Queensland Local Government Superannuation Board v Superannuation Complaints Tribunal
[2014] FCCA 2473
•29 October 2014
FEDERAL CIRCUIT COURT OF AUSTRALIA
| QUEENSLAND LOCAL GOVERNMENT SUPERANNUATION BOARD v SUPERANNUATION COMPLAINTS TRIBUNAL & ANOR | [2014] FCCA 2473 |
| Catchwords: APPEAL – Superannuation Appeals Tribunal – question of law – denial of procedural fairness. |
| Legislation: Corporations Act, s.1017B Superannuation (Industry) Supervision Act 1993 (Cth), s.58 Superannuation (Resolution of Complaints) Act 1993, s.14 |
| Board of Trustees of the State Public Sector Superannuation Scheme v Joseph David Edington and Superannuation Complaints Tribunal [2011] FCAFC 8 Dagenmont Pty Ltd v Lugton & Anor [2007] QSC 272 Dunstan v Houison (1901) 1 SR NSW Eq 212; 18 WN NSW 302 HIH Superannuation Pty Ltd [2003] NSW SC 65 Muir v Inland Revenue Commissioners [1966] 1WLR 1269 Re Hurst (1954) St R Qd 348 Rooney v ABB Grain Limited [2010] FCA 1392 Warkworth Mining Limited v Bulga Milbrodale Progress Association Inc [2014] NSWCA 105 Watsons Bay & South Shore Ferry Co Ltd v Whitfield (1919) 27 CLR 268 |
| Appellant: | QUEENSLAND LOCAL GOVERNMENT SUPERANNUATION BOARD |
| First Respondent: | SUPERANNUATION COMPLAINTS TRIBUNAL |
| Second Respondent: | PATRICIA DAVIES |
| File Number: | BRG 682 of 2014 |
| Judgment of: | Judge Burnett |
| Hearing date: | 26 September 2014 |
| Date of Last Submission: | 24 October 2014 |
| Delivered at: | Brisbane |
| Delivered on: | 29 October 2014 |
REPRESENTATION
| Counsel for the Appellant: | Mr S. Fynes-Clinton |
| Solicitors for the Appellant: | King and Company Solicitors |
| There was no appearance for the Respondents |
ORDERS
That the appellant submit a minute of order giving effect to the terms of these reasons by 4.00pm on 30 October 2014.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT BRISBANE |
BRG 682 of 2014
| QUEENSLAND LOCAL GOVERNMENT SUPERANNUATION BOARD |
Appellant
And
| SUPERANNUATION COMPLAINTS TRIBUNAL |
First Respondent
And
| PATRICIA DAVIES |
Second Respondent
REASONS FOR JUDGMENT
Introduction
In 2010/2011, the Brisbane City Council employers’ superannuation fund “City Super” and LG Super, the scheme established for other local government employees, decided to merge their superannuation funds. The merger was a financially complex and technical exercise. Ultimately terms of the merger were agreed and the processes put in place to give effect to the merger. The appellant, Queensland Local Government Superannuation Board was to be the continuing trustee of the merged funds which would continue to be known as LG Super. It was to assume all duties as trustee. The agreement provided that on transfer, all former members of City Super would have no lesser entitlements as members of LG Super than they had as members of their previous scheme, City Super. A transitional feature involved an agreement reached between the two funds on a mechanism for the distribution of surplus on a final accounting to City Super members. In the event the second respondent, Ms Davies, was ineligible to receive a sum of approximately $3,596 on the final windup because she had ceased to be an eligible beneficiary before the windup date. In exercise of her rights under Part 4 of the Superannuation (Resolution of Complaints) Act 1993 (Cth), (“the S (RC) Act”) she applied to the first respondent, Superannuation Complaints Tribunal (“SCT”) which reversed the appellant’s decision. The appellant now appeals against the SCT’s decision given 1 May 2014.
Facts
Until 30 June 2011, City Super Pty Ltd was trustee for the Brisbane City Council superannuation plan (City Super), a superannuation scheme maintained for employees of Brisbane City Council. On 1 July 2011, City Super merged with the Local Government Superannuation Scheme (LG Super), a compliant superannuation scheme established under the Local Government Act 2009 (Qld). The appellant is the trustee of that scheme. It is not in issue that the merger between the funds was compliant with the Superannuation (Industry) Supervision Act 1993 (Cth) (“the S(I)S Act”). Upon the merger of City Super and LG Super, all of the assets and members of the former fund (including Ms Davies) transferred to the latter fund.
On 1 June 2011, prior to the merger, an agreement was reached between the trustees of each fund that if any surplus or deficit arising because of the actual performance of City Super’s funds investment (as determined some months after the merger) differed to the estimates used to credit member accounts shortly after 30 June 2011, such would be applied to the former City Super members who were members in the year ended 30 June 2011 and remained members (of LG Super) when final results were determined. On 2 February 2012, the appellant determined, on a final accounting, that there was a surplus. Part of the surplus was applied to meet City Super’s agreed contribution to the operational risk reserve. [1] The balance funds were available for distribution to the qualifying beneficiaries.
[1] The operational risk reserve was a reserve required by the then recently created prudential standards and in respect of which some of the funds had to be applied.
Consistent with its earlier agreement with the former trustee of City Super, the appellant decided on 2 February 2012 to distribute the remaining balance of the surplus to the then current members of LG Super who had previously been members of City Super as at 30 June 2011. However, as Ms Davies had ceased to be a member of LG Super on 13 January 2012 she was not eligible to receive a dividend from the surplus.
