and client and retained or paid as the case may be out of the estate of the bankrupt.

1. The costs of the appellant and the second respondent of and incidental to the appeal be taxed as between solicitor and client and retained or paid as the case may be out of the estate of the bankrupt.

Note:Settlement and entry of orders are dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
TASMANIA DISTRICT REGISTRY	TG 15 of 1997

ON APPEAL FROM A JUDGMENT OF A SINGLE JUDGE OF THE FEDERAL
COURT OF AUSTRALIA

BETWEEN:

OFFICIAL TRUSTEE IN BANKRUPTCY
Appellant

AND:

JOHN SLOANE KIRKLAND
First Respondent

TNT SUPERANNUATION FUND PTY LIMITED
Second Respondent

JUDGES:	RYAN, EINFELD and FOSTER JJ
DATE:	22 DECEMBER 1997
PLACE:	MELBOURNE (HEARD IN HOBART)

REASONS FOR JUDGMENT

THE COURT:  By application dated 14 November 1996 the appellant who is the trustee of the bankrupt estate of John Sloane Kirkland (“the bankrupt”) applied to this Court for the following relief:

1.A declaration that Article 10.5 of the Rules referred to in the trust deed made on 11 April 1969 between Thomas Nationwide Transport Limited and TNT Superannuation Pty Limited, as amended at 1 July 1988, is void.

2.A declaration that the benefits pursuant to Article 4 of the said Rules were absolutely and indefeasibly vested in the first respondent as at 1 July 1988.

3.A declaration that the said benefits vested forthwith in the applicant on 31 August 1993 by operation of section 58 of the Bankruptcy Act.

4.An order that the second respondent pay to the applicant forthwith the amount of the said benefits together with any interest derived therefrom.

The trust deed made on 11 April 1969 governed the TNT Group Retirement Fund (“the Fund”) of which the bankrupt, who was employed by the TNT Group from 1967 to 1988, was a member.  He resigned his employment on 1 July 1988 and thereupon became entitled to receive from the Fund a Cash Withdrawal Benefit of $59,539.31 and a Preserved Withdrawal Benefit of the same sum.  The Cash Withdrawal Benefit was paid within two weeks of his retirement.  On 31 August 1993 a sequestration order was made against the estate of the bankrupt. 

The Rules pursuant to which the second respondent, TNT Superannuation Fund Pty Limited (“the Trustee”), was Trustee of the Fund provided for payment of benefits to six categories of retiring members and for a death benefit where the member died before retirement.  None of those categories applied to the bankrupt.  Accordingly, his entitlement to a withdrawal benefit was governed by Art 3.6 in these terms:

A Member whose Service ceases for any other reason and who is not entitled to a Normal Retirement Benefit, a late Retirement Benefit, a Total Disablement Benefit or an Early Retirement Benefit shall be entitled to receive a Withdrawal Benefit part of which, the Cash Withdrawal Benefit, will be paid as at the date his Service ceases and the balance, the Preserved Withdrawal Benefit, will be paid together with the Credited Interest as at the date he attains age 55 or as at the date of his death if occurring earlier or at such earlier date as the trustee may in its absolute discretion decide.

The Rules of the Fund as in force on 1 July 1988 incorporated by reference the provisions of the Occupational Superannuation Standards Regulations 1987 (Cth) S R 322 of 1987 (“the OSS Regulations”). That was done by Rule 10.22 which stipulated:

Notwithstanding the provisions of these Rules, in carrying out its powers and duties under the Rules the Trustee shall comply with the prescribed operating standards for superannuation funds provided by the Occupational Superannuation Standards Act 1987 and without limiting the generality of the foregoing these Rules shall be construed as if such standards that are from time to time in force are deemed to be included in these Rules and any Rule that is inconsistent with a standard shall to the extent of such inconsistency be of no effect.

The effect of Regs 10 and 11 of the OSS Regulations, as paraphrased by the learned primary Judge, was that:

...preserved benefits were required to be retained in the fund and not be paid until the member had retired from the workforce and attained age 55.  Such benefits would only become payable if the member retired from the workforce before 55 on the ground of permanent incapacity or invalidity, died, departed permanently from Australia or there were such other circumstances (if any) as the Insurance and Superannuation Commission approved.