As a matter of practice, City Super would annually effect a distribution to the accounts of its members as at 30 June. The distribution would be based on an estimate of the fund’s earnings for that financial year and based on an estimate of both the fund’s performance and taxation liability as at 30 June, for normally that position would take a number of months to be finalised. The evidence before the SCT was that once the final determination of the fund’s performance was made there would be typically be a difference between the amount previously distributed and the actual performance of the fund. Commonly, this occurred because portfolio values used for the estimates as at 30 June were based on market values as at that date but transactions in progress around 30 June were based on market value as at the date of transaction. These transactions could not be precisely determined until after 30 June following a full audit and reconciliation and interim finalisation of the tax position of the fund.
Once the determination of the fund’s performance was made, there would typically be a difference between the amount previously distributed to members as investment earnings for the relevant financial year and the actual performance of the fund. In circumstances where there was a deficit – in the sense that actual performance was lower than the estimate – a deduction would be made from the balance of member’s accounts who were members of the fund as at 30 June of the relevant financial year and also continued to be members of the fund. Conversely, if there was a surplus a further distribution would be made to the member’s accounts who were members of the fund at 30 June and who continued to be members of the fund. This approach was consistently adopted because City Super considered it impractical to make payments after finalisation to persons who were no longer members of the fund or to pursue such persons seeking refunds of overpayments made to them as terminating members.
It was this history which informed the approach of City Super to the process to be adopted upon the merger of the two funds. In the lead-up to the merger, City Super agreed to make a contribution to the operational risk reserve held by the merged fund of an amount proportionate to the level of assets it was transferring into the merged funds. In doing so, it decided to utilise funds which it believed would emerge as a surplus of actual investment returns as finally determined for 2010/2011 as compared to the estimated returns it used to determine the crediting rates applied shortly after 30 June 2011. These funds were sourced by the trustee from member funds under its control. It advised the appellant that it wished any surplus arising upon finalisation of City Super’s investment performance and taxation liabilities should be applied to:
a)City Super’s contribution to the operational risk reserve; and
b)After the application of any surplus to the operational risk reserve and other merger costs, then to the accounts of former members of City Super who had been members as at 30 June 2011 and consistent with its past practice.
On 1 June 2011, the appellant agreed with the former trustee’s proposal. To give effect to it City Super amended its trust deed on 15 June 2011 to include a new clause, 15.4, which authorised it to transfer “unallocated” funds to a successor trustee on terms providing for the application of the transferred funds. Upon the merger of the two funds on 1 July 2011, the appellant considered it was bound to deal with any surplus (or deficit) from City Super in the manner agreed with City Super’s trustee prior to the merger.
Following the merger, the appellant proceeded in late September 2011 to create the new individual LG Super accounts for the former City Super members. They included the investment earnings for 2010/2011 based on City Super’s estimate of its investment performance and estimated tax position for the year ended 30 June 2011. This followed City Super’s previous year’s practice. On finalisation, it was determined that the actual investment results, including tax credits, exceeded the estimates on which the 2010/2011 returns were settled. Accordingly, a surplus existed as contemplated by the former trustee’s position in its letter to the appellant of 23 May 2011.
It is significant in this case that by its letter of 23 May 2011, the former Trustee wrote to the appellant informing it of how it had previously managed the annual fund surplus and its policy in respect of such matters and stated how any final surplus was to be adduced on the wind up of the City Super fund. Its letter concluded by stating:
“It would be appreciated if LG Super can confirm if it will be willing to complete a distribution of an unallocated amount in accordance with the City Super Rules.”
It is uncontested that the appellant as Trustee for LG Super agreed to this matter.
It was because of this and consistent with the agreement between the trustees of the two funds that on 2 February 2012 the appellants decided to apply the surplus funds:
a)Firstly, towards the contribution that City Super agreed to make to the combined funds operational risk reserve; and
b)Secondly, by making a further distribution to the accounts of members who had been members of City Super as at 30 June 2011 and who continued to be members of the merged fund at that date, namely 2 February 2012.
Accordingly, on 9 February 2012, the appellant made the distribution. As Ms Davies had exited the merged fund on 13 January 2012, no distribution of surplus monies was made to her. She became aware of the former Trustee’s decision after being advised by a friend and former colleague of the additional distribution received by that person. She was unhappy that she had not received an additional distribution and made complaint to the appellant by letter of 7 March 2012. The appellant responded by letter of 2 April 2012 advising of its view that she was ineligible for the additional payment. It summarised the situation advising that it had made bona fide estimates and put in place a scheme, which it considered lawful, for the distribution of the surplus and, in effect, she was ineligible to receive any additional distribution.
Ms Davies was dissatisfied with this decision and on 9 April 2012 lodged a complaint with the SCT seeking a review of the appellant’s decision.
Following a review of Ms Davies’ complaint, the SCT determined that it was not satisfied that the decision of the trustee to exclude the complainant from the distribution of 2 February 2012 was fair and reasonable and made a finding in Ms Davies’ favour.
After reciting the facts, history and submissions put before the SCT by both parties, none of which is controversial concerning the matters of objective fact, the SCT decided:
a)When the assets of City Super were transferred to LG Super on 1 July 2011 it fell to the sole discretion of LG Super as to how any ultimate surplus would be dealt with. Such was subject to its trust deed, but without regard to the decision made by City Super on 23 May 2011 or the fact that LG Super had agreed prior to receiving any funds to deal with any transfer surplus on the terms decided by City Super;
b)To the extent that LG Super regarded itself as bound to give effect to the terms stated by City Super and agreed by LG Super, it had unlawfully fettered the exercise of its discretion as to how any surplus would be distributed;
c)In making its 1 February 2012 decision (not the decision actually challenged) LG Super was required to:
i)Consider whether it was equitable to refuse to make a distribution to persons who were no longer members of the scheme at the time of distribution, but not members of City Super who joined LG Super on 1 July 2011;
ii)Under s.52 of the S(I)S Act, act in the best interest of all former City Super members who became members of LG Super on 1 July 2011;
iii)Under general law trust principles, act equitably and fairly as between all former City Super members who became members of LG Super on 1July 2011;
iv)If contrary to the primary finding, consider if City Super’s decision of 23 May 2011 (not a decision actually challenged) had any ongoing operational effect that was not fair or equitable to the extent that it excluded a person such as Ms Davies from a share in the distribution; and
d)That both trustees contravened s.1017B of the Corporations Act 2001 (Cth) by failing to notify City Super members of the possibility of a surplus being determined upon finalisation for City Super’s 2010/2011 investment earnings, the knowledge of that possibility in May/June 2011 being a “material change to a significant event” within the meaning of s.1071B.
Accepting those findings, the SCT concluded:
a)That the appellant’s decision made 2 April 2012 was not fair and reasonable so that s.37(6) of the S(RC) Act was not met and the SCT’s power to make a different decision was enlivened; and
b)The appellant’s decision should be set aside and replaced with a decision (made in response to Ms Davies’ letter of 7 March 2012):
i)That “the complainant should have been included in the surplus distribution by the trustee”; and
ii)As that new decision could not itself have any practical effect for the complainant, “the trustee compromised the claimant’s claim by paying the claimant the amount which the complainant would have received from the distribution of the surplus had she been included in the distribution”.
LG Super lodged a notice of appeal in respect of that those decisions on 13 May 2014.
In its notice of appeal, the appellant sought the following orders:
a)That Ms Davies was not entitled to be included in the distribution (as a nondiscretionary decision, and as a matter of law in the events which occurred), and that her complaint to the SCT must be dismissed.
b)A declaration or determination that LG Super’s decision of 1 February 2012 to distribute the surplus to certain accumulation fund members of the scheme who transferred from City Super to the scheme on 1 July 2011 and were still members of the scheme on 1 February 2012 was lawful and had legal effect according to its terms;
c)A declaration or determination that in accordance with that decision Ms Davies had no lawful entitlement to a payment of any amount from that surplus;
d)A declaration or determination that LG Super did not make a “decision” within the meaning of s.14 of the Superannuation (Resolution of Complaints) Act 1993 (S(RC) Act) when it advised Ms Davies on 2 April 2012 that she was not eligible to participate in the distribution made on 9 February 2012 pursuant to the decision of 1 February 2012;
e)Alternatively, a declaration or determination to the extent that LG Super made a decision on 2 April 2012. That decision was:
i)A nondiscretionary decision; and
ii)A decision which was not made contrary to law; and
iii)In those circumstances a decision which was, as a matter of law incapable of being found by the SCT to be unfair and unreasonable.
In support of its appeal, LG Super advanced eight grounds:
(1)The funds from which the distribution was made on 9 February 2012, pursuant to the appellant’s decision of 1 February 2012, were funds accepted and held by the appellant on a particular trust which required the funds to be applied to the primary purpose of creating an ORR and funding costs attributable to City Super for the merger between City Super and LG Super.
(2)If there was a surplus or deficit after identifying the cost to implement the primary purposes, the terms of that trust obliged the appellant to distribute any surplus (of $1 million or more) to persons within a particular identified class, and to charge any deficit (of more than $1 million), as a cost of the fund, to the member accounts of persons of that particular identified class.
(3)The Second Respondent was not a member of that class.
(4)Accordingly, the terms of the trust in which the monies were held by the Appellant denied the Second Respondent an entitlement to any part of a surplus (but also protected her from any liability, via additional fund costs, in respect of any deficit).
(5)Alternately, if the Appellant had a discretion to deal with a surplus in a manner different from that stated in the terms on which it accepted and held the funds, the decision which it made on 1 February 2012 to deal with the surplus on those terms was a lawful exercise of its discretion.
(6)The appellant's decision of 1 February 2012 has not been challenged before the SCT (or a court), has not been set aside, and is not liable to be set aside (because it was lawfully made).
(7)In those premises:
(a)the Appellant's communication to the Second Respondent on 2 April 2012 was merely advisory in relation to rights and entitlements which were not created or affected by that communication, and was not a "decision" within the meaning of s 14 of the Superannuation (Resolution of Complaints) Act 1993;
(b)alternately, if that communication did constitute or evidence a "decision", it was:
(i)a non-discretionary decision; and
(ii)a decision which was not made contrary to law.
(8)In relation to s 1017B of the Corporations Act (supra):
(a)the appellant did not contravene that provision;
(b)even if it did, that matter was irrelevant as a matter of law to the proper determination of the Second Respondent's complaint; and
(c)in any event, the SCT erred in law in considering and relying on that matter in circumstances where it was not a matter raised by either party in submissions, or raised with the Appellant as a matter on which it might wish to make submissions, so that the SCT denied the Appellant procedural fairness by considering and relying on that matter as part of the grounds on which the SCT made its decision
Neither the SCT nor Ms Davies appeared at the appeal. The SCT indicated it would abide by the decision of the Court. Ms Davies expressed interest in upholding the SCT’s decision but did not appear to argue the case on financial grounds. Notwithstanding those matters, the outcome of the appeal has significance to the body of former City Super beneficiaries and accordingly could not be seen as trifling in any event.