From 11 March 1994, the Fund became obliged to comply with, amongst others, the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SR 57 of 1994) (“the SIS Regulations”). Accordingly, Rule 10.22 of the Fund’s Rules was amended on 13 June 1994 with effect from 1 July 1994 to read:

(a)The standards prescribed in the Statutory Requirements are deemed to be included in these Rules.  A requirement included by this Rule prevails over any other Rule inconsistent with it.

(b)If a requirement included by this Rule ceases to be in force or the Responsible Authority does not require it to be complied with, then that requirement ceases to be included by this Rule.

(c)Where a provision of this Deed or Rules permits the direction of the Trustee by another party and such direction would be contrary to the Statutory Requirements that provision shall be read as requiring the consent of the Trustee to the action involved.

(d)Where a provision in this Deed or Rules permits the exercise of a discretion by a party other than the Trustee without the consent of the Trustee and such exercise would be contrary to the Statutory Requirements that provision shall be read as requiring the consent of the Trustee in the exercise of the discretion.

The “Statutory Requirements” were defined by Rule 1.24A as amended also with effect from 1 July 1988 as:

any provision as may from time to time apply under the Act, [the Superannuation Industry (Supervision) Act 1993] Occupational Superannuation Standards Act 1987, the Income Tax Act or any other law including:

(a)any administrative guidelines issued by the Responsible Authority; or

(b)statements by Government advising changes to the Statutory Requirements, which govern the operation of the Fund;

with which the Fund must comply in order to be a Complying Superannuation Fund, or with which the Trustee must comply.

By force of Rule 122A the definition of “Responsible Authority” was from 1 July 1994:

the Insurance and Superannuation Commissioner, the Commissioner of Taxation, or any other Federal Government authority responsible for administering the laws, regulations, or any other rules applying to the operation of superannuation or similar funds.

Forfeiture of benefits in the Fund was governed by Rules 10.5 and 10.6 which provided:

10.5Benefits payable out of the Fund shall be forfeited if the person otherwise entitled thereto:

(a)assigns, alienates or charges or attempts to assign, alienate or charge such benefits or part thereof,

(b)becomes bankrupt or insolvent, before 1 July, 1994

(c)owing to mental illness requires care, treatment or control for his own good or in the public interest and is in the opinion of the Trustee for the time being incapable of managing himself or his affairs; or

(d)in the opinion of the Company commits any fraud or is guilty of dishonesty, defalcation, wilfully damaging Company property or serious misconduct.

10.6The benefits forfeited by a person entitled thereby under Rule 10.5 of this Article 10 may at the discretion of the Trustee be applied by it in whole or in part to or for the benefit of such person and his Dependents or any of them as the case may be, provided that while such person, being a Member, remains in Service the Trustee shall not make any payment to or for the benefit of the person or his Dependants other than for personal maintenance and support in case of hardship.

(The words which we have emphasised were added by the amendments which took effect on 1 July 1994.)

The SIS Regulations by Reg 6.17 provides:

(1)     For the purposes of subsections 31(1) and 32(1) of the Act, the standard set out in subregulation (2) is applicable to the operation of regulated superannuation funds and approved deposit funds.

(2)     A member’s benefits in a fund:

(a)may only be paid by:

(i)being cashed in accordance with Division 6.3; or

(ii)being rolled over or transferred in accordance with Division 6.4; and

(b)must not be paid except when, and to the extent, that the fund is required or permitted under this Part to pay them; and

(c)must be paid when, and to the extent that, the fund is required under this Part to pay them.

Division 6.3 headed “Cashing of benefits” contains Reg 6.18(1) which provides that a member’s preserved benefit may be cashed on or after the satisfaction by the member of a condition of release.  Regulation 6.18(3) is in these terms:

Subject to subregulation (4), the form in which preserved benefits may be cashed under this regulation is:

(a)the form (if any) specified in the cashing restriction for preserved benefits set out in Schedule 1 in relation to the relevant condition of release; or

(b)if that cashing restriction is “Nil” - any one or more of the following forms:

(i)a lump sum or 2 or more lump sums;

(ii)a pension or 2 or more pensions;

(iii)the purchase of an annuity or 2 or more annuities.