It is not in contest that the amount payable pursuant to the substituted decision is the sum of $3596.00 and there is no complaint about the entitlement to the addition of interest at the cash investment option rate if the SCT’s decision was otherwise correct.
Basis for Appeal
In Board of Trustees of the State Public Sector Superannuation Scheme v Joseph David Edington and Superannuation Complaints Tribunal [2011] FCAFC 8, Kenny and Lander JJ addressed the nature of appeals under s.46(1) S(RC) Act. They stated:
“Question of Law
[36] The jurisdiction invoked by Mr Edington in the proceeding before the primary judge was that conferred by s 46(1) of the Complaints Act, which provides that a party to a proceeding before the Tribunal may appeal to the Federal Court on a question of law. The jurisdiction is thus a limited one. The appeal for which s 46(1) provides is a proceeding in the original jurisdiction of the Court. The subject matter of an appeal under this provision is the question or questions of law on which the appeal is brought. No appeal under s 46(1) will lie from the Tribunal’s findings of fact, unless those findings were reached in a manner giving rise to a question of law: see, e.g., Sharp Corporation of Australia Pty Ltd v Collector of Customs (1995) 59 FCR 6 at 12 (Davies and Beazley JJ) and at 16 (Hill J). Accordingly, if the question is whether the decision-maker in answering questions of fact failed to take into account a relevant consideration had regard to an irrelevant consideration, adopted a wrong approach, or reached a decision so unreasonable that no reasonable decision-maker could have come to it, then that question is a question of law: see Sharp 59 FCR at 12.”
In addressing its appeal, the appellant addressed the grounds in submissions by reference to questions of law it contended could be identified from the notice of appeal and the answers which it contended would in turn support the appeal and the orders sought. In my view this approach represents an appropriate means to dispose of the appeal in this instance.
Question 1: Did LG Super make a “decision” within the meaning of s.14 of the S(RC) Act when it advised Ms Davies on 2 April 2012 that she was not eligible to participate in the distribution of 9 February 2012?
In its letter of 2 April 2012, LG Super explained to Ms Davies the reasoning behind its decision and her review entitlements to the SCT. It was purportedly this decision that Ms Davies took to the SCT for resolution.
I accept the appellant’s assertion that the letter of 2 April 2012 is not a “decision” as referred to in s.14 of the S(RC) Act. However, it is plain from that correspondence what decision was being complained of, namely the decision made in February 2012 when the final calculations revealed a surplus of unallocated funds which the appellant subsequently decided to distribute only to members who were members on the merger date and on the date of that decision.
Section 14 of the S(RC) Act relevantly provides:
“14. Complaints about decisions of trustees other than decisions to admit persons to life policy funds
(1) This section applies if the trustee of a fund has made a decision… in relation to:
(a) a particular member or a particular former member of a regulated superannuation fund; or
(b) a particular beneficiary or a particular former beneficiary of an approved deposit fund.
…
(2) Subject to subsection (3) and section 15, a person may make a complaint (other than an excluded complaint) to the Tribunal that the decision is or was unfair or unreasonable.”
Although the decision alluded to in the complaint is that contained in the notice from LG Super of 2 April 2012, it seems plain Ms Davies seized upon that date because it contained advice concerning appeal rights. In that regard no time for making any such application, or its form, appears to be prescribed by the S(RC) Act.
In my view, while it is correct that the instrument referred to by Ms Davies was not itself a decision, each of the parties was fully cognisant of the decision complained of and the complaint was made within time and accordingly not excluded by operation of S(RC) Act s.14(4).
It is apparent that it was the trustee’s decision of 1 February 2012 which was the subject of complaint. This is the decision which was subject to detailed consideration by the SCT. I do not accept that the SCT erred in law at the threshold by embarking upon a determination of a complaint made to it by Ms Davies on 16 April 2012 in respect of a matter which was not a “decision” within the meaning provided for in s.14 of the S(RC) Act.
Question 2: Did the appellant’s agreement with City Super on or about 1 June 2011 as to how it would deal with any surplus over the amount necessary to establish an ORR meet certain merger costs constitute an unlawful fetter on its trustee discretion?
This issue was central to the decision of the SCT. It raises the question of the legal effect (or effectiveness) of City Super’s resolution expressed in its letter of 23 May 2011 and LG Super’s action subsequent to that resolution.
In its letter of 23 May 2011, the former trustee wrote to LG Super identifying the prospect of, as then, an unascertained and unallocated surplus at the windup date then set to be 30 June 2011. Its expectation of that matter was premised upon its previous years’ experience as to the existence of surpluses at the end of each financial year and also concerning the time required to administratively settle end of financial year accounts. Accordingly, in its letter of 23 May 2011, the former trustee requested formal confirmation from the appellant that any surplus of the former fund would be dealt with in accordance with the policy determined by the former fund. In part the letter stated,
“The City Super’s trustee retained surplus from the 2010 year for the purpose of creating an operational risk reserve and also to provide for funding for the future merger. They have developed policy for this reserve and as a result of this merger have also developed a policy for the treatment of any unallocated funds available to the members at 30 June 2011. This amount will not be quantified until November 2011 at the earliest so it would be the merged funds responsibility to ensure any allocated amount is appropriately distributed to the members of City Super.