Part I of Schedule I applicable to preserved benefits in regulated superannuation funds provides that the cashing restrictions applicable to the condition of release designated “Retirement” are “nil”.  For the content of that condition of release, it is necessary to go back to Reg 6.01(7) which is in these terms:

For the purposes of Schedule 1, the retirement of a person is taken to occur:

(a)in the case of a person who has attained age 55 - if:

(i)an arrangement under which the member was gainfully employed has come to an end; and

(ii)the trustee is reasonably satisfied that the person intends never to again become gainfully employed, either on a full-time or a part-time basis; or

(b)in the case of a person who has attained age 60 - an arrangement under which the member was gainfully employed has come to an end on or after the member attained that age.

The learned primary Judge referred in his reasons for judgment to the scheme of the SIS Regulations which we have just outlined. However, he did not refer to Part 29 of the Superannuation Industry (Supervision) Act which empowers the Commissioner to grant exemptions from, and make modifications of, certain provisions (“modifiable provisions”) in the Act and the SIS Regulations. By s 327, a regulation made for the purposes of, amongst others, Part 3 of the Act is a modifiable provision. It is not disputed that Reg 6 and Schedule 1 are made for the purposes of Part 3 of the Act. In consequence, the condition of release designated “Retirement” in Part 1 of Schedule 1 is amenable to s 328 of the Superannuation Industry (Supervision) Act which provides:

The Commissioner may, in writing, exempt a particular person or class of persons from compliance with any or all of the modifiable provisions.

It is appropriate also, in this context, to refer to s 334(1) of the same Act which provides:

A declaration under this Part may have effect either generally or as otherwise provided in the declaration.

By way of calling in aid s 328, the solicitors for the appellant, on 12 December 1994, wrote to the Insurance and Superannuation Commissioner a letter which set out the facts related to the bankrupt and his membership of the Fund. After contending that Rule 10.5 was void as against the trustee in bankruptcy, the letter contained this passage:

Whilst important policy considerations have led to the incorporation of “preservation standards” under both the Occupational Superannuation Standards legislation and the Superannuation Industry (Supervision) legislation, it does not seem to us that any desirable objective is achieved by delaying payment of a bankrupt’s entitlement to his trustee in bankruptcy, if and once it has vested in the trustee.  Indeed, the application of the preservation standard in such circumstances as these results only in unnecessary hardship and delay to the bankrupt’s creditors.  It is settled that the bankrupt’s preserved benefit is now property which has vested in the official Trustee and his discharge from bankruptcy will not alter this.  Therefore, it is only the bankrupt’s creditors who may ultimately benefit from the preserved entitlement.  There is, therefore, no justification or reason for delaying payment.

We draw to your attention the fact that the recent amendments to subsection 116(2) of the Bankruptcy Act as to the vesting of superannuation benefits in trustees in bankruptcy are not applicable in this case as this is a pre-1 July 1994 bankruptcy.

We understand that the TNT Group Retirement Fund became a regulated fund under the Superannuation Industry (Supervision) Act 1993 in or around August 1994.

Accordingly, we request that the Commissioner exercise his discretion under section 328 of the Act so as to exempt the trustee of the TNT Group Retirement Fund from the requirement that it not make payment of the bankrupt’s preserved withdrawal benefit until the bankrupt’s retirement from the workforce and to permit payment of the benefit immediately to the Official Trustee for the benefit of creditors.

On 24 July 1995, the Assistant Director of the Insurance and Superannuation Commission, pursuant to s 328 of the Superannuation Industry (Supervision) Act 1993 advised the solicitors for the appellant that:

I refer to previous correspondence concerning the release of superannuation Mr Kirkland’s preserved superannuation benefits in the TNT Group Retirement Fund.

I am prepared to allow the trustee of the fund to release the money to the Official Trustee in Bankruptcy for distribution amongst the creditors of the bankrupt if the trustee is satisfied that:

·Mr Kirkland was declared bankrupt; and

·upon the bankruptcy the benefit legally vested with the Official Trustee in Bankruptcy prior to the fund becoming a regulated superannuation fund under the Superannuation Industry (Supervision) Act 1993 (SIS).

I have advised the above to the trustee of the fund.