The trustee has requested formal confirmation from the LG Super Board that any surplus City Super reserve can and will be dealt with according to the policy determined by the City Super trustee.”
The former trustee stated it had resolved the former fund’s reserving policy would include rules related to the distribution of any unallocated amount surplus to the requirements of the operation risk reserve (“the ORR”) and the costs of the former fund’s windup. Specifically it provided:
·The distribution of the unallocated amount would be to both accumulation and pension members who were members of the former fund as at 30 June 2011 and who were members at the date of calculation of the unallocated amount with members who exited the fund prior to the distribution date not being eligible for any distribution; [my emphasis]
·The distribution amount was to be in direct proportion to a members account balance as at 30 June 2011;
·The distribution would only be made if the amount was at least $1M otherwise the surplus fund would be transferred into the ORR;
·Eligible members were to receive information regarding the distribution after the distribution was made.
The appellant, as the ongoing trustee, agreed to the principles in that letter. By resolution dated 1 June 2011:
“The Board noted the letter received from the (former fund) in relation to the distribution of unallocated reserves post-merger date. The Board resolved to approve the principles contained in the letter.”
In order to give effect to the merger, the former trustee amended its trust deed to introduce clause 15.4. It provided the trustee with power to:
“…
Transfer all or part of the value of any unallocated amount.
…
To another superannuation entity as an unallocated amount, to be applied to the benefit of the Members or Former Members or any group of them or otherwise as the Trustee considers appropriate
…
Where in the Trustees opinion the transfer of Members to that or other Superannuation Entity is in the best interests of the Members and the transfer of the unallocated amount will facilitate the transfer of the Members.”
Although this amendment to the former trust deed was formally made by deed of variation dated 15 June 2011, the variation was made further to the principles set out by the former trustee and expressed in its letter of 23 May 2011.
It is not disputed that the trustee accepted the former trustee’s proposals. Although the trustee accepted this proposal by its resolution of 1 July 2011 – a date which predated the deed of variation – it is plain that the subsequent deed of variation was put in place to empower the former trustee to exercise its powers in respect of the City Super fund in the manner it proposed in its letter of 23 May.
It was that proposal which the SCT considered fettered on the exercise of the trustee’s discretion. In its decision, it stated:
“(58) It is the view of the SCT that, with immediate effect from the date on which the assets and members of the Former Fund were transferred to the Fund, the determination of any unallocated amount in relation to the transferred assets and the allocation of any unallocated amount to the members was under the control of the Trustee and not the trustee of the Former Fund and was governed by the trust deed for the Fund rather than the trust deed of the Former Fund.
…
(59) When the assets of the Former Fund were transferred to the Fund there were no longer any assets available to the trustee of the Former Fund to deal with in accordance with clause 15.3(d) of the trust deed of the Former Fund.
…
From the moment of transfer, there were no assets to be dealt with [by the former trustee] in accordance with clause 15.3(d).
(60) It was then under the control of the Trustee to be dealt with in accordance with the terms of its trust deed. It was for the Trustee to determine the quantum of the surplus amount, how it should be distributed and who it should be distributed to in accordance with its trust deed and principles of trust law.
…
(61) In agreeing to distribute any surplus amount in accordance with principles developed by the trustee of the Former Fund, the Trustee fettered the exercise of its discretion as to how any surplus amount would be distributed.
…
(62) The Trustee was, therefore, required to decide for itself what the unallocated amount was in respect of the assets of the Former Fund, how much of the unallocated amount should be credited to the operational risk reserve, whether it had power under its trustee to allocate an amount to the operational risk reserve, how much of the unallocated amount should be distributed to members, and which members of the unallocated account should be distributed to and in what proportion.
…
(63) In making its decision, the Trustee was required to determine whether it was equitable to distribute part of the unallocated amount to former members of the Former Fund who are members of the Former Fund and that the assets and members were transferred to the Fund and whether it was appropriate and equitable to refuse to make a distribution from the unallocated amount as at the date of transfer to those members of the Former Fund who cease to be members of the Fund subsequent to the transfer of assets and members on 1 July 2011.
…”
It is uncontroversial, as a matter of general principle, that a trustee which has the discretion or duty to exercise a power from time to time as the circumstances require must not fetter its discretion by binding itself as to how the power will be exercised at some future time, regardless of the circumstances which may exist at that future time: Dunstan v Houison (1901) 1 SR NSW 212; Watsons Bay & South Shore Ferry Co Ltd v Whitfield (1919) 27 CLR 268; Re Hurst (1954) St R Qd 348.
The SCT relied upon the general principle expressed in Dunstan v Hauison (supra) where at 215 Simpson CJ in Equity observed in the context of a discretionary trust, “…. the trustees are bound to exercise their discretion, and cannot in general deprive themselves by anticipation of the power to do so.” This broad expression of principle was also adopted by the High Court in Watson’s Bay and South Shore Ferry Company Limited v Whitfield (1919) 27 CLR 268 where the Court (Isaacs, Gavan Duffy and Rich JJ) at page 277 endorsed the view expressed in earlier authority that an agreement would be void if:
“…. [it] is tainted with the vice of the trustee binding himself contractually for valuable consideration that he will exercise a trust in a specific manner to be decided by considerations other than his own conscientious judgment at the time as to what is best in the interests of those for whom he is trustee”.
However, as was contended by the Appellant, these cases need to be considered in the context of the governing trust deed. In Watson’s Bay (supra) there was none: there the trust concerned land held by the Minister of Lands which Watson wished to purchase at an earlier valuation price rather than at an expected higher price which might be realised at auction. He sought by agreement to convert an earlier entitlement awarded as compensation for resumption into a re-conveyance of the land then held on trust by the Minister by an agreement binding it as trustee to such arrangement. The Court held that the agreement fettered its duty as trustee to realise the best price.
Likewise in Dunstan (supra) the terms of the trust were central to resolution of the dispute at issue. There the trust required the discretion to be considered and examined annually. Accordingly a resolution to pay set sums annually without the trustee’s annual review fettered the discretion.
The processes of the trustee in the current context were similarly favourably considered by the New South Wales Supreme Court in HIH Superannuation Pty Ltd [2003] NSW SC 65 where Barrett J, in considering a distribution plan set out in a deed giving an apparent actuarial surplus of a fund, his Honour had to consider issues similar to those before the SCT. As his Honour noted, in that instance the life of the fund before him was limited, with the relevant employer company being in liquidation and accordingly all the employees there were ceasing to be employed. In that case, the circumstances to be considered involved distributing the actuarial surplus arising from the trust deed and given the rules governing the fund. It is plain that in that case, his Honour was not considering a rollover in the sense being considered here although its effect was similar to this case. That is, a windup has the same effect as a rollover. However, the scheme there was intended to effect what the SCT might have otherwise characterised as a fetter for present purposes. For in that instance, the effect of the scheme was to give the trustee direction in respect of benefits to be payable to eligible members. Initially his Honour had reservations as his judgment indicated. Commencing from paragraph 12 his Honour observed:
“[12] The combined effect of r8.13 and r18, the principal employer's direction in the deed of 18 September 2001 (as amended) and s58 of the Superannuation Industry (Supervision) Act 1993 (Cth) is, the plaintiff contends, to put the plaintiff in a position where, if it consents to the giving of the direction, it will be empowered and required to give effect to the direction by increasing the benefits of eligible members in such a way as will implement the scheme of enhancements set out in the direction.
[13]That position is said to arise as a result of a series of steps. First, although r8.13 purports to do no more than to permit the principal employer to give to the trustee a direction as to the augmentation of benefits, the rule must, it is said, be read as creating a duty of the trustee to comply and a concomitant power of the trustee to do so. Second, r8.13, read alone, is accordingly a provision which, as referred to in s58(1), permits the trustee, in the exercise of its powers under the rules with respect to the payment of benefits, to be subject to direction by the principal employer. Third, however, r18 forestalls the conclusion that r8.13 is inconsistent with s58(1) (and therefore invalid by operation of s58(2)) by specifying that the trustee's consent is required for the giving of the direction - with the result, it is contended, that the trustee is not "subject to" the direction given by the principal employer in the sense referred to in s58(1). This is apparently because r18, in effect, causes the direction to be of no force unless and until the giving of it is consented to by the trustee, whereupon the direction and the consent combine to form a compact between principal employer and trustee which, via the rules, is the source of a power of the trustee to do as the direction contemplates, with the trustee, because of its active consent, not being subject, in the exercise of that power, to any direction that would cause s51(1) to operate.
[14]I initially had reservations about this interpretation. I could not easily identify in the rules the power of the trustee that was relevant to s58(1) and caused that section to have the potential or prospective operation that brought r18 into play. R8.13, as I saw it, neither expressly confers any power on the trustee nor expressly permits (or requires) the trustee to be subject, in the exercise of any power under the rules, to the direction of the principal employer. On reflection, however, I think that this is the interpretation that the provisions should be given, particularly in light of the fact that, as Mr Brereton SC pointed out on behalf of the plaintiff, the court should adopt a "practical and purposive" approach to the construction of superannuation or pension scheme provisions: Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587. The basis of such schemes in a contractual framework involving employer, trustee and employees emphasises the need to construe their provisions in a way that reflects the respective roles of the parties in the employment context: Lock v Westpac Banking Corporation (1991) 25 NSWLR 593.
[15]There could presumably have been included in the rules a provision empowering the trustee to augment benefits if the principal employer so requested and the trustee so agreed. That would not have involved conflict with s58(1) and would have been a direct and straightforward stipulation. Why such an approach was not taken is not clear, but I am nevertheless persuaded that the combined effect of r8.13 and r18 and s58 is the same as that of such a stipulation. In particular, I am persuaded that r8.13 is to be read as conferring, by necessary implication, a power for the trustee to obey a direction given by the principal employer as mentioned in that rule. This is because a provision purporting to enable the principal employer to give a direction to the trustee and having no other or further effect leads nowhere. The direction, once launched, is, as it were, left hanging in the air unless it is implied that the recipient trustee may receive and implement it - subject, of course, to the effects that s58 and r18 then produce.”
As here, the question there was whether, on the winding-up of a fund, the outgoing trustee could fetter himself in respect of the distribution. Barrett J noted particularly that in the context, the trust’s rules provided, by the deed of trust, that the proposed plan of distribution of the fund on winding-up appeared to constitute either a fetter, or a contravention of s.58 of the S(I)S Act. However his Honour accepted that in considering the provisions of the deed, the court should adopt “a practical and purposeful” approach to the construction of the trust provisions, recognising the basis of such schemes in a contractual framework involving employers, trustees and employees. He further accepted that such a framework emphasises the need to construe these provisions in a way that reflects the respective roles of the parties in such contracts. That is plainly the situation in this instance. The scheme here has strong parallels with the scheme under consideration with the statement of principles contained in the letter and the Trustee’s agreement to implement combining ‘to form a compact between principal employer and trustee which, via the rules, is the source of a power of the trustee to do as the direction contemplates, with the trustee, because of its active consent, not being subject, in the exercise of that power, to any direction that would cause s51(1[2]) to operate[3]’. In my view, it is not material whether the reported fetter on the exercise of the discretion was one sought to be exercised by the former trustee or the incoming trustee by agreement. The real issue is whether or not there was a true fetter upon the trustee’s exercise of its powers.