The learned primary Judge did not refer to that correspondence, perhaps because Counsel for the Official Trustee at first instance preferred to emphasise the application of the rule in Saunders v Vautier (1841) Cr & Ph 240; 49 ER 282. At all events, his Honour contented himself with observing, at the end of his reasons:

The applicant did not seek to make out a case that the bankrupt satisfied the requirements for early retirement under either the 1987 or 1994 regulations.  In particular there was no suggestion the bankrupt had retired from the workforce.

I conclude that at the date of the bankrupt’s resignation, the date of sequestration, and the present time, the bankrupt was and is not entitled to payment of the Preserved Withdrawal Benefit.  The rule in Saunders v Vautier does not apply.  Because superannuation funds in Australia enjoy substantial tax benefits there is a complex statutory regime which restricts the access members may have to benefits.  Speaking very generally, the object of superannuation is to make provision for death, disablement or retirement at normal retiring age, or earlier if there are exceptional circumstances.  It would conflict with that objective if members of funds could treat their entitlements as though they were funds on deposit, available at call.

The bankrupt could not on resignation or at the date of sequestration, and cannot at the present time, obtain payment of those benefits.  The applicant can be in no better position than the bankrupt.

The application will be dismissed with costs, including reserved costs.

Although by saying “I am prepared to allow” the release of the preserved benefit to the Official Trustee, the Assistant Director of the Insurance and Superannuation Commission appeared to be expressing himself in somewhat conditional, rather than permissive, terms, we construe his letter of 24 July 1995 as exempting the Trustee from compliance with that part of the modifiable provision which prevented the cashing of a preserved benefit upon retirement before the Trustee was satisfied that Mr Kirkland intended never again to become gainfully employed.  Accordingly, the Official Trustee’s application for payment could only be resisted after 24 July 1995 if there were some other barrier erected by the Rules of the Fund than the Trustee’s being satisfied that Mr Kirkland intended never again to become gainfully employed or if some other discretion remained to be exercised by the Trustee.

Rule 10.5 of the Rules of the Fund, to the extent that it purported to forfeit benefits otherwise payable if the relevant member became bankrupt before 1 July 1994, is clearly void.  See e.g. Re Bond; Ex parte Ramsay (1992) 25 ATR 61 where Hill J said, at 77 of a similar clause in a superannuation trust deed:

Clause 16, looked at on its own, operates to forfeit a benefit where the benefit is payable as well as in the case where the benefit may be payable.  In other words, the clause postulates that a situation has arisen where the benefit has in fact become payable but nevertheless some further act has taken place which then operates to forfeit the benefit.  In my opinion, the clause is, on its face, capable of operating to forfeit a benefit in a circumstance where that benefit has become absolutely and indefeasibly payable to the member and consequently, following the decision of Re Smith [1916] 1. Ch. 369, should be held to be void.

Hill J’s judgment was affirmed on appeal by a Full Court of this Court sub nom. Caboche vRamsay (1993) 119 ALR 215 where there is further extensive citation of authority including Hall v Busst (1960) 104 CLR 206. Mr Roach of Counsel for the respondent faintly suggested that the authorities to which we have just referred are distinguishable because Mr Bond had been the sole member of his Investment Retirement Fund. However, we can discern no difference in principle where the interest purportedly forfeited is that of one of a large number of beneficiaries under the same trust. As we perceive it, the Trustee and its legal advisers shared the view which we have just expressed when it advised the solicitors for the appellant by letter dated 5 September 1994:

It is the understanding of legal counsel that, subject to Rule 10.22 of the Trust Deed and Rules of the above Fund, Mr Kirkland has become entitled to his Benefit.  The Benefit has, therefore, vested in his Trustee in bankruptcy but, because of Rule 10.22, we are not empowered to pay the Preserved Benefit to the Trustee in bankruptcy until Mr Kirkland retires from the workforce.

Moreover, it does not appear that the learned primary Judge took any different view.  As we infer from the concluding paragraphs of his reasons, he accepted that the Official Trustee stood in the shoes of the bankrupt but considered that there were presently operative impediments to payment of the Preserved Withdrawal Benefit to either the bankrupt or the appellant claiming through the bankrupt. 