[2] I think his Honour’s reference to s.51(1) was intended to be a reference to s.58(1) S(I)S Act
[3] HIH Insurance Pty Ltd (supra) at [13]
Further as the appellant submitted, there was a distinction between an improper fetter on the discretion and in deciding at a point in time how an issue, ripe for decision and fully understood at that point in time, will be dealt with in circumstances where a further decision made, on more detailed information but not in itself requiring further deliberation, will be required in order to finally or effectively implement the earlier decision. That is this case.
The appellant submitted that the decision in Dunstan v Houison (supra) cited by the SCT illustrated the distinction. In that case, a trustee had a power to apply profits when available for purposes including endowments to clerical ministers. A previous trustee had purported to grant a permanent indefinite endowment of £50 per year to various ministers. It was held that the terms of the trust required the trustee to make a distinct decision about paying such endowments on each occasion when there were profits available, effectively on an annual basis after each financial year. Accordingly, the court determined that the purported decision to pay endowments for an indefinite number of years constituted an invalid fetter upon the discretion.
Likewise for the appellant, it was submitted that an observation in Ford & Lee drawing on Finn[4] was apposite. There the learned authors observed:
“So it has been observed by Finn, fiduciary obligations (Lawbook Co, Sydney, (1977) at p26) that “it can only be said that a discretion is fettered if the proper time for its exercise has not arrived”, and that whether the proper time for its exercise has arrived depends on the nature of the power, its relationship to other powers of the trustees and the nature of the other transactions involved.”
[4] Law of Trusts, Thomson Reuters (online), [9.11070]
The appellant contended that in this case, the decision of the former trustee of 23 May 2011 concerned solely the 2010/2011 financial year, which was the then current financial year just about to end. There, the total investment earnings which had been derived in that year could not be immediately distributed, as it was practically certain that there would be a differential between the total amounts provisionally applied to member accounts as at 30 June 2012 and the final determination of earnings following finalisation. Thus, there was likely to be a possible surplus for distribution or a possible deficit to be charged to relevant members on the wind up. Furthermore, while the amounts were not known, the source of the surplus or deficit, the means by which each amount would be ascertained and the range of potential beneficiaries (or debtors) were all known with certainty on both 23 May and 1 June 2011. Accordingly, it was submitted that the decision which was made on 23 May 2011 was one sufficiently ripe to be made at that time.
Additionally, consistent with the remarks in Ford & Lee, the appellant submits the question of whether or not a discretion is fettered must be considered in the context of the relevant trust deed. In this case the process was expressly contemplated in the principles which identified the class of members between whom any surplus/deficit was to be applied by the provision which had the effect of releasing the former trustees from its duty to exercise its power in respect of those funds more broadly.
The appellant contends that Dagenmont Pty Ltd v Lugton & Anor [2007] QSC 272 provides an illustration of the application of this principle. There the court was considering whether an agreement entered into between the trustees of a discretionary trust and a beneficiary acted as a fetter upon a broad discretionary trust. In that case Chesterman J at [37] noted that a provision in a trust deed authorising trustees to release powers which they would otherwise have a duty to exercise are valid: see Muir v Inland Revenue Commissioners [1966] 1WLR 1269 at 1283. In the context of the case before him, Chesterman J noted that the deed was capable as being read as a release by the trustee of the power conferred on it by the general power provision to exercise an unfettered discretion to distribute or accumulate all or part of the trust income and, in the case of a distribution, to select those beneficiaries as recipients of the distribution. He noted that, in that case, upon the release being given, the discretion was no longer unfettered and was reduced in scope co-extensively with an obligation created by the agreement to pay the sum specified in the agreement from the trust income.[5]
[5] At [36].
The appellant’s submission was that such an arrangement was effected in this case. In this instance, on 15 June 2011 – that is, before funds were transferred – clause 15.4 of the City Super Trust Deed was amended to expressly authorise the transfer by City Super to LG Super of an unallocated amount to be applied to the benefit of a defined class of City Super members. To the extent that the funds not yet allocated to individual members, they were subject to a direction as to how they would be dealt with when the time came for actual payment. That course was explicitly authorised by the amended trust deed which is not under challenge.
It follows that in this instance, as with the circumstances in Dagenmont, the deed was meant to resolve termination issues relevant to the windup of the trust. Here, as in Dagenmont, the Trustee set upon a process it thought fair and proper. It introduced a mechanism by which that result could be achieved lawfully and so arguably the Former Trustee’s act in providing for that methodology could not be regarded as an improper exercise of its power.
I do not consider LG Super in acting upon its agreement with City Super in the circumstances constitutes a fetter upon the exercise of its discretion. It follows that the SCT’s decision that the arrangement constituted a fetter on the Trustee’s discretion was in error.
Question 3: Was the appellant’s decision of 1 June 2011 to deal with any surplus on the terms stated by City Super otherwise lawful and effective to bind the appellant (as a receiving trustee of trust funds transferred on terms stated by the outgoing trustee, and accepted by the receiving trustee) to deal with any surplus only on those terms?