The interest in the Fund which passed to the Official Trustee by s 58 of the Bankruptcy Act was a right to have the Fund properly administered in accordance with the Rules, including the Statutory Requirements incorporated by reference by Rule 10.22 as amended.  That interest was analogous to an interest in a deceased estate passing by will, as to which the High Court said in Official Receiver in Bankruptcy v Schultz (1990) 170 CLR 306 at 313:

The right which any beneficiary has in an unadministered estate springs from the duty of the executor to administer the estate, to preserve the assets and to deal with them in the proper manner.  Each beneficiary has an interest in seeing that the whole of the assets are treated in accordance with the executor’s duties.  In that sense, the beneficiaries as a class may be said to have an interest in the entire estate.  But it does not follow that each piece of property which goes to make up the estate is held on a particular trust for the beneficiary named as its intended recipient upon completion of administration: Horton v. Jones (1935) 53 C.L.R. 475, at p. 486. ...

Nevertheless, Mrs. Schultz acquired upon the death of Mrs. Pereira a right to have the deceased estate administered in accordance with the duties of the executors.  Though not the legal or equitable owner of the assets which were the subject of the devise and bequest in her favour, she had, by virtue of the chose in action created by that devise and bequest, an expectation that the assets would pass to her upon completion of the administration, subject to their being realized to meet any outstanding liabilities and to defray the costs of administration, and an interest in respect of those assets.  That interest was derived from and dependent upon the chose in action.  The interest is of such a kind that, when a beneficiary transmits a chose in action (or part thereof), or that chose in action passes by operation of law, such as under the Bankruptcy Act, that transmission naturally encompasses not only the chose in action but also the expected fruits of that chose in action: Horton v. Jones; In re Leigh’s Will Trusts [1970] Ch. 277, at p. 282.

Mr Roach went carefully through the Rules of the Fund to make good his proposition that the Trustee owed duties to all members of the Fund and others, including the dependants of members, to administer the assets of the Fund prudently, to observe the Rules and not to imperil the tax-privileged status of the Fund.  The existence of those duties is accepted.  However, it was not demonstrated on the hearing of the appeal that performance of any of those duties would preclude the payment of a Preserved Withdrawal Benefit upon a member’s having retired and attained the age of 55 years if the Trustee were satisfied that the member intended never again to be gainfully employed, or were relieved from attaining that satisfaction by an exemption from the Insurance and Superannuation Commission.

In the events which have happened, the only decision or discretion available to be taken or exercised by the Trustee is as to the form in which the Preserved Withdrawal Benefit should be paid.  Rule 4.15 provides, so far as is relevant:

The Trustee in its discretion may decide that a Benefit which has become payable, or which is about to become payable shall be paid in pension form or in any other form subject to such terms and conditions as it shall decide provided that the Actuary shall certify that the value of the pension or other form so decided shall be equal in value to the Benefit otherwise payable.

As well, it will be recalled that Reg 6.18(3)(b) of the SIS Regulations permits the Benefit to be paid, in one or more lump sums, as a pension or in the purchase of an annuity.  However, given that the Benefit in the present case is wholly payable to the Official Trustee in Bankruptcy, we are unable to see how the Trustee in the reasonable exercise of its discretion could pay it otherwise than as a single lump sum.

For these reasons, the appeal should be allowed and the orders made at first instance be set aside.  In lieu thereof we shall declare that Art 10.5 of the Rules is void and shall order that the Trustee pay to the appellant within 28 days of this order the Preserved Withdrawal Benefit including all accrued interest to which the bankrupt would, but for the sequestration order of 31 August 1993, have been entitled pursuant to Art 4 of the Rules.  The costs of both parties of the proceedings below and of the appeal should be taxed as between solicitor and client and retained or paid as the case may be out of the estate of the bankrupt.

I certify that this and the preceding (10 ) pages are a true copy of the Reasons for Judgment herein of the Court.

Associate:

Dated:             22 December 1997

Counsel for the Appellant:	Mr G Bigmore, QC with Mr M Galvin
Solicitors for the Appellant:	J M Smith & Emmerton
Counsel for the First Respondent:	No appearance
Solicitors for the First Respondent:	No appearance
Counsel for the Second Respondent:	Mr P Roach
Solicitors for the Second Respondent:	Clayton Utz
Date of Hearing:	18 November 1997
Date of Judgment:	22 December 1997