Even if I am incorrect in my consideration of the fetter issue the appellant contends that the circumstances of transfer by the former trustee impressed the appellant with the trust to distribute the funds in accordance with the former trustee’s stated policy and that for the appellant to have done otherwise would have exposed it to an action for breach of trust. As was submitted by the appellant at the hearing, the transfer that the former trustee made pursuant to clause 15.4 was made on terms the former trustee had previously determined and which had been previously accepted by the appellant as incoming trustee for that fund. I accept that the evidence clearly demonstrates that the fund transferred on 1 July 2011 was transferred on the terms of the earlier statement of principle. At the time of transfer, the former Trustee was empowered to transfer on the terms it did. The appellant accepted those funds on those terms. Accordingly the appellant was bound by the settlement to distribute those funds discretely in accordance with that discrete trust impressed to that purpose in respect of those funds.
In my view, LG Super was required as a matter of law to execute the trust upon which it received those monies and in making its decision of 1 February 2012, it was required to ensure that the identified surplus was dealt with consistently with the particular trust obligations attached to the fund. It did so. It follows, in my view, that the SCT’s decision on this point was in error.
Question 4: Was the appellant’s decision of 1 February 2012 one which:
(a) Implemented the terms of the trust on which the appellant held the relevant funds; and
(b) The appellant was therefore bound to carry out the terms of the trust?
Given my findings above, I am satisfied that:
a)the appellant’s decision of 1 February 2012 implemented the terms of the trust on which the appellant held the relevant funds; and
b)it was bound to make an order to carry out the terms of that trust.
Question 5: Was the decision of 1 February 2012 lawful and according to its terms in any event?
Given my findings concerning the trustee’s proper exercise of its trust obligations assumed upon receipt of trust funds on 1 July 2011, it is unnecessary for me to address this argument.
Question 6: If the appellant’s response dated 2 April 2012 was a “decision”:
(a) was it a discretionary decision, or a non-discretionary decision;
(b) if it was a non-discretionary decision, was it made contrary to law?
In view of my earlier finding concerning the status of the appellant’s response dated 2 April 2012 not being a “decision”, it is unnecessary for me to address this argument.
Question 7: Did the SCT deny the appellant procedural fairness by considering and relying upon an asserted contravention of s.1017B of the Corporations Act (supra) as part of the grounds of its decision?
In its decision, the SCT made findings and ultimately a declaration determining that the appellant contravened s.1017B of the Corporations Act (supra). That provision is an offence provision: Corporations Act (supra) s.1131 and Schedule 3. It is well settled that even superior courts with full determinative powers hesitate before declaring in a civil context that a party has contravened a provision which imposes criminal liability: Rooney v ABB Grain Limited [2010] FCA 1392 [236].
In this instance, the SCT gave the appellant no notice that it was considering making a finding that the appellant had contravened s.1017B Corporations Act (supra). The matter was not raised in the complainant’s material and the SCT gave the appellant no opportunity to make submissions about the matter. In the circumstances, it is plain that the appellant was denied procedural fairness, a matter which constitutes an error of law: Warkworth Mining Limited v Bulga Milbrodale Progress Association Inc [2014] NSWCA 105 at [40] and [41]. There the plurality of the New South Wales Court of Appeal, Bathurst CJ, Beazley P and Tobias AJA, observed:
[40] There will be procedural unfairness where information is used by a decision maker in a way that could not reasonably be expected by one party and that party is not given an opportunity to respond to that use: see Re Minister for Immigration and Multicultural Affairs; Ex parte MIAH [2001] HCA 22; 206 CLR 57 at [142] per McHugh J and Muin v Refugee Review SCT [2002] HCA 30; 190 ALR 601 at [128]-[134] per McHugh J.
[41] Another aspect of procedural fairness was argued in the present case, namely that where a court determines a matter on a basis that was not in issue or argued in the proceedings, there will have been a denial of procedural fairness: see Stead v State Capital Insurance Commission [1986] HCA 54; 161 CLR 141. This is a basic requirement of a fair trial. See also Re Minister for Immigration and Multicultural Affairs; Ex parte MIAH in the context of administrative decision-making.
Given the significance of the SCT’s findings in respect of the appellant, a trustee for a large quasi-public sector superannuation fund with significant assets under management, such a finding has potentially serious significance. There is nothing in the material, including the SCT’s decision, to suggest that the appellant was on notice or reasonably had been on notice that the SCT intended to proceed to address this matter in the manner in which it did. In my view, the SCT’s failure in this regard constituted a clear denial of procedural fairness, in respect of which the appellant is entitled to relief.
Question 8: If that matter was properly considered by the SCT, did the appellant contravene s.1017B of the Corporations Act (supra) by not disclosing to the terms of effect the decision of 1 June 2011 to the second respondent on or about 1 July 2011 (or at some other time prior to December 2011)?
In view of my conclusion concerning this aspect of the SCT’s decision, it is unnecessary for me to address this question.
Question 9: If the answer to question 8 is “yes”, was that matter nevertheless irrelevant as a matter of law as to whether the second respondent’s complaint to the SCT should be upheld?
In view of my conclusion in question 7, it is unnecessary for me to address this question.
Orders
1.That the appellant submit a minute of order giving effect to the terms of these reasons by 4.00pm on 30 October 2014.
I certify that the preceding one (63) paragraphs are a true copy of the reasons for judgment of Judge Burnett
Date: 29 October 2014
Key Legal Topics
Areas of Law
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Administrative Law
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Statutory Interpretation
Legal Concepts
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Appeal
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Jurisdiction
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Procedural Fairness
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Statutory Construction
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